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Category: REVENUE GROWTH How Gulfstream Aerospace's financial pilot helped its top line take off.
Stephen Barr, CFO Magazine
October 1, 1999
Despite growing up the daughter of an Air Force colonel -- a wartime fighter pilot and peacetime test pilot -- Chris A. Davis was never bitten by the bug to fly. Instead, she earned her wings at the throttle of the spectacular turn around at Gulfstream Aerospace Corp., the Savannah, Georgia-based manufacturer of sleek, pricey business jets that have long stood for luxury and quality craftsmanship.
After joining the company in 1993, when it was teetering on the brink of insolvency, Davis helped Gulfstream soar again, restoring luster to its gold-plated brand name as well as its balance sheet. The top line nearly tripled in that time, thanks not only to the introduction of a new, more expensive jet, the Gulfstream V, but also to the development of new services and marketing strategies that Davis helped devise.
In 1998, Gulfstream delivered 61 planes and took orders on 90 more, both records, while revenues rose 26 percent, to $2.43 billion, and operating profit climbed 63 percent, to $373 million. As of June 30, the company had an order backlog of 122 aircraft worth some $3.9 billion. And though the stock had more than doubled since an initial public offering in 1996, it was trading at a 40 percent discount to its peers in May, when General Dynamics Corp. announced that it would buy the company. The $5.3 billion deal closed on July 30.
Gulfstream chairman and CEO Theodore J. Forstmann, whose buyout firm Forstmann Little & Co. bought Gulfstream from Chrysler Corp. in 1990, told Wall Street analysts that Gulfstream "has been monstrously undervalued in the stock market," and described General Dynamics as "a good home." Forstmann is expected to stay on as chairman of the wholly- owned subsidiary.
As for Davis, the winner of the 1999 CFO Excellence Award in the Revenue Growth category, Forstmann told CFO that she "played a key role in providing strategic focus for all business operations, including production, sales, and product development." He describes her as "a hard-driving and totally focused visionary" who has "an entrepreneurial spirit that makes her more of a risk taker than many other corporate executives I've known."
The first big risk she took was simply taking the Gulfstream job.
Davis arrived at Gulfstream in July 1993 after 17 years at General Electric, joining a company that was near bankruptcy. Forstmann had just taken control of his ailing investment, in which he had sunk about $850 million since 1990, and had watched lose $275 million in 1993 alone. Its weak financial position put it within days of defaulting on about $400 million in bank debt.
But that didn't deter Davis, who at the time was CFO of GE's Electronic Systems Division in its aerospace business, which was sold in 1993 to Martin Marietta. "As part of that transaction, I was prohibited from going back to GE for several years," she explains. "Ted convinced me that it would be fun to take on this challenge."
The first thing Davis had to focus on was Gulfstream's high cost structure. The company had been operating without a budget, and SG&A was 9 percent of sales. A range of cost- cutting initiatives, including renegotiating supplier contracts and reducing employment expenses, cut operating costs by $70 million. SG&A expenses were only 5 percent in 1998. Davis also drove a significant effort to institute financial processes and controls into the business. With reduced costs and stronger cash flows, Davis was able to pay down debt and rebuild strained relationships with key financial institutions.
Yet it didn't take long for Davis to turn her attention to devising an aggressive growth strategy for a company that had sold just 26 aircraft in 1993. Her mantra was simple: Find ways to put more people in our planes.
"Chris not only had an acute sense of the financial needs of the company," says Howard Rubel, an aerospace analyst at Goldman, Sachs, "but also how Gulfstream could expand the market for its planes."
Throughout its history, every time Gulfstream introduced a new model, it stopped making the previous one. The Gulfstream V, an ultra-long- range, large-cabin business jet, was already on the drawing board, and Davis wondered why the company would give up on the Gulfstream IV. "It was a good airplane," she says. "We weren't selling it well."
Davis and the leaders of Gulfstream decided to technologically update the Gulfstream IV and target the development of the Gulfstream V so that it would be more technologically advanced and command a higher price tag by about $10 million. Davis led the drive to ensure both products would have a cost structure to enable long-term profitability. The Gulfstream V-- developed at a cost of $800 million--was put into production in 1997 to universal acclaim, and for the first time, Gulfstream had different products with which to target different customers.
"People with smaller resources or a shorter mission requirement could now get into our planes," she says.
To address the issue of slow, less-profitable sales, Davis developed a deal review process and trained the sales staff to understand the financial impact of the deals they were negotiating. "No one understood the profitability of what they were doing," she says. In addition, the sales focus shifted from corporate pilots to the decision makers who would benefit from owning a Gulfstream-- mostly corporate executives. And to help gain access to these potential customers, rainmakers like Colin Powell and Henry Kissinger were added to Gulfstream's board.
With a unique new product on the way and a better-managed sales program in place, the stage was set for Davis's most innovative growth strategies. In 1995, she developed the business case for a fractional ownership program that would allow customers to buy shares of a new jet. Forstmann worried that selling pieces of an airplane would detract from full aircraft sales, but Davis laid out the analysis supporting fractional ownership as a new market with a new set of customers that Gulfstream had not previously reached. "Ted asked valid questions, but was convinced we should go ahead," Davis says.
That year, Davis negotiated a fractional ownership program with Executive Jet International. The program, called Gulfstream Shares, has sold 80 aircraft to date, in North America and the Middle East. "That's 80 planes we wouldn't have sold," Davis says. The venture has been so successful that legendary investor Warren Buffett bought Executive Jet last year, and made a commitment to expand the program.
Davis also established a financial-services arm to help customers finance their new jets, building a $1.25 billion fund from private- label investors. For the first time, Gulfstream could speed up the sales process, because buyers didn't have to go outside for financing, and the private-label fund meant that the company took no additional risk on its balance sheet.
In 1998, in a partnership with GATX Capital Corp., Davis launched Gulfstream Lease, the first short-term operating lease program available in business aviation. With a 15 percent equity participation in the venture, Gulfstream is able to recognize sales revenue and generate lease income over the aircraft's life in the program, as well as an additional return on used aircraft when they are sold out of the program. In its first three months, the program generated six firm orders and six options.
Finally, as the increased sales posed potential production challenges, Davis last year led the $250 million acquisition of K-C Aviation, which does the high- margin "completion" work on Gulfstream jet interiors, as well as maintenance services on Gulfstream and other planes. Not only can Gulfstream now sell completely outfitted planes, but it also has access to customers of other aircraft manufacturers.
Blue Skies Ahead
In the fall of 1998, Davis and Forstmann explored Gulfstream's future revenue-growth opportunities, and saw a merger as distinctly possible. But after General Dynamics surfaced with terms that were deemed unappealing, they told their investment bankers to back off, and looked for new strategies to generate internal growth.
This past spring, General Dynamics came back with a more attractive proposal, and Gulfstream shareholders, along with Forstmann, whose firm controls 23 percent of the outstanding shares, agreed to the deal. No longer independent, Gulfstream is expected to benefit from General Dynamics's expertise in computer-aided design and manufacturing, and no layoffs or changes in operations are anticipated.
Davis describes taking a near-bankrupt firm and making it worth more than $5 billion as "more than I could have ever imagined," and she has agreed to stay on at General Dynamics "through this transition." But few doubt that she will continue to fly high.