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General Dynamics' Novakovic to succeed Johnson as CEO

06/06/2012 | 09:53pm US/Eastern

Defense contractor General Dynamics (>> General Dynamics Corporation) said on Wednesday that Chief Executive Jay Johnson would retire at the end of the year, to be succeeded by Phebe Novakovic, who took over as president and chief operating officer just last month.

Defense contractor General Dynamics (>> General Dynamics Corporation) said on Wednesday that Chief Executive Jay Johnson would retire at the end of the year, to be succeeded by Phebe Novakovic, who took over as president and chief operating officer just last month.

Johnson, who celebrated his 66th birthday this week, will receive a bonus of $3.6 million, plus an additional $825,000 for consulting services through the end of June, General Dynamics said in a filing with the Securities and Exchange Commission.

Novakovic, a one-time CIA officer named by Fortune magazine last year as one of the "50 most powerful women in business," was running the company's marine division before being named to her current role in March. She will take over as CEO on January 1.

The management changes cap months of behind-the-scenes wrangling about the future leadership of the company, which builds everything from Navy destroyers and nuclear submarines to Army tanks and Gulfstream business jets.

In March, General Dynamics said it was splitting the company's leadership to make Novakovic, 54, president and COO.

At the time, sources predicted that Johnson would leave his position within a year, making room for Novakovic to move up to the top spot. But Wednesday's announcement came earlier than expected, amid mounting concerns about slowing sales and a fall in the company's share price.

The latest move will also make Novakovic the highest-ranking woman to run a major U.S. defense contractor, following a path blazed by Linda Hudson, a former General Dynamics official, who now heads the U.S. unit of Britain's BAE Systems (>> BAE Systems plc).

"The defense industry is undergoing a demographic revolution in which women for the first time ever are rising to the most senior jobs at places like General Dynamics and BAE Systems and Lockheed Martin," said defense consultant Loren Thompson.

"Twenty years ago you wouldn't have believed that this industry was capable of such a transformation."

Lockheed Martin Corp (>> Lockheed Martin Corporation) announced in April that Marillyn Hewson, who has held a wide array of leadership posts, would become president and chief operating officer in January.

Novakovic, who joined General Dynamics in 2001, had the strong backing of Nick Chabraja, the powerful former chief executive of the company who still holds a seat on the board, according to sources familiar with the process.

The General Dynamics board made the decision at a regular meeting on Wednesday.

Johnson, a former Navy F-14 fighter pilot who rose to become a four-star admiral and chief of naval operations, said the timing of the changes made sense.

"The company is on an excellent financial footing, our operational performance is unmatched and our leadership team is very robust. This is the right time to transition," he said in a statement released by the company.

EARLIER THAN EXPECTED

But defense consultant Jim McAleese said Johnson's earlier-than-expected departure reflected the board's concern about first-quarter declines in sales and earnings in the information systems sector, which generates about a third of overall sales.

Those results, and signs that a key customer, the U.S. Army, was slowing spending even before tough budget cuts take effect, had driven General Dynamics shares down by about $3 in April.

"Clearly the company needs a catalyst to reenergize the stock," McAleese said, adding that Novakovic was seen by investors as shrewd, charismatic and decisive.

Before joining General Dynamics, Novakovic spent nearly four years as a special assistant to the defense secretary and deputy secretary of defense from 1997 to 2001.

General Dynamics shares closed $1.64 or 2.46 percent higher on Wednesday at $63.62, still well below a year high of $75.92 reached in July 2011.

General Dynamics cited development of a new double-V hull Stryker combat vehicle, which protects soldiers from roadside bomb attacks, as among its most significant operational achievements during Johnson's tenure.

It said Johnson also oversaw the start of two-per-year production of Virginia-class attack submarines, and the final development of two new aircraft for Gulfstream, the ultra-long-range Gulfstream G650 and the super mid-sized Gulfstream G280. Both aircraft are scheduled to enter service this year.

Johnson, who joined General Dynamics' board in 2003, was the chief executive of Dominion Virginia Power before taking a top management job with General Dynamics in 2008. He moved into the CEO job in June 2009 when Chabraja retired.

Johnson said he felt he met his objectives to extend the company's "excellent performance, enhance the relevance of the products and services we deliver to our customers and continue the development of a strong group of well-qualified executives who would be ready to lead the company into a new era."

Thompson said Novakovic would face tough challenges when she assumes power, including the prospect of $500 billion in additional defense spending cuts on top of $487 billion already slated to take effect over the next decade.

"Johnson is leaving General Dynamics in pretty good shape, but his successor is going to face some really daunting challenges in terms of budget sequestration and declining military demand," he said.

(Reporting By Andrea Shalal-Esa; Editing by M.D. Golan and Chris Gallagher)

By Andrea Shalal-Esa

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