Post on 29-May-2015
Atlantic Council Copyright 2013, Exelis Inc.
The Business of Defense in an Age of Austerity: Perspectives from the Mid-Tier Atlantic Council
October 2, 2013
Atlantic Council Copyright 2013, Exelis Inc.
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$ B
illio
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Historical 2013 FYDP $1T Cut 2017 Cyclical Low
Another cyclical defense downturn is upon us, but the uncertainty is unprecedented
Defense Spending
$369B (1955) $382B (1975) $384B (1998) $390B (2017 est.)
Historical Troughs
* Constant = Real / Inflation Adjusted
Peak $735B in 2008
Defense Budget Authority – Base Plus OCO (FY2013 Constant*)
Sequestration
2
Cyclical Low
FY13 FYDP
Source: DOD, Exelis analysis
Atlantic Council Copyright 2013, Exelis Inc.
The State of Global Security
War
State Concern
Civil Unrest
Piracy
Drug War
Natural Disaster
Unstable
Highly Unstable
Nuclear Proliferation
Terrorism
Border Tension
Cyber Attack
Threats are numerous, asymmetric and unlikely to abate
3
Source: Exelis analysis
Atlantic Council Copyright 2013, Exelis Inc.
Government Adaptation
From To
Concepts Current Future
Budgets Land Centric “Commons Centric”
Programs Multiple Programs
of Record Select POR +
Affordable Upgrades
Contracts New Starts Extensions
Investment Driver Requirements Resources
Competition Robust Relentless
Declining budgets and expanding requirements are forcing shifts in the shared ecosystem of government and industry
4
Atlantic Council Copyright 2013, Exelis Inc.
Industry Trends
Uncertainty has been the key factor behind the pause in industry investment activity
5
2014 2015 2016 2013 2012
Today
Differentiated performance will drive valuation spreads both within and between sectors –
Valuations comparable to early 90’s
Cost takeout, portfolio rationalization, M&A on hold
Market declines priced in?
Sequestration begins to impact industry
Sequestration Election
Industry realignment?
FY14-16 budget cycles lend clarity to USG spending plan
“Return Value” strategy loses steam and more differentiated strategies emerge
Pol / econ climate will determine future DOD
spending outlook Washington
Industry
Wall Street
…big war era draws to close
Midterm Election
Source: RSA Advisors, Exelis analysis
Atlantic Council Copyright 2013, Exelis Inc.
Mid-tier Strategic Choices
Mid-tiers have a full range of strategic choices
Stay the Course
Reposition
Scale Up Diversify
Exit
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Atlantic Council Copyright 2013, Exelis Inc. 7
Coherent and complementary
portfolio positions have become increasingly important
Electronic Warfare
Critical Networks
ISR & Analytics
Aerostructures
Coherent and Complementary Portfolio Positions
Atlantic Council Copyright 2013, Exelis Inc.
Capital Deployment
8
Interest Rates
Availability of Quality M&A
Targets
Clarity of Customer Funding &
Requirements
Pension Liability
Equity Market Returns
Timing and Degree of Industry
Realignment
Market & Competitor Dynamics
Stock Price
Corporate agility is key to deploying capital in a fluid environment
M&A Share
Repurchase
Pension Dividend
Policy
Allocation Choices
Influencers
Atlantic Council
U.S. Congress
Trade Organizations BRT, AIA, NDIA, etc.
Gov’t & International Customers DoD, NASA, FAA, DHS, etc.
“Competimates”
Commercial Customers
Media & Influencer Groups
Partnerships and Engagement
How can we best forge productive partnerships?
9 Copyright 2013, Exelis Inc.
Atlantic Council Copyright 2013, Exelis Inc.
Industry Concerns
• Congressional funding levels
• Industrial base durability
• Government assumptions regarding industry investment
• Trade and ITAR reform
• Clarity of customer requirements
10
Government / industry engagement is the key to success