Atlantic council address david f melcher - exelis ceo - 10-2-13 (final)
1. 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
2. Atlantic Council Copyright 2013, Exelis Inc.
$100
$200
$300
$400
$500
$600
$700
$800
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
$Billion(FY2013Constant)
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
3. 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
4. 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
5. Atlantic Council Copyright 2013, Exelis Inc.
Industry Trends
Uncertainty has been the key factor behind the pause in industry investment activity
5
2014 2015 201620132012
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 outlookWashington
Industry
Wall Street
…big war era draws to close
Midterm Election
Source: RSA Advisors, Exelis analysis
6. 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
6
7. 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
8. 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
9. 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?
9Copyright 2013, Exelis Inc.
10. 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