Companies in the defense technologies ecosystem began 2021 by continuing to closely monitor operations and supply chains while positioning for short- and long-term federal government modernization efforts. In fourth-quarter earnings calls hosted in late April and early May, top executives in the industry discussed innovation and new technologies, climate initiatives, the global semiconductor shortage, supply chain monitoring and opportunities related to space and satellites.
The executives also highlighted opportunities, headwinds, and strategic initiatives in their Q4 earnings calls, according to Bloomberg. Specifically, the companies represented were from L3Harris Technologies, Inc. (LHX); Teledyne Technologies, Inc. (TDY); BWX Technologies, Inc. (BWXT); Maxar Technologies, Inc. (MAXR); Mercury Systems, Inc. (MRCY); and Kratos Defense & Security Solutions, Inc. (KTOS). Across the earnings calls for these companies, five key themes rose to the surface.
1. The modern threat environment demands new technologies—legacy systems will not cut it
The time has come for federal investment in innovative technologies that replace legacy systems. While maintenance and improvements of legacy systems will continue to some extent, the global threat environment demands new technologies to defend sophisticated air, space and cyber threats.
While maintenance and improvements of legacy systems will continue to some extent, the global threat environment demands new technologies to defend sophisticated air, space and cyber threats.
Eric DeMarco, chief executive officer of Kratos Defense & Security Solutions, highlighted signals of new technology investment from Defense Department leadership, noting: “the [Biden] administration is clearly focused on the retirement of no-longer-relevant legacy systems, including Defense Secretary (Lloyd) Austin and Deputy Defense Secretary (Kathleen) Hicks making it clear that they intend to propose divesting legacy systems in favor of new technology approaches and systems.”
DeMarco went on to say current legacy systems are “the best on the planet, but they’re not the right ones to address the China and Russia threat.”
Chris Kubasik, the incoming CEO of L3Harris Technologies, Inc., also highlighted the recent changes in the acquisition process related to federal customers looking for “disruptive and innovative and agile and affordable solutions.” This shift emphasizes the advances in technology and innovation demanded by the federal government and the charge to contractors to innovate in a quick and affordable manner.
2. Climate change initiatives will bring opportunity in many forms
The Biden administration’s focus on climate change brings opportunity to federal contractors in two ways: first, by helping the federal government improve its environmental footprint; second, by serving agencies that hold the keys to climate data and the expertise to drive change, such as the Environmental Protection Agency (EPA) and the National Oceanic and Atmospheric Administration (NOAA).
As a leader in weather and payload ground systems, L3Harris is particularly enthusiastic around the climate initiatives. Kubasik drew attention to the White House discretionary budget request for NOAA reflecting a 30% increase year-over-year.
Rex Geveden, CEO of BWX Technologies, highlighted the “evolving mission requirements of the Department of Defense, including the reduction of its carbon emissions.”
This quarter’s climate change commentary illustrates the effects of the Biden administration’s commitment to meaningful climate change initiatives, whether it be limiting the government’s environmental footprint or investing in meaningful climate change research and programs.
3. The semiconductor shortage is real, but there’s no need to panic—yet
Defense technology contractors have their eyes on the global semiconductor shortage but have not yet been significantly disrupted.
While most executives are cautiously optimistic about their ability to navigate the related supply chain issues, they also note the significance of the shortage and the potential for negative impacts if the shortage were to exist for an extended period.
Robert Mehrabian, executive chairman of Teledyne Technologies, said he was “cautiously optimistic” but that the situation has the ability to “really spin out of control, and then we’ll have to deal with it again.” So far, Teledyne navigated the shortage by consolidating procurement efforts across Teledyne, working with suppliers to forecast delivery times, placing orders in advance and getting products from foundries.
Mercury Systems CEO Mark Aslett outlined the company’s efforts to position itself for future demand via the company’s trusted microelectronics facility in Phoenix: “We really have positioned ourselves at the intersection of tech and defense to be able to take the commercially available silicon and then transform it for use for defense applications,” he said. “I think it’d be even better if the domestic manufacturing does come back. And so we’re able to get that silicon here domestically as opposed to it coming offshore and us just packaging it and securing it in the Phoenix facility.”
4. A stable and sound supply chain is the key to success
Contractors continue to focus on securing, protecting and reshoring their supply chains wherever possible, particularly in light of the Biden administration’s so-called Buy American executive order, as highlighted by DeMarco. The Kratos CEO called the administration’s Made in America efforts “very beneficial to our country and our company.” Elsewhere, Rex Geveden of BWX and Mark Aslett of Mercury both emphasized the stability of their respective supply chains.
5. Space renaissance: Rebirth throughout the galaxy
While overall defense spending is expected to remain relatively flat, space is a growing segment that will continue to provide opportunity for innovative and technology-driven contractors.
While overall defense spending is expected to remain relatively flat, space is a growing segment that will continue to provide opportunity for innovative and technology-driven contractors.
DeMarco described the space market as “undergoing a renaissance” in which “advancements and ground systems and satellite technologies are joining to form space networks that support multi-domain missions and broader data requirements.”
William Brown, L3Harris’ outgoing CEO, noted “the response of satellites is really where we’ve moved the needle the last year or so, and we were optimistic in the future, so that’s the fastest growing part of the portfolio.”
Finally, Daniel Jablonsky of Maxar Technologies said that demand for space systems and architectures is growing along with the company’s other technologies. “They’re across both commercial and government markets for missions in LEO (low-Earth orbit), GEO (geosynchronous equatorial orbit) and deep space,” he said.
Looking ahead
Company executives in the sector remain agile, anticipating future government spending trends and investing in rapidly advancing technologies. We expect Q2 earnings calls to touch on continued supply chain monitoring, fiscal year 2022 budget expectations, and continued developments around space and 5G.
