Defense technology businesses spent Q3 2020 shoring up their supply chains in the wake of the COVID-19 pandemic. These businesses simultaneously navigated the start of pandemic recovery, shifting election expectations and a continuing resolution. Top executives in the defense technology space highlighted opportunities, headwinds, and strategic initiatives in their Q3 earnings calls, which took place between Oct. 21 and Nov. 20. And in the weeks since those calls, the landscape for 2021 and beyond has continued to take shape with the help of U.S. elections and new legislation. Specifically, the companies represented in this report are L3Harris Technologies, Inc. (LHX); Teledyne Technologies, Inc. (TDY); BWX Technologies, Inc. (BWXT); FLIR Systems, Inc. (FLIR); Maxar Technologies, Inc. (MAXR); Mercury Systems, Inc. (MRCY); Cubic Corporation (CUB); and Kratos Defense & Security Solutions, Inc. (KTOS). Across the calls, the transcripts of which were published by Bloomberg, five key themes rose to the surface. 1. The results of the election matter but don’t warrant a quick trigger The result of the U.S. presidential election is meaningful but not critical to defense technology businesses. The slow and deliberate nature of the federal government (particularly under a divided Congress) usually prevents quick and significant changes in federal spending levels. Both parties appear aligned on issues involving national defense, suggesting steady state defense spending going forward. And on Jan. 1, a bipartisan Congressional vote overrode President Trump’s veto of the National Defense Authorization Act for fiscal year 2021. Five days prior, Trump signed the $2.3 trillion omnibus bill that includes $900 billion in COVID-19 aid. Eric DeMarco, CEO of Kratos Defense & Security Solutions, noted on Oct. 29 that the company’s systems and solutions “will be of increasing importance, irrespective of administration, with federal budget pressures, conflicting funding priorities, and the need to address national state peer threats to the United States.” 2. Environmental, social and corporate governance (ESG) demands a seat at the table Industry executives made a point to communicate plans and progress around ESG initiatives, an increasing consideration of investors, customers and employees. Examples include FLIR Systems’ efforts to, as CEO Jim Cannon said on Oct. 30, “operate in a sustainable and inclusive manner,” “invest in philanthropic efforts with organizations that align with our mission,” and “working with our customers on using FLIR products to make a positive impact on both their operations and environmental footprint.” FLIR also highlighted the importance of environmental reporting to make and track progress going forward. 3. Other Transaction Authority contracts (OTAs) are on the rise The use of nontraditional acquisition vehicles, like OTAs, continued to increase as the federal government prioritized innovation, speed and affordability. Such contracts are highly customizable, making critical review and negotiation of their key terms paramount. Both Kratos and Mercury emphasized the Department of Defense’s evolving acquisition approach—namely an increase in OTA contracts that encourage investment in innovation, quicker technology cycles, affordability, and increased speed to market. 4. Supply chains are disrupted and delayering Progress is being made to shore up supply chains that were severely disrupted during the peak of the pandemic. The DOD continues to prioritize supply chain risk, and some agencies are looking to simplify their supply chains by working directly with niche subcontractors, delayering some of the prime contractors previously involved in procurement. Mercury Systems CEO Mark Aslett on Nov. 3 identified trends in supply chain delayering. Specifically, the company saw end customers bypass some Tier 1 providers in an effort to simplify their supply chain and acquisition process. He coupled this trend with a flight to quality suppliers, shift to outsourcing at the subsystem level and an increased focus on creating a domestic supply chain “to secure trusted advanced electronics designed and built in the U.S.” 5. The stars are aligning for opportunity in space Developments related to satellites and space exploration are driving a focus on the space market going forward. William Brown, CEO of L3Harris Technologies, explained drivers of the expanding space market, noting on Oct. 30 that, “historically, a lot of the space domain was dominated by the intelligence community, but because of the lower cost, faster time-to-market, more onboard processing of our small satellites, it’s opening up new markets within the DOD. So the addressable base for us is actually expanding.” Looking ahead Company executives in the sector remain agile, anticipating future government spending trends, monitoring key supply chain risks, and investing in rapidly advancing technologies. We expect Q4 2020 earnings calls to center around the fiscal year 2021 federal budget appropriations and expected spending priorities of the new Biden-Harris administration, particularly around infrastructure.