Space is the new frontier, as the evolution of combat progresses from land to sea to air and, finally, to zero gravity.
3. Supply chain management is critical: Simplification and transparency are key. L3Harris and Mercury Systems executives identified opportunities associated with maximizing and securing their supply chains. Specifically, Brown of L3Harris noted the business is expecting “substantial activities” in 2021 relating to facility rationalization and other opportunities within their supply chain. Aslett, Mercury’s CEO, highlighted the DOD’s focus on a domestic supply chain, noting that the department “remains focused on China’s militarization and tightened tensions in the diplomatic, technological and economic domains.” As a result, the DOD’s top defense technology priority is U.S.-produced trusted microelectronics. These sentiments align with recent executive orders from President Joe Biden to buy American and review critical U.S. supply chains. 4. Shed the old to prepare for the new: Portfolio shaping continues as contractors realign strategic priorities. Contractors are shedding unattractive business lines to focus on their core competencies and areas of focus for defense technology going forward. L3Harris’ Brown highlighted the company’s continued efforts to “position the business for long-term value creation by exiting non-core businesses and focusing on significant R&D investment on more strategic technology-based business areas.” Divestitures and increased investment are indicators that contractors are positioning themselves to align with the new administration, the future of defense and technological advancement and innovation that is revolutionizing the battlefield and changing how we gather and act on intelligence. 5. M&A simply isn’t slowing down. The roaring M&A environment over the last 10-plus years (with a brief pause for 2013 sequestration and the 2020 pandemic) is showing little sign of slowing down. Nearly all executives noted the depth of their M&A pipelines and access to cash and debt needed to finance acquisitions going forward. A significant transaction of note was Teledyne Technologies’ purchase of FLIR Systems (a company we covered in prior quarters) in calendar year Q4 2020. Mehrabian, Teledyne’s executive chairman, provided context around the deal rationale, noting that Teledyne had been watching FLIR since Teledyne first entered the space-based infrared imaging market in 2006 when it acquired Teledyne Scientific and Imaging. “We believed then and we believe now that our infrared imaging technology and market segments are uniquely complementary,” Mehrabian said. “For example, Teledyne entered the subsea drone business in 2008 and FLIR entered the airborne unmanned business in 2016, and, more recently, the land-based robotics business.” This illustrates the opportunity for contractors to enhance and expand their technologies, applications and end markets via acquisition. Kratos Defense and Security Solutions CEO Eric DeMarco emphasized the synergistic opportunity associated with M&A, explaining that many of the opportunities in the company’s M&A pipeline “could truly be one plus one equals four or five, not one plus one equals two.” Looking ahead Company executives in the sector remain agile, anticipating future government spending trends and investing in rapidly advancing technologies. We expect Q1 2021 earnings calls to center around future spending trends under the Biden-Harris administration, executive orders issued during Biden’s first 100 days, continued developments around space and 5G, and more M&A.