Defense technology businesses spent Q4 2020 focusing on the future of defense, as well as the technology and innovation required by the federal government to protect the homeland and compete with nation-state threats. These businesses simultaneously navigated the start of pandemic recovery while considering how to position their businesses strategically via divestitures and acquisitions.
Top executives in the defense technology space highlighted opportunities, headwinds, and strategic initiatives in their Q4 earnings calls, the transcripts of which were compiled by 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. While there may be a long-term reckoning for defense spending, the geopolitical climate cannot be ignored.
Record levels of government spending in calendar year 2020 in response to the pandemic suggest a reckoning for federal spending is on the horizon. With defense spending being the key line item of the federal budget, executives expect total defense spending to be flat going forward. A few voiced concerns about downward pressure on defense spending and reiterated that any cuts would have to be limited, given the tense geopolitical climate involving large, sophisticated nation-state threats like China and Russia.
Robert Mehrabian, executive chairman of Teledyne Technologies, said: “With the world situation as it is today, we think defense is going to be stable, and we have long-term programs in very critical areas, including space infrared programs that are going to be healthy.”
If new pressures on defense spending do materialize, Mark Aslett, CEO of Mercury Systems, suggests: “We’re likely to see an even greater focus on existing platform modernization, speed and affordability,” which could suggest continued use of non-traditional contracting methods, such as other transaction authority (OTA) contracts.
2. Defense is extending to the galaxy, and satellite data is critical to identifying and targeting threats.
In light of flat defense budget expectations, contractors are positioning themselves for the segments of the budget that are expected to grow in share—most notably space and satellites. Space is the new frontier, as the evolution of combat progresses from land to sea to air and, finally, to zero gravity.
William Brown, CEO of L3Harris Technologies, referenced Secretary of Defense Lloyd Austin’s confirmation testimony about the “focus on space.” Brown also noted that this focus is not just across the Department of Defense but also woven throughout the intelligence community.
Daniel Jablonsky, CEO of Maxar Technologies, provided greater detail on space defense, explaining that “one of the key goals of these investments by the government is to achieve an advantage on the battlefield by shortening the sensor-to-shooter timeline from space, which is all about seeing, identifying, targeting and prosecuting dynamic targets, at scale and at distance.” He also noted that the goal of the DOD is “driving to combine broad-area surveillance and automatic target recognition to support long-range precision fires at speeds required on future battlefields.”
Space is the new frontier, as the evolution of combat progresses from land to sea to air and, finally, to zero gravity.
