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Atlantic council address david f melcher - exelis ceo - 10-2-13 (final)


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Atlantic council address david f melcher - exelis ceo - 10-2-13 (final)

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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