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Playing Defense

CFOs of defense contractors are preparing their companies for a new era of austerity at the Pentagon.

13Nov_Subhed_p38Exelis: Strategic Investments
Exelis, a McLean, Va.-based diversified global aerospace, defense and information solutions company spun off from ITT in 2011, has been undertaking a “fairly aggressive” restructuring this year, says Peter J. Milligan, senior vice president and CFO. “We’re leaning out the cost structure with the assumption things will get worse from sequestration and the shrinking government budget,” he says.

The contractor (2012 revenues: $5.5 billion) is cutting its 20,000-strong workforce by 6%, partly through a voluntary early retirement program. It’s also reducing its real estate footprint by 10% in 2013 and another 10% in 2014. All told, restructuring is expected to cost the company between $70 million and $80 million this year.

13Nov_PD_p38At the same time, Exelis is sharpening its business focus. By selling off noncore businesses like fiberglass reinforced pipe manufacturing, Exelis can plow more money into strategic investments extending its capabilities in mission-critical networks, ISR (intelligence, surveillance and reconnaissance) and analytics, and electronic-warfare systems. The latter supports the detection, defense and defeat of threats on the electromagnetic battlefield (bursts of electricity that render technology devices useless).

Exelis is also strengthening its nonmilitary and commercial businesses. The company’s recent acquisitions include C4i, an Australian provider of advanced communications software used in air traffic systems; Space Computer, which makes real-time signal processing systems and software used in satellites and unmanned aerial vehicles; and Applied Kilovolts Group, a maker of precision high-voltage power supplies for medical, scientific and food safety instruments.

“We are spending more money on fewer things, and making sure we concentrate on our true competitive advantages,” Milligan says.

13Nov_Subhed_p39aL-3 Communications: Shifting Resources
L-3 Communications (2012 revenues: $13.1 billion), a New York-based prime contractor in command, control, communications and ISR, also is effectively managing through sequestration, says senior vice president and CFO Ralph G. D’Ambrosio. “We’re being vigilant about how we manage our various businesses, being sure they’re properly sized to what we anticipate the demand will be,” he explains. “We’re always trying to stay ahead of the curve, which requires making projections and assumptions about what might happen to the volumes. Obviously, in a cyclical downturn, the assumption is our defense business will be declining.”

In response, L-3 is seeking to grow its nondomestic defense revenues, with special focus on its commercial businesses and foreign military sales. (About 70% of the company’s 2012 revenues came from government business, primarily the DoD.) Regarding the former, L-3 has a leg up on competitors, D’Ambrosio claims. “We have more commercial, nonmilitary revenues in our business base, which will help us offset the declines in our military business,” he says.

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