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Playing Defense

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

Nevertheless, the company also is in the thick of determining which businesses it wants to compete in. “We’ve taken some dramatic actions over the last year and a half, such as spinning off a sizable part of our company [now called Engility Holdings] to shareholders,” D’Ambrosio says. The spin-off of the $1.7 billion government services subsidiary was completed in July 2012.

13Nov_PD_p39a“But we’re also growing the company, too,” adds the CFO. Recent acquisitions include the civil aircraft simulation and training business of Thales Training & Simulation ($130 million) and the electro-optical unit of Danaher ($210 million).  “We’ll continue to make such niche buys, seeking out opportunities that align with our existing core organizational competencies,” he says. “We’re looking for businesses similar to the defense industry, characterized by generally few customers, customized solutions and a bid and proposal process. We’re not ramping up and down here—we’re shifting resources.”

13Nov_Subhed_p39bDayton T. Brown: Deepening Relationships
Smaller defense contractors, too, are revising their plans in the face of shrinking DoD outlays. “We’re deepening our relationships with the OEMs [original equipment manufacturers] to get a bigger share of their wallets,” says Steve Marini, vice president and CFO at Dayton T. Brown, a Bohemia, N.Y.-based subcontractor with annual revenues of $40 million. The fortunes of the family-owned company, which focuses on engineering, technical and testing services, are hinged to those of its major customers, like Lockheed and Raytheon.

“A year ago, things looked worse for us than they look now because of all the uncertainty [around sequestration],” Marini says. “The government was delaying programs and otherwise dragging its feet. We didn’t know whether specific programs would be cut or everything would be trimmed across the board. That slowed down orders from the OEMs, but now we’re seeing something closer to a normal order flow.” He adds, “It’s not boom times, but at least people aren’t afraid to make decisions.”

Since its revenues derive primarily from services, the largest expense at Dayton T. Brown is payroll. Unlike other contractors, it couldn’t sell off a product line or consolidate factories. This made it difficult for the company to get leaner than it already is.

“There wasn’t much fat left to cut, so we had to go after the top line,” Marini says. “One way we’re building deeper customer relationships is by investing in highly specialized testing equipment that most of our competitors don’t have. For instance, we recently spent $1.3 million on a T5500 vibration shaker, which can be used to test how long a bomb rack holds up before it breaks. Customers know if they need something big to be shaken, they come to us.”

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