In February 2015, when Harris first announced its plans to acquire fellow defense company Exelis, CEO Bill Brown called the deal transformational. Nearly 16 months after the deal close, it’s fair to say that’s true. Harris saw its defense revenue climb 85 percent in 2015 to $4.4 billion. It jumped in our Top 100 rankings from 39 to 17.
Brown spoke to Defense News Executive Editor Jill Aitoro about the acquisition, a year and a half later, and what the future holds for a company now swimming among the far bigger fish.
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Q. So is it fair to say that the acquisition of Exelis explains the jump in defense revenue?
A. Yes it does. We completed and closed on Exelis on May 29 of last year. It was the largest we had done in the history of Harris Corp. and we’re now one year into integration. It’s going well. It really was a transformative acquisition for the company. It added scale. It broadened our technical offerings. And it gave us additional capabilities in four key areas. One is space and intelligence. Exelis brought strong capabilities in electro optics, and we combined that with Harris’s expertise in RF [communications], which has allowed us to offer broader sets of solutions. It’s a domain growing quickly for us and others in the industry. It also gave us a better position in air traffic management. Together we have good position in surveillance and communications, with good opportunities to grow internationally, bringing UAVs into the air space systems.
The third area was in global weather. We all see the need for more accurate predictable forecasts; that requires more optical space-based sensors, which drives more data, [enabling more advanced] ground processing. Last, is the electromagnetic spectrum domain. Harris has world-leading capability in RF communications, and Exelis in electronic warfare. [Combined] it provided capabilities in communicating through contested environments.
Those are the four themes as to why we put our companies together. We’re pleased, and it made us a more formidable player.
Q. You mentioned some civilian-focused areas, like air traffic management and weather satellite capabilities. Any opportunity to extend those to support your defense business?
A. We provide air traffic management to civil and military; but it’s primarily FAA and international air traffic navigation service providers. On the weather side – what Exelis has is a broad suite of space-based sensors. Some of those capabilities are provided on satellites for the military. But primarily it’s civilian applications. But when I step back and think what’s required for putting sensitive sensors on orbit, providing responsive sensor-based solutions for military, intel – that’s a direction we're heading in.
Exelis had a strong position on legacy platforms. Not new, but strong on legacy – they offered the F-18 Integrated Defensive Electronic Warfare System, [and] sell a solution for international F-16s. We’ve been winning contracts on B-52, and rotary aircraft. What drives this is new threats that the US military is seeing overseas, particularly from Russia, where legacy systems have to be upgraded. That plays to the strength of Exelis. And Harris is strong in phased array [antennas]. It allows us to take front end phased array, and the signal processing of Exelis, and package them in new ways to different customers. This will take time; the platforms have long gestation periods. But we’re working diligently.
Q. The acquisition seemed to go pretty smoothly. Any words of wisdom?
A. We did strong due diligence. Our integration planning was good. And what made the biggest difference is we put together an outstanding team, led by a full time seasoned integration leader. We had dedicated resources. We had regular CEO and board level reviews. We made decisions quickly, we moved fast. Really from May 29 to now – almost all if not all of the integration efforts have been kicked off and completed. We also focused pretty intently on retaining key talent. We had an organizational model we created for our business segments, and we populated the leadership ranks with strong representation from both Exelis and Harris. Almost 50/50 mix.
Q. Any more M&A planned?
A. I think now we’re focused on paying down the debt we took on to acquire Exelis. We’re focused on driving cash flow. For now I don’t see M&A on the near term horizon. Certainly longer term it will be a growth driver. What we’re focused on now, is deleveraging and looking at the portfolio.
Q. Where do you see the most potential in terms of defense opportunities?
A. The area that is very interesting to us is the space domain, space superiority. You have Air Force officers talking about space as a contested environment, and we provide capabilities that are useful to our military customers. How do we drive reliability, resiliency, flexibility in the architecture, with multi-sensor, multi-mission capabilities.
Q. While Harris of course jumped quite a bit post acquisition, a lot of defense companies were either flat in terms of defense revenue or saw a modest dip. What challenges emerged in 2015?
A. I can speak for Harris. Over last year our short cycle business – tactical radios, for example – came under pressure, [particularly] outside the US. And that was affected by a slow procurement environment. Slow approval process through FMS pushed to the right a number of opportunities outside the US. That’s something all the players are seeing. Space and intel, electronic systems, air traffic management – those are longer cycle business. We expect low single-digit growth there next fiscal year.
Q. We hear a lot about the need for FMS reform, even from some within the Pentagon. What needs to change?
A. I think they’re faced with a large volume of work on a certain group of people that’s not getting bigger. The volume going through FMS has gone up pretty dramatically over the last couple of years. It’s a key part of the problem. It’s volume driven.
Q. Harris is an interesting player in the defense space, in that you straddle system and IT services, even as some large primes are exiting the IT business. How do you mange that balance?
A. The IT business is a big [portion] of our portfolio – $1 billion for Harris, with two-thirds defense related, and one-third civil. It’s a broad variety [of contracts], not any of which are particularly large. That’s an area that did come down in terms of revenue as the market has shifted, [moving] more toward shorter contract lengths. But it’s stabilizing.
Q. The acquisition did elevate Harris, at least in terms of revenue, to a position nearly in line with some of the prime contractors. Has competition shifted at all? Do you find yourself going up against different players?
A. Exelis made us a solidly mid-tier player in the defense space. We have scale and critical mass in key franchise areas that we can prime when it makes sense. But we also support a prime if that’s the best solution. I don’t see today that we have any capability gaps.
Q. Do you expect to be able to maintain this level of revenue longer term, or is this the immediate result of a nearly $5 billion acquisition?
A. For our guidance for our fiscal 2017, which just started, we see top line revenue down low single digits. The weakness we see is in our service business, and short-cycle tactical radio business. But longer cycle businesses are up low single digit. And longer term, we should see growth returning through significant investments in [independent research and development] of up to 4 percent of revenue.
Q. Where does international play into Harris’s future?
A. Right now international is 25 percent more or less. We were above 30 before buying Exelis, which was more focused on US. The majority of our international is defense, and that has been driven by the tactical radio business. Our international tactical radio business is twice the size of US.
Q. We hear a lot about global companies – often with support from government – bolstering domestic development and manufacturing. Is that happening in the radio space?
A. We run into competitors from around the world. But when you are standardized in a certain market, that military customer tends to come back. It has to be backward compatible. You also develop a strong customer relationship. That has a degree of sustainability. [That said] there are international customers that are looking for local waveform, crypto capability – some modest transfer of technology.
We also see the radio business growing in 2018 and beyond through modernization in both Army and SOCOM, who are upgrading to newer wide-band capabilities. We have won positions on all those vehicles. We’re well positioned to grow as those programs get funded.
Q. We’re in an election year. Any hopes for what we might see emerge with the next administration?
A. Defense spending is on an upturn. It was in the last president’s budget request, and I would hope that would be sustained. We believe that our national security hinges on strong military spending. And we hope they solve the Budget Control Act issue.
Q. Did Harris take a hit from sequestration significantly?
A. We sure did several years ago when sequestration was triggered. All the downturn, it impacted our business – particularly short cycle. But more importantly, with the government shutdowns, furloughs – it drives hesitancy on the part of acquisition officials to spend. We all, in business and certainly in government, work on certainty. If you tell us what the budget is going to be, we can work within constraints. As we transition to a new administration and new Congress, that is the key thing on my mind – driving some certainty into the budget environment. That’s a hope from our perspective.