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[Music]
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[Music]
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We're speaking today with Dave
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Meltchure, CEO of ITT Excelis, which
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spun off from ITT exactly a year ago.
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About 70% of Excel's revenues come from
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defense related businesses. And so uh in
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this world today with sequestration and
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other issues coming to the four um
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everyone's wondering what defense
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companies are going to do uh in the in
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the new world. Could you tell us a
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little bit about your company and and
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the industry in general?
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We are a defense and aerospace company
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uh but we also do networking. Uh and one
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of the things we've tried to do over the
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past uh several years is to diversify a
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bit away from sole dependence upon the
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Department of Defense. Uh and so as you
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mentioned we're 70% DoD today and we're
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30% other and that other constitutes uh
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organizations like the Federal Aviation
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Administration, NASA International is
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now about 10% of our revenues and
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commercial is about 3 or 4%. Uh and so
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we're trying to grow in those latter two
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arenas certainly and we're trying to
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find some other business uh be it
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governmental or you know otherwise that
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allows us to use our technologies in a
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different way than just solely
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supporting the department but DoD is
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still very important to us uh you know
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don't don't mistake that. Uh and so
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we've tried to you know adapt to thrust
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on for the Pacific uh different
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priorities and focus areas that'll be
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needed for the future.
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The military's gone so high-tech in
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recent years and um a lot of the
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discussion around the defense budget has
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been doing away with some of the bigger
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platforms which are seen as not as
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important whereas some of the more
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electronic capabilities are increasingly
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important. Could you discuss um how that
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shift is happening and um how your
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company's positioned for that? Well, I
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think we're very well positioned for
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being platform agnostic, you know, is is
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probably the way to term it. um we build
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the capabilities that either go on
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platforms whether they're new ones like
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the F-35 or uh if the decision is made
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to upgrade F-18s, F-16s, you know, we
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build a lot of capability that goes on
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those platforms as well. So, you know,
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we we don't rise or fall on any one ship
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or plane or ground combat vehicle. Uh in
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terms of priorities, electronic warfare
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uh has been a stated priority for the
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future. uh networking is a stated
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priority and of course we have deep
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capabilities in both of those areas. Uh
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and then sensors to decisions you know
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everyone says we have so many sensors
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today unmanned aerial vehicles you know
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airborne sensors shipboard sensors how
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do you make sense of all the data that's
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coming in through all these multiple
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venues we have a lot of capability there
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in integrating big data and you know
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making it more accessible to the users
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uh you know of of every service. People
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talk about big industries like defense.
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If you try to make changes, it's like
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turning the Queen Mary or perhaps a big
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battleship is a better metaphor. The
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whole industry has to shift as the
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Pentagon's priorities are shifting. Um,
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how difficult is that going to be for
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the industry? How much is it going to
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change? How different will it look 5
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years from now? Well, I think it is
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going to be a wrenching process uh for
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defense and aerospace companies,
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particularly those that are more pure
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play uh aerospace and defense companies.
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uh because the fact is we've been on a
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you know a growth pattern for the last
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10 years and these things tend to go in
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10ear cycles 10 years up 10 years down
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uh so I think everybody in industry is
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trying to brace uh for the proposition
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that this could be an 8 to 10 year down
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cycle so I think getting cost structures
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uh you know aortioned correctly to the
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amount of revenues flowing through the
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businesses re-examining footprint you
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know looking for ways to you know be
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more uh economical in delivering those
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capabilities and services will be
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extremely important. Affordable
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capabilities is something that all of
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our customers are going to need on the
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DoD side. Were these big tectonic
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changes in the defense industry um a big
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part of the decision for the spin-off of
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uh your company from ITT? Well, I think
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the the underlying thesis for ITT
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Corporation was that the sum of the
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parts, a big defense company, a big
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water products company, and a big
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industrial products company were not
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being valued, um, you know,
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proportionate to their their underlying
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worth. Uh, and so the theory was that if
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the company split up, uh, then defense
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and water and industrial products could
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be valued more in line with the
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multiples, uh, that were acrewing to
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each of those industries. I think the
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company felt it was a little overweight
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in defense on the eve of a defense
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downturn. Uh so you know since we uh
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have broken up I think that theory has
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basically held true. Each one of the
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companies has performed fairly well
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realizing that the economy is still not
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you know entirely there for the
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commercial side of the business and we
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know we're facing a defense downturn.
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But you know for our uh stock for
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example we came on the market at 1033
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and as of yesterday we were at 1099. So
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there's been return to shareholders in
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that year and we've paid about a 4%
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dividend on top of that. So you know we
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feel like we've performed in line with
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expectations and the other two have as
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well. Uh but that was the theory of the
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case when you um were preparing for the
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spin-off. Uh what were the biggest
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challenges that you saw and how did that
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comport with reality and also what were
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some of the biggest surprises over the
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first year uh from the spin-off that
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that you found? Well, you know, the
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preparation for a spin-off is uh
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meticulous. Takes about 9 to 12 months
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depending on on how hard you're going to
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charge. You got to get all the SEC
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approvals. You certainly have to get the
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IRS approvals. You have to determine how
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to split up all the assets, if you will,
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of the company and the liabilities of
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the company. Uh you have to have uh
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transaction service agreements for IT
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and for contracting and for shared
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services. And so we had a very
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disciplined process to work our way
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through that over the nine or 10 months
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uh prior to the spin-off. Then once we
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had spun off, of course we had to build
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a corporate team and we worked on that
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prior to the spin-off. We went from a
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about a 60 person uh group headquarters
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inside of a larger corporation to about
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a 125 person corporate team adding tax
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and audit and uh treasury capabilities
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that were you know formerly part of our
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parent. Uh and so we we tried to bring
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in a good diverse group of people with
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different backgrounds and experiences
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including commercial experience to try
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and help us build a team that could be
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ready for the you know for the
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challenges that await it. For me
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personally as a CEO um the time
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allocations are very different. Um
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dealing with a board probably takes 25
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to 30% of your time. Uh whereas you were
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not doing that previously. uh dealing
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with the external community, the
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analysts community, your investor
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community. Those are all new parts of
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the picture for a CEO of a spin-off
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company. And then not the least of which
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is managing the business uh now with no
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reliance on other parts of the company,
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you know. So if it's a tough defense
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year, perhaps the commercial business is
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doing well. If it's a good a tough
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commercial year, perhaps the defense is
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doing well. Now we're pretty much, you
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know, left as a defense and aerospace
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company uh that has to, you know, fend
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for itself in this marketplace. But I
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think, you know, we're trying to do that
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very well and manage the challenges uh
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that are out there. Um let's talk a
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little bit more about that funding for
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yourself. What's your what's your
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overarching strategy over the next two
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to four years, let's say? Well, we
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intend to be, you know, a very agile
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defense, aerospace, and networking
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company that can bring not only high
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technology solutions, but affordable
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solutions to our customers. And I'm
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talking customers in the Department of
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Defense, in the other federal agencies,
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internationally, and commercial
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customers. And so we have a very wide
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portfolio as you as you've observed in
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looking at uh what we do lot of core
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electronics air traffic management we
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have air structure composits business
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and we have a lot of sensors to
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decisions capability including cyber
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related capabilities. So what we're
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trying to do is focus our investments
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wisely on those things that represent
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the greatest opportunity for us uh and
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managing this portfolio in a in a smart
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way to take advantage of the growth
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platforms that we have even in a defense
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downturn. defense related companies um
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and the Pentagon are probably the
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biggest targets of attack of cyber
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warfare and um you therefore would have
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to have a lot of experience in
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protecting your systems and anti-cyber
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warfare and all the rest of it. Uh are
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you now or or will you be using that
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capability to advise other firms on how
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to secure their own networks? Uh we do
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in fact have a a very extensive uh you
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know cyber protection capability. We
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defend our own networks. Uh and like
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every other defense company and many
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commercial companies out there, you
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know, there have been a lot of attempts
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to try and extract information from
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those networks. We think we're very good
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at doing that. And the reason we have to
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be good is because we manage the FAA's
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air transportation network. We manage
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NASA's deep space network and the
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Curiosity Mars rover um you know effort
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is part of the network that that we
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manage. We have to have those networks
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secure as well. So it's not just about
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securing our own network. It's about
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securing the networks of our customers.
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And so we do think that there's wide
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applicability for those capabilities
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that we have. Uh we are advising a lot
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of federal customers with respect to
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that. Not so much other commercial
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companies. Uh we're not necessarily you
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know in the business of doing you know
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what what many companies do for
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commercial businesses. Tell us about the
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Mars Curiosity project. uh what your
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company does and uh any special
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challenges given that's probably the the
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furthest piece of equipment away from
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you that you've ever had to work with.
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Well, we manage NASA's deep space
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network which is a a series of three
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gigantic uh antennas uh in the Mojave
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Desert in Spain and Australia to try and
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communicate with all those things. uh
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you know the Voyager which is way out
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there now you know at the outer limits
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of the galaxy the Mars rover um you know
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you have to have a means of
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communicating with that capability so
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that it can do the experiments and send
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back the information uh we're very proud
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to have been uh managing that contract
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for NASA for the last several years and
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so we were out in Pasadena at the Joint
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Propulsion Lab uh the evening when the
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Mars rover landed and our communications
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folks were side by side with the NASA
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people trying to ensure that everything
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went according to plan and the series of
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miracles that had to happen for that
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thing to land uh cap you know on Mars
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and we were a part of that and we're
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very proud uh to have made a
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contribution to this great effort.
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Um could you talk a little bit about the
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specific opportunities you see for
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taking your technology which is as we
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say mostly defense related and applying
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it to non-defense businesses or niches.
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Mhm. Well, as I said, our commercial
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business is now today about 3 or 4% of
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revenues, but I think we have the
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potential to expand that going forward.
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And here are a couple examples. Uh,
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aerosure composits. We make these parts
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for the F-35 and for the Sakorski
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helicopters that are part of the marine
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inventory, but we've also done
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commercial parts for Boeing, and we're
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looking to expand that with Airbus
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Boeing and other commercial carriers uh
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because we have a great facility out in
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Salt Lake and can expand it. The
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machines don't care whether it's a
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commercial or a defense part. And so
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there's one opportunity. Space payloads.
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Uh we've built these for the government
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and very high-end capabilities, but
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we've sold a weather payload to Japan
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and we're trying to sell imagery
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payloads uh in places like the United
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Arab Emirates. Uh and then we also have
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some some defense technologies that have
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a commercial application. For example,
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one is uh a brain cancer treatment
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called Novacure. Um it was an Israeli
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technology. It's been through FDA
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trials, but it centers around the
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pasoelectric discs that are part of a
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harness that helps to prevent brain
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glyopblastoma and then lung also. Uh,
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and so it's because they they emanate a
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perfect uh electric current that was
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developed for DoD purposes on largecale
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sonar arrays but now applied to a
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medical technology. We also have a
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commercial uh imagery business uh you
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know and tools to take commercial
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imagery geollocate it and make it
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accessible to businesses that use that
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kind of information. So I think we
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really have a number of opportunities in
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the commercial um you know market that
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are close to our core capabilities in
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defense uh and that can be explo
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exploited as we go forward for the lay
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person. Would you explain in a little
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more detail what imaging means in in the
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way that you're using it? Uh when I'm
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talking about imaging, I'm talking
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about, you know, capturing images that
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uh perhaps are captured by space
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payloads or unmanned aerial vehicles uh
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and tagging that imagery to, you know,
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geoloccation on the ground for use. For
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example, Hurricane Sandy just came
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through. There are any number of
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organizations that need to look at
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patterns of what's happening with
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flooding as it relates to levies as it
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relates to, you know, other critical
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infrastructure that's on the ground. We
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have abilities to take layers and layers
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of data and make it accessible for use
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not only by uh military organizations.
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For example, in the case of solving
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improvised explosive device issues, but
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also available to commercial uh and
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federal uh agencies to use that
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information for what they need to do on
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the ground to execute their mission. So,
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it's taking all these layers of data and
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imagery and and using them in meaningful
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ways. So, this is cameras on satellites
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basically. Is that is that correct? Yes.
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Well, it it starts there, but it can
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also be cameras or infrared devices on
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unmanned aerial vehicles as well. Okay.
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Other areas um that that you've
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developed special expertise in that can
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apply to uh commercial areas that that
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would be interesting to know about.
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Well, you know, I think I mentioned a
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couple of them. Um you know, we're
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trying to look for opportunities. We've
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looked at uh you know, some energy
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harvesting solutions. We've looked at
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some power generating solutions because
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we have a power solutions business that
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have commercial applications for first
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responders and things like that. Um, you
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know, basically we try and and orient
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our businesses to bring forth good ideas
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like this for potential investment that
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have wider applicability and potential
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market applications in commercial as
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well as military markets. And so we're
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we're constantly trying to explore the
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frontier of what's possible. So those
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power applications would be what sort of
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portable portable generators? Yeah. Uh
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portable uh in power inverters that
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could be on vehicles and yield maybe
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three or four or five times the power
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that previously could be done by a
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commercial alternator. Where this is
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important is in theater for example
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where on vehicles now you have the
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radios plus you have geo positioning
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equipment plus you have jammers and you
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have other command and control
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applications all of which consume great
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amounts of power for a military
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application. The same is true now with
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first responders who have ever more
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capability that are going on their
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vehicles that has to be powered somehow
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and so we have a capability to do that
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that we've developed. anything more
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you'd like to tell us about your
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strategy going forward before we we uh
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end our discussion? Well, I I just think
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uh you know, Excelis is a new company.
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We're one year into our our new history.
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Uh but of course, we come from a 50-year
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legacy of defense capabilities within
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ITT Corporation. So, it's it's a new
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company by name, but an old company by
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capability. And I think the frontiers
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that we're trying to explore now, you
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know, for our Department of Defense as
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well as our other customers and
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emphasizing those technologies that are
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really going to be important for the
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future like networking, like imagery,
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like electronic warfare. Those are the
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kind of things that I'm excited about
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and I know our employees are as well.
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And so, uh, we think we have a bright
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future ahead of us and we're going to
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keep, uh, working to bring our customers
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the right things that they need to be
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successful. Thanks for joining us. Thank
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you.
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