DRS and $16 Billion Contracts

LEONARDO DRS CEO TALK T-100 AND COMPANY GROWTH WITH AVIATION WEEK

By Jen DiMascioAviation Week & Space Technology

May 11, 2017, WASHINGTON -- Since 2011, Leonardo DRS has undergone significant change, from a company focused on Army technologies to one that is more balanced across the U.S. military, and branching out into new directions.  CEO Bill Lynn, a former deputy defense secretary, recently sat down with Aviation Week editors. He discussed DRS’s in-process acquisition of Daylight Solutions—a company that makes a laser that can improve rotary-wing aircraft survivability—and the company’s first-ever bid as a prime contractor, the M-346 light fighter for the Air Force T-X trainer competition. And, he makes clear that at this point DRS is not for sale.

More on this Announcement

AW&ST: It has been a couple of months since DRS took over as the prime contractor candidate on T-X after Raytheon dropped out. You were optimistic about whether Leonardo as a prime would be able to streamline. How is the relationship going? What are you seeing?

Lynn: We submitted the bid. We think we have a very competitive price. Some of that comes from being able to take layers out, which might not have otherwise been possible. I am not going to get into competitive data. The team, since we are under the same roof, under the same headquarters, has worked very well together, in terms of putting this bid together. It was a seamless operation between Leonardo DRS and Leonardo Aircraft. It gives us a nice combination of an experienced U.S. prime and an aircraft company that has built 60 or 70 of these aircraft and training systems. It gives the Air Force a different kind of offering than they might otherwise have been able to get.

DRS CEO Notes

  • T-X contract would be Leonardo DRS’s first prime aircraft win
  • Predicts real U.S. defense budget growth
  • In process of buying Daylight Solutions

What about the international market for the Leonardo DRS aircraft?

Leonardo has won four of the five competitions they’ve gone head-to-head in. In addition, there is Italy, which I would not really call a competition in this case. Those are frankly smaller buys. The Air Force is 350 aircraft. But everyone is assuming here that the U.S. may expand that buy beyond 350. You hear about another 100, another 200, over time. People are looking at the T-38 [order] size—which was about 520 or 530—and then almost an equal number of international sales. If you have the U.S. franchise, a lot of countries, particularly countries that buy U.S. aircraft, are interested in the training system used for those aircraft. I think that is particularly the case with the F-35. That is one of our selling points. It is already being used to train pilots in Israel who will fly the F-35. So that gets you up toward 1,000 aircraft.

It is one of the reasons all of the companies are putting their best foot forward here. This is an important competition for everyone.

So you see this as a potential franchise for your company?

For sure. We’re not bidding a lot of other $16 billion contracts.

Last fall you were optimistic about where defense spending was going in an administration headed by President Donald Trump. How do you feel about the budget now?

Everybody’s nose is a little too close to the window. If you take a longer view here, you have an Obama budget that was moving up at a couple of percent a year. You have a Republican administration. The nature of Republican and Democratic administrations is that it’s very difficult for a Republican administration not to exceed, by some, the prior Democratic administration’s budget levels. There’s a dynamic that drives you in that direction. And then if you take a third angle on this and look at it historically, we’re at a relatively robust level of defense spending.

In constant dollars, we’re at about $100 billion a year over the Cold War peacetime average. If you’re looking at how robust the market is, I don’t think we’re going to see explosive growth, but we’re going to see some growth. I think it’s going to be above what’s programmed now, and we’re already at a historically strong level. It’s not reading day to day what’s going on at Capitol Hill, because I think you can get a little lost in that.

You still see real growth?

I think you’ll see some real growth. There are two things that are the most important to watch. One is, can they find a way to get out from under the Budget Control Act? It’s still hard, because it takes legislation. It is particularly important, not so much because of what budget number we get this year or next year. It’s more important for stability. Having done this for a living, it’s very, very hard for the Pentagon to plan on 12- or 18-month cycles.

In my mind, repealing the Budget Control Act is important to get that kind of out-year stability. There’s always going to be some variability, but the sequester level is so much below what anybody thinks is really going to happen. It is just way too much uncertainty.

Every six months the question pops up, whether DRS is for sale. Can you address where it is now under the new leadership? And looking back, why did we keep hearing that question?

The new leadership has not taken over. We are in a transition. It’s been announced who is going to take over. But it’s a shareholder vote and that doesn’t take place until May, under a fairly strict governance model.

You shouldn’t listen to too many rumors coming out of the financial community, from people looking for transactions. There was always much, much more smoke. If you look at Leonardo’s strategy, they’ve become a global aerospace and defense company. The largest market for that, more than 40%, is the U.S. A high proportion of their presence in the U.S. market is DRS. So strategically DRS makes sense. It doesn’t mean leadership can’t make their own decisions and change strategies, but I think we’re in sync with the Leonardo strategy.

How do you manage through that confusion, the rumors, though? It has to affect you that the home company and home country are figuring out what to do with you, from across the Atlantic. You can’t just ignore it.

Again, well—you’re assuming because there are rumors in the financial community that there are actually serious considerations going on. I’m saying that at least to this point, that really hasn’t been the case.

And as far as you know, DRS is not for sale?

DRS is not for sale.