The defense and aerospace industry has been about as volatile as the global political landscape. Terrorist attacks have cities and countries overseas evaluating their defense programs, providing new markets for U.S. defense manufacturers still recovering from the effect of United States sequestration that led to deep spending cuts.
New Hampshire is home to 350 aerospace and defense contractors, representing about 4 percent of the state’s GDP—the sixth highest percentage nationally, says Dawn Wivell, CEO of Firebrand International, a global market development firm in Portsmouth, and executive director of the NH Aerospace and Defense Export Consortium. The sector employs about 7,000 people in NH, she says, and pays an average salary of $97,000, or more than twice the average salary in NH.
But those companies have been subject to constantly shifting patterns of war and global economics that make for great uncertainty. The National Defense Authorization of 2015 set defense spending in the U.S. at $585 billion dollars for fiscal year 2015, $30 billion less than fiscal year 2013 per a Deloitte report. That drop in defense spending began long before 2013.
Between 2010 and 2015, there was an 18 percent decline in overall federal contract spending, from $540.1 billion to $437.2 billion.
Despite that, in fiscal year 2015, NH companies landed 11,000 prime contracts worth $1.6 billion and an additional $161 million in reported subcontracts, says Dave Pease, program Manager of the NH Government Contracting Assistance Program (formerly NH-PTAP).
With caps set by congress in 2011 on discretionary spending from 2013 through 2021, defense contracts have been slow to ramp up and there is debate about whether caps should be lifted. The Congressional Budget reported in December that appropriations for the current fiscal year do not exceed discretionary spending, and “hence a sequestration will not be required for 2016.”
“We’ve seen steady decline in growth [in revenue] in the last three to four years in the U.S. defense and aerospace market,” says Wivell. She says the industry saw a 3.2 percent increase in 2013 but only 1.9 percent in 2014. She says it appears there was a slight decline in 2015 but that the overall defense market globally is projected to grow 3 percent in 2016.
Large companies like BAE Electronic Systems in Nashua and Elbit Systems of America in Merrimack won a large share of those contacts, but smaller companies such as Appledore Marine Engineering in Portsmouth and AQYR Technologies Inc. in Nashua are also competing effectively in this national market, Pease says. “Best-in-class companies of any size that are prepared to compete nationally often find good opportunities in federal markets” he says.
Wivell concurs. “It’s such an important part of the regional industry base,” she says, adding that while large companies like BAE pump big bucks into the economy by using local vendors, smaller companies are also a vital part of the sector, including contract manufacturers.
A Changing Landscape
One common result of sequestration is job cuts. Among them is Elbit Systems of America in Merrimack, which produces enhanced vision systems for aircraft, man portable equipment, and self-powered towers, among other products. As it appears the defense budget will grow again, David Enos, executive director of Elbit says the company is “well positioned with a broad product portfolio,” which will allow the company to begin adding employees again.
Elbit Systems of America’s integrated tower systetm used for border security. This system detects and assesses items or people of interest from miles away. Courtesy of Elbit Systems.
Enos says belt tightening the past few years came with fierce competition. “Years ago some of our larger competitors would not have been bothered to chase some of the programs we all compete on today,” Enos says, adding that bonuses for coming in ahead of schedule or improving on specs is a thing of the past. The government, he says, is looking for the best equipment at the lowest price.
Another significant shift in the defense marketplace is the reduction in multi-year contracts, says L.P. Frieder, president of Gentex Corporation in Manchester, a manufacturer of helmet systems. “The number of revenue opportunities that fall in that category have decreased in our marketplace. That creates a different level of uncertainty compared to several years ago,” he says.
New Opportunities
The unrest in Syria, Afghanistan and the recent terror attacks in Paris have the international community paying closer attention to homeland security.
“We will see change in 2016. It looks like there are increases in various defense budgets, including the U.S. defense budget and in other countries because of the resurgence in global security threats. Everyone is adding to their security budgets,” Wivell says. “We’re lucky. The U.S is known for having the most innovative military defense products in the world,” she says.
Foreign markets are an important revenue stream for Elbit, a wholly owned subsidiary of Elbit Systems in Israel. “We take a lot of the products we’ve designed here [in the United States] and make changes to them so they are exportable to allied countries,” Enos says.
He adds that recent events are spurring more business overseas. “What does happen when any country or city experiences one of those devastating attacks, it opens their eyes as to, ‘what do we need to do to protect our citizens,” Enos says. “It happens in one country and then ripple effect goes around the world.”
The battle over illegal immigration and demand for more secure borders is another area of opportunity for Elbit. The company designed integrated fixed towers for the U.S. Department of Homeland Security that are being tested in Texas to detect illegal crossings from Mexico. The self-powered towers are equipped with radar systems, day cameras, and infrared cameras for night vision to detect people illegally crossing the border, communicating that data in real time to border agents. The total value of the contract, plus support for eight years, could add up to $125 million or more. Enos says there is discussion of expanding the program to the Canadian border as well.
Gentex Corporation is also responding to increased demand from overseas markets, Frieder says. Despite the defense spending cuts in the United States, Gentex continues to grow through innovation and acquisition, such as the October acquisition of Aegisound, a manufacturer of products that improve hearing protection, safety and communications in high noise environments. In 2014, Gentex acquired a U.K.-based company to help it expand overseas.
“They opened up some customer spaces that we weren’t very active in, but [are] still within our core market. It also allowed us to grow internationally and support the international market more effectively,” he says.
That increase in foreign markets is balanced, however, with the decrease in defense spending in the U.S. Therefore, Gentex is forecasting flat revenue for 2016.
L-3 Warrior Systems’ Insight Technologies division, which has about 700 employees and is based in Londonderry, also sees opportunity in foreign markets, especially security forces and special law enforcement units, says President Todd Stirtzinger.
Adapting to Commercial Markets
Defense manufacturers are also reconfiguring their products for the commercial market. Those in the aeronautics side could see a boom in the commercial market as airlines need to replace aging fleets, Wivell says.
That trend spurred the NH Aerospace and Defense Export Consortium and the University of NH to recently launch a project to help NH defense companies diversify their markets, including introducing products into the commercial marketplace. The project provides a series of courses for businesses focused on diversifying markets. The project is funded through a grant from the U.S. Department of Defense.
Among the defense manufacturers testing the waters of the commercial marketplace is AQYR in Hollis, which manufactures man portable, rugged tactical satellite communications systems that can fold into the size of a suitcase. AQYR’s primary customers are military and federal agencies, but the company has begun working with relief agencies, private companies with military contracts and companies conducting oil and gas exploration.
Team Rubicon, an emergency response team, uses an AQYR Typhoon Terminal following the Earthquake in Nepal. Courtesy of AQYR.
Mark Wheeler, director of business development for AQYR, says that diversification will allow the company to grow revenue by 20 to 25 percent this year and to increase its workforce of 14 by roughly the same percentage. That’s a reversal from the sequestration that forced the company to reduce its workforce.
Elbit produces an enhanced vision system for the military and commercial markets using infrared technology to help pilots land planes safely in fog, rain and snow, or on a battlefield amidst dust and smoke. “It’s amazing how much farther they can see,” Enos says.
Lighter, Smaller, More Efficient
When the government evaluates technology it looks for this trinity of SWaP—size, weight and power. “Trying to get the smallest size with the smallest weight and least amount of power. That is always going to be the Holy Grail—to be the smallest and fastest,” Wheeler of AQYR says.
AQYR’s ability to produce easy-to-use tactical satellite communication systems that can fold into the size of a suitcase is driving its success. “It can determine its own position and locate any satellite,” which means its systems can be operated with minimal training, Wheeler says.
Its systems can receive up to 45 megabytes of information per second—including full-motion video from unmanned aerial vehicles to provide situational awareness—and runs off of batteries.
All of that makes it attractive to military special forces operations, Wheeler says.
Enos of Elbit says among the company’s fastest growing markets is portable technology—essentially equipment soldiers carry or wear onto the battlefield.
“Those soldiers carry over 80 to 90 pounds of gear on a mission,” Enos says. “We focus our product development on removing every extra pound. Extra weight reduces maneuverability and safety. Every ounce and pound we can reduce allows them to do mission better and come home safely. We’re taking existing equipment and combining it in lighter-weight gear.”
Gentex is finding ways to integrate more technology into helmets, Frieder says.
Gentex Corporation’s helmet solutions include the HGU-55/P Fixed Wing Aircrew Helmet System with Gentex High Altitude/Low Profile (HA/LP) Oxygen Mask. Courtesy of Gentex.
“There is an overall decrease in the number of forces. It puts more pressure on those remaining forces who are active and how to make them more efficient is key—lightening their load, increasing their situational awareness and making improvements are critical,” he says.
L-3 Warrior Systems has partnered with other defense manufacturers to develop goggles that display information from other devices the war fighter is carrying so the soldier can receive information without having to look away from a target or lose “situational awareness,” says President Todd Stirtzinger.
A soldier wearing an Insight Operations’ Enhanced Night Vision Goggle, a helmet-mounted dual waveband monocular produced by L-3 Warrior Systems in Londonderry. Courtesy of L-3.
Opportunities for Support Services
It’s not just manufacturers who are keeping a close eye on the federal budget. There are many companies that support those manufacturers that are also navigating changing trends.
HydroComp in Durham, which provides engineering design tools of propulsion systems of ships, supports the U.S. Navy, Coast Guard and Army Corps of Engineers as well as defense contractors that serve them.
Donald MacPherson, technical director and co-owner of HydroComp Inc. in Durham, says as defense contractors make the leap to the commercial market, they are following suit. Its software is used to design shipping vessels and recreational boats as well. The company, which has eight employees, has historically grown revenue about 10 to 15 percent annually.
N’ware Technologies in Dover is a business software applications firm that sells systems to help government contractors comply with regulations regarding proper financial management as government contractors must comply with Defense Contract Audit Agency (DCAA) regulations to win Department of Defense contracts.
“There seems to be renewed interest to go after those contracts,” says Dan Parent, CEO of N’Ware. “There seems to be more bidding opportunities,” particularly in late 2015 and into 2016. Since the recession, N’Ware, which has 75 employees, has grown revenue 15 to 20 percent annually and has been increasing its focus on DCAA compliance as there are fewer competitors in the marketplace, Parent says. He estimates about 15 percent of N’ware’s clients are pursuing government contracts. “Depending on the result of the election, if the budget increases for military and defense, it will be a big year for us in 2017,” Parent says.
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