Season 3

Team: The Intoxicated

Arpita Mathur N

Tushar Singhal

Sristi Gupta

Executive Summary

Milco is a leading Aerospace and Defense provider in the US with core

products such as Military Flight Simulators (MFS) and MRO technology
systems, as well as corresponding services. Although having strong revenues,
Milco will need to adapt to the budget cuts by the US Government and
increasing competition by new market entrants. The financials of the
company are doing good right now but the projected financials for 2019 do
not show any significant growth in any segment. Infact there is no increase
in demand for MFS and its services over the next 5 years.

Milco can consider stepping out of the Military Facility Construction

segment due to tremendous competition and very insignificant market
share, and also because of increasing global focus on sea-air operations.
Milco can also focus on expanding the MFS segment internationally.
Countries like Russia, China, India and Brazil are going to increase their
defense budgets and they can be the new markets that Milco can target.
The market share for the MRO IT systems can be increased through M&A
with competitors B and D which will enable better technology solutions
and bring down costs. This in turn will create greater demand for the
products in the new markets that Milco can venture into. Technological
innovations like ISR, data analytics and cognition and cyber security can also
be adopted.

Basic Income Statement - Milco

Expenses
Particulars

Income
Amount ($M)

Cost of Goods Sold

1050.00

SG&A

421.00

D&A

106.40

Interest

340.00

Tax

64.14

Profit after tax

23.46

Working Note:
1. Tax is calculated on the taxable income (Operating Profit)
2. WACC is used as the interest rate for the Long Term Debt
3. COGS & Sales
Product
COGS ($M) Revenue($M)
Flight Simulator
360
600
MRO IT Systems
180
300
Flight Simulator Instruction
120
350
Flight Simulation Maintenance
200
400
MRO IT System Services
115
230
Military Facility Construction
75
125
1050
2005

Particulars

Amount ($M)

Sales

2005.00

4. Depreciation and Amortization

Product

Value ($M)

Lifespan (yrs.)

Depreciation
($M)

Flight Simulator

320

10

32

MRO IT Systems

320

20

16

Flight Simulator Instruction

320

25

12.8

Flight Simulation Maintenance

320

25

12.8

MRO IT System Services

320

25

12.8

Military Facility Construction

500

25

20

2100

106.4

Financial Performance

Milco has made profit but profits have been declining since 2011 and will continue to decline till atleast 2019
(projected data) (Assumption: Milco is among the top 20 defense companies in the US)
Product/Service

Profit %
2014

Military Flight Simulator

66.67

59

MRO IT Systems

66.67

66.67

191.66

191.66

100

99.9

100

100

66.67

100

Military Flight Simulator Instruction

Military Flight Simulation
Maintenance
MRO IT System Services
Military Facility Construction

2019

Although profitable, Milco might consider an exit from the military facility construction segment due to

Only 0.1% of US market share and 6% of Milcos business

Extremely large competition in US market (>100 companies)

Global requirement to conduct operations without direct access to airfields and land bases

Market contraction for concentrating more on the primary products (MFS and MRO IT)

Competitive Position
Competitor Analysis

Major Business

Competitor A

Competitor B

Competitor C Competitor D

Competitor E

MFS

na

MRO IT

na

Competition Segment
with Milco
MFS
Significance in the US
market share (wrt
Competition Segment) Very High

Future Planning

International

na

MRO IT &
MRO IT & Services Services

MRO IT &
MRO IT & Services Services

Very Low

High

Very Low

Very Low

Expand MRO

Expand IT
Solutions

Shut down MRO

Entering Military
Market

Milco is currently the market leader in Military Flight Simulator, and Military Flight
Simulator Instructions and Maintenance. Competitor A is the market challenger
It is also safe to assume that Milco is market leader in MRO IT System and Services.
Competitor C is the market challenger

Recommendations for Milco

Investment:
It should try to explore international markets for Military Flight Simulators because:

Primary source of revenue for Milco (30%)

No growth in demand in the US from 2014 to 2019, declining projected profits
US defense expenditure about to be cut by US$52 billion every year for next 9 years
(Budget Control Act, 2013)
Competitor A planning to do the same
Defense spending increasing in Middle East, India, China, Russia, South Korea, Brazil and Japan
Global shift towards sea-air operations, greater need for Military Flight Simulators

Collaboration:
It can consider a M&A of the MRO IT System segments with competitor D and also B because:

Many players in the market (>15), M&A will give quick access to greater market share
Competitor D wants to exit the MRO market
Competitor Bs plans to expand MRO offerings will enable better technology and IT
solutions which will bring down costs and also create greater demand, esp. in international
markets
The market in US is also currently growing (US$3 bn increase in market size in 2014)

Going Global

Adaptation:
Expand internationally:

Brazil, China, India and Russia to provide maximum defense budget increase
Indonesias growth has led to increased military investment
Russia has pledged nearly $1 bn for Russian aerospace industry
Chinas interest in East and South China Sea will create more requirement for air and sea
carriers.

Terrorism has declined in the developed nations, but increased greatly among lowincome nations (India, Pakistan, Iraq etc.). Thus an increase in their defense budgets

Technological innovations:

Cyber security
ISR
Data analytics & cognition

Investment in next generation technologies that can be developed and maintained

at lower costs: Digital product development, Computer Aided Design, Six Sigma
technology

Bibliography

2014 Global Aerospace and Defense Industry Outlook, by Deloitte.

Global Defense Outlook 2014 Adapt, Collaborate and Invest, by Deloitte.

THANK YOU