Interview: CAE’s Dan Gelston on the Acquisition of L3Harris Military Training

In the wake vortex of CAE’s announcement that it will be acquiring L3Harris’ military training business, Halldale Group Editor Marty Kauchak virtually met with Dan Gelston, Group President, Defense & Security for CAE.

MS&T: Dan, thanks for again taking time to meet with MS&T. Let’s start by following up the 1 March announcement of CAE’s intent to acquire L3Harris Military Training business.
Dan Gelston: We’re very excited about the announced acquisition. I hope I gave you a little indicator the last time we talked that I had an aggressive plan for both ‘organic’ and ‘inorganic’ growth to fill out some of our gaps. We think CAE is the best home possible for L3Harris Military Training business. This is a business that we have known and admired for decades, and they have certain areas that are complementary to our business, as well as being similar in nature. In fact, when we were walking through their facility in Arlington, Texas and doing our due diligence, the common theme from my team was: this feels a lot like how we do things at CAE USA in Tampa, this is the same kind of culture, focus on the customer, mission and same level of passion for training and simulation. We think it is going to be a great fit!

MS&T: And the timing of this acquisition?
DG: The last time we talked we discussed that paradigm shift, for the US and its allies, driven by the US defense strategy. It is going from an asymmetric threat back to a near-peer threat, and that is driving the need for training and simulation, particularly in the digital realm across all five domains. And that is the key: do we have capabilities to provide world-class, digitally immersive training solutions in all five domains?

When you look at the combination, L3Harris is almost the size of our current US business – the combined businesses will be over $1 billion in revenue in the US, then CAE’s significant international business will bring our total Defence & Security revenue to over US$1.5 billion.

When you look at it through the lens of the five battlespace domains, they really complement us and solidify our leadership in the air tier – we have traditionally been strong in air mobility platforms and Navy helicopters while L3Harris have had the fast-jets and bombers – this is a beautiful marriage. They augment our land and sea capabilities. For example, we have done training systems for surface ships like the Littoral Combat Ship bridge simulators being delivered to the Navy while L3Harris has done highly classified submarine trainers.

And when you look at space and cyber, they really help us with an entrée to those domains. For example, the US Air Force Ground Based Strategic Deterrent (GBSD) program has a significant space component and L3Harris is the training systems integrator for Northrop Grumman, who is the prime. In cyber, L3Harris is priming the US Air Force’s Simulator Common Architecture Requirements and Standards (SCARS) program that will tie all 50-plus Air Force platforms together in a single, cyber-hardened network. You can train in full five-domain elements no matter where you are, or whatever platform you are on; they are all connected together – and cyber is the key.

MS&T: We would expect CAE’s own competencies will provide synergies in this acquisition.
DG: Yes, they are similar enough to where we are going to find a lot of synergies. We’re going to help with manufacturing and supply chain. And yet, they are different enough, particularly in the classified realm because L3Harris was a longstanding US business, whereas our highly classified work only came online several years ago with our AOCE [Alpha-Omega Change Engineering] acquisition. We see much of the future training in this multi-domain environment being ‘behind closed doors’. When you look the next generation platforms, they are highly classified. L3Harris has been working on the B-2 training system for three-plus decades – and that experience and expertise could lead into the new US Air Force B-21 Raider. And then all their experience on fighters like the F-16 and F-18 leads quite naturally to US DoD’s NGAD [Next Generation Air Dominance]. Their remotely piloted aircraft training work will help us in MQ-9B and future autonomous opportunities. It’s a good balance of where we are now and where we need to go.

Probably one of the biggest areas where we see synergies are in things like the full-flight simulators. Now, L3Harris buys a commercial flight simulator (RealitySeven) from their commercial business ‘across the pond’. They complete the cockpits, the paneling and cable work at AMI Aviation [Oklahoma, US] and they do final assembly, test and integration in Texas. If it’s not classified, we can do this manufacturing at CAE’s facility in Montreal, where we probably do 70 full flight simulators a year. No one else has this type of production line and supply chain for simulators, and that leads to cost and schedule synergies that are beneficial to our customers. This is another case where we think 1+1 can equal 3.

MS&T: You mentioned the new B-21. Is CAE competing for B-21 training system work?
DG: That is a very attractive opportunity coming up. L3Harris is bringing its bomber portfolio to CAE – three-plus decades of working closely with Northrop Grumman on the B-2, and now also on GBSD where Northrop Grumman is the prime. While we have worked with Northrop Grumman in the past, we have done more work on the CAE side with OEMs like Lockheed Martin, Boeing, Airbus and others. Adding that relationship is exciting to us. We’re only a couple of years out from seeing this B-21 sixth-generation bomber platform coming out and of course, it is highly classified. We hope that the expertise, experience, past performance and prime relationship gives us an excellent opportunity to be the training systems integrator for the B-21 going forward.

MS&T: Will the S&T community once again see the ‘Link’ label?
DG: I don’t want to be premature, and there a lot of conversations to have regarding integration, some of which we can’t do until after closing. My gut says I would like to think that the Link name and its 90+ years of history [since 1929] is something we can carry forward and somehow leverage with the CAE brand, which is also incredibly strong in the training and simulation market.

MS&T: And post-closure, later this calendar year, how will CAE Defense & Security rank in size in the broader military S&T industry?
DG: We’ve done quite a bit of analysis on the overall addressable market. At the macro-level, the top five, to the best of our estimates, make up about one-third of the market in the US. In that top five, the non-OEMs are CAE and L3Harris. Put us together and we’re a little less than 10% of the overall market share. There are OEMs above and below us. Lockheed Martin would be at the top while Boeing and General Dynamics would each be sitting just below a combined CAE/L3Harris business. And you would have FlightSafety at number five. So, the US military training and simulation market will still be highly competitive and served by major OEMs, specialist companies, and a wide variety of small businesses. What we’re really going for is that pure-play, platform-agnostic, global military simulation and training leader not tied to a specific set of platforms. Training and simulation is our priority. That’s all we think about, all we do, all we invest in and that is going to be very exciting for L3Harris Military Training to be part of a company where that is the focus.

MS&T: How might the value of your new portfolio better allow CAE to compete for business?
DG: CAE’s Defense & Security unit is a little over US$1billion in business, with that split roughly 55% US and 45% international. We’re going to essentially double the size of the US business with the additional of L3 Harris. So, following close of the acquisition we’ll be at over US$1.5 billion in Defense & Security with a portfolio that’s about two-thirds US and one-third international. We’re excited about that. At that size, particularly in the US, you reach a ‘critical mass’ – you’re a legitimate prime for the really big training and simulation programs. You’re here to stay, you have the past performance, you have stand-alone capability and economies of scale. We can hopefully take on some much bigger jobs as a result of that critical mass, both in the US and internationally.

MS&T: Will this acquisition help increase your international business share in the next 3-5 years?
DG: Out of the gate, at acquisition close, we’ll be roughly two-thirds US, one-third international. Traditionally, L3Harris Military Training has been a focused US business – over 80% of its revenue is from the US. And as noted before, CAE is much more balanced with a significant international business. What’s particularly exciting for L3Harris is now they will all of a sudden have access to a robust international infrastructure and business development network with services and support to really accelerate the offering of their products and services internationally. CAE has literally hundreds of people in the UK, Germany, the Middle East, Australia, Asia Pacific, and thousands in Canada of course. And for CAE, it means we have a much broader portfolio of solutions to offer our international customers. We’re really looking forward to that ‘revenue synergy’ – expanding our ability to sell more of their products and services for a longer-term period internationally.

MS&T: You’re also increasingly focusing on the classified aspect of your business.
DG: We have been predominately at the ‘Secret’ level until several years ago. The AOCE acquisition by CAE USA that formed CAE USA Mission Solutions elevated that to the ‘Top Secret’ level. The preponderance of business for L3 Harris has been in the classified world – 80% of their employees have Secret-level clearances or higher. That and other attributes give them the ability for lab work such as the collaborative research they do with the Air Force Research Laboratory and DARPA along with the classified platforms – things we touched on such as GBSD, B2, submarine work and others. That gives you ‘stickiness’ – the higher the classified level, the higher the barriers to entry, the more difficult it is to get long-term, trusting relationships. So, when I look forward to sixth-generation platforms – B-21 and others – because of preparing for this near-peer threat, more and more programs will be classified. The US Air Force budget, for example, had, until recently, about 20% of its programs listed as classified. This past year, almost one-half was classified. This will only continue with these next generation platforms. So, what we get in L3Harris is a trusted, long-term partner, with hundreds of ‘cleared’ engineers and secured compartmented information facilities [SCIFs]. While we’ve been successful in the classified parts of our business, they really put that infrastructure, understanding and knowledge on overdrive and that should benefit both CAE and most importantly, our customers.

MS&T: Given the new and strengthened competencies L3Harris is bringing to the acquisition, how will your core S&T product and services portfolio further evolve in the next 3-5 years?
DG: A particular focus for CAE is digital immersion. We see the future is digital. Marc Parent, President and Chief Executive Officer of CAE, several years ago dedicated Cdn$1billion in our Project Digital Intelligence R&D program to allow CAE to have as a major business focus and accelerate investment in digital immersion. We’re talking here about investments in artificial intelligence, virtual and augmented reality, and data analytics – all leveraging cloud computing to make this digital immersion possible. We’ve done a lot of work in this area – you’ll recall the last time we talked about our Single Synthetic Environment technology demonstrator for UK Strategic Command.

There is also a US Special Operations Command program we’ll be doing that is giving a ‘single pane of glass’ for situational awareness by integrating information, real and virtual, from all five domains to provide a common operational picture. L3Harris has something similar when you look at their work on GBSD – they’ll be building eight training products and working on software for the decision-making process – expanding from pure training and simulation to mission operations and support. This sounds similar to our SOCOM work in a digitally immersive environment.

Moving forward you’ll see CAE putting more emphasis on mission operations and support with a focus on the digital immersion, the digital twin, moving synthetic environments into the decision cycle beyond just the pure training element. While we’ll remain focused on our core simulation and training market, and continue to be the lead training systems integrator, we see mission and operations support as a close adjacency.

MS&T: Thanks for taking time to share these interesting new insights and perspectives. Perhaps we’ll have an opportunity to again meet in a ‘live’ setting later this year.
DG: You’re welcome, and I look forward to our meeting.

Editor’s Note: In the late 1980s, CAE acquired the military simulation and training business of the former Singer-Link (Binghamton, New York and Silver Spring, Maryland), which included programs such as USAF B-2, F-16 and F-117A simulators, US Army helicopter sims, and USN rotary-wing and submarine trainers. That business, re-branded CAE-Link, was sold in 1995 to Hughes Electronics in Arlington, Texas, which was subsequently acquired by Raytheon in 1998, who revived the Link name, and then L3 in 2000 (becoming L3Harris in 2019).