Defense firms still hate the infatuation with Silicon Valley; L3 looks to reverse overseas slump; F-35 price tags, revisited, and more.
For two years, just about every conversation I’ve had with defense executives and production line employees alike has at some point led someone to say: ‘Hey! We can innovate too!’ But more recently, they’ve been asking a question as well: Now that Ash Carter is no longer defense secretary, what happens to his Silicon Valley push? Fact is, we still don’t know.
Carter’s successor, James Mattis, may have offered a clue at his Jan. 12 Senate confirmation hearing. Asked whether the military would continue its pursuit of alternative energy sources, Mattis replied, “I've been living in Silicon Valley for the last several years, so you can understand my interest in what they're doing out there in the private sector.”
Still, the new SecDef has yet to lay out his major policy priorities. He has spent his first weeks at the Pentagon focusing on the Defense Department’s 2018 budget proposal and a supplemental spending aimed at boosting military readiness.
But the Silicon Valley question keeps coming up. And the big defense companies are still trying to make their case.
“We don’t always get credit for it, but I would argue we still have the best engineering force, bar none. I think we still have the most innovative engineering force, bar none,” Lockheed Martin CFO Bruce Tanner said Wednesday at Cowen and Company’s Aerospace/Defense & Industrials conference in New York. “I think the solutions that our workforce can come up with have yet to reach their highest potential.
“I think everyone looks at all innovation comes from Silicon Valley or all innovation comes from small companies and I’m here to tell you, I don’t think that’s true,” Tanner said. “Not in our case.”
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L3 standing up international offices
L-3 Communications...make that L3 Technologies, since Jan. 1, is undertaking a similar overseas rebranding as it works to reverse an international-sales slump.
L3 plans to rebrand its business in the U.K. and Australia, where it has “a pretty good infrastructure,” President and COO Christopher Kubasik said Wednesday at the Cowen and Company conference. The firm is also standing up offices in the Middle East and Canada.
“We’re making the investments in both the infrastructure and the people,” he said.
The firm’s international sales were down about 10 percent in 2016 and another 3 percent reduction in sales is expected in 2017, said CFO Ralph D'Ambrosio.
“We definitely have the ability in 2017 — if we capitalize in some of our upside pursuits — to probably have some modest growth internationally,” D'Ambrosio said. “Over the next year or two, there’s going to be some significant opportunities that we are already pursuing … that should allow us to return the entire international portfolio to growth.”
Where might that growth come?
“Just look at the geopolitical problems, whether it’s in the South China Sea or areas of in the Middle East,” said Chairman and CEO Michael Strianese. “There’s certainly an appetite for maritime patrol [and intelligence, surveillance and reconnaissance] to cover border issues.”
Strianese pointed to the firm’s “affordable solutions,” including two versatile Beechcraft turboprop aircraft that L3 outfits with high-tech electronics.
“These are solutions … that can provide 80 percent of a mission at 20 percent of the price of the larger platforms being offered elsewhere,” Strianese said.
Two weeks ago, the State Department approved the sale of 12 Air Tractor attack planes to Kenya, which wants the aircraft to strike al-Shabaab. L3 is the lead contractor on the project as its integration work helps turn the cropduster into a armed attack plane.
The Air Tractor is a “small, rag-tag type plane, but it does the mission and it does it well and it’s very affordable and it makes that capability well within the budgets of some of these smaller countries,” Strianese said.
Qatar missile-defense deal
Speaking of international deals, Raytheon is expecting to get a contract in the coming months for a massive, early-warning radar from Qatar. The Gulf state, situated near Iran, has expressed interest in the missile tracking for years.
“The country of Qatar decided to add on more capability into their buy of ... an early warning radar,” Tom Kennedy, Raytheon chairman and CEO, said Wednesday at the Cowen conference.
Qatar wanted “additional items” to be part of the deal, which is subject to U.S. government approval and oversight, delaying the finalization of the contract three to six months, Kennedy said.
Aside from the contract, which could top $1 billion, and the size of the radar, the deal is a big one because Middle Eastern nations have just minutes to react if Iran launches a missile.
About those F-35 prices
Remember when we charted the price tag of the F-35A from the military’s first buy in 2007 to the latest buy announced this month? Well, we now have more comprehensive data that includes the F-35B, the short takeoff and vertical landing version, and the F-35C, the version that can fly from aircraft carriers.
What did we find? The prices of the other versions of the plane are falling too, however the rate of decline is less consistent steady and consistent than the F-35A. That’s likely because far fewer F-35Bs and F-35Cs have been purchased compared to the F-35As. The Pentagon and its allies have purchased a total of 113 F-35Bs (83) and F-35C (30). Compare that to 241 F-35As. The price of the F-35B is also coming down at a more steady rate over the past four purchases of jets.
One more note from the latest buy of jets, which was announced last Friday: The price of the F-35A fell 7.4 percent; the price of the F-35B fell 6.8 percent and the price of the F-35C fell 7.6 percent.
Lockheed is already preparing for the next round of F-35 contract negotiations. “We’re hopeful we get that done this year,” Tanner, Lockheed’s CFO, said on Wednesday at the Cowen conference. Internally, the firm is shooting for a deal for the 11th batch, called LRIP-11, of F-35s in the late third or early fourth quarter of the year, he said. “Since we just negotiated [the 10th batch, called LRIP-10], and we think there’d be a lot of carry over in terms of the sorts of cost data you looked at in LRIP-10 versus LRIP-11,” Tanner said. “We’d like to think we could get LRIP-11 done maybe in a sooner fashion than we had previously.”
Fighting words … Lockheed is still not happy with the Pentagon over the previous LRIP-9 contract. And Tanner hinted at action. “If we’d have agreed with the position, we would have accepted the contract that was offered,” he said. “We think there’s a difference in our position versus the government’s obviously. I don’t think it’s something that necessarily gets dropped. There’s different avenues for how we could potentially pursue this thing.” He noted the company can take its claim to the federal appeals court “basically until the contract is complete.”
Italy’s Leonardo to fly solo in bid for USAF training jet
First Leonardo tried to partner with General Dynamics to pitch its M-346 pilot training jet to the U.S. Air Force. That didn’t work out. Then along came Raytheon. After less than a year together, they broke up. Now Leonardo says it will place a solo bid with DRS Technologies, its U.S. business, serving as the prime contractor. Northrop Grumman, which last week announced it would not enter a bid despite scratch-building a jet, is still not bidding. We’ll keep you posted on any new twists and turns, which are bound to happen with so many companies involved in the T-X contest.
Northrop's new head of Japan business
Stan Crow has been named the chief executive of Northrop Grumman Japan, as the American firm looks to grow its business in the Pacific. “As chief executive, Northrop Grumman Japan, Crow will be responsible for leading the company’s development in Japan by supporting current programs and developing growth strategies,” the company said in a statement. Japan is buying the E-2D Advanced Hawkeye and Global Hawk, both made by Northrop, which opened a Tokyo office in 2014.