Interesting finds in earnings reports; More details about US bomb shortage; Boeing loves Capitals hockey, and more.
Springtime. The weather is improving, baseball is back, and the NHL playoffs start to heat up — but more on that later. For now, let’s check on some major defense firms’ first-quarter earnings, the first reported since Donald Trump moved into the White House. Among the items of interest:
Lockheed Martin took a $120 million charge for “performance matters” on EADGE-T. That’s short for Extended Air Defence Ground Environment-Transformation, which CEO Marillyn Hewson described as an effort to build “the world's first end-to-end integrated air and missile defense system.” Who’s the launch customer? The United Arab Emirates. What’s its problem? “Our solution to date has proven to be less mature than needed for this highly complex effort and we are working with the customer to fulfill their requirements,” Hewson said. “We do believe, however, that once completed, this system has the potential to bring these uniquely integrated capabilities to other customers around the world.”
General Dynamics is plowing ahead with the U.S. Navy’s final two DDG 1000 destroyers, nearly a year after delivering the first. (The newly commissioned ship experienced some woes during the voyage to its homeport in San Diego.) Now GD’s Bath Iron Works is building the last two of these next-generation destroyers. “The final two ships of this class are demonstrating very good levels of ship-over-ship learning in terms of labor hour performance, which is our prime metric that we look at when we look at shipbuilding,” said Phebe Novakovic, chairwoman and CEO. In fact, the firm “experienced the best ship-to-ship learning curve we have ever seen at Bath on that program,” she said. “To the extent that there was any risk, I believe that is behind us.”
Boeing says President Trump’s deregulatory policies are already helping defense projects. “In the Defense Department, we’re seeing streamlining of regulations and contractual structures, things like improving the cycle time on foreign military sales…which is an enabler for us on helicopters and fighters,” said Dennis Muilenburg, chairman, CEO and president said. “We’re seeing progress on things like multiyear procurement programs and performance-based logistics. These are things that are clearly working to our benefit broadly as an industry.”
Northrop Grumman leaders say the Trump administration's national security spending plan is still unfolding. Or, as chairman-CEO-president Wes Bush put it: “Recognizing that any new administration has a limited opportunity to refine the next year budget input only into in his time in office, the better indication of the vector of national security investment will be the 2019 budget submittal, which will be the first time a more broadly populated team in the new administration has the ability to put its imprint on a comprehensive approach to addressing the national security challenges.” Bush said the 2019 budget should take into account the results of the just-started nuclear posture review and other “critical assessments now under way.” Bush’s bottom line: “Absent some dramatic event, we should expect a modest upward trend for the foreseeable future in national security spending.”
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Tracking the Bomb Stockpile
We received some more details about the bomb stockpile shortage that U.S. defense officials have been warning about for more than a year. Now U.S. Pacific Command is shipping Small Diameter Bombs to U.S. Central Command, which oversees the airstrike campaigns in Iraq, Syria, and Afghanistan.
“These are not exciting kinds of weapons; these are mundane sort of weapons,” Adm. Harry Harris, the PACOM commander, told the House Armed Services Committee on Wednesday. “But they're absolutely critical to what we're trying to do, not only...against North Korea, but also in the fights in the Middle East.”
The bombs are also being shipped to Africa, Harris said. “That's the fight we're in and they need them, so we send them there and they use them, which is a good thing.”
Small Diameter Bombs were originally made by Boeing. Newer models that can strike moving targets in bad weather are made by Raytheon.
What else is Harris short? Raytheon AIM-9X and AIM-120D, the latest air-to-air combat missiles for fighter jets.
Continuing resolutions, government shutdown fears, Budget Control Act caps, and sequestration! New president, same budget fights. But there are still expectations that the Pentagon investment budget — that’s procurement and research-and-development funding — will rise. “We believe that mid-single digit growth is a consensus,” Byron Callan of Capital Alpha Partners wrote in a note to investors last week. By his calculations, there’s almost a one-in-two probability that DoD investment spending “achieves mid-single digit annual growth in current dollars” in fiscal years 2018 to 2021, a one-in-three chance of 2 to 3 percent growth, and a one-in-five chance that it exceeds 7 percent.
Callan notes that some sell-side analysts expect 7 percent or more growth. “[W]e don’t believe there is consensus that growth expectations could falter,” he wrote.
Fun fact: Since 1977, there have been 17 government shutdowns due to lack of budget authority, Callan wrote. The most recent was in 2013.
When Bill LaPlante returned to MITRE in 2015 after three years as the Air Force’s assistant secretary for acquisition, he was put in charge of the organization’s intelligence portfolio. Now he has a new job: senior vice president and general manager of MITRE's Center for National Security, which includes two federally funded research and development centers — the National Security Engineering Center and the National Cybersecurity federally funded research and development centers. Separately, Cubic Global Defense, the security arm of Cubic, named Diane Giuliani formerly of Textron Systems, senior vice president of global business development and strategy.
Boeing Defense Loves Caps Hockey
If you’ve been anywhere near the Verizon Center over the past two years, you may have noticed a lot of Boeing logos and advertisements of the firm’s defense products. Along 7th Street Northwest, massive jumbotrons on the outside of the arena have displayed videos of C-17s, Super Hornets, KC-46 tankers, and other defense products. Inside the arena, the firm’s blue logo is affixed to the boards during Washington Capitals games. Video screens show animated Super Hornets — painted in Capitals red, white, and blue — taking off from aircraft carriers, while hovering Apache helicopters appear before game highlights. Playoffs games this year are “Presented by Boeing.” Tickets even have the Boeing logo affixed to them these days. Defense contractor Leidos is another noticeable sponsor of the Capitals.
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