Second shutdown looms over earnings week; What’s up with L3-Harris merger ; F-35’s flashy rollout; and more.
Take a deep breath; Q1 earnings week is just about over. For those of us who listen in on company conference calls (*pats self on back*) or just read the transcripts later, this is the first of four weeks per year that are...let’s just say they’re time-consuming.
But it’s an opportunity to hear what’s on the mind of defense sector CEOs. No surprise this time: it’s the budget situation. A 35-day partial government shutdown just ended; another one looms in less than three weeks unless Congress and the White House strike a spending deal. And that’s just nailing down funding for the current fiscal year that started four months ago. As I mentioned last week, the Budget Control Act caps are set to return when fiscal 2020 arrives at the end of September.
Most executives tried to downplay the doomsday scenarios (another shutdown, spending caps return, some other type of fiscal nightmare) that could start on Oct. 1. Several CEOs appeared to be operating off the same set of talking points.
“What I am hearing in my discussions with members of Congress is the bipartisan support for defense spending,” Lockheed Martin CEO Marillyn Hewson said Tuesday. “There is no doubt that the threats are getting greater around the world.”
CEOs pointed to the year-old National Defense Strategy, the one that warns of great power competition with Russia and China. They warned of North Korea and its missiles. And they spoke of the need to recapitalize aging weapons.
Harris CEO Bill Brown talked about how the Pentagon is moving to modernize weapons after two years of focus on rebuilding readiness.
“[T]he modernization ramp clearly has happened — we're seeing significant growth in modernization spend as we expected and have communicated to our investors over the last couple of years,” Brown said Tuesday, touting his company’s tactical radio business.
But even if federal spending turns flat or dips following two years of sizable defense spending increases, it’s not likely to have an immediate impact since defense is a three-to-five-year cycle business.
“Even though there’s uncertainty on where budgets for ’20 and beyond are going to go, even if they come down a little bit…we’re still going to grow for another three to four years,” Raytheon CFO Toby O’Brien told me this morning. “We feel, because of our products and our capabilities, that we’re very well positioned.”
Raytheon, which booked a record $32.2 billion in sales last year, is expecting revenue to grow 6 percent to 8 percent this year. It’s also projecting growth in its backlog, which currently stands at a record $42.4 billion — about 40 percent for international sales.
“All of that puts us in good position not just for ’19, but beyond for future growth,” he said.
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Netherlands Celebrate First Operational F-35
You’d normally expect to see the Dutch DJs Sunnery James & Ryan Marciano at Miami’s Ultra Music Festival or other global electronic music festivals. Wednesday, however, found the energetic pair at Lockheed Martin’s F-35 factory in Fort Worth, spinning beats amid lights and lasers for the rollout of The Netherlands’ first operational Joint Strike Fighter. There were suits and cowboy hats in the audience; Lockheed CEO Marillyn Hewson and Will Roper, the head of U.S. Air Force acquisition, were spotted clapping to the beat. You should check out the video, because it’s really something else.
Aircraft delivery ceremonies are often over-the-top. I’ve only been to a handful, but each was memorable for one reason or another. There was the time in St. Louis when Boeing unveiled the F-15 Silent Eagle, a plane that they were pitching against the F-35. On display, if I recall correctly, was a stock F-15 with fake canted vertical tails and internal weapons bay. Perhaps even more memorable was the time, also in St. Louis, when Australia received its first F/A-18 Super Hornet. Forget the pageantry. The most memorable part was when a senior U.S. Navy officer — in front of hundreds of Boeing employees in St. Louis — home of Budweiser and the world’s largest brewery — talked about how much he liked Australian beer. Didn’t think he’d make it out alive. And new planes aren’t the only excuse to play loud rock music and deck out a hangar with laser lights. Northrop Grumman once did it in a factory outside Baltimore to show off a radar it had developed for F-16 fighter jets. Here’s a YouTube list of other F-35 rollout ceremonies.
Back to the F-35 for a minute. Lockheed has delivered more than 165 jets to the U.S. and allies. It has a backlog of “nearly 400 planes,” Hewson said Tuesday on her quarterly earning call. Some more numbers: The company delivered 91 F-35s in 2018 and is expected to deliver 131 this year. (The factory can build 180 per year.)
What about the Air Force’s possible purchase of Boeing’s F-15X? “If they chose to have an order on F-15, it won't be at the expense of F-35 quantities,” Hewson said. “I'm hearing that directly from leadership in the Pentagon and I think that's an important point to make, not just our suspicion, but I've been told that directly. So, I'm not concerned about that.” Hewson’s comments are in line with what Gen. Dave Goldfein, the Air Force chief of staff, told Defense News’ Jeff Martin last week that if the Air Force does in fact buy the F-15X, money would not be taken from the F-35.
Canada-Saudi GD Misses Combat Systems Projections
General Dynamics made a rare move: warning Canada not to pull the plug on its $13 billion armored vehicle contract with Saudi Arabia. (GD makes the vehicles in London, Ontario.) The company’s Combat Systems division missed its projections by $8 million, which CEO Phebe Novakovic said was “largely attributable to the diplomatic issues that slowed production of a vehicle program in Canada in the fourth quarter.” Novakovic said: “To be clear, this is a timing issue and we expect to receive the delayed payment this year.” “Diplomatic issues” refers to the Canadian government’s threats to pull the plug on the deal following Saudi’s alleged killing of journalist Jamal Khashoggi.
What’s Up with L3-Harris Merger
Executives are still expecting the deal to close in mid-2019, but the government shutdown has slowed regulatory approval. Harris CEO Bill Brown — slated to become CEO of the merged L3 Harris Technologies — said Tuesday that “we believe we have enough slack in the schedule to absorb the near-term delay without impacting the mid-year closing.” Also, he said, the company might sell its night vision business. (Both Harris and L3 are players in night vision technology.) The Justice Department made a second request for information from the companies in early January. “As part of the regulatory process, we're moving proactively to explore the possible sale of our Night Vision business,” Brown said.
Big changes at L3. CEO Chris Kubasik continues to reshape L3 into a more traditional defense company. “We changed out two of the four segment presidents during 2018. Across the enterprise, over 70 vice presidents exited the business last year. We replaced them equally with external hires and internal promotions all bringing energy and new ideas. We took significant strides to energize our employees and to build a culture of respecting collaboration.” That’s a big change for a company whose divisions used to compete against one another for business.
Huge Growth for Boeing Defense
Boeing’s defense and space business reported 2018 revenue of $23.2 billion, up 13 percent from the previous year’s $20.6 billion . The division booked $36 billion in new orders, Boeing CEO Dennis Muilenburg said Wednesday during the company’s quarterly earnings call. Remember, Boeing won deals for Air Force pilot training jets, security helicopters, and Navy MQ-25 refueling drones last year. Two KC-46 tankers have been delivered and two more have been accepted and will be delivered to the Air Force “imminently,” Muilenburg said. An important asterisk: Boeing books defense business within its Global Services and Commercial Airplanes division, so that $23.2 billion number does not reflect the value of all of its defense contracts.
MQ-25 drone to fly this year: The unmanned refueling drone for the U.S. Navy is undergoing ground testing and is expected to fly late this year, Muilenburg said He said the company has already “demonstrated deck handling and engine trials.”
FLIR Acquires Aeryon
FLIR announced Tuesday that it has acquired drone maker Aeryon Labs Inc. for $200 million. “Aeryon Labs is now part of the FLIR Government and Defense Business Unit’s Unmanned Systems and Integrated Solutions division,” the company said in a statement.
Three moves this week at Dynetics:
- Steve Cook and Mike Moody were named executive vice presidents. Cook leads the company’s corporate development organization and is also president of Dynetics Technical Solutions. Moody manages the company’s business operations.
- Ronnie Chronister was named a senior vice president. He leads the company’s contracts organization.