Boeing’s KC-46 tanker problems continue. The company is expected to take yet another charge on the refueling aircraft, according to people familiar with the program, with the exact amount to be disclosed in the company's 10K SEC filing on Friday. Since it’s considered an immaterial charge, it was not disclosed when the company reported its quarterly earnings on Wednesday.
The company has already eaten more than $3 billion during the troubled development of the Boeing 767 variant, thanks to the Air Force’s fixed-price contract that keeps taxpayers off the hook. Still, Air Force leaders have become increasingly frustrated with the Chicago-based company for delivering planes with deficiencies that will prevent it from being used in combat until at least 2022.
To date, Boeing has delivered 30 KC-46 aircraft to the Air Force. But the Air Force has withheld about $800 million in payments, Air Force spokeswoman Ann Stefanek said Thursday. That money is being withheld because they are not in full working order.
Earlier this month, Bloomberg reported that Gen. David Goldfein, Air Force chief of staff, sent new Boeing CEO David Calhoun a letter demanding the company — which is in the midst of a crisis stemming from two deadly 737 Max crashes and subsequent grounding — focus more on the KC-46.
“The Air Force continues to accept deliveries of a tanker incapable of performing its primary operational mission,” the letter reads.
Calhoun, on his third day on the job, met with Goldfein earlier this month.
“We’re committed to see that through and see it through the right way and it’s going to finish beautifully,” Calhoun said during a Wednesday conference call with reporters. “It’s going to operate in the field and they’re all going to be proud of it and we’re going to be proud of it.
“It is not going to deter us in any way, shape or form from further investment in the defense side of our house,” the CEO continued. “We’re going to do what we have to do. I want to make sure people understand that and believe in that, ’cause I do.”
Delays in fielding the KC-46 has prompted the military to consider leasing commercial planes to refuel aircraft mid-flight, the head of U.S. Transportation Command said this week. Army Gen. Stephen Lyons, the head of TRANSCOM, said during a Tuesday event an Atlantic Council.
The KC-46 is to replace Eisenhower-era KC-135 tankers.
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From Defense One
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A $13 million DARPA contract will get Northrop working on the problem.
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2019 Earnings Results and 2020 Expectations
- Company: 2018, 2019, 2020
- Lockheed Martin: $53.8, $59.8, $62.75 to $64.25
- Boeing Defense: $26.4, $26.2, No guidance issued
- Northrop Grumman: $30.1, $33.8, $35.3 to $35.8
- General Dynamics: $36.2, $39.4, $40.7
- Raytheon: $31.2, $36.3, Merging with UTC
- United Technologies: $66.5, $77.0, Merging with Raytheon
- Textron: $14.0, $13.6, $14.0
Some Earnings Highlights
Classified work fuels Northrop Grumman’s growth. In fact, so-called “restricted” contracts accounted for more than a quarter of the company’ 2019 sales, CEO Kathy Warden said during a Thursday morning quarterly earnings call with Wall Street analysts. The company was awarded classified contracts totaling “nearly $11 billion.” Of that, “approximately $7 billion” is for space projects. “We clearly still see space as being a growth driver for us into the future,” Warden said.
What about hypersonic weapons? Northrop sees itself providing propulsion for hypersonic weapon prime contractors Lockheed Martin and Raytheon. It has relationships with both, Warden noted. But it could also be a system integrator as well. “We do see ourselves following both paths,” Warden said. “We want to be a good provider to the primes in propulsion and that means making investments that support multiple technology paths, but at the same time we do have a capability ourselves to prime efforts and be an integrator for certain types of systems.”
Northrop sees its space sensors playing counter-hypersonic missions. “There [in counter-hypersonics] we see really our expertise in space and the capabilities that we have in space being a key enabler to the future counter hypersonic mission set,” Warden said. “We have looked at the space business that we are assembling and view ourselves as both a capable prime and payload provider in that space.” This week, DARPA announced a $13 million contract to Northrop for initial research in the field.
Raytheon sees itself playing a big role in counter-hypersonics. “We view the counter-hypersonic market as more opportunistic for us compared to hypersonics,” CFO Toby O’Brien said in an interview Thursday. He pointed to the company’s missile defense radars and command-and-control systems that are vital in detecting and tracking missiles. That data is passed on to the interceptor itself. He also noted that while Raytheon doesn’t build satellites, it builds sensing technology on satellites. “We're playing in the counter-hypersonic area in different ways, albeit, some classified and not necessarily yet multibillion-dollar type of awards,” O’Brien said. “But like hypersonics, opportunity lies in front of us there and we feel good about how we're positioned.”
Lockheed is still waiting for counter-hypersonic contracts. “We really were investing in the counter hypersonics, but we really haven't seen any orders there yet,” Lockheed Martin CFO Ken Possenriede said Tuesday during the company’s quarterly earnings call. “[It] would not surprise us if we're put under contract this year and going forward for counter and those will be dilutive to margins as well.”
Raytheon-UTC Merger Update
United Technologies and Raytheon are now expected to merge “early in the second quarter of 2020” opposed to the first half of 2020. The accelerated timeline is due to progress made over the past three months, including Raytheon and UTC’s effort to divest businesses, Raytheon CFO Toby O’Brien said in an interview on Thursday. Last week, BAE Systems announced it would acquire Collins Aerospace’s GPS business for $1.9 billion and Raytheon’s Airborne Tactical Radios business for $365 million. UTC still has to spin off Otis and Carrier, which is expected before the deal closes.
Raytheon and UTC still need Justice Department approval, which typically comes close to the close date. “We feel confident that the actions we've taken will satisfy their requirements,” O’Brien said. The European Commission is expected to rule by Feb. 28 whether to clear the merger.
2019 Aerospace & Defense M&As
The volume of deals declined 4 percent in 2019 (447 deals when compared to 464 deals), but the value of the deals increased by 62 percent to $93.8 billion, according to a new PwC report. “Statistics regarding 2019 deal values were heavily impacted by the UTC/Raytheon transaction announced in the second quarter,” the report says. “We believe the more telling aspect of the story in the year is found in transaction volumes, which fell just short of 2018, but exceeded the ten-year average in the industry.” PwC expects the deals to continue into the first quarter of 2020.
Brazil Approves Boeing-Embraer Deal
The Brazilian government will allow Boeing to buy Embraer’s commercial airplanes business. “The partnership has now received unconditional clearance from every regulatory jurisdiction with the exception of the European Commission, which continues to assess the deal,” the companies said in a joint Jan. 27 statement. Boeing plans to buy an 80 percent stake in Embraer’s commercial division and 49 percent stake in the C-390 cargo plane program. More here.
China’s Arms Exports Increase
The Stockholm International Peace Research Institute has a new analysis of four Chinese defense companies: Aviation Industry Corporation of China (AVIC), China Electronics Technology Group Corporation (CETC), China South Industries Group Corporation (CSGC) and China North Industries Group Corporation (NORINCO). “The estimates suggest that China is the second-largest arms producer in the world, behind the United States and ahead of Russia,” the analysis states. “All four of the profiled companies would be ranked among the 20 largest arms-producing and military services companies globally in 2017, with three—AVIC, NORINCO and CETC—in the top 10.”
Germany Drops Plan to Buy Triton Surveillance Drone
Instead, it will buy three Bombardier Global 6000 manned reconnaissance planes, Reuters reports. The five-year delivery timeline and $2.66 billion price tag contributed to the decision to scrap plans to buy the Triton, a version of the Northrop Grumman Global Hawk.
GM Picks Subcontractor for Army Infantry Vehicle
GM Defense has chosen engineering firm Ricardo Defense to support logistics and fielding of the company’s U.S. Army’s Infantry Squad Vehicle proposal. “Ricardo Defense will assist GM Defense with integrated product support, typically consisting of vehicle technical manuals and training materials for operators and maintenance personnel,” GM Defense said in a Jan. 28 statement. GM is competing against Oshkosh/Flyer and SAIC/Polaris.
Joseph Dunford, former Joint Chiefs chairman and retired Marine Corps general, has been elected to Lockheed Martin’s board of directors effective Feb. 10. He will serve on the company’s Classified Business and Security Committee and Nominating and Corporate Governance Committee.