The Global Business Brief: Defense firms endure coronavirus pandemic; Why Northrop’s CEO didn’t lobby for COVID bailout; Air Force narrows search for new drone, and more.
It’s becoming abundantly clear that companies with heavy defense business have been able to endure the coronavirus pandemic much better than those with sizable commercial aerospace portfolios.
That group: Lockheed Martin, Northrop Grumman and General Dynamics.
“All in all we weathered the storm of the second quarter reasonably well,” said General Dynamics CEO Phebe Novakovic, during this week’s earnings call. “This will be the low point of the year as we and many of the analysts had anticipated.”
Companies with a lot of commercial exposure, like Boeing and Raytheon Technologies, are having a far rougher go as they predict it will take at least three years for airline passenger travel to return to 2019 levels. It’s led to layoffs, furloughs and pay cuts.
As I wrote Tuesday: “A strong commercial business could allow a company to place a competitive low bid when competing for Pentagon contracts and make larger investments in military-related research and development.” It could also prevent strategic investments, like buying a company with a unique technology.
Here are some other highlights from the companies reporting secord quarter earnings this week:
Northrop continues to win big classified contracts. The company booked $5.9 billion in classified space deals in the second quarter, CEO Kathy Warden said Thursday on the company’s second quarter earnings call with Wall Street analysts, largely off of a single contract award. “It is quite significant,” Warden said. “I can't provide any color on what it is, but suffice it to say, this is a long-term program as a result of the size of the effort.” Classified Pentagon contracts have been fueling Northrop’s growth in recent years.
Up in Maine at General Dynamics Bath Iron Works, thousands of shipyard workers are still on strike, but have returned to the negotiating table. During the company’s second quarter earnings call on Wednesday morning, Novakovic, General Dynamics CEO, called the strike at Bath “immaterial to our results. This is our smallest shipyard generating less than 2 percent of our profits. So its impact was negligible.”
“We need them as part of our industrial base,” James “Hondo” Geurts, the head of Navy acquisition, said of the shipyard during a Thursday call with reporters. “We value that shipyard. We value the product that they produce for our Navy. My expectation is the corporation and the union work very hard and very urgently to resolve this so they can get back to full strength building ships for the Navy. Our sailors are expecting that and I’m expecting that.” Geurts said he was encouraged both sides were back at the negotiating table working with a federal mediator.
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Senate Coronavirus Stimulus Includes Cash for Contractors
The fourth coronavirus stimulus package introduced in the Senate this week — a $1 trillion plan put forth by Republicans — includes $29.4 billion marked for the Pentagon, of which $11 billion is meant for defense contractors that have had business disrupted by coronavirus. Most CEOs have been lobbying for the money, which Congress authorized the funding in the CARES Act earlier this year, but did not appropriate any funds. Politico reports that $8 billion is set aside for weapons, including the F-35 Joint Strike Fighter, C-130J cargo plane, new wings for the A-10, P-8 submarine hunters, ships and National Guard equipment. Progressive groups have opposed using the stimulus to pay for weapons.
Why didn’t Northrop’s Warden join her CEO peers in lobbying for the bailout? “I want to make it clear, though, that we are supportive of a strong national defense and recognize that funds need to be appropriated to support that objective and we are directly engaged in supporting that cause,” she said. “However, we did see that our impacts from COVID were less significant than we are seeing projected elsewhere. Therefore, we have continued to focus on that very issue making these impacts as small as possible, so that we are not in a position where we have an additional bill for taxpayers to get capability delivered. And we'll continue to be focused on that as our primary objective.”
Congress is running out of time to pass the much needed stimulus before the August recess begins at the end of next week. “It is unclear how the $1 trillion GOP proposal and the $3 trillion Democratic proposal will be reconciled but given that enhanced unemployment benefits that helped avoid severe economic damages are expiring there will be pressure for Congress to move quickly,” Avascent’s Matt Vallone, wrote in a Wednesday newsletter. “Expect a resolution by the end of next week.”
What Trump’s Foriegn Drone Sale Changes Mean for Companies
The White House said late last week that it would relax drone exports by reinterpreting language in an informal agreement between 35 countries that had limited overseas sales of armed drones. Defense companies have long argued that the policy was prompting U.S. partners to buy drones from China, particularly in the Middle East. The changes will allow U.S. companies to compete in the future, but don’t expect countries that have purchased drones from China or Israel to just abandon them. “Those deals have already been penned and so they're likely not to be undone,” said Wes Hallman, senior vice president for strategy & policy at the National Defense Industrial Association. “It's really about future market share as opposed to current market shares. Where many of these companies are going to be looking [is] at future purchases.”
Air Force Choses Four Companies to Make ‘Skyborg’ Drones
The Air Force’s vision to build a robotic fleet of drones that fly alongside manned warplanes took a step forward with the selection of four companies — Boeing, Northrop Grumman, Kratos and General Atomics — that will compete to build prototypes. “The aim of the Skyborg Vanguard program is to integrate autonomous attritable unmanned air vehicle technology with open missions systems to enable manned-unmanned teaming,” the Air Force said in a statement. Pairing the low-cost, attritable drones with fighter jets is considered a “game-changing capability” — if it could be done.
Of note is that the Air Force chose the four companies out of 18 that bid, according to a Pentagon contract announcement. That’s a lot considering two competing companies for a defense project is oftentimes considered a success. “We're very surprised that Lockheed Martin didn't make it to the next round,” Cowen & Company analyst Roman Schweizer wrote in a July 24 note to investors. Interestingly enough, Lockheed potentially buying Kratos, who did win a spot at the Skyborg table, was a subject of speculation in Wall Street circles last week. “With Lockheed now on the outside looking in, an acquisition or partnership with Kratos would make sense for more reasons than just Skyborg,” Schweizer wrote.
What’s being proposed? The Air Force has been experimenting with the Kratos OA-58 Valkyrie and Boeing is developing what it calls the Loyal Wingman for Australia. Little is known about the General Atomics and Northrop Grumman bids.
Space Command Nominee’s Views of Overclassification
The Pentagon has been increasingly classifying its spending, particularly when it comes to its activities in space. Some — including Robert Work, a former deputy defense secretary, and Dennis Blair, a former director of national intelligence — argue that “the partitioned nature of space program classification still remains and far exceeds that of other equally sensitive domains — air, land, sea, undersea and cyber.” The general who has been nominated to lead U.S. Space Command appears to agree.
“In my previous job as the commander of U.S. Army Space and Missile Defense Command, I saw first hand how that overclassification, if you will, was actually making it more difficult for us to actually provide support to the warfighter,” Army Lt. Gen. James Dickinson, U.S. Space Command deputy commander, told the Senate Armed Services Committee during his Tuesday confirmation hearing. “We have to look at that.” In the Army, Dickinson said, declassification of previously secret weapons has allowed more soldiers on the battlefield to get access to these systems. “I will tell you we have come a long way in a short period of time in terms of that particular effort.”
Johns Hopkins APL Ranked Among Top Places for Innovators to Work
The Johns Hopkins Applied Physics Lab — whose research largely focuses on Pentagon, NSA, DHS and NASA projects — was ranked third on the Fast Company 100 Best Workplaces for Innovators. “The state-of-the-art research facility is the kind of place where a random conversation between barely acquainted colleagues led them to enter an internal multidisciplinary innovation competition dubbed MOSH PIT (Meet Other Staff Hoping to Propose Innovative Technologies), combining research into navigational planning in brains with autonomous robotic swarms,” the publication wrote.
Pentagon Should Consider Climate Change Impact on Supply Chain
That’s the recommendation for the Government Accountability Office. “The Department of Defense has not routinely assessed climate-related risks faced by its contractors as part of its acquisition and supply processes, through which DoD obtains contracted goods and services,” GAO said in a new report. The Pentagon should “incorporate climate adaptation into its acquisition and supply guidance and issue or update guidance on mission assurance-related assessments for commercial facilities,” GAO said.
Inhofe Blocks FCC Commissioner Nomination Over 5G Decision
The Senate Armed Services Committee chairman said he would block the nomination of Mike O’Rielly to be FCC Commissioner until O’Rielly “publically commits to vote to overturn” a FCC decision that allows Ligado to build a 5G network in the United States that, according to national security officials, would interfere with GPS signals.
- The Senate Armed Services Committee canceled its Thursday confirmation hearing for Anthony Tata, President Trump’s controversial nominee to be undersecretary of defense for policy. “We didn’t get the required documentation in time,” Sen. Jim Inhofe, R-Oklahoma, the committee chairman tweeted. “Some documents, which we normally get before a hearing, didn’t arrive until yesterday. As I told the President last night, we’re simply out of time with the August recess coming, so it wouldn’t serve any useful purpose to have a hearing at this point, and he agreed.” Instead, some outlets are reporting Trump may rescind the nomination and give Tata the acting appointment.
- Trump on Wednesday nominated Craig Duehring to be principal deputy undersecretary of defense for personnel and readiness. Duehring is Air Force assistant secretary for manpower and reserve affairs.
- SAIC has named Steffanie Easter, a former director of the U.S. Navy staff, vice president of strategy and planning, for its Defense Systems Group.