CEOs tout secret contracts; Icebreaker, attack helos ordered; Earnings breakdown; and more...
The Pentagon has been getting more secretive in recent years, pulling a veil over various kinds of information that has in the past been publicly available. Even military contracting seems to be affected. Listening to defense CEOs report their first-quarter earnings for 2019 this week, I heard a lot of executives touting increases in classified, or “restricted,” Pentagon work. They don’t mention specific projects, but they’ll tell you which of their corporate divisions are receiving contracts.
Since the National Defense Strategy, the one that predicted great power competition, came out last year, there’s been more secrecy around what the Pentagon is up to, so not to clue China or Russia in on weapons projects. This seems increasingly the case when it comes to space, aircraft, and intelligence-related work.
“In space, we received a $3.2 billion restricted award,” Northrop Grumman CEO Kathy Warden nonchalantly said Wednesday on the company’s earnings call.
General Dynamics touted “$580 million for services to classified customers” within its GDIT division. Lockheed mentioned “$100 million for classified development activities due to higher volume” within its Aeronautics division. It also referred to classified programs in its Missiles and Fire Control division.
“It's growing, and it's an important piece of our portfolio,” Lockheed CFO Ken Possenriede said of the company’s classified portfolio on a Tuesday earnings call.
Raytheon CEO Tom Kennedy this morning said, “Our classified business was once again strong in the first quarter.” Classified sales were up 22 percent over the same period last year, he said.
United Technologies CEO Greg Hayes, on a Tuesday earnings call, talked about “very strong growth” in the company’s intelligence and space businesses “and some of the other businesses that we don’t often talk about....[T]this is what Rockwell Collins brought to UTC that gave us real heft in the military communication side, some of the optics and satellites that work very well with our ISR business.”
And more growth is expected.
“We do expect that for 2019 and for, sort of, the long run we believe that the restricted portfolio will likely grow faster than the unrestricted portfolio,” Northrop CFO Ken Bedingfield said on Wednesday’s call.
Northrop — which regularly touts its classified business — is expecting more such growth within its space, aerospace and mission systems business. “[W]e’re looking at some continued restricted awards in the balance of the year,” Bedingfield said.
Then there’s the giant, and classified, Air Force B-21 bomber project. “That's been one of our fastest-growing programs for the last few years,” he said.
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Earnings Breakdown
Lockheed Martin
There was a lot of talk about F-35, which you should read about here, so we’ll focus on the Pentagon’s $750-billion budget request for fiscal 2020. Lockheed CEO Marillyn Hewson said she was “encouraged by recent congressional support for raising the spending caps.” But Hewson noted that an actual budget deal remains far off. “We have seen strong bipartisan support for national security initiative and the recapitalization of our nation's armed forces over the past several budget cycles as well as for our programs in general, and we are hopeful the fiscal year ’20 process results in a similar outcome,” she said.
General Dynamics
Canada and Saudi Arabia are continuing to negotiate the future of a General Dynamics armored vehicle program. General Dynamics makes the vehicles in Canada. “These are negotiations between two sovereign powers that are progressing, but they’re very, very sensitive, as all diplomatic negotiations are,” Phebe Novakovic, General Dynamics CEO, said Wednesday. “Progress is good, but slow. We do anticipate it resolving this year.” The company is waiting for “roughly $1 billion” in payments for the armored vehicles, CFO Jason Aiken said. How sensitive are those negotiations? Neither Novakovic or Aiken mentioned Saudi Arabia by name. Instead Aiken referred to the project as “”one of our large international vehicle programs in Canada.”
Elsewhere in the company’s Land Systems division, the company sees demand for armored vehicles and recapitalization of existing fleets.”The world is getting [to be] a more dangerous place, unfortunately, but that creates demand for our products,” Novakovic said. “Our Euopean land systems has multiple opportunities throughout the former Soviet border states in the eastern bloc and domestically and elsewhere. Threats drive funding and they drive the need for requirements and unfortunately we live in a world with increased threats.”
General Dynamics Information Technology (which now includes CSRA) took in revenue of $2.2 billion in the first quarter. “The integration has gone well and is a bit ahead of the plan we put in place last year,” Novakovic said. “This business is growing and it’s positioned for growth.”
Novakovic touted a speed and range flight record recorded by the company’s Gulfstream G650, which flew from Singapore to Tucson, Arizona, earlier this month. The business jet flew the 8,379 nautical miles in 15 hours, 23 minutes, at an average speed of .85 Mach. That’s 227 nautical miles farther than the previous record, set by a Bombardier Global 7500 just weeks earlier. “This is to our knowledge the longest distance ever flown by any business aviation aircraft,” she said.
Boeing
Problems with the 737 Max, the plane at the center of two deadly crashes, is expected to cost Boeing at least $1 billion. The company, whose Wednesday earnings call was dominated by discussion about the jetliner’s flight control issues that are suspected to have played a role in the Ethiopia and Indonesia crashes, also canceled its earnings forecast for the year. Company executives had little to say about defense-related projects in their prepared remarks. “Our current first order of business is the safe return to service of the 737 Max, and we’ve made the adjustments necessary to allow our teams to prioritize additional resources and focus on this effort,” said Dennis Muilenburg, the company’s chairman, CEO and president. “At the same time we are maintaining our focus on keeping the business strong and healthy.”
Boeing Defense, Space, and Security won “key contracts” worth $12 billion. The company’s defense and space backlog totals $67 billion, 31 percent of which are international orders, CFO Greg Smith said.
Muilenburg has asked Boeing’s board of directors to create a committee “that will be focused on our design, development [and] certification processes not only for the Max, but more broadly for our airplane programs.” That review will be led by Edmund Giambastiani, a retired Navy admiral who served as vice chairman of the Joint Chiefs of Staff.
Northrop Grumman
The company is eyeing space a “major area of opportunity for us,” new Northrop CEO Kathy Warden said Wednesday, touting the company’s ability to provide “end-to-end mission needs,” including launch (remember, they acquired Orbital ATK), satellites, payloads, ground systems and command-and-control. “We are designing and manufacturing systems vital to our national security and continually pushing the boundaries of science and exploration,” she said. “We are taking commercial applications of technology and creating cost-effective and reliable solutions for our government partners using agile processes.”
The company stood up a “resiliency and rapid-prototyping space business unit to augment and sharpen our focus on emerging customer opportunities in the new space warfighting domain,” she said. Warden also touted Northrop’s R3D2 satellite, which “demonstrated a new type of deployable antenna for small aircraft.” The project went from concept to orbit in 20 months, she said.
United Technologies
With the acquisition of Rockwell Collins complete, Greg Hayes, UTC chairman and CEO, talked about an uptick in defense business, in areas where you might not necessarily think of the company (see top section about communications work). Then there’s the obvious: UTC’s Pratt & Whitney makes the engine for the F-35, so clearly planned production increases of the jet are important to the company. “[W]e’re not just a commercial aerospace company, we’re an A&D company,” Hayes said. “I think we shouldn’t forget as we have a very, very solid position on the defense systems side. Defense spending goes up and down…Has it peaked? I'm not sure, but we can certainly see the programs that we’re on have a lot of runway, both on the ISR side, on the communication side, as well as the ramp on the [Joint Strike Fighter].”
Raytheon
Raytheon’s earning call wrapped up shortly before we hit “send” this morning. The company posted weaker than expected margins in its missile business, which drew questioning from several Wall Street analysts. CEO Tom Kennedy is focusing on the long-game of which he sees the company well positioned. “We are in an era of rapid technological change and as a result, it is becoming clear that the solutions our customers will need in the future, relative to escalating threats will most likely be complex systems integrating multiple technologies including radars, missiles, missile defense and cyber security,” he said.
Two Important Contract Awards
The Pentagon awarded VT Halter Marine $746 million contract for design and construction of the U.S. Coast Guard Polar Security Cutter. If the Coast Guard buys three ships, the contract could be worth nearly $2 billion. VT Halter Marine is part of ST Engineering, the Singapore-based company that partnered with SAIC for the Army’s Mobile Protected Firepower program.
The Army on Tuesday awarded five prototyping contracts for its Future Attack Reconnaissance Aircraft. The five companies/teams awarded contracts: AVX Aircraft & L3 Technologies; Bell; Boeing; Karem Aircraft; and Lockheed Martin (Sikorsky). The new aircraft, called FARA, “shall be capable of achieving and sustaining overmatch against potential competitors and enduring asymmetric threats by closing or mitigating gaps in Army aviation attack and reconnaissance,” according to the Army.
Mental Health, Hockey, and the Military
The following item has absolutely nothing to do with the Pentagon’s budget, weapon, or a defense company — but it’s important. Robin Lehner, a goaltender for the NHL’s New York Islanders, was diagnosed last year with bipolar disorder while seeking treatment for addiction to alcohol and pills. Yet the Islanders signed Lehner last summer and he is now having the best season of his career. In between games, he has spent much time talking about the journey to overcome his demons. (Here is his first-person account in The Athletic, which requires a subscription, and here’s a free USA Today article.)
Lehner often talks about the numerous veterans he encountered along the way. During a recent Q&A with The Athletic’s Arthur Staple, he had this to say:
“I was in rehab with a lot of people in the military — and how they’re treated, it’s atrocious. I’m going to keep saying that, because it’s atrocious. I’ve seen it, how the veterans are treated. It’s mental health. And there’s everyday people, too, who need help. So I want to get [my] foundation going and start somewhere, grow it. I feel like I have the resources and the right people involved. With the success I’ve had, maybe I can turn it into something. I’m really looking forward to it.”
So why am I writing about this? Aside for personally finding Lehner’s story inspirational, it provides yet another chance to focus on mental health, especially in the military, something we probably don’t talk about enough.