Q2 results from two giants of the US aerospace and defence industry earlier this week – Lockheed Martin and Boeing – confirm that while both have specific problems to resolve both are in the best of financial health as they move forward of different strategic agenda’s:
Not for the first time this year Lockheed Martin has pleased investors with better than expected performance and by raising full year earnings guidance, this time to $11.15 per share. Based on relatively flat full year revenue expectation the continuing improvement in bottom line performance from the Bethesda, Maryland based company in Q2 comes primarily on the back of raised efficiency, strong cash flow and continuation of a long running share buy-back campaign. In many past years I have drawn attention to LM’s strong cash flow and how this would in my view hold the company in good stead in the years to come.
Once again we can see how cash flow has impacted on the latest set of results and long may that continue. That apart, given the variety of issues impacting on how western governments choose to spend on future defence capability, that Lockheed Martin continues to defy earnings gravity is in part a reflection on the very strong management the company clearly has together with an excellent strategy of growing international business presence. Neither should we ignore in this context the massive potential of a likely 3,000 plus F-35 military aircraft programme build that, together with maintenance, repair and overhaul, will be spread over the next thirty or more years.
With all eyes on what is clearly a serious problem currently affecting the F-35 Joint Strike Fighter programme development following an engine fire that led to a temporary grounding of the 100 plus jets already built, LM’s Chief Financial Officer, Bruce Tanner was quoted Tuesday saying “I don’t believe that we’re quite at the root cause [of the problem] yet, but we’re getting close”. As a reassurance such words went down well with investors, partners, buyers and component suppliers, but as a complicated military aircraft development programme little more than 60% complete we do need to accept that problems such as the one that led to the current investigation process should not be perceived as being that unusual. That the Pentagon itself does not apparently believe there is a systematic design problem with the Pratt and Whitney built F-35 engine is also reassuring, although I guess that sceptics may be entitled to resurrect the view that the Pentagon decision not to go ahead with the originally proposed alternative second engine development by Rolls-Royce/GE engine on affordability reasons was a mistake.
The bottom line is that in my experience if there is the will and determination to succeed all engineering and technology related problems are resolvable. This one is no exception and I am in no doubt that the combined efforts of Lockheed Martin and Pratt & Whitney will get to the bottom of the F-35 engine related issue even if we have to accept the inevitability that in getting there this could cause a further delay in overall programme delivery.
The growing international presence and status of Lockheed Martin internationally, and particularly the fast growing base of operations here in Britain that have been built over the past fifteen years, has been one that has been very interesting to observe. The relationship between Lockheed Martin and the UK is now writ large in stone and through a mix of diverse engineering based acquisitions, LM UK has grown into a formidable operating unit that provides a mix of systems integration and mission systems for fighting vehicles, plus a range of other engineering based and logistical operations and services. The UK division of LM is also charged with responsibility for the ongoing Warrior Capability Sustainment programme for the MOD, the Merlin Capability Sustainment and integrated Merlin Operational Support for the Royal Navy and also the Hercules Integrated Operational Support programme. Add to these a vast range of other activities relating to training, simulation, space systems, postal distribution, information security and cyber related systems, air traffic control systems plus numerous others that sustain around 10,000 direct and indirect jobs in the UK, shows the value and importance of the investment and belief that the company has placed in the UK.
Not all US based defence companies are doing nearly as well as Lockheed Martin but then not that many have the international strength and presence that Lockheed Martin does.
After a long period in which the company has struggled with a great many different issues including the 787 aircraft development few will have found that much to gripe about in the latest set of quarterly results from Boeing. Better still is that the outlook also remains good.
Reporting Q2 period revenue of $22bn that reflected higher commercial aircraft deliveries, strong cash flow, $1.5bn of shares repurchased during the period and earnings guidance increased by $0.75 to between from $7.90 and $8.10 second quarter results from Boeing were rightly well received by investors yesterday. The tax rate fell from a previous 33.4% to just 3.7% due to adjustments and previously announced settlements and there was a sharp fall in interest and debt expense. With an order backlog valued at $440bn that includes no less than 5,200 commercial planes on order of particular note is that Boeing Commercial looks very set fair for a period of strong growth ahead.
But while Commercial is doing well note that Defense, Space and Security showed a 5% decline in Q2 revenue and, on margins down to 7.5%, a 25% decline in earnings. Given the impact of a specific charge taken on the KC-46 tanker programme and fewer deliveries of C-17 and P-8 aircraft in the second quarter that was partially offset by an increased number of F-15 deliveries I suspect that figures from the Defense, Space and Security division are not as bad as they appear at first sight.
But just as it is for almost all others engaged in the sector, defense is for Boeing a problem area in terms of future growth outlook. Next year will see the last deliveries of the hugely successful C-17 Globemaster of which 262 aircraft have so far been built and the closing of the Long Beach factory facility which I have previously visited probably during mid-summer 2015. This is a sad prospect indeed and one that I consider we may well regret. It will mark that loss of production of a great transport aircraft of one that there is in my view no equal built anywhere in the world.
Meanwhile the F-15 programme looks assured through 2020 but notwithstanding the contract recently awarded to Boeing Military to supply 44 E/A-18 ‘Growler’ (100 aircraft of this type have so far been delivered) and F/A-18 aircraft for the US Navy, more orders for this superb aircraft will be required if production is to be maintained. Nevertheless, the order backlog for the division stood at $63bn at period end of which 36% represents orders with international customers.
The Boeing Military Aircraft order backlog stood at $23.8bn at period end while that of Network and Space Systems was $9.6bn and Global Services and Support $16.3bn. The total backlog for the Defense, Space and Security Division was thus $49.7bn, slightly ahead of the previous quarter end.
Of note was that a total 15 CH-47 Chinook helicopters were delivered in the period compared to just 8 in the previous quarter. F-15E Eagle deliveries stood at 4 compared to the zero while Apache helicopter deliveries stood at 9 compared to a previous year Q2 period delivery of 5. Deliveries of F/A-18 aircraft types was unchanged at 12.
Boeing said that 30 787 aircraft were delivered during the three month period (double the number delivered during the same period last year) and I note on this that the full year outlook is built on the expectation of 110 deliveries for the 787 aircraft type. One may note that the overall Commercial Aircraft division margins are predicted to exceed 10% for the year as a whole and that, as the most successful commercial aircraft programme in the world, Boeing delivered the 8,000th 737 aircraft built during the period and 124 of the aircraft type compared to a previous year quarter comparative of 116 aircraft were delivered. The latter shows how far the company has come in terms of efficiency and the ability to increase production of the type. 777 aircraft deliveries were broadly unchanged at 24 and the number of 767 aircraft delivered declined from 8 to 1. Just two 747 aircraft were delivered during the period.
Boeing is undoubtedly doing well and I very much look forward to my own planned visit to various company facilities in the US during October. While defense will remain a concern for Boeing over the next few years the balance of activity between commercial, defence and space should ensure sound performance in the years to come. Driven by technology development, competition and growth particularly from emerging markets in the number of passengers seeking Boeing looks very well placed.
CHW (London – 24th July 2014)
Howard Wheeldon FRAeS
Tel: 07710 779785