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New Priorities

By Vertical Mag | July 27, 2015

Estimated reading time 10 minutes, 44 seconds.

For Lockheed Martin, the strategic importance of Sikorsky lies in the company’s military products, including the new CH-53K. Sikorsky Photo
When Lockheed Martin made the decision, announced July 20, to acquire Sikorsky Aircraft from United Technologies Corporation (UTC), it wasn’t because of Sikorsky’s commercial helicopters.
For Lockheed — currently the world’s largest defense contractor by sales — the strategic importance of Sikorsky lies in its multi-billion-dollar backlog with the U.S. Department of Defense and its strong international military presence, not in its commercial S-76 and S-92. Pending regulatory approval of the $9 billion deal, Lockheed, maker of the F-35 Joint Strike Fighter, will also become the manufacturer of the ubiquitous Black Hawk helicopter and the U.S. Marine Corps’ new CH-53K, strengthening its already formidable presence in the defense sector.
On the same day it announced the Sikorsky acquisition, Lockheed underscored its priorities by revealing it will shed some of its existing nonmilitary information technology and services businesses, representing around 17,000 employees and US$6 billion in sales. That focus on defense has led many in the civilian helicopter industry to wonder: what does the future hold for Sikorsky’s commercial product lines?
Lockheed has said that it plans to keep Sikorsky’s commercial business, which is largely concentrated in the offshore oil and gas sector. The sector as a whole has recently taken a severe hit from low oil prices — one reason why Sikorsky announced in June that it would be reducing its manufacturing footprint by approximately one million square feet, and cutting around 1,400 jobs at facilities in Connecticut, Pennsylvania, and Poland.
With Lockheed’s focus on defense products, many now wonder what the future hold for Sikorsky’s commercial product line. Skip Robinson Photo
For Lockheed, those commercial pressures are advantageous insofar as they’re allowing the company to acquire Sikorsky “at a low point in the economic cycle,” according to Lockheed president and CEO Marillyn Hewson. In the company’s second-quarter 2015 earnings call, Hewson told investors that she sees “a good, strong, healthy business” in Sikorsky’s commercial sustainment activities, as well as “a real opportunity for growth” as the oil and gas market recovers. In the same call, Lockheed executive vice president and CFO Bruce Tanner suggested that the company is expecting a rebound in the commercial market “say in the late ’18, ’19 timeframe,” which is around the time when Sikorsky development programs, notably the CH-53K, should transition into production.
Industry analyst Richard Aboulafia said he does indeed expect Lockheed to retain Sikorsky’s commercial business — but not necessarily because doing so is strategically optimal for the defense contractor. Rather, he said, Lockheed may simply find it too difficult to separate out the S-76 and S-92 lines, particularly since the S-92 is the basis for military and governmental products including the VH-92 Presidential Helicopter and the CH-148 Cyclone. “I can’t see how you would split them out,” said Aboulafia, noting that selling off only the S-76 line would cause the company to “lose that critical mass you get from two separate products.”
Whether Sikorsky’s commercial business actually represents “a real opportunity for growth” remains to be seen. Aboulafia pointed out that Sikorsky’s dominance in the offshore market has been aided by a relative shortage of competing products, as well as by the temporary grounding of the Eurocopter EC225 (now Airbus Helicopters H225), which is the main competitor to the S-92. But that landscape is changing with the introduction of new medium and “super-medium” helicopters including the Airbus Helicopters H175, AgustaWestland AW189, and Bell 525 Relentless (with a new heavy helicopter from Airbus, the X6, also in the pipeline).
“All of this stuff is going to be hitting its stride when this recovery takes place — if this recovery takes place,” said Aboulafia.
According to respondents in Vertical’s 2015 Helicopter Manufacturers Survey, the Schweizer S-300 has languished under Sikorsky’s ownership. Skip Robinson Photo
Largely overlooked in media coverage of the sale has been the orphan in Sikorsky’s commercial product line, the S-300 model previously owned by Schweizer (and originally developed by Hughes). Sikorsky acquired this humble piston-powered training helicopter when it purchased Schweizer in 2004, and it has always been an awkward fit in a company focused on large, technologically advanced turbine-engine aircraft.
According to respondents in Vertical’s 2015 Helicopter Manufacturers Survey, the S-300 has languished under Sikorsky’s ownership (see p.58, Vertical, June-July 2015) and it will likely be even less of a priority for Lockheed. Many S-300 owners would like to see the line sold to a company that would take a more focused interest in it. But Sikorsky, which is no longer taking orders for the aircraft, has remained vague on its plans for the model.
“We continue evaluating the business case for further production,” a Sikorsky spokesperson told Vertical. “Right now, our priority is to follow through on our commitments with contracted customers while we strengthen our supply chain and remain focused on ensuring strong aftermarket support.” The spokesperson declined to specify whether a decision as to the S-300’s fate will have to wait until after the acquisition by Lockheed is finalized.
Currently, Lockheed is anticipating closure of the deal by late fourth quarter 2015 or early first quarter 2016. The transaction is subject to regulatory approvals, but neither Lockheed nor UTC has expressed serious concerns on that count. “Right now everyone’s acting like it’s a done deal,” observed Aboulafia.
Although the nominal price of the transaction is $9 billion, for Lockheed, that will effectively be reduced to around $7.1 billion after tax benefits are taken into account. The company plans to fund the purchase through a combination of available cash and new debt, taking advantage of “a historically low interest rate environment,” according to Hewson.
Industry analyst Richard Aboulafia said he expects Lockheed to retain Sikorsky’s commercial business. Ricardo Zenner Photo
Meanwhile, the sale is expected to generate $6.2 billion of available cash for UTC, which will use proceeds to repurchase shares, offsetting the earnings-per-share dilution from the loss of Sikorsky earnings. According to UTC president and CEO Gregory J. Hayes, the “transaction is a very good deal all around.” In UTC’s own second-quarter earnings call, Hayes explained to investors that Lockheed’s offer was too good to turn down, given that UTC estimated a valuation for Sikorsky of $5 billion if the company was spun out — another option that was under consideration.
“I think of the fact that we’re going to net over $6 billion on this deal and the fact that it’s certain, it’s today, it’s cash, made a heck of a lot more sense than the risk associated with a spin, the cost, and how the market reacts,” Hayes said.
Lockheed — whose last solo helicopter venture was the AH-56 Cheyenne (see p.170, Vertical, Feb-Mar 2014) —plans to align Sikorsky under its Mission Systems and Training (MST) business segment. The companies already partner on a number of significant programs, including the VH-92 Presidential Helicopter, the U.S. Air Force Combat Rescue Helicopter, and the U.S. Navy MH-60. However, Lockheed has commitments to other helicopter manufacturers, too — notably Bell Helicopter, with which Lockheed is partnering on the V-280 Valor Tilt-Rotor, a finalist in the U.S. Army’s Joint Multi-Role Technology Demonstrator (JMR-TD) program. The V-280’s competitor in that program is the SB-1 Defiant, a coaxial-rotor compound helicopter being jointly developed by Sikorsky and Boeing. Nominally, JMR-TD is a precursor to the Future Vertical Lift program, which could replace the U.S. Army’s Black Hawk and Apache helicopters with a common platform in the 2030 timeframe.
According to Hewson, Lockheed’s “commitment to bring the best we have to offer to our work with other helicopter manufacturers is absolutely undiminished.” As for Future Vertical Lift specifically? In Lockheed’s second-quarter earnings call, Tanner spoke with a candor that Aboulafia described as “genuinely refreshing.”
“Future vertical lift is so far out in the future, you tell me when it’s going to happen, the quantities and so forth, there is a lot of chance between now and then for people to change ideas, thoughts, requirements, etc.,” Tanner said. “So whether that ends up being the program that we think it is today or not, is anyone’s guess. And so it’s hard for me to get just too excited about where we sit today with something that’s probably not going to come at the full rate production for 15 or 20 years.”

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