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Saturday, August 1, 2015

Sikorsky Enters A New Age

Lockheed Martin’s proposed purchase holds promise for the famed manufacturer, but many issues must be addressed.

By James T. McKenna

Through the Sikorsky acquisition, Lockheed Martin seeks to bolster its defense market position as revenue growth slows from programs like the multi-national, multi-service F-35, shown here during tests of the short-takeoff/vertical-landing F-35B variant at Naval Air Station Patuxent River, Md. June 19, 2015.
Lockheed Martin Photo by Andy Wolfe
Lockheed Martin’s proposed multi-billion purchase of Sikorsky Aircraft would mark a new era for the 92-year-old aviation manufacturer.

If Bethesda, Md.-headquartered Lockheed Martin clears regulatory reviews (which shouldn’t be difficult) and executes the transaction as planned, Sikorsky would return to a corporate parent whose focus on aerospace and defense matches its own.

Sikorsky could, in fact, benefit from a parent that not only is focused on those areas but is increasing that focus.

“One of the key elements of our strategic planning is to secure and extend our core defense business,” Lockheed Martin’s chairman, president and CEO, Marillyn Hewson, said July 20 in announcing the purchase deal with Sikorsky parent United Technologies Corp. “We feel confident that the addition of Sikorsky will contribute significantly to the growth objective.”

Sikorsky’s position as the largest supplier of helicopters to the U.S. Defense Department and its standing with other nations that rely on its H-60s for utility, transport and special operations missions should help L-M expand its already substantial business base with the Pentagon as well as its markets abroad.

For much of its existence as a U.S. business, Sikorsky has been aligned with companies at the heart of the aviation industry. Within four years of its 1925 founding by Igor Sikorsky, the company became part of the aviation holding company United Aircraft and Transport Co. The U.S. government prompted that firm’s breakup in 1934. Its Western U.S. manufacturing operations became Boeing. Its transport arm became United Airlines. Its Eastern manufacturing units—Pratt & Whitney, Chance Vought and Sikorsky—became United Aircraft Corp.

In the 1975, United Aircraft became United Technologies Corp. and began to diversify beyond aerospace, adding manufacturers serving the commercial building industry (such as Otis Elevator and Carrier Refrigeration). UTC retained its focus on the heavy, fixed-wing (and spaceflight) sectors of aerospace and defense, but in recent years began to lose interest in helicopters. In the last five years, UTC has sold off billions of dollars in assets. The Sikorsky sale would put the divestiture total at $15 billion and might be the last for awhile.

“We’re done getting smaller,” UTC President/CEO Gregory Hayes said the day after announcing the deal with L-M.

Sikorsky revenue growth should come from ongoing, multi-year U.S. contracts for H-60s and new development of a U.S. Air Force combat rescue helicopter and a presidential transport to replace the U.S. Marine Corps Sikorsky VH-3Ds and VH-60Ns, one of which carried President Barack Obama to Joint Base Andrews, Md. on Sept. 23, 2014. USAF photo by Master Sgt. Kevin Wallace
In retrospect, spinning off Sikorsky as a standalone didn’t seem to be a real option for UTC. Hayes said UTC profit from the sale to L-M will more than outweigh what Sikorsky might have been worth as a spinoff. It expects to clear more than $6 billion from the $9 billion transaction, which is expected to close late this year or early in 2016. Hayes added the L-M deal is “certain, it’s today, it’s cash, and it made a heck of lot more sense than the risk associated with a spinoff.”

Hayes called the helicopter (and fixed-wing) manufacturer “a very solid company long term, with great technology.” But he added that “Sikorsky will have a tough couple of years in front of it. They’ve got some big development issues and programs they’ve got to get past.”

Complicating the planned acquisition is the fact that L-M and Sikorsky are competing for the U.S. Army’s Joint Multi-Role Technology Demonstrator initiative. L-M is teamed with Bell Helicopter on the V-280 Valor, while Sikorsky is partnered with Boeing in a bid based on its S-97 Raider. (shown above) Photos courtesy of Bell, Sikorsky
Sikorsky is lagging in development of the next-generation CH-53K heavy lifter for the U.S. Marine Corps and is developing a new combat rescue helicopter for the U.S. Air Force as well as a new presidential transport for the Marines. That’s on top of its ongoing production of H-60s for the Army and Navy, production of S-76s and S-92s, development of the S-97 high-speed compound helicopter and its bid (with Boeing) based on the S-97 for the Army’s Joint Multi-Role Technology Demonstrator initiative.

L-M sees great promise in Sikorsky, even before it improves that company’s contracting, cash management and other management procedures and disciplines, according to the aerospace and defense giant’s CFO, Bruce Tanner. “We think it fits well into our portfolio. This is what we do.”

L-M plans to place Sikorsky in its Mission Systems and Training business segment, its L-M partner on the VH-92 Presidential Helicopter, Combat Rescue Helicopter and U.S. Navy MH-60R/S helicopter programs. L-M plans to keep Sikorsky’s Stratford, Conn. plant. To increase its defense focus, L-M is weighing the divestiture of some of its government IT and technical services businesses.

Need To KnowL-M aims to “secure and extend” its defense businessUTC wants out of the helicopter business to focus on high techL-M and Sikorsky today compete on a key vertical-lift program, JMR

Commercial Again?

A successful acquisition of Sikorsky Aircraft would put Lockheed Martin back into the commercial aircraft market. The predecessor company Lockheed largely left the commercial field in 1984 when it delivered the 250th and last L-1011 TriStar.

In early 2014, L-M started work with the FAA to update the type design for the L-382, the commercial variant of its legendary C-130 Hercules. Between 1964 and 1992, Lockheed sold 115 commercial Hercs. The new type design would be based on the latest Herc model, the C-130J, and targeted at a niche market of unimproved-/short-field operations “and other operations at the edges of the commercial air cargo spectrum,” the company said.

Sikorsky’s helicopters serve more than niche markets. The S-92 holds a solid share of the offshore oil-and-gas and VIP segments, and the S-76 does well in those and other segments (though its position is waning with the S-76D).

A key question is whether L-M want to build and support more than just military rotorcraft.


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