Keeping track of government contract awards is essential to assessing the financial health of companies operating in the defense sector. While current economists’ consensus is that the world economy will avoid a hard landing (the IMF projects 3.1% world GDP growth in 2024, U.S. growth seen at 2.1%), government contracts could prove to be a lifeline to companies should their commercial business take a hit.
Figure 1. Contract awards by the U.S. Department of Defense, 2019-2023
Source: TenderAlpha.com
The article looks at the four largest defense suppliers in the US - Lockheed Martin, Boeing, RTX Corporation (formerly Raytheon Technologies), and Booz Allen Hamilton in respect to their latest quarterly and annual results, and the significance of government procurement for their revenue.
Lockheed Martin (NYSE: LMT)
Lockheed Martin 2024 Q1 Results Overview
Lockheed Martin reports results in four key segments, namely Aeronautics at 39.8% of Q1 2024 net sales, Missiles and Fire Control (MFC) at 17.4%, Rotary and Mission Systems (RMS) at 23.8%, and Space at 19% of Q1 2024 net sales
Figure 2. Lockheed Martin 2024 Q1 Net Sales Breakdown
Source: Lockheed Martin Form 10-K for Q1 2024
Lockheed Martin recorded a 13.7% Y/Y increase in sales in Q1 (2023: +2.4%), with all segments contributing to the excellent start of the year, but also the company benefitting from an extra working week during the quarter. Backlog developments were less robust - the total backlog was down 0.7% Q/Q to $159 billion, with a book-to-bill ratio of just 0.9 in Q1 2024.
From a profitability perspective, adjusted EPS was $6.33/share in Q1, down 1.6% Y/Y (2023: $27.82/share), impacted by higher interest expenses. Free cash flow was $1.3 billion in the first quarter (2023: $6.2 billion).
Turning to the 2024 outlook, the company expects 2.5% higher sales, flat free cash flow, and 6.5% lower earnings, driven by higher pension contributions and tax rates.
Lockheed Martin Government Revenue Share
In Q1 2024, the U.S. government accounted for 74.6% of Lockheed Martin’s sales. That said, no detailed update was released on international government exposure with the set of Q1 2024 results, but as per the company’s annual report, in 2023, government customers accounted for about 92.5% of Lockheed Martin’s revenue, including:
- 73% to the U.S. government
- 19.5% to international governments
International commercial customers made up 6.5% of total sales, while U.S. commercial customers accounted for just 1% of total company revenue.
You can read our full Lockheed Martin Q1 2024 analysis here.
Boeing (NYSE: BA)
Boeing 2024 Q1 Results Overview
Boeing reports results in three main segments, namely “Commercial Airplanes” (BCA) at 28% of Q1 2024 revenues, “Defense, Space & Security” (BDS) at 42%, and “Global Services” (BGS) at 30% of Q1 2024 revenues:
Figure 3. Boeing revenue breakdown between segments
Source: Boeing Form 10-K for Q4 2023
Boeing recorded an 8% Y/Y sales drop in Q1 2024 (2023: +17%), driven entirely by quality issues at the Commercial Airplanes division, with the other two segments recording both higher sales and improved margins. Core loss per share was $1.13/share in Q1 (2023: $5.81/share). Free cash flow was negative at $3.9 billion in Q1 (2023: +4.4 billion), likewise, the core operating margin was negative at 2.3% (2023: -2.4%).
On a more positive note, the total backlog grew 2% Q/Q to $529 billion at the end of Q1 2024, putting the company on a sustainable growth trajectory once production picks up in the Commercial Airplanes division.
With the focus remaining on quality rather than financial performance, Boeing did not provide a full-year financial forecast in Q1 2024. This is understandable given the fact that CEO David Calhoun is set to step down by the end of the year.
Boeing Government Revenue Share
Boeing defense contracts account for a substantial amount of Boeing government contracts. Government orders are booked primarily through the BDS division, as well as the BGS services business to a lesser extent.
Following the 31% Y/Y drop in BCA revenue in Q1 2024, the relative importance of government contracts for Boeing increased dramatically. In Q1 2024, a combined 47% of Boeing's revenue came from the U.S. government alone. Quarterly company disclosures, as noted above for Lockheed Martin, are not detailed enough to conclusively compute the exact government exposure to non-U.S. sources. That said, our estimates show that an additional 7% of Q1 2024 revenue was derived from non-U.S. government sources As a result, the cumulative government revenue exposure of Boeing was 54% in Q1 2024.
You can read our full Boeing Q1 2024 analysis here.
RTX Corporation (NYSE: RTX)
RTX 2024 Q1 Results Overview
RTX Corporation, previously known as Raytheon, reports results in three main segments of roughly equal size in terms of sales, namely Collins Aerospace, Pratt & Whitney, and Raytheon. From a profitability perspective, results are more nuanced, with Collins Aerospace accounting for 50% of Q1 2024 operating profit, Pratt & Whitney for 20%, and Raytheon for 30% of Q1 2024 operating profit:
Figure 4. RTX Corporation revenue breakdown between segments
Source: RTX Q1 2024 Results Presentation
RTX delivered 12% Y/Y revenue growth in Q1 2024 (2023: +3%), driven by growth across all three segments. Adjusted EPS increased 10% Y/Y to $1.34/share (2023: $5.06/share), driven by a 6% Y/Y increase in operating profit. Free cash flow was negative in Q1, at $125 million (2023: $5.5 billion). Combined defense sales increased 7% year-over-year in Q1.
RTX’s results look particularly impressive given that the company managed to grow its backlog by 3% Q/Q to a record $202 billion (book-to-bill ratio of 1.34), driven by the commercial business, as defense backlog actually declined by 1% during the first quarter of 2024. This decline is in line with the developments observed at Lockheed Martin and Booz Allen Hamilton.
Turning to 2024, the company expects 14% sales growth driven by Pratt & Whitney, 5% adjusted EPS growth, and 4% free cash flow growth.
RTX Government Revenue Share
RTX Corporation conducts government business primarily (but not limited to) through its Raytheon segment. In Q1 2024, government orders accounted for 54.9% of RTX’s revenues, with the U.S. government the largest single customer, at 42.1% of all Q1 2024 sales:
Figure 5. RTX Corporation customer breakdown Q1 2024
Source: RTX Corporation Form 10-Q for Q1 2024
The cumulative government exposure of 54.9% in Q1 2024 is down from the 59% share government business had in RTX’s 2023 topline, indicating the increased significance of the commercial business for RTX in recent quarters.
You can read our full RTX Q1 2024 analysis here.
Booz Allen Hamilton (NYSE: BAH)
Booz Allen Hamilton 2024 Q4 Results Overview
Booz Allen Hamilton has a fiscal year ending in March. The company recorded 15% Y/Y revenue growth in Q4 of fiscal 2024, with adjusted EPS of $1.33/share in the quarter and $5.50/share for the full year, up 32% and 21% Y/Y respectively.
Backlog developments were less robust - the company saw the second consecutive quarterly drop in total backlog, down 1.4% Q/Q to $33.8 billion. On a more positive note, relative to the prior-year quarter, the backlog is still up 8.3%.
In line with the weaker underlying growth visible from backlog developments and the 7% Y/Y increase in total headcount, Booz Allen Hamilton expects to achieve 9.5% revenue and 8% adjusted EPS growth in fiscal 2025:
Figure 6. Booz Allen Hamilton fiscal 2025 guidance
Source: Booz Allen Hamilton Q4 2024 Results Presentation
Booz Allen Hamilton Government Revenue Share
Booz Allen Hamilton is almost entirely dependent on the U.S. government for its business, with Defense clients (47% of total revenue), Intelligence Clients (17%), and Civil Clients (34%) making up a combined 98% of the company’s top-line:
Figure 7. Booz Allen Hamilton revenue by customer type
Source: Booz Allen Hamilton Form 10-K for 2024
The continued growth of the government business, coupled with business divestments, prompted the company to stop reporting commercial revenue separately going forward.
Defense Sector Peer Analysis
After lackluster growth in the previous decade, the defense sector is poised for a comeback in the years to come. Against the backdrop of rising geopolitical tensions and upcoming U.S. elections this fall, some players such as Lockheed Martin and Booz Allen Hamilton are in a better position to weather economic headwinds.
The high proportion of government spending as a percentage of their revenues secures their position as it ensures the predictability of their cash flows. Of the four companies, Boeing remains a turnaround play and is the only company operating at a loss. RTX has seen its commercial business develop robustly and is also shielded from an economic downturn with its sound financial health and 54.9% government spending exposure.
Figure 8. Defense Suppliers Government Sales Share out of Total Sales (Q1 2024)
Source: Company 10-Q and 10-K filings
As shown in Figure 8, all four companies rely heavily on government sales. For Booz Allen Hamilton, U.S. government sales make up as much as 98% of the company’s revenue. For defense heavyweight Lockheed Martin Q1 2024 revenues from government tenders amounted to circa 93%, with 74.6% coming from sales to the US government alone.
Turning to the other two companies, Boeing and RTX are more dependent on commercial sales, with Boeing seeing its government business grow in importance after recent quality lapses in the Commercial Airplanes division. As a result, public spending accounted for 54% and 54.9% of Boeing and RTX revenue respectively.
Furthermore, we observe that backlog developments were polarized - continued growth at commercially exposed companies (Boeing and RTX) and declines in government-focused players (Lockheed Martin and Booz Allen Hamilton). Lockheed Martin trades at the highest earnings yield with backlog developments similar to those at Booz Allen Hamilton, which appears expensive in light of the recent growth slowdown. RTX shares offer the second-highest earnings yield in our sample, but also the highest backlog growth among our peer group.
In conclusion, we once again posit that monitoring the global public procurement activity of major players within the defense sector is worthwhile due to their well-documented dependence on government contracting. This holds particularly true in light of the relationship between government receivables and stock movement that we have discovered and discussed in one of our white papers. Learn more about our forward-looking government receivables data here.
This article was originally published in September 2022. Its current, updated version has been published in June 2024.