How Much Do Government Contracts Contribute to Defense Suppliers’ Revenue Share?

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 2023 Q4 Results Overview

Lockheed Martin reports results in four key segments, namely Aeronautics at 40.3% of Q4 2023 net sales, Missiles and Fire Control (MFC) at 16.8%, Rotary and Mission Systems (RMS) at 25%, and Space at 17.9% of Q4 2023 net sales:

Figure 2. Lockheed Martin 2023 Q4 Net Sales Breakdown

Source: Lockheed Martin Form 10-K for Q4 2023

Lockheed Martin recorded a 0.6% Y/Y drop in sales in Q4 (2023: +2.4%), with all segments except Space recording lower revenues in the final quarter of the year. On a positive note, the company’s backlog grew 7% in 2023 to a record $160.6 billion, setting the stage for strong revenue growth in the years to come.

From a profitability perspective, adjusted EPS was $7.90/share in Q4, up 1.4% Y/Y (2023: $27.82/share, +2.2% Y/Y, in line with sales growth). Free cash flow was $1.7 billion in the final quarter and $6.2 billion year-to-date (2022 $6.1 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 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 Q4 2023 analysis here.

Boeing (NYSE: BA)

Boeing 2023 Q4 Results Overview

Boeing reports results in three main segments, namely “Commercial Airplanes” (BCA) at 43.6% of 2023 revenues, “Defense, Space & Security” (BDS) at 32.1% and “Global Services” (BGS) at 24.6% of 2023 revenues:

Figure 3. Boeing revenue breakdown between segments

Source: Boeing Form 10-K for Q4 2023

Boeing recorded a 10% Y/Y sales increase in Q4 (2023: +17%), however, profitability remains an issue - core loss per share was $0.47/share in Q4 (2023: $5.81/share). Nevertheless, free cash flow grew to $4.4 billion in 2023 (2022: $2.3 billion). Furthermore, the total backlog grew 29% Y/Y to $520 billion at the end of 2023, putting the company on a sustainable growth trajectory once production picks up in the Commercial Airplanes division.

In the aftermath of the 737 Alaska Airlines accident, the company remains squarely focused on operational improvement and did not provide a 2024 financial outlook.

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.

In 2023, a combined 37% of Boeing revenue came from the U.S. government alone. In addition, foreign governments accounted for an additional 3% of Boeing revenue. As a result, the cumulative government revenue exposure of Boeing was 40% in 2023.

You can read our full Boeing Q4 2023 analysis here.

RTX Corporation (NYSE: RTX)

RTX 2023 Q4 Results Overview

RTX Corporation, previously known as Raytheon, reports results in three main segments, namely Collins Aerospace (Collins) at 37% of 2023 sales, Pratt & Whitney at 26%, and Raytheon at 38% of 2023 sales:

Figure 4. RTX Corporation revenue breakdown between segments

Source: RTX Corporation Form 10-K for Q4 2023

RTX delivered 10% Y/Y revenue growth in Q4 (2023: +3%), driven by Collins and Pratt & Whitney. Adjusted EPS grew 2% Y/Y in Q4 to $1.29/share (2023: $5.06/share, + 6% Y/Y). while free cash flow increased 12% in 2023, reaching $5.5 billion. RTX is set to continue growing in the future, with total backlog up 12% Y/Y to 196 billion in 2023, of which the defense backlog alone accounts for 40%.

Turning to 2024, the company expects 7.5% organic 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 2023, government orders accounted for 59% of RTX’s revenues, with the U.S. government the largest single customer, at 46% of all 2023 sales:

Figure 5. RTX Corporation customer breakdown, 2021-2023

Source: RTX Corporation Form 10-K for Q4 2023

Booz Allen Hamilton (NYSE: BAH)

Booz Allen Hamilton 2024 Q3 Results Overview

Booz Allen Hamilton has a fiscal year ending in March. The company recorded 12.9% revenue growth in Q3 of fiscal 2024, with adjusted EPS increasing 17% in the first nine months of the year, reaching $4.17/share (2023: $3.55/share). Free cash flow conversion picked up in Q3 but only partially compensated weakness early in the year, with free cash flow at $65 million in 9M 2024 (9M 2023: $314 million). Despite Q3 weakness (book-to-bill ratio of just 0.72), total backlog grew 14.2% Y/Y in Q3 to $34.3 billion.

The company expects a strong finish to fiscal 2024, with revenue growth anticipated at 14.5% and adjusted EPS up 17% to $5.25-5.40/share:

Figure 6. Booz Allen Hamilton updated 2024 guidance

Source: Booz Allen Hamilton Press Release for Q3 2024

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%), Intelligence Clients (16%) and Civil Clients (35%) making up a combined 98% of the company’s top line:

Figure 7. Booz Allen Hamilton revenue by customer type

Source: Booz Allen Hamilton Corporation Form 10-Q for Q3 2024

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 predictability of their cash flows. Of the four companies, Boeing remains a turnaround play and is most exposed to commercial developments in the aviation sector. RTX will also benefit should the air traffic recovery continue, and is also shielded to an economic downturn with its sound financial health and 59% government spending exposure.

Figure 8. Defense Suppliers Government Sales Share out of Total Sales (2023)

Source: Company 10-Q and 10-K filings

As shown on Figure 8, all four companies rely heavily on government sales. For Booz Allen Hamilton, US government sales make up as much as 98% of the company’s revenue. For defense heavyweight Lockheed Martin 2023 revenues from government tenders amounted to 92.5%, with 73% coming from sales to the US government alone.

Turning to the other two companies, Boeing and RTX have benefitted from the commercial aircraft recovery and have seen their reliance on government orders diminish somewhat. Nevertheless, public spending accounted for 40% and 59% of Boeing and RTX revenue respectively.

Furthermore, we observe that the higher the backlog growth, the lower the earnings yield demanded by the market to own stocks of large government suppliers. Lockheed Martin trades at the highest earnings yield but delivered the lowest backlog growth in 2023. In contrast, Booz Allen Hamilton commands a premium thanks to its stellar 14% backlog growth. RTX shares appear particularly attractive, given strong backlog growth but comparable earnings yield to Lockheed Martin.

In conclusion, we once again posit that monitoring the 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 February 2024. 

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