Industry risk report: aerospace

Risk & Insurance, Jan, 2008 by Dan Reynolds

INDUSTRY RISK REPORT AEROSPACE

Many companies are dependent on the U.S. government for revenue, which
is a blessing and a curse. When the U.S. goes to war; the stocks of
defense contractors rise as the Pentagon looks to replace hardware.
But when the government pulls back on spending defense contractors
suffer to a greater degree than other sectors, unless companies like
Boeing, have a healthy commercial aircraft book of business.

Company Name      Location           CRO

Boeing Co.        Chicago, Ill.      Mark Meyerhoff,
                                     Sr. Director,
                                     Risk Management
                                     and Insurance

United Techno-    Hartford, Conn.    Leon Palmer
  logies Corp.                       Director, Risk
                                     Management

Lockheed          Bethesda, Md.      Dennis Bronco,
  Martin Corp.                       Vice President
                                     of Risk Management

Honeywell         Morris             Lois Fuchs, Assis-
  International     Township, N.J.   tant Treasurer,
  Inc.                               Risk Management

Northrop          Los Angeles,       Mark Rabinowitz,
  Grumman Corp.     Calif.           Treasurer

General           Falls Church,      John Wethern,
  Dynamics          Va.              Staff Vice
  Corp.                              President, Risk
                                     Management

Raytheon Co.      Waltham, Mass.     Maria Medeiros,
                                     Senior
                                     Manager, Insu-
                                     rance and Risk
                                     Management

L-3 Commu-        New York N.Y.      Nathaniel Ogiste
  nications                          Corporate
  Corp.                              Risk Manager

Textron Inc.      Providence, R.I.   Michael Harring-
                                     ton, Director,
                                     Risk Finance

Goodrich Corp.    Charlotte, N.C.    Marshall Larsen, CEO

                                     2006 Total       No. of
Company Name      CFO                Revenue          employees

Boeing Co.        James Bell         $61.53 billion   154,000

United Techno-    James Geisler      $47.82 billion   214,50
  logies Corp.

Lockheed          Christopher        $37.21 billion   140,000
  Martin Corp.      Kubasik

Honeywell         David Anderson     $31.36 billion   118,000
  International
  Inc.

Northrop          Wesley Bus         $30.14 billion   122,200
  Grumman Corp.

General           L. Hugh Redd       $24.06 billion   81,000
  Dynamics
  Corp.

Raytheon Co.      David Wajsgras     $20.29 billion   80,000

L-3 Commu-        Ralph D'Ambrosio   $12.46 billion   63,700
  nications
  Corp.

Textron Inc.      Ted French         $11.49 billion   40,000

Goodrich Corp.    Scott Kuechle      $5.87 billion    23,400

                  Primary
Company Name      Broker       Captives

Boeing Co.        Aon-Marsh    Astro II Inc. (Vermont)
                               Astro Ltd. (Bermuda)

United Techno-    Withheld     UT Insurance Inc.
  logies Corp.                 (Vermont)

Lockheed          Withheld     Withheld
  Martin Corp.

Honeywell         Withheld     Withheld
  International
  Inc.

Northrop          Aon          Northrop Grumman
  Grumman Corp.                Risk Management Inc.
                               (Vermont)

General           Aon, Marsh   None
  Dynamics
  Corp.

Raytheon Co.      Aon          Marshall Insurance Group
                               Ltd. (Bermuda) Travel Air
                               Insurance Co. (Kansas)

L-3 Commu-        Withheld     Withheld
  nications
  Corp.

Textron Inc.      Aon          Westminster Insurance Co.
                               (Vermont)

Goodrich Corp.    Marsh        First Charter Insurance Co.
                               (Vermont)

Company Name      Risk Exposure:                    Risk Strategies

Boeing Co.        As a major supplier to the U.S.   Because it is
                  commercial airlines, Boeing       such a
                  bears a considerable risk         substantial
                  exposure because of the           supplier to the
                  continued financial weakness      U.S. government,
                  of the legacy carriers such as    the Boeing Co.
                  United, Continental, Delta and    receives some
                  U.S. Airways. Since 2001,         indemnification
                  several of those carriers have    for certain
                  declared bankruptcy and are       liabilities. As
                  either still under bankruptcy     a result of past
                  protection or have come out       alleged corporate
                  from under bankruptcy protec-     ethical viola-
                  tion and still maintain a high    tions and a
                  degree of indebtedness.           result of legal
                  Boeing is also a major supplier   actions filed
                  to the U.S. government.           against the
                                                    company, Boeing
                                                    is spending in
                                                    excess of $29
                                                    million above
                                                    2004 spending
                                                    levels over a
                                                    five-year period
                                                    to enhance com-
                                                    pliance, risk
                                                    management and
                                                    internal gover-
                                                    nance functions
                                                    and processes,
                                                    according to its
                                                    2006 annual
                                                    report.

United Techno-    As a major government supplier,   United Technolo-
  logies Corp.    United Technologies is now,       gies is a highly
                  and will continue to be the       diverse business
                  subject of numerous U.S.          that conducts
                  government investigations.        operations through
                  United Technologies could, as     distinct brands
                  a result of those investiga-      such as the Otis
                  tions, be suspended from          Elevator Co.,
                  bidding on or receiving           Carrier HVAC and
                  contract awards from the U.S.     Refrigeration
                  government. In addition, 60       Systems, Pratt &
                  percent of United Technology's    Whitney aircraft
                  business is conducted outside     and Sikorsky mili-
                  the U.S. Such countries as        tary and commer-
                  Brazil, Argentina, China,         cial helicopters.
                  India and Russia represent        The company main-
                  substantial political and         tained a debt-to-
                  economic risk.                    capitalization
                                                    ratio of 31 per-
                                                    cent in 2006,
                                                    which was below
                                                    its five-year
                                                    average of 31.9
                                                    percent.

Lockheed          Like Raytheon, Lockheed-Martin    To spread its risk
  Martin Corp.    sells the vast majority of        in the development
                  its products to the U.S.          of the most sop-
                  government. While there are       histicated types
                  research and development risks    of fighting jets,
                  for which the U.S. government     the U.S. govern-
                  will indemnify the company,       ment has signed a
                  there are others that the         development agree-
                  government will not. In           ment with the
                  addition, as a company that       United Kingdom,
                  depends on advanced engineering   Italy, the Nether-
                  to produce many of its            lands and seven
                  products, Lockheed-Martin,        other nations. The
                  like many companies, is up        12-year program to
                  against a national shortage of    develop Lockheed-
                  qualified engineers in some       Martin's F-35
                  disciplines.                      Lightning II
                                                    reached the half-
                                                    way point in 2007.
                                                    The first flight
                                                    of the advanced
                                                    fighter took place
                                                    in December 2006.

Honeywell         Although Honeywell is a major     Honeywell's broad
  International   supplier to the aerospace         product diversity
  Inc.            industry,. it is also             must be counted as
                  manufacturer and seller of air    a strength. In ad-
                  control systems to the            dition to aero-
                  residential construction and      space, the company
                  commercial construction           supplies specialty
                  industry. As such, the company    chemicals, automo-
                  is a likely candidate to be       tive products, the
                  impacted by a continued slow-     oil refining
                  down in the U.S. housing          industry, and
                  market. Honeywell also does       security systems
                  a large amount of manufactu-      in addition to the
                  ring overseas and is subject      residential and
                  to interruptions or failures      commercial cons-
                  on the part of its suppliers      truction business.
                  and manufacturing partners.       Honeywell is also
                                                    well-diversified
                                                    in its supply
                                                    chain and counts
                                                    only one subs-
                                                    tance, phenol,
                                                    that it gets from
                                                    just one supplier.
                                                    In its 2006 annual
                                                    report, Honeywell
                                                    says that its phe-
                                                    nol supply is in
                                                    no danger of cur-
                                                    tailment or inter-
                                                    ruption.

Northrop          The company find adequate         As a general phi-
  Grumman Corp.   coverage in the traditional       losophy the com-
                  insurance markets. The one        pany looks to
                  area the company is always        create long-term
                  looking to reinforce is           relationships with
                  California earthquake coverage,   solid credit part-
                  as the company has significant    ners. In terms of
                  manufacturing operations in       managing its expo-
                  that state.                       sure to the varia-
                                                    bility of federal
                                                    government con-
                                                    tracts the company
                                                    tries to work very
                                                    closely with that
                                                    customer.

General           General Dynamics depends          General Dynamics
  Dynamics        heavily on sales to the U.S.      is in a relatively
  Corp.           government. Its 2006 annual       strong position in
                  report indicates that the         regards to its
                  company sells 68 percent of       debt to equity
                  its products to the federal       ratio. The compa-
                  government. Overcall, 78          ny's 2006 debt to
                  percent of General Dynamics'      equity ratio was
                  sales are to governments of       at 28.3 percent,
                  all kinds, while only 22          its lowest rate
                  percent of its sales are in       since 2002's rate
                  the commercial markets.           of 28.2 percent.
                                                    The company's
                                                    debt-to-equity
                                                    ratio is signifi-
                                                    cantly down from
                                                    its recent high
                                                    of 68.1 percent
                                                    in 2003.

Raytheon Co.      The March 2007 sale of            Although Raytheon
                  Raytheon Aircraft means that      is highly depen-
                  Raytheon is now 84 percent        dent on government
                  dependent on sales to the U.S.    sales, it is well
                  government for its revenue.       diversified in
                  Although U.S. military            that arena. The
                  spending in Iraq and              company has major
                  Afghanistan has increased         business segments
                  dramatically in the past few      in integrated de-
                  years, there is a strong          fense systems,
                  possibility of an abrupt          intelligence and
                  change in the U.S. executive      information
                  branch in the next year,          systems, missile
                  which could well mean a           systems, network-
                  substantial alteration of U.S.    centric systems,
                  military spending patterns        space and airborne
                  and levels.                       systems and tech-
                                                    nical services. In
                                                    addition to the
                                                    U.S. Department of
                                                    Defense Raytheon
                                                    also sells to
                                                    Japan, Saudi
                                                    Arabia, Taiwan,
                                                    Australia and
                                                    Germany.

L-3 Commu-        L-3 Communications carries a      Despite its debt
  nications       substantial debt load,            load, L-3 was able
  Corp.           partially as a result of its      to use cash to
                  2005 acquisition of the Titan     make $942 million
                  Corp. As of the end of Dec.       in strategic
                  31, the company's debt load       acquisitions in
                  measured $4.55 billion in         2006. Included in
                  aggregate principal and L-3       those acquisitions
                  had $76.8 million outstanding     were companies
                  in its senior credit facility.    that manufacture
                  The high debt load makes the      electrical sytems
                  company vulnerable to             for ship builders,
                  fluctuating interest rates and    security systems
                  also inhibits the company's       used in military
                  ability to make acquisitions.     and homeland
                                                    security, aircraft
                                                    structures and
                                                    radio and satel-
                                                    lite communica-
                                                    tions systems.

Textron Inc.      Textron has a relatively high     Through its sub-
                  unionized workforce with          sidiary, Bell
                  18,000 workers, or about          Helicopter,
                  45 percent of its overall         Textron is the
                  workforce, under collective       sole supplier of
                  bargaining agreements. As         military tiltrotor
                  such, the company is vulne-       aircraft, inclu-
                  rable to work stoppages which     ding the V-22
                  could adversely effect            Osprey. One of the
                  relationships with customers.     company's key
                  High numbers of unionized         strategies is to
                  workers can also impact a         align its products
                  company's flexibility as it       with the U.S. De-
                  seeks to respond to changing      partment of
                  market conditions.                Defense's emphasis
                                                    on network-centric
                                                    warfare and the
                                                    use of information
                                                    technology in
                                                    military
                                                    functions.

Goodrich Corp.    Goodrich a major supplier to      The diversity of
                  Airbus and Boeing, is             both Goodrich's
                  vulnerable to worldwide cost.     client list and
                  pressures on titanium, steel,     its manufacturing
                  aluminum and specialty metals     base must also be
                  as continued strong               counted as
                  consumption of those metals       strengths. In
                  in expanding economies in         2006, the company
                  India and China continues         sold 15 percent of
                  to impact pricing. The company    its products to
                  is also subject to political      the U.S. govern-
                  risk and financial risk           ment, 17 percent
                  because it has manufacturing      to Airbus and 14
                  operations in as many as 15       percent to Boeing.
                  foreign countries, including      Goodrich also
                  Indonesia, China and the          divides its sales
                  United Arab Emirates.             between the
                                                    commercial avia-
                                                    tion original
                                                    equipment market
                                                    (33 percent), the
                                                    commercial avia-
                                                    tion aftermarket
                                                    (36 percent), the
                                                    defense and space
                                                    markets (25 per-
                                                    cent) and other
                                                    markets (six
                                                    percent).

COMPILED BY DAN REYNOLDS FROM THE FOLLOWING SOURCES: HOOVER'S, RISK
AND INSURANCE MANAGEMENT SOCIETY INC. DATABASES; COMPANY FILINGS AND