D. Dowd Muska


Get Your (DOD) Billions Back, America!

April 30, 2015

Some investment advice, from a columnist whose expertise is public policy, not -- repeat, not -- financial planning: Put your money in “national security.”

With the release of Raytheon’s 2014 annual report, America’s major “defense” contractors have each disclosed how they fared last year. The news was uniformly sunny. Lockheed Martin’s net earnings were $3.61 billion, up from $2.98 billion. Boeing “delivered 52 percent more military aircraft and satellites in 2014 than in 2010,” which helped the corporation hike net earnings from $4.59 billion to $5.45 billion. General Dynamics had “a very good year,” its chairman and CEO boasted, with “operating earnings, margins, free cash flow, earnings from continuing operations and earnings per share … the highest in the company’s history.”

Northrop Grumman posted “another year of strong financial performance.” Its stock price substantially outperformed both the S&P 500 and the S&P Aerospace & Defense Select Industry Index. Net earnings rose to $2.07 billion. Raytheon’s net income rose 12.2 percent. The missile-maker’s “bookings, operating income and earnings were all up compared to 2013.”

It’s agonizing irony for taxpayers that every spring, around the time the Pentagon’s publicly traded contractors reveal their annual financials, the Government Accountability Office issues its assessment of DOD development and procurement. This year, as usual, the results were dismal. GAO auditors concluded that “following established management controls to deliver capable and supportable weapons to the user when and where needed, and at reasonable cost, has been the exception rather than the rule. As a result, DOD continually buys higher cost systems which substantially exceed original estimates, are delivered much later than originally scheduled, and do not meet the capabilities advertised.”

Oops. Scratch that. The quote is a quarter-century old -- from a GAO review published in 1990. In 2015, congressional investigators found that the implementation of “knowledge-based acquisition practices … is showing little improvement as programs continue to progress through the acquisition cycle without the appropriate levels of knowledge at key junctures, making them less likely to achieve their cost, schedule, and performance objectives.” Of a “portfolio of 78 major weapon system … programs,” costs on 47 “increased over the past year.”

The poster child for gross DOD/contractor mismanagement is the F-35. Too few of the fighter’s “critical manufacturing processes are mature -- despite the 110 aircraft produced -- and problems with the aircraft’s engine have delayed … deliveries and testing underway.” Software development/verification “remains a significant risk.” Unit cost has soared, from $79 million to $138 million.

Lockheed Martin is responsible for the F-35, and the multinational has even more red ink on its hands with the Evolved Expendable Launch Vehicle (EELV) program, which provides the Pentagon “assured access to space.” United Launch Services (ULA), a joint Boeing-Lockheed Martin enterprise, provides its Atlas and Delta rockets under EELV. In March, SpaceX’s Gwynne Shotwell summarized the glaring unfairness of her competitor’s sweet deal in congressional testimony: “ULA receives, on average, $1 billion annually primarily on a cost-plus basis to fund ‘facility and facility support costs, launch and range operations, mission integration, mission unique development and integration, subcontract support engineering, factory engineering, etc.’ ULA receives these … subsidies whether they launch zero rockets or eight; if they launch more than eight times, they are paid additional subsidies. … Essentially, the Government supports all of ULA’s fixed costs.” The result? An EELV unit-cost overrun of 270 percent.

Raytheon’s Joint Precision Approach and Landing System Increment 1A is nearly 100 percent over budget. Northrop Grumman’s Ground/Air Task Oriented Radar overrun is 150 percent. Warfighter Information Network-Tactical Increment 2, a communications system being built by General Dynamics, is more than 200 percent over budget.

Grisly. But unlike the profligacy of agri-welfare, Medicaid, the U.S. Department of Education, and the National Endowment for the Arts, you can do something about the military-industrial complex’s free-spending ways. Buy stock, and get some of your money back. In March, the General Dynamics board hiked its “quarterly dividend by 11.3 percent from 62 cents per share to 69 cents per share, the 18th consecutive annual increase.” Lockheed’s dividend has more than doubled since 2010. Boeing’s payouts to shareholders are rising. Between 2012 and 2014, Northrop Grumman’s dividend rose 26 percent. Raytheon, its top executive bragged in its annual report, “increased our dividend by 10 percent in 2014 -- our 10th consecutive year with an increase.”

Congress is committed to squandering bottomless sums on weapon systems that are hideously expensive, and frequently unnecessary. As long as the madness continues, there’s money to be made in “defending the homeland.”

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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