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Completed 07 Mar 2017 09:51 PM EST
Disseminated 07 Mar 2017 10:02 PM EST

North America Equity Research
07 March 2017

Aerospace and Defense
Defense By The Numbers
We have updated our database tracking defense investment, employees, and sales
mix for 2016. This year, the group is set to grow organically for the first time
since 2010. We believe the stocks are pricing in expectations for moderate multiyear top line growth and we see two key questions that will determine relative
performance: 1) how much budget growth will we see in FY18 and beyond?
Congress will not resolve this question near term and initial indications are mixed
(see below). 2) What kind of performance will we see in the broader economy?
Accelerating GDP and capex growth should mean faster sales growth with
operating leverage for industrial companies with exposure to the broader
economy, potentially making defense stocks a source of funds . . . and vice-versa.
 FY18 budget is TBD. President Trump has proposed a DoD base of $573 bn,
which would be 3% higher than the FY18 placeholder in the Obama
administration’s last plan. This is in line with our base budget forecast and
below what Republican defense hawks are advocating but we are still far from a
total FY18 defense budget with two major questions outstanding. First, where
will supplemental spending (OCO) shake out? With DoD requesting $30 bn
more for OCO this year, the FY17 OCO budget should exceed $90 bn, the
highest since FY12. The y/y change in the total FY18 budget will therefore
depend on whether OCO remains elevated. Second, the White House proposes
to offset defense growth with domestic spending cuts that are likely to preclude
even the modest Democratic support needed to overcome a filibuster. As a
result, Congress may ultimately approve a budget that looks much different than
the administration’s request. (See Table 1.)

Aerospace & Defense
Seth M. Seifman, CFA

AC

(1-212) 622-5597
seth.m.seifman@jpmorgan.com
Bloomberg JPMA SEIFMAN <GO>
J.P. Morgan Securities LLC

Benjamin E Arnstein, CFA
(1-212) 622-6548
benjamin.e.arnstein@jpmorgan.com
J.P. Morgan Securities LLC

Michael S Rednor, CFA
(1-212) 622-1110
michael.s.rednor@jpmorgan.com
J.P. Morgan Securities LLC

Shivang Badaya
(91-22) 6157 5070
shivang.badaya@jpmorgan.com
J.P. Morgan India Private Limited

 Top line growth returning. We expect average organic growth for our defense
companies to turn positive in 2017 at 2% vs a flat 2016 and negative growth
rates prior to that. Looking forward, we see average growth of ~4% through
2020, comparable to our expectation for investment account growth. Northrop’s
6% CAGR leads the pack, driven by Aerospace (B-21, F-35, classified)
followed by GD and LMT at ~5%. For, LLL and RTN , we expect ~4% through
2020, while Boeing BDS’ mature portfolio leaves our estimate at ~1% but with
increasing potential upside from old and new programs. (See page 3.)
 NOC, RTN investing ahead of growth. Most of the defense contractors have
boosted their capex in dollars and as a share of sales to prepare for expected
growth. Northrop and Raytheon stand out here and we see this increased
investment driven by B-21 for NOC and Missile and IDS for Raytheon. R&D
has been in line, with capex at 1-3% of sales with NOC and RTN at the higher
end here as well. Boeing BDS is at the lower end for both capex and R&D,
consistent with a relative lack of top line opportunities. (See page 4.)
 Margins stable in 2017, with some expansion later on. Mature portfolios
drove high EACs in 2012-2014 and adjusted EBIT margins have contracted
modestly to just below 11% the past two years. We expect RoS to stabilize this
year, with margins moving back above 11% in the out years. From an execution
standpoint, we see opportunity at LLL, with our EBIT margin ex FAS/CAS
expanding from 9.5% last year to mid 11% by 2020. (See page 5).

See page 11 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

North America Equity Research
07 March 2017

 Headcount remains stable, productivity edging higher. Employment fell double
digits at defense companies with declining budgets earlier in the decade but it has
been running stable or slightly higher as companies prepare for growth. As with
their investment levels, Northrop and Raytheon are the two most growth-oriented
companies from an employment standpoint. Productivity (revenue/employee) edged
higher across the board last year, with the only significant change coming from a
bump up at Lockheed due to the divestiture of IS&GS, a people-intensive business.
Since the start of the decade, Boeing BDS stands out for the increase in revenue per
employee. Boeing is now seeing a similar dynamic in its Commercial Airplanes
business. (See page 7).
 Cash return yields fell in 2016. This is partially due to lower share repurchase
activity but also due to higher share prices, which raise the denominator in the cash
return yield calculation. Boeing now stands out as the company with the highest
cash return yield in the group by far. For the rest, cash return yields are down from
the high single and double digit levels we saw earlier in the decade mid-single digit
levels more in line other industrial stocks. This has happened as investors have
started viewing defense stocks differently. In the early years of the decade, low
interest rates and weak GDP growth made defense stocks more attractive amid a
search for yield; today, investors are more attracted to defense stocks based on
expectations for budget growth. (See page 8.)

2

North America Equity Research
07 March 2017

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

FY18 Budget a Long Way from Complete
President Trump’s FY18 budget proposal calls for a base budget of $573 bn, just 3%
higher than FY18 in the Obama administration's final defense spending plan and in
line with our estimate. Defense hawks in Congress, including Senator McCain, are
advocating for a much higher base budget in excess of $600 bn plus ~$60 bn in
supplemental spending for ~$670 in total. The administration's FY18 supplemental
request remains a wild card and with the FY17 supplemental expected to reach ~$90
bn, a flat FY18 could take total spending closer to the amount in McCain's plan and
above our estimate.
Table 1: DoD Budget Proposals
FY18 Budget Proposals
FY16

FY17E

Obama

JPMe

Trump

McCain

Base Budget

$528

$538

$556

$571

$573

$608

Supplemental

$59

$92

$64

$64

tbc

$60

Total Budget

$587

$630

$620

$635

tbc

$668

7%

-2%

1%

tbc

6%

$176

$190

$191

Growth
Base Investment Acct

$180

Supplemental

$8

$15

$10

$10

Total Inv Acct

$188

$191

$201

$202

2%

5%

6%

Growth
Source: DoD and InsideDefense.com.

Beyond the uncertainty around the supplemental, there is no guarantee that Congress
will approve the administration’s base budget without major changes, especially
since it will require some Democratic support in the Senate to overcome a filibuster.
In recent years, the compromise for Democrats and Republicans to boost defense and
domestic discretionary spending above sequester levels has been to add modest
amounts for both categories. President Trump is seeking a new arrangement that
boosts military spending with offsetting cuts for domestic spending and while control
of the White House likely gives Republicans more leverage than they have had the
past four years, it is far from clear that this new arrangement will be acceptable.

Most Top Lines Gathering Steam . . .
We expect average organic growth for our companies to reach 2% in 2017, the first
foray into positive territory since 2010. Average growth was negative for the
following 5 years before improving to zero last year. Looking ahead, we see further
acceleration to the mid-single digits for 2018-20, which is roughly in line with our
expectation for the addressable market (investment account outlays plus international
opportunities).

3

North America Equity Research
07 March 2017

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

Table 2: Y/Y Organic Growth Estimates for Our Defense Coverage (2011-2020E)
2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2017-20
CAGR

Boeing BDS

-1%

2%

2%

-7%

-2%

-3%

-1%

4%

1%

2%

1%

GD (ex Gulfstream)

-2%

-14%

-7%

-4%

2%

1%

2%

9%

6%

6%

5%

Harris

0%

-2%

-7%

0%

-2%

-7%

-1%

4%

3%

4%

3%

L3 Technologies

-4%

-2%

-5%

-5%

-3%

2%

1%

5%

4%

4%

4%

Lockheed Martin

2%

1%

-4%

0%

1%

2%

6%

4%

6%

5%

5%

Northrop Grumman

-4%

-4%

-2%

-3%

-2%

4%

4%

7%

6%

7%

6%

Raytheon

-3%

-2%

-4%

-4%

1%

3%

4%

4%

4%

4%

4%

Average

-2%

-3%

-4%

-3%

-1%

0%

2%

5%

4%

5%

4%

Addressable Market Growth

-3%

-4%

-5%

-5%

-3%

3%

6%

5%

4%

5%

5%

Relative Performance

1%

2%

1%

2%

2%

-3%

-4%

0%

0%

0%

-1%

Source: Company reports and J.P. Morgan estimates. Note: GD growth rates are all “apples-to-apples” and are based on the company's old revenue recognition standard through 2015 and the new
standard for 2016 and beyond.

Northrop’s 2017-20E CAGR of 6% is highest in our group, with the company
benefiting from F-35, B-21, unmanned systems, classified work, and some new
Electronics programs. GD and LMT are close behind at 5%, followed by our 4%
estimates for LLL and RTN. Boeing’s BDS business is a conspicuous laggard with
fewer growth programs and a greater focus on cost cutting and sustainment. We
expect Boeing to under grow the group in most scenarios but we do see opportunities
to close a portion of the gap based on Trump administration enthusiasm for the F-18
Super Hornet and new programs that BDS is pursuing, such as the T-X trainer. GD is
an outlier on the downside for growth in 2017, but this is largely due to a temporary
slowdown in the Marine segment, which should see a large pick-up in growth
towards the end of the decade.
. . . And some contractors are investing ahead of expected budget growth
To prepare for growth ahead, some of the defense companies are adding or
expanding facilities or purchasing new equipment and this trend is currently most
prominent at Northrop and Raytheon.
Table 3: Capex for Our Defense Coverage (% of sales)
2010

2011

2012

2013

2014

2015

2016

2017E

Boeing BDS

0.7%

0.9%

1.0%

1.0%

1.1%

0.9%

1.1%

1.1%

GD (ex Gulfstream)

1.1%

1.1%

1.0%

0.8%

1.3%

1.6%

1.2%

1.3%

L3 Technologies

1.2%

1.4%

1.6%

1.8%

1.6%

1.9%

2.1%

2.0%

Lockheed Martin

1.8%

2.1%

2.0%

1.8%

1.9%

2.0%

2.1%

2.3%

Northrop Grumman

2.2%

1.9%

1.3%

1.5%

2.3%

2.0%

3.8%

3.3%

Raytheon

1.5%

1.8%

1.7%

1.4%

1.7%

2.0%

2.6%

2.6%

1.4%

1.5%

1.4%

1.4%

1.6%

1.7%

2.1%

2.1%

Average
Source: Company reports.

For Northrop, we believe B-21 is a leading driver of capex in Aerospace Systems,
which saw an 90% increase over 2015. Additional investment at Raytheon was
concentrated in Missile Systems last year, though it has been rising at IDS and SAS
4

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

North America Equity Research
07 March 2017

too. GD has invested in Marine Systems in recent years, in part, we believe, ahead of
the ramp on the Columbia class sub, but this came down from elevated level last
year, partially offset by higher capex in IS&T. In addition, some capital spending for
Columbia could be showing up as development revenue that is funded by the Navy.
Table 4: Key Segment Capex ($ mn)
2014

2015

2016

GD Marine

124

166

92

GD IS&T

54

73

97

NOC Aerospace

376

237

451

RTN IDS

95

124

135

RTN MS

56

62

135

RTN SAS

117

131

149

Source: Company reports.

At 1-3% of sales, R&D for our companies was roughly in line with capex last year,
though R&D has been steadier in recent years. Once again, Northrop and Raytheon
are at the high end of the investment spectrum with R&D amounting to ~3% of sales.
Boeing BDS is at the lower end for both capex and R&D, consistent with our view
that management is highly focused on cost cutting due to a relative lack of top line
opportunities. We could, however, see a pickup in investment at BDS for specific
opportunities, such as T-X.
Table 5: R&D Spend for Our Defense Coverage (% of sales)
2010

2011

2012

2013

2014

2015

2016

Boeing BDS

2.4%

2.5%

2.6%

2.8%

2.8%

2.3%

2.1%

GD (ex Gulfstream)

1.0%

1.1%

1.2%

1.0%

1.2%

1.3%

1.3%

L3 Technologies

2.0%

2.1%

2.2%

2.3%

2.1%

2.2%

2.5%

Lockheed Martin

1.4%

1.3%

1.3%

1.5%

1.6%

1.8%

2.1%

Northrop Grumman

2.1%

2.1%

2.1%

2.1%

2.4%

3.0%

2.9%

Raytheon

1.7%

1.8%

1.8%

2.0%

2.2%

3.0%

3.1%

Total

1.8%

1.8%

1.9%

1.9%

2.0%

2.3%

2.3%

Source: Company reports. Note: GD is an estimate based on total company R&D spend.

We Expect Margins to Stabilize and Then Expand Modestly
Adjusted industry margins have been on the decline the past two years from the
>11% level seen in 2011-14 and to the upper-10% range. While 2017 should see
stable margins, we do see expansion at LLL, where execution is improving, as well
as BDS, where we expect lower tanker charges. Longer-term, we see some margin
expansion back toward the low/mid-11% level as new programs mature and some
company specific developments play out.

5

North America Equity Research
07 March 2017

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

Table 6: Defense Operating Margins ex FAS/CAS.
2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

2020E

Lockheed Martin

10.8%

11.0%

11.8%

11.7%

10.8%

9.9%

9.7%

10.1%

10.6%

10.9%

Northrop Grumman

10.9%

11.9%

12.0%

12.2%

11.6%

11.7%

11.1%

11.2%

11.3%

11.3%

Raytheon

13.2%

13.3%

13.4%

12.7%

12.2%

11.7%

11.7%

12.0%

12.3%

12.4%

GD (ex-Gulfstream)

11.7%

10.6%

10.1%

10.4%

11.0%

11.4%

11.3%

11.1%

11.2%

11.4%

Boeing BDS

9.9%

9.4%

9.7%

10.1%

10.8%

10.2%

11.8%

11.4%

11.4%

11.4%

L3 Technologies

10.9%

10.7%

10.4%

9.1%

7.2%

9.5%

10.2%

10.6%

11.1%

11.3%

11.1%

11.1%

11.3%

11.2%

10.9%

10.7%

10.8%

11.0%

11.2%

11.4%

Weighted Average

Source: Company reports and J.P. Morgan estimates.

In assessing the sources of margin contraction in recent years, we believe some
businesses were over-earning in 2013-2014 relative to their long term potential,
including LMT Missiles & Fire Control, NOC Electronics, and Raytheon IDS. This
mainly reflected the timing of cumulative adjustments on mature programs, however,
and we do not see a major adverse shift in industry profitability. In thinking about
why margins can improve from here, BA, GD, and LLL, should have better margins
than the 2013 industry peak, whereas NOC should see trough margins in 2017, with
modest expansion thereafter, and LMT should benefit from improvement off a very
low level at recently acquired Sikorsky.

Mix Has Mostly Been Steady
International sales as % of total sales were largely unchanged in 2016 with the
exception of Lockheed, which divested IS&GS (low international sales) and acquired
Sikorsky (higher international sales). Lockheed’s international sales target of 30%
shouldn’t be hard to achieve, in our view, on the backdrop of higher F-35 sales and
increased demand for missile defense. A higher proportion of international sales has
long distinguished Raytheon and we believe this should continue to grow in 2017.
Moreover, the current administration's pressure on the U.S. allies to step up their
defense spending means US contractors may have opportunities to benefit across the
board.
Table 7: International Sales Mix (% of total sales)
2010

2011

2012

2013

2014

2015

2016

Boeing BDS

18%

24%

24%

25%

28%

31%

31%

GD

13%

15%

15%

14%

18%

20%

19%

L3 Technologies

7%

8%

11%

14%

17%

17%

17%

Lockheed Martin

14%

17%

17%

17%

20%

21%

27%

Northrop Grumman

8%

8%

8%

10%

13%

14%

13%

Raytheon

23%

25%

26%

27%

29%

31%

31%

Average

14%

16%

17%

18%

21%

22%

23%

Source: Company reports. Note: includes Foreign Military Sales (FMS) and Direct Commercial Sales (DCS). Lockheed excludes
IS&GS for all 2016.

Generally, fixed price contracts can carry higher margins, though last year’s mix
changes were mostly small from a contract type perspective and we do not view them
as a major driver of profitability across the group. Northrop is an exception, however,
with the fixed price mix falling as a result of a ramp on the cost plus B-21 program,
which lowered profitability in the Aerospace segment. Lockheed's percentage of
fixed price sales increased significantly but this was a result of the acquisition of
6

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

North America Equity Research
07 March 2017

Sikorsky and the divestiture of IS&GS. The low fixed price percentage of sales at
GD reflects the high level of cost plus work in Marine and services within IS&T,
along with a cyclical bottom in Combat, where the proportion of fixed price sales is
relatively high.
Table 8: Fixed-Price Contract Mix (% of total sales)
2010

2011

2012

2013

2014

2015

2016

GD

46%

45%

44%

38%

35%

36%

36%

L3 Technologies

58%

69%

71%

71%

76%

74%

73%

Lockheed Martin

35%

45%

50%

50%

55%

54%

61%

Northrop Grumman

33%

41%

44%

47%

49%

48%

46%

Raytheon

n/a

n/a

55%

55%

55%

55%

56%

Source: Company reports.

Headcount Stabilizing, Productivity Still Edging Higher
Major defense contractors leaned themselves out through the downturn with the
number of employees falling by ~10% from 2011 to 2015. The total fell again in
2016 but this was due to the portfolio changes at Lockheed, with Sikorsky in and
IS&GS out. Employment is trending steady to up at Northrop and Raytheon and
given employment cuts at Gulfstream, we believe defense employment at General
Dynamics is probably up as well. Headcount at BDS meanwhile, continues to
decline.
Table 9: Headcount (th)
2010

2011

2012

2013

2014

2015

2016

Boeing BDS

66,186

62,619

59,939

57,763

53,352

49,200

47,377

GD

90,000

95,100

92,200

96,000

99,500

99,900

98,800

L3 Technologies

63,000

61,000

51,000

48,000

45,000

38,000

38,000

Lockheed Martin

132,000

123,000

120,000

115,000

112,000

126,000

97,000

Northrop Grumman

79,600

72,500

68,100

65,300

64,300

65,000

67,000

Raytheon

72,400

71,000

67,800

63,000

61,000

61,000

63,000

Total

503,186

485,219

459,039

445,063

435,152

439,100

411,177

Source: Company reports.

Revenue per employee was up modestly across the board last year, though the only
material change was the increase at Lockheed, driven by acquisitions and
divestitures. Boeing does not include corporate employees at BDS, and so the level
of sales per employee exceeds the others, but still, BA productivity per employee has
seen the largest increases over time as measured by revenue per employee. RTN and
especially NOC have seen relatively smaller productivity movements and revenue
per employee is similar in absolute terms too. Pro-forma for the NSS divesture,
LLL’s sales per employee ticked up a bit and we believe labor intensive Aerospace
Systems work explains the lower absolute level here.

7

North America Equity Research
07 March 2017

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

Table 10: Revenue per Employee (th)
2010

2011

2012

2013

2014

2015

2016

Boeing BDS

$483

$511

$544

$575

$579

$618

$623

GD

$361

$344

$342

$325

$311

$315

$317

L3 Technologies

$249

$249

$258

$263

$270

$274

$277

Lockheed Martin

$347

$378

$393

$394

$407

$399

$487

Northrop Grumman

$354

$364

$370

$378

$373

$362

$366

Raytheon

$348

$350

$360

$376

$374

$381

$382

Source: Company reports and J.P. Morgan estimates. Note: LMT is pro forma for IS&GS and Sikorsky. LLL is pro forma for NSS
divestiture in 2015.

Boeing appears to be taking a page from its Defense business on the Commercial
side now that sales are no longer growing. BCA headcount peaked at 80-85k during
the 2012-15 period but it is down below 75k. Sales are unlikely to exceed the 2015
level of $66 bn again until 2019 at the earliest but given the downward headcount
trend and plans for more automation, sales per employee is likely to continue rising.
Table 11: Boeing Commercial Airplanes Revenue Per Employee
2012

2013

2014

2015

2016

2017E

2018E

BCA Employees

84,764

80,753

83,274

83,508

76,454

74,634*

na

BCA Sales ($bn)

$49,127

$52,981

$59,990

$66,048

$65,069

$63,377

$62,041

$580

$656

$720

$791

$851

na

na

Sales/Employee ($k)

Source: Company reports and J.P. Morgan estimates. * 2017 employee number as of Feb 23.

Defense Cash Return Yields Are Tapering Off
Cash return yields fell for most of our defense companies in 2016, with some
companies ramping down share repurchase activity and additional pressure from the
denominator, due to higher stock prices. Our cash return yield is the sum of
dividends and net repurchases at a percentage of market cap at the end of the prior
year. We view the defense stocks’ high cash return yields for 2012-15, especially vs
other industrials, as a reason that defense outperformed through that period but with
expectations for growth and interest rates picking up, cash return yields are not as
important as they once were, even if visible, stable cash return is still attractive.
Table 12: Cash Return (Buybacks + Dividends)
Company

2010A

2011A

2012A

2013A

2014A

2015A

2016A

2017E

Raytheon

8.5%

9.8%

8.0%

General Dynamics

5.9%

7.2%

5.7%

8.4%

4.4%

4.8%

4.2%

3.5%

3.1%

10.9%

8.4%

6.0%

L3 Technologies

9.5%

14.1%

15.7%

5.1%

12.1%

9.9%

8.4%

5.8%

5.6%

Lockheed Martin

11.6%

13.7%

7.3%

8.3%

Northrop Grumman

9.0%

14.5%

10.9%

16.5%

7.0%

7.9%

6.1%

5.9%

12.7%

12.7%

6.4%

Boeing

3.0%

2.4%

2.2%

5.6%

5.5%

7.6%

9.5%

9.7%

10.0%

Total Defense (ex Boeing)

8.9%

11.4%

8.2%

8.7%

8.6%

8.3%

5.7%

5.2%

Industrials Wtd Avg

5.3%

6.1%

5.3%

5.3%

7.0%

Source: Company reports and J.P. Morgan estimates. Note: Industrials weighted average includes GE, HON, DHR, DOV, PNR, MMM, IR, ROK, EMR, TYC, CAT, CMT, DE, ETN, ITW, PCAR, and
PH.

NOC saw the sharpest decline following the completion of its share retirement goal.
LLL also fell as management directed cash towards M&A. Boeing was the outlier
8

North America Equity Research
07 March 2017

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

with higher cash return for the year. The broader industrials group we track was led
higher by GE.
Table 13: Lockheed Martin
Cash from Ops

2013

2014

2015

2016

2017E

2018E

2019E

2020E

$4,546

$3,866

$5,101

$5,189

$5,897

$5,388

$5,771

$6,151

Capex

($836)

($845)

($939)

($1,063)

($1,150)

($1,175)

($1,200)

($1,225)

Free Cash Flow

$3,710

$3,021

$4,162

$4,126

$4,747

$4,213

$4,571

$4,926

Share Repo

$935

$1,592

$2,897

$1,990

$2,210

$1,950

$1,950

$2,035

$1,540

$1,760

$1,932

$2,048

$2,139

$2,319

$2,532

$2,768

$269

$898

$9,003

($1,800)

$0

$0

$0

$0

Total Cash Deployed

$2,744

$4,250

$13,832

$2,238

$4,349

$4,269

$4,482

$4,802

Cash Returned (repo + div)

$2,475

$3,352

$4,829

$4,038

$4,349

$4,269

$4,482

$4,802

54%

87%

95%

78%

74%

79%

78%

78%

2013

2014

2015

2016

2017E

2018E

2019E

2020E

Cash from Ops

$2,483

$2,593

$2,162

$2,813

$2,925

$3,070

$3,018

$3,165

Capex

($364)

($561)

($471)

($920)

($850)

($750)

($700)

($650)

Free Cash Flow

$2,119

$2,032

$1,691

$1,893

$2,075

$2,320

$2,318

$2,515

Share Repo

$2,187

$2,668

$3,182

$1,547

$1,550

$1,500

$1,500

$2,100

$545

$563

$603

$640

$691

$760

$827

$898

$0

$0

$0

$0

$0

$0

$0

$0

Total Cash Deployed

$2,732

$3,231

$3,785

$2,187

$2,241

$2,260

$2,327

$2,998

Cash Returned (repo + div)

$2,732

$3,231

$3,785

$2,187

$2,241

$2,260

$2,327

$2,998

% of CFO

110%

125%

175%

78%

77%

74%

77%

95%

2013

2014

2015

2016

2017E

2018E

2019E

2020E

Cash from Ops

$2,378

$2,064

$2,345

$2,852

$2,948

$3,112

$3,344

$3,506

Capex

($329)

($380)

($457)

($625)

($650)

($650)

($600)

($575)

Free Cash Flow

$2,049

$1,684

$1,888

$2,227

$2,298

$2,462

$2,744

$2,931

Share Repo

$908

$551

$810

$740

$540

$690

$1,340

$1,590

Dividends

$694

$735

$797

$850

$907

$1,023

$1,101

$1,178

$9

$427

$1,610

$57

$0

$0

$0

$0

Total Cash Deployed

$1,611

$1,713

$3,217

$1,647

$1,447

$1,713

$2,441

$2,768

Cash Returned (repo + div)

$1,602

$1,286

$1,607

$1,590

$1,447

$1,713

$2,441

$2,768

67%

62%

69%

56%

49%

55%

73%

79%

Dividends
M&A

% of CFO

Source: Company Reports and J.P. Morgan estimates.

Table 14: Northrop Grumman

Dividends
M&A

Source: Company Reports and J.P. Morgan estimates.

Table 15: Raytheon

M&A

% of CFO

Source: Company Reports and J.P. Morgan estimates.

9

North America Equity Research
07 March 2017

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

Table 16: L3 Technologies
2013

2014

2015

2016

2017E

2018E

2019E

2020E

Cash from Ops

$1,156

$1,071

$1,042

$1,097

$1,101

$1,171

$1,240

$1,289

Capex

($204)

$174

$197

$216

$215

$200

$200

$200

Free Cash Flow

$952

$1,245

$1,239

$1,313

$1,316

$1,371

$1,440

$1,489

Share Repo

$672

$730

$692

$320

$422

$660

$760

$760

Dividends

$199

$208

$214

$220

$239

$258

$279

$302

M&A

$58

$57

($38)

($173)

$0

$0

$0

$0

Total Cash Deployed

$929

$995

$868

$367

$662

$918

$1,039

$1,062

Cash Returned (repo + div)

$871

$938

$906

$540

$662

$918

$1,039

$1,062

% of CFO

75%

88%

87%

49%

60%

78%

84%

82%

Source: Company Reports and J.P. Morgan estimates.

Table 17: General Dynamics
Cash from Ops

2013

2014

2015

2016

2017E

2018E

2019E

2020E

$3,106

$3,728

$2,499

$2,198

$3,478

$3,608

$3,794

$4,116

Capex

($440)

($521)

($569)

($392)

($485)

($520)

($550)

($575)

Free Cash Flow

$2,666

$3,207

$1,930

$1,806

$2,993

$3,088

$3,244

$3,541

Share Repo

$157

$2,835

$2,965

$1,704

$1,678

$1,882

$2,033

$2,130

Dividends

$591

$822

$873

$911

$1,006

$1,188

$1,279

$1,378

$1

$0

$0

$0

$0

$0

$0

$0

Total Cash Deployed

$749

$3,657

$3,838

$2,615

$2,684

$3,070

$3,312

$3,507

Cash Returned (repo + div)

$748

$3,657

$3,838

$2,615

$2,684

$3,070

$3,312

$3,507

% of CFO

24%

98%

154%

119%

77%

85%

87%

85%

M&A

Source: Company Reports and J.P. Morgan estimates.

Table 18: Boeing
2013

2014

2015

2016

2017E

2018E

2019E

2020E

Cash from Ops

$8,179

$8,858

$9,363

$10,499

$10,745

$11,018

$11,285

$11,182

Capex

($2,187)

($2,236)

($2,408)

($2,575)

($2,300)

($2,250)

($2,192)

($2,256)

Free Cash Flow

$5,992

$6,622

$6,955

$7,924

$8,445

$8,768

$9,093

$8,926

Share Repo

$1,704

$5,642

$6,352

$6,680

$6,179

$5,679

$5,679

$5,679

Dividends

$1,467

$2,115

$2,490

$2,756

$3,397

$3,615

$3,802

$4,016

$26

$163

$31

$297

$0

$0

$0

$0

Total Cash Deployed

$3,197

$7,920

$8,873

$9,733

$9,576

$9,294

$9,481

$9,695

Cash Returned (repo + div)

$3,171

$7,757

$8,842

$9,436

$9,576

$9,294

$9,481

$9,695

39%

88%

94%

90%

89%

84%

84%

87%

M&A

% of CFO

Source: Company Reports and J.P. Morgan estimates.

10

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

North America Equity Research
07 March 2017

Companies Discussed in This Report (all prices in this report as of market close on 07 March 2017)
Boeing Company (BA/$182.02/Neutral), General Dynamics Corp. (GD/$191.47/Neutral), L3 Technologies
(LLL/$169.07/Overweight), Lockheed Martin (LMT/$269.04/Neutral), Northrop Grumman (NOC/$243.78/Neutral),
Raytheon (RTN/$154.48/Overweight)
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Coverage Universe: Seifman, Seth M: B/E Aerospace (BEAV), Boeing Company (BA), Bombardier (BBDb.TO), General Dynamics
Corp. (GD), Harris Corporation (HRS), L3 Technologies (LLL), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN),
Rockwell Collins (COL), Spirit AeroSystems (SPR), Textron (TXT), TransDigm Group Inc (TDG), Triumph Group (TGI)
J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2017

J.P. Morgan Global Equity Research Coverage
IB clients*
JPMS Equity Research Coverage
IB clients*

Overweight
(buy)
43%
52%
43%
67%

Neutral
(hold)
45%
48%
50%
61%

Underweight
(sell)
12%
34%
7%
43%

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11

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

North America Equity Research
07 March 2017

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Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

North America Equity Research
07 March 2017

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"Other Disclosures" last revised January 07, 2017.

Copyright 2017 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P

13

Seth M. Seifman, CFA
(1-212) 622-5597
seth.m.seifman@jpmorgan.com

14

North America Equity Research
07 March 2017



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