United Technologies Corp.'s (NYSE:UTX) Pratt & Whitney engine unit is nearing a deal with the U.S. government for about $2 billion worth of engines for the Lockheed Martin Corp.’s F-35 Joint Strike Fighter, the company announced on Thursday. The clause of the contract suggests that the company will be engaged in two years of production of about 80 engines. The agreement comes after the U.S. government this year criticized Pratt & Whitney for not doing enough to reduce the cost of the turbine, called the F135. The Pentagon has been putting pressure on Lockheed Martin and Pratt & Whitney to cut their prices as the government tries to pare the costs of its most expensive weapons program. The Pentagon expects to pay about $399 billion for the F-35, including the purchase of 2,443 jets.
Pratt & Whitney and the U.S. Department of Defense had last year reached an agreement in principle on a $1 billion production contract for the sixth batch of engines to be used on F-35 Lightning II warplanes. The contract would cover 38 total engines, including program management, engineering support, production and spare parts.
Switching back to present, contract talks between the two sides continue even as the failure of one of the engines on an F-35 last month has led to a fleet wide grounding of the jets. The grounding has so far kept F-35s from coming to the U.K. for their overseas air show debut.
The company officials said that the company has cut the industrial footprint where it works on the engine by 15% and reduced staff involved in the program. Pratt plans to reduce the cost to make each engine by 12% every time they double the number of units produced. Lowering costs is partly linked to boosting output. That has been a challenge for the F-35 as production has increased more slowly than planned, leaving companies to pay for excess infrastructure they have put in place to prepare for higher output volume. Pratt & Whitney has an 877,000-square-foot manufacturing facility in North Berwick.
Despite a keen focus on innovation and development, the company's earnings have more than kept rising. United Technologies produced $4.00 per share in 2009, moving to $6.21 per share in 2013. And that value has translated into shareholder returns.
United Technologies has delivered 197% shareholder returns over the past 10 years, which is almost twice that of the S&P 500 or the Dow Jones Industrial. The company has also been able to pay a dividend every year since 1936. During 2008 and 2009, United Technologies boosted its dividend by roughly 15% each year, and it's no stranger to share repurchases. Since 2008, the company has returned more than $19 billion to investors in the form of dividends and share repurchases. This is a reason enough to encourage investments in the UTX stock.