Defense Business Brief: No extra cash for inflation; Earnings recap; Aerojet for sale again; and more.
The U.S. Defense Department has no plans to pay more for existing contracts despite industry complaints about inflation, a detail that seemed to get lost this week as the Pentagon released three major strategy reviews.
“DoD does not intend to enact a policy to increase contract prices due to inflation,” Bill LaPlante, the Pentagon’s top weapons buyer, wrote in an Oct. 19 letter to Sen. Elizabeth Warren, D-Mass.
Warren’s office released the letter as the the CEOs of the six largest U.S. defense firms said inflation is driving up their costs. But it’s tough to know exactly how much that’s affecting business. Overall U.S. corporate profits rose to an all-time high in 2022 after two years of decline, even as companies grappled with supply-chain hiccups and workforce shortages.
“We were not anticipating the level of supply-chain disruption nor the duration of supply-chain disruption that we've experienced,” Northrop Grumman CEO Kathy Warden said Thursday.
Boeing said it would lose $2.8 billion on a handful of key defense and space programs — the new Air Force One, KC-46 tanker, MQ-25 refueling drone, T-7 pilot training jet, and Starliner space capsule — due in part to inflation and supply-chain problems.
Lockheed Martin CFO Jay Malave told analysts on the company’s third-quarter earnings call last week that higher labor and supply chain costs would be factored into future bids.
“We are seeing different changes both on the labor side and in supply chain,” Malave said. “It does have an impact, really, going forward on bid and proposals as something that we have to keep in front of us, and we're having dialogues with the customer.”
Raytheon Technologies CEO Greg Hayes summed up the company’s supply-chain woes like this: “We've got 13,000 suppliers. And of those 13,000,about 400 of them are a problem for us.”
Many of the companies expect these issues to persist into 2023 or longer.
“We expect these issues to be a bit sticky for the next year,” Warden said. “We do expect them to resolve in the 18-to-24-month timeframe.”
Despite these complaints, most of the companies are flush with cash. This year, they collectively spent billions of dollars to buy back stock, something staunchly opposed by Warren.
Another important item in LaPlante’s letter to Warren: He dismissed a National Defense Industrial Association assessment that said inflation would strip the Pentagon of $110 billion in buying power between 2021 and 2023.
“To date, the Department has not received any analyses or data from the National Defense Industrial Association, Aerospace Industries Association or the Professional Services Council to support increasing contract prices due to inflation, other than what has been provided to the general public,” LaPlante wrote.
Read LaPlante’s letter here.
A recap of earnings week. Lockheed Martin CEO Jim Taiclet said it’s becoming more difficult for the company, which relies predominantly on government business, to give accurate forecasts for next year in the fall, in part, because Congress typically doesn’t pass a defense appropriations bill until the new calendar year. Starting in 2024, the company will start issuing its full-year revenue projections in January instead of in October, Taiclet said.
As mentioned above, Boeing continues to have to eat losses from fixed-price development contracts, something we wrote about in April.
Raytheon Technologies is expanding. The company said it has hired a whopping 27,000 people in 2022, roughly 3,000 per month, CEO Greg Hayes said. The company now employs more than 180,000 people.
General Dynamics is selling more bridges—mobile bridges for land forces, CEO Phebe Novakovic said. “We've seen demand for bridges…and we've got a very nice business in Germany that provides river crossings at various widths and weight levels.”
The Air Force’s B-21 stealth bomber remains on track to be unveiled on Dec. 2, Northrop Grumman’s Warden said. “There’s nothing to report to you in any material change on our outlook for the profitability on that program,” the CEO said.
Lockheed Martin is working with software firm Red Hat to add artificial intelligence to some of the company’s products. “With Red Hat Device Edge, Lockheed Martin is equipping U.S. military platforms, such as the Stalker unmanned aerial system, with advanced software that was previously too large and complex for these systems,” Lockheed said. “This advanced software enables small platforms to handle large AI workloads, increasing their capability in the field and driving faster, data-backed decision making.” Here’s a video of the product.
Aerojet Rocketdyne is officially for sale, again, Reuters reports. The company has started soliciting bids from other companies and private-equity firms, the news agency reports. Recall, the U.S. government blocked Lockheed Martin’s $4.4-billion acquisition of the rocket manufacturer earlier this year.
Startup X-Bow Systems, a company that has developed technology to 3D-print rocket energetics, has named Terry Benedict and Charlie Precourt to its strategic advisory board. Benedict is a retired Navy vice admiral who is executive vice president for naval, nuclear, and critical infrastructure programs at Systems Planning and Analysis. He was chief operating officer of Blue Origin. Precourt was vice president and general manager of Northrop Grumman’s propulsion systems division.