Supply chain clouds looming over defense industrial base

Global problems in the supply chain are impacting the defense industrial base and two of its largest members reported their third quarter financial results to investors Tuesday that illuminate those exact headwinds.

Global problems in the supply chain are impacting the defense industrial base and two of its largest members reported their third quarter financial results to investors Tuesday that illuminate those exact headwinds.

Here are what Lockheed Martin and Raytheon Technologies executives talked about with Wall Street analysts during their respective earnings conference calls.

Lockheed Martin

The world’s largest defense company is going back to the drawing board in some respects and reassessing its five-year business plan. It is considering several factors impacting others in the industry and other factors that are unique to Lockheed.

Lockheed’s initial revenue outlook of $66 billion for next year forecasts a year-over-year decline, while this year’s sales forecast was cut by 2.5 percent to around $67 billion. Slight growth should return in 2023 with steadily increasing sales through 2026.

Here are some of the megatrends behind that as laid out by CEO Jim Taiclet: the coronavirus pandemic, extended delivery timelines across the supply chain, expectations of moderating U.S. defense budget growth, and shifting customer priorities driven by events such as the withdrawal from Afghanistan.

More unique to Lockheed is the time needed to move ahead on its acquisition of Aerojet Rocketdyne, the renationalization of an atomic weapons program in the U.K., and a re-baselining of F-35 fighter jet deliveries.

Taiclet said Lockheed now expects to close the Aerojet transaction in the first quarter of next year, one quarter later than expected as the antitrust regulatory process continues.

Our larger focus here is on the megatrends and particularly the supply chain disruptions that have been simmering for some time but accelerated because of COVID-19.

Acting Chief Financial Officer John Mollard said the main stress Lockheed observes in its supply chain is seen in “dual-use suppliers,” or those that provide equipment and other parts for both defense and commercial platforms. Those solely focused on defense still are experiencing problems but not to the same extent.

“Those are the (dual-use) suppliers that have fixed operating costs that have seen substantial revenue decreases on the commercial supply side that have really cut into their operating cash flow,” Mollard said.

Lockheed estimates it has sped up $1.5 billion in payments to its suppliers as of the last quarter’s end to help recover from pandemic-related impacts, plus maintain program schedules and customer missions.

Within Lockheed itself, Taiclet said the company’s internal investments will include $2 billion of annual capital expenditures and approximately $1.5 billion in independent research-and-development spending each year.

The company is also building digital factories to complement the physical assets, not just for current programs but future ones being either shaped or pursued.

Acquisitions are also on the agenda but the landscape that Lockheed is looking at does not present much at this juncture.

“Our M&A approach has had to evolve because there's not that much supply out there in our industry as far as acquisition candidates of any scale and the regulatory environment is also shifting a bit. So we're shifting with it,” Taiclet said.

None of the above means Lockheed is shifting away from everything Taiclet has talked about regarding networks and the “21st Century Warfare” concept since he became CEO last year.

“We're just being and doing the things that you have to do when you're running an actual business in the real world, which is be agile.”

Shares in Lockheed tumbled nearly 12 percent to $333.91 Tuesday.

Raytheon Technologies

Raytheon fits the definition of a company that sees all angles of the ongoing supply chain disruptions given it is both a prime contractor that integrates products for its own systems and a supplier to other aerospace companies, both in commercial and defense.

There is of course the human capital aspect for Raytheon to consider regarding its nearly 125,000 employees and how the company is working through the Dec. 8 deadline for federal contractors to be vaccinated against COVID-19.

“We certainly expect that there will be some disruption in both the supply chain and with our customers as a result of this (mandate), but we're going to work our way through it,” Hayes said.

Raytheon has had its own vaccine mandate in place since September and that came down one month before the Biden administration made such a requirement for all government contractors.

Hayes said the government’s mandate on contractors will affect the ongoing labor shortage in its supply chain, but the directive “probably will help us on the commercial aerospace side if everybody gets vaccinated, so we're all for that.”

Availability of labor is one pressure point on the supply chain, which feeds into how price increases of what is needed to make products are becoming a reality for all companies.

“Think about aluminum prices going up, thinking of steel, all of the basic raw materials, lead times pushing out, and it's just harder to get material in the door on time,” Hayes said.

What does Hayes make of the global computer chip shortage?

“Not a huge issue for us, I think we've got adequate supply, but it's always a watch item out there.”

Raytheon sees its revenue for this year arriving at $64.5 billion, which was $100 million above the low end of its prior guidance range.

Shares in Raytheon fell nearly 2 percent to $89.16.

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