Investors got some answers to that big-picture question from CACI International and Northrop Grumman.
File inflation in the same category of megatrends that the endless cycle of stopgap government funding bills belongs in: there is very little if anything businesses can do to affect it in the big picture.
But here is how CACI International and Northrop Grumman explained some of what they are doing in the meantime during their most recent quarterly earnings calls with investors Thursday.
The nature of cost-plus contracts means a government customer shares in the financial risk a company takes on for a program, whereas other types of contracts including fixed-price essentially puts it all on the contractor.
During CACI's fiscal first quarter call, CEO John Mengucci acknowledged additional labor costs as a reality of working in today's environment.
Wage inflation has always been a factor for contractors to keep in mind given all it takes to bring in what Mengucci called "top talent with specialized technology skills, with the right certifications and the right clearances."
Competition for those people being high is a not new concept for sure, but inflation does have some affects on how companies try to get at their optimal cost structure.
Nearly 60% of Reston, Virginia-headquartered CACI's revenue mix comes from cost-plus contracts. Mengucci said that means higher wages get passed along to the customer as part of those contracts.
"But there again, our customer asks us to find the best and brightest, and that's what the best and brightest cost," Mengucci said.
The other 40% of CACI's sales are from other types of contracts not of a cost-plus nature, which makes the contractor more susceptible to higher labor costs.
CACI's long-term path to becoming a company that blends mission expertise with technology products means revenue and headcount are not fully correlated with one another.
Revenue is split roughly even between the expertise and technology areas, Mengucci said, with the former being fully focused on labor.
"The other portion is on the technology side where we get to write the labor categories, we reserve the full rate of who we're going to hire and how we're going to pay them," Mengucci said. "We are looking for efficiencies as well.
"Software is a superpower. It allows us to deliver so much more capability out there, much higher productivity, potentially some lesser supply chain issues as well."
First quarter revenue of $1.6 billion was 7.7% higher compared to the prior year period with that growth almost evenly split between organic expansion and acquired sales. Profit climbed 5.7% year-over-year to $170 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
CACI's guidance for its 2023 fiscal year that started July 1 has a revenue range of $6.475 billion-to-$6.675 billion, or growth of between 4.5% and 7.5%. The bottom-line outlook is for an adjusted EBITDA margin in the mid-to-high 10% range.
Elevated labor costs are certainly a watch item for this blue chip defense hardware company just like they are with CACI and the other more IT-centric systems integrators.
Northrop could characterize its own headwinds and that of the defense industrial base at-large as covering these two broad categories: people and parts.
But the people front going in the direction Northrop wants and has previously called out as a priority item.
During Northrop's third quarter call, Chief Financial Officer David Keffer said the labor-driven revenue picture is looking more clear after the company added 1,000 net new employees in the second quarter and an additional 2,700-plus people in the third.
"We have talked about that throughout this year as being a bit of a headwind for us in the first half of the year," CEO Kathy Warden said. "We were not adding headcount and retaining headcount at the level we needed to fuel our growth, and that started to turn the corner in the summer."
Inflation presents a completely different picture, or perhaps lack thereof, even as Northrop looks to the various economic indicators.
"Your guess is as good as mine as when this inflation really starts to modulate," Warden said to an analyst question about the topic.
"I don't see that as a big opportunity or risk. I think that one we probably have hedged pretty well, but we're monitoring it."
Regarding the health and stability of supply chains: Warden said Northrop assumes many of those challenges will persist in 2023, particularly delays in the transportation of parts for its development programs.
Warden noted the Defense Department's efforts to work with industry on problems in supply chains, including adjustments to some contracts and the vulnerability of small and medium-sized businesses.
"We as an industry are doing our part: certainly looking at those investments and managing some of our cash into the supply chain in ways that we have not historically done for the benefit of keeping those businesses healthy," Warden added. "We've been doing that now for the last several years, really since the pandemic began, and I expect we will continue to do that."
Third quarter revenue of $9 billion was 3% higher compared to the prior year period, while net earnings of $915 million were approximately 14% lower year-over-year.
Northrop expects its financial results for this year to be at the lower end of these outlook ranges: $36.2 billion-to-$36.6 billion in revenue on an operating margin of 11.7-to-11.9%.
All of the aforementioned big-picture factors are why Northrop is guiding itself and investors that way, even with this bit of optimism in the company's initial 2023 outlook: sales growth of between 4% and 5% and an operating margin of mid-to-high 11%.