Global conflicts drive GovCon demand amid evolving capacity constraints

No discussion about the government contracting industry's current status and future prospects can go forward without looking through the prism of big-picture happenings that shape what the customer needs.

Global turbulence is an obvious driver of how GovCon companies respond: see Ukraine's defense against Russia and the Israel-Hamas conflict as the lastest high-profile examples.

Here is how the chief executives of two publicly traded contractors spoke of those world events and their impacts on the industry during their quarterly earnings calls with investors on Thursday.

CACI International

As John Mengucci put it to analysts: Russia's invasion of Ukraine "raised the urgency level around defense and national security" given that the threat was put forward by a near-peer adversary of the U.S.

But the Israel-Hamas conflict now entering into its fourth week brings back a theme from the 2000s and even early 2010s.

"I think the attack on Israel is a reminder that despite the increase of near-peer threats, you've all heard me say this, counterterrorism is still a major concern," Mengucci said on CACI's first quarter call. "Yes, there is more money going to be spent on the near-peer threat. But I've always said, in our mind, it was never an 'or,' it was always going to be an 'and.'"

That contributes to the bigger picture driving demand by U.S. and international defense buyers. Regarding what they are looking for, Mengucci cited electronic warfare and the electromagnetic spectrum as areas of interest to customers.

"Nations around the country want to know where that signal is, what it is and how can they repeat it," Mengucci said. "I’m sure that expansions around Eastern Europe and NATO and other select countries is what we'll start taking a look at. We’re going to be very, very conservative and very, very calculating as to how we enter the international markets with the offerings that we have."

First quarter revenue of $1.8 billion was approximately 15.2% higher over the prior year period, while profit of $174.2 million represented a 2.5% year-over-year increase in EBITDA (earnings before interest, taxes, depreciation and amortization).

Reston, Virginia-headquartered CACI lifted its fiscal year 2024 guidance to a revenue range of $7.2 billion-to-$7.4 billion with EBITDA expectations unchanged from the prior outlook.

Northrop Grumman

No conversation about meeting customer demand can happen without bringing up the theme of capacity, in particular the availability of people and parts to put systems together.

For Northrop Grumman, part of its answer has been to ramp up capital expenditures this year with plans to have what CEO Kathy Warden called "robust CapEx plans" in place for 2024.

"We had forecasted an increase in demand, particularly in our solid rocket motor business, but broadly as we've been ramping up for production of satellites, aircraft and mission systems capability across the board," Warden told analysts. "First and foremost, we did what's necessary, and that is invest in our workforce and our facilities to be able to support that demand, and it's what's allowing us to support both our direct customers and primes who are now coming to us for that capability."

Training and digital technology are two examples Warden cited of where Northrop has made workforce-centric investments in an effort to further enable productivity. Northrop can do that now that the company is more "able to get the workers that we need" versus prior quarters, she said.

Productivity of the workforce goes hand-in-hand with stability in the supply chains, which has been slower to materialize after the peak of disruptions during the COVID-19 pandemic. Warden said Northrop is putting some of those same resources into its network of suppliers, including co-locating with them.

"Once we remove that bottleneck, I think we'll, as an industry, be able to no longer have capacity to be our constraining factor," Warden said.

Third quarter revenue of $9.8 billion was 9% higher over the prior year period, while segment operating income of $1.1 billion showed an 8% year-over-year increase.

Northrop's updated guidance for 2023 pegs sales at around $39 billion, up from the prior $38.4 billion-to-$38.8 billion range, with segment operating income held at $4.3 billion-to-$4.4 billion.

The company also provided an initial outlook for 2024 that sees both revenue and segment operating income increases of 4%-to-5%.

On the matter of capital expenditures: Northrop sees spending hitting between $1.650 billion and $1.75 billion this year and holding steady in the next. Northrop's Capex spending was $1.4 billion in both 2022 and 2021.