In the second quarter of 2021, the defense technologies ecosystem continued to closely monitor and optimize its labor force and supply chains while positioning for short- and long-term federal government modernization and innovation efforts. In second-quarter earnings calls, top executives in the industry discussed the labor market, supply chain disruptions, the space market, investment in nuclear power and steady international demand.
Top executives in the defense technology space highlighted opportunities and headwinds in these calls, according to Bloomberg and AlphaSense transcripts. Specifically, the companies represented were from L3Harris Technologies Inc. (LHX); Teledyne Technologies Inc. (TDY); BWX Technologies Inc. (BWXT); Maxar Technologies Inc. (MAXR); Mercury Systems Inc. (MRCY); Kratos Defense & Security Solutions Inc. (KTOS); General Dynamics Corp. (GD) and Lockheed Martin Corp. (LMT).
Across these earnings calls, five key themes rose to the surface.
1. The war for talent is under control—for now
Labor is a hot topic across the economy—and the government contracting channel is no exception. However, most contractors feel well positioned due to transparent cash flow streams that have supported strategic hiring during the pandemic. Leaders continue to watch labor market issues carefully but are not yet signaling significant concern.
“We’ve always got a certain amount of turnover in our business with talent…but we’ve done a really good job of backfilling and being aggressive in our talent acquisition profile,” Maxar Technologies CEO Daniel Jablonsky said.
Maxar has hired more than 600 people during the pandemic. Some new employes are just now coming to Maxar facilities for the first time, but that has not impacted operations. Jablonsky added that the competition for talent is “really extreme” in software engineering for the intelligence community.
2. Expected supply chain disruptions continue
Supply chain delays and disruptions continue to play a role in defense technology programs, considering COVID-19-related production cuts, labor issues and increased prices. Some contractors expect movement toward normalcy in the second half of 2021, while others are still grappling with long inventory lead times, input price increases on fixed-fee contracts and accelerating payments to suppliers.
Phebe Novakovic, CEO of General Dynamics, said her company anticipates an increase in deliveries, revenue and operating earnings in the second half of this year as a result of “post-COVID demand.” This follows a reduction in demand and production because of supply chain issues. That drop reached a low point during the second quarter of 2021.
James Taiclet, CEO of Lockheed Martin, said the company generated $1.3 billion of cash from operations in the second quarter after making $1.4 billion in accelerated payments to the company’s supply base. Those payments were intended to mitigate supply chain risks brought on by the pandemic.
3. Staring off into space
The space market continues to be the focus of defense technology contractors, considering its high growth outlook within an otherwise flat defense budget. Taiclet said he believes opportunities in the space market seem to be “trending up in an accelerated way.”
Teledyne Technologies Executive Chairman Robert Mehrabian touted his company’s development of products related to satellites, as well as imaging products in the classified space program. More broadly, satellites continue to launch from all directions.
“As space is becoming increasingly congested, it is also becoming more contested and competitive,” said Eric DeMarco, CEO of Kratos Defense & Security Solutions. “The ability to identify, locate and track potential threats to on orbit space systems through a more comprehensive view of the space environment is absolutely critical and it’s increasing rapidly.”
Contractors that can innovate and revolutionize satellite applications while also using artificial intelligence and machine learning to exploit their valuable data will be well positioned for the future.
4. Don’t forget nuclear—renewable energy is more than just wind and solar
A renewed focus on nuclear power generation and related applications under the Biden administration has resulted in innovation and new technologies for NASA, the Department of Energy and Department of Defense.
“In recent years, many commercial players have delayed investments, given headwinds from low power prices and subsidies from alternative renewables,” said BWX Technologies CEO Rex Geveden. “But owing to our patience, persistence and very-long-term view, we have maintained our capabilities in this market, including the only North American facility and infrastructure capable of supplying large nuclear components. So as responsible nations race to confront climate change, we expect a renewed focus on nuclear solutions.”
5. We get by with a little help from our friends (and allies)
Defense and military spending abroad provide additional opportunities to help our allies, particularly European nations, Australia, Canada, and Japan.
Increased demand is being driven by European nations, said Novakovic, the General Dyanamics CEO. For her company specifically, that centers on combat vehicles–wheeled vehicles and tracked vehicles, specifically the Abrams main battle tank.
Looking ahead to the third quarter
Company executives in the sector remain agile, anticipating future government spending trends and investing in rapidly advancing technologies. We expect Q3 2021 earnings calls to touch on continued supply chain monitoring, fiscal year 2022 budget resolution, and continued developments around broader labor and pricing issues facing the macroeconomy.