During first-quarter earnings calls, executives of publicly traded federal government contractors discussed how their businesses are aligning their strategies and operations to serve high-stakes and global missions. Three themes emerged on the calls, transcripts of which were provided by S&P Capital IQ.
Eyes on the skies
While defense systems cover land, sea, sky and outer space, most executives had their eyes on the skies in the first quarter, specifically as it relates to advanced missiles, missile defense and detection systems.
Northrop Grumman Corp. and Leidos each noted missile and hypersonic production as primary areas of investment for the United States and its allies. Lockheed Martin Corp. also highlighted large contract awards to supply Germany and the U.S. Army with Patriot air missile systems and precision strike missiles.
Counter-UAS (unmanned aircraft system) technology remains equally important. John S. Mengucci, CEO of CACI International Inc., said his company is constantly adapting its counter-UAS technology to withstand the evolving tactics and threats of the nation’s foes.
L3Harris Technologies Inc. and Lockheed Martin both said they are performing work on the U.S. Missile Defense Agency’s newest defense capability: the next-generation interceptor (NGI). Development of the NGI has occurred out of necessity because ballistic missile threats have increased in power, scale and complexity.
While the large prime contractors, like Lockheed Martin, often lead the charge in developing and manufacturing the largest defense weapons systems, they work alongside small businesses to do so. The NGI is no exception, with Lockheed Martin partnering with small, innovative businesses that used the Small Business Innovation Research and Small Business Technology Transfer programs to perform critical research and development.
Missile production and missile defense will continue to be a key focus for government contractors of all sizes as both address crucial aspects of developing complex weapon and defense systems.
Supply chain impacts
With large, sophisticated weapon and defense systems come complex supply chains. Executives spoke of the continued recovery from COVID-related shocks and the enhanced awareness of supply chain vulnerabilities that came as a result.
Shifting from the skies to the seas, executives noted supply chain challenges in relation to the U.S. Navy’s need for new ships, particularly submarines.
Kathy Warden, CEO of Northrop Grumman, said her company is addressing issues that are prevalent across the organization’s shipbuilding operations.
While concern remains, Warden expressed optimism that Northrop Grumman’s ship-building productivity is close to executing deliveries efficiently, relative to prior quarters.
International demand
Global partnerships are paramount in a world with increasing connectivity and geopolitical strife. International partnerships and allies provide avenues for government contractors to provide their products and services via the United States’ presence abroad and directly to ally governments.
The AUKUS partnership is a great example of this as the United States, United Kingdom and Australia work together to secure the Indo-Pacific region. Thomas Bell, CEO of Leidos, said several AUKUS partnership initiatives fit well within his company’s wheelhouse: seamless information sharing, artificial intelligence and autonomy, hypersonics and electronic warfare.
In addition, Bell voiced optimism regarding discussions to reduce International Traffic in Arms Regulations between the nations of the trilateral partnership, specifically the United Kingdom. This could benefit government contractors in the space if the change in legislation enhances international cooperation, collaboration and communication.
For more industry insights, visit RSM’s government contracting page.
Meanwhile in Europe, conflict continues in Ukraine, and foreign aid packages continue to support the ongoing crisis. Executives discussed their role in the mission via the products and services being requested. The solutions with the highest demand in this region relate to national defense and security, ranging from tactical radios, munitions and radar systems to advanced air defense capabilities like the Patriot air missile systems.
Similarly in the Middle East, companies like Parsons Corp. are engaged in cyber, electronic warfare and other counter-threat technologies.
In addition to defense spending, global infrastructure spend is also on the rise. The Infrastructure Investment and Jobs Act that passed in 2021 spurred a global domino effect of legislated infrastructure spend. We expect government contractors with the capabilities to service international infrastructure needs to benefit from this focus.
Ultimately, the United States government is going to remain the largest customer for the companies represented on the earnings calls. However, as these large players continue to grow, we expect government contractors to expand their customer bases globally among U.S. allies.
The takeaway
Opportunities for government contractors are increasing on a global scale. To serve these opportunities well, contractors are hyperfocused on secure, agile supply chains and seamless collaboration. Effectively communicating and managing supply chain constraints will ensure that contractors will deliver the cutting-edge solutions (like hypersonics and NGIs) required for security at home and abroad.
Brad Sawyer contributed to this article.
