Defense budgets are increasing around the world, boosting local revenue. However, supply chain problems continue to slow down production and reduce profit margins. Senior executives do not expect these pressures to ease fully until 2024.
This was the key message from recent earnings calls that executives at Lockheed Martin Corp. General Dynamics Corp. Raytheon Technologies Corp. conducted with analysts following the release first-quarter results.
General Dynamics, based in Reston (NYSE: GD), reported a 5.2% increase in revenue from the same period last year. Sales were up but the aerospace segment saw a slight decline as supply shortages caused delays that resulted in four fewer planes being delivered than anticipated in the quarter. Executives said this on the earnings conference call. Marine Systems reported an 13% rise in revenue over the previous year, to $3 billion. However, its operating profit was flat because of cost pressures resulting from late deliveries of parts for Virginia-class subs that it is building for the U.S. Navy.
Lockheed Martin, based in Bethesda (NYSE: LMT), reported a modest increase in sales from last year to $15 million. However, operating profits declined in three of the company's four business segments due to a lower production volume. Executives attributed this to supply chain delays. Raytheon's (NYSE: RTX), meanwhile, reported a 10% rise in revenue compared to the same quarter in the previous year, but growth was muted in two of the company's business units - Raytheon Missiles & Defense, and Raytheon Intelligence & Space - due in part, Gregory Hayes stated on the Arlington firm’s earnings call held on April 25, due in large part, to the challenges obtaining parts for rocket engines.
Companies are taking their own steps to reduce supply chain disruptions, and accelerate production. Lockheed is doing bulk purchases of raw materials and mid-stage components, while General Dynamics sends its own employees to work with the production teams at its suppliers. Raytheon took a similar strategy by increasing on-site support to its suppliers for structural casings, rocket motors and other components.
Hayes stated on the earnings call that 'we still have supply chain constraints, but it is getting better'. As we work out those supply-chain issues with rocket motors, that should also lead to extraordinary growth in top line over the coming years.
Executives often say that the supply chain woes will start to fade later this year, and by next year they could be a distant memory.
General Dynamics expects growth to slow in the third quarter due to supply chain challenges. However, Phebe Novakovic, Chairwoman and CEO of General Dynamics said that it is forecasting "very strong" fourth and third quarters on April 26.
Jay Malave, Chief Financial Officer at Lockheed Martin, reiterated this point during the company's call with analysts on April 18.