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The Defense Industry Is Winning in Ukraine
I know, big surprise. But this stuff is worth tracking, especially as the war bogs down.
Edited and with Reporting by Sam Thielman
I NEED TO WORK ON A LONGER PIECE THIS WEEK so I'm going to write this edition of FOREVER WARS like I'm double-parked.
On Tuesday President Biden will visit a Lockheed Martin facility in Alabama that manufactures parts for the Javelin anti-tank missile. That missile is part of the ever-growing stock of weapons that the administration is sending to Ukr–
–"sending to Ukraine" is the accepted shorthand, and the two years I worked out of the Pentagon press bullpen has me reflexively reaching for it. But of course it obscures what's going on. What's going on, as the war enters what appears to be a protracted phrase, is the Biden administration buying weapons to provide Ukraine in its defense against Russian aggression. As of Friday, according to a senior Pentagon official who briefed reporters on Monday, the U.S. has shipped more than 5,000 Javelins into Ukraine.
So much more is on the way. For instance: On Sunday, about 20 Ukrainian soldiers began training in use of a new kamikaze drone—think of it more as a controllable, maneuverable anti-armor missile—developed by the Air Force called the Phoenix Ghost. The Pentagon plans to buy 121 Phoenix Ghosts from the California firm Aevex Aerospace. According to the senior Pentagon official, at the moment, less than a fifth of them are in Ukraine.
Similarly, the Pentagon is rushing the Stinger anti-aircraft missile into Ukraine—something that speaks to the dynamics involved. The Stinger is an old system, one that agonized Soviet pilots in 1980s Afghanistan, and the psychology of brining it out for an encore performance seems like a factor here. Raytheon, manufacturer of the Stinger, said last week on an earnings call that expanding production of a missile that the Pentagon hasn't bought in a generation is going to take years, for reasons ranging from supply-chain issues to a needed redesign for its sensor's electronics. In other words: not cheap.
"I would expect, again, this is going to be a '23, '24 where we actually see orders come in for the larger replenishments, both on Stinger as well as on Javelin," said Raytheon chairman and CEO Greg Hayes.
That’s quite a casual way to state your expectation that Raytheon's going to be filling ramped-up Stinger orders for the next two years, but it's hardly without merit. In mid-April, the Pentagon assembled executives from Raytheon, Boeing, L3, BAE, Lockheed Martin, Huntington Ingalls, General Dynamics and Northrup Grumman to discuss "accelerating the production and fielding of systems that are critical to the Department’s ongoing security assistance to Ukraine, as well as broader efforts to increase the readiness of U.S., Ally, and partner forces." A readout provided by the Pentagon emphasized the building's commitment to "understand[ing] what challenges large companies in the defense industrial base faced in accelerating fielding of critical capabilities, and how the Department might be able to alleviate these issues."
To be Don Draper about it, that's what the money's for. And is there ever money. Biden is seeking $33 billion—$20 billion of it for weapons and other military items—from Congress for Ukraine, on top of the $14 billion it approved in March. $33 billion is a little less than three times the budget of Head Start, for comparison. Five billion more will equal the annual budget of the New York City public school system. If the war is as protracted as the defense industry is suggesting to investors it will be, get used to these kinds of requests.
What a time to be a defense contractor. We're so far gone from any prospect of a post-Afghanistan deceleration in defense spending. Recently, the Pentagon invited contractors to submit bids detailing how they can "accelerate production and build more capacity across the industrial base for weapons and equipment that can be rapidly exported, deployed with minimal training, and that are proven effective in the battlefield." Here's what they're looking for – and read quickly, because submissions are due on Friday.
the Department seeks information from across industry on weapons systems or other commercial capabilities related to air defense, anti-armor, anti-personnel, coastal defense, counter battery, unmanned aerial systems, and communications (e.g., secure radios, satellite internet).
(Sam found that RFI while down a rabbit hole I sent him for another piece we're working on that isn't ready yet, and this piece is a better fit anyway.)
Raytheon CEO Hayes bottom-lined it on that earnings call. They're looking at something like $750 million in losses after pulling out of business with Russia post-invasion. And that's absolutely nothing.
That said, as a result of ceasing business activities in Russia, we are going to reduce our full year sales outlook by $750 million to a new range of $67.75 billion to $68.75 billion. However, we are going to hold our adjusted EPS range of $4.60 to $4.80, and we continue to expect free cash flow of about $6 billion for the year. Neil will give you a little more color on this in just a minute. Our defense backlog remained very strong at $62 billion exiting the quarter, and total company backlog was $154 billion.
Hayes added that he was "very pleased with the enacted '22 DoD budget, and we're encouraged by the president's most recent fiscal '23 budget request of $773 billion. … And we expect the enacted budget could be even higher to account for inflation and the many unfunded priorities identified by the services." Better still is the post-Ukraine decision by Germany and others to rearm, "which we are uniquely positioned to support," Hayes marveled. Whatever happens in Donbass, Northern Virginia is going to keep winning.