Domestic and international defense growth will hit an “inflection point” in two to three years as demand firms up, funding is appropriated, contracts are let and suppliers can meet capacity, all related to Russia’s invasion of Ukraine and more recent concerns about China’s intentions as well as North Korea, the chief executive of the top U.S. defense contractor said on Tuesday.
“The value of deterrence has never been greater really at this point now,” James Taiclet, chairman, president and CEO of Lockheed Martin [LMT] said during the company’s earnings call with financial analysts. “And that shift happened over literally three or four months. What that requires is the Department of Defense to shift gears. And I can tell you the clutch isn’t engaged yet.”
Before Russia’s invasion in late February, the global security environment was relatively “benign” following U.S. withdrawal last year from Afghanistan and an overall diminished presence in the Middle East, Taiclet said.
Lockheed Martin had been projecting “relatively flat” U.S. defense budgets for the next two years and no growth triggers from allies as well, he said.
The company is now preparing for an “inflection point” for itself and its share count beginning in 2024 and beyond due to the “unfortunate situation in global security,” Taiclet said.
In the past year, Lockheed Martin’s pipeline of business opportunities has “certainly grown,” evidence in part by new contracts for the company’s F-35 fighter it is producing for the U.S. and allies, and increased international interest in the company’s legacy F-16 fighter, Jay Malave, Lockheed Martin’s chief financial officer, said on the call.
The current backlog for F-16s stands at 128 aircraft, and the pipeline has grown from a previous forecast of between 300 and 400 fighters to about 500 “given what we’ve seen over the past six to 12 months,” Malave said.
Malave also said that the international pipeline is growing for tactical, air and missile defense systems such as the Javelin anti-tank weapon, the High Mobility Artillery Rocket System (HIMARS) and the Patriot Advanced Capability-3 surface-to-air missile. Javelin and, more recently, HIMARS have been used with great success by Ukrainian forces against the invading Russians.
Like Taiclet, Malave said when these demand signals translate into new business awaits further clarity.
“The reality is today, none of it is under contract,” Malave said. “And so, we’re trying to get a better understanding what the timing of which these will come into contract and then getting a better understanding of our supply chain capability to determine when we can actually deliver. But I can’t say with some level of reasonable confidence that our orders and backlog outlook over the next two years will be better than it was a year ago.”
Taiclet said the upcoming period of higher growth that will begin mid-decade will coincide with increased shareholder value. During the current low growth period, Lockheed Martin has been boosting its share repurchases, investing in future growth and investing in its digital transformation to become more efficient, he said.
“The goal then is to take down the share count in the relatively low growth period so when the high growth period comes about, you’ve got, you know, kind of a turbocharger on the investor basis, if you will,” Taiclet said. “So, we think shareholder value inflection point comes mid-decade because the revenue growth we expect to ramp then.”
Growth is also expected to result in cash flow, he said.
Malave said that Lockheed Martin remains committed to returning 100 percent of free cash flow to shareholders through dividends and share repurchases. He said that more specifics around the longer-term free cash flow outlook will be presented when the company reports third quarter results in October.
Lockheed Martin continues to forecast future growth in areas such as hypersonic weapons, classified programs, legacy programs such as the CH-53K helicopter for the Marine Corps, sustainment of F-35s and potential wins in ongoing competitions in the U.S. and elsewhere, Malave said.