A trio of large defense contractors belive their financial futures are secure in 2020 and 2021 – even with COVID-19 and a slowed federal budget process.
Leaders from Huntington Ingalls Industries, Lockheed Martin and Northrop Grumman provided investors with their financial outlook over two days during the annual Bernstein’s Virtual Strategic Decisions Conference.
President Donald Trump proposed a top line defense budget of $741 billion for Fiscal Year 2021, slightly more than the FY 2020 budget of $738 billion, said Marillyn Hewson, chief executive of Lockheed Martin. COVID-19 has thrown off Congress’ usual schedule, but Hewson said progress is being made with working out a defense authorization act.
“It will probably see some timing impact because of the coronavirus situation. We are starting to see Congress weigh in a little bit,” Hewson said.
There’s a chance lawmakers will not pass a budget before the fiscal year ends on September 30, Hewson said. In this scenario, Congress would likely pass a temporary spending measure to keep the government running at FY 2020 spending levels. If the government has to operate under such a stopgap spending bill, Hewson did not expect much of a change in Lockheed Martin’s finances, since the Department of Defense’s proposed spending in FY 2021 is nearly the same as what Congress approved for FY 2020.
“The budget that was submitted this year, even though it was less than the budget that was approved last year, the budget that was submitted this year is still an historically high budget, you know, relative to what shipbuilding has been over the last 30 years,” said Mike Petters, the chief executive of Huntington Ingalls Industries. “What that means is the outlook is still pretty bullish for shipbuilding.”
The Navy’s FY 2021 budget request lays out the smallest shipbuilding plan in six years, though, the proposed spending on shipbuilding is still higher than was the case in 2015. The FY 2021 ship buy proposes spending $19.9 billion for eight ships – $4 billion and four ships less than the FY 2020 ship buy. The last time lawmakers approved only purchasing only eight ships was 2015, when the entire budget process was skewed by spending caps mandated by the Budget Control Act of 2011.
Among the ships cut from the FY 2021 budget request when compared to previous shipbuilding plans is a second Virginia-class attack submarine, which Huntington Ingalls Industries is slated to work on with sub-building partner General Dynamics Electric Boat. The Virginia-class program had been on a two-sub per year build rate since 2011. Lawmakers and the Navy had even discussed squeezing funding to increase the build-rate to three Virginia-class subs in future budgets.
Petters painted the single-Virginia-class submarine buy in FY 2021 as part of the budgeting process, not a lack of faith in the program.
“When you take things out of the budget at the eleventh hour like they did, it doesn’t mean that they don’t like the program, it means they’re trying to figure out how they’re going to pay for it and when they’re going to pay for it,” Petters said. “Taking a submarine out in your submission then gives the Congress an opportunity to put it back in, or it means that you’re going to appropriate the money in next year’s budget and not this year’s budget.”
In the long-run, Petters suggested the second Virginia-class submarine will likely reappear in a future appropriation. The second Virginia-class submarine tops the Navy’s unfunded priorities list. Petters said Huntington Ingalls Industries isn’t even expecting to change its production schedule.
“There’s no curtailments going on. This is just really moving pieces around to try to figure out how to fit them into the appropriations process for 2020, 2021, 2022,” Petters said. “It’s just trying to figure out the best way to do that.”
Hewson and Kathy Warden, the chief executive of Northrop Grumman, both said the proposed FY 2021 defense budget gives them a signal of where to invest research and development dollars.
“If you look at what was submitted in the president’s budget, there is $3.2 billion for hypersonic programs, which is a key area that we are focused in,” Hewson said.
The companies who win future contracts for such emerging programs as hypersonics, Hewson said, will be those investing in research and development now. Warden agreed, saying Northrop Grumman sees the demand for hypersonics increasing, opening up opportunities for more firms to compete for contracts
“When you look over the long-term, we believe the demand signal will be there, and there will be new requirements that create the potential for companies like ours to enter particular areas,” Warden said. “We’ve talked about hypersonics. We see that as part of this broader market space over the long-term, and we do believe there will be enough demand signal to support three suppliers.”