By Doug Cameron
Refilling the U.S. armory to replace weapons sent to Ukraine -- and tens of billions in new aid confirmed last week -- means big business for the U.S. defense industry for years to come.
Lawmakers' approval of a long-delayed $95 billion aid package frees up funding that had been frozen in Congress for four months. Two-thirds of it will go toward new military equipment for Ukraine, Israel and Taiwan, estimated analysts, as well as expanding U.S. production. U.S. military jets started flying fresh supplies from Pentagon stocks to Ukraine on Wednesday, within hours of President Biden signing the funding into law.
Lockheed Martin and RTX, formerly known as Raytheon Technologies, have been the biggest beneficiaries of the $30 billion in federal contracts already awarded to supply Ukraine and refill U.S. weapon stockpiles. Other contractors including General Dynamics and L3Harris last week reported strong quarterly sales as they delivered on deals awarded over the past two years.
Strengthening results have also led defense contractors including Lockheed and RTX to increase share buybacks, drawing criticism from some lawmakers and military officials.
The U.S. has already provided around $44 billion in military assistance to Ukraine over the past two years, spending that goes beyond the Pentagon's normal budget. Companies typically don't book the majority of sales until weapons are delivered, and are just now beginning to generate sales from prior military aid.
More than $60 billion of the newly approved aid package is expected to turn into new business over the next two or three years, said defense executives, a significant bump to the Pentagon's latest $320 billion procurement budget.
Almost half of the new money will replenish U.S. stocks, which often involves purchasing newer, more expensive weapons than those being sent to the front in Ukraine. The $1 million Cold War-era ATACMS long-range rockets provided from the U.S. arsenal will be replaced with Lockheed's more sophisticated PrSM missile, priced at $2.4 million apiece.
The Pentagon on Friday detailed a $6 billion package of new weapons, training and spare parts that will be sent to Ukraine over the next several years.
Industry and Pentagon officials said the newly approved aid funds will unlock more orders for air-defense systems, artillery shells and technology to knock out drones. Frank St. John, Lockheed's chief operating officer, said the extra spending approved last week will sustain factories for years to come.
Lockheed said annual output of GMLRS missiles fired from its Himars rocket launchers is expected to rise to 14,000 next year from 10,000 at present. With a range of around 50 miles, the rockets have been a key part of Ukraine's front-line fighting.
"Tactical and strike missiles is where we really saw a lot of sales activity," said Lockheed finance chief Jay Malave. Lockheed's missiles unit reported a 16% rise in revenue during the latest quarter.
RTX makes the Patriot air-defense system and the Stinger antiaircraft missile. Neil Mitchill, the company's chief financial officer, said the company didn't pause production or efforts to expand capacity when the Pentagon said in January that additional funds for Ukraine had run out. He said RTX had opportunities to win contracts in about $40 billion of the extra aid earmarked for Ukraine.
L3Harris reported an 11% rise in sales at its unit that makes radios and night-vision goggles widely used by Ukraine. CEO Chris Kubasik said on an investor call Friday that the supplemental funding would boost L3Harris as well as hundreds of small and medium-size suppliers.
Ukraine is facing acute shortages of 155mm artillery shells. The U.S. Army plans to boost monthly output to 100,000 next year from around 40,000 currently, an effort that had stalled awaiting the new aid but now is back on track. That includes a new shell plant in Texas run by General Dynamics.
Pentagon and White House officials have spent months stressing that the aid package will support domestic jobs and bolster U.S. defenses through expanded capacity to produce weapons. "We are going to help Ukraine, but we have to help ourselves, too," said Army acquisition chief Doug Bush at an industry conference last month.
It has also translated into buoyant cash flow for defense companies. The fierce debate over the latest funding round has also reignited criticism over how profits from elevated weapons sales are used as companies direct billions into share buybacks.
Lockheed and RTX bought back $19 billion in stock between them last year. Lockheed repurchased another $1 billion in the first quarter, with Northrop Grumman buying back almost $350 million and General Dynamics more than $100 million.
The S&P aerospace and defense subindex gained around 2% in the week ended Friday, overtaking the S&P 500 year to date after lagging behind the index in 2023.
A group of lawmakers including Sen. Elizabeth Warren (D., Mass.) last month called for an end to what they called "war profiteering."
Some senior Pentagon officials have also weighed in. Navy Secretary Carlos Del Toro directly tied delays in all of the Navy's major ship and submarine programs to defense companies' investment priorities.
"You can't be asking for the American taxpayer to make greater public investments while you continue to goose your stock prices through stock buybacks, deferring promised capital investments, and other accounting maneuvers," he said at an industry conference in January.
Industry executives said they have increased investment spending, even while contracts were delayed by the budget morass, and that it isn't being curtailed to pay for stock buybacks.
"I don't see one being made at the expense of the other," said Lockheed's Malave. RTX said it is boosting capital spending to $10 billion this year from $9 billion in 2023.
Pentagon leaders have long recognized the tension created by rising military spending and elevated corporate buybacks. They have said that incentives are needed to encourage more investing.
"It has to be attractive for people to do business with us," Pentagon acquisition chief Bill LaPlante said. "Unless they're billionaires and they're stupid, they're not going to just throw their money away."
Write to Doug Cameron at Doug.Cameron@wsj.com
(END) Dow Jones Newswires
April 28, 2024 10:00 ET (14:00 GMT)
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