WASHINGTON — The defense industry, already trying to find its way through supply chain snarls and other COVID-related problems, now has another challenge to contend with: inflation.
While parts of the economy and labor market are recovering as the country continues to adjust to the ongoing pandemic, inflationary pressures are raising prices across the board, squeezing consumers and corporations alike.
And during quarterly earnings calls with investors this week, several major contractors highlighted the effects of inflation on their businesses — and how they’re trying to absorb those impacts.
Raytheon Chief Executive Officer Greg Hayes said in a call the company will see “unexpected inflation in the supply chain” drive up its costs by as much as $150 million in early 2022. At this time of year, the company typically works with its suppliers to cut its costs by about $200 million, but Hayes said the pressure is much higher now.
“We have seen inflation — obviously, I think, like everybody else — and it has been higher than what we expected,” Hayes said. “The whole goal here is to keep the input costs flat year-over-year. So we go out, we work cost reduction. This year, we’ve got a little more work to do.”
Rising wages around the country are also hitting the defense sector — and contracting executives said it’s unclear how long the situation will last.
Hayes called signs of labor inflation “a little troubling,” and something Raytheon has seen in its own shops.
“Our hope here is we’re going to see inflation start to slow down here by the back half of this year, and we’ll have to keep an eye on it,” Hayes said. “And again, I think it’s everybody’s concern across the country right now. When you see 7% inflation, that’s a big headline and we’ve got to keep after it.”
Hayes said Raytheon can raise prices, but will also try to offset wage costs by finding efficiencies in its factories.
While the pressure caused by supply chain complications appears to have relaxed somewhat since the previous quarter, when it was a frequent topic of concern in earnings calls, it still remains an issue.
General Dynamics is among the defense firms riding out supply chain disruptions and labor shortages. CEO Phebe Novakovic said its mission systems and information technology segments have been grappling with the ongoing global semiconductor shortage, while its Electric Boat division has had to slow production of the Virginia-class submarine.
“Electric Boat, in particular, we’ve seen some challenges in the submarine supply chain largely manifest in Virginia schedule variance,” she said. “So we’ve pretty widely reported that, but we’re continuing to work with the Navy to kind of shore up that supply chain so we can get normalized Virginia schedules.”
Northrop Grumman CEO Kathy Warden said COVID surges, particularly during the waves of the delta and omicron variants, dealt a blow to the company’s labor force. Warden stressed that the company encourages people to stay home if they have symptoms and isolates people who have had a close COVID contact.
But as a result, “absenteeism has been higher in these surges,” Warden said. This has particularly hurt the company’s work on the F-35 fighter, which is a high-rate, high-volume production line and typically has people in closer proximity. When one person is out on such a production line, Warden said, it affects the entire work cell.
Those COVID-driven hits to Northrop Grumman’s F-35 workforce led to a $93 million charge in the fourth quarter, the company’s financial statement showed.
“We would have expected to see a stronger fourth quarter topline had we not experienced those two surges,” Warden said.
Oshkosh Corporation CEO John Pfeifer said in an earnings call that rising costs of materials and supply chain disruptions delivered a two-part shock to the company.
But while Pfeifer expressed confidence the company could weather those challenges, he struck a sober tone on the likelihood of conditions changing.
“We think we’re kind of heading into a new normal,” Pfeifer said. “We don’t believe that this material cost is transitory. We believe that inflation will most likely continue.”
Pfeifer said Oshkosh is getting more aggressive about locking in prices on materials such as steel, and building into contracts some ability to raise prices if material costs significantly rise.
John Mollard, acting chief financial officer of Lockheed Martin, said the company expanded its practice of paying the suppliers it relies upon in advance, to make sure they can stay afloat during COVID-19 complications. Mollard said Lockheed accelerated $700 million in payments to suppliers in the fourth quarter, and the payments for all of 2021 topped $2.2 billion.
Mollard also said Lockheed’s supply chain team has embedded personnel in its suppliers’ facilities to help them deal with challenges.
“We think the bow wave has passed in supply chain disruption for Lockheed Martin, but we’re still watching it closely,” Lockheed Martin CEO Jim Taiclet said. “Not all the risk is out of the system yet.”
Jen Judson contributed to this report.
Stephen Losey is the air warfare reporter for Defense News. He previously covered leadership and personnel issues at Air Force Times, and the Pentagon, special operations and air warfare at Military.com. He has traveled to the Middle East to cover U.S. Air Force operations.
Joe Gould was the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He had previously served as Congress reporter.