What’s News in Earnings: Soaring Backlogs for Defense Companies

SPEAKER_1 (0:00)

This podcast is brought to you by ReliaQuest. Cyber criminals are constantly attacking. They want your data, they want your identity, they want your innovation. ReliaQuest fortifies your business with agentic defense, AI that detects, contains, and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. ReliaQuest, agentic defense for the enterprise. Learn more at reliaquest.com.

Marcus Weisgerber (0:34)

Hey, listeners. It's July 27th. I'm Marcus Weisgerber, national security reporter for the Wall Street Journal. And this is What's News in Earnings, our look at some of the biggest themes standing out this earnings season. As the war in Iran nears the start of its six month, the manufacturing capacity of US defense companies is in the spotlight. The Pentagon's top leaders have pressed companies like Lockheed Martin and RTX to expand their production lines, especially for munitions. They promised lucrative multi-year deals, but Congress still needs to prove a lot of the funding.

The money is still coming through, though. Lockheed just reported a record $230 billion order backlog.

To break this all down for us today, we're joined by Wall Street Journal Aerospace and Defense reporter, Drew FitzGerald. Drew, three of the top six defense companies, Lockheed, RTX, and Northrop Grumman, have already reported. Shares of Lockheed Martin and RTX are surging after both companies reported swelling order books driven by strong demand for military hardware. What's the sentiment among these companies right now?

Drew FitzGerald (1:41)

Well, the mood among these defense company executives is positive right now. As you mentioned, Lockheed has a record $230 billion order backlog. That's up nearly $40 billion this year, largely thanks to a roughly $35 billion deal for THAAD Interceptors. That's a very high-end, powerful missile interceptor that's been used a lot in the Middle East lately and is very backlogged all around the world. Backlog is soaring, and that doesn't even account for some of these framework agreements that the Pentagon has issued these companies, which are kind of like IOUs. They're not backed by congressional funding, and congressional funding is a big question for them, whether that will come through. So that's a possible storm cloud on the horizon, but investors aren't really concerned about that right now because they have so many firm orders already on their books.

So another sign of how much demand is feeding these companies bottom line, Northrop Crumman said it got the okay to supply solid rocket motors to Lockheed's Pack 3 Interceptors. That's another interceptor that has been used extensively in the Middle East and in Ukraine to knock down ballistic missile threats and also other types of missiles targeting cities and military installations. That's an investment that Northrop made a while ago, anticipating this boom in demand before it actually hit.

Now, not all of this is being fed by the war with Iran. The Pentagon was pushing for this dramatic upscaling of production of high-end missiles more than a year ago. But the war with Iran has really added urgency to some of these orders.

Marcus Weisgerber (3:23)

We've seen President Trump threaten to limit defense companies' ability to buy back their own stock, pay dividends, and pay executives if their performance doesn't meet the Pentagon standards. But so far, we haven't seen any teeth to those threats, have we?

Drew FitzGerald (3:36)

Not really. There's been lots of carrot for these companies, not as much stick. These contractors have been dialing back their stock buybacks. It's true, but certainly not their dividends or their executive bonuses.

And that's partly because they're pledging to hit their targets even without frontloading all of these big investments in new factories. There have been plenty of ribbon cuttings over the past year, but Lockheed's capital spending projections for this year are actually down. That's because executives say they've found more efficiencies and are managing to get production up without spending as much as they thought they might have to early on.

Marcus Weisgerber (4:14)

So looking forward, Boeing, General Dynamics, and L3Harris all report this week. What were you going to be looking for?

Drew FitzGerald (4:21)

Well, let's start with Boeing. The defense business at Boeing had a rare breather earlier this year, where they, for the first time in a long time, had no big write downs or losses in any of their major programs. And we'll see if that can continue, given some of the setbacks they've had on the new Air Force One jet model, issues with refueling tankers and the space business. Speaking of space, another thing that we'll look out across all of those companies is how much competition from SpaceX is affecting their long-term trajectory.