U.S. defense contractors may be waiting longer than anticipated for the full payoff from higher military spending authorized by Congress this year and backed by the Trump administration.
While additional money is already flowing to government suppliers, a slowdown in contract awards means the year-to-year surge in defense spending may stretch out over a lengthier period of time, said Roman Schweizer, an analyst with Cowen Washington Research Group, which has tracked government policy for the past four decades. That means year-to-year spikes would appear smaller.
In the 11 months through August, which excludes only one month of the federal budget year, defense spending increased 7.1 percent to $551.7 billion, according to Treasury data. Full-year outlays will probably rise 6.8 percent, less than the 11 percent initially estimated, Treasury said.
The reduction “means there is still an outstanding balance of budget authority and unobligated money that must still be put under contract and flow through the system,” Schweizer said in a report. “Next fiscal year’s forecast could be higher as contracting activity catches up and outlays roll out.”
Should Congress succeed in approving expenditures for the 2019 budget year by the time it starts on Oct. 1, that would be a positive for military contracts, he noted. “And the Department of Defense might be able to more quickly work off its hefty backlog in unobligated money.”
The increase so far in fiscal 2018 includes a 4 percent spike in operations and maintenance expenditures and a 7 percent bump in procurement, Treasury said. That follows a two-year agreement ratified by lawmakers in March that raised the cap for defense spending to $700 billion for fiscal 2018, which ends Sept. 30, and to $716 billion for 2019.
“The surprise to me is some of that is already under contract today,” Lockheed Martin’s chief financial officer, Bruce Tanner, said on a July call after the company reported a 5 percent spike in revenue from January through June. “We’re potentially seeing several hundreds of millions of dollars of revenue associated with omnibus funding that was never, ever envisioned as we started 2018.”
Not only is Lockheed building the F-35 fighter jet, the most expensive weapon in U.S. history, the Bethesda, Md.-based company nabbed a U.S. Army contract in July to develop and test prototypes for unmanned convoys that would shelter soldiers from some of the dangers inherent in moving supplies through hostile territories.
Rival Boeing, meanwhile, has landed a $194 million agreement with Boeing Co. to update software and equipment used by crews training to work on the U.S. Navy’s P-8A Poseidon; a $2.9 billion order for 18 of the planemaker’s KC-46 refueling tankers and an $805 million contract to develop the first unmanned plane for Navy aircraft carriers.
The Chicago-based manufacturer is benefiting from “strengthening defense budgets in the U.S. and amongst some of our key allies,” Chief Executive Officer Dennis Muilenburg said at a Morgan Stanley conference on Wednesday.
The Navy drone contract is a “big strategic win for us,” Muilenburg added, and the KC-46 award represents a “message of confidence” from the Air Force in the plane, which completed its regulatory certification last week.
“This is going to be ultimately a production line that’s producing hundreds of aircraft that’s going to have a multi-decade franchise caliber,” the CEO said. “So we’re looking forward to getting the tanker out into the fleet.”
