Government Issues Startling Report On Mushrooming Defense Industry

The Defense Department recently issued a report on its major suppliers – Boeing, General Dynamics, Lockheed-Martin, Northrop Grumman and Raytheon – that reviewed a series of regulatory, legal, financial and other factors in order to “assess defense industry financial performance over a twenty-year timeframe.”

Among the major findings:

In aggregate, the defense industry is financially healthy, and its financial health has improved over time. Operating in the DoD environment has its advantages, especially with respect to cash flow through DoD's contract financing policies, and this result is demonstrated by traditional major defense contractors out-performing commercial counterparts in many key financial metrics.

That ought to be no surprise to anyone who has followed the sustained rise in defense spending over the last 20 years.

But defense contractors paint a picture that shows big challenges, including tight margins that cut into their ability to conduct research and development:

Defense industry association commenters specifically cited the importance of using cash to invest in research and development and capital assets. In its comments regarding capital investments, one defense industry association specifically stated: “In most cases the profitability for government customers is insufficient to finance the investments.” (emphasis added)

Which sounds very bad for America. We're falling behind in defense because Uncle Sam is a skinflint! Except the industry's own financial data say otherwise:

However, this assertion did not appear to be demonstrated by the data. Despite increased profit and cash flow, defense contractors chose to reduce the overall share of revenue spent on IR&D and Capital Expenditures (CapEx) while significantly increasing the share of revenue paid to shareholders in cash dividends and share buybacks by 73%… (emphasis added)

Ouch! Regardless of what one thinks of share buybacks, that the major contractors prefer to do those rather than conduct research and development….and then complain they don't have enough to spend on R&D…is astounding/outrageous/flabbergasting/horrifying all at the same time.

And that's before we get to the litany of excuses as to why the armed forces can't get the ammunition they need. Just a month ago, The New York Times' Eric Lipton reported:

“Look at me. I am not forgiving the fact you're not delivering the ordnance we need. OK?” Adm. Daryl Caudle, who is in charge of delivering weapons to most of the Navy's East Coast-based fleet, warned contractors during an industry gathering in January. “We're talking about war-fighting, national security, and going against a competitor here and a potential adversary that is like nothing we've ever seen. And we can't dillydally around with these deliveries.”

What are the excuses for not suppling the hardware?

Industry consolidation, depleted manufacturing lines and supply chain issues have combined to constrain the production of basic ammunition like artillery shells while also prompting concern about building adequate reserves of more sophisticated weapons including missiles, air defense systems and counter-artillery radar.

Do any of these excuses hold water? Maybe. But the Defense Department report looked specifically at two items – inflation and the COVID-19 pandemic – to see if they were really to blame for supply and production issues.

The defense contractors asserted that COVID and inflation both hammered the industry, especially those companies that “maintain both defense and commercial applications.”

Except not really. And a big reason has to do with Boeing, a big defense contractor that is also the world's leading commercial jet maker. The DoD crunched the numbers and found that:

…when the Boeing financial data is included, it would give the impression that the impact of COVID and inflation to date has been significant on the entire defense industry. However…when the Boeing financial data is excluded, the financial data for the other 48 firms shows that the financial situation actually improved in three of the four measures after 2019.

Oh. And it gets worse:

The improvement in net margins and cash flow is particularly relevant in regard to the arguments that defense industry associations made as to the cash companies spend on capital expenditures and IR&D. As shown below, neither the COVID-19 pandemic nor the rise in inflation to date slowed the defense contractor spending on share repurchases as the spending as a percentage of free cash flow increased. If the defense industry had been significantly impacted by COVID-19 and inflation to date, DoD would have expected to see a more conservative approach to cash management with more cash being held rather than being paid out to shareholders in the form of share repurchases. (emphasis added)

There's a lot more in this report, and you should read it all. As a taxpayer, you paid for it…just as you paid for the financial engineering those major defense contractors have engaged in for the last two decades. Engineering that's made their shareholders rich but increasingly made the all-important defense industrial base poorer.

The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.

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