2024 U.S. Presidential Election: Implications for Defense and Aerospace Sectors

Potential Changes in Defense Spending

Changes in budget and spending levels, shifting funding priorities, and debates over budgetary priorities and spending caps could significantly impact defense programs and companies. An increase in the 2025 defense budget is anticipated, but ongoing resolutions and potential restrictions remain key considerations.

"Changes in these budget and spending levels, policies, or priorities, which are subject to U.S. domestic and foreign geopolitical risks and threats, may impact our defense businesses, including the timing of and delays in U.S. government licenses and approvals for sales, the risk of sanctions, or other restrictions. Other Matters" --- (RTX, sec filing, 2024/Q2)

"The result may be shifting funding priorities, which could have material impacts on defense spending broadly and our programs." --- (LMT, sec filing, 2024/Q1)

"We anticipate that issues related to budgetary priorities and defense spending levels, the debt ceiling, and the spending caps imposed by the Fiscal Responsibility Act of 2023 (FRA), particularly with respect to discretionary spending, will continue to be a subject of considerable debate, with a potentially significant impact on our programs and the company." --- (NOC, sec filing, 2024/Q1)

"increase the 2025 defense budget. There'll be a continuing resolution as always." --- (LHX, conference, 2024/05/30)

"Estimated potential contract value in our defense segments was $38.1 billion on June 30, 2024." --- (GD, sec filing, 2024/Q2)

Policy Shifts and Regulatory Impacts

Economic tensions, international trade policy changes, and emerging regulations are expected to significantly impact the defense and aerospace sectors. Companies like Northrop Grumman, Lockheed Martin, and Raytheon Technologies are preparing for these shifts by focusing on domestic priorities, mitigating transition costs, and addressing potential disruptions from foreign sanctions.

"Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could also further impact the global market for defense products, services and solutions. U.S. Political, Budget and Regulatory Environment" --- (NOC, sec filing, 2024/Q1)

"By disclosing a report on how Lockheed Martin intends to reduce its full value chain emissions, the Company will provide investors with critical information about how the Company intends to mitigate transition costs associated with emerging regulations and demonstrate how it will compete in a low carbon regulatory environment. Thank you for your time today. Please vote for item 5." --- (LMT, event transcript, 2024/05/02)

"We have several factories running 2 shifts, 3 shifts. We need Congress on a wartime footing, which means you approve the budget timely." --- (LHX, conference, 2024/05/30)

"If China were to impose additional sanctions, enforce announced sanctions, or take other regulatory action against RTX, our suppliers, affiliates, or partners, it could potentially disrupt our business operations." --- (RTX, sec filing, 2024/Q1)

"And we're very committed to those programs. So this is not a shift away from domestic priorities." --- (NOC, conference, 2024/05/30)

Geopolitical Impacts and International Relations

Geopolitical tensions, such as conflicts in Ukraine and instability in Asia and the Middle East, are driving changes in defense spending and necessitating stronger defense capabilities. Companies are also monitoring global trade impacts, including sanctions and export controls, to navigate the evolving geopolitical landscape.

"The overall defense spending environment, both in the U.S. and internationally, reflects the continued impacts of the conflicts in Ukraine and geopolitical tensions across Asia and the Middle East, and changes to U.S. Government or international spending priorities have and could in the future impact our business." --- (LHX, sec filing, 2024/Q1)

"Global Geopolitical and Economic Environment - The global geopolitical and economic environment continues to be impacted by uncertainty, heightened geopolitical tensions, and instability." --- (HII, sec filing, 2024/Q1)

"Additional Considerations Global Trade We continually monitor the global trade environment in response to geopolitical economic developments, as well as changes in tariffs, trade agreements, or sanctions that may impact the Company." --- (BA, sec filing, 2024/Q1)

"The increasingly unstable geopolitical environment in the world today makes it essential for industry and government to strengthen our nation's capabilities to deter and defend against further aggressive behavior against the U.S. and our allies." --- (LMT, earning call, 2024/Q1)

"Geopolitical Matters. In response to Russia’s invasion of Ukraine, the U.S. government and the governments of various jurisdictions in which we operate, have imposed broad economic sanctions and export controls targeting specific industries, entities, and individuals in Russia." --- (RTX, sec filing, 2024/Q1)

Technological Investments and Innovation

Major defense and aerospace companies like RTX, LMT, GD, HII, and NOC are heavily investing in next-generation technologies, driving innovation across diverse portfolios. These investments are fostering advancements in areas such as integrated air and missile defense, unmanned systems, and microelectronics, ensuring sustained growth and technological leadership.

"So with the best portfolio within A&D, core driving our continuous improvement in operational excellence and ongoing investments in next generation technologies, I'm incredibly confident in RTX's future and our ability to transform into the best company in A&D." --- (RTX, earning call, 2024/Q1)

"BUSINESS OVERVIEW We are a global defense technology company driving innovation and advancing scientific discovery." --- (LMT, sec filing, 2024/Q1)

"Both businesses have robust pipelines driven by their respective investments in different technologies." --- (GD, earning call, 2024/Q1)

"In addition to very strong sales growth, Mission Technologies won strategic competitions in the quarter, including a $305 million contract to protect U.S. regional interest in the Republic of Korea, a $74 million contract to research, analyze and develop enhanced capabilities for vertical launching systems onboard U.S. Navy surface ships and in order to build a REMUS 620 unmanned underwater vehicle for an international customer." --- (HII, earning call, 2024/Q1)

"And it's really the diversity and breadth of that portfolio from space to armaments to integrated air and missile defense and mission systems and microelectronics in general that are positioning the company not only for the growth we're experiencing today, but sustained growth into the future." --- (NOC, conference, 2024/05/30)

Market Sentiment and Investor Confidence

Investor confidence in the defense and aerospace sectors remains strong, driven by robust financial performance and strategic investments. Companies like Northrop Grumman, Boeing, L3Harris, General Dynamics, and Raytheon Technologies report expanding cash flows, improved margins, and significant capital returns, reinforcing positive market sentiment.

""The investments we've made in our broad portfolio give us confidence in our outlook, including strong and expanding cash flows."" --- (NOC, press release, 2024/05/14)

"The products are performing in the field, and we're confident that our efforts to drive [ execution stability ] will return this business to performance levels that our investors recognize." --- (BA, earning call, 2024/Q1)

"Wanted to ask, I guess, Ken and maybe, Chris, as well, when you gave the outlook and the targets at Investor Day it was, I think, about 100 basis points of margin improvement in each business." --- (LHX, earning call, 2024/Q2)

"During the quarter, the company paid $389 million in dividends, invested $201 million in capital expenditures, and used $34 million to repurchase shares, ending the quarter with $1.4 billion in cash and equivalents on hand." --- (GD, press release, 2024/07/24)

"Commercial aerospace operating profit increased $0.1 billion as the benefit from higher commercial aftermarket volume as well as favorable large commercial OEM and commercial aftermarket mix, was partially offset by the unfavorable impact from higher large commercial OEM volume and the absence of a $60 million favorable contract matter in the second quarter of 2023." --- (RTX, sec filing, 2024/Q2)

Workforce Implications and Talent Acquisition

L3Harris Technologies emphasizes employee well-being by maintaining flat medical costs and effective succession planning, which are crucial for talent acquisition and workforce stability in the defense and aerospace sectors.

"So we're in pretty good shape. We do a lot. We spend a lot of time on the focus on the employees, things that may not seem significant, but they are well received by the workforce, keeping the medical cost flat for 2 straight years." --- (LHX, conference, 2024/05/30)

"We've kind of branded ourselves as the trusted disruptor. But I'd say a majority of what happened went on plan on schedule or better from the integration cost of over $600,000,000 Everything per the merger agreement with the terms and conditions, the Board, succession planning, moving headquarters, everything went exactly how we laid it out." --- (LHX, conference, 2024/05/30)

Supply Chain and Manufacturing Considerations

Macroeconomic factors, including inflation, labor challenges, and supply chain disruptions, are significantly impacting the defense and aerospace sectors. Companies like Northrop Grumman, Raytheon Technologies, Boeing, Lockheed Martin, and General Dynamics are experiencing production delays, increased costs, and the need for agile, innovative supply chain partners to maintain quality and competitiveness.

"We anticipate that the broader macroeconomic environment, with ongoing inflationary pressures, pockets of labor challenges, and supply chain disruption, among other considerations, will continue to play a significant role in the outcome of these debates and, in turn, on our industry and company." --- (NOC, sec filing, 2024/Q1)

"And I'd say in two areas, one, you mentioned a little bit about this before in terms of bringing margins up to your objectives in 2025, which presumably fixed price contracts play into that, but also the supply chain progress." --- (RTX, earning call, 2024/Q1)

"And as far as production is concerned, we will be a couple lower than that 5 per month for most of the year as the supply chain catches up." --- (BA, earning call, 2024/Q1)

"Quality performance is required at every level of the global supply chain. It requires partners who can harness innovation and remain agile to deliver competitive advantage in both cost and quality." --- (LMT, press release, 2024/04/23)

"In total, the Aerospace segment’s operating margin decreased 120 basis points in the second quarter and 70 basis points in the first six months of 2024 compared with the prior-year periods, reflecting additional costs associated with the first lot of G700 aircraft, out of station work caused by late supply chain deliveries and extended certification processes." --- (GD, sec filing, 2024/Q2)