With Russia’s invasion of Ukraine grinding on into a second year and the US shooting down surveillance balloons (or whatever they are), security concerns are all over the news these days. And defense contractors have taken notice.
“I think we all feel a lot of responsibility,” Neil G. Mitchill Jr., chief financial officer of Raytheon Technologies Corp., told CFO Brew. “It’s important for me and my role and the team that I have here to make sure that we’re providing the needs that our customers have, as quickly as we possibly can.”
For CFOs forecasting budgets in the defense industry, that means tracking what Congress is approving quite closely, a process that keeps sales teams hyper-focused, Francois Chadwick, CFO of Shield AI, an American aerospace and defense technology company, told CFO Brew. For the current fiscal year, Congress appropriated $858 billion for a bipartisan national defense bill, which was signed by President Biden, including $816+ billion for the DOD budget.
“This is taxpayers’ money. And with that comes a whole lot of other rules and regulations and controls and also the need to be audited by the various different government bodies,” Chadwick said. This means that FP&A has to bake in more time for the Defense Contract Audit Agency, or DCAA, to do its own audits.
Of course, companies like Raytheon and Shield AI that have worked with the DOD also have other sides of their businesses. In Raytheon’s Q4 earnings call, Mitchill told investors that its commercial aerospace and defense markets will help the company in 2023. The CFO said that 2022 fourth-quarter sales grew by $18.1 billion or 7% YoY, primarily due to the commercial aerospace side of the business.
The DOD has said it aims to boost small business involvement, a goal Chadwick has also heard from the entity.
(The DOD did not immediately respond to a request for comment on this story.)
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Ahead of the curve. Instead of tracking the DOD budget, Epirus’s CEO Ken Bedingfield, is tracking the warfighter needs, which is defense lingo for the military service and its members, as that can predict how the government will eventually need said supplies, versus waiting for the government to explicitly commission specific R&D.
“While the defense budget overall can come under pressure, we’re solving a critical need,” Bedingfield told CFO Brew. He added that they’re beginning to invest more like a commercial model, not waiting on government funding to come in.
Mitchill said while there is always a change, but it hasn’t been a huge change financially.
The new models have emerged, dubbed “defense unicorns,” with outside investors being the main vehicle for initial funding and growth of the companies.
Reinforcements needed? But according to some pro-military associations, there aren’t enough people or companies working in the defense industry compared to years past. In its recent Vital Signs report, the National Defense Industry Association noted there were 1.1 million workers in the US defense sector, compared to 3.3 million in 1985. Over the past five years, the DOD estimated the number of small businesses participating in the defense industry has shrunk by 40%. Some defense companies have turned in-house, creating their own venture capital arms, to bolster fund development.
So how does the job of a defense company CFO differ from other industries? Finance chiefs told CFO Brew that while they have additional compliance considerations, that additional compliance did come in handy for some firms’ supply chains when Covid-19 hit.
“The situation in Ukraine has highlighted the need for companies like ours to be very ready to produce and deliver our services,” Mitchill said. “I play a role in making sure that we can have all the right ingredients to deliver on all those demands.”—KT