This week, FSN publishes a series of financial analyses from Finserve examining Western defense companies and their quarterly reports. In this third and final part of their analysis, the focus is on the USA, where rapid integration of AI, autonomous systems, and advanced missile technology is driving growth. The article also highlights how American companies are responding to increased defense budgets and the challenges in an increasingly complex global security environment. Part 3 of 3 in the analysis of quarterly reports from defense companies globally

In Part 1 and Part 2 for the Nordics and Europe in our quarterly analysis, it was noted that the focus was on addressing urgent defense needs in Ukraine as well as joint strategy and acquisitions within the EU. The structural changes will further increase growth in Europe. In this context, it was noted that Nordic companies and smaller firms may be well-positioned when more funds enter the system. While Europe has the potential for higher growth, the USA is more efficient at quickly allocating funds to companies and achieving production capacity.

Quarterly Reports in the USA

During the third quarter of 2024, revenues for the American defense industry increased significantly. This was driven by growing government defense budgets and rapid integration of AI-based solutions. Additionally, conflicts have now spread in the Middle East, and geopolitical tensions have increased in the Pacific region.

In addition to evaluating geopolitical developments, the Reagan National Defense Forum 2024 reflected on trends in defense materials and systems. UAS/UAV/UGV (unmanned systems), hypersonic weapons, cyber defense, and military space technology were discussed in depth. Jim Taiclet, CEO of Lockheed Martin, emphasized the importance of innovation in the space domain and integrated satellite systems to maintain national security. Leading military commanders also highlighted how AI and autonomy enhance the U.S. defense capability.

Below are some of the most prominent trends in the Q3 reports from American defense companies.

Hypersonic Weapon Systems and Missile Defense:

The uncertain global environment drives the development of advanced deterrence and defense systems, with hypersonic weapons at the forefront. During Q3 2024, Lockheed Martin and Northrop Grumman reported clear progress in the development of hypersonic missiles and defense systems. Northrop Grumman's collaboration with the Missile Defense Agency (MDA) and Japan on the Glide Phase Interceptor (GPI) aims to address the growing threat from hypersonic missiles.

Kathy Warden, CEO of Northrop Grumman, emphasized that the partnership with MDA is crucial for delivering an effective interceptor. Lockheed Martin also reported progress with its hypersonic weapon Mako, which can reach speeds over Mach 5 and be compatible with platforms like the F-35 and F-22. These efforts demonstrate how companies are positioning themselves to meet future threats with both offensive and defensive solutions.

Financially, Lockheed and Northrop delivered strong reports. Lockheed Martin's sales for the quarter increased by 1% to 17.1 billion USD, the order backlog reached a record high of 165 billion USD, and free cash flow was strong at 2.1 billion USD. Northrop Grumman's order backlog amounted to 85 billion USD, more than double the company's annual revenues. Year-to-date revenues have increased by 6%, and the company expects to achieve its full-year target of 5% growth.

Autonomous Systems and AI Integration:

Investments in autonomous systems and AI-driven sensors continued to increase during the quarter. The development is primarily driven by the increased need for self-learning AI models for real-time decisions, swarm technology where multiple drones collaborate, and longer endurance and higher autonomy in operations.

AeroVironment highlighted in its latest report the growing demand for autonomous solutions and its strategic focus on larger, more profitable markets. The acquisition of BlueHalo is expected to strengthen the company's position in next-generation defense technology, while the new drone P550 is believed to drive future growth with interest from both U.S. military customers and international markets.

Kratos, which develops the autonomous combat drone system XQ-58A Valkyrie under the "loyal wingman" concept, reported revenues of 275.9 million USD and an adjusted EBITDA of 24.6 million USD. The company plans to increase its production to approximately 400 jet drones per year to meet demand.

Among private actors are Anduril Industries and Shield AI. Anduril has expanded within the defense sector and is collaborating with Archer Aviation to develop military VTOL hybrid aircraft. Shield AI raised 200 million USD in a Series F round, led by USIT and Riot Ventures, valuing the company at 2.7 billion USD. Their AI pilot Hivemind enables autonomous operations in hostile environments without external remote control or GPS.

Space-Based Systems:

Investments in satellite-based surveillance and communication have increased and are expected to become a central part of defense in the coming years. Christopher Kubasik, CEO of L3Harris, mentioned that there are short-term budget constraints in the space sector. However, given the current threat landscape and an increased prioritization of space-based missions instead of airborne, growth is expected to accelerate from 2026. The company's Space & Airborne Systems (SAS) segment showed mixed performance during the quarter. Revenue remained at 1,683 million USD compared to the same quarter last year. There was growth in classified programs for Intel and Cyber, as well as increased volume in the FAA's critical safety network for air traffic.

RTX sees great potential in the space area but emphasizes that some segments are difficult to make profitable, especially under fixed-price contracts for development programs. The company intends to focus on strengths such as space protection, ISR (intelligence, surveillance, and reconnaissance), and C2 (command and control). Depending on future growth opportunities, some parts of the space business may be reevaluated or divested. Additionally, RTX reported adjusted sales of 20.1 billion USD, an increase of 6% from the previous year, with an organic sales growth of 8%.

Overall, the Q3 reports show that the American defense industry continues to grow through technological innovations and strategic investments, adapted to meet an increasingly complex and challenging security environment. Alongside this development, we look forward to following the new Trump administration's focus on streamlining the state apparatus, which also includes defense and intelligence services.

This week, the U.S. Department of Defense released its annual report on military and security policy developments in China. The degree of military buildup and civil-military integration in China underscores the need for continued strong defense funding, both in the short and long term in the USA.

Available for reading are also Part 1 and Part 2 for Nordic and European companies.

Joakim Agerback & Shayan Heidari Managers of the Finserve Global Security Fund I The Finserve Global Security Fund invests broadly in the defense sector and holds positions in several Nordic companies, many of which are mentioned in the text. This report is solely a commentary on the quarterly reports in the Nordic defense sector and should not be considered investment advice.