2020 Q2 EARNINGS CALL ROUNDUP – OEMS

Northrop Grumman increased its guidance for the year. They have flowed down all the accelerated payments received from the DoD to support the defense supply base. In addition, they have instituted payments to their “most vulnerable suppliers totaling nearly $500 million year-to-date.” Further indication of the impact of commercial aerospace’s existential crisis on defense. Northrop Grumman’s Space Division also received $5.9B of awards for restricted programs. Quoting the Air Force, Northrop Grumman said that the B-21 continues to progress on schedule and will move into LRIP after key milestones in 2022 are completed.

Lockheed Martin also raised its financial outlook for the year. The only business segment not receiving an increase in forecasted revenue was their Fire and Missiles Division. This is their fastest growing division; however, as an indicator of the interrelationships between commercial and military, they are being impacted there by COVID-19 related slowdowns in the supply base. The F-35 is working a slower production schedule than planned earlier this year for the same reason. They too have been flowing down the advance payments received by the DoD as requested but their suppliers are not 100% defense. In fact, defense spending makes up less than 20% of the overall spend in aerospace as a whole (down from approximately 50% decades ago). So, commercial aerospace problems will impact higher rate defense production programs.

Raytheon is really a tale of sectors. Their defense-oriented segments did well. They also received significant classified awards totaling $1.9B. Pratt & Whitney’s commercial OE sales were down 42 percent and commercial aftermarket was down 51 percent. They also wrote off $148M in bad debt some of which is ASC 606 related. ASC 606 requires companies to assess the probability of future events such as cancellations and uncollectable debts. Tellingly, Collins Aerospace, which has $2.5M per shipset of content on the 737MAX, after assessing their customer’s inventory position concluded “we probably aren’t going to be shipping much 737 hardware until the back half of 2021.”

General Electric saw its commercial aviation orders decrease by 41% for OE and 67% for aftermarket. Revenues for the segment were down 44% with equipment down 33% and services down 51%. During the quarter, General Electric reduced Aviation headcount by 11% or 5,400 people towards a 25% headcount reduction. Neither Pratt & Whitney nor General Electric’s Commercial Aviation are going to be able to provide much support to suppliers while also laying off significant numbers of their own people.

Airbus reported net commercial aircraft orders totaled 298 (H1 2019: 88 aircraft). Their dominance in single aisles coupled with the 737MAX problems has left them better positioned than Boeing. Still, Airbus delivered a total of 196 commercial aircraft through June 30 compared to 389 aircraft in the first half of 2019. In addition, while much has been written about Boeing’s parked finished aircraft, Airbus has 145 parked aircraft of their own. They do not expect to burn that off until next year. They believe though that they can hold their current rates even considering the parked aircraft and, in what may be a bout of optimism on the part of CEO Guillaume Faury, disclosed that “we think there will be a point in time where the ramp-up will come again, and it should be around 2022 for the single-aisle.”

Boeing delivered 20 commercial aircraft in the quarter. While their Defense segment had flat revenue, Commercial’s revenue was down 65% over Q2 of 2019 and Global Services’ was off 23%. ASC 606 also impacted Boeing’s order book as 62.5% of the reported commercial cancellations in the quarter were as a result of Boeing’s assessment of the customer’s ability and willingness to take an order for which there is a right of customer termination. Note that if Boeing’s assessment subsequently changes, the orders can come back on the book without announcements of customer sales. Boeing disclosed though that if anything they expected further ASC 606 related cancellations. Boeing announced rate reductions in all programs except the 747/767 with the 787 moving to six per month prompting a study of whether the program can be produced viably at that reduced rate. Our opinion is it cannot. Furthermore, the logical location for the program is Charleston because a) leaving it in Puget Sound would increase the probability of a successful union organizing effort in Charleston, b) Boeing’s collective bargaining agreement with the IAM expires in 2022 and even if the 787 is built in Puget Sound, there are still very contentious negotiations ahead with a good possibility of a strike there anyway so putting production in Charleston would ensure one revenue producing program continues, c) labor costs are lower in Charleston and d) the 787-10 cannot be produced in Puget Sound without additional non-recurring expense.