Q1 results: Covid-19 savages commercial wings; defence remains stable

Harry Lye 30 April 2020 (Last Updated April 30th, 2020 15:11)

Northrop Grumman’s Q1 finances have remained steady despite the impact of the Covid-19 pandemic, reporting sales increases across the board and net earnings of $868m. The results come as defence contractors Airbus and Boeing reported sweeping losses, largely due to their stagnant commercial operations.

Q1 results: Covid-19 savages commercial wings; defence remains stable
Image courtesy of Boeing.

Across the sector, defence operations have stayed relatively steady, with Boeing president and CEO Dave Calhoun saying that its Defence, Space and Security division would ‘‘limit the overall depth of the cut” caused by the continued effects of Covid-19.

Defence contractors have sought to free up cash to maintain their operations during the crisis. Already some companies have had to temporarily pause operations on some systems, whilst the US government has looked to free up funding to keep defence contractors afloat during the pandemic.

This, however, has not stopped some contractors feeling the pinch with the damage to commercial operations outweighing the steady heading of their defence divisions.

Northrop stays steady, but are there signs of cracks?

Bucking the trend seen in other companies’ reports, Northrop Grumman saw growth across all of its business segments in Q1 of 2020. Across all of its business divisions, Northrop Grumman reported total sales of $8.6bn, a 5% increase on the same period in 2019.

Northrop Grumman’s space division saw the biggest growth in sales of 8% compared with last year, increasing to $1.9bn.

Commenting on the results, Northrop Grumman chair, chief executive officer and president Kathy Warden said: “Our results this quarter reflect the strength of our business, our portfolio’s alignment to the highest-priority global security threats, and the dedication of our team to deliver for our customers and our shareholders in a challenging environment,”

During the quarter, Northrop Grumman increased its cash flow by $80m, however, the company said that this was largely in line with the prior year’s cash use, not as a result of Covid-19.

Despite staying relatively steady, Northrop Grumman updated its 2020 guidance in light of the pandemic and its effects on the market. The company updated its projected sales, decreasing it from $35.3bn-$35.8bn to $35bn-$35.4bn.

GlobalData associate aerospace and defence analyst Madeline Wild said: “The military orientated sales portfolio of Northrop has buffered the company against the effects of Covid-19 compared to more commercially led companies such as Boeing and Airbus. During the pandemic, Northrop has continued to push forward with product development, testing, for instance, their OmegA rocket on schedule despite the Covid-19 crisis.

“Subsequently, sales have grown for Northrop along lines of relatively secure investment. The US awarded Northrop Grumman a US$165 million contract on 24 April for the production of Lot 9 Full-Rate Production (FRP) of the AGM-88E advanced anti-radiation guided missile (AARGM).”

Despite the positive signs, the company’s operating income for its aeronautics systems and defence systems divisions fell by 16% and 3% respectively. In Q1 of 2020, its aeronautics systems wing posted an operating income of $259m, down from $308m in the same period of last year. Similarly, income from defence systems fell from $202m to $196m.

Wild added: “These figures suggest that there has been some level of supply chain disruption due to Covid-19. Not only physical disruption due to reduced workforce but also cost increases in the aeronautics related to the collapse of air travel and the struggle of commercial aviation.

“Northrop mentioned, for instance, EAC adjustments for Autonomous Systems that have lowered operating income figures. Nevertheless, if Northrop manages to support smaller companies within its supply chain and to maintain production schedule, the company should withstand the lasting effects of the pandemic.”


Airbus feels the pinch

Airbus chief executive officer Guillaume Faury said of the company’s Q1 results: “We saw a solid start to the year both commercially and industrially but we are quickly seeing the impact of the Covid-19 pandemic coming through in the numbers.”

Airbus saw business across the board fall dramatically, contributing to around $526m (€481m) in losses. Faury added that the company was ‘in the midst of the gravest crisis the aerospace industry has ever known’.

Across the board, Airbus revenue fell by 15% from $13.6bn (€12.5bn) to $11.5bn (€10.6bn). The company’s defence business took a big hit in this period, with its EBIT-adjusted results falling 85% from $101m to $16.3m.

Airbus said: “EBIT Adjusted at Airbus Defence and Space decreased to €15m (Q1 2019: €101m), reflecting the lower business performance, including in Space Systems. Due to the severity of the coronavirus pandemic, the incremental impact on the business is being assessed and the restructuring plan at Defence and Space will be adjusted accordingly.”

GlobalData aerospace and defence analyst Anthony Endresen told Army Technology: “With major primes like Airbus straddling defence and commercial aerospace, the collapse of the commercial passenger market is a hammer blow to company finances in the short-medium and long terms. These issues do not represent an existential threat to Airbus, given its significance to several key European states, in addition to its role in vital defence programmes.

“Important Airbus measures such as planned output reduction to maintain production whilst preserving cash in the commercial sector will be of importance great use to the company. I

would like to see Airbus address a number of issues now, from logistics in terms of delivery of finished aircraft – mentioned as a looming issue – to proposing some measures to allow defence work to take up the slack where commercial work has stalled. The latter would entail initiatives such as those pointed to by the assistant secretary of the US Navy for research, development and acquisition James Geurts this week.”


Defence buoys Boeing’s losses

In its Q1 results, Boeing posted a loss of $641m and burned through $4.3bn in cash as the company tries to stay afloat and see its way through the ongoing crisis.

In response to this, Boeing has tightened its belt, reducing operating costs, cutting spending, further suspending stock buybacks and dividend payments, and deferring research and development spending to later quarters.

In a letter, Boeing president and CEO Dave Calhoun said: “The ongoing stability of our defence, space and related services businesses will help us limit the overall depth of the cut. And in the end, because there are so many unpredictable drivers for this crisis, we’ll have to monitor continuously what’s happening in our markets, and we will make adjustments whenever needed to ensure we’re matching the size of our business to the changing demand in the market.”

The majority of the damage to Boeing’s finances came from its commercial aircraft division, which was already recovering from the ongoing damage from the 737 MAX; revenues for this section of Boeing dropped by 48% and posted an operating loss of $2bn.

In comparison, Boeing Defence, Space and Security saw a smaller drop in revenues, decreasing by 8%. Across the division Boeing posted operating losses of $191m compared with earnings of $852m for the same period last year.

On top of this, Boeing’s global services wing in Q1 delivered earnings of $708bn, the only wing of the company to not lose money during the quarter largely due to military support contracts. In its results, Boeing said: “During the quarter, Global Services was awarded a P-8A integrated logistics services and site activation support contract modification from the US Navy and the government of Australia and secured a logistics, components and services contract for the US Army AH-64 Apache fleet.”

GlobalData aerospace and defence analyst Nicolas Jouan said the future of Boeing could lie in a shift to focusing more on defence, at least in the short term.

Jouan said: “The German press reported that the Federal Government was ordering 30 additional F/A-18 Super Hornet and 15 EA-18G Growler to Boeing in order to replace ageing Tornado and Typhoon. The two F-18 variants can conveniently fill Germany’s capability gaps without engaging in a new program such as Lockheed Martin’s F-35 as the country is also involved in its own next-generation fighter programme in partnership with France: the FCAS. Boeing benefits from this, and will likely see the defence and space share of its business growing in 2020.

“Defence represented 34% of revenues against 42% for commercial aeroplanes in 2019, but could very well become Boeing’s most important revenue stream in 2020. More cancellations of the 737 should be expected in the months to come, which will tip the balance in favour of the company’s defence portfolio.”