The Defense Department on Sunday said that senior procurement officials are taking steps to maintain the health of the defense industrial base (DIB) amid the coronavirus pandemic, including increasing the rate of progress payments to large and small businesses and ensuring that invoices are paid quickly.
The steps DoD is taking in support of the DIB were put forth in a memo last Friday from Kim Herrington, director of Defense Pricing and Contracting, who said due to the COVID-19 outbreak, “effective immediately” progress payment rates for large businesses will be increased from 80 percent of cost to 90 percent and for small businesses from 90 percent to 95 percent.
Lockheed Martin [LMT] last Friday night tweeted its support for the change.
“We applaud @DeptofDefense for leading by example during COVID-19 crisis with enhanced progress payments targeted for small businesses. Lockheed Martin will do the same by flowing these funds to our supply chain partners in supporting U.S. men & women in uniform.”
The government makes progress payments to its contractors as work progresses, with the compensation rates a percentage of total costs incurred under a contract.
The DoD on Sunday also said that it is using other means to also accelerate payments to prime contractors and is asking to those contractors in turn to quickly pay their subcontractors. It also said that the Defense Contract Management Agency, which provides contract administration services for the department, is working to make sure contractor invoices “be paid in a timely manner.”
Byron Callan, an aerospace and defense analyst with the strategic advisory firm Capital Alpha Partners, said in a note to clients on Sunday that the boost in progress payment rates “should help shore up smaller suppliers who may need assistance in March and coming months, particularly those that may also provide airlines with spare parts or commercial aerospace OEMs (original equipment manufacturers).”
Callan also doesn’t expect large publicly-traded companies to increase share buybacks with the incremental cash flow, and said “we would be shocked in the current political environment” if that happens.
The Pentagon on Sunday also said, “It is especially important to understand that during this crisis the DIB is vulnerable to adversarial capital, we need to ensure companies stay in business without losing their technology.”
Boeing [BA] last Friday evening extended a suspension of its stock repurchase program, which it has turned off since last April, and suspended its dividend until further notice, due to the COVID-19 pandemic. The company’s top two officers, CEO Dave Calhoun and Chairman Larry Kellner, are forgoing all their pay until the end of this year.
The company’s share repurchases had previously been suspended due to ongoing challenges associated with its 737 MAX commercial passenger plane.
On Monday Boeing announced further actions to cope with the pandemic, including a two-week suspension of its production operations at its Puget Sound area facilities due to a state of emergency declared in Washington state. Boeing builds several aircraft in the region, including its 777 and 787 widebody planes and the Air Force’s KC-46 tanker and Navy P-8 Maritime Patrol Aircraft.
The shutdown will begin on March 25 and is aimed at protecting the company’s employees, their families, and the local community.
Boeing said it will use the two-week production suspension for “additional deep cleaning activities at impacted sites and establishing rigorous criteria for return to work.”
Calhoun in a statement said “We continue to work closely with public health officials, and we’re in contact with our customers, suppliers and other stakeholders who are affected by this temporary suspension. We regret the difficulty this will cause them, as well as our employees, but it’s vital to maintain health and safety for all those who support our products and services, and to assist in the national effort to combat the spread of COVID-19.”
Washington is one of states hardest hit by the coronavirus with King and Snohomish Counties, which cover a large area on the eastern side of Puget Sound, accounting for about 75 percent of the roughly 2,000 cases and about 90 percent of the deaths in the state.
Boeing said it will work to minimize disruptions to support of defense and space programs while also working to “ensure the readiness of our defense customers to perform their vital missions.” The company said it will continue working with these customers in the coming days to support them and added that distribution operations that support airline, government, and maintenance, repair and overhaul customers will continue.
Employees that work from home will continue doing so and those that can’t will receive paid leave for the first 10 working days of the suspension, Boeing said.
Boeing last week said the aerospace manufacturing sector needs at least $60 billion in loans and loan guarantees from public and private sources to cope with the economic shocks from the COVID-19 pandemic.
No defense company has quantified material financial impacts to their businesses due to COVID-19. Northrop Grumman [NOC] last week and General Dynamics [GD] on Monday added the pandemic to their risk factors.