Defense industry financial performance during COVID-19, third quarter update

Government contractors were not immune to the economic disruption brought on by COVID-19. There are more than 50,000 contractors doing business directly with the Department of Defense, and roughly 300,000 suppliers in the government’s larger industrial base. Many contractors have significant commercial business impacted by the pandemic like in aerospace where 60 percent of the global aviation fleet was grounded during the pandemic. Boeing faced a $2.4 billion loss (20 percent of revenue) in the second quarter of 2020. The third quarter looked more promising for the company, with losses amounting to $450 million (3 percent of revenue).

From a list of the largest US defense contractors, the Center collected from the top ten companies to have released their third quarter financial statements. Aggregate revenues dropped from $93 billion in the three months ending in September 2019 to $85 billion in September 2020 (a fall of 8.6 percent). The performance of those companies’ in terms of revenue indexed to third quarter of 2019 is shown in the figure below. Companies with greater commercial business have taken relatively larger hits in terms of revenue. Companies more reliant on government saw relatively stable or growing revenues.

[You can download the financial data in Excel that I used for this chart here.]

**Quarterly Revenues from Top Defense Companies**. Huntington Ingalls, SAIC, and Leidos have not released their third quarter 2020 financial statements as of Oct 30, 2020. Index, 1.00 = Sep. 2019.

From the top ten, only General Electric, Boeing, and Raytheon took net operating losses. Since merging with United Technologies, roughly half of Raytheon’s business is commercial. Though Raytheon was able to squeeze out positive net income in the third quarter, it had the worst second quarter performance of top defense and aerospace companies, losing $3.8 billion (27 percent of revenue).

Aerospace and defense company stock valuations have struggled more than most in the wake of COVID-19. The iShares US Aerospace & Defense (ITA) exchange traded fund dropped nearly twice as much as an index of the S&P 500 over the course of March 2020. By the end of October, the Aerospace & Defense index remained down 32 percent compared to the same time in 2019. The S&P 500 was actually up 7 percent over the year. The picture may change with the volatility index (VIX) rising throughout October 2020, indicating heightened market uncertainty due in part to looming presidential election in the United States and the possibilities of another surge in COVID-19 cases.

**US Aerospace & Defense Stock Valuations.** A common index of US Aerospace & Defense public stock prices underperforms relative to an index of S&P 500 companies. Index, 1.00 = Nov. 1, 2019. Data as of Oct. 31, 2020.

[This post draws from a forthcoming white paper in advance of the GMU/DAU conference on November 10. I’ll be interviewing DoD’s Stacy Cummings, HHS’s Joe Hamel, and GSA’s Mark Lee. Be sure to be there!]