Sharon Terlep
Appearances
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
I would say nobody's totally insulated. The nature of supply chains today are parts go back and forth. There's nobody in this industry that is reliant entirely on the United States. That said, unlike most complicated global supply chains, the supply chain for building defense products, jets, missiles, all that type of thing is much more protected and U.S.-based than, say, cars or home appliances.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
Absolutely. And we're hearing that privately, but also publicly. Boeing CEO Kelly Ortberg talked about there's the cost that we could incur by the parts that we have to import. But then there's the cost of having markets shut off to us because of trade wars. And like everything in this industry, that's complicated as well. The big news last week was China.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
Some Chinese airlines started literally flying planes, sending Boeing jets back to the United States rather than paying tariffs, which was painful for Boeing financially in the short term. At the same time, the reality is China relies on U.S. parts makers and Boeing for jets, engine parts for a lot of things. And so they quietly lifted some of their tariffs on U.S. aerospace parts.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
There is cost cutting, as you've said, and particularly in the DOD, they're coming down on these contracts and these companies that are overspending and over budget. They're trying to tighten that up. At the same time, as there's cuts throughout the entire government, President Trump has recommended a $1 trillion cut. defense budget. So that would be a 12% increase from the prior year.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
So it's one sector of the government that while there's perhaps an expectation of efficiencies, there's also an expectation that there's more spending. As much as Europe would like to be more self-reliant, the conflict there, one European industrial company CEO told us that the peacetime in Europe is over and everybody's building for it. And that's going to require some purchases from U.S.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
You saw with earnings at a time that's hard for a lot of big industrial companies, Boeing, for example, it's still burning cash, but almost half as much as it had been a year ago. So $2.3 billion in earnings. in cash burn much better than expectations. GE and RTX put estimates on how much they would lose from tariffs for GE. It was about $500 million. RTX, it was around $850 million.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
Lockheed and Northrop, both forecasts that didn't thrill investors. So you saw that in their stock price. So it is very much kind of a mixed bag out there.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
You'll hear executives say, this is why we do this, because a lot of times just the nature of air travel is when times of economic and geopolitical uncertainty, people are maybe less likely to travel, but that's also when defense spending goes up. So certainly a case can be made that that's good. I'm The question is, can they execute well on the defense side?
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
So Boeing, they have a strong defense business in terms of demand, but they've really struggled with massive losses because they've really struggled to execute these contracts and have been losing a lot of money. In this quarter, it was actually the first time in a while they didn't take a big charge in defense, and they seem to have started to turn things around.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
And it depends. And I think this is where you're seeing the variation. There's different types of defense contracts. One thing that Boeing will say is that they've typically struck contracts in which if there's cost overruns, they carry the load of that. So for Boeing, they've been taking a ton of extra costs. And they've said, look, we're not going to do these contracts anymore.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
We're going to do contracts where the government's going to have to help if costs change and we'll be guaranteed more of a profit. So it really depends on where the contracts were in terms of how they'll be affected by this change going forward. The language out of the DOD is that they're not going to tolerate these overrun behind schedule projects.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
The trick is when you're dealing with a program as important as the F-35 or if you think of battleships and these huge things, they can't just... cut it off and go get it somewhere else.
WSJ What’s News
What’s News in Earnings: Defense Contractors Thrive in Uncertain World
Well, thanks for having me.