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Defence manufacturing giants accelerate payments to suppliers


Emergency US government support has transformed the working capital picture for the country’s defence sector giants, in contrast with non-defence sector manufacturers and those based in other countries

by Anmol Karwal

Published: 20 July 2021

Working capital has been one of the pain points for treasurers during the pandemic. Customers asked for more time to pay, while suppliers asked to be paid faster. As documented by EuroFinance, they used mechanisms like supply chain finance or receivables factoring to maintain cash flows and liquidity. Few are in the envious position of US defence manufacturers, whose biggest customer has accelerated their payments.

The “accelerated payments plan” developed by the US Defence Department at the onset of the pandemic allowed the government to speed up the payments to defence contractors including Lockheed Martin, Northrop Grumman and General Dynamics, L3Harris Technologies, Boeing and Raytheon Technologies so that they had sufficient liquidity to pay workers and suppliers.

This resulted in the average days payable outstanding (DPO), a measure of the average number of days that it takes for a company to make payment after a purchase has been made decline to 25 days in the first quarter of 2021, signifying that these companies were paying their suppliers three days faster than their pre-pandemic level.

However, non-defence manufacturers and international contractors who weren’t a beneficiary of this scheme followed a different trajectory by increasing the time to pay suppliers while supporting them with supply chain finance facilities.

Faster receivables leading to faster payables

During Q1 2021, the government provided $4.6 billion under this plan, with almost 50% of it going to the top contractors Lockheed Martin, Boeing, Raytheon Technologies, Northrop Grumman and the Lockheed-Boeing United Launch Alliance LLC joint spacecraft venture. This resulted in the average days sales outstanding (DSO), the average number of days that it takes for a company to collect payment after a sale has been made, plummet to 13 days, lowest since the pandemic.

The Maryland based defence behemoth, Lockheed Martin which received two-thirds of its revenue from the US government in 2020 saw its DSO at 11.6 days during the first quarter, 20% lower than a year ago while it further paid $1.3 billion to its suppliers which were due in future periods in Q1 2021 compared to only $50 million in the first quarter of 2020.

“In April, we averaged more than $430 million weekly in accelerated payments to our supply chain partners, with a focus on small and vulnerable businesses.” was announced by Lockheed Martin via a press release in May. This resulted in its DPO falling to only 9 days as compared to 15 in Q1 2020.

“Since the beginning of the pandemic, we have accelerated payments to more than 11,250 suppliers, including more than 6,900 small businesses across all 50 states, the District of Columbia, Puerto Rico and 47 nations. We will continue to accelerate cash to small businesses and vulnerable suppliers to meet commitments vital to national security.” the company explained further.

Another beneficiary was Northrop Grumman, which now settles bills in 22 days in Q1 2021, eight days faster as compared to its practice in 2019.

“We continue to take steps to support our suppliers, with a particular focus on critical small and midsize business partners, including passing through increased progress payments from the DoD to our suppliers and accelerating payments to certain suppliers.” said the company in the Q1 fillings.

General Dynamics, which makes tanks and Gulfstream business jets also followed suit by paying more than $2 billion in progress payments to its suppliers, well in excess of the $500 million that the U.S. government advanced it received.

“These cash advances remain essential to the survival of thousands of small businesses in our supply chain” said a spokesperson over email. The company recorded moderate declines of 9% and 6.5% in its DSO and DPO respectively compared to a year earlier.

One US defence manufacturer that bucked the trend was Raytheon Technologies, whose DPO increased despite receiving accelerated payments from the government. According to a company spokesman, this was connected to its commercial-military business mix, and the impact of the recent merger with United Technologies.

Divergent Strategies

A falling DPO environment goes against a trend that has gained traction in many corporate treasury departments since the pandemic, where companies have been able to increase their payment terms with suppliers while offering them the facility of supply chain finance (SCF) to liquidate its receivables before time via a third party.

Amongst the US based industrial companies, General Electric (GE), 3M and Honeywell recorded a 9% surge in DPO to 83 days in Q1 2021. Reluctant to wait longer for payment, suppliers tapped the SCF facility offered by GE as $1.6 billion of supplier invoices were paid via the SCF program during the same time period. While Honeywell didn’t disclose the amount in the first quarter, it saw a fivefold increase in payables to suppliers who had elected to participate in the SCF program.

Similar trends were visible for the defence manufacturing companies on the other side of the Atlantic. Italian defence and aerospace firm Leonardo announced in July 2020 that it would boost its SCF programme to help Italian SME suppliers. In December 2020, the 12 month increase in its DPO was 25 days.

Meanwhile, European aerospace manufacturer, Airbus saw its DPO rise from 94 days in 2019 to 111 days in 2020.

“In the first three months of 2021, cash provided by operating activities has been positively impacted by certain agreements reached with suppliers relating to negotiation on payment terms, and by the payments made to suppliers in anticipation as at 31 December 2020. Airbus said in its Q1 fillings.

Better terms with suppliers resulted in the company generating a net positive free cash flow during the quarter, first time since 2011. While the company did support its suppliers with access to supply chain financing programs but didn’t disclose the details of the same.

But this year, SCF has been unable to stem inflationary pressures on working capital. Despite favourable payment conditions, Airbus DPO fell to 92 days in Q1 mainly due to an excessive rise in purchases as compared to trade payables as inflation affected costs. DPO is inversely proportional to the purchases; hence any rise will reduce the metric.