Pentagon Maintains Covid Plan to Speed Cash to Contractors

The Pentagon is sticking with a plan developed in the early days of the Covid-19 pandemic to speed progress payments to defense contractors, even as evidence mounts that major companies appear financially healthy and are stepping up stock buybacks.

Under the accelerated payments plan, the Defense Department provided $4.6 billion to defense contractors as of March 31, department spokeswoman Jessica Maxwell said in a statement. About $2.4 billion of that total was paid to top contractors Lockheed Martin Corp., Boeing Co., Raytheon Technologies Corp., Northrop Grumman Corp. and the Lockheed-Boeing United Launch Alliance LLC joint spacecraft venture, Maxwell said.

Pentagon officials say the Biden administration’s Feb. 24 order extending former President Donald Trump’s emergency declaration as the pandemic exploded indicated that companies should still benefit from the program, which boosted the percentage of periodic progress payments a contractor would receive for incurred costs.

The goal was to ensure companies had cash needed to pay workers and ensure stable supply chains amid the economic turmoil generated by the pandemic.

“At this juncture, the Department cannot project when the increased progress payment rates will be rescinded, as the economic impact of the Covid-19 crisis continues to impact the Defense Industrial Base,” Maxwell said.

Under the program, large companies have been paid up to 90% of incurred costs on an accelerated basis, up from 80% previously. The figure climbs to 95% for small businesses, up from 90%.

The payments have contributed to stronger financial conditions of major defense companies.

“Most defense contractors crushed their pre-Covid-19 cash flow guidance” in the first quarter, said Virginia-based analyst James McAleese. That’s because of a combination of the higher Defense Department progress payments, payroll-tax deferral under the $2.2 trillion Cares Act, internal company cost-cutting and increased use by the military services of contracting practices that allowed for faster billings, he said.

The new $1.9 trillion American Rescue Plan Act also allows some contractors to defer planned 2021-2023 pension contributions, “directly-increasing 2021-2023 cash flow,” McAleese added.

Stock Buybacks

When it was instituted in March 2020, the policy change raised questions over whether major contractors would pass along payments to subcontractors in a timely manner or divert some of the net increase to buying back shares or paying dividends.

That is starting to become a bigger concern.

Lockheed Martin, Raytheon, L3Harris Technologies Inc., General Dynamics Corp. and Northrop Grumman reported first quarter share repurchases totaling about $4.8 billion “compared to $4.6 billion for all of 2020,” said Byron Callan, managing director for Capital Alpha Partners LLC.

If the accelerated progress payments continue another one to three months, “that’s probably needed to help smaller contractors that have been impacted by the plunge in commercial aerospace,” Callan said in an email. “But longer than that, I don’t know if it is justified. The optics may also get uglier as large defense contractors resume share buybacks.”

Senator Elizabeth Warren, a Massachusetts Democrat, who questioned the payments when the program was instituted last year, said in a statement she remains skeptical.

‘Dumping Their Money’

“During the pandemic, the Defense Department started paying giant contractors ahead of schedule in order to keep projects on track and people at work,” Warren said. “If those same contractors are going to start dumping their money into stock buybacks rather than reinvesting in their workers, then DOD should cut off those early payments or make sure they can’t be used for buybacks, dividends, or executive compensation.”

Maxwell said there isn’t evidence of accelerated payments being diverted for buybacks or enhanced compensation. Companies have been voluntarily submitting, on a monthly basis, payment information on dollars flowing to subcontractors, she said, citing information tracked by the Defense Contract Management Agency.

“There currently has not been any sign of contractors diverting funds to pay dividends or share buybacks,” she said. “The overall limited number of supply chain-related program delays seems to indicate that vendors in the supply chain have enough access to funds to avoid operation disruptions. There has not been any sign of abuse.”

Lockheed Martin, one of the largest beneficiaries of the program so far, “has flowed all of the accelerated payments it has received to more than 11,000 suppliers, including more than 6,700 small businesses across all 50 states, the District of Columbia, Puerto Rico and 47 nations,” company spokesman Trent Perrotto said in a statement.

Jeff Davis a spokesman for General Dynamics, said “we have accelerated more than $2 billion in progress payments to our suppliers over the past year, well in excess of the $500 million advanced by the government to us.” He called those advances “essential to the survival of thousands of small businesses in our supply chain.”

Callan said he accepted the Pentagon’s conclusion that there’s no diversion of payments away from subcontractors but “the open issue is why accelerated payments are still needed when the four largest contractors used $4.8 billion of cash for share repurchases in Q1?”

John Luddy, vice president of national security policy at the Aerospace Industries Association, said the Pentagon payments are “one of the most impactful” tools in mitigating” the Covid-19 crisis “according to 71% of AIA members -- and provided companies with the cash flow to pay employees and continue operations.”

©2021 Bloomberg L.P.

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