Q2 2020 General Dynamics Corp Earnings Call
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I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead Sir.
Good morning, Thank you Rocco.
Welcome to the general dynamics second quarter Twentytwenty conference call any forward looking statements made today represent our estimates regarding the Companys outlook. These estimates are subject to some risks and uncertainties.
Additional information regarding these factors is contained in the company's 10-K, 10-Q, and 8-K filings with that complete I'd like to turn the call over to our chairman and Chief Executive Officer BB Novakovic. Thank you Howard and good morning off.
Before I address the company's performance in the quarter, Let me briefly discuss how covet 19 is continuing to impact us.
We continue on a professional and proactive way to create a safe work environment for our people adhering to CDC guidelines, encouraging social distancing and instituting a companywide mandatory math policy.
We temperature screen, our employees and send those homes will fail.
These procedures have ensuring that we have lower infection rate than the locales in which we operate.
Of our over 100000 employees globally, we have had 515 cases today less than one half of 1%.
As you would expect we continue to incur significant coded related direct costs across the company. In addition, several of the business units are experiencing considerable program impacts, which we estimate to be around 127 million by the end of the first quarter.
Second quarter.
The most significant impact appears to be a JV I T, which I will discuss later in my remarks.
On the goodness frat with respect to Congress all of our major programs are well supported in the congressional markups of the defense spending bills.
As we turn to our results in the quarter I will spend less time on quarterly and year to date comparisons that are well stated in the exhibits to the press release and focus my remarks on the operations in the significant nonrecurring items in the quarter.
Regarding the company's second quarter performance as you can discern from our press release, we reported earnings of $2 in 18 cents per fully diluted share on revenue of 9.26 billion operating earnings of 841 million and net income of 625 million.
As one would expect revenue was down 291 million or 3% against the second quarter last year operating earnings were down 249 million or 22.8% and net earnings were down 181 million.
The defense side of the business was down very modestly against the Euro both corridor and even last year to date.
For the defense business in the first half revenue was down only six tenths of a percent and operating earnings are down, 3.7% 30 basis point lower operating margin.
Most of the revenue and earnings challenges.
In short fall occurred at Gd 80, and in our Aerospace segment, which was particularly impacted by jet aviation.
I'll comment on this and considerable detail later in my remarks.
We experienced solid growth it combat systems and marine systems in both the quarter in the first half along with declines in revenue it.
T and mission systems impart caused by the divestiture of our Satcom business at mission systems.
However mission systems had growth in operating earnings for both the quarter and the half on significantly improved operating margin.
Before I get into the details at the operating level, particularly at aerospace and Gd I T. And then give you some forecasted anticipating the impact of co bid on our operations for the full year I want to spend a moment on the resiliency and strength of the company's backlog.
Total backlog of 82.7 billion is down 3.1 billion against the end of last quarter funded backlog at $61.2 billion is down only 2.6 billion. However, total estimated contract values up 8.4 billion against the end of last quarter.
Let me give you a sense of perspective here. It is important to observe that total backlog is up 15 billion over this point a year ago. Further total estimated contract values up 30.3 billion over this time last year and is that at its highest point ever.
[noise] at Aerospace you may recall that Gulfstream was able to deliver only 23 aircraft in the first quarter due to travel restrictions. We struggled with the same problem in the second quarter, but managed largely to mitigate that problem a 32 deliveries.
With that process Aerospace had revenue of 1.97 billion and operating earnings of $159 million with an 8.1% operating margin much of the problem in the quarter rests with jet aviation, where we incurred a 19 million dollar operating loss driven in part by an 87 million.
Dollar sequential reduction in revenue as the result of covert related impacts.
At this reduced revenue Jack had a significant overhead absorption issue.
Jet also incurred a $12 million charge for severance we fully expect to be back on track at Jack in the third and fourth quarters with improved revenue and receiving the benefits of the cost reduction made any paid for in the second quarter.
Gulfstream alone had an operating margin of 9.8% on a somewhat disadvantaged delivery mix, coupled with a $30 million severance charge and a loss of 10 million related to pre owned aircraft.
The operating margin without severance and pre owned would have been 12.1%.
Much like jet aviation Gulfstream will improve margins steadily throughout the year with the benefit of efficiencies, resulting from actions taken this quarter.
From an order perspective sales activity in the quarter was extremely difficult exacerbated by fears concerning the economy by an ability to travel by an ability to arrange demonstration flights and by difficulty getting before the customers other than by telephone.
In that environment, our salesforce concentrated on redevelop being a good sales pipeline, which they did this gives us optimism for an improved third quarter, we actually feel reasonably good about the 0.5 to one book to bill under the circumstances.
We also see increased interest in Europe, and the far east.
Finally, we are holding to the delivery forecast. We gave you last quarter of between 125 and 130 delivers for the year.
Say more about that on our forecast at the end of this marks.
Combat systems had revenue of 1.75 billion up 5.7% over the year ago quarter. However, operating earnings at 239 million were down 3 million a 1.2% on a 100 basis point reduction in operating margin largely attributed to a 330 basis.
Degradation in margin it LS as a result of coal that 19 ramifications in Spain.
The largest impact to our operation in the quarter was the temporary but mandatory shutdown of two of our large European manufacturing sites in Seville untrue via by the Spanish government.
We have since reopened and are ramping up production to pre cove at levels. We are on the men npls.
Combat systems had nice order activity in the corner with over 1.4 billion and funded orders and another 2.1 billion and I'd I Q contracts or options for potential contract value of 3.6 billion.
Our ordinance business had a particularly strong order book in the quarter from higher rocket gone. Another munition orders. The group had a book to Bill a 0.8 to one.
As I indicated earlier information technology as our defense business most directly impacted by Coven 19, and that is reflected in our results.
Information technology had revenue of over 1.88 billion in the quarter operating earnings of 83 million and an operating margin of 4.4% driven by a charge of approximately 40 million in a legacy Gd IP program or execution is occurring in Europe.
We can't get our people from here to there to do the work required by this contract. This is the most painful programmatic impact of Cove at 19, we have experienced.
While we have taken a charge in the quarter, we will aggressively seek contract relief as we move forward.
As previously noted toward the end of the last quarter some of ITC customers, including a number of our classified customers closer sites to all but mission essential employees. This impacted revenue and earnings and we'll continue to do so.
Some of ITC services highest margin programs have come to a hard stop because of covert 19.
While this is the first quarter in some time, but I T is this failed to achieve a one to one book to Bill. It is important to note that the funded backlog has increased.
To 5.46 billion the highest ever.
Another fact worth observing about ITC performance in the quarter is its cash performance.
Produced free cash flow in excess of 250 million of imputed net income.
Since the acquisition is CSR a information technology has supplied 1.7 billion of free cash flow over nine quarters is running 156% of imputed net income.
These cash contributions have been critical for us during a period when we have been making significant cash investments in the marine and aerospace groups.
GDP continues to see unprecedented bid it up and bidding opportunities and the quarter as the government is moving to the cloud and leveraging the power of data analytics integrating enterprise I T artificial and fiber tools, we remain confident that we will win our fair share of these new bid.
Opportunities.
Turning to mission systems mission systems of revenue of $1.81 billion was down 96 million quarter over quarter impart due to the divestiture of our ground based satellite antenna business.
However earnings of 164 million were up 2 million against a year ago quarter on 120 basis point improvement in operating margin.
Mission systems also enjoyed very strong growth in both revenue and earnings on a sequential basis.
For the first half revenue is down 138 million, but earnings are up slightly over last year's first half on a 90 basis point improvement in operating margin.
Mission systems had a good quarter from an order perspective with orders of 1.29 billion versus revenue of 1.18 billion over 110 million more in orders, resulting in a book to bill of 1.1.
There were modest revenue adjustments to backlog as a result of the saddle Satcom divestiture M.S. continues to perform well across its portfolio.
In the Marine group. This is once again a good news story revenue of 2.47 billion is up significantly against the Euro go quarter sequentially and on a year to date basis.
Earnings are up as well.
Against all comparison periods, but only modestly due to a mix shift at NASSCO Emmis failure of many employees to report to work at Bath Iron works, leading to the operate leading to operating issues.
Electric both performance was particularly solid.
The strike at Bath was immaterial to our results. This is our smallest shipyard generating less than 2% up our profit so its impact was negligible.
You may recall the announcement during the quarter that electric boat received an 11.5 billion dollar cost plus contracts with the Columbia ballistic missile submarine program, including the construction of the first two boats of that amount 869 million went into firm backlog and the remainder into potential contract.
Value.
Something in excess of $10 billion will come into firm backlog. When the 2021 defense builds are passed by Congress later this year.
This is an important continuation of the Marine group growth story.
So let me now turn the call over our CFO, Jason action taken for additional remarks, and then I'll give you our updated guidance.
Thank you Phoebe and good morning.
I'll start with some observations about our balance sheet and liquidity position following our first full quarter of operations influenced by the pandemic.
We generated free cash flow of $622 million in the quarter I, 100% net earnings conversion and ended the quarter, where the cash balance of $2.3 billion.
Importantly, operating working capital remained essentially flat during the quarter, even as we've advanced in excess of $1.1 billion to our suppliers to support their liquidity compared with approximately 360 million advance to us by our customers over the same period.
At this point, we continue to expect free cash flow for the year to be in the range of 80% to 85% of net income.
As previously signaling we repaid the 2.5 billion of notes that matured in May along with just over 1 billion of our outstanding commercial paper balance for a total debt repayment in the quarter of $3.5 billion.
That leaves us with a net debt balance at the end of the quarter of approximately $12.3 billion down about 380 million from the first quarter and almost 1 billion lower than 12 months ago.
We plan to repay the remainder of our commercial paper during the third quarter and expect to end the year with just over $10 billion net debt.
Our net interest expense in the quarter was $132 million versus 119 million in the second quarter of 2019.
That brings the interest expense for the first half of the year to $239 million essentially unchanged from 236 million for the same period in 2019.
At this point, we expect interest expense for 2020 to be approximately $480 million.
With respect to capital deployment capital expenditures were $221 million in the quarter or 2.4% of revenues.
We still expect our capital expenditures to reach approximately 3% of revenues for the year, reflecting the continued investment in our ship yards to support the significant growth is on the horizon before declining over the next couple of years to our more typical 2% range.
In the quarter, we paid $315 million in dividends and we did not repurchase any shares of our stock.
As Steve you alluded to we also completed the sale of the satellite antenna systems business for our mission says from our mission systems segment in the quarter.
This will reduce mission systems revenue for the year by approximately $150 million, but the sale resulted in a modest gain in the quarter, which will offset the second half earnings associated with this divested revenue.
Our effective tax rate in the quarter was 14%, bringing the rate for the first half to 15.5%.
The second quarter rate benefited from several factors, including lower taxes on international income and increased research and development credits.
We now expect a full year effective tax rate in the mid 15% range consistent with the first half.
To put a little more color on that outlook, we expect the third quarter rate to be somewhat below the full year average and the fourth quarter to offset that with a somewhat higher rate.
I'll wrap up with a few points of color on the backlog following up on fees earlier comments.
We finished the quarter with a total backlog of $82.7 billion, that's up 22% over this time a year ago.
The total potential contract value, including options and I'd argue contracts, which was $132.2 billion on all time high was up 30% over a year ago and was boosted by the award in the first Columbia construction contract in the second quarter.
And the last item I'll note is the ongoing impact of foreign exchange rate fluctuations on the backlog at combat systems, which experienced a reduction in backlog of more than $200 million in the first six months of the year due to this issue.
That concludes my remarks, and I'll turn it back over to Phebe for some updates to our full year guidance and closing remarks.
Now let me do my best to give you an updated heart cactus I promised at the end of the first quarter in an effort to be as granular as possible in the midst of significant uncertainty.
Our air space forecast given to you at the end of the last quarter appears to be holding fairly well.
We expect about 100 million less than revenue than forecast 90 days ago, roughly 8.4 billion and operating earnings of 1.13 billion that is about 20 million less than I gave you 90 days ago given everything at work here. These are very modest changes.
With respect to the defense businesses. The impact is now more apparent we're holding our full year targets for combat systems for both revenue and earnings Marine systems has about 200 million of sales pressure, but it is holding its earnings target, even assuming an extended strike at bath.
Mission systems is also holding its revenue and earnings forecasts with the exception of the 150 million of divested revenue that Jason discussed.
Finally, JD I T has identified between 300 400 million of revenue degradation, and 130 million reduction and forecasted earnings, including the 40 million charge on the International program I discussed previously.
So on a companywide basis, we see annual revenue of about 38.4 billion and operating earnings of about 4.2 billion. This role to an E. P. S.
$11 to 11 10 about a three cents reduction from what we forecasted at the end of the first quarter. All in all we weathered the storm of the second quarter reasonably well this will be the low point of the year as we and many of the analysts had anticipated.
Finally, as you can see from the highlights pro forma chart, we've provided with the earnings release apps and co that the underlying operations. The company are quite solid with double digit first half EPS growth.
That concludes my remarks, and I'll turn the call back to Howard for questions.
Thank you phebe.
As a reminder, we ask participants to ask one question on one follow up so that everyone has a chance to participate Rocco could you. Please remind participants how to enter the Q.
Absolutely answer.
Two questions. Please gross stores and one it was order. So we would you please first stores and soup.
So first question comes from Peter Herman Miller. Please go ahead.
Yes, Jason FCB last quarter, you highlighted a allowed details around just kind of the health of the of the Gulfstream backlog. You also mentioned a couple of defaults that you expected that might come back maybe you could just give us an update on.
What you're seeing regarding.
Kind of the health of the customers and what you're seeing on that.
Regarding the sales cycle I know you mentioned that that was quite challenged this quarter.
[noise] so [noise].
Our backlog is holding up pretty strongly which is in Mark contrast to 2008 nine for example, where it acts where the backlog experienced some significant erosion, while so it's very difficult to sell airplanes in fact impossible over the telephone we weren't constant contact with our.
Customers.
Who expressed the same needs in the same requirements as they had going into going into this.
Going into this downturn.
But look and implied in your question I think is a little bit about the demand environment. So.
Let me talk to you a little bit about that as I said, we've continued to talk to our customers and Weve continued to see their interest much. The same we rebuilt our backlog for men, we held our backlog and rebuilt our pipe our pipeline, but this is an interesting downturn.
Unlike previous downturns. This one is not driven by any thing in the economy itself on the economies of the world itself is driven by an exaggerated force impacting the economies with closure in some instances of entire sectors and certainly slowdowns among many others.
So that means I believe that it is very hard to predict with any level of certainty and assurance what that economic recovery it looks like across across the world, including most particularly the United States. So so when we look at where we are right now at Gulfstream.
We've seen it beginning of the what would appear to be an increase.
In demand.
But it's way too soon to be able to tell the slope.
Of Ah that recovery.
Yeah, and just as a follow up to that Phebe is there any is there been any pick up in defaults or is it still been holding as as expected.
A holding as expected, but I think we had five in the quarter.
And.
But holding up pretty darn well, we haven't seen many default that as I said differentiates this downturn from.
All of the other two of the too that I lived through 2000 line Tech bubble, and then Oh eight or nine.
Thank you. Our next question today comes from cargo on rumor with Cowen. Please go ahead.
Well our goal is a little sooner and it's working comes from Rome upsell ancillary merger. Please go ahead.
Hey, good morning, guys.
Due to give an update on what's going on it that burn works because I know there were some labor stuff. Some some work disruption if you could update listener.
[noise] so.
We are working quite closely with the federal planet aided effect upon it a mediator. So I think it's best to to be somewhat clad at this time sign on at this time, but I.
I would note that cross our company, we have many many union partners and in all respects, we have very strong decades long positive working relationships with them. This union appears unfortunately they'd be the the one exception. So we just need to work through this and and as I said because of over.
Working with the mediator, I think where where best to.
So to say nothing at the point, but in any case it will given their size and the fact that they are smart with shipyard or they really had an immaterial impact on on a quarter.
Gotcha Gotcha, and then maybe that the one follow up on a plan systems.
Have you seen much of an impact yet or you're expecting to see much of an impact on the.
Quoted on international portion of that business.
That for you know some countries the spending that they're doing it stimulates or economies.
And so are there yeah.
Yeah, So if you're talking about any.
You know in the quarter I think there is pretty clear about what those impacts for but but in terms of that demand.
First of all that we don't see any of our in production vehicles being impacted in the slightest I mean, yeah. These are highly performing probe a program that.
Our very much in demand by our buyer international customers.
On a going forward basis, we still see that see demand you now it's interesting. It's been mine you and I've talked about this has been my long held view that.
That whether it's in the United States an hour and.
Any of our Allied nations that demand is really driven by the threat or the perception of threat and in all respects I think theres a general consensus that the threat has not dissipated in fact arguably some of.
Our potential adversaries have become a.
If they have raised additional questions. So I think with respect to overseas markets I see a fair amount of stability right now I will see going forward, but I'm not hearing a lot of the at the.
You know grassroots level.
On you know any pending economic or any pending you know defense cut and doing in defense cuts.
I remember its washing today comes from carbon rule with Cowen. Please go ahead.
Yes, thanks, so much.
So freebie good performance.
Yes.
Streamed given the 42 million severance kinda design goes through the mix.
Have a little trouble getting to your number was there will be.
Back in R&D yesterday, where were the accrual rates.
Multimedia newer programs.
So increased in the quarter.
So.
So luckily for are in the quarter, we had the severance we had lower R&D, we expect that to continue in the year really as a result of some of the Rightsizing, we're doing and we had a disadvantageous as I noted in my remarks mix there were.
Several 650 to international customers that the cause of an entirely because of.
Kobe travel related restrictions, we couldn't deliver.
So I think if you add goes up along with the pre owned you'll see a that's sort of gets hit to the number that help.
I'm a little bit.
[laughter] come on kind of you know [laughter] did I Miss the classic somehow well know on me. So R&D was a lot lower is up I mean, because you did have the disadvantages mix what I'm trying to say is I was surprised to profit was strong as it was given the severance.
I guess you answered it says well, okay, I'm, sorry, I misunderstood. So the you know the underlying operations or are are quite effective and in fact I'm on a production level. We are we are really a humming nicely. So I think that was a significant contribution I know it was.
The significant contribution to our to our cost like we've been isn't it now that we took some some charges that we needed to take they have some mix issues.
By the company performed beautifully operationally and that's reflected in.
And what we considered to be up in the environment a pretty good margin.
Just a quick follow the.
When you look as demand for for your products.
Can you give us some characterization terms or where is the interest from for example is going international domestic high net worth corporate buyers and in total.
So as I noted.
Europe in the far east has been.
Pretty active.
In the United States, Oh, we talk to all of our customers and potential customers quite frequently but we've been a little slower to get back into the.
Back into the order execution phase, though the interest remains in a quite intense and their needs are the same nothing has changed about that so.
This is just a question of timing, we've got to get some of the economic uncertainty behind us.
But look you know we entered this downturn and a very strong position with the best portfolio of products unmatched by any with a great service or the best a in the industry service and support business and by far the strongest financial position. So.
Given that nothing has materially changed that we can see and the nature of the orders going forward basis, we expect to emerge out of the stronger. Even then when you went in.
So youre not sourcing for the assumption so those move with JP Morgan please.
Yeah, Thanks, very much and good morning I.
I was wondering what's an appropriate level of working capital.
For for Cross channel dynamics that that you guys can potentially settle out on that at some point in the future.
And ideally if you could express it as a percentage as though.
No no that I'd take it as a percentage of sales so much that it's clearly a at this point at an elevated state we've talked for extensively I think over the past couple of years about what we're seeing in the combat systems group, particularly on the large international program as you're well aware, we've started to turn that.
Oh, the beginning of this year, we'll see that continue I think in a more accelerated way over the next two three years I'm. So that'll have a good.
Hi, good tailwind to it in terms of reducing the working capital level and and then the other big piece of course is Gulfstream as we've talked about when you're in a mode of introducing new models that naturally comes with so a working capital build associated with the the test articles as well the initial production ramp in inventory of those of those models.
And then as you get him into full rate production you start to see that inflection point and see that turn we had been expecting that to happen. This year, but of course with the disruptions that we've seen a associated with the pandemic that has caused the production and delivery schedule to move a little bit to the right and as a result, I think the inflection point with the with the working capital moves a little bit.
For the right, but we ought to see that start to come down are reasonably starting at some point in the next year and compounding that with the with the combat systems improvements in working capital I think those two big muscle movers, you'll see us having a good favorable impact to our free cash flow performance over the next two three years.
Okay. Thanks, Thanks very much.
But on a person's when it comes from miles rule.
Please go ahead.
Thanks, Good morning.
CB, maybe you could talk to the second half implied margin trends at aerospace, obviously pretty robust bounce back and.
Maybe talk about what that means for 21 is is this 15%, but you're talking about in the second half of road map 21 in anyway.
So our our margin performance this year and frankly into next will benefit significantly by the charges that we took in paid for in the quarter. So that is a a a significant benefit.
We also see I'm more advantageous next to our delivery, particularly at us and assuming that we don't get a worsening of international travel restrictions or getting zero abatement in them.
So we are where we see a password implied we've got a.
A clear path to 70 to 75 deliveries as I said, our operations are performing well, we have Oh, we have a plan to deliver each and every one of those airplanes.
So were comfortable and the moment that that Ah that trajectory, while Steve is quite achievable.
So going into 21, all that all the benefit from this year's cost and rationalise cost reductions and rationalization will clearly benefit 21 margins.
So you could maintain the second half margins into 21, or maybe is that it's going to be a little lumpy and we're not going to I'm not going to start parsing 21, but you can imagine that they will benefit from them.
Alright, thank you.
[noise] bitterness worsens very coaching drawn reviewed with Citi. Please go ahead.
Hi, Thank you good morning, Jason following up on the cash generation question.
Can you talk about.
While the rest of the your shapes up and kind of what green you into that range and then also obviously things should get better going forward to get back that more consist of 100% with all that cash coming towards you, though what is the capital allocation I'm sorry, the decision process going forward and I didn't repurchase any in second quarter, but that how how's the capital.
Allocation conversation going at this point.
So as it relates to the outlook on cash I think you'll see this year frankly look quite similar to the way it's looked over the past couple of years, it's it's a fairly steady in steep.
Improvement in the free cash performance in the third and fourth quarters, that's become a more frankly typical pattern for us over the past several years and so you'll see a I think a particularly strong fourth quarter.
And again I think that has to do with some of that working capital starting to unwind in the fourth quarter in and I think as I described in the earlier question.
We expect to see some of that working capital unwind in a more meaningful way a into 2021 and frankly, even 22 and 23. So those are really the underpinnings of where we see.
The free cash flow start to get.
To back not only back to 100%, but you know we've been expecting it to get above 100% as we look out into the next couple of years and it really is all about unwinding those elements of a working capital as it relates to capital deployment I'll I'll turn it back over to Phebe not perhaps to answer that question. So I think in a moment in periods of great uncertainty preserving liquidity is the most important.
The thing we did not buying shares in the quarter.
And will hold Pat for now with respect to that we'll continue to honor that dividend as we've told you for years.
Our dividend is the one part of capital deployment that is repeatable and predictable.
So that's all I think we're gonna say about capital deployment at the moment.
Thank you.
And then of course is good cones for dogs harder with Bernstein. Please go ahead.
Good morning, Thank you.
Yes, maybe when when you talk about a rightsizing the operations said Gulf stream in order to get the margins did improve margins how do you think about this.
Im to longer term in other words, your rightsizing to a level, but I would expect certainly with the flexibility to take that rate up when.
Demand reemergence or how do you how do you balance the two things.
[noise]. So let me give you a little better color on how we sat in any given year.
The production right now and then and then we can talk a little bit more in detail. So [noise].
And if we talk specifically about 21 production rate and 21 will depend on the number of airplanes, we have in the backlog of that for delivery in 21.
The number of airplanes, particularly in the third quarter of 2020 that we sell for delivery into third or into the I'm 2021.
And then bar or how we see demand when we sat are a plan and all of this is Don in in the fall.
And it's part of a multi it's been a longstanding disciplined process that we have had for a very long time, so look in the.
That will give us some time all odd to if we need to increase our Ah.
Our production schedule, we've got some flexibility around that our production plan for next year, but it is way too soon to speculate about that but in any case is rightsizing I think that we've done our in many instances permanent.
This was a good opportunity to just cut costs and I don't expect under any scenario for those all of those cost to come back when revenue increases.
So so this is something that would allow you to hopefully it'll move margins up high or was it.
One of the things that.
Also a win win if we can understand a little better is when you think about the G 700.
And compare that to sit as you 500. The T 650 can you talk about how.
You are leveraging past designs manufacturing processes and should we see margins rise on the G 700 more quickly than these other new programs I would expect that.
That is unlike the other two a in modification of an existing airplane.
So all those lessons learned on the 650, we can apply and to the 700 and you can expect us to do quite well as we come down the learning curve, which will be obviously less steep we know how to build this type of airplanes you've done it before.
<unk> Charles with Barclays. Please go ahead.
Thanks, Good morning, everyone I gave it a fee being on on Judy.
What what proportion of E.
No.
No contracts are people need actually need access to a customer.
Customer facilities and can actually just do the work from home home.
No it.
Let me put it here this play we thought about 10% of our workforce.
That is either idle underutilized and a significant portion of that or core and classified as which has been a longstanding a series of relationships. We've had for many many years than a good solid partnership that we have with.
Our customers, but as you know it's impossible to do.
To do a classified work from home so as our customers sort through how they I think judiciously and prudently bring back employees in this cove it environment.
And then how we manage now we have met.
All of that will will sort of depend on going forward, where we are now you know right now those costs are being covered by the cares act, but with no margin. So they've been very dilutive to margin, but ultimately this will resolve and it all depends on when our cut back on working at full.
Full steam one that some of the cobot uncertainties have have been eliminated.
Okay, Great and could you could you give a little bit more color on the on the lawsuits yet I guess, what was what was unique about or.
Situation jet as compared to I guess, you're over the rest of your service business and then also the exposure to pre owned a that loss there or how does it.
So that was really about absorption that was a headwind that we tend not to have in our other businesses revenue there's only so.
And we can only take the fixed costs out itself out at a fast on you know I buy anything in any given given schedule, but as I said that will that without overturn that was a onetime impact and not and they had disproportionately more higher severance charges.
Given the given the nations in which they work so that's hurting and important element of that.
And with respect to the pre on you know we discipline our inventory of pre owned I'm very very you know very clearly in with with Harry strict structures. So I don't see us having much material with fondness and plus this was ended up.
Corridor.
Not a expecting any on a going forward basis, but you know.
Your next question comes from her with Wolfe Research. Please go ahead.
Hey, Thank you. Good morning, Phebe can you talk a little bit about how the virus is impacting the fractional biz jet market.
How it has impacted so far any potential changes that you see in the landscape going forward out of this thank you.
HM glad let the Uh huh.
At the operators at the fractional businesses talk about that.
But I can't tell on a going forward basis, we do not see any structural change in this market.
Simply don't I.
And they say no evidence to suggest that there would be.
Okay, and I'm, just say squeeze one more in just a follow up on the comment about the 700 margins are you, suggesting that marches on that just to clarify can exceed peak margins on 650.
As I think that aside I think that's a little too early to lie declare victory, but let's just put it this way everything about this airplane is performing exactly as they helped in fact better.
We'd have 100 hours of tasks on that airplane and.
And it is.
Oh, all indications all carat you know in all respects outperform even some of US specifications. So why does that matter because we really understand best airplane and I think it's premature to say I understand them how to build up but it's very premature say at this juncture that we're going to clubs.
Gross margins, but as we get closer to it in service. They get this we get this through tests, we get it through the certification process and love a little bit more color about you know the timing of them in a margins and earnings associated with that airplane going forward, but this is gonna be a very good airplane for us.
Okay.
Thank you and everyone's questions. When it comes from Pete Skibitski was on the global Please go ahead.
Hi, Good morning, guys I'm writing.
Steve you looks like you're expecting some some back up.
On bad relative to the first half I'm, just wondering is that the Spanish facilities coming online or some mix benefit potentially.
All right so.
So we always ramp.
That's that businesses, you know pattern, but really as you quite accurately playing out and it's at our European land systems, but we've we've got those facilities up and there are near peak production. So that's behind us with respect to that.
Okay, and just the I've lost track of this but the big Spanish in Morocco combat vehicle programs. What do you expect to have those under under contract if they're not yet.
Well I have learned not to speculate on the timing of sovereign government has decisions, but I will tell you that we're going to get this and and it'll be a nice addition to the backlog.
Okay fair enough. Thank you.
And then operator I'm, we'll have we'll take one more questions upcoming one will be our last please yes, sir or final questions. We will come from Robert So ER with vertical research. Please go ahead.
Thanks, so much and good morning.
Morning.
Maybe just a couple of quick ones on aerospace I was wondering if you could tell us what you'd be sitting on some of them all short cycle parts of this division.
Such as the aftermarket services in terms of trends in recent months will there be Auvs and then secondly pricing and you commented on what you've seen in pre what you see this down cycle versus previous cycles. How is pricing held up this time versus what you've seen in the past [noise].
Well, let me answer that an inverse order.
Oh, we're seeing really no degradation in pricing.
And and as you all know we consider price pressure [noise].
So we do not compete on price, we never have and that doesn't change in this kind of environment. So our pricing is holding up pretty well.
With respect to the shorter cycle aerospace businesses, what those are really volume driven an entirely at the I feel it's volume driven so the more flying hours they get it across.
Across all met me models of airplane, the better the F. Fios to service.
Service is Ah service was down but only slightly.
[noise] it maybe a little bit make carry all through the rest of the the year, but we'll have nice performance on service.
And now and we expect the mix to improve as well.
You know it's hard for in the second quarter for people to get to help their scheduled maintenance, we did that somebody's guys that listen it couldn't travel so hard to get the airplane that will resolve.
Thank you.
Thank you.
Operator.
We now and discuss today as a reminder.
MX website for the second quarter earnings release, and our highlights priests in station. If you have any other questions I can be reached 73.
It's 763117 [noise].
Thank you Sir <unk> conference call with a you overcome in todays presentation. You may now disconnect your lines that have a wonderful day.
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