(BRK.A), (BRK.B)
The restart of the 737 Max assembly line this past summer has yet to alter the trajectory of Berkshire Hathaway’s swooning aerospace manufacturer, Precision Castparts. The company’s profits have crashed landed, and are leading to much wider layoffs than previously disclosed.
Precision Castparts is a worldwide manufacturer of complex metal components and products, provides high-quality investment castings, forgings, fasteners/fastener systems and aerostructures for critical aerospace and power generation applications.
According to The Oregonian, forty percent of Precision Castparts’ workforce will have been laid off by the end of 2020, and its total worldwide layoffs are expected to exceed 13,000 employees.
The number is far larger than the hundreds that it disclosed were laid off in its home state of Oregon in the second quarter.
In June 2020, the company turned its previously announced furloughs in Oregon into layoffs, and added additional layoffs at its Clackamas small structures business operations facility. The company cited the COVID-19 pandemic for the 717 layoffs in Oregon, which represented roughly 24 percent of its workforce in the state.
Plunging Revenues, Dwindling Profits
Falling revenue led to a disastrous third quarter. Precision Castparts’ reported third-quarter revenues of $1.5 billion, down 41.4% from the same quarter of 2019, and third quarter profits were down a stunning 80%.
“The COVID-19 pandemic contributed to material declines in commercial air travel and aircraft production,” Berkshire Hathaway disclosed in its most recent quarterly filing. “Airlines responded to the pandemic by delaying delivery of aircraft orders or, in some cases, cancelling aircraft orders, resulting in significant reductions in build rates by aircraft manufacturers and significant inventory reduction initiatives being implemented by customers.”
When Berkshire Hathaway acquired the company for roughly $37 billion in January 2016, it believed it had found one of Warren Buffett’s famed “elephants”—a company that had durable advantages that created a wide moat. At the time, the acquisition was Berkshire’s biggest ever, topping its $26 billion purchase of BNSF Railway in 2009.
While manufacturing for aerospace doesn’t have the same moat as a regulated utility or a railroad, it still has a huge barriers to entry due to the high cost of manufacturing specialized parts, and the unlikelihood that a customer will switch suppliers once a plane begins its production run.
Before Berkshire Hathaway acquired the company, Precision Castparts had an alluring annual growth rate of 23% over the previous ten years. Almost five years later, growth has evaporated, and the company has already taken $300 million in charges in 2020 to cover the costs of restructuring and inventory write-downs.
A Turbulent Future
Despite the good news that the F.A.A. is finally allowing Boeing’s 737 Max to return to commercial service after being grounded for twenty months, long term Precision Castparts is facing headwinds due to reduced demand over the next decade for aerospace parts.
Boeing, one of the company’s biggest customers, is revising downward the number of commercial airliners it will be building over the next ten years. The 2020 Boeing Market Outlook projected an overall demand for 18,350 commercial airplanes in the next decade — 11% lower than Boeing’s 2019 forecast.
© 2020 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.