Industrials recognize revenue just like other companies, but are subject to long-term contract rules, which can cause revenue and cash to diverge.
The revenues of industrial companies can be split into two subcategories.
OE stands for original equipment and covers products such as vehicles, trucks, and commercial aircraft.
AM stands for aftermarket and covers the delivery of products as part of a longer term arrangement.
Often industrial companies will try to generate both OE and AM revenue.
The install base, as it's called, represents the items sold such as vehicles and trucks generating OE revenue.
Industrial will then position itself as the ideal candidate to provide after sale service, such as maintenance inspections and customization.
This provides very useful AM revenue stream to the industrial.
This may be higher margin due to its more service-based nature.
Some relationships can go on for a very long time this way.
Lockheed Martin produces the F 35 stealth fighter for the US government.
The contract was won in 2001.
The first aircraft flew in 2006, first entered service in 2016, and the plans are for the US government to buy thousands of new F 30 fives all the way through to 2044.
These will all need maintenance and customization as new technologies become available.
Generating AM revenue for Lockheed Martin.
Over the longer term, OE tends to see revenue created at point of delivery, whereas AM involves longer term contracts revenue, and is typically recognized over time AM revenue recognition may be covered by the contract accounting parts of IFRS 15 or a SC 6 0 6.
