By Calvin Biesecker
Defense Daily
The global economic hardship creates by the COVID-19 pandemic gouged Boeing’s first-quarter financial results, mainly in its commercial businesses, but even the defense segment reported top- and bottom-line declines.
The KC-46A aerial refueling tanker being developed and built for the Air Force took an $827 million pre-tax charge, with $551 million stemming from costs related to an agreement with the service earlier this month to develop and integrate a new Remote Visions System (RVS) for the aircraft. The remainder of the charge was due to productivity inefficiencies and a factory disruption related to COVID.
The new RVS “will ensure the KC-46 becomes the standard by which all future refueling aircraft are measured,” Boeing President and CEO David Calhoun said on the company’s earnings call Wednesday.
The tanker is one of Boeing’s remaining toe-holds in the U.S. nuclear arsenal, though a peripheral one. The company still has its work on the B61-12 gravity bomb’s guided tail kit, plus the B-52H bomber fleet, which will be the first to carry the new Long-Range Standoff nuclear cruise missile toward the end of the decade.
The German defense ministry also wants to buy Boeing F15 aircraft for that country’s NATO nuclear-security sharing mission with the United States, but the deal requires approval by German lawmakers.
Meanwhile, the company has been utterly shaken off the Air Force’s Ground-Based Strategic Deterrent (GBSD) program, which rival Northrop Grumman looks poised to snap up before Labor Day. Gen. Timothy Ray, head of Air Force Global Strike Command, said he was happy with the progress Northrop and the Pentagon were making in negotiating the $25 billion GBSD contract, and that he didn’t believe there would be any “classic” single-source problems with the deal.
Boeing executives said during the earnings call that other defense programs were bitten by COVID-19 during the quarter, leading to further margin reductions in the segment. Greg Smith, the company’s chief financial officer and executive vice president of Enterprise Operations, pointed in his remarks to the VC-25B aircraft program, the new Air Force One presidential plane based on a 747 airliner, as being impacted by the pandemic.
Later, during a media call, Smith said there have been inefficiencies on the program due to teleworking initiatives “that has caused us to re-evaluate our estimate to complete those efforts.” He added that the team is “executing very well on many fronts” and the “program remains on schedule and like I said, we’re continuing to execute.”
The net loss in the quarter was $641 million, which resulted in negative $1.11 earnings per share, versus net income of $2.1 billion, or $3.75 a share, a year ago. Adjusted earnings in the quarter were a $1.7 billion loss, minus $1.70 a share, which was $0.13 a share worse than analysts’ estimates.
Sales in the quarter tumbled 26% to $16.9 billion, versus $22.9 billion a year ago.
Sales in the Defense, Space, and Security segment were down 8% to $6 billion, mainly due to the KC-46A charge. The company also delivered fewer military aircraft. The charge was also the primary driver in a $191 million operating loss in the quarter.
Boeing’s third operating segment, Global Services, turned in solid results considering the challenges the company is facing. Sales were flat, as a decline in commercial work was offset by increased government business. Operating income rose 8% on performance on government work.
The earnings call was dominated by discussion of Boeing’s commercial business. Calhoun said it will be two to three years before airline travel returns to 2019 levels and it will be a few years beyond that “for the industry to return to long-term growth trends.” The industry “will recover,” he said.
Calhoun also told the company’s employees on Wednesday morning that with reductions in commercial aircraft production rates coupled with the impact of COVID-19 Boeing will reduce its employee count by 10% through a combination of “voluntary layoffs, natural turnover, and involuntary layoffs as necessary.” The commercial aircraft and services businesses will fare worse, with more the company planning to reduce headcount by more than 15% in these areas, he said.
“We will be a smaller company for a while,” Calhoun said on the earnings call.
Will Roper, the Air Force’s acquisition chief, said during separate media call on Wednesday he isn’t concerned that Boeing’s pending layoffs will affect his service’s programs. He said he’s “been in discussions with Boeing to ensure that our programs are going to be able to maintain the momentum that will deliver as close to on time as the crisis allows.”
Free cash in the first quarter was a $4.7 billion outflow. Backlog at the end of March stood at $438.6 billion, down from $463.4 billion at the end of 2019. Backlog in the defense segment was down slightly to $63.6 billion from $63.7 billion at the end of 2019. Boeing said that 28% of the business in backlog is from international customers.
This story first appeared in Nuclear Security & Deterrence Monitor affiliate publication Defense Daily.
