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Boeing profit falls as Pentagon scales back

The airplane maker is mulling layoffs and other costs cuts to shore up its defense business, CEO James McNerney says.

July 28, 2010|By Julie Johnsson

As the Obama administration pares military spending, Boeing Co. is mulling layoffs and other cost cuts to shore up its defense business, Chief Executive James McNerney told analysts Wednesday.

Chicago-based Boeing, the largest aerospace and defense contractor in the world, suffered a major blow last year when Defense Secretary Robert Gates axed $330 billion in weapons packages from the Pentagon budget, including the Army's Future Combat Systems and U.S. Air Force's F-22 Raptor fighter.

Boeing is starting to feel the consequences of those cuts and the overall gloomy outlook for U.S. defense spending. Military outlays peaked two years ago and are expected to be targeted for cuts in the fiscal 2012 budget as Congress and the White House grapple with a yawning deficit, analysts said.

Boeing's second-quarter net income fell 21% to $787 million, or $1.06 a share, from a year earlier. Revenue declined 9%, to $15.6 billion. Boeing didn't absorb any new financial hits from its star-crossed 787 Dreamliner and 747-8 jumbo jets, to Wall Street's relief, although the plane maker warned it may face additional outlays as the first deliveries of the aircraft draw near.

Investors, however, were troubled by the unexpectedly poor results at Boeing's defense business, whose operating earnings dropped 19%, to $711 million, from the year-earlier period. Boeing shares fell $1.30, or 1.9%, on Wednesday to $67.32.

"Defense results were lower than we expected across the board," said Joseph Nadol, aerospace analyst with JPMorgan Chase. "Given budget and pricing pressure, it's hard to have much confidence that things will get much better."

McNerney vowed to improve the 8.9% operating margin reported by the defense business during the quarter, down from 10.1%.

McNerney can boost Boeing's margins by beefing up overseas sales and making painful employee cuts, said Loren Thompson, defense analyst with the Lexington Institute think tank.

Boeing stands to sell 72 F-15 Eagle fighter jets to Saudi Arabia, while India is interested in purchasing more of its C-17 Globemaster cargo jets, helicopters and F/A-18 Super Hornet fighters.

"With regard to foreign sales, Boeing's prospects are looking very good," Thompson said. "With regard to efficiency, the company will have to right-size its workforce to reflect diminished demand."

But Boeing can't yet count on its commercial aircraft business to offset weakness on the defense side. Boeing already has garnered 279 net airplane orders so far this year, surpassing 2009's total of 142 orders. But it won't see strong results from its aircraft business until it begins to deliver its badly delayed 787 and 747-8 jets at a steady rate.

The two aircraft programs continue to drain Boeing, which doesn't expect to generate any operating cash flow this year. If the 787 and 747-8 get on track next year, as expected, Boeing expects its operating cash flow to exceed $5 billion.

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