Boeing [BA] on Wednesday said its defense segment swung to an operating loss in the fourth quarter of 2023 due to additional charges on fixed-price development programs despite strong sales growth in the defense business.
The $101 million loss at Boeing Defense, Space & Security contrasted with a $112 million operating profit in the segment a year ago and was driven by $139 million in losses on three fixed-price development programs, unfavorable performance, and a sales mix that favored lower margin work. Boeing on its investor call did not disclose which development programs it took charges on.
Defense segment sales in the quarter increased 6 percent to $6.7 billion from $6.2 billion a year ago, with the gain stemming from a $2.3 billion contract last November for 15 KC-46A aerial refueling tankers for the Air Force and higher volume on other programs, Brian West, Boeing’s chief financial officer, said during the investor call.
Operating margin in the defense segment in 2023 was negative 7.1 percent, an improvement from negative 15.3 percent in 2022.
Boeing still plans to return the defense segment to high single-digit operating margins in the 2025 to 2026 timeframe, West said. He highlighted that 60 percent of the segment’s sales are programs returning margins in the mid-to-high single digits.
Fighter aircraft and satellite programs make up 25 percent of defense sales and performance in these areas “stabilized” by year-end although margins remained negative, West said. Segment margins will grow as “we roll in new contracts with tighter underwriting disciplines” and the troublesome fixed-price development programs continue to mature, he said.
During 2023, Boeing recorded $1.6 billion in losses on five fixed-price development programs, including $482 million on the VC-25A Presidential Aircraft, $309 million on the KC-46A, $288 million on NASA’s Commercial Crew astronaut transportation program, $275 million on the Air Force T-7A jet trainer, and $231 million on the Navy’s MQ-25 unmanned aerial refueling tanker, according to the company’s annual report filed with the Securities and Exchange Commission on Wednesday.
Losses at the defense segment in 2023 narrowed to $1.8 billion from $3.5 billion in 2022.
Boeing Defense, Space & Security is still burning cash but the Commercial Airplanes and Global Services segments are more than offsetting this decline, West said. Free cash flow in the quarter was $3 billion and for 2023 $4.4 billion.
Boeing did not provide an outlook for 2024 amid an ongoing investigation into an incident on Jan. 5 when a door panel fell off a 737-9 MAX aircraft while airborne. Boeing President and CEO Dave Calhoun said in a message to employees on Wednesday that “now is not the time” to update annual financial objectives.
“We will simply focus on every next airplane while doing everything possible to support our customers, follow the lead of our regulator and ensure the highest standard of safety and quality in all that we do,” he wrote. “Ultimately, that is what will drive our performance.”
Still, West said 2024 will be a “another steady year of free cash flow” driven by Commercial Airplanes, improvements at the defense segment, and strong cash generation at Global Services. Demand for the company’s products and services remains strong as is the backlog, he said.
Boeing’s overall backlog at the end of 2023 stood at $520 billion, up 29 percent from $404.4 billion in 2022. Defense backlog at year-end was up 9 percent to $59 billion from $54.4 billion a year ago, with international business accounting for 29 percent of the total. The defense segment tallied $8 billion in orders in the fourth quarter.
In the quarter, Boeing’s Commercial Airplanes segment posted a 13 percent increase in sales to $10.5 billion and operating income of $41 million on better performance and lower abnormal costs on certain aircraft programs. Sales at Global Services increased 6 percent to $4.8 billion on commercial work and operating income jumped 33 percent to $842 million.
For 2023, Boeing’s sales increased 17 percent to $77.8 billion from $66.6 billion a year ago driven by higher commercial aircraft deliveries followed by growth at the defense and services segments. Net losses fell to $2.2 billion ($3.67 EPS) from $5.1 billion ($8.30 EPS).