Boeing [BA] on Wednesday reported third quarter results that included $933 million in charges at the defense business, with work on the new Air Force One aircraft knocking $482 million off the bottom-line.
In addition to the VC-25B aircraft program, Boeing posted a $315 million loss on a satellite constellation for an undisclosed customer, and $136 million in other charges, $71 million of which is for the Navy’s MQ-25 unmanned aerial refueling aircraft due to higher-than-expected production costs to complete the development aircraft.
Boeing cited three factors for the loss on the VC-25B Presidential Aircraft, including engineering changes to support build and installation, a resolution to supplier negotiations, and labor instability at its factory. So far, the losses on the $4.3 billion program to modify two 747-8 commercial aircraft total more than $1.9 billion.
The VC-25B has “made progress completing engineering and production requirements,” Boeing said in a quarterly filing with the Securities and Exchange Commission.
“I’ll note that none of these items will impact the performance and capability of the end product,” Dave Calhoun, Boeing’s president and CEO, said during the company’s earnings call.
Total losses on the MQ-25 program to date are around $1.1 billion.
Calhoun said the loss on the satellite program comes as “we build out the constellation and meet our lifecycle commitments for our customer.” He added that “We’re working on real innovation and advanced capabilities in this space and see real potential market as we deliver against this commitment.”
The satellite contract was signed several years ago, Brian West, Boeing’s chief financial officer, said.
“This performance is below our expectations,” West said of the various program troubles that have been plaguing the defense business. “And we acknowledge that we aren’t as far along in this recovery as we expected it to be at this stage.”
The defense business is working to get back to high single-digit operating margins in the 2025 to 2026 timeframe, West said. A portion of the troubled programs are fixed-price development contracts and Boeing is no longer bidding on these, he added.
West said that fixed-price development programs such as the Air Force’s KC-46 aerial refueling tanker and the VC-25B represent 15 percent of the defense segment’s portfolio. Once the first test flight milestone is reached, the VC-25 will shed a lot of risk, he said.
By the 2025 to 2026 timeframe, Boeing expects most of the work on its fixed-price development contracts to be “substantially de-risked” and the order book built with more discipline resulting in better execution, he said.
West said that 25 percent of the defense portfolio are fighter aircraft and satellite programs with fixed-price production contracts that involve “real technical innovation” but have had execution challenges. New contracts will have “stronger underwriting disciplines that more accurately reflect the prevailing economic conditions,” he said.
Sales at the Defense, Space & Security segment rose 3 percent to $5.5 billion while the operating loss narrowed to $924 million from $2.9 billion a year ago.
Overall, Boeing’s net losses in the quarter narrowed to $1.6 billion, $2.70 earnings per share (EPS), from $3.3 billion ($6.49 EPS) a year ago. Core earnings, which exclude pension adjustments, were a loss of $3.26 EPS, 8 cents a share worse than consensus estimates.
Boeing’s Commercial Airplanes segment reported a wider loss in the quarter against a year ago, $678 million versus $622 million, due to a supplier non-conformance issue on the 737 aircraft. Boeing said the issue involves the aft-pressure bulkhead section of certain aircraft that is not a safety issue but will require inspections and rework, delaying deliveries.
Commercial Airplanes sales increased 25 percent to $7.9 billion on higher 787 aircraft deliveries.
The Global Services segment delivered higher sales and operating income due mainly to commercial services.
Boeing is still targeting between $3 billion and $5 billion in free cash flow this year although the guidance is now weighted to the low end of the range due to the 737 challenges. The company also continues to forecast $10 billion in annual free cash flow in the 2025 to 2026 timeframe. Free cash flow in the quarter was a $310 million outflow.
Backlog at the end of September stood at $469.2 billion, up 16 percent from $404.4 million at the end of 2022. Most of the increase was at Commercial Airplanes. Backlog at the defense business rose 6 percent to $57.8 billion from $54.4 billion.