Boeing lost $2.8 billion from its Defense, Space and Security business in the third quarter from fixed-price development programs, according to the company's earnings report, because of continuously rising supply chain and manufacturing costs along with "technical challenges."
The biggest losses came from the contracts for the KC-46A tanker at $1.2 billion and the VC-25B Air Force One replacement at $766 million, Chief Financial Officer Brian West said in the Wednesday morning earnings call. The MQ-25 drone along with the T-7A trainer and Commercial Crew programs also recorded losses.
“While current performance doesn’t reflect where we’d like to be for sure, we’re focused on driving execution stability,” West said. “These programs have an outsized impact on [Boeing Defense, Space and Security] margins and will be key to margin recovery in future periods.”
Third-quarter revenue was down 20% year over year from $6.6 billion to $5.3 billion in Boeing’s defense business with an operating margin of negative 52.7%. Across Boeing as a whole, revenues were up 4% to $15.956 billion with an operating margin of negative 17.5%.
Boeing CEO David Calhoun highlighted the business’ success in reaching its positive free cash flow goals overall in the earnings call.
“We generated $2.9 billion in the quarter; that puts us on the path that we projected for 2022, which was positive,” Calhoun said. “Very important accomplishment for us. I think [it] begins a real turning point for the company.”
That free cash flow does contrast with the hefty charge taken on from the military development contracts, Calhoun said, many of which have been highlighted in previous calls. He added that the “charge is meant to complete these contracts” and deliver to the armed-services customers.
“In any way, we’re not embarrassed by them,” Calhoun said. “They are what they are, and we intend to deliver against these contracts and satisfy our customers.”
Macro-economic challenges that face all of industry, such as supply-chain problems and labor shortages, are driving the costs associated with these programs, Calhoun said, and Boeing doesn’t anticipate those problems will go away within the next year.
“As we look to 2023, our operational and financial performance should continue to improve,” West said. “The acceleration will not be as significant as previously anticipated, and our path to recovery is taking a bit longer than expected, driven by the challenging macro-environment.”
Labor shortages are a key problem for Boeing as workers need time to be trained or, in the case of the VC-25B, need security clearances to work on the platforms, Calhoun said.
Despite supply problems, demand for Boeing products has been strong on the defense side.
During the quarter, Boeing secured contracts for 15 KC-46As with the U.S. Air Force and four of the same aircraft with the Israeli Air Force. Poland also selected the AH-64E Apache for its attack helicopter, though a contract was not signed during the quarter.
“In the U.S., there’s broad support for increased defense spending in Congress to meet current challenges,” West said. “Internationally, ongoing global tensions are driving our partners and our allies to announce plans for increased spending and additional capabilities for national defense.”
BDS delivered 34 aircraft and two satellites, including the first four MH-139A Grey Wolf test helicopters to the U.S. Air Force.
The backlog for BDS totaled $55 billion, 31% of which comes from customers outside the U.S.
On the commercial side, demand is also strong as air travel increases closer to pre-pandemic rates, West said.
Boeing recorded a revenue increase of 40% year-over-year to $6.3 billion due to the resumption of 787 deliveries and higher 737 deliveries. China is the exception, as “the COVID restrictions and policies in China have reduced demand for airplanes in general,” Calhoun said.
“We hope that is what is restricting the acceptance of the airplanes that they have on our tarmac, but we are clear-eyed about the geopolitical risks that are out there,” Calhoun said. “We are not going to impart new risks on our investors, and we believe we can de-risk what we have.”
The supply-chain problems also affect the commercial side of business, West said, primarily from casting engine components.