Boeing [BA] Chief Dennis Muilenburg on Wednesday said his company’s bids and ultimate wins in the third quarter on two marquis dollar U.S. defense programs were clearly aimed at capturing long-term business worth potentially more than $60 billion for domestic and international customers.
Muilenburg said the Air Force’s T-X trainer and Navy’s MQ-25 unmanned aerial refueling tanker demonstrate a “targeted and very deliberate strategy focused on some key defense franchises that we believe have life-cycles that are measured in decades.” He put the long-term value of the T-X at $40 billion and the MQ-25’s value at over $20 billion.
Boeing is considered to have bid aggressively on T-X and MQ-25, as well as another nice win for the company in the quarter, the Air Force’s replacement for UH-1N Huey helicopters in support of protection of ICBM bases. On Tuesday, Lockheed Martin [LMT] Chief Marillyn Hewson, whose company came out on the losing end on all three Boeing wins, said her company would have lost $5 billion if it had bid the same prices Boeing had and won (Defense Daily, Oct. 23).
Boeing took $540 million in after-tax charges related to investment in both T-X and MQ-25 to continue technology maturation and position them for international customers.
“This strategy reflects a commercial investment mindset; a deliberate and purposeful decision to position ourselves to capture significant market opportunity in services, support, training and platforms in the autonomous systems, trainer and light attack markets,” Muilenburg said on Boeing’s third-quarter analyst call.
Boeing is sizing the overall T-X market at 2,600 aircraft, to include trainers, light attack variants, ground-based trainers, simulators and life-cycle services and support. Muilenburg said there are opportunities for more than 200 MQ-25 unmanned aerial refueling aircraft and derivatives.
Muilenburg was asked by Sanford Bernstein aerospace and defense analyst Doug Harned about the dangers associated with the fixed-price development contracting mechanisms used for T-X and MQ-25, noting that the same type of contract is used for Boeing’s work on the Air Force KC-46 manned aerial refueling tanker, which has suffered delays and cost overruns. Boeing in its earnings release disclosed $176 million in new charges on the tanker program due to cost growth and further delays in certification and testing.
Boeing has “de-risked” both T-X and MQ-25 through a series of investments and efforts the past few years, Muilenburg said. To date, Boeing and its partner, Sweden’s Saab, have flight-tested two production-ready T-X models 71 times, he said.
As for the MQ-25, Boeing has performed engine runs, taxi testing and deck handling trials, Muilenburg said. Boeing has an MQ-25 prototype that will start flight-tests in 2019, he said.
Boeing has “invested up front” on both programs and has a “very strong” business case for its shareholders, Muilenburg said. He called them “small development programs leading to rapid production.”
“As a result, the risk profile of these programs is dramatically different than tanker,” he said.
The KC-46 began as a drawing board design, Muilenburg said. The aircraft is based on a derivative of the company’s 767 commercial jetliner. KC-46 deliveries are expected to begin during the fourth quarter of this year.
Boeing won the $9.2 billion T-X contract in September for 351 trainers and 46 simulators to replace the aging fleet of T-38 trainers. There is an option to buy 475 aircraft and 120 simulators. The Navy in late August awarded Boeing $805 million for engineering and manufacturing development of the MQ-25, to include four test aircraft, with a plan to spend $13 billion overall for 72 aircraft.
In the quarter, Boeing reported a 4 percent increase in sales to $25.1 billion from $24.2 billion a year ago, driven by double-digit percentage increases in both the defense and services segments, which more than offset a slight decline in the commercial aircraft division.
The defense business, which boasted a 13 percent increase in sales to $5.7 billion, benefited from higher volume on government satellites, the KC-46 Tanker, the F/A-18 aircraft, and weapons programs. Backlog in the segment stands at $58 billion, with 31 percent of that from international customers.
Net income was $2.4 billion, $4.07 earnings per share (EPS), up 31 percent from $1.8 billion ($2.99 EPS) a year ago. Excluding pension adjustments, core earnings were $1.9 billion ($3.58 EPS), which beat consensus estimates by 11 cents per share.
The higher earnings were aided by a favorable tax settlement, higher sales and lower pension expenses. Operating income was higher at the Commercial Airplanes segment, despite lower sales, and at Global Services on program mix. The defense segment swung to a $246 million loss due mainly to the charges on T-X, MQ-25 and KC-46.
Boeing increased its sales outlook for 2018 by $1 billion to between $98 billion and $100 billion to account for better-expected volume in the defense and services segments, as well as the recent acquisition of KLX, which is now part of Global Services.
Earnings guidance was raised by 50 cents per share to between $16.90 and $17.10 EPS to reflect lower taxes and improved performance.
Total backlog at the end of the quarter was $491 billion, up $488 million from the end of the second quarter. Free cash flow was $4.1 billion.