On Oct. 28, the Boeing Co. (BA) published its third-quarter earnings report. While analysts and investors had been braced for bad news in light of both the continued 737 MAX grounding and the disruption of the coronavirus pandemic, few were prepared for the reality.
Putting a brave face on earnings
During the third quarter, Boeing brought in $14.1 billion in revenues, resulting in a $401 million net loss from operations. In the letter accompanying the report, CEO David Calhoun said:
"Our diverse portfolio, including our government services, defense and space programs, continues to provide some stability for us as we adapt and rebuild for the other side of the pandemic."
Calhoun clearly wanted to accentuate the positives buried in the grim result by highlighting Boeing's government and defense business as a bulwark against demand shocks to its commercial aircraft business.
A bad year for the defense and space segment
Boeing's Defense, Space & Security segment ought to be a strong bulwark against commercial market disruption thanks to its reliance on lucrative long-term government development and production contracts. Unfortunately, while the defense segment may provide diversification in theory, it has failed to soften the blow of Boeing's recent financial losses.
In the third quarter, revenue from Boeing's Defense, Space & Security segment came in at $6.8 billion, a 2% decline from the same period in 2019. Earnings from segment operations fared even worse, falling 17% year-over-year to $628 million.
Boeing's defense and space business was looking shaky even before Covid-19 struck. During the first nine months of 2020, the segment brought in revenues of $19.5 billion, down a fairly modest 3% from the previous year. The bottom line took a far more substantial hit, however, falling 60% year-over-year to $1.0 billion.
Pegasus program proves problematic
The KC-46 Pegasus, a next-generation Air Force tanker aircraft, was meant to be an easy win for Boeing. However, long development delays have weighed on the program. In an April article for GuruFocus, I discussed the technical problems that have mired the KC-46, as well as the growing frustration among top military brass.
As a fixed-price development contract, Boeing is required to shoulder the burden of cost overruns. Through the first half of 2020, Boeing had spent an eye-watering $4.7 billion of its own money on the KC-46. In the third quarter, it booked another $67 million charge. With no end to its troubles in sight, the KC-46 has proven to be a costly millstone that Boeing can ill afford.
Starliner's struggles sour supporters
Starliner, Boeing's manned spacecraft program, has also suffered a series of embarrassing setbacks. A failed unmanned test flight late last year led to a NASA investigation, which identified a number of "fundamental" software problems in February. The botched test forced Boeing to book a $410 million charge.
While Boeing has long been able to rely on the support of powerful allies on Capitol Hill, recent space contract decisions suggest that at least some government decision-makers have lost patience with the venerable aerospace giant. In March, Boeing was beaten by upstart rival SpaceX for the Lunar Gateway supply contract, a program worth up to $7 billion over 15 years. A month later, Boeing again fell short, failing to secure even a piece of NASA's 10-month, $967 million lunar lander development contract.
My verdict
The troubles facing Boeing's Defense, Space & Security segment have multiplied over the past year. A number of critical development programs have faced painful delays and cost overruns, turning potential cash cows into financial burdens. Unless Boeing can change course and get its government programs back on track, it may end up alienating its friends and allies in government, which could threaten its ability to win lucrative federal contracts going forward.
Boeing cannot afford to lose its position as a favored aerospace partner to the U.S. federal government and military. With industry competition already intensifying on multiple fronts, the clock is ticking.
Disclosure: No positions.
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