Boeing’s defense programs run $400 million overspend

A Boeing MQ-25 unmanned aircraft rests on the flight deck of the aircraft carrier USS George HW Bush (CVN 77). (US Navy/Mass Communication Specialist 3rd Class Brandon Roberson)

WASHINGTON: Boeing announced today $400 million in over-budget fixed-price defense contract spending, the most significant amount being $147 million before Navy taxes MQ-25 refueling drone.

Those losses contributed to a tough financial quarter for Boeing’s defense business, with a profit of $71 million and an operating margin of about 1%, the company reported in its second-quarter 2022 earnings.

In a call to investors, CEO Dave Calhoun attributed the protection fee “primarily to supply chain impacts and inflation.”

In 2018, the Navy awarded Boeing an $890 million firm-fixed-price contract to develop the MQ-25 and supply seven aircraft and test products, according to Boeing filings with the SEC. So far, Boeing has booked $516 million in pre-tax benefits from the program, including the latest loss announced today, which the company said was “primarily due to additional testing and certification, supplier quality and engineering design issues.”

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While the MQ-25 program charge was the largest announced by Boeing today, several other programs also exceeded their spending ceilings this quarter:

  • The Commercial Crew program, under which Boeing provides NASA’s transportation to the International Space Station, has spent $93 million due to an update to the launch manifest and additional costs incurred as part of Orbital Flight Test 2 in May
  • The T-7A Red Hawk trainer aircraft added another $87 million this quarter, with a whopping $367 million split between the development and production portion of the program this year. Boeing attributed the charges to “customer testing requirements … and hardware qualification issues,” as well as overall cost increases and delays due to lingering supply chain issues.
  • The KS-46 posted a charge of $44 million due to higher supply costs and production disruption. The tanker has cost more than $5 billion in development, meaning cost overruns have exceeded the $4.9 billion contract Boeing agreed to in 2011.
  • The VC-25B Presidential Aircraftwhich will be nicknamed “Air Force One” during the presidential flight, recorded a $26 million charge as Boeing continues to deal with “higher supplier costs, higher costs to complete certain technical requirements and schedule delays,” the company said in its SEC. sawdust

In all cases, Boeing noted that “the risk remains that we may need to record additional losses in future periods.”

Under former CEO Dennis Muilenburg, Boeing has shown a willingness to accept fixed-price contracts for defense programs, with the company typically bidding low, figuring it would take a financial hit during development but turn a profit later in the program’s production and sustainment phases.

But there are indications that Boeing’s current management team will take less risk on future fixed-price contracts. Calhoun, who became CEO in 2020, stated his reluctance to continue the practice, and during roundtable with journalists earlier this month, new Boeing Defense CEO Ted Colbert said the company would take a “different approach” to future contracts if it made sense, based on lessons learned from programs like the KC-46 tanker.

“We learned a lot of lessons, especially in the area of ​​contracting,” – he told journalists on the eve of the Farnborough Airshow. “Frankly, we have discussed these lessons learned with our procurement clients. And we learned everything. So we’re working together to make sure that everything we do going forward will increase the likelihood of completing tasks on time.”

Despite the losses this quarter, Calhoun said today that he is now “more bullish” on the outlook for international sales than before.After that, he led the campaign, in particular for the KC-46 and MQ-25 tanker. But, he noted, it remains a long-term game.

“They may be at the leading edge of the demand curve, but that’s not going to happen in the next six months,” he said. “In fact, it will take us a year to get to the point where that demand starts to translate into actual orders.” Boeing’s defense programs run $400 million overspend

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