Boeing (NYSE:BA) made quite a good impression during its Investor Day. It goes without mentioning that significant challenges to remain competitive persist, but overall Boeing executives made a much better impression than in previous years. The Investor Day was little over two weeks ago and since then Boeing has made a major announcement, which I will discuss in this report.
Boeing Reorganizes Defense, Space and Security
Effective immediately, Boeing is bringing the number of divisions down from eight to four. These four divisions are the following:
- Vertical Lift
- Mobility, Surveillance & Bombers
- Air Dominance
- Space, Intelligence & Weapon Systems
Boeing states that the realignment aims to accelerate operational discipline, program quality, safety and performance, and Ted Colbert, CEO of Boeing Defense, Space & Security, said the following:
I am confident this reorganization will drive greater and more simplified integration and collaboration across Boeing Defense, Space & Security. These changes will help accelerate operational discipline and program quality and performance, while stabilizing our development and production programs. These are necessary steps to put BDS on the path to stronger, profitable growth.
While it indeed seems easier to have valuable crossflows between divisions and programs when there are less divisions, the simplification likely also is driven by a need to reduce costs. Boeing Defense, Space & Security has shown underwhelming performance with its key growth platforms such as the tanker showing subpar financial performance to date and fixed price development programs have significantly increased Boeing’s losses as timelines have shifted and inflation has resulted in higher costs.
Looking at results from Boeing Defense, Space & Security what we see is that it’s a segment that has shown little topline growth. The 2022 bar includes revenues for Q4 2021 to get to a twelve-month trailing number and shows a significant reduction compared to 2021. However, that’s not so much a major point of concern as the reduction in revenue reflects charges that Boeing took in the third quarter bringing twelve-month trailing losses to $3 billion. What’s more worrisome is that Boeing actually took those charges. Normally those charges are one-off items, but with Boeing they have become standard business practice. The Defense segment normally should be a segment with margins in the 10% to 12% range. However, driven by charges, Boeing has not been able to deliver satisfying margins for at least the past five years and that likely is also a reason for Boeing to restructure the defense segment. Doing so could shave off overhead costs, although Boeing has not discussed any potential savings as part of the restructuring.
New CEO Has A Major Task Ahead
Ted Colbert has been Boeing’s Defense boss since March 2022, but already has had quite some tough items to work through. While Boeing does have some promising products in its portfolio, financial performance is lagging either due to engineering shortfalls or the way the contracts are structured. It’s up to Ted Colbert to fix the mess and the reorganization of the business seems to be one element of that. Boeing has lost contracts to the competition and the contracts on major programs that they did win are financially non-performing. I believe that Colbert is aiming to cut costs, but also to position the company such that a leaner structure with beneficial crossflows arises.
From what I have seen Colbert has the charisma of someone who could be Boeing’s next CEO, and if he successfully transforms the Defense business, chances of becoming Boeing’s next CEO will only increase. Whether a reorganization provides the right condition to become a CEO remains to be seen, but if that’s the case Colbert would be following the steps of Dennis Muilenburg who restructured the Defense unit when he was leading it back in 2012. In fact, the announcement to reorganize comes a decade after Muilenburg announced a restructuring of the Defense segment he was leading. Muilenburg would eventually become Boeing’s CEO and was sent off due to an inability to get the Boeing 737 MAX certified and backlash from the FAA. So, both of these individuals have pushed the Defense segment through a restructuring but whereas Muilenburg’s approach was more focused on shrinking the headcount, management ranks included, to reduce costs, Colbert’s approach seems to be much more focused on simplifying the business to improve oversight and performance and that might actually be a right approach as it seems Colbert is attempting to structure the business in such a way that its innovative spirit is not further degraded but the financial performance can improve.
Conclusion: Defense Restructuring Was Long Overdue
I view the restructuring of the Defense segment to be long overdue. The previous CEO of Boeing Defense, Space & Security, Leanne Caret, had a long history at Boeing but was unable to turn defense platforms into a financial success despite also restructuring the business in 2018 in an attempt to get the KC-46A back on track and compete for the Ground Based Strategic Deterrent program. Looking at both programs, the restructuring cannot be seen as a success as KC-46A costs continued to rise and Boeing eventually withdrew from the GBSD competition.
Colbert’s focus seems to be on conditioning the defense segment in such a way that performance is improved creating the right conditions and framework for platforms to start adding to the financial performance as well. If successful, Boeing should be able to return to margins in the low-teens for its Defense unit. Time will tell how successful it will be, but I consider it a good sign that Colbert is already taking reorganization steps now after already having de-risked the programs earlier this year.