Boeing moves to put scandals in past

IDS unit key to revived government business

Based: Chicago

Chairman, President and CEO: W. James McNerney Jr.

Employees: 155,000

URL: www.boeing.com

2005 revenue: $54.8 billion

2005 net earnings: $2.6 billion

Top 100 ranking: 15

Back in business

According to analysts, these are some of the major upcoming programs the Boeing Co. is chasing:


»The next generation of the Air Force's Combat Search and Rescue helicopter program


»The Secure Borders Initiative Network contract


»The Crew Exploration Vehicle space shuttle replacement program


»The Air Force's Transformational Satellite Communications System program


»The Air Force's aerial tanker replacement program


»The Army's cargo aircraft program to produce European models in the U.S.

Managing expectations

The Boeing Co. told analysts and reporters during its July 26 second-quarter conference call that it would lower its earnings per share guidance for 2006 to the range of $2.40 to $2.55 per share.

Simultaneously, it raised revenue guidance to between $60 billion and $60.5 billion.
The bright spots for the company are its commercial aircraft business and the lowering of pension expense.

Boeing executives also raised the 2007 earnings per share guidance to between $4.25 and $4.45 while also increasing 2007 revenue guidance by $1 billion to $64.5 billion to $65.5 billion, based on expected growth in the company's commercial business.

On Aug. 10, Boeing's stock closed at $76.20, roughly midway between its 52-week high of $89.58 May 10 and its low of 62.01 Sept. 21, 2005.

Boeing Co. has settled charges of contract fraud and improper hiring, but the company has just begun to rebuild its financial performance and reputation.

On June 30, Boeing announced it would pay $615 million to the federal government to settle charges that it improperly possessed documents from its competitor Lockheed Martin Corp. for bids on rocket launch service contracts.

The payment also settles charges that Boeing illegally recruited and hired former senior Air Force acquisition official Darleen Druyan while she was overseeing billions of dollars in Boeing contracts for the Pentagon.

The settlement is the largest of its kind between the Defense Department and a contractor, and helped contribute to Boeing's reported $160 million second quarter loss. In the same quarter last year, it reported a net profit of $571 million.

"Simply speaking, my intent is to focus on the future and put this unfortunate part of our past behind us," W. James McNerney Jr., Boeing's chairman, CEO and president, told analysts and reporters during a July 26 conference call.

One of the priorities on McNerney's to-do list is rejuvenating the Integrated Defense Systems unit, which generated $30.8 billion, 56 percent of the company's $54.8 billion in 2005 revenue. IDS revenue in the second quarter of 2006 was relatively flat at $7.77 billion, compared to $7.8 billion in the second quarter of 2005.

Based in St. Louis, the four-year-old IDS unit offers systems integration services and builds network-centric systems for defense, civilian, intelligence and commercial customers. IDS' main customer is the Defense Department, which generates more than 90 percent of the unit's revenue. NASA and international defense and civilian markets are other clients. IDS employs about 76,000 of Boeing's 155,000 workers.

Most of Boeing's IT work is done by IDS, and it helped put the Chicago company at No. 15 on Washington Technology's 2006 Top 100 list, with $912.7 million in federal IT prime contract revenue in fiscal 2005.

But IDS has had stagnant revenue growth for the past several quarters. Before that, its growth was quite robust, said Paul Nisbet, an aerospace analyst at JSA Research Inc. in Newport, R.I.

Boeing lost about $1 billion worth of work with the Air Force on Evolved Expendable Launch Vehicle program as a result of its scandals, McNerney said during an Aug. 1 Senate hearing on the company's settlement agreement.

Nisbet said Boeing had to surrender several military satellite launches to Lockheed Martin as part of the Air Force's punishment of the company for having used Lockheed Martin proprietary documents to help it with the majority of Evolved Expendable Launch Vehicle satellite launch contracts.

IDS also has been hurt by falling behind on deliveries of its Airborne Early Warning and Control system for surveillance, said James Bell, Boeing's chief financial officer and executive vice president of finance, during the second quarter conference call. Boeing took a $496 million charge for the program in the second quarter.

Some of IDS' revenue growth stagnation is a result of lower volumes on proprietary commercial satellite work and an overall slowdown in government defense spending growth, said David Strauss, an equity analyst at UBS Investment Research.
James Albaugh, IDS president and CEO, has told analysts that he expects growth of 2 percent to 3 percent for the foreseeable future, Nesbit said.

Boeing officials declined a request for an interview to discuss the company's IDS business and the impact of the scandals on it, saying that McNerney's statement to Congress spoke for itself.

To try to shore up revenue at IDS, Boeing earlier this year restructured the business unit into three divisions: precision engagement and mobility systems, networks and space systems, and support systems. The goal is to better serve customers and provide more cost-effective solutions.

IDS is trying to focus on growing its customer support business and communications and network-centric programs, such as Future Combat Systems, which are higher growth markets for the company, said Robert Toomey, an aerospace and defense analyst at E.K. Riley Advisors in Seattle.

To repair its reputation, Boeing has revamped its ethics training and compliance program. All employees must sign annually the company's code of conduct and participate in yearly ethics recommitment sessions, McNerney said.

The company also created an office of internal governance that monitors and tracks potential conflicts of interest in hiring, and oversees ethics and compliance concerns for its top leaders, he said.

"I will continue to do everything in my power to ensure that the company never finds itself in a situation like this in the future," McNerney told the Senate Armed Services Committee.

Some of IDS' most significant government programs are Missile Defense, Joint Tactical Radio Systems, Future Combat Systems, multimission maritime aircraft, F-18 and C-17 military aircraft, the Airborne Early Warning and Control surveillance program and classified programs, such as Future Imagery Architecture, most of which are still in early stages, analysts said.

Boeing has not had any large program awards so far in 2006, Strauss of UBS said.

Boeing "must continue to maintain a healthy win rate in order to keep IDS healthy and growing," said E.K. Riley's Toomey. "However, given the expected slowing in the Defense Department procurement budget, IDS' revenue growth will slow over the next several years."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

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