Boeing says prepping for further U.S. budget cuts

Tue May 15, 2012 4:16pm EDT

* Boeing cuts workforce, overhead costs to maintain margins

* Company sees slowdown in some government orders

* Boeing: $1 trillion cut in U.S. defense spending possible

By Andrea Shalal-Esa Boeing Co is paring its workforce, consolidating facilities and cutting overhead to prepare for the "distinct possibility" that U.S. defense spending will be cut by a total of $1 trillion over the next decade, the head of the company's defense business said on Tuesday.

The defense division has already shed about 8,000 of 60,000 jobs over the past 18 months, but most of those people had shifted to positions in the commercial sector, where revenues are still rising, Dennis Muilenburg, president and chief executive officer of Boeing Defense, Space and Security, said on a webcast of the company's annual investor conference.

He said Boeing's defense business has already cut the number of executives by 15 percent and lowered overhead costs by 20 percent as part of a drive to improve productivity.

That should allow Boeing's defense business to maintain profit margins in the high single-digit range, he said, even if $500 billion in further budget cuts are piled on top of $487 billion in cuts that are already set to take effect in fiscal 2013 and the following nine years.

Muilenburg said the Obama administration's fiscal year 2013 budget plan cut Pentagon programs by 13 percent, but Boeing programs were cut by only about 4 percent. If $500 billion in additional spending cuts took effect in January as planned, Boeing expected to see about double that impact, he said.

"A $1 trillion defense-budget reduction in the U.S. over the next 10 years is a distinct possibility, and we are sizing our cost structure actively to prepare ourselves for such a scenario," he said, adding that it was more important than ever for the company to deliver weapons programs on time and on cost.

PREPARING FOR WORST-CASE SCENARIO

Boeing Chief Executive Jim McNerney said earlier in the day that the company still believed lawmakers could take action to avert the additional spending cuts known as "sequestration," but felt it was prudent to prepare for them just in case.

Boeing and other U.S. weapons makers are bracing for the fallout from further, automatic spending cuts that are due to take effect in January 2013 after Congress failed last year to find $1.2 trillion in other deficit-reducing savings.

In January, Boeing said it was closing its Wichita, Kansas, plant, eliminating more than 2,100 jobs.

Over 2,300 workers in the aerospace and defense sector lost their jobs in April, bringing the total for the year to date to 10,102, according to the most recent data from Challenger, Christmas & Gray, a Chicago-based consulting firm that helps displaced workers find new positions.

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Muilenburg cited a "general slowdown and murkiness" in the government budget process, noting that some contracting officers were holding off on orders until the future outlook was clearer, while others were accelerating orders while they still could.

"In the face of all of that uncertainty, to manage our risk as a business, our position is to assume that sequester will happen ... and size our cost structure to accommodate that so we can meet our margins," Muilenburg said.

He noted that Boeing, which reported a profit margin of 9 percent in the first quarter, found its margins under pressure every time it negotiated a fresh multi-year contract with the government.

Overall, he said Boeing was well positioned in areas such as unmanned vehicles, cyber security and military satellites that were expected to see continued growth and investment even as the total level of military spending declined.

He said Boeing defense had a backlog of $72 billion at the end of March.

Last week, the U.S. House of Representatives passed a Republican measure to halt the automatic cuts by cutting social safety net programs instead.

No Democrats supported the measure, which would be unlikely to pass the Democratic-controlled Senate and is facing a veto threat from President Barack Obama.

Defense Secretary Leon Panetta warned at a news conference that Congress was headed toward a stalemate on the issue that could result in a failure to stop the looming cuts.

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