* 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.
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
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.