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Boeing Restructuring Shows Industry Strain

By | July 28, 2003

      Boeing’s [NYSE: BA] realignment of its launch and satellite businesses last week is another sign of how the industry’s downturn is causing even one of the largest, most diversified companies to cut staff and operations.

      The company is cutting way back on its commercial space businesses and focusing on its business with the U.S. government. At the same time, Boeing’s U.S. government business could be jeopardized by the U.S. Air Force’s decision to punish the company over misconduct in competing for military satellite launch contracts.

      The reality is that the commercial space market has “eroded” to a point where it is no longer a driving force in either Boeing’s satellite or launch services business, explained Jim Albaugh, president and CEO of St. Louis-based Boeing Integrated Defense Systems.

      “In the commercial space segment, we’ve seen the market dip to historic lows and do not expect a near-term recovery,” Albaugh said. “In addition, we have had performance problems in this area.”

      Richard DalBello, president of the Satellite Industry Association, commented that the “recent restructuring reflects the reality of the current marketplace and is meant to provide a leaner, more focused management approach to implementing these businesses.”

      Earlier this month, Boeing announced that it would take a pre-tax, second-quarter charge of $1.1 billion, or 87 cents a share, due to weakness in the commercial space launch market, higher mission and launch costs for its Delta IV program, and cost increases in its satellite businesses. Approximately $835 million, or 66 cents per share, of the charges are attributable to the company’s Delta IV program and reflect its significantly lowered assessment of global demand for launch services. The reduced volume cuts the profitability of contracted launches.

      The charge also reflects higher mission costs, primarily related to government launch requirements. A hit of approximately $265 million, or 21 cents per share, has resulted from Boeing Satellite Systems’ higher cost estimates to complete several satellite programs and take write-downs of commercial inventory in recognition of current market conditions.

      Roughly $135 million of the total charge is from non-cash depreciation and inventory adjustments, while cash outlays associated with the remaining $965 million of charges will be incurred over the next seven years as the affected launch vehicles and satellites are completed and delivered.

      Among last week’s restructuring moves, Boeing Satellite Systems will be consolidated into Space and Intelligence Systems. Dave Ryan, vice president of Boeing Satellite Systems, will continue to lead the satellite manufacturing unit but now reports to Roger Roberts, senior vice president of Space and Intelligence Systems.

      In addition, Boeing’s Expendable Launch Systems unit, which builds and operates the Delta family of launch vehicles, is being consolidated with its Air Force Systems unit in order to cater primarily to the U.S. Air Force. Will Trafton, general manager of Expendable Launch Systems, now reports to George Muellner, senior vice president of Boeing’s Air Force Systems.

      In addition, Rocketdyne Power and Propulsion, the builders of the Space Shuttle main engine and the power generation systems on the International Space Station, will become part of Boeing’s NASA Systems unit. Byron Wood, vice president and general manager of Rocketdyne, now reports to Mike Mott, vice president and general manager of NASA Systems. The new chain of command will enable Boeing to better support NASA as a customer for human space flight operations, exploration, and the emerging nuclear propulsion business, company officials said.

      These changes coincide with the creation of the Integrated Defense Systems Office of the President and the appointment of Dave Swain, a Boeing executive vice president and former chief technology officer, as the unit’s chief operating officer. Swain has held various leadership positions within Boeing Phantom Works, and the company’s military aircraft, missiles and transport businesses.

      Swain will focus on “operational excellence,” Albaugh said.

      –Paul Dykewicz

      (Richard DalBello, Satellite Industry Association, 703/739-8357)

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