The worst would be the extremely unlikely event that "sequestration" actually occurs, cutting $500 million in defense spending over 10 years, on top of the longer-term downward trend in defense spending as the wars in Afghanistan and Iraq wind down.
"As we look forward to where the U.S. budget is headed, at a minimum expected a $500 billion reduction over 10 years, and a maximum of a trillion over 10 years," said Dennis Muilenburg, CEO of Boeing Defense, Space & Security, at a recent Bank of America/Merrill Lynch investor seminar. The latter would include the impact of sequestration.
"We are assuming that worst-case scenario, designing our cost structure to accommodate a $1 trillion cut," Muilenburg said. "We are preparing ourselves and have been preparing ourselves for that worst-case budget scenario."A congressional "super committee" on Monday may announce it has failed to reach an agreement on deficit spending that would trigger automatic across-the-board spending cuts to a wide variety of domestic programs and the Pentagon budget, starting in January 2013. If the worst-case scenario does not occur, Muilenburg said, that creates opportunities. But Boeing, he added, knows what other successful companies know, that "in a defense down cycle budget cycle, it's very important to not hunker down," but rather to invest. Boeing's other strategies, which it has frequently discussed during the past year, include an effort to expand international defense and security sales in order to offset the decline in U.S. sales. Boeing spokesman Dan Beck said 83% of BDS revenue, which totaled $32 billion in 2010, is from government contracts, with the vast majority from the defense department. About 17% of BDS revenue is from international sales: The unit's goal is that international sales will generate 25% to 30% of revenue by 2013. Additionally, Boeing has sought to expand into other related businesses including security, intelligence and energy management at military bases. And of course, Boeing is shielded from declines in defense spending by its vibrant commercial aviation sector, which accounts for about half of revenue. BB&T Capital Markets analyst Carter Leake said that while defense contractors face obvious challenges from the current defense environment, Boeing appears to be better positioned than many of its peers. "We are not naïve to the fact that all of the global defense suppliers can't all be right when they say increased international sales will be their savior, but if we look at the big, upcoming international fighter opportunities, Boeing's platforms are clearly the next best choice," Leake said.
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