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Boeing's Defense Business Gets More Transparent

By Rich Smith - Updated Jun 26, 2017 at 10:20AM

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Drones, helicopters, fighter jets, and spaceships will soon each have their own separate divisions within Boeing.

Boeing (BA 2.23%) builds a lot of stuff.

Its most famous stuff -- 737, 747, 777, and 787 airliners -- make up the most visible parts of Boeing's business. At more than $65 billion in annual sales, such commercial airplanes also comprise nearly 69% of Boeing's annual revenue stream.

But Boeing also does big business in noncommercial airplanes, and that part of the business has become increasingly difficult to parse in recent years.

AH-64 Apache attack helicopter

What does this look like to you? To Boeing, it used to be a "military aircraft." From now on, it will be a "vertical lift" product. Image source: U.S. Army photo by Tech. Sgt. Matt Hecht.

Boeing's military garage

Outside of commercial airplanes, Boeing maintains three separate defense, space, and security divisions , plus a smaller Boeing Capital business for financing airplane sales and leasing. Over time, though, these divisions have become somewhat cluttered as old businesses fall away and new businesses get added to the mix.

For example, Boeing military aircraft, which you probably (and rightly) assume covers the manufacture of such things as F/A-18 and F-15 fighter jets, also includes sales of Boeing Apache helicopters, drones, and even missiles and bombs. The company's network and space systems division includes everything from ground-based communications systems to satellites to space probes. And Boeing's global services and support feels like a grab bag of whatever doesn't quite fit anywhere else in the mix.

And so, to streamline its business and "boost competitiveness" (and, as a side benefit, make Boeing stock a bit more comprehensible to investors), Boeing has decided to do a bit of spring cleaning this summer and reorganize its garage of noncommercial aircraft parts.

What's changing

Earlier this month, Boeing defense, space, and security head Leanne Caret announced that two of Boeing's big defense units, military aircraft and network and space systems, will be broken up, and broken down, into the following four divisions:

  • Autonomous systems. This unit will be responsible for producing ScanEagle and Integrator drone airplanes and A160 Hummingbird drone helicopters, along with Wave Glider unmanned surface vehicles and Echo unmanned undersea vehicles for the Navy.
  • Space and missile systems. Both missiles and missile defense will shift over from their current home in military aircraft to this more logical abode. In addition, space and missile systems will be responsible for space launches through Boeing's United Launch Alliance joint venture with Lockheed Martin, for building and operating satellites, and for the biggest man-made satellite of them all -- the International Space Station.
  • Strike, surveillance, and mobility. This is where you'll find Boeing building F-15 and F/A-18 fighter jets, and P-8 Poseidon maritime patrol aircraft as well. Maintenance and upgrades of Boeing aircraft will also fall under SSM's ambit. 
  • Vertical lift. At long last, Boeing will break out its helicopters separately from other military aircraft. AH-6i light attack and AH-64 Apache heavy attack helicopters will reside here, along with CH-47 Chinook transport helicopters, and the V-22 Osprey tilt-rotor aircraft jointly built with Textron.

What's not changing

Boeing advised that it is leaving its development, global operations, and Phantom Works segments "largely ... unchanged" but did not specify precisely where they will reside under the defense, space, and security umbrella. Boeing also didn't mention any changes to its global services and support division -- which may mean this is where you'll find those segments going forward.

What it means to investors

As far as we know, Boeing's move will have no effect on sales, earnings, or free cash flow. While management says 50 executive positions will be "affected" by the reorganization, it doesn't say specifically that layoffs or severance payments will result, and no charges to earnings were mentioned in connection with the reorganization.

The only real effect, therefore, would seem to be that Boeing's business is going to get a whole lot more transparent as a result of this move. With two divisions becoming four, sales and operating earnings (and operating profit margin on those sales) will now be broken out in twice as much detail as before. This will make it easier for investors to predict the impact on profits when Boeing books a new order for Apache helicopters, for example, versus one for F/A-18 fighter jets.

For investors, I think that's good news.

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