The Boeing Co. (BA) has declared the formation of a new organization – BDS Development – as part of the restructuring of its defense and space business. The move is expected to enhance product efficiency and lower costs for Boeing’s defense customers in addition to maintaining delivery schedules.
The new organization will take over six key programs that are presently managed elsewhere. BDS Development is similar in design to the Airplane Development Organization at Boeing Commercial Airplanes, which oversees the development of commercial airplanes.
The recent move to revamp its defense unit by BDS CEO Chris Chadwick has been made to keep proper track of its troubled $52 billion KC-46 aerial tanker. After several technical snags, there have been rising concerns as to whether Boeing will be able to meet the deadline of providing the U.S. Air Force with 18 KC-46 refueling planes by Aug 2017.
According to the CEO, the new organization will enhance cost efficiency and scheduled performance, while allowing effective application of engineering expertise, program management and integration of key development activities.
Apart from the KC-46 aerial refueling tanker program, the new organization will also oversee the Air Force’s program to build the presidential aircraft. The CST-100 spacecraft for National Aeronautics and Space Administration’s (“NASA”) Commercial Crew program, NASA’s Space Launch System rocket designed to ferry humans beyond Earth’s orbit and Boeing’s 502 small satellite efforts will also fall under the purview of BDS Development. BDS Development will also oversee work on Boeing’s 777X commercial airplane.
The BDS segment reported a 14% year-over-year fall in quarterly revenues to $7.8 billion in the fourth quarter of 2014. Nevertheless, the segment’s operating margin expanded130 bps year over year to 12.1%.
Chadwick has initiated several restructuring measures to cut costs and enhance efficiency after taking charge of the unit in late 2013. Boeing’s decision to exit from the commercial cybersecurity business was Chadwick’s effort to cut costs and lay emphasis on core capabilities. (Read more: Boeing to Exit from Commercial Cybersecurity Business)
Management has set a target of reducing operating costs by $2 billion and enhancing product affordability. With Chadwick at the helm, Boeing's restructuring process and cost savings will likely drive growth at the segment, going forward.
Also, the U.S. Department of Defense's FY16 budget proposal lays special emphasis on space, missile defense, and cyber security on account of rising security threats. Additionally, the proposal has sought funding for the development of the KC-46 tanker. With this, Boeing will likely witness a boost in order flow at its defense unit, which will both reduce costs and improve earnings.
Boeing currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include Engility Holdings, Inc. (EGL), Rockwell Collins Inc. (COL) and Spirit AeroSystems Holdings, Inc. (SPR), each carrying a Zacks Rank #2 (Buy).
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