Boeing Co. warned investors Oct. 26 that the loss of part of its multibillion-dollar Future Imagery Architecture (FIA) contract to build U.S. radar and optical spy satellites will affect its financial performance in 2005 and beyond.
But the company also said it expects to remain prime contractor for the program.
In a filing with the U.S. Securities and Exchange Commission (SEC) and in a presentation to financial analysts, Chicago-based Boeing said it took a $150 million charge against its Network Systems division’s earnings for the three months ending Sept. 30 because of expected higher costs and lower revenues associated with FIA and a second, unnamed military satellite program.
In recent months, government and industry officials have said Boeing’s three-satellite Wideband Gapfiller military communications satellite program had been delayed because of manufacturing and assembly defects found in the first satellite.
Boeing Chief Financial Officer James A. Bell said the company had a “quality issue” with the unnamed military satellite program but that the issue affected only one satellite.
“We had a quality issue that we know we’ve fixed,” Bell said. “We don’t have that same problem on the remaining satellites under that program. We think the quality problem is behind us.”
The most recent Wideband Gapfiller issues are not the first. Boeing recorded a $265 million charge against its second-quarter 2003 earnings because of manufacturing issues with that program and with three other satellite programs.
How much of its FIA contract Boeing will lose remains unclear. The U.S. National Reconnaissance Office on Sept. 28 issued a partial stop-work order to Boeing as part of a restructuring of the classified program, an event Boeing said it assumes will lead to a cancellation of some of the scheduled work.
Boeing said in its SEC filing that its current estimate is that the lost FIA revenues will be less than 1 percent of total company revenues in 2005, expected to be $55.5 billion, and less than 2 percent of “annual forecasted revenue.” Boeing is forecasting $62 billion in 2006 revenues, meaning its FIA-related revenue loss would be less than $555 million in 2005 and less than $1.2 billion in 2006.
“If the final cost and fee turn out to be materially different than our current assessment, it could impact our financial performance,” Boeing said in the SEC filing.
Bell said Boeing remains FIA prime contractor.
“These are very, very technically complex programs and I might point out that none of the incumbents have done even as well as we have done on the one we’ve have problems on,” Bell said. “Having said that, we made a commitment and we didn’t meet that commitment. We are still prime contractor, and there is still substantial work remaining. Clearly we’re going to have to focus on improving our performance going forward. This is very complex work. It’s invention. That’s why this contract is a cost-type contract. You’re going to learn as you go, and in learning sometimes you find yourself more challenged than you thought. That’s where we ended up on this program.”
Boeing also has issues in its commercial satellite programs that may be costly. The Spaceway 2 Ka-band satellite built for DirecTV Group of Los Angeles is scheduled for launch Nov. 9 aboard the second qualification flight of Europe’s Ariane 5 ECA rocket. Boeing has not fully insured this launch. In the event of a launch or satellite in-orbit failure, the company could face a liability of between $65 million and $315 million, Boeing said in the SEC filing.
Boeing said it has another commercial satellite program “that could expose us to a TFD [termination for default] notification risk of $137 million.” The company did not name the satellite, but that figure corresponds to the approximate contract value of the Measat-3 telecommunications satellite Boeing is building for Measat Global of Malaysia.
Measat-3’s contract delivery date was between May and November 2005. Boeing spokeswoman Marta E. Newhart said the satellite is now expected to be delivered in January.
Boeing said it is unlikely its customer will cancel the contract and that “continuing contractual efforts” are being made to avoid that possibility.