Boeing Projects Stability for Satellite Maker

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Boeing’s commercial satellite division lost some $200 million in 2004 on about $1 billion in revenue, but appears on track to break even in 2005, Boeing managers said in separate remarks to financial analysts.

These officials said the spacecraft that have caused Boeing’s El Segundo, Calif.-based satellite manufacturing division problems the past two years are now nearing the end of production, permitting the division to return to financial stability.

For the three months ending March 31, Boeing’s Launch and Orbital Systems division reported $802 million in revenue and operating earnings of $95 million, for an unusually high earnings margin of 11.8 percent. Launch and Orbital Systems is responsible for Boeing commercial satellites, Delta launch vehicle development and Boeing’s NASA work.

The division’s performance in the quarter was buoyed by two events. The first was the sale of Boeing’s Electron Dynamic Devices division, a maker of satellite subsystems, to L-3 Communications of New York, for which Boeing gained $25 million.

The second event was the U.S. Air Force’s lifting of the contract suspension of Boeing’s launcher division, which permitted Boeing to book contracts related to its Delta 4 rocket launch pad.

Boeing Chief Executive Officer James Bell said the company expects Launch and Orbital Systems to report almost no operating profit for the rest of the year. “One quarter does not a trend make,” Bell said in an April 27 conference call. “The NASA business is continuing to create decent margins and they are somewhat mitigated by the satellite business. We’re expecting the satellite business to sort of break even, and the launcher business to stay pretty stable going forward.”

Jim Albaugh, president of Boeing Integrated Defense Systems, which includes the space division, said May 3 that commercial satellite production, which is expected to account for one-third of the Launch and Orbital Systems division’s revenue , appears to have turned the corner.

“I’m not going to tell you that without question we’ve solved all our problems in our satellite factory,” Albaugh told an investors’ conference in New York organized by Bear Stearns. “But we’ve had two pretty solid quarters and I’m starting to gain some confidence that the team down there has their arms around the issues.”

Albaugh said IDS reported an operating earnings margin of 9.6 percent in 2004, despite the fact “we lost a couple of hundred million dollars in commercial space,” and added that he expects a 9.8 percent earnings margin in 2005 for all of IDS. The Launch and Orbital Systems Division reported a loss of $342 million on sales of $3 billion in 2004.

Boeing also owns 40 percent of Sea Launch LLC of Long Beach, Calif., which targets the commercial market and operates a Russian-Ukrainian-Norwegian launch system from a floating platform in the Pacific Ocean. Boeing continues to reduce its future potential exposure to Sea Launch losses. As of March 31, Boeing’s total maximum exposure to Sea Launch — mainly credit guarantees to Sea Launch creditors — was $183 million, Boeing stated in an April 27 filing with the U.S. Securities and Exchange Commission.

The filing also suggested that Boeing, which was responsible for the manufacture and launch of the first two DirecTV Group Spaceway Ka-band satellites, has been unable to secure launch insurance at acceptable rates for the two satellites.

The first Spaceway satellite was successfully launched April 26 by a Sea Launch vehicle. The second is scheduled for launch this summer aboard an Ariane 5 ECA rocket that will be attempting its first successful commercial launch. Boeing said the potential uninsured amount for a Spaceway launch “could range between $65 million and $315 million, depending on the nature of the uninsured event.”

Boeing valued its launch of Spaceway 1 aboard a Sea Launch rocket at $315 million, including the cost of the rocket and the satellite, but was able to secure only $250 million in insurance because of market-capacity limitations and the rise in insurance premiums. The company is not insuring the $315 million Spaceway 2 satellite’s launch aboard the Ariane 5 ECA vehicle, tentatively set for late June, because the rocket’s lack of a track record makes insurance unavailable at reasonable rates, according to Boeing officials.