September 07, 2010

Article at Reuters

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Boeing cuts costs as defense outlook dims

WASHINGTON (Reuters) - Boeing Co's BA.N defense unit is working to cut overhead and improve productivity, given the outlook for flat defense spending in the United States and Europe, the company's top defense executive said on Tuesday.

Boeing expects to expand international sales and grow in areas such as cyber security and unmanned systems, Dennis Muilenburg, chief executive of the defense, space and security division, told the annual Reuters Aerospace and Defense Summit in Washington.

He said Boeing’s defense unit expects moderate growth in coming years, with international sales, expansion into adjacent markets, and acquisitions to help offset flat defense spending in the United States and Europe.

“It’s a challenging environment but also one in which we see a lot of opportunity,” Muilenburg, 46, told the Reuters Summit, noting that he expects stable funding for two Boeing programs that the Pentagon cut sharply last year -- a big Army modernization program and ground-based missile defense.

He said there would be fewer new program starts and some programs could be delayed, putting pressure on defense companies to cut costs and streamline their operations.

As part of that effort, Boeing on Tuesday said it is consolidating its military aircraft business from six divisions down to four, saying the move should position the company for further growth over the next decade.

The move will result in a 10 percent cut in the number of executive positions at the company, with additional cuts expected at all levels of the organization in coming months, Boeing said in its announcement.

Muilenburg said Boeing is also actively looking at potential acquisition opportunities in response to a changing security environment and will not rule out a merger with another large defense contractor.

Boeing continues to look at high-growth areas such as cybersecurity, intelligence and surveillance and unmanned systems for potential deals and will make targeted acquisitions in those areas.

“We continue to see acquisitions as an opportunity area for us. It’s one of the tools that we use to grow,” said Muilenburg, chief executive of Boeing’s defense, space and security division.

The company is not interested in the shipbuilding unit of Northrop Grumman Corp NOC.N, Muilenburg said, when asked if Boeing were interested in acquiring any part of Northrop.

Pressed if that could include any non-shipbuilding parts of Northrop, Muilenburg said: “I’m not going to rule out or rule in any options.”

“Obviously as we see defense budget pressure, that does at times lead to potential consolidation,” he said, adding that any merger of large defense players would likely result in a comprehensive antitrust review by the U.S. government.

Given the Pentagon's drive to lower costs and overhead, Muilenburg left open the possibility of Boeing lowering the price of its proposal for a new U.S. Air Force refueling plane should the government ask the bidders to submit final proposal revisions. Boeing is competing against Europe's EADS EAD.PA for the contract, valued at up to $50 billion.

The Boeing executive said he expects the Air Force to pick a winner in the competition this fall.

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