Boeing posts big 3Q09 loss

Here is a link to the press release. The earnings call is at 10:30am EDT today. The results were no particular surprise, as the $1bn charge for the 747-8 program and $2.5bn write off on the 787 were previously announced.

Aerospace analysts were fairly sanguine about the earnings.

David Strauss at UBS wrote:

Boeing (BA): No Surprises

  • * Q3 loss of $2.22, better than expected CF: Q3 EPS at -$2.22 vs UBSe -$2.10 and consensus at -$2.12. Q3 includes $3.45 in previously announced 787 and 747-8 charges as well as an additional $0.14 for work incurred during Aug/Sep on first three 787 test airplanes. Operational results were lower than we had forecast on 9% revenue growth (UBSe 14%), including 3% growth at IDS, while 10.2% margins at BCA ex charges were above our 8.3% forecast. FCF at $1B was well above our forecast for a $350M use on working capital contribution (receivables & payables) and lower customer financing.
  • * Adjusts guidance for charges, 787 schedule reaffirmed:BA lowered its guidance by $3.40 to $1.35-1.55 to reflect the 787 and 747-8 charges. R&D guidance was increased $3B to $6.6-6.8B. $2.5B is for 787 cost reclassification with remainder to adjust BCA “operating model” and for higher IDS R&D. FCF guidance was raised $100M to >$1.2B on lower capex and customer financing. BA commented it has begun the reinforcement of the wing to the side body area and remains on track for first flight by the end of 2009 and first delivery in Q4 2010.

Joe Nadol at JP Morgan wrote:

  • We don’t see much new in the BA results this morning (although on the margin some of the underlying profits and cash flow looked good), and we don’t expect much of an update on the key issues today, particularly 787. Margins in both Commercial and Defense were a somewhat better than we had expected, and cash flow was strong, but we believe the key issue for BA remains the 787 program, and the company had nothing new to say in the release. While we expect many questions on the call to be 787-related, we are not expecting any change today to the company’s outlook for first flight by year end and first delivery in 4Q10. Potential production cuts are a secondary issue for the stock, in our view, but we don’t expect much news on this front either today.

  • *  In a noisy Q3, Boeing reported a loss of $2.23, ahead of the $2.45 loss we had forecast. EBIT from BCA and IDS each exceeded our estimate, partially offset by higher net interest expense and a smaller-than-expected tax benefit.

  • *  Excluding the $3.5 bln of charges and the incremental $772 mln of R&D over and above the $2.5 bln 787 charge, pre R&D margin at BCA was a strong 18.2%. The business had run at 17-17.5% in the first half, and we will be looking for additional info on the drivers of this performance and potential sustainability. Nevertheless, we still see several upcoming issues that are likely to push this figure down, including rate cuts, further development program delays, etc.

Noah Popanak at Goldman Sachs wrote:

GS Aerospace & Defense: Boeing (BA; Neutral): First Take: 787 schedule reiterated, cash flow solid.

  • We believe the quarter and guidance are in-line with expectations given the 787 and 747-8 items were announced intra-quarter. In our view, the significantly more important items are: (1) 787 first flight (by year-end) and first delivery (in 4Q10) were reiterated, (2) 3Q cash flow of $1.2bn was strong and full-year cash guidance was reiterated, (3) the full-year BCA aircraft financing target was reduced, (4) there is no change to any build rate schedules, and (5) all 2009 guidance excluding charges was reiterated.
  • Analysis
    We view today’s results positively and anticipate the market will do the same, as the quarter itself is largely a non-event (given the 787 and 747-8 charges were already announced), and there are other positives to point to in areas where investors have had significant concern. The most significant one is the reiteration of the 787 schedule, as there has been a lot of recent discussion in the market of further potential delays, but today the schedule was reiterated. Other major positives include strong cash flow, and a lower BCA aircraft financing target, two areas where there has been serious doubt with regard to BA’s full-year targets, and it now appears as if they will meet or exceed both.

The Conference Call:

Jim McNerney (JM)

James Bell (JB)

McNerney:

  • We are operating with better discipline on passenger 747 than freighter.
  • Side-of-body modifications on 787 are proceeding and we are pleased with progress. Static testing yet to be done. Some gauntlet testing will have to be redone. Still plans first flight in 4Q09 and first delivery in 4Q10.
  • Discipline on cash management has maintained costs. Tracking somewhat short of goal of 10,000 position reduction this year, will meet and surpass next year.
  • Market environment continues to be challenging in commercial and defense markets. BCA accommodated 85 deferrals in 3Q, 130 in 1H09 with production rate reductions/freezes on 777, 747-8, 767. No change in assessment to hold 737 production rates. Capital markets are gradually holding up, BCC financing estimate of $1bn has been reduced to $800m. Both businesses continue to face substantial challenges.

James Bell:

  • Generated $1.2bn in operating cash flow; did not acquire any shares in long-running buy-back program but paid +$300m in dividends.
  • 2009 EPS is $1.35-$1.55 share, adjusted to reflect 747/787 charges/write-offs.
  • We will have pressure on 2010 cash flow as inventory on 787 program builds, improving in 2011 as 787 deliveries begin.
  • May decide to contribute stock instead of cash to pension fund requirements in near future, relieving cash requirement.
  • R&D going up. Wants to better balance R&D between BCA and suppliers on 787 program. IDS R&D higher.
  • The remaining spending on first three flight test airplanes will be $100m in 2010. Will provide further guidance next earnings call.

McNerney:

  • The fundamental operating engine of this company is running well. When we emerge from current challenges we will be a stronger company.

Q&A

  • JM: The management challenge to getting flight test program is not insignificant for 747/787 simultaneously. We have long anticipated this overlap and have prepared for it. Combination of planning and organizational approach makes this do-able.
  • JB: We expect to have around 30 or so airplanes built by time of first delivery. (Note: Unclear if referring to only 787 or both 787 and 747.)
  • JM: Grow earnings over next 3-4 years: no doubt about two things, when we get through problems, we will have a stronger company with solid double-digit basis going forward and market-share gains with deliveries of 787 and 747. The challenge is getting through the next couple of years. This gets down to executing our plans. Get these planes into flight test program, work with partners for gross margin improvements for both of us and reduce R&D since we don’t have an imminent new program ahead of us. (Emphasis is JM’s.) The diversity of our company with a defense business that deliveries greater-than-industry-average margins and good 777-737 programs can absorb some of the near-term pressures.
  • JM: (In response to “what went wrong?”) The industry got a little overheated in 10-15 years and baselines were set up that were very aggressive and in our case there was also significant outsourcing and new technology. We experienced a bridge too far and that’s what we are trying to recover from. Going forward we will have realistic baselines that don’t try to stretch into market performance that are unrealistic. We have not had the balance right in technical oversight. We need to bring more systems engineering back into Boeing. We need greater visibility of partner supply chains and IT work. Tis list probably doesn’t totally shock you. It sounds like business practices that you should have been pursuing, but looking back we have to rebalance outsourcing. Jim Albaugh (president of BCA) is best to achieve this. There isn’t an engineering shortage in Boeing. The problem was 787 and 747 programs were supposed to be timed as complementary, but they peaked simultaneously, and that was the problem.
  • JB: (In response to $9bn pension under-funding going into 2010): We are looking at ways to mitigate funding requirements in 2010 (Note: not all $9bn is due in one chunk.) It won’t be mandatory we put cash in (may use stock).
  • JB: (In response to supplier claims and how Boeing is working through these): We’ve assumed the cost of the claims and included them in the cost of the first [50] planes, we have to look beyond these planes going forward. It doesn’t mean the claim on what suppliers put forward is what the ultimate payment will be. These claims will not be settled by year end. “Absolutely not.” This will be settled going forward.
  • JM: (Does Albaugh get a “free pass” for another delay?) Look, we are all on the same team, we are not on different teams. Jim was not un-knowledgeable of issues at BCA and he was not startled by what’s going on. He doesn’t have an “oh my God period to go through.” Having said that there is a tendency to take a fresh look at things. He does have a tiger by the tail to get 787 and 747 delivered but he has opportunities as well as challenges.  There has been no slip on the schedule. The schedule changes everyday but the original guidance we gave about flying this year. You add it all up we are still on track to fly this year.
  • JM (in response to Albaugh coming in on Sept. 1 and EIS): Albaugh has accepted the flight test program and the production program. The flight test program can produce issues we have to deal with and he will deal with it. Jim didn’t come into the job and come to me and say the flight test schedule isn’t right or production schedule isn’t right. He’s focused on getting job done now.
  • JM (concerning deferrals): I think the risk to the 777 has been taken into account with production rate change announced earlier. Deferrals about what we thought it would be. On 737 deferral rate requests have stayed about the same and we just don’t see, when you add it all up, and an overall trend that is not worsening, and financial markets getting more robust, airplane-by-airplane, customer-by-customer, we don’t see a need to change rates. Deferral pressure tends to move incrementally more planes out than in. I don’t see us pulling demand into 2010 from 2011/12. The fact that we feel comfortable holding it in 2010 is a sign of strength.
  • JM: Flight test airplanes: one a month following EIS of #1 in 4Q09. (NOTE: If first flight is December 2009, a date considered most likely if a 4Q09 first flight is met, having the first delivery in 4Q10 is challenging. Not having all six flight test airplanes in service until May or June is highly significant. It has been assumed by aerospace analysts that all six have to be in service by the end of February to meet a 4Q10 EIS.)
  • JM: (On the tanker). We will have some comments for USAF where RFP can be improved. The playing field is not level with respect to WTO ruling which will enable (them) to take more risk than I came. This is one area we are probing very heavily. (NOTE: This is significant. The USAF said it will not take the WTO ruling into account; it has been alleged by Boeing supporters that $5bn in more Airbus costs should be added to the Northrop cost-basis. McNerney is hinting by his answer that Boeing is going to press this point.)
  • JM (on 787 Line 2): We started with pretty broad playing field on where but we are really down to Everett and Charleston as a choice. We are sorting through that now. We should expect a decision in next couple of weeks. (In response to assertion Charleston adds risk, duplication): It’s a fair question. There would be execution challenges associated with that choice. We have a pretty good sized operation there today. There would be some duplication. Diversifying our labor pool and labor relationship has some benefit. The IAM and company have had trouble figuring out that relationship in the past and I have got to figure out how to minimize that risk. Our balance sheet would be in better shape than if we did not have a strike last year. Our customers would be happier if no strike last year. The 787 program would be in better shape than if there had been no strike. It’s not all IAM fault, it’s ours too. Discussions with IAM are occurring on a regular basis and tone is positive. We see how they end up.



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