Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing announced 4Q, YE2009 results
Boeing announced its 4Q and year-end 2009 results today. Here is a link to the press release. The earnings call is at 10:30 EST. We’ll have our usual running account when the time comes.
Here are some initial takes from analysts:
David Strauss of UBS:
Boeing (BA): Guides Well Below with Negative FCF
- Q4 at $1.50 ex low tax rate: BA reported Q4 EPS at $1.77, including approximately $0.27 from a lower tax rate, vs UBS at $1.43 and consensus at $1.36. Upside mainly from better than expected 11.1% Commercial Airplanes (BCA) margins partially offset by weaker margins at Defense on AEW&C charge ($0.10-0.15). FCF better than expected at $3B on relatively flat working capital despite $900M inventory build. BA did not repurchase any shares in Q4.
- 2010 EPS guidance at $3.70-4.00: Initial 2010 EPS guidance at $3.70-4.00 below UBS at $4.15 and consensus at $4.19. Guidance reflects 460-465 BCA deliveries including handful 787s. BCA margins at 6.5-7.5% as compared to 10% in 2009 on lower deliveries and worse mix. Defense forecast 3-4% lower with relatively flat margins. R&D forecast relatively flat (ex 2009 charges). FCF forecast at negative $1.9B with OCF breakeven on further inventory build. BA noted that OCF will improve to >$5B in 2011 on lower R&D and higher deliveries.
Joe Nadoll of JP Morgan:
As we expected, Boeing guided for 2010 EPS of $3.70-4.00 (JPME-$3.80), below consensus of $4.25, with commercial R&D and lower defense sales pressuring earnings. Boeing also guided for $0 of operating cash flow in 2010, as previously indicated. The key piece of new information this morning is management’s guidance for operating cash flow to exceed $5 bil in 2011, as we have not been expecting cash to bounce back so fast. Key determinants of 2011 cash flow will be progress on 787 and commercial production rates, and we will seek more info on the assumptions behind this guidance on the call.
Noah Popanak of Goldman Sachs:
- GS Aerospace & Defense: Boeing (BA; Neutral): First Take: Mixed 4Q09 results from BA; positive read-across to SPR
- We believe the read is positive for SPR: (1) lack of a 737 cut gives us increased confidence that SPR will provide initial 2010 guidance 10%-15% above consensus (which we believe still embeds some revision on 737) when it reports next Thursday, (2) BA expects to generate breakeven cash from ops in 2010, but $5 bn of CFO in 2011, which would imply FCF/NI well above 1.0X, and our sense is the consensus expects another weak year of cash generation for BA and SPR in 2011, (3) reiteration of the 787 schedule.
- We believe the read is negative for NOC, as BA took a $130 mn charge on AEW&C, a program where NOC has had challenges and taken charges in the past.
Analysis
- Boeing reported 4Q2009 EPS of $1.77, ahead of consensus of $1.35, largely driven by a stronger than expected EBIT margin at BCA (11.1% vs our 7.1% estimate). The company provided initial 2010 EPS guidance of $3.70-$4.00, below consensus of $4.20; the variance appears due to (1) higher than expected R&D at BCA, (2) a 6% revenue decline at IDS (at the mid-point). BA expects 2010 cash from ops of breakeven, but more importantly (and why the stock likely trades higher) it provided a 2011 cash from ops target of greater than $5bn. Boeing also expects BCC to finance less than $500 mn of new aircraft in 2010, further evidence that aircraft financing markets are improving.
Earnings Call Begins
James McNerney: JM
James Bell: JB
JM: There is no question the 787 side-of-body issue and the 747 delays significantly impacted financial results. The 787 has a level of technological advancement not seen since the 707. Initial stall tests and other dynamic maneuvers have been completed. There is much work to be done and challenging days ahead.
- Third and fourth flight test airplanes in service in February, final two by the end of the second quarter.
- 747-8: first flight and start of test program in very near future, first 747-8F delivery by year end and 747-8I in 4Q2011. Sees strong future for this airplane.
- P-8A made first flight this year.
- Incorporating lessons learned across the company.
- We are pleased with international interest with C-17 and Congressional support.
- We continue to face challenging marketing environment. It will take some time for economic indicators to rebound. Had 271 deferrals in 2009, more than 100 cancellations. No change in production rate plans; to hold 737 rate at present for foreseeable future. We remain oversold in 2011 with a strong customer base. No need to do bad business deals to maintain rates.
JB: 787 program is not in a forward-loss, taking into account of side-of-body, R&D, all other expenses; and accounting number (Editor’s Note: break even, which was not revealed). We will continue to assess program profitability prior to first delivery and provide update.
- Boeing Capital financed about $800m in aircraft in 2009, expects less than $500m this year.
- Contributed $1.5bn in Boeing shares to pension plan, about 80% that required.
- Issued $5bn in corporate debt in 2009, BCC $1bn in new debt offset by $500m paid-down debt. Boeing generated more than $5bn in cash.
- Has ample liquidity to pursue new programs and market uncertainties.
- Delivery forecast 460-465 airplanes; sold out in 2010. Expect to deliver first 787s this year.
- Cash flow is forecast to be zero this year, to rebound to more than $5bn next year with 787 deliveries.
- 2010 R&D $3.9bn-$4.1bn this year. 2011 to decrease by more than $500m to reflect lower 787/747 costs but potential investments in 777 and 737 programs. (Editor’s Note: decisions to re-engine, replace or enhance these airplanes are expected this year and next.)
- 2011 results will be drive by how commercial and defense markets evolve; R&D on new programs; success in growing services business lines.
- No receipts this year from supplier cost-sharing.
JM: Key priorities continue to be getting 787 into hands of customers; repositioning defense; maintaining lead in innovation; preserving financial strength.
Q&A Begins
JB: Commercial skyline in 2011 looks good, predominately sold out, oversold, looks good.
JB: Looking at just a few deliveries for 787 and 747s, reduced deliveries on 777.
JB: R&D guidance takes into account the puts and takes on no new wing for 787-9 and no customers for 787-3. No large savings in the cost base, though. Profitability differences on first deliveries will be huge from an accounting perspective. Costs will be larger than $2.5bn written off for first three test airplanes. (Editor’s Note: no additional detail available.)
JB: Deliveries will be lower next year by about 20 widebodies.
JM: Progress in Charleston in terms of facility coming on line for production to begin in 2011, deliveries in 2012, will be benchmarks to watch on 787 program. Deliveries by YE10 another benchmark.
JM: 2010 orders forecast book-to-bill to be below one, but doesn’t provide better detail. Customer discussions not slowing down, at good level and a little stronger than 2009.
JM: R&D guidance for 737/777 characterized as maturing technologies for both efforts but doing pretty detailed thinking for product alternatives, including re-engining 737, which is under active consideration. On 777 still need to wait and see what A350-1000. 737RE decision will have to be made quicker than 777.
JM: On 787 weight question we have block improvements as we march through initial production quantities. We don’t anticipate any major modifications resulting from the flight testing program. We have not discovered anything significant in design. There is still risk of something being discovered we don’t anticipate.
JB: We reveal accounting quantity once deliveries begin.
JM: Q. If re-engine the 737, what will impact be on existing customer base? A. There is always this tension when new technology is introduced. It is this customer base that is pushing for an RE or in some cases a completely new airplane. Airlines are focused more on productivity.
JM: Discussion today with most customers remain about moving delivery positions around, though some are moving things forward who take over others’ deferrals.
JB: We have liquidity we need to get through the development and ramp up of 787 and 747 programs. Repositioning defense is a high priority. No share repurchases until 2011.
JM: Defense: continued growth in services, strong growth on international, accelerated growth in adjacent markets and some platforms offset by F22, Joint Combat System, but overall see some momentum.
JM: (The biggest issue on ramp up): the supply chain has settled down, all the trends are good. Getting through flight test, getting into a position to delivery by year-end. There is a lot less risk on supply chain than I would have said a year ago.
JM: Overall financial system is in better shape (for customer financing) than anticipated a year ago: commercial banks, capital markets, leasing companies, are all better than a year ago. When you add it all up, various financial sources are in better shape than anticipated. Slight growth in Chinese financing sources to support their volumes there. Leaves less of a requirement for the OEM.
JM: Deferrals and cancellations are trending down. Sold out in 2010, overbooked in 2011. There is continued strength beyond that.
JM: Will have close to 30 787s in inventory as deliveries begin (fewer than 10 will be delivered by YE).
JM: To get 747 out of loss position, hope for additional volume, sales at new prices. We remain confident in the marketability for the airplane. There is a huge 747-400 base out there and there is a big opportunity to sell to this base, work with supply chain. We are confident this airplane will do well. the mix of freighters vs. pax is tough to project given current market conditions. But we are seeing discussions pick up on passenger side. If we achieve half the market…there will be no problem with profitability.
JM: A400M problems provide opportunities for C-17. Wedgetail is seeing new international interest as delivery gets closer. There will be a significant market for this airplane.
“Has ample liquidity to pursue new programs ”
“787 program is not in a forward-loss”
BULL.
The fiirst statement is an outright lie, and the second is all deliberate, calculated, accounting legerdemain.
“Progress in Charleston in terms of facility coming on line for production to begin in 2011, deliveries in 2012”
That’s a pipe dream and anyone with any common sense at all knows it. Pure fantasy. If it’s not a bald faced lie then JM is self dellusional to such a degree that his already questionable leadership is well, even more questionable. That’s a poor way of saying he should be removed, but saying that in those terms is a waste of time, because BA’s board is so hands off as to be more of a supper club than a shining example of corperate governance.
“Costs will be larger than $2.5bn written off for first three test airplanes.”
Really? Whodathunkit that BA execs can’t establish the cost of an airplane? If they don’t know what the first three cost them, I sincerely doubt they have the first clue as to what revenues from deliverd units will actually be. Wait. didn’t they they take a charge against earnings in Q3 for the three? Is this a cryptic warning of another charge to come?
“To get 747 out of loss position, hope for additional volume”
Not a real confidence builder there Jim. You are a CEO. I don’t want hope out of you, I want results. Thats what you are vastly overpaid to do.
I’m less impressed by the day with these guys, their track record is poor, and thier credability is weak.
They just don’t understate the risks the company is currently undergoing, they don’t adress them at all. This is just another typical rosy scenario quarterly from JM and JB, just enough for a few big money managers to latch onto. For the rest of us, those who really understand, it’s just in one ear and out the other.