Boeing earnings: strong 3Q, 9 months, first look at Global Services

Oct. 25, 2017: Boeing announced strong earnings for the third quarter and nine months ending Sept. 30, including the first break-out of Boeing Global Services.

The press release may be seen here.

JP Morgan’s initial take:

Boeing’s Q3 report looks solid and largely meets our expectations on several fronts including implied cash flow and core EPS for 2017 and (we believe) 787 cash flow. The stock has performed well into the print, however, and so it is not clear that modestly higher guidance will drive much outperformance today. Boeing took another tanker charge (~$250 mn), but this is not a major surprise and lower R&D roughly offsets the EBIT impact.

  • BA raised FCF guide $250 mn to >$12.5 bn. This new guidance is about in line with our expectations into today, and given a track record of beating guidance, Street estimates could move modestly higher. The new guide implies just over $2 bn of Q4 cash from ops, which would be down y/y, but Q3 beat our estimate by $900 mn and cash flow is lumpy. Given Boeing’s guidance for annual cash from ops growth through 2020, each boost to 2017 raises the baseline for future growth.
  • Core EPS move up 10c to ~$10.00 at the midpoint. Sell-side estimates are already here, and so we could see consensus move a bit higher. Boeing took a ~$250 mn charge on the Tanker, but this is more than offset by lower R&D expense and a lower tax rate.
  • 787 deferred balance came down ~$515 mn. We had estimated ~$500 mn, and so the result looks solid as we had expected performance here to moderate with Boeing booking more cash profits on the income statement following the extension of the accounting quantity. We estimate this equates to total program cash flow of almost $800 mn in Q3, or a mid- to upper-teens cash margin.

First look at Global Services. Boeing reported Services revenue of $3.6 bn in the quarter with a ~14% margin. We would note that YTD Services growth stands at 1%, and so Boeing’s growth plans for this segment are still taking shape

42 Comments on “Boeing earnings: strong 3Q, 9 months, first look at Global Services

  1. The tanker charge was actually $329 million. That after CFO Greg Smith said there’d be no more charges!

    Think how much more it would have cost if they didn’t have all that tanker experience they and their supporters boasted about. 😉

    • Definitely lots of tanker experience. However, not a lot of experience getting a tanker and all it’s military specific systems FAA certified.

      • Definitely very little recent tanker experience (which also did not go well) and with the layoffs, turnover and cowering employees, it has not gone well.

        Last 707s were build 40 years ago?

        Whole different ball game between maintain KC135 and actually building a new up to date tanker.

        It will get there but its incredibly poorly executed.

        Maybe they need some of the current 787 management to shift over?

        Anyone that built a tanker for Boeing or MD has retired or croaked (or both)

        • Last 707s for military users rolled off the production line in 1994. There were 68 E-3 versions , 17 E-6 versions and 8 KE-3.
          The KE-3s were tanker versions for Saudi Arabia based on the later E-3, ie with CFM56 engines, so were a different model to the KC-135 narrow fuselage from the 50s and 60s

  2. Yes, the tanker is killing them (/sarcasm). Their free cash flow has risen from $10 billion a year to $12.5 during this order down cycle.

    Oh, but they are doomed since they didn’t buy the BBD C-series program? 787 making $800+ million in free cash per quarter is amazing. If we theorize that the 777 generates about a similar number (which is crazy), totalling 6.4 billion in cash for widebody profits per year (747/767 are marginal), that ancient, mistake of a narrow body 737 must be generating close to $2 billion in cash per year even as it has transitioned to a new model.

    Boeing has the cash to launch MoM and NSA whenever they like, including together. That’s the bottom line.

      • No, I don’t own any that I know of.

        I guess all those stock buy backs have gained momentum.

        Maybe they could be a few billion into some new aircraft?

    • “Oh, but they are doomed since they didn’t buy the BBD C-series program?”

      It’s obvious that isn’t true, but that is what they told the U.S. government when pursuing tariffs against the CSeries. You can criticize others for making that claim/sarcasm, but it’s only because it came straight from horse’s (Boeing’s) mouth.

      • You’ve just got to read Loren Thompsons latest in Forbes. Apparently straight from the horse’s mouth. I do actually share some of the doubts about the Cseries deal but this is prized BS.

        • “Boeing isn’t worried at all”
          “President Trumps commerce department”
          Have they just admitted perjury?

          • No. According to Thompson, Boeing isn’t worried because in their view the tariff will still apply.

          • Not that Loren is an objective commentator….

          • Airbus is US manufacturer, so can they apply for tariffs on the 787 wings? It’s just as logical.

          • Not my view, but I’m just stating Thompson’s view of Boeing’s view that I got from reading the article. Although I’m quite sure that all the legal and trade experts that comment regularly in this forum will have all the correct conclusions sorted out before long.

          • US cant apply tariffs on EU airliners- its a reciprocal arrangement. Thats the reason for the Airbus share of the Cseries program being a tad over 50%

          • Regarding the comment by dukeofurl that “US cant apply tariffs on EU airliners- its a reciprocal arrangement.” This is not true, any such agreements for normal trade do not apply to any findings of dumping or disallowed subsidies. It what dukeofurl asserts was true, then why would Boeing and Airbus have been pursuing subsidy cases against each other at the WTO for 14 years? For the intellectual satisfaction of getting to eventually say they won, even though they could not impose retaliatory duties? For anyone who may not have heard about these cases, I have included an excerpt from a Seattle Times article about these cases below. See the link after the excerpt for the full article. Note that the amounts remaining in dispute, according to the WTO, are 800 million USD in the Airbus complaint against Boeing, and 22 billion USD, repeat 22 billion USD, in the Boeing case against Airbus. Note also that Boeing and Airbus, unlike Bombardier, do not whine about the fairness of the adjudicating body or refuse to participate in it’s proceedings. A Boeing Vice-President is quoted in the article as stating that if Boeing looses their appeal on the final 800 million of tax incentives at issue in the case against them, they will look into what they need to do to fix them, instead of, like Bombardier, threatening to boycott products of the company, country, or countries that dared to file a complaint against them. Boeing and the US have already taken actions to remedy several subsidies that the WTO objected to. There were 1 billion USD in subsidies in the Bombardier subsidy case that US Commerce did not object to, I don’t understand why Bombardier didn’t try to restructure the subsides to which US commerce objected along the lines of the ones Commerce did not object to, instead of going for full on confrontation against a much larger country whose current President has developed a reputation for never backing down or admitting error when he is directly challenged. I’m no Trump supporter, I’m just observing it seems to me that publicly and loudly criticizing his administration on an issue in dispute, insures that they will never give in on the issue in dispute. This would be true to some extent even for a normal US President. Giving in to an ultimatum or demand from another superpower, let alone a smaller country, as opposed to having the ever popular frank and useful discussions about issues of mutual concern (aka arguments that are going nowhere), would tend to cause political damage for any US President.

            Excerpt from Seattle Times article starts here.

            “Last year, Boeing saved a total of $242 million from the total package of state tax incentives, including B&O tax credits for property leases and investments in pre-production equipment and a sales and use tax exemption.

            However, these other tax incentives are no longer an active part of the WTO dispute panel’s remit. It’s only the $800 million Boeing has saved from the B&O rate reduction that is still in dispute.

            This compares with $22 billion in Airbus launch aid — government loans used to fund development of new airplanes — that remain in dispute following the corresponding ruling last September in the parallel WTO suit against the EU.

            That case, filed more than a year before the case against Boeing, is closer to an endpoint.

            Bob Novick, former general counsel to the U.S. Trade
            Representative and now outside counsel to Boeing, said the appeal in that case against the EU should be decided this year, after which the U.S. government can begin the process of taking retaliatory trade measures.

            “The U.S. is headed for the right to retaliate,” said Novick. “It’s coming very soon.”

            If the Washington state B&O tax reduction is found to be out of compliance after the appeal, “We’ll take a hard look and see what we need to do,” Boeing Vice President John Demers said in an interview.”


          • Hello Grubbie,

            Regarding – “Airbus is US manufacturer, so can they apply for tariffs on the 787 wings? It’s just as logical.”

            For the specific case you mention, if Airbus made aircraft wings in the US, they could file a dumping or subsidy (CVD) petition against non-US manufacturers of aircraft wings.

            In order for their subsidy case to move forward, they would have to successfully argue to the USITC that there was a reasonable indication that they were being materially injured by disallowed foreign (in this case Japanese) government subsidies to the foreign wing producer (Mitsubishi).

            In order for a dumping case to move forward Airbus would have to successfully argue to the USITC that there was a reasonable indication that they were being materially injured, in the case of wings manufactured by a foreign market economy, by sales below the home market sale price of the wings or the cost of production of the wings. I doubt that Mitsubishi has sold any 787 wings directly to Japanese customers, or that they are selling them to Boeing below their cost of production.

            I am under the impression, but not sure, that Airbus does not currently manufacture wings in the US, but rather ships assembled wings from Europe to be joined with assembled fuselage sections that are also shipped from Europe. If this is the case, then Airbus would not have standing to file a dumping or subsidy case regarding aircraft wings in the US.

          • Regarding Mike Bohnet’s coment – “No. According to Thompson, Boeing isn’t worried because in their view the tariff will still apply.”

            Below are some excerpts from Chapter 26 of the USITA Enforcement and Compliance Divisions’ Antidumping Manual, entitled “Scope and Anticircumvention Determinations”, that are relevant to the issue of production being moved to a US facility after an affirmative determination of dumping. By my reading of the excerpt the Airbus Bombardier collaboration could minimize the chances of a circumvention finding by minimizing the number of parts of assemblies shipped from Canada, but even if they do this they might still run into problems with the last paragraph in the excerpt, i.e. “Finally, the Department will take into account the relevant patterns of trade, whether the U.S. assembler is affiliated with the foreign producer, and whether imports into the United States increased after the imposition of the order.” Note that the scope statements in both the CVD and dumping cases have so far included partially assembled aircraft.

            “A. Merchandise Completed or Assembled in the United States

            Parts, components or subassemblies of the subject merchandise are not usually presumed to be included within the scope of an AD/CVD order unless the language of the order clearly specifies
            that they are. After an AD/CVD order is issued, respondents may begin to import parts or components of the subject merchandise for completion in the United States and sale to U.S. customers. Through a circumvention inquiry, those parts can be brought into the scope of an AD/CVD order if the Department finds that:
            • the completed merchandise being sold in the United States is the same “class or kind” as the merchandise subject to the order;
            • this merchandise is completed or assembled from parts produced in the foreign country subject to the AD/CVD order;
            • the process of assembly or completion in the United States is minor or insignificant; and,
            • the value of the parts or components is a significant portion of the total value of the merchandise.
            See Section 781(a)(1) of the Act and 19 CFR 351.225(g).

            In determining whether a process is “minor or insignificant,” the Department will consider the level of investment in the United States necessary to perform the completion or assembly, the nature of the research or development undertaken in the United States, the nature of the production process, the extent of U.S. production facilities, and whether or not the value of the
            processing performed in the United States represents a small proportion of the value of the merchandise sold. See Section 781(a)(2).

            The prerequisite for an affirmative circumvention finding is that the difference in value between the imported merchandise and the finished product must be small. When comparing the value of
            the imported parts to the total value of the merchandise, the Act does not establish a specific value-added percentage that constitutes “significant portion.” The legislative history denotes that Congress recognized that the facts of circumvention vary from case to case and intended that the Department employ wide discretion in these situations. See Ausimont USA, Inc. And Ausimont SPA, v. United States, 882 F. Supp. 1087, 1099 (CIT 1995).

            Finally, the Department will take into account the relevant patterns of trade, whether the U.S. assembler is affiliated with the foreign producer, and whether imports into the United States
            increased after the imposition of the order. See Section 781(a)(3) and 19 CFR 351.225; see also Initiation of Anticircumvention Inquiry on Antidumping and Countervailing Duty Orders on HotRolled and Bismuth Carbon Steel Products from the United Kingdom and Germany, 62 FR34213 (June 25, 1997); Granular Polytetrafluoroethylene Resin From Italy; Final Affirmative
            Determination of Circumvention of Antidumping Duty Order, 58 FR 26100 (April 30, 1993)

            Here is a link to the full chapter.


          • There is no finer insight into the workings of the military /industrial complex and the minds of the shysters that pay him than the writings of Loren B Thompson.

          • Boeing didn’t want it and are now seeming to suggest that only an idiot would have got involved with it.

    • Oh, and they don’t have the cash for MOM and NSA because all the cash is being spent on share buybacks.

      They COULD, but that’s not the same thing.

      • Really?

        According to the financial experts I have been following, they say that companies instead of investing in new product are spending it on share buy backs which do not have nearly the same impact on the economy.

        Seems spot on to me.

      • why bother developing new and better airplanes when you can just purchase US DOC tarrifs and make sure nobody can sell any better products to the US airlines?…anything wrong with that??….Trump is happy, Boeing is happy, only the airlines, passengers, Canada, the UK, and the US public gets screwed. The US DOC has got to be the most corrupt institution outside of Venezuela.

  3. Some time ago it was reported that BA was taking increased payments when recieving orders. Is it still getting increased pay for taking a booking? How much of the real price of the backlog has already been rcd/used? Is there any profit left in the backlog? Critican questions which any invester needs an answer to.

    • Why is there this major buy back going.

      Generally it happens if you want to un-bundal company, lets see?

    • “Is there any profit left in the backlog?”

      I think the deferred production balance decreasing by $0.51B in the last quarter and the fact that this decrease has been growing every quarter since it first went positive should sufficiently answer your question.

        • It would be a good answer if it were true. The numbers don’t actually support the premise.

          • Its roughly $14 mill per 787 delivered based on 12 per month.
            At that rate the remaining 900 in the accounting block of 1500 will reduce the outstanding deferred costs by say $12.5 bill. Another $10 bill needed

      • For what it is worth profit on the B787 is a distant chimera or possibly a mirage. In terms of FCF however this is kicking performance. My only caveat is the possible lack of investment given that in this industry the lead times and decision points are so far in advance of the payback.

        We celebrate FCF on the B787 a decision of 2004, the B777 from 1993 (?) and the B737 from, well you choose. To say that Boeing can sweat the assets is not in doubt, whether they can make the next correct strategic move is a moot point.

        In my view Boeing has suffered from a congenital desire to do little or nothing since the B757/767. They have been saved by the two projects they felt forced to develop in the B777/ B787 being on the money and even the B777 was a bit touch and go in the early days.

        • Yea it would be nice to have them pay some taxes instead of the workers supporting them.

      • Hi Mike, my worry here is that the aircraft being produced were ordered a couple or more years ago, before Boeing started asking for increased advance payments. It could be that they are collecting 90pc on the aircraft they are delivering and 15pc on new orders, making this a 105pc year, if you get my meaning. So as normal people we have no way of judging these figures

  4. Boeing keeps squawking about they want to make a 15% ROI like their supplier have (or better)

    So, if you execute programs with discipline and technical expertise and don’t have those losses?

    And then shareholder buy backs. I smell a rotten fish.

  5. As an aside but 787 related.

    This was from Tessa’s Electronic car operation but applies to their rockets as well.

    They clearly understand the downside to both vertically and supplier procurement, and choose a route that recognized that if you have a supplier you have to monitor them and you can only work inside their culture that allows you, you can force them to do exactly what you want and feel you need.

    What is amazing is how oblivious Boeing was to that outsourced aspect.

    • The problem was not with their major suppliers – they have been longtime suppliers on other programs for the most part. The problem was with massive increase of top tier supplier responsibility and their ability to manage their sub-tiers.

      A large commercial airplane supply chain is an order of magnitude more complex than a rocket and two orders more than a car by part count…

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