Boeing 2Q earnings: down as expected, 777X delay confirmed

July 24, 2019, © Leeham News: Boeing’s first quarter and first half revenue is down $9bn vs last year as the impact of the 737 MAX grounding takes a full hit.

The MAX was grounded March 13, near the end of the first quarter, with limited understanding of the financial impact. The plane will be grounded through the entire third quarter and well into the fourth quarter, Boeing has acknowledged. Some believe a return to service won’t occur until into the 1Q2020.

Boeing’s 2Q2019 earnings press release has details.

Boeing also acknowledged the 777X will be delayed, with first flight now coming next year due to engine issues previously disclosed. Entry into Service is still targeted for 2020. LNA sees EIS slipping to 2021.

Boeing so far says the FAA certification process scrutiny for the 737 MAX hasn’t affected the 777X, but LNA and industry participants believe that the FAA must be reviewing what it’s done in the past and looking at what processes are to come. The consensus, and LNA’s conclusion, is that the FAA’s revisiting the process (if this thesis is correct) will result in a delay as well.

Lufthansa Airlines, the first launch order for the 777X, has been notified by Boeing that first delivery is now scheduled for December 2020. Emirates Airline has been notified first delivery is January 2021. LNA believes Lufthansa’s delivery will slip into 2021.

Below are first reactions from analysts to Boeing’s 2Q results.

Buckingham Research
It’s difficult to put BA results in context with consensus given a pre-announced charge and consensus estimates that varied widely due to any number of assumptions regarding the impact of MAX issues on BCA margins. BA reported 2Q consolidated sales of $15.751B which appears to exceed consensus expectations (largely due to BCA) that were reset following the July 18th pre-announcement of a $5.6B charge.

BCA sales of $4.7B included the previously announced $5.6B charge related to MAX customer concessions. Excluding the charge, we think it’s safe to say that BCA sales of >$10B would likely have beat expectations that were set prior to the July 18th pre-release – roughly $9B on average. It seems that excluding the MAX issues BCA is firing on all nine of its eight cylinders.

There was some disappointing news from BA’s other segments in BA’s 2Q report. Defense sales of $6.6B slightly exceeded consensus $6.5B, but was in-line with our estimate. Defense operating profit of $717M fell slightly below expectations for $721M but was in-line with our estimate. Global Services sales of $4.54B fell slightly below our in-line with consensus $4.64B estimate. Global Services operating profit of $687M fell below $697M consensus and was in-line with our estimate.

Cowen & Co
Ex. the MAX, BCA program margins were on track. Favorable variance reflected (1) lower than est. R&D spend ($498MM of $2.7B+ estimate for full year 2019) and (2) higher 787 margins.
787 amortization of deferred production costs and tooling improved to $1.24B, up from Q1’s $1.04B and Q4’s $753MM. Core unit deferred production increased to a very impressive $31.0MM/unit vs. $29.0MM in Q1.
Defense margin of 14.7% included a $192MM gain on the sale of property (adds ~290bps). Ex. the gain, underlying margins (11.8%) beat our 10.9%E, driven by lower cost growth on the KC-46 Tanker program. Global Services (15.1% vs. 14.6%E) also came in higher.
Free cash outflow of $1.011B was better than our est. $1.4B outflow on an impressive $1,238MM drop in 787 deferred/tooling costs partially offsetting a $4.663B spike in commercial inventory (ex 787 deferreds), likely a build in 737 & 777X inventory. Customer advances were flat. There was no share repo in the Q given buyback plan is on pause until MAX resolution.
 Credit Suisse

Overall better than expected, outside of MAX: Average unit deferred production ticked up to ~$25M per plane on the 787, the highest result to date, reflecting the first full quarter at 14/month. BDS grew 8.4%, with margins of 14.7% (mid-11% range ex. gain). BGS ticked up 10.9%, with margins modestly higher at 15.1%. However, we note that much of the Y/Y increase in top line was attributable to KLX, with what looks to be only moderate organic growth at BGS, in part due to deferred service on MAX replacement lift. We think the market will look through quarterly performance at BDS and BGS, given the significance of the MAX issue, though attention will likely shift to these segments after the MAX issue is resolved, and longer term trends therefore bear watching.

Goldman Sachs

Messy Results: Reported core EPS of $(5.82) includes a previously disclosed 737MAX charge of $(8.74) and an unsized property gain at BDS, making it difficult to accurately compare to FactSet consensus at $1.87 and our $2.41. Adjusting for a $5.6bn charge, revenue was 4% above our estimate, with upside at BCA and BDS and downside at BGS. BDS had an unsized gain on a property sale, obfuscating margin performance there. Performance on 787 continues to be strong, though the 737MAX situation makes it difficult to draw other conclusions about BCA. However, Boeing stated that engine issues associated with the 777X push the first flight to early 2020 and that the delivery schedule (starting late 2020) is at significant risk. Boeing continues to suspend 2019 guidance in light of uncertainty surrounding 737MAX certification.

JP Morgan

The key number in Boeing’s Q2 release was ~$600 mn of operating cash burn, near our estimate for $800 mn. The fact that cash burn is in the right ballpark could be something of a relief but after last week’s pre-announcement, we do not think there was a great deal of fear remaining around the quarter. While there are some items to dissect in the release, we may not see a very big stock reaction, given that the big picture is unchanged: 1) BA really needs the 737 MAX to fly safely; 2) the company is working hard toward that end but does not control the process; and 3) the market will probably continue to assume a grounding that lasts into Q4 or early 2020, which we think BA can weather, given its financial strength.

Q2 FCF was a ~$1 bn outflow. This is modestly better than our $1.4 bn estimate though part of the upside stemmed from capex, which BA can defer to preserve cash. Cash from ops is the truer measure of how Boeing is managing the MAX inventory build and the ~$600 mn outflow was ~$200 mn better than our forecast, largely due to receivables and payables. Across the company, advances were neutral in 2Q19. We do not know exactly what others were expecting, but we do not think our cash from ops estimate was a dramatic outlier and so the result is likely broadly consistent with expectations.

Liquidity update. Boeing ended Q2 with $9.6 bn of cash, and we see quarterly cash use of ~$2.2 bn from paying its quarterly dividend ($1.2 bn) and cash burn (~$1 bn, noted above.) Hypothetically, if Boeing resumes deliveries on Jan 1, 2020 (we have some Dec deliveries in our model), this would leave ~$5 bn of cash at year-end, well below where the company normally operates. BA raised $3.5 bn of new debt after Q1 and we assume the company can address any 2H19 cash shortfall with a combination of CP and bonds.

 

 

 

 

 

36 Comments on “Boeing 2Q earnings: down as expected, 777X delay confirmed

  1. “Lufthansa Airlines, the first launch order for the 777X, has been notified by Boeing that first delivery is now scheduled for December 2019. Emirates Airline has been notified first delivery is January 2020. LNA believes Lufthansa’s delivery will slip into 2021.”

    I think you need to fix the dates – presumably LH is Dec. 2020 not 2019 and Emirates is Jan 2021 not 2020.

  2. It’s entertaining how these analyst are fighting, isolating, wringling to pull out the good news. “better then we expected” (but told nobody) seems to be the favorite framework. They know what their clients want to hear & deliver.

    Now is the moment for Boeing to demonstrate strong long term leadership. That’s what stockholders will reward.

  3. ‘Lufthansa Airlines, the first launch order for the 777X, has been notified by Boeing that first delivery is now scheduled for December 2019. Emirates Airline has been notified first delivery is January 2020. LNA believes Lufthansa’s delivery will slip into 2021.’

    Sorry for being pedantic but the dates in this paragraph seem to be completely wrong

    • @Sowerbob: Correct and it’s been fixed one year to the right.

    • Boeing are now delivering airplanes between 600-1000. They were sold at a profit before the A330neo was launched. We will see how much Boeing reduced the price once they start delivering airplanes > 1000

      • Wasnt the first 500 at a big discount before the bubble about reduced production costs burst. Fuel prices had ramped up in the 2010-14 period and then totally dropped from ‘a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016 ‘ so its likely the selling price has dropped again at that time.
        However some gains in production efficiency partly from the steady rise in monthly production rate would offset that.
        Now they have to sell more 777F freighters at rock bottom prices to prevent 777 production line putting out whitetails until the delayed 777X comes good.
        When I looked into Boeing Brasil production rates, thats fallen like a stone
        ( 2/3)as well this year

  4. The information on the B787 deferred production cost amortization is very positive. Even with no efficiency or learning gains this would suggest a clearing of the costs in 5 years. So each unit produced is being sold at on average $31m more than the production cost. That is a mighty figure indeed. Behind the scenes it appears Boeing has got its act together in snapping these aircraft together.

    Let us assume they clear the deferred cost, they will then be in a situation to either contribute $5bn++ annually to the bottom line. Volume seems to be everything in this game.

    • Aren’t those gains to a large part effected by heavily all around “leaning” on suppliers?
      One other cost compressor can be seen in faking papers and in general skipping on safety/quality assurance?

    • Sowerbob, the deferred production cost is a book keeping entry as the money was spent long ago. The money to look for is FCF – free cash flow and they seem to still be good numbers.
      A lot of the 737Max costs will be offloaded onto its deferred production block numbers too

      But its a perfect storm, no wonder the NMA keeps getting delayed and its business case was wobbly and EIS was wildly optimistic to srart with

      • Sorry, looking at the impact on the bottom line rather than cash flow. I agree that the FCF is probably the more relevant metric. what I was getting at was that once the accounting block is completed the B787 will consistently be pumping this sort of value to the profit

  5. @scott (if you are the author) Delivery dates are a year out for Lift/Emirates (19/20.. should read 20/21 I think).

    Have a great afternoon.

  6. Minus the charges stated by Boeing recently, the deferred B737MAX revenues should pick up once delivery starts again. The “down $9 billion y-o-y” IMHO is temporary as one should see a large y-o-y revenue gain next year if the B737MAX starts to get delivered again.

    Agree with everyone here on the B77X delivery dates entered incorrectly.

  7. With every aspect of Boeing Corp. in the news, customers for the 777X have got to be thinking: I wonder if Boeing cut corners on this “Next Generation” of the popular wide body?

    • Try to find out what kind of internal problems BA hides in the lee of GE’s engine problems/delays.

      • Both GE and Boeing are lucky GE test their Engines pretty hard and over FAA requirements to discover these problems before certification. Now it will be a hickup instead of a very expensive mess if it was discovered whrn 120 Aircrafts were built. Other sites mention a stator problem on the GE9X.

        • In general:
          BA and GE “over and beyond duty” qualification inhouse efforts are folklore. Carefully crafted PR. nothing more.

          777X engine probs:
          Talk was about the movable stator vane actuation having “small” issues.
          Going by what has been reported later on the “small issues” have been ejected from the engines rear end for further inspection :-)).

          I have no doubt that this is fixable.
          But it is also not a thing condensing out of the blue sky.

          • Been there, done it, GE actually did test their Engines pretty hard and buyond FAA cert requirements. That might have fooled Airbus thinking the PW1100G testing was as thorough and no need to specify teesting buyond certification requirements even as they have lived thru JT9D-59A, JT9D-7R4, PW4158 and PW1100G issues, P&W, GE and RR will soon see new Airbus testing requirements for new Engines.

    • Wouldn’t be surprised if LH and ET are following the 777-X’s certification just as closely as the FAA is.

      • If traffic is slowing as some other airlines are noticing they may (privately) welcome any delays while being ‘inconsolable’ to Boeings face.

  8. OK, so engine issues, which seem to be afflicting three of the industry’s leading manufacturers, Rolls-Royce, Pratt & Whitney and General Electric, is beyond Boeing’s control, so slippage of 777X deliveries cannot necessarily be blamed on Boeing.

    But still believe Boeing, or rather “McBoeing” as the company in the post (reverse) takeover era has become, would be better served by a thorough housecleaning in the C-Suite and Boardroom given the outcomes of the miscalculations and outright failed strategies that resulted in the 737MAX being launched using faulty assumptions that Bombardier’s C-Series would be at best “damaged goods” as an orphan aircraft produced by an under-capitalized, inexperienced rival that lacked the sales and/or repair and maintenance infrastructure Boeing and Airbus have for their models (for example, Fokker F-100, or before that BAC-111, among others), if not outright completely eliminated by its, and Airbus’s efforts to protect their duopoly producing mainline aircraft, followed by its spectacular fail seeking to instigate a trade-war with Canada in its desperate attempt to kill the C-Series after Delta’s program salvaging order in April, 2016 that a.) resulted in Airbus gaining control of program, since renamed A220, for $1 AND (worse still) b.) led to a new final assembly line that will allow for significantly increased production of the model it sought to cripple/kill, not to mention “everything else” now known about the 737MAX’s deficiencies/defects that renders this as a flightless aircraft until ?

    And that’s assuming NONE of the other recent reported problems of product quality for 787s produced at “McBoeing’s” non-union/scab labor final assembly line in South Carolina or those for its long-delayed KC-46 tankers emerges for the 777X during its flight tests and certification, which might also arise given the other recent missteps and bad decisions made by present leaders and signed off by the Board.

    Just sayin’ 😉

    • Howard – I fear readers’ eyes may glaze over after the first 100 of the 200 words in your question. Just sayin’.
      Sorry, but…

      • Yes , some capitals and punctuation would be welcome, even some paragraphs

          • Howard – a tip: after you’ve drafted what you want to say, read it out loud and put in a period (full stop) everywhere that you’ve stopped to draw breath. That second para probably works much better for most readers (and certainly any listeners!) if you made it about four sentences. IMHO.

      • Understood! 😉

        No aspirations to be an Ernest Hemingway or perhaps one of the best writers I can think of, William F. Buckley, whose prose remains among the best I can recall ever reading.

        Yep, my writing “style” – especially when time constrained during a subway ride, or when I have a few spare moments – often is difficult, even tedious, at times.

        Or even “rant-y” 😉

        Always has been, with professors in college often giving “A’s” and “A+’s” for content and analysis over “C’s” and “D’s” for written style and grammar.

        Like Avis, will “try harder!”

        But, for sure, heard and noted.

        PS: terrible writing style, grammar and all, many professors also told me they always looked forward to my crazy AF written term papers, with several telling me they always read mine first, too!

    • It gets worse when you realise Boeing were offered “similar terms” as Airbus to take over the C Series program.

      • Yep. Such is the price of Boeing’s hubris and arrogance.

        So cocky and certain they’d squash Bombardier like a bug, they never imagined that the worst case/nightmare scenario that came to be where instead of killing an aircraft produced by an under-capitalized, inexperienced, 2nd tier aerospace manufacturer better known for Jet Skis, passenger trains, light rail, and small private jets/fading regional jets, that lacked the global infrastructure for parts, repair and maintenance that Boeing and Airbus have; and which had a single final assembly line that could only churn out so many units per month/year anyway had it continued treading water/plodding along as an independent manufacturer…

        …would somehow go horribly wrong where Airbus would gain control of the program, the advanced technology and patents for $1…

        …and, as if that alone wasn’t already a worst case scenario, to add insult to injury, a new and 2nd final assembly line at Airbus’s Mobile, AL facility, that will allow production to double production of the A220.

        Sheesh, for such stunning incompetence alone it’s amazing that the nincompoops who let THAT happen didn’t get shown the door! 😉

        Yeah, yeah, I know, the side-stick thing…

      • I find this hard to believe. I know there were talks earlier but I don’t see how Boeing would have getting the same terms as AB after the tariffs hit. The deal with AB was in part brokered by Gov. Canada and the political mood in Canada would not have allowed it to do the same with Boeing. It would have been seen as giving in to extortion.

      • Wow, I missed that. I had thought AB had pulled a fast one in getting the Cseries. Did Boeing not even make an offer?

  9. Boeing is now one of the companies with negative equity. Almost $5 billion of liabilities are not covered by assets. Accounts payable are up significantly.

    • Ignore that as its not a real problem due to the way assets are counted. All the development expenditure over the decades on its in- production planes isnt counted as an asset, but its obviously shown by the firm contracts for 1000s of planes worth $100s billions

      • so why did accounts payable go up so much?

        it is still concerning when a company shows negative equity, even if there are hidden reserves

        • You are talking ‘negative shareholders equity’ but most of that is because of $55 bill of ‘Treasury stock’ or shares they have not issued to shareholders , ie buybacks mostly.

          • Well, if the equity is bought back, it is simply not shareholders equity.

            That is like saying a bankrupt company is only bankrupt because it didn’t yet sell new shares.

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