Oct. 31, 2022, © Leeham News: Boeing last week surprised Wall Street aerospace analysts with a huge loss instead of the expected profit for the third quarter.
But positive cash flow was the metric the analysts focused on. The loss was attributed mostly to big write-offs of five defense programs: the KC-46A, VC-25B, MQ-25, T-7A, and Commercial Crew (the Starliner) programs. Boeing wrote off $2.8bn for these programs in the quarter. The company previously wrote off $8.8bn for these programs.
The specifics: Boeing took charges of $1.2bn for the KC-46 tanker, $766m on Air Force One, $351m for the MQ-25 aircraft carrier tanker drone, $285m for the T-7 jet fighter trainer, and $195m for the Commercial Crew.
All are fixed price contracts that have come back to bite Boeing big time.
Boeing also had a loss of $643m in the quarter at Commercial Airplanes. Global Services reported a profit of $733m and Boeing Capital Corp (BCC)—the leasing unit—eked out a $23m profit.
For the nine months, Commercial Airplanes recorded a loss of $1.74bn. Defense lost $3.66bn. Services reported a profit of $2.1bn and BCC barely recorded a profit of $14m.
But cash flow was positive at $2.9bn. And this is what analysts liked. Yet there was a little smoke-and-mirrors involved in this. Boeing said the cash flow was helped by “higher commercial deliveries, favorable receipt timing, and a tax refund,” as analyst Robert Stallard of Vertical Research put it. The tax refund was $1.5bn, a huge chunk of the cash flow touted by Boeing.
A tax refund, of course, doesn’t provide cash flow from operations, which is really the important metric to look for. And “favorable receipt timing” can mean a lot of things. In the past, Boeing routinely worked with customers to advance payments from one quarter to the current quarter to dress up cash flow and the balance sheet. Boeing reported $1.1bn in advances from the Defense Department, though it’s tough to understand how much of this was “favorable receipt timing.”
Boeing’s 10Q quarterly report, filed after the initial analyst reports were issued, contains this important piece of information:
“During the first nine months of 2022, net cash provided by operating activities was $0.1 billion. Our operating cash flows continue to be impacted by lower commercial airplane deliveries. We expect a negative impact on our operating cash flows until commercial deliveries ramp up. Charges recorded on BDS fixed-price development contracts are expected to negatively impact cash flows in future periods.” (Emphasis added.)
“Bears will complain that Boeing’s Q3 FCF beat is low quality, with a disappointing quarter operationally. . . and they will be justified . . . but we’re not sure how much that matters today,” writes Seth Seifman of JP Morgan. “The fact that Boeing struggles operationally, especially in Defense, is not new news….”
Why the big spike in charges?
LNA is told there is a bit of “clearing the decks” going on. As Boeing prepares to pay down and refinance debt, and as it prepares to launch a new airplane program, CFO Brian West wants to clean out known charges to present a “clean” case to potential bond buyers and debt providers. The charges taken today are against the actual cash outlays in the next year (which, ironically, will reduce cash flow). More charges are to come.
“Of the $4.5bn of pre-tax charges taken this year, the majority of the cash outlays will be spread out over the next 12-18 months and will likely result in downward cash flow estimate revisions,” wrote analyst Robert Spingarn of Melius Research. “Boeing booked $330m of abnormal production costs on the 787, meaning that $600, remains to be expensed. On the 777X program, Boeing booked $111m of abnormal production costs, leaving $1.3bn still to be expensed through 2023.”
Stallard writes that Boeing is moving to the right ramping up production, notably of the 737. Spingarn writes that Boeing still will be in the low 30s per month early next year and around 40/mo by year-end. LNA was told by the supply chain that Boeing’s move to the right is by six months.
Spingarn writes that between 8-10 MAXes per month will be delivered from inventory next year. This means clearing the MAX inventory will slip into 2025.
In a case of mixing metaphors, Stallard writes, “Turning around like a supertanker – Boeing management continues to state that the company is in turn around mode, but we’d say that the arc of recovery remains extremely elongated. In whack-a-mole fashion, just as Boeing gets something right (787 restarts), something else goes wrong (Defense charges, China, supply chain). Given the track record to date, particularly on forecasting additional defense charges, we continue to be wary of whatever outlook Boeing provides and think that there are far less risky ways of gaining aerospace and defense exposure.”