Despite a nearly $700 million charge for Boeing's two big recent military contract wins, plus another $176 million charge for continued unplanned excess spending on the Air Force tanker, Boeing's third quarter earnings results reversed this month's dip in its stock price.
Though Boeing’s Dow-leading stock performance dipped sharply this month as investors worried about a drop in 737 jet deliveries, as well as the potential impact of tariffs and friction with China, the jet maker’s third-quarter earnings results and confident management outlook turned that trend around on Wednesday.
Boeing’s stock rose more than $11 in mid-afternoon trading in New York before losing much of that gain as the market plunged toward day’s end. Boeing shares still closed up for the day $4.60, or 1.31 percent, at $354.65.
This was despite a nearly $700 million charge booked to cover development costs for Boeing’s two big recent military-contract wins, plus another $176 million charge for continued unplanned excess spending on the Air Force KC-46 aerial refueling tanker.
Those accounting charges reduced profits that still came out way above forecasts. But they did not lower Boeing’s gushing cash flow, the financial measure most carefully watched by investors as the commercial-jet business unit harvests years of investment in the 787 Dreamliner and 737 MAX models.
Boeing Chairman and Chief Executive Dennis Muilenburg offered reassurance that the recent production problems on the 737 are being fixed and that deliveries will be fully back on schedule by year end.
“While we’re not complete with the recovery yet, we’ve made substantial progress,” he said on a conference call. Teams of mechanics are gradually reducing the number of unfinished planes parked around the Renton plant, and “more and more, we’re seeing aircraft being completed in place in the factory,” he said.
Muilenburg said fuselages are now being delivered to plan from Spirit AeroSystems in Wichita, Kansas, and that LEAP engine deliveries from CFM International should be fully recovered “towards the end of the year.”
He reiterated Boeing’s intention to increase 737 production next year from 52 per month now to 57 per month. He said that won’t produce the same supply-chain issues as did the production hike this year, which coincided with the complicated introduction of the new MAX model.
This year, Boeing expects 40 to 45 percent of the 737s built to be MAXs, the rest being the previous model.
“Next year, as we get to 57 a month, we’ll be almost entirely MAXs by that point,” Muilenburg said.
Meanwhile, production of the 787 in particular continues to improve and to bring in more cash every quarter. Boeing generated $4.6 billion in operating cash flow in the quarter.
The total of 787 production and tooling costs deferred into the future dropped $782 million, or $23 million per airplane delivered in the quarter, down to $26.4 billion.
Defense wins expensive
On the defense side, Boeing booked $691 million charges for the Air Force T-X trainer jet contract and the Navy’s MQ-25 carrier-based refueling drone.
But Muilenburg characterized this as an investment for the future.
Boeing won the Air Force T-X contract with a bid of $9.2 billion for delivery of 351 jets, 46 simulators and associated ground equipment, versus an earlier Air Force estimate of $16 billion.
But he said the T-X can be sold overseas as either a trainer jet or a light-attack aircraft, and will have total potential sales as high as 2,600 aircraft. With maintenance support and training services, he said, it represents a market potentially worth $40 billlion.
And he said the $805 million MQ-25 drone program, which developed important autonomous and artificial intelligence technologies, could sell more than 200 aircraft and be worth ultimately more than $20 billion.
Analysts on the conference call were skeptical, suggesting that the charges showed Boeing had bid too low to win these fixed-price contracts.
Lockheed Martin CEO Marilyn Hewson said on an earnings call Tuesday that if her teams had matched Boeing’s pricing on the contracts for the T-X and MQ-25 as well as the $2.4 billion MH-139 Air Force helicopter awarded in September, Lockheed would have lost in excess of $5 billion.
Robert Spingarn of Credit Suisse asked if these programs in years to come would suffer from the same “investment creep” as the KC-46 tanker program, on which Boeing has racked up overcharges of nearly $3.6 billion but still hasn’t delivered the first airplane.
Muilenburg insisted that the two new military programs “are fundamentally different from tanker.” He noted that the company built two T-X prototypes and had them fly even before winning the competition, suggesting that this meant much less risk ahead.
“Think of these as investments that enable a production run that begins in the early 2020s and continues for decades,” he said.
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As for the tanker, Muilenburg said Boeing is working with the Air Force to complete the required steps ahead of first delivery. That’s expected later this month.
Analyst Rob Stallard of Vertical Research Partners was not entirely convinced. In a note to investors Wednesday, he wrote that if Boeing were purely a defense company reporting charges of nearly $700 million along with easy assurances that these fixed-price contracts will work out well later, “we don’t think their shares would have been up.”
Yet because of the strength of the commercial jet side of the business, he added that “Boeing’s momentum in (cash flow) continues to keep investors on side.”
Commercial jet business booms
Muilenburg reiterated his constant refrain that world air travel has become so diversified that demand in the airplane business is no longer cyclical.
“The changing nature of travel, with the expansion of network city pairs and rising middle-class population in emerging markets, has fundamentally expanded traffic patterns” to ensure sustained growth in Boeing’s business long-term, he said.
He played down worries over the way President Donald Trump has upended the previous international consensus on world trade and in particular the potential impact on Boeing sales to Chinese airlines, the biggest customers for its 737 jets.
Boeing projects that over the next two decades China will take about 7,700 new aircraft.
“On the U.S./China relationship, we are very engaged with Chinese airline customers, and the leadership in China, along with the U.S. government. Both countries are interested in a healthy aerospace industry,” Muilenburg said. “We continue to engage with leaders in these countries to urge a productive dialog to resolve trade differences.
Providing an update on Boeing’s proposed acquisition of the commercial jet business of Brazil’s Embraer, Muilenburg said “we are finalizing the definitive agreements.”
He added that in the months ahead, Boeing will work with Embraer and its shareholders, along with the Brazilian government and regulators to complete the transaction.
Muilenburg said it will create “the most important strategic partnership in the aerospace industry.” The negotiations may be affected by the outcome of the Brazilian election, set for Sunday.
Boeing’s revenue for the quarter jumped 4 percent to just over $25 billion, topping the $23.9 billion projection consensus among Wall Street analysts, according to FactSet trading research.
Boeing raised its guidance for this year’s total revenue by $1 billion, which for the first time brings the high end of the projected range to $100 billion.
Net profit for the quarter was $2.4 billion compared with $1.8 billion a year earlier, with earnings per share at $4.07, up from $2.99 a year ago. This included a $412 million tax benefit from a settlement of audits for 2013 and 2014.
Adjusting to exclude certain pension items, core earnings per share was $3.58, which beat analyst projections of $3.47, according to FactSet.
Further goosing the stock price, Boeing repurchased $2.5 billion of its own shares in the past quarter and paid out $1 billion in dividends to investors.