Boeing Delivers Cash Haul While Investors Fret Over Sales Drop

  • Jetliner deliveries fall to the lowest level in three years
  • Company raises earnings forecast as expected tax rate declines

Dreamliner 787 planes sit on the production line in North Charleston, South Carolina, on Dec. 6, 2016.

Photographer: Travis Dove/Bloomberg

Boeing Co. surprised analysts by generating cash rather than burning it and reporting a first quarter profit that blew past estimates. Neither impressed investors.

They focused instead on a disappointing 7.3 percent drop in revenue as the planemaker delivered the fewest jets since 2014. The quality of the earnings was another concern as Boeing’s profit benefited from a low tax rate, even as the commercial airplane business showed signs of strain.

The report spotlighted Boeing’s need to make its factories more efficient as the company navigates a difficult aerospace market. While the Chicago-based manufacturer raised its forecast for 2017 earnings because of improved tax expectations, it didn’t boost the cash outlook -- a concern for investors as aircraft orders fade late in a sales cycle that began more than a decade ago.

“It’s not a bad report, it’s just not a blockbuster,” George Ferguson, an analyst at Bloomberg Intelligence, said Wednesday. “The stock has been rolling and people clearly had high expectations.”

The shares dipped 1 percent to $181.71 at the close in New York, the second-biggest drop among the 30 members of the Dow Jones Industrial Average. Boeing has advanced 17 percent this year.

Commercial Margins

Boeing had indicated the quarter would be the weakest of the year. Even so, the company posted the lowest profit margin for its commercial jetliner business since the first quarter of 2011 after excluding accounting charges, Seth Seifman, an analyst at JPMorgan Chase & Co., said in a note to clients. While Boeing’s earnings were better than analysts predicted, most of the gain was driven by taxes and not operations, he said.

The commercial airplane business posted an operating profit of $1.22 billion, an 18 percent gain from a year earlier, as services sales helped soften the impact from seven fewer jetliner deliveries. Boeing delivered 169 commercial jets as it stockpiled 737 Max jets ahead of the initial delivery of the upgraded narrow-body next month.

The 8.5 percent operating margin for the unit was well below the mid-double-digits goal that Boeing Chief Executive Officer Dennis Muilenburg has set for late decade. The results were dinged by $120 million in costs to prepare the first KC-46 aerial tankers for delivery to the U.S. Air Force early next year, Greg Smith, Boeing’s chief financial officer and chief strategist, told analysts during a conference call.

The defense business’s profit fell 10 percent to $737 million, as the company’s space business spent to develop satellites and a capsule to haul humans to space. The division’s operating margin rose to 11.3 percent from 10.3 percent.

Boeing, the world’s largest aerospace company, continues to seek new ways to improve profitability in a highly competitive and uncertain environment, Muilenburg said. The measures include investing in new sources of growth such as the proposed 737 Max 10 jet and a constellation of small satellites. Boeing is also bringing outsourced work back in-house, and closely managing a workforce that has shrunk by more than 27,000 people since the end of 2012.

“Some of the tough affordability actions we’ve had to take have been necessary so we can continue to fuel our R&D and our innovation machine for the future,” Muilenburg said.

New 737

Boeing plans to cut output of the 777, long its second-largest source of profit, for a second time later this year. The 787 Dreamliner should help dull some of the pain and Boeing will also gain as initial deliveries start next month for the 737 Max, the newest member of its most profitable jet family, Ferguson said.

Deferred production costs for the 787 fell $316 million to $27 billion from the previous quarter. The balance shrank by about $8.8 million for each 787 that rolled out of Boeing’s factories in the quarter, said Douglas Harned, an analyst at Sanford C. Bernstein & Co.

The deferred costs represents the money the company sank into inventory and manpower after the Dreamliner entered the market three years late following a series of production and supply-chain breakdowns. The marquee aircraft, with a frame made of spun carbon-fiber, emerged as a money maker for Boeing last year after a decade of losses.

Boeing has promised a steep improvement in cash and savings from the Dreamliner as it refines the plane’s manufacturing process, builds more higher-margin models like the 787-9 and no longer has to compensate customers for late deliveries.

Cash Flow

First-quarter free cash flow of $1.63 billion contrasted with the average analyst estimate that the planemaker would consume $137 million during what’s typically the company’s slowest period. Earnings adjusted for pension expenses were $2.01 a share, the company said Wednesday in statement. That compared to the $1.91 average of analyst estimates compiled by Bloomberg.

The per-share results also gained a boost from Boeing itself, which has been a major purchaser of its own stock in recent years. The manufacturer acquired 14.9 million shares for $2.5 billion during the quarter. It also paid $868 million in dividends, 30 percent more than a year ago.

“We view this as a good start to the year for Boeing, particularly cash flow,” Robert Stallard, an analyst at Vertical Research Partners, said Wednesday. “Although this year looks to be on track, beyond 2017 we think there remains the usual concerns about potential weakening in the aerospace cycle.”

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