Aerospace giant Boeing’s (BA, Financial) second-quarter earnings result zoomed past analyst estimates. This came as a pleasant surprise to investors particularly after the company announced taking half a billion dollar charge on account of the KC tanker just a few days before the earnings release. The charge did impact the plane maker’s bottom line, but strong commercial deliveries and overall operational efficiency partially helped set off the loss. Let’s take a closer look at the quarter that went by, the key commercial aircraft programs, and the company’s cash generation.
Commercial division comes as a savior
Boeing reported revenue of $24.5 billion in the second quarter, up 11% from a year ago quarter. Analysts had estimated the revenue to come in around $24.19 billion. The rise in revenue came from strong commercial deliveries. The aerospace juggernaut dispatched 197 jets against 181 a year earlier. Higher deliveries bolstered the company’s commercial airplane revenue by 18% to $16.9 billion.
The jet maker’s net profit came in at $1.1 billion, which translates to $1.59 a share. That compares with last year’s $1.65 billion or $2.24 a share, when Boeing benefited from one-time tax credit. However, in the second quarter this year the plane maker assumed a massive aerial refueling tanker charge of $536 million, which lowered its earnings per share by $0.77. Despite this, the company was able to beat the consensus estimate of $1.37 a share. The tanker setback has been a drag on Boeing’s results for the second time in a year. It has already hit Boeing $1.3 billion in the pocket. The company is spending on repairing and remodeling the complex fuel system of the military tanker after it cracked at a pressure test. Several analysts worry that Boeing may have to assume such charges again if it encounters with more flight test problems.
Boeing has had developmental issues in the past with the 787 Dreamliner where it bled billions of dollars. The company is in no position to entertain other developmental cost overruns again. Boeing CFO Greg Smith said the jet maker’s improved productivity of its key commercial airplane programs somewhat lessened the impact of the tanker charge.
Boeing’s key aircraft programs
The narrow body 737: The 737 is Boeing’s most popular aircraft model and a regular source of cash. Of the total quarterly deliveries, the 737 accounted for 128 units. During the quarter, Boeing booked orders for 209 commercial airplanes, of which 150 are for the single aisle jet. So far through July 21, the Chicago-headquartered company has booked orders for 380 airplanes, 251 being for the 737. A similar trend can be observed in the company’s order book as well. The 737 makes for over 75% of the total orders or 4,253 units on a record backlog of around 5,700 aircraft worth $431 billion at catalogue price.
Boeing currently makes 42 737s a month. The company is preparing to eventually increase its production rate to 52 a month in 2018 following the resilient demand and growing appetite for the single aisle.
The 777: Boeing delivered 26 777s in the second quarter. The twin-engine jet has been Boeing’s most popular wide-body plane for years. However, its younger sibling, the 777X, has been stealing the headlines ever since its launch at the 2013 Dubai Air Show. The demand for the 777 tumbled as airlines’ attention shifted to the new kid on the block, which is due to enter service in 2020. Boeing’s challenge lies in facilitating a smooth transition to the reengineered program as the 777 is a cash cow and the most lucrative program. Boeing needs to bridge the production gap efficiently so that the aerospace major’s revenue and cash flow doesn’t get hit during the changeover phase. Industry experts have expressed their concerns on the matter.
At the earnings call, Boeing’s new chief executive Dennis Muilenburg expressed confidence in filling the unsold 777 slots before the 777X hits the world’s runway. The production line is totally occupied through next year end with half the 2017 slots filled. The company has also sold out several 777 slots for 2018 as well. Boeing is also keeping the option of 777 production rate cut open, depending on how it’s able to fill the remaining slots. The company is currently involved in deciding on the 777X component production and says further clarity on how the Everett assembly line shall be meshed with the present 777 would be reached next year.
The 787 Dreamliner: Boeing rolled out 34 Dreamliners from the assembly line in the second quarter compared with 30 in the year ago quarter. It continues to sell the Dream machine below cost, draining $23 million per delivery from its coffers in the latest quarter. The innovative-but-expensive program’s deferred cost now stands at $27.7 billion. Boeing expects the program to breakeven by end of this year. Muilenburg said the company’s progressing in lowering the cost per plane. In the last 210 787-8 deliveries, the company managed to cut its manufacturing cost by 35%. For the 787-9, Boeing reduced the cost by 35% in only 35 deliveries. Though the Dreamliner’s making steady progress, Boeing may have to wait a little longer to reach breakeven.
Strong cash flow and attractive investor return
Boeing’s operating cash flow soared a stunning 82% to $3.3 billion, thanks to the higher 787 Dreamliner deliveries and solid operational performance. The company’s free cash flow of $2.6 billion compensated for the poor cash generation in the preceding quarter. The jet maker had a dismal first quarter in terms of cash flow. But the second quarter suggests Boeing’s on track to achieve its 2015 target of generating over $9 billion in operating cash. The metric should see significant improvement as Boeing gains 787 production efficiency.
Boeing returned $2 billion to its investors through share buyback and another $0.6 billion through dividend payment. Muilenburg promises of greater investor returns in the future. Robust deliveries, rise in revenue, and the strength in its overall portfolio assisted the company generate healthy operating cash flow and establish a strong second quarter. Boeing has strong fundamentals and, with disciplined commitment, things seem to be looking good for the jet maker.
