Boeing Costs Spiral Further In Fresh Blow
Summary
- Boeing revenues suggest low-end pricing for aircraft.
- Cost growth on BCA and BDS was disappointing.
- Debt declined, but further operational improvement is needed.
- I do much more than just articles at The Aerospace Forum: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Bradley Caslin /iStock Editorial via Getty Images
Boeing (NYSE:BA) reported its third quarter earnings on the 27th of October. Initially, shares of Boeing traded higher in pre-market only to dip slightly. Assessing Boeing’s quarterly results is already difficult with the various segments of the company and the various products. It becomes even more complex when considering the recovery of the market and progress on reinstating some of the products and the pace at which that is happening. In this report, I will attempt to do all of that.
Boeing's Q3 - More Aircraft, Less Revenue
Source: Boeing
For the third quarter, we saw that there was a strong increase in deliveries driven by higher deliveries of the Boeing 737 MAX offset by lower Boeing 787 deliveries. Using details from the TAF Boeing Orders & Deliveries Monitor, we estimated revenues of around $4.75 billion in a high aircraft pricing scenario and $4.44 billion in a low pricing scenario. Aircraft are customized according to the specification of the airline and that does affect the reported revenue. However, just looking at the reported revenues suggests that the aircraft pricing currently resides on the lower end of the spectrum which would generate a gross profit of around $835 million, which should be reduced by R&D, SGA and any abnormal costs. R&D costs were in line with what we expected. Boeing does not split out the SGA by segment, but we believe that those costs were around $50 million higher than our model anticipated. Excluding abnormal production costs, that would bring the loss for the quarter to $190 million versus an expected loss of $148 million. There also were abnormal production costs of $418 million for the Boeing 737 MAX and $183 million for the Boeing 787. Which according to our model would yield a $750 million loss. Boeing produced a loss of $693 million, so you could say that Boeing exceeded expectations. This is mainly caused by the lower assumed revenues on the Boeing 737 MAX deliveries, but its margins are still a bit stronger than what we have modeled.
Sequentially, revenue dropped from around $6 billion to $4.5 billion driven by unfavorable mix with less Boeing 787 and Boeing 777 deliveries, which have higher sales prices compared to smaller aircraft. The loss from operations widened from a $472 million loss to a $693 million loss. It was already expected that results wouldn’t be as strong as in the first quarter, but what BCA showed was revenues that suggest aircraft pricing at the lower end of the range, higher margins than anticipated but also new added costs for the Boeing 787.
So, Boeing is marching through the recovery phase but the Boeing 787 is currently providing a headwind to results on top and bottom lines. So, the result is slightly better than I expected, but it is still not great and on top of that Boeing expects to have roughly $1 billion in costs and that shows Boeing’s problem in recent years: The company falls from one costly blunder into the other and it is costing billions of dollars.
Cost Growth in Defense
Source: Boeing
What we see for Boeing Defense, Space & Security (BDS) is slightly higher revenues for the 9-month ended and a slight year-over-year reduction for Q3. More worrisome are the margins. Those margins should normally be north of 10% and they were impacted during the quarter by a $185 million reach-forward loss on the Commercial Crew program due to the need for a second unmanned flight orbital test now scheduled for 2022. Absent of this charge, the margins would be around 9%, which is not what we are looking for but also not bad but once again we are seeing that just like for Boeing Commercial Airplanes (BCA), BDS is dealing with additional costs due to engineering mishaps.
Finally Something Good
Source: Boeing
To see at least something good in terms of revenues and margins, we have to look at the global services segment which benefits from increased demand for services as airlines are returning their fleets to service. With a revenue of $4.2 billion, we see that the quarterly revenue reached 90% of the lower end of the average quarterly revenue that Boeing guided for pre-pandemic. So, there certainly is a rebound there and with Boeing’s freighter conversion programs, there are a lot of growth opportunities. The margins also were looking strong and were as Boeing guided for pre-pandemic. So, Global Services (BGS) performed very well during the quarter.
Boeing's Q3 Results are mixed
Looking at the various segments, Boeing showed a $47 million lower loss than expected for BCA, but for BDS the earnings were $292 million lower than I would have liked to see, whereas BGS profits were around $34 million higher than I anticipated. So, we see recovery in the commercial space offset by some cost growth on the Boeing 787 program and disappointing results for the Defense and Space arm. Overall earnings were $211 million lower than I would have liked to see due to the charge on the Commercial Crew program.
Boeing's Cash Flow, Cash and Debt
Source: Boeing
What we are most interested in at this point is how Boeing is managing its debt and cash balances. For the 9-months ended, operating cash flow improved by almost $10.2 billion and sequentially the improvement was $221 million. This was because of income tax refund, higher delivery payments and higher contract signing payments and lower expenditures. Important to note is that this improvement would have been even bigger were it not for the abnormal production costs that Boeing is now incurring for the low-rate production and rework on the Boeing 787.
Source: Boeing
By quarter-end Boeing had $20B in cash and marketable securities including $9.8B in cash, marking a decrease of $1.3 billion in cash and cash equivalents. On cash level, we do see that there was a $1.6 billion increase as marketable securities were turned into cash, and cash and cash equivalents were used to reduce the debt from $62.1 billion to $60.9 billion. So, we are seeing that Boeing is actually paying down debt instead of refinancing it which is a good thing. At the same time, the absence of Boeing 787 deliveries and the cost overhang for the rework on the Dreamliners is adding to costs and slowing down the pace of the repayment on debts.
Conclusion
Looking at revenues, BCA revenues suggest that currently the pricing of aircraft is at the lower end of the range that the models from The Aerospace Forum use. Earnings on BCA came in slightly above expectations, as did earnings for Global Services. All of this, however, was offset by a reach-forward loss on the Commercial Crew program and there were added costs and future cost growth on the Boeing 787 program, and as much as I like that Boeing reduced its debt during the quarter, the combination of cost growth and relatively disappointing MAX delivery ramp up leaves some concern about the pace at which Boeing can reduce its debt since the positive cash flow to get there is not there yet but the future additional costs already have been announced. So, Boeing is getting there but the pace at which things are happening is what I consider to be problematic.
Particularly the $1 billion in additional costs for the Dreamliner program are off-putting, especially when considering that I approached Boeing a year ago to provide clarity on the costs and only now a year later they have been able to do that. It shows that Boeing still has a lot to fix as a company.
This article was written by
His reports have been cited by CNBC, the Puget Sound Business Journal, the Wichita Business Journal and National Public Radio. His expertise is also leveraged in Luchtvaartnieuws Magazine, the biggest aviation magazine in the Benelux.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BA, EADSF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (68)
That would work, as long as shareholders get nothing and C-suite personnel are fired....the Board dissolved as well with no carryover appointees.
As far as I recall for the past two years I have been highlighting platform problems and the problems in the management and executive ranks. Those problems have not resolved and I have major doubts that this CEO is even close to fit to take Boeing to the next level.
Go to the Bellagio and watch the roulette wheel. All you need to know.
As long as BA keeps rudderless as to fixing its issues, things will keep going from bad to a bit worse to really bad…
Commercial is way worse than numbers reflect….Product line looks like the hole part in the Swiss cheese, abysmal execution, obsolete designs (except for 2 products with a limited TAM), throw in oil >$100, Max’s will need to go at a real deep discount for any one to take on a frame that was already uncompetitive 2 generations ago…
The rest of the business is not much better… keeps going thanks to the tax payer….
It takes miles to bring a train to a halt, but it eventually comes to a halt…
What is uncompetitive about it is that it's a half-century old. It is not a 757 replacement, which airlines need, and it doesn't have the operating economics of stretched A220. Airbus has an entire family of more modern aircraft that can be custom tailored to airline's needs. Boeing went to the well once too often with the tired 737 platform. They spend billions to develop composites with the Dreamliner.... Time to leverage that technology to create something to compete with the Airbus Neo aircraft.
BA sooner or later will solve the issues. take a risk.
You can understand why they seek higher prices on the model 10 and why Ryanair were surprised as they hoped to buy at rock bottom prices.
Ryanair claimed this would help Boeing to rebuild production levels but as seems clear, this is not a problem, as the problem is pricing with a huge need to get prices higher.
Meanwhile where is the 797 which was promised for the end of this year?