On July 26, Boeing held its earnings call, announcing Q2 2017 results and updating their outlook for the year. The time period, during which the company won 183 commercial aircraft orders and introduced a new model – 737 MAX 10 – with 361 orders/commitments to date, can be described as a “perfect home run,” despite an 8% fall in revenue year-over-year. The company’s stock shot up by more than 8% to $230.43 on July 26.
To recap Q2 2017, the company won 183 net orders valued at $22 billion, adding to a robust backlog of $424 billion. 88 of quarter’s orders – just under a half – came for wide-body aircraft, with 1266 in Boeing’s backlog to date.
Second-quarter GAAP earnings per share increased to $2.89 and core earnings per share (non-GAAP) increased to $2.55, beating the forecasts of $2.30. Despite the shares soaring to record highs and showing what is the biggest single-day gain in eight years, Cannacord analyst Ken Herbert is cautious..
“We expect a positive reaction to the results in the stock, but we remain cautious due to wide-body market risk, margin upside potential, and valuation,“ Ken Herbert of Cannacord said in a statement. „Confidence in the commercial and defense markets has increased, and BA is clearly outperforming our expectations on cash generation, as well as margin. The company is also benefitting from the lack of new program starts, allowing controlled R&D and investment spending while it increases efficiency on the shop floor.. We are concerned about future multiple expansion on the FCF [free cash flow – AeroTime] in light of lower growth in the commercial markets (777 declines).”
Boeing’s revenue was $22.7 billion, 8% less than in Q2 2016, reflecting planned production rates and timing of commercial and defense aircraft deliveries.
Operating cash flow in the quarter of $5.0 billion was driven by strong operating performance and favorable timing of receipts and expenditures. During the quarter, Boeing repurchased 13.6 million shares for $2.5 billion, leaving $9.0 billion remaining under the current repurchase authorization. Boeing also paid $0.9 billion in dividends in the quarter, reflecting a 30% increase in dividends per share compared to the same period of the prior year.
“Our teams are delivering better performance in every segment of the business, which is reflected in our strong second-quarter results and improved 2017 outlook,” said Boeing CEO Dennis Muilenburg. “Our robust cash flow enabled us to return more value to shareholders, invest in future growth and in our people, including a plan to accelerate pension funding that also reduces risk and cyclicality in our business.”
Other important highlights include delivering the first 737 MAX 8 to Malaysian Malindo Air, and launching the stretched 737 MAX 10 at the Le Bourget Paris Air Show. Second and third 787-10 Dreamliners entered their flight test program.
Middle-of-the-market aircraft in 2024
During the earnings call, Jason Gursky, analyst at Citi, directed the conversation towards Boeing’s plans to develop a middle of the market aircraft.
“We’re continuing to make progress on our efforts there as we talk to customers about the potential middle market airplane,“ Dennis Muilenburg, Boeing‘s CEO, commented. „We’ve talked with more than 50 customers around the globe with a diverse set of business models and business needs. We continue to see a potential market there for 2000 to 4000 aircraft.”
According to him, the company is working through the details of the supporting business case, with intention to leverage all of the investments that Boeing has made across things like 787 and 777X, the composite technology the company heavily invested in. The works have already started, with the company seeing the plane‘s entry into service in the 2024-2025 timeframe.
One of the ideas stressed out during the earnings call was Boeing‘s ambitions to make the productivity initiatives that had worked for the Dreamliner program. Last year, the 787 started finally being manufactured for less of its sales price, following nearly a decade of losses.
„We have teams that are working mid-body and half-body on 787,“ Dennis Muilenburg commented. „They’re setting new champion times and what we’re seeing is this culture of champion time performance. The farther you drill down, the more powerful it is. And we get teams at the workgroup level that are adopting this philosophy.“
Boeing had previously said that the company wants to zero out the more than $28.6 billion booked in deferred production costs for the Dreamliner program by the delivery of the 1300th Dreamliner. With 565 Dreamliners having already been delivered, the company needs to drastically cut costs in order to achieve the set goal.
„The linear trend in per unit decreases over the past quarters would suggest that Boeing could reduce its deferred balance on the Boeing 787 program by as much as $440 million during the second quarter of 2017,“ Dhiering Bechai, analyst at Seeking Alpha, writes. „The more aggressive 12-quarter trend would even suggest a decrease of >$500 million. Investors should be aware that a vastly more aggressive decrease is needed to reduce the deferred production balance to 0 by the 1,300th delivery.“
Layoffs to continue
As we have written earlier, Boeing is currently reducing staff at the fastest pace in more than a decade. During the first half of 2017, the aerospace giant has parted with about 4% of its employees, most of whom have worked at the company’s plants in the state of Washington.
The cuts also affected the plant in North Charleston (South Carolina). The number of employees at Boeing’s facilities in the Charleston area by the end of June was reduced to about 7,300, while at the end of 2015 it exceeded 8,000.
Answering the question asked by Dominic Gates of The Seattle Times, Muilenburg said the following:
„We have had to continue to make some tough decisions as we are driving competitiveness. Where we can voluntary layoffs and other actions that are frankly good for our people and good for our company. And this is a continuous process.“
While the company‘s revenue forecast remains the same at $90.5-92.5 billion, Boeing has increased the outlook for GAAP earnings per share to from $10.35-10.55 to $11.10-11.30. Boeing also improved its forecast on the operating margin for its Commercial Airplanes division, now projected to be more than 10%.
Boeing is the world’s largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. A top U.S. exporter, the company supports airlines and U.S. and allied government customers in 150 countries. Boeing products and tailored services include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training.
Source – AeroTime