22-Apr-2010 12:08 PM

Boeing’s net profit down sharply, but shares gain on guidance. Delta 787 order in jeopardy

Boeing's operating margin declined 1.5 points to 7.7% as revenues fell 8% to USD15.2 billion, during the first quarter ended 31-Mar-2010. Operating profits rose 15% to USD1.17 billion, while net profits fell 15% to USD519 million. Operating cash flow experienced a dramatic negative swing from USD193 million in the year-ago quarter to -USD285 million, reflecting continuing investment in development programs.

The B787 programme continued flight testing during the quarter, the company reported. Two additional aircraft joined the two already in the flight test programme. The Dreamliner completed key flight test milestones such as flutter, stall and ground-effect tests. On 28-Mar-2010, the static test unit successfully completed the ultimate load test with a fully pressurised cabin. First delivery is expected, as previously anticipated, in 4Q2010. Total firm orders for the B787 at quarter-end were 866 aircraft from 57 customers.

The B747-8 began its flight test programme during the quarter, completed initial airworthiness testing, and ended the quarter with three aircraft in the flight test programme. Initial delivery is also expected in 4Q2010.

Boeing's backlog held steady, ending the quarter at USD315 billion, largely unchanged from the same period last year, but five times current annual revenue, as new orders kept pace with deliveries.

The company said the results reflect solid performances across core businesses and a previously disclosed USD0.20 charge on health care legislation, while the year-ago quarter was reduced by USD0.31 per share on a charge reflecting to poor market conditions in the commercial airplanes unit.

"With clear progress on the B787 and B747-8, solid financial performance and marked improvement in our customer outlook, we continue to draw on the positive momentum we saw at the end of 2009," said Chair, President and Chief Executive Officer Jim McNerney. "Our outlook remains attractive, and we are focused on executing well and delivering on our commitments to customers."

Its free cash flow went from -USD192 million in 1Q2009 to -USD471 million in the current quarter. Cash and investments in marketable securities totaled USD10.4 billion at quarter-end, down USD0.8 billion on investments in development programs. Boeing’s debt remained steady at USD12.9 billion.

Commercial Segment

Boeing Commercial Airplane suffered from few planned B747 deliveries and challenges with a seat supplier which cost it 11 deliveries in the quarter when it posted revenue of USD7.5 billion, down 13%. Earnings from operations rose 63% to USD679 million.

Operating margin for its commercial business expanded to 9.1%, an increase of 4.2 points, due to the charge on the B747 program related to a reduction in twin-aisle production rates and unfavourable delivery price escalation forecasts. Its strong operating performance partially offset the impact of lower new airplane deliveries from 121 in 1Q2009 to 108 in 1Q2010.

The company booked 100 gross orders in 1Q2010, offset by 17 cancellations compared to 1Q2009 when cancellations exceeded the 28 gross orders. Contractual backlog remains strong with 3,350 aircraft valued at USD250 billion, over seven times the unit's projected 2010 revenue. That backlog held steady from the USD296.5 billion at 31-Mar-2009. Its total contractual backlog rose from USD296.5 billion in 1Q2009 to USD298.9 billion in 1Q2010. It has an unobligated backlog of USD15.9 billion down from USD19.1 billion.

Delta 787 order in jeopardy

Its B787 order with Delta has entered dangerous territory when Chair and CEO Richard Anderson indicated yesterday that the 787 may not be part of Delta’s future fleet plans. When asked about the order, he said that “technically, yes” Delta was still a B787 customer, which piqued the interest of all on the first quarter conference call.

Mr Anderson clearly indicated the airline had plenty of long-haul capacity and that Delta and Boeing are currently negotiating the fate of the 18-aircraft, 50-purchase rights former Northwest order. Delta, which has 180 widebody aircraft, has extended the leases on its B747-400 fleet on average for about five years and is upgrading them with flatbeds and new seats. Anderson said its long-haul fleet was young.

Boeing delivered 86 B737s during the quarter, down from 91 in the year-ago period. It did not deliver any B747s compared to four in 1Q2009. Deliveries for the B767 held steady at three during the quarter, while B777 deliveries dropped from 23 to 19.

Boeing Capital Corporation

Boeing Capital Corporation (BCC) reported first-quarter, pre-tax earnings of USD46 million compared to USD37 million, down 24% from the same period last year. Revenues dropped 1% to USD162 million. Earnings improvement was primarily driven by gains on sale of portfolio assets. During the quarter, BCC's portfolio balance declined to USD5.4 billion, down from USD5.7 billion at year end, on normal run-off, asset pre-payments and depreciation. BCC's debt-to-equity ratio decreased to 5.6-to-1.

Guidance

The company's 2010 financial guidance reflects "solid operating performance amid lower volumes, higher pension expense and continued investment in development programmes". It expects to end the year with between USD64-66 billion in revenues, USD3.50-3.80 per share, down from previous guidance at USD3.70-4.00 per share. BCA expects to deliver 460-465 aircraft this year earning USD31-32 billion in revenues and an operating margin between 6.5-6/7%.

The company continues to expect that 2011 revenue will be higher than 2010, primarily driven by projected B787 and B747-8 deliveries. Combining higher projected deliveries with spending plans for R&D investments and other factors, operating cash flow in 2011 is expected to be greater than USD5 billion.

Commercial Airplanes' 2010 delivery guidance is unchanged at between 460 and 465 aircraft and is sold out. It includes the first few B787 and B747-8 deliveries. The unit's 2010 revenue is expected to be USD31-32 billion with operating margins between 6.5% and 7.5%.

Defense, Space & Security's revenue for 2010 is expected to be USD32-33 billion, with operating margins of approximately 10%.

Boeing Capital Corporation expects that its aircraft finance portfolio will continue to reduce as its expected new aircraft financing for 2010 is less than USD0.5 billion, below normal portfolio runoff through customer payments and depreciation. BCC's debt-to-equity ratio is expected to return to the 5.0-to-1 level in the second half of 2010.

Boeing's 2010 R&D forecast is USD3.9 billion to USD4.1 billion on continued investment in development programs. R&D is expected to decrease significantly in 2011. Capital expenditures for 2010 are expected to be approximately USD1.9 billion reflecting the bulk of capital investments required for the second B787 assembly line in South Carolina. Capital expenditures in 2011 are expected to be lower than in 2010.

The company's non-cash pension expense is expected to be approximately USD1.2 billion in 2010.

Boeing’s shares gained 3.9% yesterday.

MTU Aero Engines’ revenue down 7.6%

Elsewhere in the aviation supply chain, MTU Aero Engines reported the following financial highlights for the three months ended 31-Mar-2010:

Revenue: EUR640.2 million, -7.6% year-on-year;
- Commercial Engine: EUR265.3 million, -6.8%;
- Commercial MRO: EUR245.0 million, -19.0%;
EBIT*: EUR68.8 million, -8.5%;
- Commercial and military engine: EUR52.8 million, -3.6%;
- Commercial MRO: EUR14.2 million, -26.4%;
Net profit: EUR32.6 million, +5.2%;
- Order backlog**: EUR9,264 million, +4.8%;
- Commercial and military engine: EUR4,237 million, +6.9%;
- Commercial MRO: EUR5,027 million, +3.0%. [more]
*Calculated on a comparable basis **Includes value of MRO contracts

MTU reaffirmed its forecast for the financial year 2010. The company expects to generate revenues on roughly the same level as last year. Operating profit (EBIT adjusted), which amounted to EUR292.3 million in 2009, is also expected to develop along stable lines, as is net income, which came to EUR141.0 million in 2009.

The company stated, “despite the high research and development expenses to safeguard MTU’s future, the company anticipates a free cash flow of at least EUR100 million in 2010, compared with EUR120.2 million in 2009”.

MTU’s shares eased 0.5% yesterday.

Selected Aviation suppliers’ daily share price movements (% change): 21-Apr-2010