Boeing Beats On Cash Flow, Hikes 737 Output In 7th Straight Money-Losing Quarter

Boeing was not only instrumental in helping today’s durable goods number smash expectations (3.2% vs Exp.0.7%) due to a 78.4% surge in non-defense aircraft orders (which was all Boeing): it also helped prop up the Dow when it reported Q1 earnings and released forward updates which were both better than expected, especially following recent negative news on 737 MAX fittings. Cash flow in the quarter, guidance for the year, and individual airplane production rate updates were all incremental positives.

Here are the details:

Q1 EPS -1.27 vs loss/shr $2.75 y/y, missing the exp. -97c
Revenue $17.92 billion, beating exp. $17.43 billion
Commercial Airplanes revenue $6.70 billion, +60% y/y, missing exp. $7.11 billion
Defense, Space & Security revenue $6.54 billion, +19% y/y, beating exp. $5.73 billion
Global Services revenue $4.72 billion, +9.4% y/y, beating exp. $4.54 billion

Commercial airplanes operating loss $615 million, -31% y/y, missing exp. loss $447 million
Negative operating cash flow $318 million, beating exp. negative $1.49 billion
Defense, Space & Security operating loss $212 million, -77% y/y, missing exp. loss $194.8 million
Global services oper earnings $847 million, +34% y/y, beating exp. $695.9 million
Backlog $411 billion

Of note, Q1 free cash flow of $(786)MM was ahead of consensus of $(1.91)BN. The Defense margin was negative with a tanker charge and near breakeven adjusted for the charge which remains surprisingly low. The Services margin at 17.9% is strong.

Boeing’s operating margins improved across all three business units, a sign that it’s making progress to Calhoun’s goal of stabilizing work in its factories and across its supplier base. The company had a core operating margin of negative 2.5% in the first quarter, an improvement from negative 10.3% a year earlier.

Source: Boeing Q1 presentation

Despite the stronger than expected FCF, Boeing notched its seventh straight money-losing quarter. An adjusted loss of $1.27 a share was worse than analysts’ average projection of a 97-cent loss, according to estimates compiled by Bloomberg.

The manufacturer’s defense business also continues to face execution problems, with the KC-46 tanker recording a $245 million pretax accounting charge. The potential costs of the 737 issue and defense overruns pose a “considerable risk” to its 2023 results, said Nick Cunningham, an analyst with Agency Partners. “Boeing’s runaway train of calamities may have slowed down, but it is still trundling on despite the brakeman’s best efforts,” Cunningham said in a report before first-quarter results were announced.

The mixed results underscore the fitful progress Boeing is making in turning around its finances and addressing quality lapses after years of crisis. A recent rush of commercial jet deliveries propelled the US planemaker past rival Airbus SE on a quarterly basis for the first time in almost five years.

The balance sheet gross deleveraging continued with cash declining by $2.4BN, as debt (rated Baa2/BBB-) declined by $1.6BN. That said, on a net basis, the company used up more cash than it paid down debt.

Boeing reiterated all guidance for full-year 2023 including 737 shipments, and reiterated all medium-term guidance. The bank expects $4.5-$6.5BN in operating cash and $3-$5BN in free cash flow, net of $1.5BN in capex.

Of note, it officially specified a plan to break to 38/month on 737 in 2H23, while noting the underlying supply chain / production rate master schedule is unchanged following the fittings news. BA is at 3/month underlying rate now on 787 and reiterated the plan for 5/month by end of 2023.

As Bloomberg notes, the mixed results underscore the fitful progress Boeing is making in turning around its finances and addressing quality lapses after years of crisis. A recent rush of commercial jet deliveries propelled the US planemaker past rival Airbus SE on a quarterly basis for the first time in almost five years.

“This is an important year for us,” Chief Executive Officer Dave Calhoun told employees in a message Wednesday. “As demand surges across our markets, we must focus together on execution and meeting our customer commitments.”

The earnings were strong enough to help push shares higher 2.3% before the start of regular trading in New York. Through the close of Tuesday’s session, Boeing’s stock had risen 6.1% this year.

That said, continuing its recent momentum will be challenging as Boeing grapples with the 737 Max manufacturing flaw that Calhoun said will slow deliveries “over the next several months.” Bloomberg previously reported that Boeing would hike production rates this year, and Calhoun said last week that the latest snag wouldn’t alter its master schedule for suppliers.

Separately, Boeing executives are expected to detail their plans to manage the latest 737 setback on an earnings conference call Wednesday morning. The company affirmed its target of handing over between 400 and 450 of the narrowbody jets this year, delivering 70 to 80 of its 787 Dreamliners and generating free cash flow ranging between $3 billion and $5 billion.

“I think you’re going to see a bit of a relief rally in the stock,” Ken Herbert, analyst with RBC Capital Markets, said of Boeing’s plan to stay the course in 2023. Affirming the full-year guide implies that Boeing expects 737 deliveries to pick up later in the year as the latest disruption is resolved.

“They view the issue on the Max as near term and not something that’s going to require that much time – weeks and not months — to resolve,” Herbert said in an interview.

Investors will look for a more information on the scope of repairs needed to address faulty workmanship at Spirit AeroSystems Holdings Inc. affecting potentially hundreds of 737 Max and P-8 maritime patrol planes manufactured since 2019. The flawed parts, which were disclosed by Boeing and the supplier earlier this month, involve fittings that help attach the jets’ vertical stabilizer to the rear of its aluminum fuselage.

Boeing didn’t say when it plans to hike 737 output to a 38-jet monthly pace this year. Its goal is to reach a 50-jet monthly pace by 2025 or 2026. The company said it has increased production of the 787, another key source of cash, to a 3-jet monthly build rate. That’s a step to its goal of building five Dreamliners a month by year-end.

As Bloomberg concludes, returning the 737 Max to pre-crisis production levels is crucial if Boeing is to resume being the prodigious cash generator that made it a darling of Wall Street last decade.