By Calvin Biesecker
Boeing [BA] yesterday said its third quarter earnings swung to a profit on higher aircraft deliveries and strong operating performance in its commercial airplanes sector, which more than made up for a drop in sales and profits at the company’s defense division.
Net income was $837 million, $1.12 earnings per share (EPS), versus a $1.6 billion ($2.23 EPS) loss a year ago, which stemmed from a research and development reclassification on the 787 passenger aircraft program and a charge to the 747-8 freight plane (Defense Daily, Oct. 22, 2009). Income results beat analyst expectations by a nickel.
Sales in the quarter edged up 2 percent to $17 billion from $16.7 billion a year ago. Free cash flow was $1.6 billion.
The strong financial results were driven by Boeing Commercial Airplanes (BCA), which posted an 11 percent gain in sales to $8.7 billion on 124 aircraft deliveries, 11 more than a year ago. Net aircraft orders were also up.
Operating income at the commercial segment was $1 billion versus a $2.8 billion loss a year ago due to the charges. Margins were a robust 11.6 percent.
Boeing said its 787 program remains on track for first delivery in the middle of the 2011 first quarter. A problem with one of the Rolls-Royce-built engines that experienced a surge last month just before a test flight is now “understood” by Rolls, which has to show government regulators the hardware and software fixes that need to be made, Jim McNerney, Boeing’s chairman, president and CEO, said on yesterday’s earnings call. Britain’s Rolls-Royce and General Electric [GE] are each making engines for the new passenger plane.
The commercial services component at BCA also aided segment performance as airlines are beginning to increase discretionary spending and McNerney sees a “prolonged recovery” period compared to “prior cycles” here.
Given the strong performance in commercial aircraft production and services, Boeing upped its earnings guidance for 2010 to between $3.80 and $4 EPS, an increase of 30 cents on the low end and 20 cents on the high end. The outlook for sales was narrowed to between $64.5 billion and $65.5 billion, versus $64 billion to $66 billion previously.
Boeing’s defense segment, Defense, Space & Security, delivered weak results, with operating income declining 23 percent to $684 million and sales off 6 percent to $8.2 billion. Operating margins fell 1.7 percent to 8.4 percent.
The weak showing at defense was driven by the Network & Space Systems and Military Aircraft sectors, which saw operating income fall 40 and 35 percent, respectively, due to lower volume on the Army’s Brigade Combat Team Modernization and Ground-based Midcourse Defense programs, lower pricing and mix on the Air Force C-17 aircraft program, and a $42 million charge on a tanker program for Italy. Sales at both sectors also fell.
The Global Services & Support sector within defense turned in a strong quarter earnings wise, posting a 44 percent jump in operating income on just a 1 percent gain in sales to $2 billion. Boeing attributed the strong earnings to performance on integrated logistics and maintenance, modifications and upgrades.
Boeing won’t provide detailed guidance for 2011 until it reports on its fourth quarter 2010 results, but it did give some color on what to expect next year. Sales are still expected to be higher, driven by commercial aircraft as defense sales and operating earnings are expected to remain flat, James Bell, Boeing’s chief financial officer, said.
Bell and McNerney pointed to a difficult contracting environment in the United States for defense goods.
“Without a doubt, we recognize that we are in an era of significant fiscal constraint with our U.S. government customers,” McNerney said. In return, we are accelerating our efforts to aggressively manage costs and drive further productivity to support our customers’ objectives and remain competitive with our industry peers.”
Longer-term, Boeing believes that growth in the defense sector can come in international markets and adjacent markets such as cyber security.
While commercial sales will be up next year, overall commercial margins will be down as the 787 and 747-8 enter service and the production ramp begins to build, Bell said. The company continues to see growth in air travel worldwide.
Boeing’s total backlog at the end of the quarter stood at $320.9 billion, up from $315.6 billion since the start of the year. BCA’s backlog was $255.2 billion, up $4.7 billion so far this year. Defense backlog was $46.3 billion, up $300 million this year.