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UPDATE – A $2.8 billion charge on fixed-price defense development programs had a significant impact on Boeing’s earnings and revenues, resulting in a $-3.308 billion consolidated net loss in Q3. But despite more aircraft deliveries and higher revenues, Commercial Airplanes also reported a higher operating loss, Boeing said on October 26. Defense woes make Boeing slip back into a deeper loss.
Boeing Group reported $15.956 billion in revenues compared to $15.278 billion in the third quarter of 2021. But the attention is very much on the $-2.799 billion operating loss compared to a $329 million profit last year. This pushed the net result into a $-3.308 net loss versus a $-132 million in 2021. The operating margin swung from 2.2 percent to -17.5 percent. On the positive side is the $3.190 billion operating cash flow compared to $-262 million, with free cash flow turning the corner and getting back to positive to $2.906 billion from $-507 million. By comparison, Boeing Group produced a $160 million net profit in the second quarter.
“We generated strong cash in the quarter and are on a solid path to achieving positive free cash flow for 2022. At the same time, revenue and earnings were significantly impacted by losses on our fixed-price defense development programs. We’re squarely focused on maturing these programs, mitigating risks, and delivering for our customers and their important missions”, President and CEO David Calhoun in the earnings release.
The nine-month result saw a $-4.390 billion net loss compared to $-126 million last year, an operating loss of $-3.194 billion (2021: $1.269 billion), and revenues of $46.628 billion ($47.493 billion). The operating margin is -6.8 percent compared to 2.7 percent for January-September 2021. The operating cash flow was $55 million versus $4.132 billion, free cash flow was $-841 million from $-4.890 billion. Cash and cash equivalents stood at $14.3 billion, up from $11.4 billion in June. Net debt remained unchanged at $55.7 billion.
Commercial Airplanes
Boeing Commercial Airplanes (BCA) delivered 112 aircraft in Q3 compared to 85 in the same period last year. Of these, 88 were 737s and MAX, but they also include nine 787s after deliveries resumed in August. Also delivered in Q3 were nine 767/KC-46s and six 777s. Year to date. Total deliveries stand at 328 versus 241 in 2021, including 277 737/MAX, 21 767/KC-46, eighteen 777s, nine 787s, and three 747s. Boeing secured orders for 227 aircraft.
Q3 revenues of $6.263 billion compared to $4.459 billion reflect the higher deliveries, but they were partly offset by higher expenses. The net loss for BCA was still almost identical at $-643 million versus $-693 million last year. The operating margin improved to -10.3 percent from -15.5 percent.
January-September, the net loss is $-1.744 billion ($-2.021 billion), and revenues of $16.643 billion ($14.743 billion).
The focus at BCA remains on stabilizing production and the supply chain, which also impacts the Defense business. “Nearly every industry is navigating broad supply chain, inflation, labor, and macro-economic challenges – and we’re certainly no different. We’re realistic about the environment we face and are taking comprehensive action. Within our production facilities, we’re not pushing the system too fast. We’re slowing down when necessary and working hard to ensure work gets completed in sequence,” Calhoun said.
MAX production rates remain at the low 30s
Although engine makers Pratt & Whitney and General Electric are seeing some stabilization of the problems and delivered more engines in Q3 than in previous quarters, Boeing sees engines as the primary constraint for 737/MAX stabilization and rate increases. “It boils down to engines and competition for castings”, said Calhoun. Chief Financial Officer Brian West said that Boeing increased its on-site presence to support first-tier and sub-tier suppliers. For now and into next year, the production rate of the MAX will be maintained in the low 30s but once the supply chain issues are under control, “that number will snap up to a 40-tag number,” said West. Boeing will provide more color about this next week in its Investor’s Conference on November 2.
Total 737/MAX deliveries this year will be around 375 aircraft, down from 400 in the previous forecast. Some aircraft will come from the inventory, which still includes 270 MAX, down twenty from Q2. West said that most inventory should be burned down in 2023 and 2024, but didn’t rule out that some will move into 2025. Boeing has 138 MAX in inventory for Chinese customers and will start remarketing some of them as the geopolitical situation between the US and China remains strained. West said Boeing is “in active discussion” with customers and will have to make a final decision soon. “We have a clear eye on the geopolitical risks out there and we are not going to impart new risks on our investors. We believe we can derisk what we have,” said David Calhoun.
Calhoun said he is confident that Boeing will get an extension from Congress for the certification of the MAX 7 and 10 beyond the December 31 deadline. “Because this is the safe answer. We heard from airlines, pilots, from our worker’s associates, and we know that the FAA is putting in the work to certify these airplanes. We remain not just hopeful but confident that we will get this across the finish line.”
Even with the delivery of nine 787s since August, there are still 115 Dreamliners left in inventory that all need rework. Finishing this will take some two years to be completed. Boeing took another $303 million in abnormal costs related to rework, but this is part of the $2.0 billion that is expected. Production rates will remain low for some time, but with the long haul/widebody market heating up, the rate will gradually increase to five per month. Deferred production costs for the 787 now stand at $11.868 billion, down from $12.056 billion in Q2.
Boeing also took $111 million in abnormal costs on the 777X as part of the projected $1.5 billion due in 2023. The timeline of the program is unchanged, with the first deliveries still expected in 2025.
Global Services
With the $2.8 billion charge at Defense, Space & Security (to $-2.798 billion in Q3, up from a $436 million profit), it is Boeing Global Services that is the only business unit to report a profit. Earnings from operations totaled $733 million, up from $644 million in Q3 2021. At $4.432 billion, revenues were up by five percent and returned to pre-pandemic levels. The operating margin is a solid 16.5 percent. The nine-month profit was $2.093 billion compared to $1.616 billion, with $13.044 billion in revenues from $12.037 billion.
Global Services won a contract from the Italian Air Force for performance-based logistics of the KC-767A tanker/transporter, plus an order from the US Navy for support of the F/A-18. Civil contracts include a landing gear exchange and aircraft health management plan from Ethiopian. Deliveries of converted 737-800BCF continue.
Boeing hasn’t offered full-year guidance, but Brian West said in the earnings call that HY2 and full-year free cash flow will be positive. Given the challenging macro-environment, the path to recovery will take longer. Calhoun remarked in a statement to Boeing staff: “We remain in a challenging environment and have more work ahead to drive stability, improve our performance and ensure we’re consistently delivering on our commitments. (…) As we begin to hit key operational milestones, we were able to generate $2.9 billion in free cash flow in the quarter. This sets us on a very solid path to achieving positive free cash flow for 2022, which has been our leading financial metric for the year.”
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