KC-46
Boeing is generating cash and on the way to meeting key promises made to investors, top managers asserted July 26 while unveiling financial results for the second quarter of 2023 that exceeded Wall Street expectations in a few meaningful ways.
The Arlington, Virginia-based OEM and large defense prime reported quarterly revenue of $19.75 billion, up 18% from the second quarter of 2022. Net loss was $149 million versus a previous gain of $160 million, with comparable per-share results of a loss of $0.25 against a gain of $0.32.
Still, Boeing reported free cash flow (FCF) of almost $2.6 billion in the latest quarter. Financial analysts had expected a small gain at best or even a small cash burn. Boeing leaders further reiterated their earlier promise to deliver $3-5 billion in FCF by the end of 2023. With the latest results, Boeing has generated $1.8 billion in FCF in the first half of 2023, and executives already said they expect a stronger second-half performance.
The FCF results and accompanying positive commentary on raising monthly airliner production rates satiated financial analysts who were girded for far worse. In recent months, headlines have included 737 tail fin assembly issues and admonitions by Boeing leaders that the Defense, Space and Security (BDS) division was going to take a lot longer to fix.
“Boeing reported an impressive second-quarter FCF cash flow beat, and there is production and delivery momentum on 737 and 787,” noted analysts Seth Seifman, Rocco Barbero, Alexander Ladd and Wuzmal Handu of J.P. Morgan.
“We view the second-quarter performance from Boeing as mixed,” said Rob Stallard and Karl Oehlschlaeger of Vertical Research Partners. “On the positive side there was the Boeing Global Services margin, a steadier production rate at Boeing Commercial Airplanes, and, of course, the cash flow (even if flattered by the timing of deposits). On the flip side, Defense continues to bleed money, and supply chain remains a challenge.
“So overall, not bad and a much better performance than what the company has reported in the not-too-distant past,” they continued. “But investors hardly need reminding that Boeing has been accident prone, and we see lower risk/higher quality alternatives in the aerospace sector.”
Even without further surprises, Boeing leaders know they have a tough job to turn around the Defense unit. “I think we said that we’re not expecting much at all from the BDS portfolio, just to be clear, because these things aren’t going to solve themselves in the near term,” Boeing CFO Brian West said in a teleconference with analysts.
BDS revenue for the second quarter of 2023 came in line at $6.2 billion, but the division swung to an operating loss of $527 million versus a gain of $71 million the year before. Operating margins plummeted to negative 8.5% from positive 1.1%.
The poor results primarily were driven by losses on high-profile fixed-price development programs for the Pentagon and NASA, as well as continued “labor instability” and supply chain disruption on other programs, Boeing said. The NASA Commercial Crew program recorded a $257 million loss in the latest quarter due to further effects of the previously announced launch delay. The U.S. Air Force T-7A program recorded a $189 million loss due to growing estimated costs on production contracts. The Navy MQ-25 program also recorded a $68 million loss due to schedule delays. The latest charges bring the total to $12.2 billion for those and other programs such as the Air Force KC-46A. (See chart.)
Boeing leaders admitted there is no quick fix, especially because veteran workers left the company and new hires take time to train for complicated work. They also said the factories for some programs nearly stopped during the COVID-19 pandemic. They now predict cash burn at BDS this year will be worse than the prior range they provided, which was $500 million to $1 billion.
“It’s a significant gap,” West acknowledged. “It’s hundreds of millions of dollars of swing that we have to go execute to get these handful of programs in a better spot. And they are complicated situations with complicated products and factories that almost went dark during the pandemic, and we’ve had to bring them back to life.”
Finally, Boeing made modest progress on paying down its mountain of accumulated debt from the pandemic and 737 MAX and 787 production crises. The company counted consolidated debt of $52.3 billion at the end of the latest quarter, down from $55.4 billion a year earlier. But cash and equivalents on hand also dipped from $14.8 billion to $13.8 billion. Boeing leaders said repaying debt and maintaining investor-grade ratings from the major credit bureau companies remains a top priority.
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