Boeing Sees Challenges After 2012

(Bloomberg) – Boeing Co., which has boosted its 2012 profit forecast three times as commercial and military aircraft sales rose, said it expects challenges next year that include a tougher defense market and higher pension expense.

The projected $3.5 billion in pension expense next year will be about $1 billion more than this year’s, the planemaker said. The defense unit, source of more than 40 percent of total sales last year, is bracing for cuts in Pentagon spending, according to Boeing, which won’t forecast 2013 performance until January.

Those obstacles may temper sales growth from commercial plane deliveries as Chief Executive Officer Jim McNerney takes advantage of a $307-billion backlog, bolstered by airlines seeking to trim fuel expenses with more efficient aircraft. Boeing is increasing the division’s output by 60 percent in the four years through 2014.

The non-cash pension expense is about $500 million higher than Barclays Plc. had projected and “will weigh on consensus estimates more than we originally expected,” Carter Copeland, a New York-based analyst, said in a note to clients after the company’s third-quarter earnings report. “We expect this to be the central push-back point on an otherwise strong quarter.”

The expense may prompt a reset of 2013 earnings projections, said JPMorgan Chase & Co.’s Joe Nadol, who called it “a whopper.” Higher pension costs have also weighed on earnings this year, lowering third-quarter profit by $194 million.

Boeing Chief Financial Officer Greg Smith said the company plans to make voluntary cash pension contributions next year “to proactively manage our liability and expense.” He said his top priority is to return cash to shareholders, and he will give an update on share repurchase plans by the end of the year.

Free cash flow in the quarter was $1.17 billion, up from $69 million a year earlier, Chicago-based Boeing said in a statement. The company increased its outlook for operating cash flow this year by $500 million, to more than $5.5 billion. Earnings in 2012 will be $4.80 to $4.95 a share, Boeing said, a projection that exceeds the $4.70 average estimate of 29 analysts in a Bloomberg survey. Third-quarter sales rose 13 percent to $20 billion as shipments of aircraft and equipment to customers climbed 28 percent.

Boeing Commercial Airplanes, which accounted for more than half of 2011 sales, is responding to what McNerney termed a “dramatic” replacement cycle, with airlines trying to reduce fuel costs by investing in new planes.

Commercial Backlog

The commercial-jet backlog rose 2.5 percent last quarter and now stands at 4,100 airplanes valued at more than eight times the unit’s revenue last year.

In the defense business, McNerney warned on an earnings call that 2013 would be a challenge because of this year’s “unusual strength” in sales to foreign militaries and because of the threat of sequestration, the $500 billion in automatic U.S. defense cuts slated to go into effect unless lawmakers agree on an alternative deficit-reduction plan.

Boeing fell 0.2 percent to $72.68 at 3:03 p.m. in New York. The shares previously dropped less than 1 percent this year, trailing a 12 percent gain in the Standard & Poor’s 500 Index.

The company delivered 149 commercial jets and 50 military aircraft, helicopters and satellites in the three months through September.

Third-quarter net income at Chicago-based Boeing fell 6 percent to $1.03 billion, or $1.35 a share, from $1.1 billion, or $1.46, a year earlier. That beat the average of 25 analysts’ forecasts for $1.12 a share.

Higher Margins

“With no major execution issues this quarter, operating margins came in comfortably ahead of our expectations,” Rob Stallard, an analyst with RBC Capital Markets in London, wrote in a note, keeping his neutral rating on the shares. Operating margin in the commercial-planes business fell 1.9 points to 9.5 percent in that period, while remaining steady at 9.9 percent for the year through September.

Boeing said it still expects total airliner deliveries to rise to 585 to 600 this year after 436 in the first nine months. The company plans to deliver more 777s, 787s and 737s next year. Carriers pay about 60 percent of the price of a plane in installments leading up to delivery, and the rest when they pick up the jet.

Airbus SAS, which had delivered more planes than Boeing every year since 2003, handed over just 405 through September and has forecast 570 for the full year.

Jetliner Deliveries

Boeing reiterated that it will deliver 70 to 85 of the new wide-body 787s and 747-8s this year, split about evenly between them. The company expects more orders by year-end for both the passenger and freighter versions of the 747-8, which entered service a year ago, McNerney said.

The higher deliveries last quarter pushed the commercial unit’s sales up 28 percent to $12.2 billion. Earnings rose 6 percent to $1.15 billion, reflecting dilution from the lower- margin 747-8 and 787 Dreamliner, which was delivered to its initial customer in 2011 after more than three years of delays.

Boeing’s defense business tripled the number of Chinook transport helicopters it delivered to 18, and handed over 10 Apache attack helicopters in the period compared with none a year earlier. Deliveries for other programs declined, and shipments of F-15 fighter jets dropped to zero.

Defense revenue fell 4 percent to $7.84 billion as deliveries of less-costly aircraft increased, and operating profit grew less than 1 percent to $827 million. The defense unit’s margin rose by half a point to 10.5 percent.

The margin growth is consistent with companies across the industry as contractors including Boeing focus on cost reduction ahead of the Pentagon’s expected budget cuts, wrote Douglas Harned, an analyst with Sanford C. Bernstein & Co. in New York who rates the stock outperform.

Boeing is repositioning its military business and focusing on getting 30 percent of revenue from abroad in the near future, McNerney said. That would be up from 24 percent last year.

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