Boeing 2Q Profit Net Drops 21% As Sales Fall; Shares Dip

The Wall Street – July 28, 2010

The head of Boeing Co. (BA) said Wednesday the company was likely to cut jobs in a defense unit facing increasing budget pressures from the Pentagon and overseas customers.
Chief Executive Jim McNerney said Boeing was conducting a top-to-bottom review to marry costs for its defense business with changing national security priorities around the globe.

McNerney said on a post-earnings conference call that this would likely lead to layoffs throughout the military business, though he didn’t quantify potential cuts.

The pressure on the defense side contrasts with the rapid recovery in commercial aircraft orders. McNerney said Boeing may boost output beyond existing plans if its suppliers can keep pace.

He also said customers were leaning towards favoring an all-new replacement for its best-selling 737 range rather than a revamped plane with new engines.

McNerney’s comments came as Boeing reported a 21% drop in second-quarter profit and said first deliveries of two new aircraft may slip into early next year.

It beat analysts’ expectations despite a dip in deliveries of commercial and military aircraft, and left its full-year guidance unchanged.

Chief Financial Officer James Bell said talks about potential compensation payments to customers for the near-three-year delay in delivering its first new 787 aircraft would be wrapped-up by the end of the year.

The company recently said the first 787 delivery may slip into early 2011, and on Wednesday said the new 747-8F freighter could also fail to hit a year-end target.

Boeing earned an ironic $787 million in the June quarter compared with $998 million a year earlier. Per-share profit fell to $1.06 from $1.41 a share, beating the FactSet consensus by six cents.

Revenue dropped 9.2% to $15.57 billion, with commercial and defense margins both down from a year earlier but higher than the prior quarter. Group margin fell 0.5 point to 8.4%.

Boeing increased its full-year margin guidance for commercial planes by a point to between 7.5% and 8.5%. Guidance for the defense, space and security segment was trimmed to 9.5% from 10% as the sector braces for cost-cutting measures within the Pentagon.

Total backlog dipped 0.4% from the prior quarter to $297.6 billion as an increase in aircraft orders were offset by a decline in defense.

Boeing still expects revenue next year to be higher than the $64 billion to $66 billion seen in 2010.

The company and rival Airbus have both announced plans to boost commercial aircraft production at the end of the year and received orders and expressions of interest for almost 600 planes at the recent Farnborough International Air Show.

Aerospace suppliers have in recent days sounded upbeat about a recovery in demand for aviation spares and services, another key revenue source for the manufacturers.

Boeing’s commercial unit reported a 9% drop in profit to $114 million in the second quarter as deliveries fell 9%. Part of the dip reflected a global shortage of aircraft seats after quality problems at a Japanese manufacturer. Margin fell 0.5 point from a year ago to 9.2%, slightly higher than the prior quarter.

The defense unit was weighed by a 24% fall in revenue from its network and space systems business, while military aircraft sale rose 4%. Margins fell 1.5 points from a year ago to 8.9%, but were also higher than in the March quarter.

Boeing shares were down 1.5% at $67.56 in midday trade.