* Defense revenue slips but margins improve
* Profit $1.35/share vs Street view $1.13
* Revenue $20 billion vs $17.7 billion a year earlier
* Shares close lower after rising 3 percent
By Alwyn Scott
Oct 24 Producing more airplanes and cutting
costs in its defense business helped Boeing Co post
stronger-than-expected profit for the third quarter, and the
company notched up its earnings forecast for the third time this
Boeing is churning out cash as it delivers more jets to
customers, and it took the opportunity on Wednesday to say that
"first and foremost" it intends to give money back to
shareholders through dividends and share buybacks.
But the solid report was tempered by pension costs that
appeared to be rising more than expected. Boeing forecast that
pensions will cost $3.5 billion next year, 40 percent more than
in 2012, as its obligations rise largely because of low interest
"That's going to be a cash-consuming item, and it probably
caught some people by surprise," said Russell Solomon, a credit
analyst at Moody's Investors Service. "This is a problem that's
not going to get better unless interest rates start to rise."
Boeing raised its full-year earnings forecast to a range of
$4.80 to $4.95 a share, compared with $4.40 to $4.60 previously.
It said revenue should reach $80.5 billion to $82 billion
this year, driven by more sales in the defense, space and
security businesses. Revenue in 2011 totaled $68.7 billion.
The company said it was on track to deliver up to 600
commercial jets this year, compared with 477 in 2011.
In the quarter, it earned $1.0 billion, or $1.35 a share,
compared with $1.1 billion, $1.46 a share, a year earlier.
Revenue rose to $20.0 billion from $17.7 billion.
Analysts surveyed by Thomson Reuters I/B/E/S had expected
earnings per share of $1.13.
"Boeing is getting pretty good at this," Robert Stallard, an
analyst at RBC Capital Markets, wrote in a note to clients. He
called it "another trouble-free quarter with no execution
But he added: "If there is one dark cloud it is the looming
increase in pension expense next year, which we doubt has been
fully reflected in consensus estimates."
Boeing shares ended 0.2 percent lower at $72.71 on Wednesday
after rising as much as 3 percent earlier in the session.
The commercial aircraft business delivered 22 more jets in
the third quarter than a year ago, due in large part to 787
deliveries, opening a second 787 assembly line, and ramping up
output of 737 and 777 jets.
The delivery increase drove revenue in the commercial
airline business up 28 percent to $12.2 billion.
But Boeing earned less from the jets because many were newer
aircraft, which tend to have lower profit margins. The business
also earned less from aircraft services, which tend to have
higher margins. Overall margins contracted to 9.5 percent from
The commercial airplane business "was a little soft on the
top line and slightly softer on the margin, but not as weak on
margins as feared," said Ken Herbert, an analyst at Imperial
The defense business performed better than expected in the
quarter. Although revenue fell slightly from a year earlier, the
margins improved, showing Boeing's ability to cut costs as
defense spending is contracting in the United States and Europe.
"They're ahead of the curve compared with their peers,"
PENSION EXPENSE RISES
Boeing said that excluding pension costs, earnings rose 5
percent from a year earlier, to $1.89 a share from $1.80.
Boeing Chief Financial Officer Greg Smith said the company
made $1.5 billion in discretionary contributions to pensions
this year, prompting analysts to question how that builds
Boeing said that pre-funding the pension lowers the
long-term expense. Smith said Boeing was committed to rewarding
shareholders and would give more details on the cash deployment
strategy - share buybacks and dividend increases - later this
"When it comes to cash deployment, first and foremost, (the)
priority is returning cash to shareholders," Smith said,
according to transcripts of a conference call with analysts.
Despite "pension headwinds," the defense, space and security
business "maintained double-digit margins in a challenging
environment, while commercial airplanes continued to build
momentum with 787 deliveries and 737 MAX orders," Chief
Executive Jim McNerney said in a statement.
Defense revenue fell 4 percent to $7.8 billion in the third
quarter, but margins improved to 10.5 percent from 10 percent.
The higher margins surprised most analysts, but left questions
about whether they can be sustained.
"I am encouraged by the improved margin trends," said Carter
Leake, an analyst at BB&T Capital Markets. "But we'll see if
these margins can be continued into 2013."
Analysts said they were focused on whether Boeing can
continue to speed up delivery of 747 and 787 jets, which
currently drag on earnings, and arrive at the point where they
are contributing to cash flow.
"The question is when they get to cash-flow break-even" with
the 747 and 787 jets, Leake said.