Boeing Beats Big, Talks Big

Updated from 9:34 a.m. EDT

Boeing ( BA) announced a blow-out first quarter that topped Wall Street estimates, as expected, but guided 2004 and 2005 earnings higher, based on strong business trends.

Boeing had net income of $623 million, or 77 cents a share, a $1 billion improvement from its net loss of $478 million, or 60 cents a share, in the previous year. Excluding the impact of gains from a federal tax income, Boeing earned 65 cents a share, which tops the 44-cent Wall Street estimate, as expected.

Revenue came in at $13 billion, up from $12.3 billion in the year-ago quarter and better than the $12.7 billion expected by analysts, according to Thomson First Call. In reaction, shares of Boeing were up $1.06, or 2.4%, to $44.61, at midday.

"Boeing's first-quarter 2004 results reflect our drive to improve profitability through intense focus on execution across all of our businesses," said Harry Stonecipher, in his first full quarter as the company's new CEO and president.

Last Thursday, Boeing told analysts that it would significantly exceed their first-quarter estimates, but declined to give a rationale. That left analysts divided over whether the strong quarter was due to a timing issue, or if the beleaguered aerospace giant is seeing business improve.

The bulls have it. Boeing raised guidance for 2004 and 2005 because of better-than-expected results from its two core businesses, Integrated Defense Systems (IDS) and Commercial Airplanes, and lower pension expenses.

Boeing expects earnings per share to come in between $2.05 and $2.25 in 2004, up from earlier guidance between $1.75 and $1.95 a share and higher than current expectations of earnings of $1.86 a share. In 2005, the company said earnings would come in between $2.20 and $2.40 a share, up from previous guidance between $1.95 and $2.20 a share. Currently, Wall Street expects Boeing to make $2.07 in 2005.

Furthermore, Boeing expects 2004 revenue to come in near $52 billion, which is in line with previous guidance and current Wall Street expectations. But in 2005, the company said that revenue would be between $57 billion and $59 billion, up from earlier guidance between $55 billion and $57 billion. Currently, Wall Street expects Boeing to bring in $55.5 billion.

Operation: Damage Control

The strong first-quarter results and better-than-expected guidance can only help Boeing rebuild its reputation on Wall Street. Last week, Darleen Druyun, a former company vice president, pleaded guilty to a federal conspiracy charge as part of a government investigation into Boeing's bid on a $17 billion contract to lease and sell tankers to the Pentagon.

In November, Boeing fired former CFO Michael Sears and Druyun for unethical behavior, leading to the resignation of then CEO Phil Condit. Soon after, the company brought Stonecipher, a former president and board member who retired in 2002, back into the fold to help repair the company's reputation.

Stonecipher's been in this situation before and is well-known for his candor when dealing with bad press. In 1987, while with the Sundstrand Corp., a defense company, Stonecipher negotiated a settlement with a federal grand jury investigation into allegations the company had overcharged the government.

On Boeing's conference call discussing results, Stonecipher stressed the company's commitment to restoring its reputation with the customers, suppliers and its own employees, adding that the company continues to execute, despite the public relations problem.

"I don't think the scandal is distracting totally but it's certainly frustrating," he said. "The reason I think I was chosen to come back is that I've been here before unfortunately. I knew what to expect and I'm going through this one thing at a time. Waiting this long to release earnings was the biggest stress I've had lately."

Boeing's Defense Unit, Its Best Offense

All of Boeing's units performed well in the first quarter, but the IDS unit continues to be the company's new growth engine, supplanting the commercial airline unit, accounting for more than half of the company's total revenue.

In the first quarter, IDS revenue came in at $7.4 billion, an 18% jump from a year ago, led by better-than-20% increases in revenue from network systems and launch and orbital systems. The IDS unit's adjusted earnings from operations came in at $738 million, up 22% from last year, driven by rising adjusted operating margins, which came in at 10% for the quarter, up from 9.6% a year ago.

Despite the company's recent difficulties in Washington, D.C., the company said its IDS unit was on track for continued outperformance.

"IDS anticipates continued growth and performance in its Network Systems segment, driven by captured programs such as Future Combat Systems and its leading position in missile defense, homeland security, intelligence and DoD network-centric programs," the company said, noting that operating margins for aircraft and weapons and support systems units will fall from first-quarter levels.

Boeing's current expectations for IDS could change, however, if the government decides to cancel its contract to provide refueling tankers for the Air Force. The company said its outlook factors in the successful signing of a proposed contract to deliver 100 tankers, which has come under fire from Pentagon officials for overcharging the government.

"If the tanker deal doesn't materialize there will be a one-time non-cash charge and there may be some supplier charges to go with it," said Stonecipher. "Guidance will be off if the tanker program fails to materialize."

Low-Cost Growth Drives Commercial Unit

The commercial airlines unit showed strength, delivering 76 airplanes in the first quarter, up from 71 last year. Adjusted earnings from operations came in at $352 million, up 54%, because of Boeing's increased focus on cutting costs and increasing efficiencies. With adjusted operating margins coming in at 6.6%, up from 4% a year ago, Boeing offset the unit's 6% slide in revenue because of weak airplane services and used aircraft sales volume.

The company's next-generation aircraft, the 7E7 Dreamliner, announced its first launch customer, All Nippon Airways, which will buy 50 planes, worth $6 billion at list prices. The company still lacks an American partner for the 7E7, which intends to reinvent the flying experience for travelers while ushering in a new era of fuel efficiency.

But it appears that Boeing will continue to finish a close second to Airbus, a unit of EADS, when it comes to commercial aviation. In its guidance, the company said it expects to deliver 285 planes in 2004 and approximately 300 planes in 2005, up from earlier guidance that said 2005 deliveries would be flat with 2004.

"A number of low-cost carriers continue to gain market share, remain profitable and order new airplanes," said the company, in a statement. "Commercial Airplanes is experiencing increased demand for 737s as airline passengers continue to value frequent, direct routes and airlines focus on reducing costs. As a result, the company expects airplane deliveries to increase slightly in 2005 before a further increase in 2006."

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