Boeing Sees Challenges After 2012

Manila Bulletin
October 29, 2012

(Bloomberg)- Boeing Co., which has boosted its 2012 profit foercast 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, blostered 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 JP Morgan 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 respondingto what McNery termed a "dramatic" replacement cycle, with airlines trying to reduce fuel costs by investing in new planes.