An­a­lyst cau­tious on Boe­ing free cash flow

Financial Mirror (Cyprus) - - FRONT PAGE - By Jon C. Ogg

When Boe­ing Co. (NYSE: BA) re­ported earn­ings in Jan­uary, some an­a­lysts were sur­prised at the huge boost the com­pany re­ported in its free cash flow (FCF). In the third quar­ter of 2014, Boe­ing’s FCF to­taled just $317 mln, and in the fourth quar­ter FCF rose by a fac­tor of nearly 14 to $4.33 bln. How did that hap­pen?

Ac­cord­ing to aerospace an­a­lyst David Strauss at UBS, Boe­ing was able to pull for­ward ad­vances and progress pay­ments for new air­planes due to the “very strong or­der cy­cle and in­creas­ing pro­duc­tion rates over the last sev­eral years driv­ing large cus­tomer pre­pay­ments.”

Here is how the air­craft maker gets paid for a new air­plane, ac­cord­ing to Strauss, as cited by Lee­ham News & Com­ment: “When a cus­tomer places an or­der, as­sum­ing an or­der is for fur­ther out than 18-24 months, Boe­ing col­lects a small down pay­ment at ~2% of the pur­chase price (1% of list), which is recorded as an ad­vance (li­a­bil­ity) on its bal­ance sheet. Then roughly 18-24 months prior to de­liv­ery, the cus­tomer be­gins mak­ing ad­di­tional pay­ments to Boe­ing, with roughly 40% of the pur­chase price (20% of list) in to­tal due prior to de­liv­ery. Ini­tially, th­ese pre­pay­ments are also recorded as ad­vances.

“Once Boe­ing be­gins air­craft pro­duc­tion, it re-clas­si­fies ad­vances as progress pay­ments, which is a con­tra as­set within its in­ven­tory ac­count. The cus­tomer pays the re­main­ing ~60% bal­ance at the time of de­liv­ery.”

UBS says that its model for es­ti­mat­ing Boe­ing’s ad­vances and pre­pay­ments has “cor­re­lated well with ac­tual pre­pay­ments other than dur­ing 2014.” Strauss also notes that to­tal pre­pay­ments are fore­cast to av­er­age around $2 bln for 2015 to 2017, about $2 bln to $3 bln less than the av­er­age for 2011 to 2014. Boe­ing’s av­er­age FCF for the four years from 2011 to 2014 is $5.2 bln, ac­cord­ing to data com­piled by Mar­ketWatch.

Strauss out­lines UBS’s fore­cast for Boe­ing ahead of the com­pany’s sched­uled April 22 earn­ings an­nounce­ment: “We think cash gen­er­a­tion will come through be­low ex­pec­ta­tions as 787 cash costs im­prove at a con­tin­ued slow pace, while tougher pric­ing in the back­log, pen­sion and cash taxes are head­winds. We con­tinue to see risk to the large air­craft pro­duc­tion cy­cle, as de­liv­er­ies as a per­cent­age of the in­stalled base are well above nor­mal lev­els, while higher in­ter­est rates have the po­ten­tial to limit fur­ther growth and cheap fuel makes older air­craft more at­trac­tive rel­a­tive to new.”

The head­winds that UBS out­lines could be mag­ni­fied by the loss of loan guar­an­tees if the U.S. Ex­port-Im­port Bank’s char­ter is not re­newed in June. That could force the com­pany to pro­vide the loan guar­an­tees it­self and add to its FCF dif­fi­cul­ties. Other head­winds in­clude or­ders for the cur­rent ver­sion of the 777 and de­ferred pro­duc­tion charges that could con­tinue to rise for the next quar­ter or two.

Boe­ing shares were down frac­tion­ally Tues­day morn­ing, at $152.78 in a 52-week range of $116.32 to $158.83.

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