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Boeing flying higher after big upswing in earnings

By Dominic Gates
Seattle Times aerospace reporter

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Boeing yesterday delivered the aerospace industry's most bullish results since the aviation downturn began in 2001, with a first-quarter financial performance that soared along with an improving economy.

The company raised its forecasts of revenues, profits and commercial-airliner deliveries.

Puget Sound-area factories will gear up to deliver 300 jets next year, 15 more than had been expected, with a further increase anticipated for 2006.

But the news won't mean new hiring in this region, a spokesman emphasized later — only more stability for the current work force.

Having started the week with the boost of a 50-jet 7E7 launch order from All Nippon of Japan, Boeing Chief Executive Harry Stonecipher was ebullient yesterday about business prospects.

"We've raised the tempo around here. Let's make decisions. Stop waiting for all the lights to turn green," Stonecipher said in a teleconference with Wall Street analysts and reporters. "I'm thrilled with what I'm seeing."

Stonecipher's good news came largely from a phenomenal 18 percent growth in revenue on the defense side of the business.

Money was so flush that Boeing chose to pay an extra billion dollars in pension contributions this quarter and promised to step up research-and-development spending, primarily on the 7E7, by 1 percent.

The company raised its revenue forecast for 2005 by $2 billion. It expects to take in $52 billion this year and as much as $59 billion next year.

"Our investment and performance is paying off," Stonecipher said during the conference call.
 
Putting Boeing's performance in the context of a strengthening U.S. economy, he noted air travel is back to levels not seen since Sept. 11, 2001.

"I think the economy is moving," Stonecipher said. "Having the economy recover is good for the Boeing company."

Boeing credited the expected rise in deliveries in 2005 to renewed demand for the single-aisle 737, built in Renton. Most of the forecast deliveries have buyers.

With the demand for airliner spare parts and services also way up, the company raised its revenue forecast for the commercial division by 10 percent, twice as much as the jet-delivery increase.

The commercial-airplane division earned $352 million on $5.3 billion in revenue for the first quarter, or 6.6 percent profit.

But the real engine of the quarter's financial upswing was the booming growth performance of the Integrated Defense Systems division, which raked in $738 million in profit from $7.4 billion in sales, delivering 10 percent profit.

The military unit, based in St. Louis, Mo., is headed by Jim Albaugh, who had been under heavy pressure for financial hits in previous years and who now must deal with current ethics investigations of the division.

Stonecipher used the occasion to back his embattled lieutenant.

"Seeing Jim up there on the nape of the neck of the horse and riding hard is quite satisfying," Stonecipher said.

Federal prosecutors are investigating Boeing's use of documents from rival Lockheed Martin to win government rocket-launch contracts. They are also looking into possible corruption and conflicts of interest stemming from the hiring of an Air Force official who negotiated her job with Boeing while also negotiating a contract for the Air Force to buy Boeing 767 tankers.

Although new ethics issues were reported Tuesday over Boeing's rocket-launch contracts in the late 1990s, Stonecipher was optimistic about getting beyond the defense-procurement scandals by the end of this year.

He expressed frustration that a Boeing employee, who earlier testified under oath about the rocket-launch bidding process while still at the company, had resigned and then changed his testimony.

On the other major ethics scandal, Stonecipher said the company's financial forecasts assume the 767 tanker deal will go through.

Pending an outcome, he said, the company could stave off a decision on closing the 767 line in Everett until as late as next year.

"We still think there will be a tanker program for the U.S. Air Force," he said. "We're counting on the tanker program for the sustainment of the 767 line."

The tanker deal to sell and lease as many as 100 tankers is on hold until next month as the Pentagon waits for three separate reviews of the contract.

In an interview yesterday, former Defense Department Comptroller Dov Zakheim said the deal will likely need major revision.

"Will it survive intact as a proposal? I doubt it, because the Inspector General raised too many questions," Zakheim said, as reported by Bloomberg News.

Zakheim was co-leader of a Pentagon lease panel that reviewed and approved the original proposal submitted to Congress in May 2003.

During yesterday's conference call, Stonecipher glowingly defended the prospects of two Boeing business units that have been mired in red ink: the high-speed Internet service called Connexion, based here, and the satellite-making division in Southern California.

He said he had expected to shut the troubled satellite division when he returned to Boeing in December as CEO, but decided that it should have bright prospects after one more year of losing money.

As for Connexion, upon which Boeing has spent hundreds of millions of dollars without return over several years, Stonecipher promised that the company had "the money and the patience to invest in it."

Analyst Howard Rubel with Schwab Soundview Capital Markets said both units must have passed a vigorous "wire-brush test" by Stonecipher.

"If you can stand the scrutiny that Harry gives," Rubel said, "you must have a good business."

Boeing's profit for the first quarter was $623 million, or $0.77 a share, on revenue of $13 billion. Results included a $0.12 per-share gain from a federal tax refund.

This compares with a loss of $478 million, or $0.60 a share, on revenue of $12.3 billion a year ago.

Wall Street, which a week ago had on average forecasted a profit of $0.46 a share, naturally welcomed the bullish results, impressed especially by the surge in revenue on the military side.

"That's pretty healthy growth for a $25 billion business," said Paul Nisbet of JSA Research.

Schwab Soundview's Rubel, though attributing part of the financial performance to accounting, said that it also suggested a broad "improvement in fundamentals."

Boeing stock yesterday closed up 48 cents, or 1 percent, to $44.03.

Boeing is up 4.6 percent for the year, while the Dow Jones industrial average, of which it is a member, is down 1 percent.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com