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Boeing: Strong Q4 787 Deliveries Will Help Cash Burn

 January 08, 2013 05:46 PM

(By Mani) Boeing Co. (NYSE: BA) reported higher than expected 787 deliveries for the fourth quarter at 23, including 11 in December, totaling 46 in 2012. The strong deliveries would help the company reducing cash burn.

Investors seemed to have underestimated the prospects of 787 due to the current macro-economic jitters and a recent slowdown in new commercial aircraft orders. These order slowdown was conceived by some investors as an ominous sign for Boeing as the company's shares have historically traded on order trends.

However, the latest report showed that said it booked 1,203 net commercial airplane orders last year, the second-largest number in its history. The company also delivered 601 airplanes, the most since 1999, helped by an increase in production rate. To date, Boeing said 49 787s have been delivered to eight customers.

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787 total inventory is expected to be relatively flat in the fourth quarter, after increasing significantly over the last several years as a $1 billion reduction in physical inventory will be offset by a roughly equivalent increase in deferred production.

"While we see total 787 inventory not growing for the first time, Boeing actually guided on its Q3 conference call to a $1B reduction in Q4 following a $5B increase Q1-Q3. We see the 787 inventory balance holding relatively flat in Q4, not declining," UBS analyst David Strauss said in a client note.

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Moreover, the 787 deliveries are expected to continue to outpace production in 2013-15, although more modestly than in the fourth quarter as mostly early line unit (LU) number aircraft now remain to undergo change incorporation that will take longer to deliver.

"Grouping by LU number, of the 26 total aircraft that remain to undergo change incorporation, we estimate four of seven are LU 4-10 aircraft (57%), 10 LU 11-20 aircraft, six LU 21-30 aircraft (60%), but only six of 36 LU 31-66 aircraft (17%)," Strauss noted.

Physical inventory will decline yielding a cash tailwind moving forward as deliveries exceed production; although, higher in-process inventory to support the planned production ramp could temper expectations.

The 787 program was launched in April 2004 with a record order from Japan's All-Nippon Airways (ANA). Fifty-nine customers from six continents of the world have placed orders for 870 airplanes valued over $178 billion, making it the most successful twin-aisle launch of a new commercial airplane in Boeing's history.

Boeing, which has used composite materials to make 50 percent of the primary structure of the 787, delivered the first 787 to ANA on Sept. 25, 2011.

Given years of delays and disappointments, it's easy to overlook that the 787 really is a big deal. If manufacturing issues are indeed being resolved, the 787 represents the bulk of Boeing's topline growth in the years ahead. On the flip side, it would also raise the prospect of $20 billion plus of working capital releases over the next decade.

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