Leeham News and Analysis
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Leeham News and Analysis
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Boeing 1Q15 earnings: EPS beats consensus but cash flow concerns dominate analyst reaction
April 22, 2015: Boeing reported its first quarter earnings today, with earnings per share well ahead of analyst expectations. Of the analyst reports we see, only Bernstein was pleased with the cash flow, with others concluding free cash flow was below expectations. Increasingly analysts believe Boeing has been accelerating aircraft deposits (advances) to improve cash flow and to meet share buyback promises.
A summary of the earnings call follows the initial analyst reaction.
Analyst reaction:
Bernstein
Boeing reported Q1:2015core EPS of $1.97, well above our estimate of $1.82and consensus of $1.83. GAAP EPS was $1.87, also well above our $1.74 and consensus $1.79.Revenues of $22.15bn were below consensus of $22.5bn but slightly above our estimate of $22.05bn. The company also reiterated its 2015 Core EPS guidance of $8.20-$8.40 on revenue of $94.5-96.5 bn. Margin performance was strong, as margins beat our estimates across all units.
787 deferred production costs rose to$26.9billion. This represents an increase of $793mn in Q1, compared to $960 mn in Q4(both on 30 airplanes).The trajectory is consistent with our estimate and company guidance. We project deferred production to peak in late 2015 at roughly $28 billion.
The company generated $(0.5)bn in free cash flow in Q1,on operating cash flow of $0.1 bn. Cash generation was low in part because of the acceleration into Q4 2014. Management reiterated 2015 free cash flow guidance of at least $6.2 bn. Boeing has historicallyhad weaker cash generation in Q1. Expectations this year are that cash will come primarily in H2 as it has in prior years.
Buckingham
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Credit Suisse
First and foremost, 787 unit deferred finally showed a meaningful (17.4%) decline to $26.4M.
Second, BDS margins were strong, driving most of the EPS beat with a modest assist from tax and share count. Regarding share count, Boeing mirrored last year’s Q1 with a sizable $2.5B buyback though this does not necessarily set a cadence for the year, as it did not last year.
Third, unit accounting at BCA was positive as well as the improved performance on 787 appears to reflect good progress on -9.
Fourth, BCA margin in Q1 at 10.5% was above guidance, implying to us that the guidance affirmation reflects some conservatism.
The primary negative is a $486M use of FCF, which is roughly $1B below expectations. Given that we believe that this remains a FCF-driven story some investors may question Boeing’s ability to bridge to $6.2B in FCF with a Q1 start this far off consensus, and we suspect this is what may drive the shares down in early trading. That said, we recognize that Q4 FCF strength likely accelerated some funds from Q1 and could partially explain the lower result this quarter. Further, it is not unusual at Boeing or elsewhere in Aerospace to see highly back-ended FCF as in Q4’14. Thus, we could see the shares gaining traction as this will likely be addressed during the earnings call.
Goldman Sachs
Boeing reported mixed 1Q15 results. EPS in the quarter beat consensus expectations, with revenue worse than expected but margins better than expected. The sequential deferred production increase while still large on an absolute basis, was a smaller rate of change than we expected. Free cash flow in the quarter was worse than expected, including a sequential decline in advances (off a 4Q14 comparison that seemed to have pull forward). BCA book-to-bill in the quarter was 0.60X. All components of the full-year 2015 outlook were reiterated.
1Q15 GAAP EPS was $1.87, above our $1.83 estimate. “Core EPS” (defined by Boeing as GAAP EPS + unallocated pension expense per share) was $1.97, above our $1.86 “core” estimate and consensus of $1.80 (was $1.86 12 days ago).
Total revenue of $22.15bn was 2.3% below our $22.68bn estimate and below consensus of $22.60bn. Revenue downside was concentrated in Defense which declined 12% yoy including BMA down 21% (delivery timing can be lumpy).
Segment EBIT margin of 10.7% was 70 bp above our estimate with Commercial 50 bp above and Defense 130 bp above our expectations. In Defense, upside was concentrated at Global Services & Support.
Free cash flow in the quarter was weak at a use of $(486)mn compared to a source of $615mn in the year-ago period and below our estimate for a use of $(200)mn. BA repurchased $2.5bn of stock in the quarter compared to $1.0bn last quarter, and above our estimate of $1.5bn. Operating cash flow of $88mn was below our estimate of $500mn.
The 787 deferred production balance increased to $26.94bn from $26.15bn last quarter. That $793mn sequential increase compares to our estimate of $901mn and is lower than the $960mn sequential increase from 3Q14 to 4Q14.
Total company backlog decreased 1% sequentially to $495bn. BCA book-to-bill was below 1.0X – at 0.67X, and BDS was 1.10X.
Boeing reiterated all aspects of its 2015 guidance including core EPS of $8.20-$8.40, cash flow from operations of >$9bn, and revenue of $94.5-$96.5bn. Boeing still expects to deliver 750-755 aircraft in 2015 with BCA revenue of $64.5-$65.5bn and an operating margin of 9.5%-10.0%. Boeing expects total BDS revenue of $29.5-$30.5bn with an operating margin of 9.75%-10.0%.
Our 12-month $132 price target is derived from a target 14.5X CY16E P/E. Key risks include (1) Potential for strong cash and capital deployment, (2) strong aircraft backlog, (3) DoD spending (Sell; last close $153.33).
Wells Fargo
EPS SUMMARY. Boeing’s Q1 Core EPS of $1.97 was ahead of our/consensus $1.80. Relative to our forecast, upside was from: (1) Commercial Airplanes (BCA) margin (10.5% vs. our 9.6% estimate; +$0.14); (2) Defense (DSS) margin (11.1% vs. 9.4%), with particular strength in Global Services & Support (+$0.11); and (3) higher unallocated pension/post-retirement – an add-back to computing Core EPS (+$0.07). These positives were offset partly by: (1) lower-than-expected sales ($22.15B vs. our $23.1B and consensus $22.5B), -$0.09; and (2) higher corporate expenses, -$0.06. Within DSS, Military Aircraft revenue was down 21% (Apache, Chinook, F-15, C-17 deliveries).
CASH FLOW. Q1 FCF of $0.1B was well below our $1.0B estimate due larger-than-expected growth in inventory ($1.8B) and reduction in customer advances ($0.4B). We believe inventories were hurt by the seat issue delaying a few 787’s and advances in Q1 2014 were helped by international military orders. Boeing repurchased $2.5B of stock in Q1 (average price: $147), in line with our forecast.
ORDERS. As expected Q1’s book/bill slipped to 0.80x, as BCA booked only 110 net orders (0.67x b/b) while DSS posted a 1.09x b/b.
GUIDANCE UNCHANGED. As expected, Boeing reiterated 2015 Core EPS guidance of $8.20-$8.40 (consensus: $8.48) on sales of $94.5-$96.5B. The implied FCF guidance remained greater than $6.2B, and the full-year average share count estimate was unchanged.
787 DEFERRED IMPROVED. Deferred costs for the 787 increased $793M to $26.9B – a deceleration from Q4’s $960M sequential increase. It also showed about 17% improvement in deferred per unit; this sequential growth is important progress to reach the peak in deferred.
Summary of earnings call
Analysts tell us Boeing is increasingly narrowing the ability of analysts to ask questions, excluding those who have been critical and ask tough questions.
We follow our usual format of paraphrasing comments.
Jim McNerney (JM)
Greg Smith (GM)
JM:
- Revenue increasing 21% at BCA. $2.5bn in stock repurchased, dividend up 25%. First 787-9 built in Charleston delivered.
- Low oil prices aren’t affecting aircraft orders. New aircraft deliver lower costs even at lower prices, higher revenues, longer range.
- 777 Classic is essentially sold out in 2016, half sold out in 2017 and many slots sold in 2018. 777X enters production in 2018.
- 737 MAX remains on track for delivery in 2017.
GS:
- Backlog more than $435bn, with eight years of production.
- Expect 787 program to be cash positive this year, deferred production to begin declining once rate 12 in 2016. Rate of increase in deferred production will begin declining later this year.
- 787 Unit cost declined 30%.
- We continue to see operating cash flow to be more than $9bn this year, loaded toward back end of the year.
- Returning cash to stockholders remains a top priority for us.
- Reaffirms 2015 guidance in all respects.
JM:
- We remain focused on quality, performance, executing on ramp up of production, delivering for customers.
Q&A
- (On 777): JM: We have about half of the orders for the 777 Classic we need to fill the bridge. We are feathering in some new technology on -300ER so it is derisked for 777X. We’re on budget, slightly ahead on derisking. The technical advances or reliability is coming in a little more robustly than we had hoped.
- (On 787): GS: 787-9 costs are going down very well, close to half our deliveries
(A technical glitch blew away the balance of this post in an unrecoverable manner. When a transcript becomes available via Seeking Alpha, we’ll link to that.)
“787 DEFERRED IMPROVED. Deferred costs for the 787 increased $793M to $26.9B – a deceleration from Q4’s $960M sequential increase.”
Great news. 2 Years ago:
Boeing expects its 787 deferred production balance to peak at $20 billion in late 2014 or early 2015 as production stabilizes at 10/month, up from $15.9 billion now.
http://www.istockanalyst.com/finance/story/6264185/boeing-787-costs-imply-bigger-2013-14-cash-burn
It Quaterly’s are always positive and luckily stock holders have an extremely short memory.
Well, short memory; it’s probably just that analysts look towards the future rather than to the past. Often times a winner benefits from a “short memory” – accept the loss, move forward, and spend your energy controlling what you can control.
Many frames currently delivered was booked in the year 2006, when the assumption was that final assembly of the 787 would require only twelve days. Presently, frames require between 80 and 110 days of final assembly, according to All Things 787, and with elevated employment levels according to CFO Greg Smith. Many other erroneous assumptions together constituted a flawed premise for the pricing policy of the frames sold during that time. The total cost of those flawed assumptions pertaining to the 800+ frames booked in the years 2005, 2006 and 2007 is probably a number of tens of billions of dollars; but hey, there’s little that can be done about that now and Boeing Commercial Airplanes has a backlog of $500 billion that they might as well focus their attention on. Accept the loss and move forward; simple as that.
My understanding of this situation is that the deferred costs will continue to increase until production balance is reached, i.e. when the cost of manufacturing per unit will reach parity with the price each unit was sold at. According to Javier’s latest projections this could take another four or five years, if I recall correctly.
The total deferred production cost and unarmortized tooling already reached 31B$ (26.942B+3.913B) . With a 10 millions average profit per aircraft, Boeing need to sell 3 100 aircrafts just to recovered the investment and this figure doesn’t even include penalties and R&D. Even assuming an average profit of 20 millions, Boeing still need to sell more than 1500 airframes just to recover production cost and tooling.
We are not talking about the same thing. I was referring to the cash-flow position of the 787 which should become positive in a few years from now. What this means is that when the cost of manufacturing per unit will be lower than the actual selling price, fresh cash will start coming in to absorb the deficit. The deferred costs will keep rising until that point is reached. But overall I doubt, like you do, that the programme will ever be profitable.
How is Boeing going to compete properly with the A330neo on price for new 787 orders with that enormous level of deferred costs hanging over their heads?
NB: I’m talking about new orders with deliveries post 2020; i.e. after most of the current order book has been delivered.
I think Boeing is still loosing about 15-20 millions per airframe considering current production rate and deferred production cost increase. This can be explained by huge discount that Boeing must concede in order to by competitive against Airbus. If Boeing make enough money with other programs (737, 777, 777X), it can still survive by selling the 787 at lost. By doing that, Boeing can still sell to 787 at a interesting price for airlines but this will significantly affect the investment for future project.
The problem is not how much money Boeing can ask for the 787 TODAY. The problem is the price at which the first 800 units were sold. This, associated with a highly successful marketing campaign, explains the early success of the 787. Unfortunately this apparent triumph turned out to be a Pyrrhic victory.
Good point but the A330NEO will only create additional pressure for the 787. Boeing will probably not be able to increase the price of the 787 and this will significantly reduced profit margin after “breakeven” (I assume the Boeing will “breakeven” and start make profit after 800 airframes).
Yes, that is a serious impediment for Boeing. I think the customer response towards the A330neo was totally unexpected for Boeing. But that is only where the problems start. We can add to this the problems with the 737 MAX which apparently is not meeting its promisses on fuel burn. This will cost a lot of money to CFMI for sure, but we can also expect it to have a negative impact on the MAX programme as a whole. Over the long term this leaves only the highly successful, and highly profitable, 777 to bring decent revenues to the company. But it needs to be modernized and that is going to be very expensive. This means that when the last 777 Classic will have been delivered the programme will become cash-flow negative again, and is likely to remain in that position for some time. It may also take longer than expected for the KC-46 to become profitable.
We cannot blame shareholders for wanting a quick return on their investment. But we can blame the board for not resisting it. Boeing has underestimated the competition for too long now. It is not too late to bring the ship back on course, but I am afraid it will need a new captain with a fresh vision of the situation. It will also require a lot of time and money.
Soon development of the 787-10 will reach its maximum and deffered cost could reach $30 billion. Regardless of what McNerney and others wants us to believe.
It does seem that deferred production costs, which has increased by $7 B in two years, has become like airlines (normal) loss in fuel hedging, a way to shuffle costs off the bottom line so it doesnt effect executives bonuses.
In 5 years they will still be announcing a DPC increase ?
Leeham: “Increasingly analysts believe Boeing has been accelerating aircraft deposits (advances) to improve cash flow and to meet share buyback promises.”
Yes, but that is for the last quarter. What about the next five years? That is about the time it will take for the 787 to be cash-flow positive. What are the existing profit margins on the 737? And what will they be for the over-promissed 737 MAX? Same questions for the 777 and 777X. Has anyone made any cash flow projections for the next five years for Boeing as a whole?
If I ask those questions it is not so much that I worry for Boeing, but because I worry about future product developments. I expect the 777X to be very expensive and this could push the NSA further into the future. On the other hand the 787 will probably have started to be cash-flow positive by then. But unfortunately the deferred costs will still be there.
So, is there an analysis somewhere of Boeing aircraft development programs before transition to McBoing, with the executive suite takeover that happened with the “Merger”, and comparing that to the aircraft development programs since? I think that would be interesting.
It is pretty obvious the McBoeing relationship with its workforce has certainly suffered greatly. No need to spend time analyzing that.
Just wondering….
The immediate future for Boeing looks a little bleak.
Lots of orders but at what price?
747-8 A loss
KC-46 Looks like a loss.
777X very few customers.
737NG Great product and profitable but is on the way out.
737Max Should be good, but if the Leap X only achieves a “hop”, possible consequences.
787 Has to recover almost $30 billion of deferred costs somehow.
777 The only jewel in the crown, but production is running down.
Mr. McN and his team, in my opinion are not offering a legacy of any great promise.
Maybe he should retire now and get someone there who can right the ship.
(No name comes to mind i’m afraid.
Maybe Louis Gallois is up for a last challange 😉
*1944 i.e. age 71 in 2015
In 2012, immediately after leaving EADS, Gallois became the (french) government’s Commissioner for Investment (ex WP:EN)
Wouldn’t worry too much about kc46,history shows that these home government jobs usually turn in a profit by way of change orders.
Mr. McNerney’s latest Harvard Business School buzzword appears to be”derisked”. It is hard to fathom how an executive who was so intimately involved with all the travails on a derivative program like the 747-8 would characterize any future program in such a way.
787 Unit cost declined 30%.
What I’d sill like to know is how much the absolute costs are above originally planned for levels.
Historically a bit of a quandary. All the overstatements were instrument to the overwhelming sales success.
Now the disparity between promise and reality rubs off onto other metrics ( i.e. deferred costs mushrooming balanced by advanced advances.)
As long as the financial ecology shows no allergic reactions I expect things will continue and other cosmetic measures will also be activated.
“Boeing has been relentlessly steering investors to look at the cash flow rather than the earnings performance,” Robert Stallard, an analyst at the Royal Bank of Canada, wrote in a note to clients.
“Boeing is perhaps learning the hard way that if you tell investors to focus on the cash flow, then you had better deliver it,” he added.
http://www.nytimes.com/2015/04/23/business/boeing-droops-as-dreamliner-jet-fails-to-deliver.html?_r=0
Boeing is playing games with perceptions and feeling of stockholders and other supporters. McNerney is paid based on short term stock prices.
The analysts quoted above do the same. There’s always a solid looking number to suggest progress is booked. It’s a more easy job if your public wants to hear good news only. Just say what they want to hear with different words and they’ll love you.
Predicting something bad and say it was better then expected always works. For me all the impressive calculations, variables, trends used by the not so independent analysts go for the same strategy. ” If you can’t convince them, confuse them.”
Leeham: “Increasingly analysts believe Boeing has been accelerating aircraft deposits (advances) to improve cash flow and to meet share buyback promises.”
The first time I read that sentence I did not make much of it because I have been watching Boeing for some time now and ‘knew’ it was going to be strapped for cash sooner or later. But twenty-four hours and a few posts later it is striking me as a potential turning point in Boeing’s history.
Unless someone was to explain to me that this is common practice, I view this as a rather dire situation for Boeing. I mean it’s almost like borrowing money from a co-worker until the next pay check! Or until the next quarter in this case. That’s why I find it so hard to believe today. But I have to give it credence because if this rumour was unfounded it would not be given much attention by Leeham News and Comment.
It is hard for me to imagine mighty Boeing going to its best customers asking for money earlier than it was supposed to be deposited in Boeing’s account. And all this in anticipation of below-expectations quarterly results. One way or the other it is not good for Boeing’s image with both insiders and outsiders.
My understanding is that this was just to show good results to shareholders after a share buy-back campaign. But still, I think it goes a little deeper than that. Good for Boeing if there is little more to it. Yet the risk of this being leaked was very high. In which case the situation would be hard to explain for Boeing and hard to understand and evaluate for the rest of us.
Silly question, but if these advances are being diverted elsewhere, where will Boeing go to fund production of the frames that the advances were paid against?
If the story that current 787’s are costing $30 million more than sale price, the overall math does not look great.