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.
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.
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.
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).
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)
(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.)