July 22, 2015: Boeing reported its 2Q2015 and 1H2015 earnings today, with higher revenue, $3.3bn in the all-important cash flow and a strong commercial backlog.

The earnings call presentation is here. The earnings call is here at 10:30am EDT.

This is the first earnings call for Dennis Muilenburg, who received the CEO title in July when Jim McNerney was kicked upstairs to non-executive chairman. Muilenburg had been president and COO since December 2013.

Last week, Boeing announced a pre-tax charge against the KC-46A tanker program of more than $800m ($523m after tax). This brings the pre-tax charges to about $1.3bn. Some analysts believe the latest charge was set before Muilenburg became CEO, while other observers believe this could be the first example of Muilenburg willing to take tough decisions that McNerney wasn’t willing to accept when it came to program charges.

Here is the first take from aerospace analysts:

Buckingham Research (Sell)

Goldman Sachs (Sell)

Boeing reported 2Q15 operating results above expectations driven primarily by upside in Defense margins. The full-year EPS outlook was reduced to include the recently announced tanker charge, partially offset by higher Defense margin and a lower tax rate. We estimate BA raised the segment EBIT portion of its outlook compared to prior by 2% (when stripping out tanker and tax rate), and believe investors expected a segment EBIT raise as prior guidance looked conservative on margins. The sequential change in deferred in the quarter matched our estimate and last quarter’s pace, but remains fairly large. Free cash flow in the quarter was higher than expected, with positive working capital change a large contributor. Boeing reiterated full-year free cash guidance, as it had indicated when it announced the tanker charge.

2Q15 “Core EPS” (defined by Boeing as GAAP EPS + unallocated pension expense per share) was $1.62, above consensus of $1.42 and our $1.37 “core” estimate.

Total revenue of $24.54bn was 1% above consensus of $24.22bn and 2% above our $24.04bn estimate. Revenue upside vs. our estimate was concentrated in Defense which declined -2.6% yoy.

Segment EBIT margin of 7.2% was 60 bp above our estimate with Commercial 10 bp above and Defense 190 bp above our expectations. In Defense, upside was concentrated at Military Aircraft.

Free cash flow in the quarter was $2.6bn compared to $1.4bn in the year-ago period and above our estimate for $1.1bn. Positive working capital change contributed $1.6bn to that. BA repurchased $2.0bn of stock in the quarter compared to $2.5bn last quarter, and above our estimate of $1.5bn.

The 787 deferred production balance increased to $27.73bn from $26.94bn last quarter. That $790mn sequential increase is in-line with our estimate and nearly matches the $793mn sequential increase from 4Q14 to 1Q15.

Total company backlog decreased 1% sequentially to $489bn. BCA book-to-bill was below 1.0X – at 0.75X, the second consecutive quarter below 1.0X – and BDS was 1.11X.

Boeing updated its 2015 guidance to reflect the impact of the KC-46 tanker charge, better Defense margins, and tax rate. Boeing now expects core EPS of $7.70-$7.90 (down from $8.20-$8.40), GAAP EPS of $7.60-$7.80 (down from $8.10-$8.30), a BCA EBIT margin of 9.0% (down from 9.5%-10.0%), a BDS EBIT margin of 9.5% (down from 9.75%-10.0%), and an effective tax rate of 29.0% (down from 30.5%). All other aspects of guidance were reiterated, including revenue of $94.5-$96.5bn, cash flow from operations of >$9bn, and capital expenditures of $2.8bn. Boeing still expects to deliver 750-755 commercial aircraft in 2015.

JP Morgan (Overweight)

Q2 looks solid ex previously disclosed charge.

Cash flow was strong, the P&L was in line with some puts and takes, 787 cash burn was consistent with management’s forecast, Boeing continues buying back stock, and 2015 core EPS guidance fell by less than Friday’s 77-cent tanker charge. 2Q does not resolve the major debates about the stock, such as long-term cash flow potential, the timing and magnitude of 787 unit cost reduction, and the strength of aircraft demand; however, it shores up confidence in the 2015 cash flow outlook, which was in question for some after Q1.

Q2 cash flow better than expected; guidance unchanged.

Market focus has been on cash flow in recent earnings periods, and Boeing’s strong Q2 should offer some support today. With $3.3 bn of cash from ops in 2Q15, Boeing is at $3.4 bn YTD vs unchanged guidance for >$9 bn in 2015, and while there is work to do, management has noted previously that cash flow is 2H weighted and Boeing appears to be on track.

Improved performance offset 1/3 of the tanker charge.

Management lowered 2015 core EPS guidance by 50 cents to $7.70-7.90 for the 77-cent tanker charge partially offset by performance, mainly at BDS, and a lower tax rate. This includes Global Services & Support, where margin guidance increased 50 bps to 11.5%. Also, Military Aircraft margin guidance fell only 150 bps, or ~100 bps less than the Defense portion of the tanker change implies. Commercial margin guidance fell 75 bps at the midpoint, in line with the BCA portion of the charge.

P&L broadly in line.

Core EPS of $1.62 beat our estimate by 16 cents. BDS beat by 14 cents of EPS on Military Aircraft sales and margins and unallocated added ~10 cents more. This was partially offset by modestly weaker than expected Commercial EBIT, though sales, core margin, and R&D were all nearly in line.

787 cash burn continued at 1Q15 pace.

The $790 mn increase in Q2 was consistent with Q1 and management commentary that it would remain at this level. Current expectations are for increases in deferred production to start slowing again late this year with a peak in 2016 and then reductions beginning next year around the time of the increase in rate to 12/month.

UBS (Neutral)

Q2 core EPS $1.62 including $0.77 Tanker charge

BA reported Q1 core EPS at $1.62 including $0.77 pre announced Tanker charge so $2.39 vs our $2.08. Beat driven by margin upside at BDSS (Defense) at 11.5% (ex Tanker charge) above our model at 9.4%, lower unallocated costs and a lower share count. BCA margins below at 10.2% (ex Tanker charge) vs our 10.5%. OCF at $3.3B, above our $2.1B forecast on $250M positive advances/progress payments and $900M BCA spares/used drawdown while $790M 787 deferred build was worse than our forecast. BA repurchased $2B in shares in Q2 vs $2.5B in Q1.

787 deferred grows $0.8B, now ~$28B

787 deferred production grew by $790M, virtually same as $793M in Q1 and above our $700M forecast, with balance now at $27.7B. We estimate deferred production per unit at ~$23M on ~34 aircraft produced down from ~$26M in Q1. We estimate deferred peaks at ~$30B.

2015 core EPS guide lowered for Tanker charge partially offset by BDSS upside

Core EPS guidance adjusted lower for Tanker charge, partially offset by stronger performance at BDSS ($0.27). BA now sees core EPS $0.50 lower at $7.60-7.80. FCF guidance unchanged at >$6.2B implying >$3.6B in 2H. We will look for more color during 10:30 am conference call.

Wells Fargo (Outperform)

EPS SUMMARY. Boeing’s Q2 Core EPS of $1.62 was comfortably ahead of our $1.34 and consensus $1.37, with upside from: (1) Defense (DSS) margin (7.2% vs. our 5.3% estimate, +$0.14 EPS), with particular strength in Military Aircraft; (2) net corporate & tax expenses, as deferred compensation expense declined due to the share price (+$0.10 net); and (3) Commercial Airplanes (BCA) margin (7.1% vs. our 6.9% estimate; +$0.05). Q2 EPS included the previously-announced $0.77 KC-46 Tanker charge.

CASH FLOW. Q2 FCF of $2.6B was ahead of our $2.0B estimate, helped by favorable net changes in payables/accruals ($0.8B) and customer advances ($0.6B). Boeing repurchased $2.0B of stock in Q2 (average price: $143), slightly down from Q1’s $2.5B but still well ahead of 2014’s $1.5B average quarterly pace.

ORDERS. As expected Q2’s book/bill slipped to 0.86x, as BCA (0.75x) booked 171 net orders and DSS posted a 1.1x b/b.

2015 GUIDANCE HIGHER (EX-KC-46 CHARGE). Boeing reduced 2015 Core EPS guidance to $7.70-$7.90 from $8.20-$8.40; excluding the KC-46 charge, guidance was RAISED $0.27 (3%) for general operating improvement-though a 150 bps lower tax rate is a part of the improvement. Similarly, the implied FCF guidance remained >$6.2B, but this INCLUDES about a $0.5B-$0.6B KC-46 headwind (this was disclosed in last week’s KC-46 press release). The full-year average share count estimate was unchanged.

787 DEFERRED GREW AT SAME PACE. Deferred costs for the 787 increased $790M to $27.7B–about in line with Q1’s $763M sequential increase. It showed a modest sequential increase to $26.3M in deferred per unit; while Boeing says the change is in line, we think investors are waiting for more sequential improvement to reach the peak in deferred.