Boeing reports strong 3Q results

Oct. 24, 2018: Boeing reported a stronger than expected third quarter when it announced financial results today.

The press release is here.

The stock was up more than 3% ($10.87) in early morning trading.

Wall Street analysts issued these quick notes ahead of the earnings call:

Bernstein Research

Boeing reported Q3 Core EPS of $3.58, vs consensus of $3.47 and our estimate of $3.28. The beat included a $0.71/share benefit related to a tax settlement, which was more than offset by charges for the new T-X Trainer and MQ-25 programs (together, $0.93/share), and cost growth on the KC-46 Tanker program ($0.09). Excluding the tax item and the T-X and MQ-25 charges, Core EPS for existing programs would have been $3.80, $0.33/share above consensus, reflecting revenues that were 7% above our estimate.

Segment margins were 280 bps below our estimate, and would have been 10 bps below, excluding the charges for the T-X and MQ-25. BCA reported segment margins 180 bps above our estimate, even including $112m of cost growth on the KC-46 Tanker program; ex the charge, BCA margins would have been 14.0%. Deferred production on the 787 declined by $19m per aircraft, which we estimate put unit margins above 15% in the quarter. Margins at BDS were negative because of the charges on the T-X, MQ-25 and Tanker programs; even excluding these, BDS would have been 150 bps below our estimate.

Boeing reduced its guidance for CapEx by $0.2 bn, effectively raising its free cash flow guidance by that amount on unchanged operating cash flow guidance – although it raised guidance for revenues by $1.0 bn and for EPS by $0.60/share

Canaccord Genuity

Boeing (BA) reported adjusted Q3/18 EPS of $3.58, as compared to our estimate of $3.62. The quarter also included a $0.71 tax benefit. The company raised its 2018 revenue and EPS guidance, reflecting tax, upside in commercial airplanes, and the addition of KLX into the Services business. FCF in the quarter was $4.1bn, up over Q3/17. Total revenue grew 4% in the quarter.

Operating margins in the Commercial Airplane business were 13.2%, ahead of our estimates, and reflecting the partial recovery in the 737 schedules. Operating margins in the Defense business were off our estimate, coming in at ~9% (when we exclude the $64m KC-46 charge and the $691m T-X and MQ-25 initial investments). The reported margins in the defense business were (4.3%). Margins in the Services business were 13.3%. Total company margins were ~9% in the quarter compared to our estimate of 11.8% (reflecting largely the softer defense margins).

Boeing increased its full year adjusted EPS estimate to now $15, but kept its FCF unchanged. The company remains confident that it will hit its full year commercial airplane delivery target, which we view as incrementally positive. We would note that excluding the tax benefit, EPS was softer than expected, but we continue to be impressed by the cash generation. Boeing used $2.5B to repurchase 7m shares, and currently has $9.6bn remaining on its authorization. We believe investor concerns about the macro issues (tariffs/trade, emerging market growth, interest rates) have subsided to an extent, and the strong FCF in the quarter is a positive catalyst for the stock. We continue to see pressure to the long-term margin targets, investor sentiment around the NMA, macro risk, and new program development on both the defense and commercial markets. However, FCF remains strong, and recent supply chain risks appear to have lessened.

Cowen & Co.

BCA Led Ops Beat Ex Charges; Free Cash & Book/Bill Both Were Strong

  • Q3 “core” EPS of $3.58 beat by 11¢, as tax gains (-10.8% vs. 17.0%E; added $1.00) and underlying segment EBIT beat (added 45¢) outweighed $867MM tanker & new start charge ($1.25 @ 16% tax). Excluding tanker charges, op margin of 12.8% exceeded our 0%E, all attributable to Commercial (BCA).
  • Revenues of $25.1bn (+3%) came in $1.3B better, reflecting across the board strength at BCA (favorable mix), Defense (satellites; tanker; F/A-18 deliveries), and Global Services (+14% y/y; $4bn in orders).
  • BCA margin ex-tanker (pared 80bps) of 14.0% was well ahead of our 1%E. The underlying favorable variance reflected (1) lower R&D spend of $180MME – added 100bps and (2) strong execution and favorable 777 mix.
  • 787 deferred production cost amortization rose $190m to $782m in Q3 (vs. $592m in Q2 & $799m in Q1). Core unit deferred production increased to $22.3m/unit vs. $16.9m in Q2.
  • Defense margins ex-tanker and TX/MQ25 charges (pared $755m or 13.2%) of 8.9% missed our 9.8%E. Global Services (13.3% vs. 14.7%E) was a bit light on leaner mix. Corp & unallocated costs were higher due to timing.
  • Free cash flow of $4.1bn exceeded both consensus of $2.5bn and our $1.9bn. This reflected lower 787 deferred and higher payables & progress payments. Share repo totaled $2.5bn or 7m shares (1% of O/S), with $9.6bn authorization remaining (over 18-24 months).
Credit Suisse

We view this result as modestly negative: The company posted a strong top line result, even in light of lower deliveries in the quarter. However, margins were a mixed bag – robust at BCA, and softer at BDS and BGS.  Still, the company was able to beat consensus EPS by 11 cents (+3%) with some significant tax help (71-cents, partially offsetting charges worth 93-cents). Boeing booked a total of $867m in charges in the quarter, all related to defense platforms ($691m  attributable to recent T-X and MH-139 wins, and $176m on KC-46, split between BDS and BCA). Ex-charges, BDS margins still declined sequentially and Y/Y to 8.9% by our math, and BGS margins also dipped Q/Q and Y/Y to 13.3%, on mix and higher costs. With Boeing’s mixed track record on KC-46 to date, we think investors may be concerned about the future margin profile of the recent defense wins, and we think the market may view the T-X and MH-139 charges as operating.

Bright spots: BCA had an exceptionally robust quarter on higher 787 margin and operating efficiencies, which more than offset the KC-46 charge. There were no block extensions in the quarter, so we view the strength at BCA as pure productivity. The company generated FCF of $4.1bn (OCF of $4.6bn), representing conversion of 1.74x net income and a 43% increase Y/Y. The company also recorded deferred production burndown of $657m.

2018 Guidance Update:  BA raised revenue and EPS guidance for the full year, and reiterated cash flow expectations. The $1.0bn increase in revenue was attributable to both BDS and BGS (BCA was unchanged). The outlook for BCA margins improved by 50-100bps, though BDS margin expectations dropped by 350-400bps to 6.5% as a result of the company’s recent contract awards. The anticipated effective tax rate dropped from 16.0% to 9.5%, and planned R&D and capex both declined by $200m.

Goldman Sachs
Bottom Line: BA operating results are better than our forecast on revenue, segment EBIT, and FCF, despite charges related to Tanker and newly-awarded Defense programs. Excluding those items and a tax benefit, we estimate adjusted EPS is 16% ahead of FactSet consensus. Free cash is also well above our estimate in the quarter, which had assumed greater impact from the supply chain and operational issues. Full-year operating cash guidance was reiterated. 787 deferred change is better than expected, suggesting a large sequential improvement in cash margin, assuming block size and program margin are unchanged.
Details: Reported core EPS of $3.58 is ahead of Factset consensus at $3.47 and our $3.45. We estimate that on an adjusted basis, core EPS would have been $4.04 if excluding Tanker and new Defense program charges in addition to a tax benefit. Operating results were driven by stronger-than-expected revenue in all segments, as well as better BCA margins. Boeing raised revenue guidance 1% at the mid-point (to $98bn-$100bn from $97bn-$99bn, includes KLXI; consensus is $98.5bn) and EPS guidance 4% at midpoint (to $14.90-$15.10 from $14.30-$14.50, consensus is $14.65), implying an approximate $1.06 raise (7% vs. guidance midpoint) if adjusting for this quarter’s charges.
Strength in BCA margin was unexpected, given the operational challenges in the quarter, suggesting stronger operational performance and possible block extensions. The company reported charges of $691mn on the T-X and MQ-25 competitions it won at the end of the quarter, as well as an additional $176mn charge related to cost growth and delays on KC-46.
JP Morgan

Core EPS of $3.58 beat our forecast of $3.55 modestly and consensus at $3.47. Earnings at BCA drove ~70c of upside while a ~70c tax benefit helped offset ~95c of charges related to planned investments on the T-X and MQ-25 platforms and ~25c for KC-46.

Boeing generated $4.6bn of cash from ops in Q3. The result is ~$2bn above our forecast with upside coming mainly from payables and accrued liabilities. Boeing maintained the 2018 cash from ops guidance for $15-15.5bn which implies ~$3bn of cash from ops in Q4, which would be the lowest total for the year. Boeing reduced capex guidance $200m. Timing items within working capital are likely to be a Q4 cash headwind vs Q3 but we imagine there is a path to upside in the current cash from ops guide.

Core EPS guidance is up 60c. Boeing is now targeting $15/share at the midpoint which includes several puts and takes, most importantly the benefit of a lower tax rate. Commercial margins are up for good performance and lower R&D while Defense profitability is down for the new program investments and soft performance in the quarter. Sales guidance was boosted ~$500m in both Defense and Global Services. Boeing maintained the margin guide in Services despite missing our forecast in Q3 by 200 bp.

Commercial performance was impressive. Boeing beat our forecast by ~20% despite ~$110m of Tanker charges. Some of the upside was driven by R&D ~$130m below our forecast but underlying profitability has remained solid. Ex charges and R&D expense, we estimate that BCA did a mid-17% margin in Q3, in line with Q2.

Charges on new defense programs. The charges on T-X and MQ-25 will raise eyebrows and we certainly did not expect them; however, we were not looking to these wins as profit drivers for BDS in the coming years. Instead, we believe Boeing used its scale to gain access to franchises that management hopes will pay off over decades.

787 deferred balance declined ~$655m. We estimated $630m.

Wells Fargo

EPS SUMMARY. Q3 Core EPS of $3.58 was ahead of our $3.30/consensus $3.49. Excluding unusual items (tax settlement; “investments” for the recently-won T-X Trainer and MQ-25 UAV), Core EPS was $3.80. The upside was largely due to Commercial Airplanes (BCA) margins (13.2% vs. 11.5% est; +$0.36; 787 margin raised) and sales (+$0.18). Core BCA results were arguably even better as they included $112m (70bps) of KC-46 Tanker charges. In all, we estimate the $3.80 includes $0.35 of Tanker charges.  CASH FLOW. Q3 FCF of $4.2B was above our $3.4bn estimate, helped by working capital timing. Boeing repurchased $2.45bn of shares (below our $3.0B estimate); full-year share count guidance was unchanged.    ORDERS. Q3 book/bill was 1.13x, with a 0.83x b/b in BCA (176 net unit orders and 190 deliveries); 2.04x in Defense (T-X, MQ-25, MH-139, KC-46); and 0.96x in Services.



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