“Boeing reported first-quarter revenue of $15.2bn, primarily driven by lower 787 deliveries and commercial services volume, partially offset by higher 737 deliveries and higher KC-46A Tanker revenue,” the company states in its announcement. “GAAP loss per share of ($0.92) and core loss per share (non-GAAP) of ($1.53) reflect year-over-year KC-46A Tanker improvement, higher 737 deliveries, and lower commercial airplanes period costs, partially offset by lower tax benefits and higher interest expense. Boeing recorded operating cash flow of ($3.4)bn.”
Boeing recorded a charge of $318m for the VC-25B (Air Force One) program. Impacts from COVID-19 and a vendor that Boeing sued (and which counter-sued) are cited as reasons.
Productions rates remain unchanged.
The press release is here.
But buried in the slide presentation for the earnings call at 10:30 EDT is a one line reference that US-China relations are a business environment watch item. Credit Suisse notes this is the first time Boeing has so referenced China in earnings calls.
First reactions to the financial reports and China are below.
Significant cash burn continues. Free cash flow in the quarter was ($3.7bn), in line with our estimate, but below the consensus estimate of ($3.3bn). We continue to view cash flow as more important than reported earnings, due to the impacts of the MAX delivery ramp, 787 delivery slowdown and accounting charges. We expect cash flow to improve in Q2 this year depending on MAX and 787 ramps. 787 deliveries are picking up, but the MAX is stalled. There were no changes to production rates or timelines. The target remains for MAX production at 31/month in early 2022, 787 production remains at 5/month, and first delivery of 777X is targeted for late 2023 (all previously announced). Defense impacted by VC-25Bcharge. Defense, Space and Security revenue was above our estimates, but margins were below our estimates, driven by the driven by the ($318m) charge referenced above. The company attributed this charge relates to COVID disruptions and performance issues at a supplier. But, there was no tanker charge this quarter.
Boeing reported Q1’21 sales/core EPS $15.22bn/($1.53) vs. Street $15.23bn/($0.97). The EPS miss was almost entirely driven by a $318m VC-25B (Air Force One) charge at BDS. Free Cash Flow burn was ($3.68bn) vs. Street ($3.94bn). Boening ended Q1 with $21.9bn of cash and marketable securities. Overall, we view this report as neutral to slightly negative, though commentary on call will be key, particularly with respect to 737 MAX and 787 delivery rates. Additionally, any updated commentary on potential influence from U.S.-China relations on deliveries and future production will also be key. Management’s presentation now references U.S.-China relations as a risk.
Commercial Airplanes: Sales/operating profit were $4,269m/($856m) vs. [our estimate] $4,992m/($840m). The sales miss vs. estimate may reflect more aggressive price discounting vs. what is in our model. Boeing noted that the 737 program continues to produce at a low rate and reiterated its goal of increasing production to 31/mo by early 2022. The 787 program transitioned to the 5/mo rate during Q1. No changes to production rate plans on any programs. Boeing incurred $568m of abnormal production costs during Q1.
Defense, Space & Security: Sales/operating profit were $7,185m/$405m vs. [our estimate] $6,586m/$527m. The EBIT miss was driven by a $318m charge on the VC-25B program (Air Force One), which was driven by COVID-19 impacts and performance issues at a key supplier. BDS began production on the T-7A during Q1 and delivered the first F-15EX to the USAF.
Other items: Boeing inserted the language “U.S.-China relations a watch item” on its business environment update. This seems to be the first time this language has appeared so prominently, and likely reflects the ongoing inability of Boeing to get the MAX approved by China’s aviation regulators. Risk was well-known to investors, however. Boeing made $1,172m of customer concession payments in the quarter.
Bottom line: Boeing 1Q21 free cash was better than FactSet consensus and our estimate, the MAX production plan was held (while investors appeared concerned it could slide), and the 787 production plan was held (while investors appeared concerned it could be taken down once more). BCA backlog grew sequentially for the first time since 2Q18. 1Q21 commercial operating earnigs is clearly still negatively impacted by the pandemic, but Boeing is seeing positive second derivative in most key leading indicators.
Details: Revenue of $15.22bn compares to consensus at $15.23bn, down 10% YOY on still-disrupted deliveries and aftermarket. Core EPS of $(1.53) includes a $318mn pre-tax charge on the VC-25B program in Defense and continued abnormal MAX production costs. The Boeing Global Services margin is up 20bps sequentially to 11.8% (240 bps ahead of our model), and BDS adjusted margin of 10.1% is 130bps better than our estimate. Including abnormal MAX production costs, which we model, the BCA EBIT loss is slightly better than our estimate. The 1Q21 free cash use is $(3.7bn), compared to our $(4.2bn) estimate and consensus at $(3.9bn), and is the third quarter of sequential improvement from 2Q20. The 787 deferred balance declined $173mn sequentially, which we estimate implies a mid-teens cash margin on what is now trough production. Boeing reiterated production rates, including the MAX gradually increasing to 31/mo by early 2022 with further gradual increases based on demand, the 787 at 5/mo, and the 777X at 2/mo (with deliveries beginning in late 2023).
Boeing burned more cash in Q1 than we expected but sees lower cash usage from here, assuming 787 and 737 deliveries ramp. The timing of China’s certification of the 737 MAX will likely play a role in the number of MAX deliveries, and Boeing is making clear today that this is a watch item. We expect the conference call at 10.30am to have affect the stock reaction.
Boeing burned $3.7bn of cash in Q1. This is worse than our forecast and consensus for a ~$3.1bn outflow. BCA earnings were well below our forecast, but we are not sure how much of that is cash, while working capital was a significant use of cash, including receivables, payables and accrued liabilities. Mgmt cited advances as a YOY cash headwind but they were a source of cash on the cash flow statement.
China is important for 737 deliveries. The earnings slides mention US-China relations twice as a watch item, references that did not appear in the 4Q20 presentation and the ability to deliver MAXs there, which requires government certification of the aircraft, [and] will likely be a key driver of the number of overall 737 deliveries this year, which, in turn, drive cash flow and the production rate. Management continues to expect a rate of 31/mo in “early 2022” while also noting that it will assess the demand environment in setting the rate, a new caveat.
BCA loss was greater than expected. The ~$850m loss was well below our estimate for $200m. 737 abnormal production costs may have played a role. BCA R&D of ~$270m was down only ~$10m from 4Q20 and may be bottoming at this level.
BDS missed, BGS beat. Defense earnings of $405m missed our estimate by $280m due to a $318m charge on the Air Force One program (VC-25B), where issues had been in the press during the quarter. BGS profitability recovered more than expected, with the EBIT margin reaching 11.8% vs mid-single-digits in 2H20.