In the first quarter of 2012, The Boeing Company (BA), soaring on higher deliveries of commercial airplanes, posted strong numbers. In the reported quarter the company posted operating earnings per share (EPS), excluding special items, of $1.11, beating both the Zacks Consensus Estimate of 96 cents and the year-ago EPS of 78 cents. The company’s strong numbers came from higher commercial plane deliveries which more than offset a tepid quarter for defense.
On a reported basis, Boeing reported quarterly EPS of $1.22 per share versus 78 cents in the year-ago quarter. The 11 cents difference between reported and operating earnings, during the reported quarter, was owing to a reduction in a litigation-related reserve.
Operating Statistics
On the revenue front, higher airplane deliveries pulled up the quarterly revenue year over year by 30% to $19.4 billion, above the Zacks Consensus Estimate of $18.3 billion.
Segment Results
Commercial Airplane
Boeing’s Commercial Airplane segment saw a 32% rise in deliveries to 137 units in the reported quarter. As a result, Commercial Airplanes revenue increased by 54% to $10.9 billion on higher delivery volume and mix. In the reported quarter the company delivered 99 units of 737 series and 20 units of 777 series airplanes versus deliveries of 87 and 13, respectively, in the year-ago period. The company also delivered 7 units of 767 (4 in the year-ago period), 6 units of 747 and 5 units of 787. In the year-ago period no 747 and 787 were delivered.
Operating margin rose 270 basis points to 9.9%, reflecting the higher deliveries and lower Research & Development expenditure. This was partially offset by the dilutive impact of initial 787 and 747-8 deliveries and higher period costs.
Commercial Airplanes booked 412 net orders during the reported quarter. Backlog at the end of the reported period remains strong with more than 4,000 airplanes valued at a record $308 billion.
Boeing Defense, Space & Security
Boeing Defense, Space & Security segment witnessed an 8% rise in its quarterly revenue to $8.2 billion. Of these sub-segments Boeing Military Aircraft (BMA) and Global Services & Support (GS&S) witnessed a top-line climb of 27% and 13%, respectively. The upside was primarily due to initial revenue for the F-15 Saudi Arabia contract and higher volume in integrated logistics. Only the sub-segment, Network & Space Systems (N&SS) recorded a 23% fall in revenues. N&SS revenue decreased owing to lower volume on Brigade Combat Team Modernization program.
Quarterly operating margin rose by 20 basis points to 9.0%. This was due to strong execution across various GS&S programs and improved performance in integrated logistics in BMA. However, this was partially offset by lower margin at the N&SS programs. In the N&SS sub-segment, margin fell owing to lower volume and satellite mix.
Backlog at Defense, Space & Security segment increased 20% to $72 billion on F-15 and C-17 order activity in the quarter, bringing the backlog to more than two times the unit’s projected 2012 revenue.
Boeing Capital Corporation (BCC)
Boeing Capital Corporation reported quarterly revenues of $125 million compared with $143 million in the year-ago quarter. The segment registered earnings of $38 million compared with earnings of $52 million in the year-ago period. At quarter-end, BCC’s portfolio balance declined to $4.2 billion, down from $4.3 billion at the beginning of the year on portfolio run-off and asset sales.
Financial Condition
Boeing ended the quarter with cash and cash equivalents of $6.7 billion and short-term investments of $3.8 billion. At fiscal-end 2011, the company had $10.0 billion in cash and cash equivalents and $1.2 billion of short-term investments. The company generated $837 million of cash from operating activities in the reported quarter, compared with $953 million used in the year-ago period. Long-term debt decreased to $8.8 billion at the end of the reported period from $10.0 billion at the end of fiscal 2011.
Outlook
Boeing enjoys a unique position as the largest aircraft manufacturer in the world in terms of revenues, orders and deliveries, and is one of the largest aerospace and defense contractors in the world. Besides, its revenues are spread across more than 90 countries around the globe.
Boeing raised its fiscal 2012 earnings per share to a range of $4.15-$4.35 versus its earlier guidance range of $4.05-$4.25. Revenue guidance for 2012 is reaffirmed to be between $78 billion and $80 billion. Commercial Airplanes’ 2012 deliveries are expected to be between 585 and 600 airplanes and are already sold out. This includes an expected 70 to 85 787 and 747-8 deliveries. Commercial Airplanes’ 2012 revenue is expected to be between $47.5 billion and $49.5 billion with operating margins between 8.5% and 9%. Also recent media speculation puts Boeing as the frontrunner in the $15 billion aircraft order from United Continental Holdings Inc. (UAL).
In the near term however we expect deliveries to take a hit, specially the 787 Dreamliner, owing to the April tornado in Wichita, Kansas disrupting production for more than a week at a Spirit AeroSystems Holdings Inc. (SPR) facility there. Spirit AeroSystems is one of the main suppliers to Boeing’s commercial airplanes business, specially the nose section for the 787 Dreamliner and fuselage work on other Boeing airplanes.
In the defense space, the company also secured contracts like the domestic and international C-17 Globemaster III orders; and a performance-based logistics contract for the sustainment of the Republic of Korea Air Force fleet of F-15s.
However, the threat of defense cutbacks will loom over the company going forward. Overall, Boring expects defense revenue for 2012 to be between $30.0 billion and $30.5 billion with operating margin greater than 9%. The sentiment is echoed in the outlook provided by defense peer General Dynamics Corporation (GD) which also released its numbers today. Going forward, General Dynamics does not expect significant new additions to its order backlog barring its Information Systems and Technology programs.
Boeing Capital Corporation expects that its aircraft finance portfolio will continue to decline in 2012.
Boeing’s 2012 R&D forecast is between $3.3 billion and $3.5 billion. Capital expenditures for 2012 are expected to be approximately $2.0 billion.
Boeing currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. This is in sync with other aerospace and defense behemoths. A clearer picture will emerge tomorrow when the big daddy of defense Lockheed Martin Corporation (LMT) along with Raytheon Company (RTN) comes out with their versions of the first quarter.
