Boeing reported its second quarter and half-year results today. The press release may be found here.
Initial analyst take:
Boeing reported Q1:2012 EPS of $1.27, versus our estimate of $1.20 and consensus of $1.12. Q1 sales came in at $20.0 bn, above our $19.2 bn estimate and consensus of $19.4 bn. The difference in revenues was all due to higher defense revenues. Although we do not view near term EPS as the most important driver for Boeing stock, this was a positive result. Long term cash flows are most important, which we see as strongly linked to 787 program performance. Deferred production for Q2 again did not meet the trajectory one would want to see on a learning curve. But, we reached the conclusion after meetings with Boeing in June that it was premature to develop a baseline off of reported deferred production at this stage. There is still substantial uncertainty in that trajectory. We see progress on the production ramp and supplier performance as important indicators, though, which appear to be on track
- EPS of $1.27 beat by 15-cents leading to a guidance raise of 25-cents.
- Outlook: Expectations were high, but we do not think that this level of guidance increase was expected yet. That said, we believe there is additional upside to guidance as we do not think management would have used all of its “cushion” this early in the year. Consequently, we see consensus of $4.56 rising further.
- Margins in BCA of 10.2% were strong driven by volume and mix; BDS margins of 9.1% were in-line with Q1 and with the full-year guidance.
- 787: We see a nice improvement in learning curve with estimated intangible 787 unit costs declining to $118M in Q2 (from $133M in Q1). Note, the improvement is probably greater given that Charleston’s first delivery is embedded. The tangible unit cost of 787 is estimated at $108M for total cash unit cost of ~$226M, down from ~$241M in Q1.
- The change in 787 deferred production in the quarter was $1,235M; dividing this by the units produced in the quarter (3.5 aircraft x 3 months = 10.5 aircraft yields the $118M estimated intangible unit cost for Q2.
- R&D: BCA R&D was $560M in the quarter (up from $544M in Q1). Boeing retained its forecast for total R&D expense of $3.3-3.5B for the year.
- Boeing delivered a solid Q2, and we expect the stock to perform well out of the gate. Our main concern coming into earnings was the outlook for 737 margin, and since the 737 block extension is likely to take place in 2H, we still expect some level of cautious commentary on the call. Management did raise BCA margin guidance to the top of the prior range of 8.5-9.0%, which is still below our estimate of 9.5% (we thought prior guidance was excessively conservative) but at least suggests that management feels good about performance. Higher defense sales also drove the 25-cent increase in 2012 EPS guidance.
- We see aircraft demand and 787 execution as the two key issues for the stock. Regarding aircraft demand, we expect little incremental info today. On 787, we expected little cash flow progress in Q2 since there were only six deliveries (this was already disclosed), but today management maintained guidance for roughly 40 deliveries this year, indicating confidence that the planned 2H pickup.
- *Q2 at $1.27: BA Q2 EPS at $1.27 vs $1.14 UBS and $1.12 consensus. All the upside relative to our model came from BDSS (Defense) as BCAG (Commercial Airplanes) came through slightly below our expectations with 10.2% margins. Pre R&D BCA margins at 15% roughly in line with Q1 while we estimate pre R&D margins ex 747-8/787 at 17%. BDSS surprisingly grew revenues 7% with stable margins at 9.1%. FCF at $552M or 57% of net income, although slightly better than our forecast, dragged down on $2B+ inventory build and $763M pension contribution.
- *Minor improvement in 787 cash costs: 787 deferred production grew by $1.2B, roughly in line with prior quarter, although on slightly higher production. We estimate deferred production at $120M per airplane produced during the quarter down from $132M in prior quarter. BCAG reported a $144M unit accounting loss reflective of 747-8 and 787 losses, slightly higher than $138M in Q1 on one additional 747-8 and 787 delivery.
Comments from the earnings call:
CEO Jim McNerney
CFO Greg Smith
- JM: Aft fuselage in Charleston is a challenge but not a show stopper in getting 787 to rate. Big thing is getting final production line steady with no further stops in mod center. This has been happening.
- JM: Will be working on 787 modification airplanes for another year and a half.
- JM: Relatively little change in outlook for stability of backlog; cancellations and deferrals below average. The world is fragile economically but more than half the airplanes are replacement, with 15-25% improvement over old airplane so payback is relatively quick. Financing still available.
- GS: Two changes in accounting blocks: 777 increased by 50, 747 by 25.
- GS: No impact from RR engine issue on 787.
- GS: 787 guidance, 35-42 deliveries this year, have delivered 11 YTD. About 50% from change incorporation facility, 50% from new production.
- GS: Will increase accounting block on 737 in third quarter, reflecting MAX development and introduction and eventual NG ramp down.
- JM: A320 line in Alabama: if produces better performing, lower cost airplanes, it’s a good move, but customers don’t care where it’s built. It complicates supply chain. My guess they also have challenges with employees in Europe. It’s tough enough to manage one company than two. (Editor: Hope he remembers this the next time Boeing threatens unions and WA State with another production site.)
- JM: Farnborough “commitments” are typically the way we make announcements. Commitments are being converted faster than we planned.
- JM: 787-10X-hard to predict when will bring to board for approval; end of this year, beginning of next year. Fidelity of what we want to do technically is nearing. It will be the absolute perfect next step on 787.