Boeing Reports Second-Quarter Results and Raises 2014 EPS Guidance
OREANDA-NEWS. The Boeing Company [NYSE: BA] reported second-quarter core earnings per share (non-GAAP) of USD 2.42, reflecting strong performance and favorable tax items (Table 1). Second-quarter 2014 results included a USD 272 million after-tax charge (USD 0.37 per share) on the KC-46A Tanker program reflecting the cost of additional engineering and systems installation work required to complete the Engineering and Manufacturing Development contract. Favorable tax items include the previously announced tax benefit of USD 116 million for the 2007-2008 tax settlement, as well as an additional tax benefit of USD 408 million in the second quarter.
Core earnings per share guidance for 2014 increased to between USD 7.90 and USD 8.10, from USD 7.15 to USD 7.35, reflecting the USD 408 million tax benefits, strong operating performance and the KC-46A Tanker charge. GAAP earnings per share guidance for 2014 increased to between USD 6.85 and USD 7.05.
"Strong operating performance across our production programs and services businesses drove revenue and earnings-per-share growth and healthy operating cash flow, which supported USD 1.5 billion in additional share repurchases in the quarter," said Boeing Chairman and Chief Executive Officer Jim McNerney. "We delivered our first 787-9 and our 8,000th 737, successfully completed a key missile defense intercept test, and delivered our 100th EA-18G Growler to the U.S. Navy."
"While challenges resolving engineering and systems installation issues on our tanker test aircraft are resulting in higher spending to maintain schedule, the issues are well understood and we remain on path to begin flight testing fully provisioned tankers the first part of next year," McNerney said.
"With 783 new commercial airplane orders to date this year and significant contracts in the quarter for military aircraft and satellites, our backlog remains large and diverse. Overall, our strong first-half financial performance, sustained focus on growth and productivity, and positive market outlook support our increased earnings guidance for the year," he said.
Operating cash flow in the quarter was USD 1.8 billion, reflecting commercial airplane production rates, strong operating performance and timing of receipts and expenditures (Table 2). During the quarter, the company repurchased 11.4 million shares for USD 1.5 billion, leaving USD 6.8 billion remaining under the current repurchase authorization expected to be completed over approximately the next two years. The company also paid USD 0.5 billion in dividends in the quarter, reflecting an approximately 50 percent increase in dividends per share compared to the same period of the prior year.
Cash and investments in marketable securities totaled USD 11.3 billion at quarter-end (Table 3), down from USD 12.2 billion at the beginning of the quarter, primarily due to the share repurchases. Debt was USD 8.9 billion, unchanged from the beginning of the quarter.
Total company backlog of USD 440 billion was unchanged from the beginning of the quarter, and included net orders for the quarter of USD 23 billion.
Commercial Airplanes second-quarter revenue increased 5 percent to USD 14.3 billion on higher deliveries. Second-quarter operating margin was 10.8 percent, reflecting the delivery volume and strong performance offset by the USD 238 million pre-tax charge on the KC-46A Tanker program (Table 4). During the quarter, Commercial Airplanes delivered the first 787-9 Dreamliner and the 787 program received 330-minute ETOPS certification. In July, Emirates Airline and Qatar Airways finalized orders totaling 200 777X airplanes and Monarch Airlines announced a commitment to purchase 30 737 MAX airplanes.
Commercial Airplanes booked 264 net orders during the quarter. Backlog remains strong with over 5,200 airplanes valued at a record USD 377 billion.
Defense, Space & Security's second-quarter revenue was USD 7.7 billion. Operating margin was 7.5 percent, reflecting the USD 187 million pre-tax charge recorded at BMA on the KC-46A Tanker program partially offset by strong operating performance (Table 5).
Boeing Military Aircraft (BMA) second-quarter revenue was USD 3.5 billion, reflecting fewer C-17 and P-8 deliveries partially offset by higher F-15 deliveries. Operating margin of 4.7 percent was impacted by the charge on the KC-46A Tanker program. During the quarter, BMA was awarded a contract for 44 E/A-18 and F/A-18 aircraft from the U.S. Navy.
Network & Space Systems (N&SS) second-quarter revenue was USD 1.9 billion, reflecting lower commercial satellites volume, and operating margin increased to 7.8 percent. During the quarter, N&SS completed a successful Missile Defense System intercept in flight test.
Global Services & Support (GS&S) second-quarter revenue was USD 2.3 billion, reflecting lower volume in maintenance, modifications and upgrades. Operating margin increased to 11.6 percent reflecting strong performance. During the quarter, GS&S was awarded a 5 year contract to provide support for Australia's Airborne Early Warning & Control (AEW&C) aircraft.
Backlog at Defense, Space & Security was USD 63 billion, of which 36 percent represents orders with international customers.
Unallocated items and eliminations totaled USD 126 million at quarter end, down from USD 177 million in the same period of the prior year, primarily due to lower deferred compensation expense. Total pension expense for the second quarter was USD 693 million, down from USD 753 million in the same period of the prior year. The company's effective income tax rate was 3.7 percent at quarter end, down from 33.4 percent in the same period of the prior year. The second quarter 2014 effective income tax rate included a USD 265 million benefit for a tax basis adjustment, USD 143 million benefit for a 2009-2010 tax settlement and the previously announced benefit of USD 116 million for the 2007-2008 tax settlement.
Boeing's core earnings per share guidance for 2014 increased to between USD 7.90 and USD 8.10, from USD 7.15 to USD 7.35, reflecting the USD 408 million tax benefits, strong operating performance and the KC-46A Tanker charge. GAAP earnings per share guidance for 2014 increased to between USD 6.85 and USD 7.05.
Commercial Airplanes operating margin guidance increased to greater than 10 percent on strong operating performance.
Defense, Space & Security operating margin guidance is unchanged at approximately 9.5 percent. Boeing Military Aircraft operating margin guidance is lowered to approximately 9 percent. Global Services & Support operating margin guidance increased to approximately 11 percent reflecting strong performance.
Boeing's effective tax rate is now expected to be approximately 23 percent in 2014, down from approximately 29 percent, to reflect the additional tax benefits recorded in the second quarter and continues to assume the extension of the research and development tax credit.
Non-GAAP Measures Disclosures
We supplement the reporting of our financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial information. The non-GAAP financial information presented excludes certain significant items that may not be indicative of, or are unrelated to, results from our ongoing business operations. We believe that these non-GAAP measures provide investors with additional insight into the company's ongoing business performance. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. The following definitions are provided:
Core Operating Earnings, Core Operating Margin and Core Earnings Per Share
Core operating earnings is defined as GAAP earnings from operations excluding unallocated pension and post-retirement expense. Core operating margin is defined as core operating earnings expressed as a percentage of revenue. Core earnings per share is defined as GAAP diluted earnings per share excluding the net earnings per share impact of unallocated pension and post-retirement expense. Unallocated pension and post-retirement expense represents the portion of pension and other post-retirement costs that are not recognized by business segments for segment reporting purposes. Management uses core operating earnings, core operating margin and core earnings per share for purposes of evaluating and forecasting underlying business performance. Management believes these core earnings measures provide investors additional insights into operational performance as they exclude unallocated pension and post-retirement costs, which primarily represent costs driven by market factors and costs not allocable to government contracts. A reconciliation between the GAAP and non-GAAP measures is provided on page 14.
Operating Cash Flow Before Pension Contributions
Operating cash flow before pension contributions is defined as GAAP operating cash flow less pension contributions. Management believes operating cash flow before pension contributions provides additional insights into underlying business performance. Management uses operating cash flow before pension contributions as a measure to assess both business performance and overall liquidity. Table 2 provides a reconciliation between GAAP operating cash flow and operating cash flow before pension contributions.
Free Cash Flow
Free cash flow is defined as GAAP operating cash flow less capital expenditures for property, plant and equipment additions. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders, debt repayment, and acquisitions after making the capital investments required to support ongoing business operations and long term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures such as repayment of maturing debt. Management uses free cash flow as a measure to assess both business performance and overall liquidity. Table 2 provides a reconciliation between GAAP operating cash flow and free cash flow.
Caution Concerning Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "may," "should," "expects," "intends," "projects," "plans," "believes," "estimates," "targets," "anticipates," and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, as well as any other statement that does not directly relate to any historical or current fact. Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict. Many factors could cause actual results to differ materially and adversely from these forward-looking statements. Among these factors are risks related to: (1) general conditions in the economy and our industry, including those due to regulatory changes; (2) our reliance on our commercial airline customers; (3) the overall health of our aircraft production system, planned production rate increases across multiple commercial airline programs, our commercial development and derivative aircraft programs, and our aircraft being subject to stringent performance and reliability standards; (4) changing budget and appropriation levels and acquisition priorities of the U.S. government; (5) our dependence on U.S. government contracts; (6) our reliance on fixed-price contracts; (7) our reliance on cost-type contracts; (8) uncertainties concerning contracts that include in-orbit incentive payments; (9) our dependence on our subcontractors and suppliers, as well as the availability of raw materials, (10) changes in accounting estimates; (11) changes in the competitive landscape in our markets; (12) our non-U.S. operations, including sales to non-U.S. customers; (13) potential adverse developments in new or pending litigation and/or government investigations; (14) customer and aircraft concentration in Boeing Capital's customer financing portfolio; (15) changes in our ability to obtain debt on commercially reasonable terms and at competitive rates in order to fund our operations and contractual commitments; (16) realizing the anticipated benefits of mergers, acquisitions, joint ventures/strategic alliances or divestitures; (17) the adequacy of our insurance coverage to cover significant risk exposures; (18) potential business disruptions, including those related to physical security threats, information technology or cyber-attacks or natural disasters; (19) work stoppages or other labor disruptions; (20) significant changes in discount rates and actual investment return on pension assets; (21) potential environmental liabilities; and (22) threats to the security of our or our customers' information.
Additional information concerning these and other factors can be found in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.