Boeing (NYSE:BA) posted revenues of $20 billion in the second quarter earnings, up 21% year-over-year, on higher delivery volume of commercial airplanes as well as military aircraft.  Total contractual backlog also remained strong at $354.6 billion, comprising approximately 4,000 airplanes. However, in comparison, earnings from operations increased only 1% year-on-year due to lower operating margins. Operating margin declined 1.6 points to 7.7% primarily due to inventory adjustment on A160. In addition, pension contributions of $763 million resulted in a 43% decline in operating cash flows on a year-on-year basis.
On the whole, Boeing posted better-than-expected numbers in Q2 on strong core operating performance and, as a result, has also raised earnings per share outlook for 2012.
However, in our view, U.S. defense spending cuts and further slowing of economic growth in developing nations particularly, China and India, could put pressure on the company’s order backlog and even impact growth over the next few years.
We currently have a price estimate of $91 for Boeing, approximately 20% above its current market price.
Increased commercial airplane deliveries driving growth
Boeing delivered 150 commercial planes in the second quarter, comprising more than two-third of narrow bodied 737s. It also rolled out the first 787 Dreamliner built in South Carolina. This compares to 118 commercial airplane deliveries in the second quarter of 2011. As a result, the Commercial Airplanes division registered $11.8 billion in revenues in Q2, up 34% compared to the year-ago quarter. Earnings from operations for the division too increased by 32% as divisional operating margins held steady.
The division also booked 28 new orders for the quarter, and the backlog declined marginally to $300.4 billion from $305.3 billion, sequentially.
Increased military aircraft deliveries
The company also delivered 35 military aircraft for Q2 compared to 29 for the same period last year. This resulted in a 13% rise in revenues to $4.13 billion for the Military Aircraft division. However, earnings from operations for the Boeing Military Aircraft division, part of the larger Defense, Space and Security business, declined 6% due to an inventory adjustment on A160.
Overall, revenues from the Defense, Space and Security business increased 7% y-o-y to $8.2 billion driven by higher military aircraft deliveries and higher volume in services contracts, offset by lower volume on Brigade Combat Team modernization.
Total contractual backlog for this business at the end of second quarter was $54.2 billion, nearly one-and-half times the projected revenue for 2012. We anticipate increasing pressure on this backlog over the next few years due to U.S. defense spending cuts.
High pension contributions impact cash from operations
Even though revenue and earnings from operations increased y-o-y, operating cash flow declined 43% to $908 million compared to $1.6 billion in the year-ago quarter. This decline was attributable to a high pension contribution of $763 million in Q2. The company anticipates to incur $1.5 billion in pension contributions in 2012, including $763 million incurred in first half of the year. Pension contributions have increased manifold for Boeing as low interest rates have lowered returns on pension plan assets, forcing the company to make up for the shortfall with cash contributions.
Raises outlook for 2012
Backed by better-than-expected core operating performance, the company raised earnings per share guidance range to $4.40-$4.60 from the earlier indicated $4.15 – $4.35. This compares to EPS of $5.34 in 2011. The relative difference of $0.85 is attributable to pension contributions.
On the whole, the company posted good numbers in Q2 on strong core operating performance. However, long-term growth concerns stay due to U.S. defense spending cuts and slowing growth of developing economies.Notes:
- Boeing Reports Second-Quarter 2012 Results And Raises 2012 EPS Guidance, July 25 2012, www.boeing.com [↩]