Boeing Q2 Earnings Review: Commercial Aviation Continues To Drive Growth, KC-46 Tanker Program Drags Margins Lower

Boeing (NYSE:BA) announced its second quarter earnings for 2015 on Wednesday, July 22nd. ^[1] Revenues rose to $24.5 billion which translates to an impressive 11% year-over-year growth, ^[2] primarily driven by record commercial deliveries. Boeing delivered 197 commercial airplanes in Q2 2015, an approximate 9% rise in deliveries on a year-over-year basis. ^[3] Commercial aviation constituted nearly 69% of Boeing’s top line in the quarter. Defense-related businesses continued to perform sluggishly and no substantial recovery is expected over the remainder of the year.

Core (non-GAAP) EPS witnessed a deterioration over this quarter, recording a 33% decline on a year-over-year basis. ^[2] However, standing at $1.62, core EPS still beat analyst expectations of $1.37 as recorded by Thomson Reuters. ^[4]

The primary drag on the EPS relates to a $536 million after-tax charge, which amounts to $0.77 per share, on the KC-46 Tanker program because of higher estimated costs. Bearing in mind the impact of this tax-charge on the remainder of the financial year, Boeing has revised its EPS guidance downward by $0.50 per share for FY 2015. This reduction reflects the $0.77  per share after-tax charge related to the KC-46 Tanker program, offset by strong performance that is expected to increase earnings by $0.27 per share. The new core EPS guidance range stands at $7.70-$7.90 per share. Revenue guidance remains unchanged for FY 2015 and continues to stand at $94.5-$96.5 billion. ((Boeing Reports Second-Quarter Results, Boeing Investor Relations))

We currently have a price estimate of $137.68 for Boeing, approximately 2% below its current market price. This will be revised shortly in light of the recent earnings release.

See our complete analysis of Boeing here

Record Commercial Airplane Deliveries Accelerated Revenue Growth, Defense Operations Continue To Remain Sluggish

Boeing’s commercial airplanes revenues in Q2 2015 grew at an impressive 18% over the second quarter of 2015. The backlog also continued to remain strong at $431 billion, with approximately 5,700 commercial airplane orders. ^[2]  The revenue growth was driven by record delivery volumes. In Q2 2015, Boeing delivered 197 commercial jets, compared to 181 in Q2 2014. Operating margin of the segment dropped 370 basis points on a year-over-year basis, attributable to higher expected expenditures in the KC-46 Tanker program. Higher 787 and 747 deliveries also contributed to diluting margins in the segment. The 787 witnessed a 13% rise while the 747 deliveries increased by more than 2x. ^[3] Boeing’s 747 and 787 production rate is not high enough to achieve scale yet. As a result, both of these jets are currently earning low-single digit percentage margins, diluting the overall margins earned by the division. ^[5]

The revenue growth from the commercial segment was partially offset by slower revenues derived from Boeing’s defense business as U.S. military spending environment continues to be weak. Boeing’s Defense Space & Security division witnessed an 8% year-over-year decline in revenues in Q2 2015. Total revenues dropped from $7.74 billion in Q2 2014 to $7.54 billion in Q2 2015, a year-over-year fall of over $200 million. This drop in revenues was driven by Boeing Military Aircraft’s recorded pre-tax charges on the KC-46 Tanker program that amounted to $322 million. ((Boeing Reports Second-Quarter Results, Boeing Investor Relations))

Military spending is expected to continue to remain weak through the remainder of this year. However, the proposed defense budget for fiscal 2016 in the U.S. is the light at the end of the tunnel for Boeing’s defense segment. The proposed budget gives strong indications of substantial recovery in overall military spending. Since Boeing derives majority of its defense-related revenues from the U.S. government, we expect that defense-related sales will remain slow through the rest of this year but pick up pace in 2016. As of Q2 2015, 61% of the backlog in this segment was related to U.S. government and defense programs. ((Boeing Reports Second-Quarter Results, Boeing Investor Relations)) The divisions operating margin fell 30 basis points on a year-over-year basis.

All in all, with the exception of the negative impact brought about by the KC-46 Tanker program, Boeing is continuing to show modest growth. The commercial aviation up-cycle will likely continue to lift the company’s results through the second half of 2015 as well.

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1. Second-Quarter 2015 Performance Review, Boeing Investor Relations [↩]
2. Boeing Reports Second-Quarter Results, Boeing Investor Relations [↩] [↩] [↩]
3. Orders & Deliveries, Boeing [↩] [↩]
4. Boeing Chief Pledges Focus on Growth, Wall Street Journal [↩]
5. What Is Boeing’s Most Profitable Plane?, The Motley Fool [↩]