Boeing Reports Second-Quarter Results and Raises 2014 EPS Guidance

The Boeing Company [NYSE: BA] reported second-quarter core earnings per share (non-GAAP) of $2.42, reflecting strong performance and favorable tax items (Table 1). Second-quarter 2014 results included a $272 million after-tax charge ($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 $116 million for the 2007-2008 tax settlement, as well as an additional tax benefit of $408 million in the second quarter.

Core earnings per share guidance for 2014 increased to between $7.90 and $8.10, from $7.15 to $7.35, reflecting the $408 million tax benefits, strong operating performance and the KC-46A Tanker charge. GAAP earnings per share guidance for 2014 increased to between $6.85 and $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 $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 $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 $1.5 billion, leaving $6.8 billion remaining under the current repurchase authorization expected to be completed over approximately the next two years. The company also paid $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 $11.3 billion at quarter-end (Table 3), down from $12.2 billion at the beginning of the quarter, primarily due to the share repurchases. Debt was $8.9 billion, unchanged from the beginning of the quarter.

Total company backlog of $440 billion was unchanged from the beginning of the quarter, and included net orders for the quarter of $23 billion.

Segment Results
Commercial Airplanes

Commercial Airplanes second-quarter revenue increased 5 percent to $14.3 billion on higher deliveries. Second-quarter operating margin was 10.8 percent, reflecting the delivery volume and strong performance offset by the $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 $377 billion.

Additional Financial Information

At quarter-end, Boeing Capital’s net portfolio balance was $3.4 billion down from $3.5 billion at the beginning of the quarter.

Unallocated items and eliminations totaled $126 million at quarter end, down from $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 $693 million, down from $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 $265 million benefit for a tax basis adjustment, $143 million benefit for a 2009-2010 tax settlement and the previously announced benefit of $116 million for the 2007-2008 tax settlement.

Outlook

The company’s 2014 financial guidance (Table 7) reflects continued strong performance in both businesses.

Boeing’s core earnings per share guidance for 2014 increased to between $7.90 and $8.10, from $7.15 to $7.35, reflecting the $408 million tax benefits, strong operating performance and the KC-46A Tanker charge. GAAP earnings per share guidance for 2014 increased to between $6.85 and $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.