Executives at Boeing (BA +2.47%) have long touted the company's plans to significantly increase its output toward the end of the decade. That process will begin this year, when commercial airplane deliveries are expected to rebound from a slight dip in 2016.
That said, Boeing acknowledged at the beginning of 2017 that while aircraft deliveries will rise, revenue is expected to fall again this year. Sure enough, the company's first-quarter earnings report revealed revenue declines across every major business segment. However, Boeing still managed to generate strong earnings and cash flow in the quarter.
Q1 by the numbers
Boeing's revenue fell 7% last quarter. Most of the decline was driven by a 12% drop in its defense segment revenue, more or less reversing a 19% surge in that segment during the same quarter a year ago. But from a profitability perspective, Boeing improved last quarter. Here are the details of its performance.
| Metric |
Q1 2017 |
Q1 2016 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$21.0 billion |
$22.6 billion |
(7.3%) |
|
Commercial airplanes deliveries |
169 |
176 |
(4%) |
|
Core operating margin |
8.1% |
7.5% |
N/A |
|
Free cash flow |
$1.6 billion |
$483 million |
209% |
|
Core EPS |
$2.01 |
$1.74 |
15.5% |
|
Total order backlog |
$480 billion |
$480 billion |
Flat |
Data source: Boeing Q1 earnings releases.
Commercial airplanes deliveries slipped year over year in Q1 primarily due to the impending entry into service of the new Boeing 737 MAX 8. Boeing hasn't actually reduced its 737 production -- in fact, it is on the verge of boosting output from 42 per month to 47 per month. But Boeing is building a few 737 MAX planes already, and those won't be delivered to customers until later this year.
Despite its revenue decline, Boeing reported double-digit growth in its core earnings per share, which excludes volatile pension costs. That's because Boeing incurred pre-tax charges of more than $300 million in the first quarter of 2016, related to plummeting demand for its 747 line of jumbo jets and cost overruns for its KC-46 military tanker program.
Most impressively, free cash flow more than tripled year over year last quarter. This reflects the improving cash profitability of the Dreamliner program, lower capex, and strong orders during the first quarter (and an associated increase in customer deposits).
All eyes on the Dreamliner
While rising 737 production will be a reliable source of earnings growth in the next few years, the 787 Dreamliner program could be more of a wild card.
The Dreamliner program is critical to Boeing's revenue and cash flow growth plans. Image source: Boeing.
One issue is profitability. Boeing is counting on cost cuts, product mix improvements, and better pricing for later aircraft sales to dramatically increase the Dreamliner program's cash profits, offsetting the huge losses incurred during the first few years of production.
787 deferred production costs declined by $316 million in Q1, compared to a $215 million decrease in the final quarter of 2016. While that's a meaningful improvement, profitability will have to improve at an even faster rate in the future for Boeing to meet its targets.
The second issue is sales. While the Boeing 737 continues to sell quickly, 787 order activity has been slow lately. Over the past three years, Boeing has averaged fewer than 60 net orders annually for the 787. The sales slump continued last quarter, as Boeing brought in only 11 net firm Dreamliner orders. Meanwhile, Boeing is building 144 787s per month. Unless order activity picks up within the next couple of years, Boeing could be forced to slash production.
Looking ahead
Boeing raised its full-year EPS guidance by $0.10 on Wednesday, due to a slightly lower expected tax rate, but otherwise its outlook remains unchanged.
2017 looks like it will be another transitional year for the aerospace giant. Boeing is in the midst of introducing a handful of new models over the next three years, including multiple variants of its 737 MAX family; the largest (and most profitable) member of its Dreamliner family, the 787-10; and the first member of its new 777X family, the 777-9.
This will pave the way for a return to revenue growth over the next several years, along with continued cash flow growth. The main thing Boeing must do to maximize its medium-term growth potential is to double down on its efforts to sell the 777X and 787.
