Boeing (NYSE:BA) unveiled its third quarter 2014 results on October 22. Both revenue and earnings blew past analyst estimates, giving investors reason to rejoice. The company also raised its full-year earnings guidance, which came as icing on the cake. While everything looked good, the Dreamliner acted as the dampener. Here's the lowdown on the latest quarter's financials and the essential takeaways.
The quarter in a snapshot
Boeing's third-quarter revenue topped analyst estimates of $23 billion and came in at $23.8 billion, an increase of 7% from a year earlier. Revenue from the defense segment compressed 1.7% to $7.9 billion on the back of a declining military budget, but it was more than offset by a solid commercial segment performance. Strong commercial deliveries, which improved 9.4% to 186 planes during the quarter, sent commercial airplane revenue up 15% to a best-ever $16.1 billion, boosting overall revenue. Deliveries of 31 787 Dreamliners was the highlight of the quarter.
Revenue growth trickled down to the company's bottom line as well, displayed by an 18% hike in net earnings to $1.36 billion from $1.16 billion a year ago. Core earnings per share increased 19% to $2.14, way ahead of the consensus estimate of $1.98. Operating profit of the commercial segment rose 11%, but operating margin came in a bit weak at 11.2% compared with the 11.6% registered in the same period last year as the deferred cost related to the 787 program continued to rise. Defense segment operating profits grew by a staggering 27% to $856 million and operating margin improved from 8.4% to 10.8%, reflecting the impact of operational efficiency and delivery mix.
The company's maintaining its previous yearly revenue guidance in the range of $87.5 billion to $90.5 billion, but has raised the earnings outlook from $7.90-$8.10 a share to $8.10-$8.30. This is the third time the company has lifted its earnings outlook for the current fiscal year, which is definitely good news for investors.
It's raining orders
Aircraft makers' backlogs are mounting like never before as airlines seek to lower operating costs by buying the latest planes with higher fuel efficiency. The third quarter started with a bang for the Chicago-headquartered company with a $56 billion firm order commitment for 150 777X from Gulf carrier Emirates. Apart from this, the aeromajor received orders for 201 planes at the Farnborough Air Show -- a business of more than $40 billion at list price. During the quarter, Boeing booked net orders for 501 jets.
The aeromajor's current backlog of more than 5,500 jets worth $430 billion can keep its production facilities occupied for roughly seven years. This speaks volumes about the company's future prospects. Currently, Boeing is planning to increase its production rate to better manage the massive backlog. However, some analysts and industry experts have expressed their concern over what they think is a demand bubble for aircraft and see the backlog as unreliable and unstable.
Brushing away concerns, Boeing CEO Jim McNerney said demand has held its own despite geopolitical tensions in some regions and declining oil prices. A drop in oil prices may lower the need for fuel-efficient planes. McNerney believes that unless oil prices fall below $70 a barrel, there's no scene of aircraft demand going down. He is confident that the demand to replace older planes with newer fuel-efficient jets would continue to be strong over the next decade.
The Dreamliner weighs on the quarter
Boeing's revenue, profit, and backlog inched up during the quarter, and so did costs related to the 787 Dreamliner. The jet maker declared that Dreamliner's deferred production cost went up 3.9% to $25.2 billion and could increase further. Boeing had estimated deferred cost to be $25 billion. Investors didn't like this, and Boeing's share price fell over 4% on the day of the earnings release. Now, analysts are predicting that the deferred cost could go on to touch $26 billion.
Boeing CFO Gregory D. Smith says that the rise in cost is attributable to the company's decision to stock up on component purchases for 787-9 that would help mitigate risks related to production. The company may do the same for the bigger variant, 787-10, if it thinks the move could lower costs over the long run. Increased spending on amassing parts has had an impact on this year's cash flow. Boeing forecasts the current year operating cash flow to come in at around $7 billion compared with last year's strong $9.7 billion.
Boeing is still losing money on every Dreamliner it sells, and the program is yet to generate positive cash flow for the company. Smith says that the Dreamliner project is expected to gradually creep into the black in 2015. He has also assured investors that once the production rate is ramped up to 12 a month in 2016, the deferred cost should fall at a higher rate.
The third quarter result is a good show of Boeing's improving operational efficiency. The continuous flow of orders also reflects the healthy demand for its products and services. Though its flagship offering, the 787 Dreamliner, is still gulping cash, Boeing is working hard to convert it into a cash generating machine in due course.
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