American aero major Boeing (BA 0.49%) reported its fourth quarter and full-year earnings on Jan. 28. For the quarter, the company reported core earnings of $2.31, slightly ahead of the $2.11 a share estimated by Reuters' analysts. For the full year, core earnings were $8.60 per share, up 22% compared with the year-ago period. The quarter's top line surged by almost 3% to $24.5 billion, compared with the prior year period's $23.8 billion, while the full-year revenue increased to $90.8 billion, a 5% increase from 2013.
There was good news from every quarter -- from strong commercial deliveries to widening defense margins to solid cash generation and higher Dreamliner deliveries. But what cheered investors the most was the 25% dividend hike and new share buyback program worth $12 billion.
Here are the key takeaways from Boeing's operating results.
The first flight of the Boeing 787-9. Picture shared by Gordon Werner via Wikimedia Commons.
Commercial aviation remains strong
Boeing's commercial aviation business has supported it through the year and the fourth quarter was no different. Revenue for the same grew 15% to $16.8 billion as the company delivered 195 commercial jets, up 13% from the year-ago period.
Deliveries for 2014 increased by 12% over the previous year to reach 723 jets. Boeing has been hiking the production rate of some of its models to cater to the increased demand and in turn boosting deliveries. In 2014, the company raised the production rate of the 737 to 42 a month, which is again slated to go up to 52 a month in 2018.
A summary of Boeing deliveries. Data source: Boeing Press Releases. Chart by author.
It was "an exceptional year" in terms of orders, according to Boeing. The aero major bagged new orders for 1,550 airplanes, which after adjusting for cancellations, stood at 1,432. The phenomenal order growth has pushed Boeing's backlog to 5,800 jets, representing eight years of production, worth $440 billion.
However, the not-so-good news was that operating margin in the commercial segment dropped to 9.3% in the quarter from 10.3% recorded a year ago. The full-year figure dipped marginally to 10.7% from 10.9%. This happened because of the mix of deliveries -- higher proportion of the 787 Dreamliners that still do not yet sell for a profit.
Dreamliner update
The 787 Dreamliner program is Boeing's most ambitious project in recent times, where the company pioneered aircraft manufacturing using lightweight carbon composite material. Due to numerous delays and technical glitches, the program is yet to break even.
During the year, the 787 Dreamliner remained a cause for concern for investors as its manufacturing costs continued to pile up faster than what the company had forecast. Deferred production cost for the 787 increased by almost $1 billion to $26.1 billion, and now analysts think Boeing won't be able to contain the cost within $27 billion and could go up to $28 billion. The good news is that Boeing expects the Dreamliner program to be profitable from later this year.
Defense margins widen
On the back of government's shrinking defense budget, Boeing's revenue from the defense business has been declining for some time now. During the year, it accounted for 34% of total revenues, down from 2013's 38%.
Defense revenue shrunk 7% for the year and came in at $30.8 billion, while earnings plunged 3%. For the fourth quarter, revenue dropped 14% and earnings dropped 4%. Lower deliveries of F-15 and C-17 jets, and reducing government satellite volume were the main reasons behind the fall. At the end of 2014, the defense backlog stood at $62 billion.
However, Boeing has been able to expand the business' profit margin in the fourth quarter to 12.1% from 10.8% in the same period last year. This helped full-year margin to touch 10.1% from 9.7% in the prior year.
Cash flows stage a comeback!
In the first nine months of 2014, operating cash flows had fallen 43% from the year-ago period. But to investors' relief, the fourth quarter has turned the cash position around. Thanks to the stupendous 262% surge in the quarter's operating cash flow to $5 billion, the full-year number has improved 8% to reach $8.9 billion.
Consequently, free cash flow is looking good, too -- increasing 9% to $6.6 billion in the year, and 483.6% to $4.3 billion in the quarter, over the prior-year periods.
Boeing's free cash flow trend between 2007 and 2014. Source: Boeing Press Releases. Chart by author.
The party hasn't ended
The year has given Boeing a solid platform to build on for not just 2015 but for the rest of the decade, in McNerney's words. For 2015, the company expects both earnings per share and revenue to go up between 4%-6%.
The commercial aviation and defense businesses will play out in a similar fashion as it did in 2014, with Boeing trying to maintain margins of 9.5%-10% for the former, and 9.75%-10% for the latter. Commercial aircraft deliveries are seen to remain strong between 750 and 755.
The tremendous strength in commercial aviation is buoying the company, no doubt, but Boeing's strong operational performance is the key to its success. It's giving investors no reason to complain, and it could remain like this for a while.
