The Boeing Company (BA), riding on strong operational performance reported strong numbers for the third quarter of 2011. In the reported quarter, the company posted quarterly earnings of $1.46 per share, beating the Zacks Consensus Estimate of $1.11 a share as well as the year-ago earnings of $1.12.
Operating Statistics
On the revenue front, quarterly revenues increased 4% year over year to $17.73 billion, primarily attributable to higher commercial airplane deliveries. Reported revenues, however, failed to beat the Zacks Consensus Estimate of $17.82 billion. Operating margin increased 150 basis points (bps) year over year to 9.7%. Overall net income rose 31% to $1.10 billion from $837 million in the year-ago quarter.
Segmental Results
Commercial Airplanes
Boeing’s Commercial Airplane segment in the reported quarter witnessed a 2.4% rise in deliveries to 127 units. During the period, higher number of 767 airplanes along with the maiden 787 was delivered while 737 and 777 deliveries remained flat. Higher airplane deliveries volume and improved mix drove revenues by 9% to $9.52 billion. The segmental operating margin dipped 20 bps to 11.4%.
In the reported quarter the first 787 Dreamliner and 747-8 Freighter was delivered to its launch customers, Japan’s All Nippon Airways and Cargolux Airlines, respectively. The company also received U.S. Federal Aviation Administration (FAA) certification for its 787-8 series airplane. Also during third quarter, the company launched the 737 MAX, the new engine variant of the 737 series.
Boeing’s Commercial Airplane segment in the reported quarter booked 255 net orders. Contractual backlog remains strong with over 3,500 airplanes valued at $273 billion.
Boeing Defense, Space & Security
Boeing Defense, Space & Security segment revenue remained flat year-over-year at $8.20 billion. In the reported quarter, only the sub-segment, Boeing Military Aircraft (BMA) witnessed growth of 5% to $3.96 billion. However, Network & Space Systems (N&SS) revenues fell 3% to $2.28 billion and Global Services & Support (GS&S) revenues plunged 4% to $1.96 billion.
Quarterly segmental margin increased 160 bps to 10.0%. In the reported quarter, BMA sub-segment registered operating margin of 10.0%, reflecting improved operating performance and changes in delivery mix. N&SS sub-segment registered operating margin of 7.9%, reflecting improved performance on commercial satellite programs. GS&S sub-segment in the quarter reported operating margin of 12.7%, reflecting strong performance in integrated logistics.
Defense, Space & Security backlog decreased to $59 billion from $61 billion at the end of the first six months of 2011. The fall is attributed to run-off of multi-year contracts.
Boeing Capital Corporation (BCC)
Boeing Capital Corporation reported quarterly revenues of $126 million compared with $170 million in the year-ago quarter. The segment generated earnings of $19 million compared with $45 million in the year-ago period. At the end of the reported period, BCC's portfolio balance declined to $4.3 billion from $4.4 billion at the beginning of the reported quarter due to run-off and asset sales.
Financial Condition
Boeing ended the reported quarter with cash and cash equivalents of $5.95 billion and short-term investments of $3.23 billion. At the end of fiscal 2010, the company had $5.36 billion in cash and cash equivalents and $5.16 billion of short-term investments.
The company generated $1.09 billion of cash from operating activities in the first nine months of 2011 versus $1.84 billion in the first nine months of 2010. Long-term debt decreased to $10.78 billion at the end of the reported quarter from $11.47 billion at the end of fiscal 2010.
Outlook
Boeing has a unique position as the largest aircraft manufacturer in the world in terms of revenues, orders and deliveries; and is one of the largest aerospace and defense contractors in the world. Moreover, the company’s revenue streams span more than 90 countries around the globe.
Boeing narrowed its fiscal 2011 revenue guidance in the range of $68 billion-$70 billion versus earlier range of $68 billion-$71 billion. However, the company raised its earnings per share guidance range for fiscal 2011 to $4.30-$4.40 from the earlier guidance range of $3.90-$4.10 buoyed by strong core performance across its businesses.
The guidance incorporates the delivery initiation of revenue boosters like the 787 Dreamliner and 747-8 series, which started in the reported quarter. However, the company revised the upper range of the Commercial Airplanes' deliveries guidance for fiscal 2011. Deliveries for fiscal 2011 are now expected to be approximately 480, down from earlier range of 485 – 495.
The reduction was due to lower planned deliveries on development programs (especially 787 and 747-8 units). Operating margin is now expected to be in the range of 9.0% – 9.5%, from earlier range of 8.0% – 8.5%, reflecting strong core performance and the lower planned development program deliveries.
In the defense space, the company also secured big contracts like the U.K. Ministry of Defence contract for CH-47 Chinook helicopters, Indian contract for C-17 airlifters. In the reported quarter the KC-46A Tanker program also successfully completed the Integrated Baseline Review with the U.S. Air Force. However, the threat of defense cutbacks will remain headwinds for the company going forward.
Boeing currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. This is in sync with other aerospace and defense behemoths like General Dynamics Corporation (GD) and Lockheed Martin Corporation (LMT).
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