Boeing Reports Strong First-Quarter Results 2014

The Boeing Company (NYSE: BA) reported first-quarter revenue increased 8 percent to $20.5 billion on higher commercial volume (Table 1). Core earnings per share (non-GAAP) increased 14 percent* to $1.76 when excluding a benefit of $0.19 per share for the 2012 research and development tax credit recorded in the first quarter of 2013. First-quarter 2014 core operating earnings (non-GAAP) increased 12 percent to $2.1 billion and core operating margin (non-GAAP) increased to 10.2 percent reflecting continued strong operating performance. GAAP earnings from operations included previously announced non-cash charges totaling $334 million ($0.29 per share) for retirement plan changes.

Core earnings per share guidance for 2014 increased to between $7.15 and $7.35, from $7.00 to $7.20, to reflect the benefit of a tax settlement to be recognized in the second quarter of 2014. GAAP earnings per share guidance for 2014 is reaffirmed at between $6.10 to $6.30 as the tax settlement benefit was offset by the retirement plan charges. GAAP pension expense guidance for 2014 is now at approximately $3.2 billion, up from $3.1 billion, to reflect the retirement plan charges. The company reaffirmed its 2014 revenue, operating cash flow and deliveries guidance.

"Disciplined execution across our production and development programs produced strong first quarter results," said Boeing Chairman and Chief Executive Officer Jim McNerney. "We measurably increased revenue, core operating earnings and cash flow, and expanded core operating margins. This financial and operational strength enabled the return of more than $3 billion to shareholders in the quarter through share repurchase and an increased dividend, even as we continued to invest in our future."

"Our outlook for the full year remains positive on the strength of demand for our fuel-efficient new commercial airplanes, our solid position in global defense, space and security markets, and our enterprise focus on meeting customer commitments, improving productivity and profitably delivering the growth in our sizable backlog," McNerney said.

Operating cash flow in the quarter was $1.1 billion, reflecting commercial airplane production rates, strong core operating performance and timing of receipts and expenditures (Table 2). During the quarter, the company repurchased 19.4 million shares for $2.5 billion, leaving $8.3 billion remaining under the current repurchase authorization expected to be completed over the next 2-3 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 $12.2 billion at quarter-end (Table 3), down from $15.3 billion at the beginning of the year, primarily due to the share repurchases and the pay-down of maturing debt. Debt was $8.9 billion, down from $9.6 billion at the beginning of the year, primarily due to maturities.

Total company backlog at quarter-end was a $440 billion, down slightly from the beginning of the year, and included net orders for the quarter of $19 billion.

Segment Results

Boeing Commercial Airplanes

Boeing Commercial Airplanes first-quarter revenue increased to $12.7 billion on higher 787 and 737 deliveries. First-quarter operating margin improved to 11.8 percent reflecting the delivery volume and mix and lower period costs partially offset by higher R&D (Table 4).

During the quarter, the 787 program reached a 10 per month production rate and completed preliminary design review on the 787-10. The company selected the Everett, Washington site as the location for a new composite wing center for the 777X. In April, the 737 program reached a production rate of 42 per month.

Commercial Airplanes booked 235 net orders during the quarter. Backlog remains strong with over 5,100 airplanes valued at $374 billion.

Additional Financial Information

At quarter-end, Boeing Capital Corporation's (BCC) net portfolio balance was $3.5 billion down from $3.9 billion at the beginning of the year. BCC's debt-to-equity ratio was 5.0-to-1.

Unallocated items and eliminations increased in the first quarter of 2014 primarily due to previously announced non-cash charges totaling $334 million for retirement plan changes. Total pension expense for the first quarter was $1,035 million, up from $791 million in the same period last year. The company's income tax expense was $494 million in the quarter, compared to $332 million in the same period of the prior year, as a $145 million benefit for the 2012 research and development credit was reflected in the first quarter of 2013.

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 $7.15 and $7.35, from $7.00 to $7.20, to reflect the benefit of a tax settlement to be recognized in the second quarter of 2014. GAAP earnings per share guidance for 2014 is reaffirmed at between $6.10 and $6.30 as the tax settlement benefit was offset by the retirement plan charges. Total GAAP pension expense guidance for 2014 is now at approximately $3.2 billion, up from $3.1 billion to reflect the retirement plan charges. The pension expense expected to be included in unallocated items and eliminations is approximately $1.3 billion, up from $1.1 billion.

Boeing Military Aircraft revenue for 2014 is now expected to be approximately $14.2 billion, down from $15.0 billion, and Global Support & Services revenue is now expected to be approximately $8.6 billion, up from $7.8 billion, both reflecting a business realignment completed during the quarter.

Boeing's effective tax rate is now expected to be approximately 29 percent in 2014, down from approximately 31 percent, to reflect the benefit of the tax settlement and continues to assume the extension of the research and development tax credit.

Non-GAAP Measures Disclosures

We supplement the reporting of our financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial information. The non-GAAP financial information presented excludes certain significant items that may not be indicative of, or are unrelated to, results from our ongoing business operations. We believe that these non-GAAP measures provide investors with additional insight into the company's ongoing business performance. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. The following definitions are provided:

Core Operating Earnings, Core Operating Margin and Core Earnings Per Share

Core operating earnings is defined as GAAP earnings from operations excluding unallocated pension and post-retirement expense. Core operating margin is defined as core operating earnings expressed as a percentage of revenue. Core earnings per share is defined as GAAP diluted earnings per share excluding the net earnings per share impact of unallocated pension and post-retirement expense. Unallocated pension and post-retirement expense represents the portion of pension and other post-retirement costs that are not recognized by business segments for segment reporting purposes. Management uses core operating earnings, core operating margin and core earnings per share for purposes of evaluating and forecasting underlying business performance. Management believes these core earnings measures provide investors additional insights into operational performance as they exclude unallocated pension and post-retirement costs, which primarily represent costs driven by market factors and costs not allocable to government contracts. A reconciliation between the GAAP and non-GAAP measures is provided on page 14.

Increase in Core Earnings Per Share Excluding First Quarter 2013 Benefit for 2012 Research and Development Tax Credit

The company is disclosing the increase in core operating earnings per share in the first quarter of 2014 over the first quarter of 2013 excluding the benefit for the 2012 research and development tax credit recorded in the first quarter of 2013. Management believes it is useful to occasionally exclude certain items that are not reflective of underlying performance and that can distort period to period performance comparisons. Management uses similar measures for purposes of evaluating and forecasting underlying business performance. A reconciliation between the GAAP and non-GAAP measures is provided on page 14.

Operating Cash Flow Before Pension Contributions

Operating cash flow before pension contributions is defined as GAAP operating cash flow less pension contributions. Management believes operating cash flow before pension contributions provides additional insights into underlying business performance. Management uses operating cash flow before pension contributions as a measure to assess both business performance and overall liquidity. Table 2 provides a reconciliation between GAAP operating cash flow and operating cash flow before pension contributions.

Free Cash Flow

Free cash flow is defined as GAAP operating cash flow less capital expenditures for property, plant and equipment additions. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders, debt repayment, and acquisitions after making the capital investments required to support ongoing business operations and long term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures such as repayment of maturing debt. Management uses free cash flow as a measure to assess both business performance and overall liquidity. Table 2 provides a reconciliation between GAAP operating cash flow and free cash flow.