Filed under: Earnings, Manufacturing
Despite these strong numbers, a major reduction in cash flow has decreased the positive impact of earnings. Operating cash flow fell by 67 percent compared to the same period last year, leading a major Wall Street analyst to ask "Where's the cash?" in a research note to his clients. Several attribute this negative impact to cost creep on the new 787 Dreamliner.
This earnings release for the quarter, which ended Sept. 30, follows the earnings announcements from several peers of Boeing: General Dynamics (GD), Honeywell International (HON), Lockheed Martin (LMT), Northrop Grumman (NOC), Textron (TXT) and United Technologies (UTX).
Highlights
- Summary numbers: Revenues of $23.8 billion, Net Earnings of $1.3 billion
- Earnings jumped 19 percent vs. same period last year; 7.8 percent revenue increase due to booming commercial aircraft demand and higher delivery of planes
- Gross margins now 15.6 percent from 17.8 percent compared to the same period last year, operating margins now 8.5 percent from 10 percent
- "Free cash flow" (cash from operating activities minus capital expenditures) down, partially due to big share-buyback
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| Revenue Growth (YOY) | 10.6% | 6.7% | 8.3% | 1.2% | 7.5% |
| Earnings Growth (YOY) | 12.0% | 27.0% | -12.7% | 52.1% | 17.6% |
| Net Margin | 5.2% | 5.2% | 4.7% | 7.5% | 5.7% |
| EPS | $1.51 | $1.61 | $1.28 | $2.24 | $1.86 |
| Return on Equity | 55.5% | 41.0% | 26.0% | 45.9% | 37.8% |
| Return on Assets | 5.0% | 5.3% | 4.2% | 7.2% | 5.9% |
Market Share Versus Profits
Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line--(Earnings or Net Income). Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate profits.
Boeing's year-on-year change in revenue compared to the same period last year of 7.5 percent trailed its change in earnings, which was 17.6 percent. The company's performance this period suggests a focus on boosting bottom-line earnings. Despite Boeing's quarterly profit jump of 17.6 percent, cash was scarce. Also, although the revenue performance could be better, it is important to note that the change in revenues is among the highest in the peer group thus far.
Earnings Growth Analysis
The company's earnings have gone up compared to this period last year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross and operating margins are currently at 15.6 percent and 8.5 percent, respectively. This compares with last year's numbers of 17.8 percent and 10 percent. In the second quarter, gross margins were 17.4 percent and operating margins 10 percent.
Gross Margin Trend
Companies sometimes tradeoff for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without working capital going down, it is quite possible that the company's performance is a result of truly delivering in the marketplace, and not simply a prop up using the balance sheet.
Boeing's decline in gross margins is offset by some improvements on the balance sheet side -- working capital management shows progress. The company's working capital days have gone down to 46.3 days from 59.3 for the same period last year, and suggest that the gross margin decline is not altogether bad.
Cash Versus Earnings
It is important to examine a company's cash versus earnings numbers to gauge whether a company's performance is sustainable.
Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to compare the growth in earnings to the growth in operating cash flows. In Boeing's case, a lower operating cash flow rate compared to its change in earnings suggests that the earnings number might have benefited from some unlocking of accruals, which might not be sustainable. In addition, Boeing's change in operating cash flow is less than the average among the declared results thus far in its peer group, suggesting that it may underperform its peers in the future.
Margins The company's earnings growth has also been influenced by the following factors: (1) Improvements in operating margins from 8 percent to 9 percent and (2) unusual items. The company's pretax margins are now 8.5 percent compared to 7.8 percent for the same period last year. 
EPS Growth Versus EarningsGrowth Boeing's year-on-year change in Earnings per Share (EPS) of 23.2 percent is better than its change in earnings of 17.6 percent. In addition, this change in earnings is less than the peer average among the declared results thus far in its peer group, suggesting that the company is losing ground in generating profits in this group.
Supporting DataThe table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| Revenue Growth (YOY) | 10.6% | 6.6% | 8.3% | 1.2% | 7.5% |
| Peer Average Revenue Growth (YOY) | 0.0% | 2.2% | 1.3% | 3.1% | 4.6% |
| Earnings Growth (YOY) | 12.0% | 27.0% | -12.7% | 52.1% | 17.6% |
| Peer Average Earnings Growth (YOY) | 8.3% | 17.1% | -4.5% | 8.2% | 17.6% |
| Operating Cash Flow Growth (YOY) | -5.6% | 37.9% | 5.6% | 24.8% | 23.6% |
| Peer Average Operating Cash Flow Growth (YOY) | -5.0% | -3.5% | 5.1% | 18.1% | 1.6% |
| Gross Margin | 17.8% | 16.6% | 17.7% | 17.4% | 15.6% |
| Peer Average Gross Margin | 24.0% | 24.0% | 25.6% | 25.1% | 22.8% |
| Operating Margin | 10.0% | 8.4% | 9.4% | 10.0% | 8.5% |
| Peer Average Operating Margin | 14.9% | 14.9% | 16.3% | 14.6% | 15.7% |
| Net Margin | 5.2% | 5.2% | 4.7% | 7.5% | 5.7% |
| Peer Average Net Margin | 8.1% | 7.8% | 8.8% | 8.5% | 8.0% |
| EPS | $1.51 | $1.61 | $1.28 | $2.24 | $1.86 |
| Peer Average EPS | $1.51 | $1.50 | $1.28 | $1.84 | $1.86 |
| Return on Equity | 55.5% | 41.0% | 26.0% | 45.9% | 37.8% |
| Peer Average Return on Equity | 21.0% | 19.1% | 21.9% | 19.6% | 20.9% |
| Return on Assets | 5.0% | 5.3% | 4.2% | 7.2% | 5.9% |
| Peer Average Return on Assets | 6.3% | 5.4% | 5.3% | 7.3% | 7.5% |
Company Profile
The Boeing Co. is an aerospace company that manufactures commercial jetliners and defense, space and security systems. Its products and tailored services include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training. The company is organized into two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security. The Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, principally to the commercial airline industry worldwide. It produces commercial aircraft and offers a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and non-U.S. airlines. This family of commercial jet aircraft in production includes the 737 narrow-body model and the 747, 767, 777 and 787 wide-body models. Its Defense, Space & Security business provides end-to-end services for large-scale systems that enhance air-, land-, sea- and space-based platforms for global military, government and commercial customers. In addition to designing, producing, modifying and supporting fighters, bombers, transports, rotorcraft, aerial refuelers, missiles, munitions and spacecraft for military, civil and commercial use, it is developing enhanced capabilities through network-enabled solutions, communications and intelligence, surveillance and reconnaissance technologies. Its Defense, Space & Security business comprises three segments: Boeing Military Aircraft, Network & Space Systems and Global Services & Support. The Boeing Military Aircraft segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for global strike, including fighter and combat rotorcraft aircraft and missile systems; global mobility, including transport, tanker, rotorcraft and tilt-rotor aircraft; and airborne surveillance and reconnaissance, including command and control, battle management and airborne anti-submarine aircraft. The Network & Space Systems segment is engaged in the research, development, production and modification of the following products and related services: electronics and information systems, including command, control, communications, computers, intelligence, surveillance and reconnaissance, cyber and information solutions, and intelligence systems; strategic missile and defense systems; space and intelligence systems, including satellites and commercial satellite launch vehicles; and space exploration. The Global Services & Support segment provides customers with mission readiness through total support solutions. Its global services business sustains aircraft and systems with a full spectrum of products and services through integrated logistics, including supply chain management and engineering support; maintenance, modification and upgrades for aircraft; and training systems and government services, including pilot and maintenance training. The Global Services & Support segment's international operations include Boeing Defence UK Ltd., Boeing Defence Australia, and Alsalam Aircraft Co., a joint venture. The Boeing Capital segment facilitates, arranges, structures and provides selective financing solutions for its Commercial Airplanes customers. In the space & defense markets, Boeing Capital primarily arranges and structures financing solutions for its Defense, Space & Security government customers. The Other segment includes the unallocated activities of Engineering, Operations & Technology and Shared Services Group, as well as intercompany guarantees provided to Boeing Capital. The Engineering, Operations & Technology provides technical and functional capabilities, including information technology, research and development, test and evaluation, technology strategy development, environmental remediation management and intellectual property management. The company was founded by William Edward Boeing on July 15, 1916 and is headquartered in Chicago, IL.
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