Boeing [BA] on Wednesday posted strong fourth quarter results driven by a benefit from new tax legislation, higher commercial airplane deliveries, and higher operating earnings across its three segments.
Net income rocketed 92 percent to $3.1 billion, $5.18 earnings per share (EPS), from $1.6 billion ($2.59 EPS) a year ago, boosted by a $1.1 billion ($1.74 EPS) gain from a tax reform law that went into effect on Jan. 1 but caused the company to remeasure U.S. deferred tax liabilities. The tax bill, which lowers corporate tax rates to 21 percent from the prior 35 percent level, negatively impacted fourth quarter 2017 earnings at General Dynamics [GD], Lockheed Martin [LMT], Northrop Grumman [NOC], and Raytheon [RTN], which have already reported.
Operating margin in the quarter was up 2.5 percent to 11.9 percent.
Excluding pension adjustments, Boeing’s core earnings in the quarter were $4.80 EPS, topping consensus estimates of $2.89 EPS. Excluding the tax benefit, core earnings of $3.06 EPS still handily beat expectations. Free cash flow was $2.5 billion.
Boeing’s Commercial Airplanes segment led earnings gains at the operating level, up 50 percent to $1.8 billion as operating margin grew 3.2 percent to 11.5 percent on higher sales and strong execution, the company said. Operating income in the Global Services segment was up 9 percent to $617 million on higher sales and more profitable commercial parts, and the Defense, Space & Security segment rose 6 percent to $553 million on higher sales and improved performance.
Sales in the quarter rose 9 percent to $25.4 billion from $23.3 billion a year ago as all three of Boeing’s operating segments aided the top line growth. The Commercial Airplanes segment was up 8 percent to $15.5 billion on a record 209 plane deliveries.
The Defense, Space & Security segment rose 5 percent to $5.5 billion on higher weapons and rotorcraft deliveries, and Global Services, which stood up last year and includes a mix of commercial and defense work, grew its top line 17 percent to $4 billion on growth across the portfolio.
For the year, Boeing’s sales fell a percent to $93.4 billion from $94.6 billion in 2016 while net income soared 67 percent to $8.2 billion ($13.43 EPS) from $4.9 billion ($7.61 EPS) and operating margin grew 4.8 percent to 11 percent. Core earnings were $12.04 EPS and free cash flow was a stellar $11.6 billion.
In 2018, Boeing expects sales to increase to between $96 billion and $98 billion on higher production of 737 passenger jets, growth in the defense on delivery of the last C-17 transport, weapons and fighter aircraft for international customers, and gains across the service portfolio. Long-term growth in the Global Services segment is pegged to significantly outpace the industry average of 3.5 percent with organic growth the primary driver, Dennis Muilenburg, Boeing’s chairman, president and CEO, said on the company’s earnings call.
Net income is also expected to be higher to between $15.90 and $16.10 EPS, as are core earnings, to between $13.80 and $14 EPS in sales gains, productivity improvements, and lower taxes as a result of the tax bill. Commercial aircraft deliveries are set to increase to between 810 and 815 this year versus a record 763 in 2017.
Boeing also sees continued strong cash flow ahead, forecasting $12.8 billion in free cash in 2018, an amount that analysts believe could end up higher given that the estimate could be conservative. The improved cash flow is expected to be driven by better cash generation on the 787 commercial aircraft program, increased 737 production, improvements in the Air Force KC-46 aerial refueling tanker program, and lower taxes.
In December, following congressional approval of the tax bill, Boeing said it would make $300 million in incremental investments spread equally across infrastructure improvements within the company’s facilities, workforce development initiatives, and charitable contributions.
Boeing said it will spend around $3.7 billion in research and development and about $2.2 billion in capital expenditures this year, both amounts $500 million above 2017 levels. About 70 percent of the planned R&D spending this year will be in the Commercial Airplanes segment.
Greg Smith, Boeing’s chief financial officer, said on the call that half the incentive scoring for employees is based on cash generation, which is a key priority going forward.
Tax reform is allowing the company to increase its “investment in the future” and to better compete globally, Muilenburg said.
Muilenburg said the go forward spending levels on R&D will remain stable as a percentage of sales and that with tax reform the company is accelerating related work on advanced prototyping, productivity initiatives, analytics, and vertical capabilities in some areas.
“We will be ramping up our investment in innovation as a result of tax reform in a meaningful way,” he said. Smith added that tax reform is also a allowing a slight increase in capital expenditures, some of which will go toward productivity and training.
Backlog at the end of 2017 stood at $488.1 billion, up 3 percent from $473.5 billion a year ago, driven by increase in all three segments. Boeing said 40 percent of the backlog is based on orders from international customers.
Talks with Brazil’s Embraer [ERJ] about a possible combination are still ongoing, Muilenburg said. Boeing disclosed the talks before Christmas after they leaked to the media. Embraer makes regional and business jets, areas that Boeing doesn’t compete in currently, as well as a light tactical fighter and medium airlift aircraft, and other aircraft for intelligence and surveillance missions.