Boeing [BA] on Wednesday reported a double-digit decline in its first quarter net income stemming from previously announced charges related to changes in its retirement plan and higher tax expenses but the company’s core results, which exclude certain retirement expenses, were strong.
Excluding the retirement expenses, Boeing’s core operating earnings increased 12 percent to $2.1 billion, $1.76 earnings per share (EPS), from $1.9 billion ($1.73 EPS), well above consensus estimates of $1.56 EPS. Core operating margins were up 30 basis points to 10.2 percent.
While the core operating results exclude $334 million (29 cents EPS) in non-cash charges related to changes in retirement plans, the results were still hindered by higher income tax expenses due to Congress failing to extend the federal research and development tax credit beyond 2013. The company’s earnings a year ago enjoyed a 19 cents EPS benefit from the tax credit.
Net income, which includes the retirement related charges, fell 13 percent to $965 million, $1.28 EPS, from $1.1 billion, $1.44 EPS.
Boeing’s sales increased 8 percent to $20.5 billion from $18.9 billion, driven by strong demand for its commercial aircraft, which more than offset a decline in the company’s defense business.
Aircraft deliveries in the quarter at Boeing Commercial Airplanes were up 18 percent to 161 planes on higher volume in the 787 and 737 lines, propelling a 19 percent increase in sales to $12.7 billion. Operating earnings in the segment increased 23 percent to $1.5 billion on the increased aircraft deliveries and a product mix that favored higher margin planes.
Jim McNerney, Boeing’s chairman and CEO, said customer demand worldwide for the company’s planes remains high, noting that passenger trends remain strong and air cargo traffic keeps improving gradually. The commercial segment tallied $14 billion in orders and backlog grew by $100 million to $374 billion since the end of 2013.
Sales at Boeing Defense, Space & Security slipped 6 percent to $7.6 billion due to less activity on the F-15 program, fewer P-8 maritime patrol aircraft deliveries and lower satellite volume. The defense segment’s Global Services & Support (GS&S) business grew sales on more work in maintenance, modifications and upgrades. About 30 percent of defense sales were from international customers.
Operating earnings in the defense segment fell 6 percent to $778 million as a decline at the Military Aircraft business more than offset increases at GS&S and Network & Space Systems. In addition to the lower sales at Military Aircraft, the business was also hit by a C-17 inventory-related charge that Boeing announced when it decided to accelerate the shutdown of the aircraft production line.
Total backlog at the defense business stood at $66 billion, down $2.1 billion from December, while orders were $5 billion. International awards make up 35 percent of the backlog.
Excluding the Navy’s F/A-18 fighter program, which wasn’t funded in the FY ’14 budget request, McNerney said Boeing’s programs are well positioned in the Pentagon’s near-term spending plans. He added that he expects more domestic, and eventually additional international, orders for the F/A-18 program.
McNerney said the defense business has been able to drive out $4 billion in operating costs the past few years and is on plan for another $2 billion reduction in annual costs.
Boeing raised its expectations this year for core EPS by 15 cents to between $7.15 and $7.35 due to a favorable tax settlement that will be recorded in its second quarter results. Guidance for net income was unchanged because the tax settlement was offset by the retirement plan charges.
Sales for the year are still pegged at between $87.5 billion and $90.5 billion.
Free cash flow in the quarter was $615 million and the company repurchased $2.5 billion worth of its shares and paid $500 million in dividends. The company still has $8.3 billion left in its existing share repurchase authorization it plans to spend in the next two to three years.