Boeing Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; the comparable 2017 figures were retrospectively restated for new revenue-recognition accounting. Boeing cautions that quarterly results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $23.382 billion | $21.961 billion |
| Earnings from operations | $2.875 billion | $2.206 billion |
| Operating margin | 12.3% | 10.0% |
| Net earnings | $2.477 billion | $1.579 billion |
| Diluted EPS | $4.15 | $2.54 |
| Operating cash flow | $3.136 billion | $2.098 billion |
Non-GAAP core operating earnings were $2.510 billion, with a 10.7% margin, versus $1.860 billion and 8.5%; core EPS was $3.64 versus $2.17. These measures exclude specified pension and postretirement costs and are not substitutes for GAAP results. Cost of sales was 80.5% of revenue, down from 82.3%. The effective tax rate fell to 12.8% from 26.4%, reflecting the U.S. tax-rate reduction and other tax benefits.
At March 31, cash and cash equivalents were $9.235 billion ($9.305 billion including restricted cash). Total recorded debt was approximately $12.5 billion, including $2.0 billion current; Boeing issued $1.4 billion of senior notes during the quarter. The company reported $5.0 billion of unused revolving credit capacity and compliance with debt covenants. Operating cash flow benefited from higher customer advances and lower inventory spending, partly offset by a $1.6 billion increase in unbilled receivables. Financing cash outflow was $2.845 billion, including $3.0 billion of share repurchases and $1.006 billion of dividends. Cash dividends were $1.71 per share.
Total assets were $113.549 billion and total equity $1.298 billion at quarter-end. Customer advances and progress billings were $49.955 billion; inventory was $61.303 billion. Boeing’s $486.245 billion backlog included $461.742 billion of contractual backlog; management expected about 30% to convert to revenue through 2019 and 71% through 2022.
Material changes and segment performance
- Revenue increased 6% year over year. Commercial Airplanes (BCA) revenue rose 5% to $13.652 billion, principally on higher deliveries and mix; operating profit increased to $1.508 billion from $870 million, and margin to 11.0% from 6.7%.
- Defense, Space & Security (BDS) revenue increased 13% to $5.762 billion and operating profit rose to $649 million from $549 million. Growth reflected international fighter and C-17 awards and higher weapons revenue.
- Global Services revenue increased to $3.943 billion from $3.653 billion; operating profit was $644 million versus $623 million. Margin declined to 16.3% from 17.1%.
- Boeing Capital revenue and operating profit declined to $65 million and $20 million, respectively, from $92 million and $39 million, primarily due to a smaller portfolio.
- Net income and EPS comparisons include the adoption of Topic 606, which increased restated Q1 2017 net earnings by $128 million and diluted EPS by $0.20. Boeing said the standard accelerated revenue recognition for certain long-term contracts but did not change their total contract revenue; commercial-aircraft delivery accounting was not affected.
Outlook, commentary and risks
- Production plans included increasing 737 output from 47 to 52 aircraft per month in the second half of 2018 and to 57 per month in 2019; 787 output was planned to rise from 12 to 14 per month in 2019. Boeing expected 2018 capital expenditures to exceed 2017 levels. These are operating plans, not full-year financial guidance.
- The KC-46A tanker program recorded an additional $81 million reach-forward loss in Q1, following $446 million in 2017. Certification, flight testing, technical or quality issues, and schedule delays could lead to further losses or delayed deliveries. Boeing expected 18 operational aircraft to be delivered in 2018.
- Boeing said it continued to evaluate the viability of the 747 program and could decide to end production. Commercial aircraft profitability also depends on production rates, costs, customer/model mix, certification, suppliers, and delivery schedules.
- U.S. defense spending caps and appropriations remain uncertain beyond fiscal 2019; future cuts or changing priorities could reduce, cancel, or delay programs. Fixed-price development contracts carry risk of additional costs and reach-forward losses.
- Potential U.S.-China trade tariffs and possible Russian sanctions or retaliation, including restrictions on titanium exports, were being monitored; Boeing said the referenced measures had not yet been imposed at filing time. Limited Export-Import Bank authority could also require Boeing to arrange or provide customer financing.
- Aircraft financing commitments totaled $10.038 billion, all for customers Boeing assessed as below investment grade. The company reported no required reserve based on commitment terms but could have to fund more than historically typical amounts. Customer financing collateral is concentrated in out-of-production aircraft and the 747-8, making it sensitive to market values.
- Environmental remediation liabilities were $539 million; reasonably possible costs exceeded recorded liabilities by $820 million. Other contingencies include ULA indemnifications, government contract cost audits, trade-in commitments, legal matters, and the KC-46A program. Management stated it believed legal proceedings would not materially affect results, but outcomes remain uncertain.
Important facts for investors to verify
- Whether aircraft delivery and production-rate plans are achieved, and whether Boeing’s backlog converts as projected.
- Further KC-46A cost estimates, certification progress, and delivery timing; also the 747 production decision and 787 deferred-cost recovery assumptions.
- Quality and sustainability of operating cash flow, particularly customer advances, unbilled receivables, and inventory movements.
- Debt, liquidity and potential customer-financing needs, including the $10.038 billion financing commitment exposure and Export-Import Bank developments.
- Exposure to defense-budget changes, tariffs or sanctions, environmental liabilities, and ULA or other contingent obligations.
- Effects of tax benefits and the Topic 606 restatement when comparing reported periods; review GAAP results alongside Boeing’s non-GAAP measures.