Boeing Co. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Figures are unaudited; the six-month and quarterly comparisons are with the corresponding 2017 periods. Deloitte performed an interim review, not an audit.
Business context and results
Boeing reports Commercial Airplanes (BCA), Defense, Space & Security (BDS), Global Services (BGS), and Boeing Capital (BCC). For the first half, revenue growth came from higher aircraft deliveries and mix, defense awards and weapons sales, and growth in services.
| Metric | Six months 2018 | Six months 2017 | Q2 2018 | Q2 2017 |
|---|---|---|---|---|
| Revenue | $47.640bn | $45.012bn | $24.258bn | $23.051bn |
| Operating earnings (GAAP) | $5.585bn | $4.736bn | $2.710bn | $2.530bn |
| Operating margin (GAAP) | 11.7% | 10.5% | 11.2% | 11.0% |
| Net earnings | $4.673bn | $3.328bn | $2.196bn | $1.749bn |
| Diluted EPS | $7.88 | $5.41 | $3.73 | $2.87 |
| Operating cash flow | $7.816bn | $7.047bn | Not stated separately | Not stated separately |
First-half cost of sales was 80.5% of revenue, down from 81.7%. The effective tax rate fell to 13.9% from 27.8%, reflecting the U.S. Tax Cuts and Jobs Act, R&D credits, and discrete tax benefits. Boeing’s non-GAAP core operating earnings were $4.903bn and core EPS was $6.97 for the first half; these measures exclude specified pension and postretirement items.
Financial position and liquidity
- At June 30, cash and cash equivalents were $8.121bn; current assets were $86.401bn and current liabilities $77.725bn.
- Total debt was approximately $12.118bn, including $1.611bn current debt and $10.507bn long-term debt. Debt increased from $11.117bn at December 31, 2017.
- Operating cash flow was $7.816bn; investing cash use was $1.295bn and financing cash use was $7.177bn. Cash, including restricted cash, decreased $692m over the half.
- Financing cash outflows included $5.965bn of share repurchases and $1.997bn of dividends. The company had $5.0bn of unused revolving credit capacity and reported compliance with debt covenants.
- Total equity was negative $1.374bn, compared with positive $1.713bn at year-end, following substantial repurchases and dividends; treasury stock and accumulated other comprehensive loss were significant contributors.
Changes versus prior period and segment performance
- First-half revenue rose 5.8% and GAAP operating earnings rose 18%; diluted EPS increased from $5.41 to $7.88. Lower tax expense contributed materially to net earnings growth.
- BCA first-half revenue was $28.133bn and operating earnings $3.152bn, up from $27.233bn and $2.152bn. Deliveries increased to 378 from 352; BCA margin rose to 11.2% from 7.9%.
- BDS revenue increased to $11.355bn from $10.254bn, while operating earnings were nearly flat at $1.170bn versus $1.163bn. Q2 BDS earnings declined year over year amid higher KC-46A charges and less favorable contract catch-up adjustments.
- BGS revenue rose to $8.033bn from $7.205bn and operating earnings to $1.247bn from $1.192bn; its margin declined to 15.5% from 16.5%.
- Backlog was $488.036bn at June 30, up from $474.100bn at year-end. Boeing expected about 27% to convert to revenue through 2019 and about 70% through 2022.
Outlook, risks, contingencies, and unusual items
- KC-46A: Boeing recorded $507m of first-half reach-forward losses, including $426m in Q2, citing higher costs for rework, certification, and testing. Further losses or delivery delays remain possible; deliveries were expected to begin in Q4 2018.
- Production plans: Boeing planned to raise 737 production from 52 to 57 per month in 2019, and 787 production from 12 to 14 per month in 2019. It said it continued to evaluate the 747 program and that ending production was reasonably possible.
- Other development and contract risk: Fixed-price development programs, including Commercial Crew, Saudi F-15, and satellite programs, face potential cost overruns, technical issues, schedule delays, and reach-forward losses. U.S. defense budget caps and future appropriations remain uncertain.
- Unusual litigation charge: Boeing recorded a $148m Q2 charge, including a $137m receivable write-off, after the Delaware Supreme Court denied its Spirit AeroSystems indemnification claim on July 12, 2018.
- Transactions: Boeing agreed to acquire KLX for approximately $4.25bn, subject to conditions; it expected closing in 2018. A July 5 non-binding Embraer partnership announcement contemplated Boeing owning 80% of a commercial aircraft and services joint venture, with closing anticipated by end-2019 subject to definitive agreements and approvals.
- Contingencies and external risks: Aircraft financing commitments totaled $19.060bn, including $17.757bn tied to customers believed to be below investment grade. Boeing cited potential exposure from environmental remediation, guarantees, trade-in commitments, ULA matters, tariffs, sanctions, and reliance on the Export-Import Bank. Environmental liabilities were $534m; reasonably possible remediation costs could exceed recorded liabilities by $815m.
- Boeing expected 2018 capital expenditures to exceed 2017. It did not provide a clear consolidated full-year earnings or revenue guidance figure in the filing text.
Most important facts for investors to verify
- Whether KC-46A certification, rework, and flight testing cause additional losses or delivery delays beyond the $507m recorded in the first half.
- Whether improved BCA operating performance and higher production rates are sustainable, and whether 787 deferred production and tooling costs remain recoverable.
- How much of the $19.060bn financing commitments Boeing ultimately funds, particularly given the Export-Import Bank’s limited authority and customer credit quality.
- Whether the KLX acquisition and proposed Embraer partnership receive required approvals, close as expected, and deliver anticipated benefits.
- How repurchases, dividends, debt, and the negative equity position affect liquidity and financial flexibility, alongside tariff, government-budget, environmental, and ULA exposures.