Boeing Company (NYSE: BA) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited interim statements; Deloitte performed a review, not an audit.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $23.90B | $25.85B | $71.29B | $72.54B |
| Earnings from operations | $2.28B | $2.58B | $3.65B | $6.28B |
| Operating margin | 9.5% | 10.0% | 5.1% | 8.7% |
| Net earnings | $2.28B | $1.70B | $3.26B | $4.15B |
| Diluted EPS | $3.60 | $2.47 | $5.04 | $5.92 |
| Operating cash flow | Not separately stated for the quarter | $7.67B | $6.24B |
Q3 revenue fell 8% year over year, mainly on lower commercial aircraft volume and lower Defense, Space & Security (BDS) revenue. Nine-month revenue declined 2%. Nine-month earnings from operations fell 42%, with Commercial Airplanes the main source of deterioration. Q3 net earnings rose despite lower operating earnings, supported by a $76 million income tax benefit versus $783 million tax expense in the prior-year quarter.
Nine-month core operating earnings, a company-defined non-GAAP measure excluding certain pension and postretirement costs, were $3.40B, down from $6.48B; core diluted EPS was $4.79 versus $6.11. GAAP diluted EPS was $5.04 versus $5.92. Nine-month effective tax rate was 5.8%, versus 31.5% in 2015; the Q3 rate was negative 3.4%. The 2016 rates benefited from $440 million of tax benefits related to an asset tax-basis adjustment, $177 million from settlement of a federal tax audit, and the reinstated R&D tax credit.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $8.99B, down from $11.30B at year-end 2015. Operating cash flow of $7.67B was offset by $1.96B used in investing and $8.01B used in financing; cash decreased $2.32B.
- Cash flow from operations improved by $1.42B year over year, largely reflecting lower commercial aircraft inventory spending, particularly on the 787. Advances and progress billings declined $1.8B during the nine months.
- Debt was approximately $10.5B, including $0.6B current debt, compared with $10.0B at year-end 2015. Boeing issued $1.2B of senior notes in May and reported $5.0B of unused revolving credit capacity and no commercial paper borrowings.
- Current assets were $62.24B and current liabilities $48.49B. Shareholders’ equity declined to $2.09B from $6.34B at year-end, reflecting primarily share repurchases and dividends.
- Boeing repurchased $6.5B of shares and paid $2.08B in dividends during the nine months. Cash dividends paid were $3.27 per share.
Material changes and segment results
- Commercial Airplanes: Nine-month revenue fell 2% to $48.83B; operating earnings dropped to $1.66B from $4.59B, and margin to 3.4% from 9.2%. The decline included a $1.258B 747 reach-forward loss, a $1.235B 787 flight-test-aircraft inventory reclassification to R&D, and lower volume and mix. Commercial deliveries were 563 versus 580.
- BDS: Nine-month revenue was broadly flat at $22.64B, while operating earnings decreased to $2.20B from $2.31B. The Commercial Crew program recorded a $162M charge, including a $38M reach-forward loss. Q3 BDS revenue and earnings declined year over year, particularly in Network & Space Systems and Boeing Military Aircraft; Global Services & Support grew.
- Boeing Capital: Nine-month revenue declined to $211M from $315M; operating earnings were $36M versus $41M. Its customer financing portfolio was $3.66B and its debt-to-equity ratio was 4.9-to-1.
- Contractual backlog was $448.9B, down from $476.6B at year-end 2015, primarily because deliveries exceeded net orders.
Outlook, risks and contingencies
- Management’s commercial-aircraft market forecast projected 4.8% annual passenger-traffic growth and 4.2% cargo growth over 20 years, with demand for approximately 39,600 new aircraft. Boeing said it was monitoring wide-body demand and could adjust production if orders did not materialize.
- Planned production changes included 737 output increases to 47 per month in 2017, 52 in 2018 and 57 in 2019; 777 output reduction to 7 per month in 2017; and 787 production at 12 per month, with a further increase to 14 planned by the end of the decade. These plans are subject to execution and demand risks.
- The 747 rate was reduced to 0.5 aircraft per month in September 2016. Further losses, or a production shutdown, remain possible if sufficient orders and risk mitigation do not materialize. The 787 was near breakeven gross margin and remained exposed to production, supply-chain, productivity and derivative-introduction risks.
- KC-46A recorded $816M in additional 2016 reach-forward losses. Boeing cited technical complexity, certification delays and schedule costs; further losses remain possible. First tanker delivery was expected in late 2017. The U.S. Air Force authorized two low-rate initial production lots valued at $2.8B.
- Defense spending and appropriations beyond FY2017 remained uncertain; a government shutdown after the continuing resolution expired December 9, 2016 could delay payments or disrupt performance. Boeing also identified supplier/customer disruption risks in Russia and Ukraine and potential aircraft-customer financing effects from the Export-Import Bank’s lack of a board quorum.
- Financing commitments totaled $17.43B, of which $15.27B related to customers Boeing believed had below-investment-grade credit. Standby letters of credit and surety bonds were about $4.37B. Environmental remediation liabilities were $576M; the high end of estimated reasonably possible remediation costs exceeded recorded liabilities by $873M.
- Other exposures include Sea Launch receivables of $356M under active collection efforts and contingent ULA indemnifications and cost-recovery disputes. Management said it believed outstanding legal matters would not materially affect financial position, results or cash flows, but outcomes remain uncertain.
Important facts for investors to verify
- Whether 747, 787 and KC-46A program costs, production assumptions and remaining loss exposure change in subsequent filings.
- Whether the tax benefits that materially lowered the 2016 effective tax rate are nonrecurring, and how reported earnings compare with underlying operating performance.
- Whether backlog conversion, aircraft orders and planned production-rate changes support future revenue and cash generation.
- Whether working-capital movements, share repurchases, dividends and debt levels remain sustainable alongside Boeing’s financing commitments and contingent exposures.