Boeing Company (The Boeing Company) — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Boeing’s principal businesses are Commercial Airplanes and Defense, Space & Security (BDS), alongside Boeing Capital. The filing notes that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $22.045B | $21.815B | $42.510B | $40.708B |
| Operating earnings (GAAP) | $1.787B | $1.716B | $3.329B | $3.244B |
| Operating margin (GAAP) | 8.1% | 7.9% | 7.8% | 8.0% |
| Net earnings | $1.653B | $1.088B | $2.618B | $2.194B |
| Diluted EPS | $2.24 | $1.41 | $3.50 | $2.85 |
| Operating cash flow | Not separately presented for the quarter | $2.921B | $3.991B |
- Commercial Airplanes revenue for the first half rose 11% to $27.041B, driven by higher deliveries; segment operating earnings increased to $3.052B from $2.672B.
- BDS first-half revenue fell 6% to $15.380B and operating earnings declined to $1.360B from $1.608B. Boeing Military Aircraft earnings were notably affected by the KC-46A contract charge.
- First-half GAAP operating margin eased to 7.8% from 8.0%. Management’s non-GAAP core operating margin was 9.6% for both first-half periods; this measure excludes certain pension and postretirement costs.
Financial position and liquidity
- At June 30, cash and cash equivalents were $7.533B, down from $9.088B at year-end 2013. Total debt was approximately $8.883B ($1.591B current and $7.292B long-term), versus $9.635B at year-end.
- Operating cash flow declined $1.070B year over year, primarily due to higher inventory growth. Inventory was $46.251B, up from $42.912B at December 31; Boeing cited continued investment in commercial aircraft programs, primarily the 787.
- Financing activities used $5.764B, including $3.998B of share repurchases and $1.071B of dividends paid. Boeing repurchased 30.8 million shares during the first half.
- Boeing reported $4.8B of unused revolving credit capacity, no commercial paper borrowings outstanding during the first half, and compliance with debt and credit-facility covenants. Contractual backlog was $426.046B, compared with $422.661B at year-end.
Material changes and unusual items
- Net earnings and EPS rose year over year, while the effective tax rate fell to 3.7% in Q2 and 17.6% for the first half. The lower rates primarily reflected $265M of tax benefit from a tax-basis adjustment and $259M from federal audit settlements in Q2. These items boosted reported earnings; the 2014 research tax credit had not been extended at filing.
- Boeing recorded a $425M KC-46A Tanker reach-forward loss in Q2, reflecting engineering and design issues requiring rework and additional labor. The charge was allocated $238M to Commercial Airplanes and $187M to BMA. Management said contractual milestones had been met to date.
- Net unfavorable cumulative contract catch-up adjustments across all contracts reduced operating earnings by $145M for the first half and $312M for Q2; the reported diluted EPS effects were $0.16 and $0.41, respectively.
- In Q1, pension-plan changes triggered $334M of charges, primarily curtailment costs. Approximately 100,000 employees are expected to transition to a company-funded defined-contribution plan in 2016. The related remeasurement produced a $966M net actuarial gain recorded in other comprehensive income.
Outlook, risks and contingencies
- Commercial programs: Boeing planned to raise 737 production from 38 to 42 aircraft per month in Q2 2014, with a further increase to 47 per month in 2017. It was targeting 787 production stability at 10 per month and planned future increases; management warned that production, certification, schedule, customer and supplier challenges could pressure profitability or result in additional claims or a reach-forward loss.
- The 787 program carried $24.242B of deferred production costs at June 30. Boeing expected $18.367B of 787 deferred production, tooling and other non-recurring costs to be recovered from firm-order units and $9.317B from expected future orders. The 747 program faced weak cargo demand, pricing pressure and unsold production positions; both programs had breakeven or near-breakeven gross margins in the first half.
- Defense exposure: U.S. defense appropriations and future sequestration remain uncertain. Boeing planned to end C-17 production earlier, in late 2015; unsold-aircraft inventory and supplier termination exposure could lead to further charges if sales do not materialize. The U.S. FY2015 budget request did not include funding for additional F/A-18 aircraft; a production shutdown remained possible if further orders were not secured.
- Financing and external risks: Aircraft financing commitments totaled $17.924B and related to customers Boeing believed had below-investment-grade credit. The company said it did not expect to fund a significant portion, but noted potential additional funding needs if the Export-Import Bank charter expired without renewal. Boeing reported no Russia/Ukraine-related production or delivery disruption to date, but supplier or customer interruptions could materially affect operations.
- Contingencies: Environmental remediation liabilities were $649M; the high end of reasonably possible remediation costs exceeded recorded liabilities by $895M. Uncertain tax-position liabilities were $1.420B. Boeing disclosed a possible loss of up to $356M on disputed Sea Launch receivables and potential ULA-related indemnification or cost exposure, including up to $278M for satellite pricing and up to $317M for questioned deferred costs. These are potential exposures, not amounts Boeing said it expected to pay.
Most important facts for investors to verify
- Whether the large Q2 tax benefits are nonrecurring and how tax rates may change if the research tax credit is extended.
- KC-46A cost estimates, progress against milestones, and any further reach-forward losses or contract adjustments.
- 787 deferred-cost recovery assumptions, production-rate execution, and any customer or supplier claims; also 747 demand and unsold positions.
- Cash conversion and inventory growth, particularly the amount and timing of 787 inventory recovery, alongside the pace of buybacks and dividends.
- Resolution and potential financial impact of defense-budget pressures, financing commitments, Export-Import Bank authorization, and the disclosed legal, environmental and ULA/Sea Launch exposures.