Boeing Co. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; the independent accountant performed a review, not an audit. Amounts below are in U.S. dollars unless stated otherwise.
Business context and results
Boeing operates Commercial Airplanes, Boeing Defense, Space & Security (BDS), Boeing Capital Corporation (BCC), and other activities. In the second quarter, higher commercial-aircraft deliveries and services supported growth, while BDS revenue declined. The filing notes that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $16.543 billion | $15.573 billion | $31.453 billion | $30.789 billion |
| Operating earnings | $1.534 billion | $1.307 billion | $2.534 billion | $2.481 billion |
| Operating margin | 9.3% | 8.4% | 8.1% | 8.1% |
| Net earnings from continuing operations | $942 million | $789 million | $1.530 billion | $1.308 billion |
| Diluted EPS | $1.25 | $1.06 | $2.04 | $1.76 |
| Operating cash flow | Not separately stated | Not separately stated | $643 million | $(19) million |
For the first half, revenue rose 2% and diluted EPS rose from $1.76 to $2.04. The effective tax rate declined to 33.7% from 42.1%, primarily reflecting a $150 million health-care-related tax charge in the first half of 2010 and 2011 R&D tax-credit benefits.
At June 30, cash and cash equivalents were $5.050 billion; short-term and other investments were $3.752 billion. Total debt was $11.628 billion, including $1.304 billion classified as short-term, versus $12.421 billion at December 31, 2010. Shareholders’ equity was $4.733 billion, compared with $2.766 billion at year-end.
Six-month cash flow improved to $643 million from a $19 million use. Operating cash was constrained by a $4.889 billion increase in inventory, partly offset by payables and customer advances. Investing activities provided $758 million; financing activities used $1.747 billion, including $851 million of debt repayments and $620 million of dividends paid. Cash declined by $309 million during the period.
Material changes and segment performance
- Commercial Airplanes: First-half revenue increased 7% to $15.961 billion and operating earnings rose to $1.429 billion. Deliveries totaled 222, unchanged year over year. Commercial contractual backlog was $259.921 billion.
- BDS: First-half revenue declined 2% to $15.305 billion, while operating earnings rose to $1.469 billion. Lower Network & Space Systems and Global Services & Support revenue was partly offset by Boeing Military Aircraft. BDS backlog declined to $61.260 billion, including unobligated backlog.
- BCC: First-half revenue decreased to $290 million, but operating earnings increased to $114 million, mainly due to lower interest and depreciation expense and a reduced loss allowance. The financing and investment portfolio was $4.376 billion.
- Backlog: Total contractual backlog increased to $307.964 billion from $303.955 billion at year-end; unobligated backlog declined to $15.619 billion from $16.871 billion.
Unallocated costs, including pension and deferred-compensation expenses, increased by $163 million in the first half versus 2010. Pension costs rose amid lower discount rates, higher amortization of actuarial losses, and C-17 curtailment charges.
Outlook, risks, and unusual items
- Commercial programs: Boeing expected first delivery and certification of the 787 and 747-8 Freighter in Q3 2011, and the 747-8 Intercontinental in Q4 2011. The 777 production rate reached seven aircraft per month in June; planned 737 increases included 42 per month beginning in 2014. These were program expectations, not consolidated earnings guidance.
- 787 economics: Management said the program was not then in a reach-forward loss position, but expected zero margin on initial deliveries. Delays, rework, supplier issues, customer claims, or further design changes could raise costs or cause charges.
- KC-46A: The fixed-price incentive development contract for four tankers was valued at $4.4 billion; exercising all options could bring expected contract value to about $30 billion. Cost increases could result in a material charge.
- C-17 and F-15: Boeing reported $630 million of inventory expenditures and potential supplier termination liabilities tied to probable additional C-17 orders, and $1.335 billion tied to probable international F-15 orders. If orders do not materialize, write-offs or termination costs could result. C-17 production was transitioning to a lower rate; a future shutdown remained possible.
- Contingencies: Potential A-12 litigation outcomes included up to $1.720 billion in pre-tax charges in an adverse scenario, while a favorable outcome could yield approximately $1.169 billion. Disputed ULA matters could expose Boeing to up to $226 million and $282 million, respectively; Sea Launch receivables of $356 million were contested. Environmental liabilities were $788 million, with the reasonably possible high estimate exceeding recorded liabilities by $997 million.
- Other exposures: Financing commitments totaled $14.254 billion as of July 22, 2011; standby letters of credit and surety-bond contingencies were $7.233 billion at June 30. Boeing said it expected third-party financing to cover a significant portion of commitments but could not assure it would not have to fund more.
- Legal and market risks: The NLRB complaint challenged Boeing’s South Carolina 787 assembly plant; the hearing was ongoing. Boeing also disclosed satellite-related litigation and other claims. Management identified aircraft-program execution, fixed-price contracts, government demand, labor, pension assumptions, customer financing concentrations, and environmental obligations among relevant risks.
- Market and liquidity: Boeing cited political turmoil, Japan’s natural disasters, and high fuel prices as pressures on airlines; its 2011 industry profit outlook was $4 billion versus $18 billion in 2010. Boeing stated it had $4.376 billion of unused revolving credit capacity, no commercial-paper borrowings, and was compliant with debt covenants.
Investor verification priorities
- Check subsequent 787 and 747-8 certification, delivery timing, production costs, customer remedies, and whether initial 787 margins matched management’s expectations.
- Track inventory growth, operating cash conversion, and the pace of planned commercial-aircraft production increases.
- Assess the funding, delivery, and cost risks of the KC-46A and other fixed-price development programs, and whether expected orders support C-17 and F-15 inventory.
- Follow resolution of the A-12, ULA, Sea Launch, environmental, and other legal matters, including any resulting cash payments or earnings charges.
- Monitor BCC’s AirTran exposure and customer-financing commitments, as well as Boeing’s debt, liquidity, pension assumptions, and contingent guarantees.