Boeing Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless noted. Amounts are in millions of dollars, except per-share data. Interim statements were reviewed, not audited, and management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Revenue | $15,216 | $16,502; down 8% |
| Operating earnings / margin | $1,174 / 7.7% | $1,025 / 6.2% |
| Pre-tax earnings | $1,050 | $932 |
| Net earnings from continuing operations | $519 | $615 |
| Diluted EPS | $0.70 | $0.87 from continuing operations (reported total diluted EPS: $0.86, including a discontinued-operations loss) |
| Operating cash flow | $(285) | $193 |
| Investing cash flow | $(4,041) | $(598) |
| Cash and cash equivalents, March 31 | $4,517 | $9,215 at December 31, 2009 |
| Short-term investments, March 31 | $5,845 | $2,008 at December 31, 2009 |
| Total debt, March 31 | $12,943 | $12,924 at December 31, 2009 |
| Cash dividends per share | $0.42 | $0.42 |
Operating cash use reflected a $1,333 million working-capital outflow, principally higher inventories as Boeing prepared for anticipated 787 and 747-8 deliveries. Investing outflows were largely driven by $4,744 million of contributions to investments, primarily time deposits. Cash plus short-term investments totaled $10,362 million at quarter-end. Boeing reported $3,525 million of unused revolving credit capacity, no commercial-paper borrowings, and compliance with debt covenants.
The effective tax rate rose to 50.6% from 34.0%, including a $150 million charge related to U.S. health-care legislation and the absence of the prior-year R&D tax credit. The company reported a $1,713 million net liability for uncertain tax positions.
Material changes and segment performance
- Commercial Airplanes: Revenue fell 13% to $7,468 million, primarily due to fewer deliveries, including lower 747 deliveries during the transition to the 747-8 and supplier challenges. Operating earnings rose to $679 million from $417 million, largely because Q1 2009 included a $347 million 747 reach-forward loss; margin increased to 9.1% from 4.9%. Deliveries were 108 aircraft versus 121.
- Boeing Defense, Space & Security: Revenue decreased 1% to $7,613 million and operating earnings declined to $664 million from $709 million; margin was 8.7% versus 9.2%. Lower Network & Space Systems volume was partly offset by growth in Military Aircraft and Global Services & Support.
- Boeing Capital Corporation: Revenue was nearly flat at $162 million; operating earnings increased to $46 million from $37 million, mainly on lower interest expense and loss provisions.
- Backlog: Contractual backlog increased to $298,855 million from $296,500 million at year-end; unobligated backlog declined to $15,921 million from $19,058 million.
Outlook, risks and unusual items
- The filing provides program milestones and expectations but no clear consolidated full-year revenue or earnings guidance. Management expected first delivery of the 787-8 and 747-8 Freighter in Q4 2010, subject to flight testing and certification; the 747-8 Intercontinental was expected to be certified and delivered in Q4 2011.
- Management cited continuing 787 execution risks, including supply-chain coordination, traveled work, weight and systems integration, schedule delays, customer and supplier claims, and potential cost pressure. The three initial flight-test aircraft were considered unsaleable; costs for three other test aircraft remained in inventory, with possible further charges if they cannot be sold.
- The 777 production rate was scheduled to fall from seven to five aircraft per month beginning June 2010, with a planned rate increase accelerated to mid-2011. Boeing planned to reduce C-17 production from 15 to 10 aircraft annually by mid-2011 and could decide in 2011 to end production if additional orders do not materialize. The filing cited approximately $570 million of inventory expenditures and potential supplier termination liabilities tied to aircraft not yet under contract.
- Contingencies include possible additional pre-tax losses of up to $1,695 million in the A-12 litigation, up to $438 million related to Sea Launch recovery risks, and up to $382 million if ULA cannot obtain additional pricing for certain satellite missions. Boeing also disclosed $10,087 million in financing commitments and environmental remediation liabilities of $716 million; its reasonably possible high-end environmental estimate exceeded the recorded liability by $952 million.
- Other risks include fixed-price development overruns, pension assumptions and investment returns, commercial-airline and customer-financing conditions, government-contract dependence, litigation, and access to external funding. Management reported no material change in market risk or risk factors from the 2009 Form 10-K.
Investor verification priorities
- Confirm 787 and 747-8 test, certification, delivery and production assumptions, and whether inventory estimates or customer/supplier claims change.
- Track aircraft deliveries, Commercial Airplanes margins, and the effects of 747 and 777 production transitions.
- Monitor operating cash flow and inventory growth, as well as the composition and availability of cash and short-term investments.
- Assess tax-rate effects, the potential R&D credit extension, and outcomes or timing of IRS examinations.
- Review developments in A-12, Sea Launch, ULA, environmental and other legal contingencies, alongside financing commitments and debt capacity.