Business Context and Reporting Period
Company: The Boeing Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Segments: Commercial Airplanes, Integrated Defense Systems (IDS), Boeing Capital Corporation (BCC), and Other.
Key Financial Metrics
| Metric ($ millions) | 9 Months 2005 | 9 Months 2004 | 3 Months 2005 | 3 Months 2004 |
|---|---|---|---|---|
| Total Revenues | $40,641 | $39,143 | $12,629 | $13,152 |
| Operating Earnings | $2,268 | $1,979 | $763 | $511 |
| Net Earnings | $2,112 | $1,686 | $1,011 | $456 |
| Diluted EPS | $2.62 | $2.07 | $1.26 | $0.56 |
| Operating Margin | 5.6% | 5.1% | 6.0% | 3.9% |
| Effective Tax Rate | 5.1% | 16.8% | (24.8)% | 1.6% |
| Cash from Operations | $4,552 | $2,137 | N/A | N/A |
| Cash & Equivalents (Sep 30) | $4,547 | $3,204 | N/A | N/A |
| Total Debt (Sep 30) | $10,862 | $12,200 | N/A | N/A |
Note: Total Debt includes short-term debt ($726M) and long-term debt ($10,136M) as of Sep 30, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Nine-month revenue increased 3.8% driven by Commercial Airplanes (up $1.16B due to favorable model mix and used aircraft sales) despite a labor strike in September. IDS revenue remained stable.
- Profitability Surge: Net earnings increased 25% for the nine months. The effective tax rate dropped significantly to 5.1% (from 16.8%) due to a $537M IRS tax refund settlement for years 1998-2001.
- Divestitures: Significant gains were recorded from the sale of Rocketdyne Propulsion and Power ($582M pre-tax gain) and Electron Dynamic Devices ($25M pre-tax gain). Conversely, a $294M net loss was recorded on the sale of Wichita/Tulsa facilities to Spirit Aerosystems.
- Strike Impact: A labor strike by the International Association of Machinists (IAM) in September halted production, resulting in 21 fewer aircraft deliveries and an estimated $1.5B revenue decline for the quarter.
- Pension Costs: Pension expense increased $555M year-over-year due to settlement/curtailment charges related to divestitures and a decrease in the discount rate.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects continued strong operational performance. The 787 program launch remains a key focus. The 717 program production is concluding in 2006 with remaining shutdown costs of ~$100M to be expensed as incurred.
- Unusual Items:
- Tax Benefit: A $406M net income increase in Q3 2005 from the IRS settlement.
- Accounting Change: Adoption of SFAS 123R (Share-Based Payment) resulted in a $21M cumulative effect of accounting change (net of tax) and increased share-based compensation expense by $243M.
- Asset Impairments: Charges of $27M and $24M recorded in Q3 related to Delta and Northwest Airlines EETC investments due to bankruptcy filings.
- Risks & Contingencies:
- Customer Bankruptcies: Delta, Northwest, ATA, and VARIG have filed for bankruptcy or reorganization. Boeing does not expect a material adverse effect but monitors collateral values closely.
- Legal Proceedings: Ongoing A-12 litigation (potential loss up to $1.54B if default termination is upheld, though management believes provision is adequate) and EELV litigation (stayed pending ULA joint venture closing).
- Sea Launch: Net maximum exposure to loss is estimated at $149M.
Investor Verification Checklist
- IRS Settlement: Verify the finality of the 1998-2001 tax settlement and the status of protests filed regarding other adjustments.
- Strike Resolution: Confirm the long-term impact of the IAM strike on 2005 delivery schedules and 2006 production ramp-up.
- Divestiture Accounting: Review the timing of pension curtailment losses associated with the Rocketdyne and Wichita sales (some expected in Q4 2005).
- Airline Exposure: Assess the valuation of collateral (aircraft) held by BCC for customers in bankruptcy (Delta, Northwest, ATA) and the adequacy of loss reserves.
- 717 Program: Monitor the execution of the shutdown plan and the realization of the remaining $100M in termination costs.
- ULA Joint Venture: Track regulatory approval status (FTC "second request") for the United Launch Alliance with Lockheed Martin.