Boeing Co. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results; comparisons are with Q1 2016 unless stated otherwise. Amounts are in millions of dollars except per-share data.
Financial results and condition
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $20,976 | $22,632 |
| Earnings from operations / margin | $2,024 / 9.6% | $1,788 / 7.9% |
| Net earnings | $1,451 | $1,219 |
| Diluted EPS | $2.34 | $1.83 |
| Operating cash flow | $2,094 | $1,275 |
| Cash and cash equivalents at period end | $8,190 | $7,886 |
Revenue declined 7.3%, mainly from lower Defense, Space & Security (BDS) revenue; Commercial Airplanes revenue was also slightly lower. Operating earnings rose despite the revenue decline, reflecting improved Commercial Airplanes performance, lower program losses than in the prior-year quarter, and a larger unallocated pension benefit. The effective tax rate fell to 25.9% from 30.0%, primarily due to higher discrete tax benefits, including share-based payment tax benefits.
Cash from operations increased by $819, mainly due to working-capital changes, including higher customer advances. Investing activities used $262 and financing activities used $2,463. Boeing repurchased $2,500 of shares and paid $868 in dividends. Cash ended the quarter $611 lower than at year-end 2016.
At March 31, total debt was approximately $10,799, including $367 classified as current on the balance sheet; long-term debt was $10,432. Boeing issued $900 of senior notes during the quarter, with net proceeds of $872. Current assets were $62,367 and current liabilities $49,781. Shareholders’ equity was $95, with total equity of $155.
Material changes and segment performance
- Commercial Airplanes: Revenue was $14,305 versus $14,399; operating earnings increased to $1,215 from $1,033, and margin rose to 8.5% from 7.2%. Improved cost performance and lower reach-forward losses helped offset lower volume and delivery mix. Deliveries were 169 versus 176.
- BDS: Revenue fell to $6,532 from $7,956 and operating earnings to $737 from $822. Lower revenue affected all three BDS businesses. Segment margin increased to 11.3% from 10.3%, notwithstanding lower earnings.
- Boeing Capital: Revenue rose to $92 from $64 and operating earnings to $39 from $5, primarily on higher interest and lease income and lower impairment expenses.
- Backlog: Total contractual backlog increased to $461,549 from $458,277 at year-end 2016, primarily because orders exceeded deliveries.
- Non-GAAP comparison: Core operating earnings were $1,709 versus $1,694, and core EPS was $2.01 versus $1.74. These measures exclude specified unallocated pension and postretirement benefit income; GAAP results include that income.
Outlook, risks and unusual items
- Program charges and execution: Boeing recorded $142 of Q1 reach-forward losses on the KC-46A Tanker program, following $243 in Q1 2016. Management cited certification, cost and incorporation-of-change risks; further losses or delivery delays remain possible. The first tanker delivery was expected in late 2017, with 18 fully operational aircraft expected in early 2018.
- Commercial program exposure: The 787 program continued to have near-breakeven gross margins amid production challenges, early-aircraft changes, schedule and supplier issues, and wide-body demand uncertainty. Boeing warned that further material losses are possible if risks are not mitigated. The 747 was producing 0.5 aircraft monthly; insufficient orders could result in additional material losses or a decision to end production.
- Production plans: Boeing planned 737 rate increases from 42 to 47 monthly in Q3 2017, then to 52 in 2018 and 57 in 2019; first 737 MAX delivery was expected in Q2 2017. The 777 rate was reduced to 7 monthly, with a further reduction to 5 planned for H2 2017. The 787 was producing 12 monthly, with a planned increase to 14 by decade-end. These are operational plans, not full-year financial guidance.
- Government and financing risks: U.S. defense budgets, appropriations and continuing-resolution funding were uncertain. The Export-Import Bank lacked a board quorum to approve transactions above $10, which could affect customer financing. Boeing reported $14,067 of financing commitments, all relating to customers it considered below investment grade, and approximately $3,960 of standby letters of credit and surety bonds.
- Contingencies: Environmental remediation liabilities were $525; the high end of reasonably possible remediation costs exceeded recorded liabilities by $867. Product warranty liabilities were $1,345. Certain ULA indemnities could expose Boeing to payments and losses if disputed costs or pricing are not recovered. Boeing stated that pending legal proceedings were not expected, based on current information, to materially affect its financial position, results or cash flows.
- Accounting change: Boeing planned retrospective adoption of the new revenue-recognition standard in 2018 and expected a material income-statement and balance-sheet impact, but could not quantify it. Management expected timing changes for some defense and military-derivative contracts; commercial-aircraft program accounting was expected to continue.
- Liquidity and spending: Boeing reported $5.0 billion of unused revolving credit capacity and said it was in compliance with debt covenants. It expected 2017 capital expenditures to be lower than in 2016, but gave no specific full-year earnings or cash-flow guidance in this filing.
Important facts for investors to verify
- Whether KC-46A certification, cost and delivery milestones progress as planned, and whether additional reach-forward losses are recorded.
- Whether 787 production economics improve and whether 747 demand supports continued production without material additional losses.
- Whether BDS revenue and earnings stabilize despite government funding and program-mix uncertainty.
- How customer advances, inventory investment, share repurchases and dividends affect operating cash flow, cash balances and the very low reported equity balance.
- The quantified effects of 2018 revenue-standard adoption and any developments in environmental, ULA, Sea Launch or other contingent exposures.