Boeing Co. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited interim statements; the independent accountants conducted a review, not an audit.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $25.849 billion | $23.784 billion | $72.541 billion | $66.294 billion |
| Operating earnings (GAAP) | $2.580 billion | $2.119 billion | $6.282 billion | $5.448 billion |
| Operating margin (GAAP) | 10.0% | 8.9% | 8.7% | 8.2% |
| Net earnings | $1.704 billion | $1.362 billion | $4.150 billion | $3.980 billion |
| Diluted EPS | $2.47 | $1.86 | $5.92 | $5.36 |
| Operating cash flow | Not separately stated | Not separately stated | $6.244 billion | $3.860 billion |
Third-quarter revenue rose 9% year over year, primarily from increased commercial-aircraft deliveries and mix. Nine-month revenue also increased 9%. Nine-month GAAP operating earnings improved, but non-GAAP core operating earnings declined to $6.482 billion from $6.516 billion and core EPS fell to $6.11 from $6.30; these measures exclude certain pension and postretirement costs.
Segments and material changes
- Commercial Airplanes: Nine-month revenue increased 16% to $49.950 billion, while operating earnings declined to $4.591 billion from $4.849 billion and margin fell to 9.2% from 11.2%. Higher 777X research and development, escalation and KC-46A charges weighed on results; deliveries increased to 580 from 528.
- Defense, Space & Security: Nine-month revenue decreased 3% to $22.603 billion, while operating earnings increased to $2.311 billion from $2.216 billion. Third-quarter revenue and earnings increased year over year.
- Boeing Capital: Nine-month revenue increased to $315 million, but operating earnings declined to $41 million from $66 million, primarily reflecting higher asset impairment expense.
- Backlog: Total contractual backlog was $472.214 billion, down from $487.092 billion at year-end 2014, mainly because deliveries exceeded orders.
Cash, debt and liquidity
- Cash and cash equivalents were $9.383 billion, down $2.350 billion from year-end 2014. Short-term and other investments were $474 million.
- Recorded debt was approximately $9.0 billion, including $614 million of short-term debt and current maturities. Boeing issued $750 million of senior notes during the period.
- Operating cash flow was $6.244 billion. Investing activities used $965 million, including $1.827 billion of capital spending; financing activities used $7.609 billion.
- Cash returned to shareholders included $6.001 billion of share repurchases and $1.882 billion of dividends. Boeing reported $5.0 billion of unused revolving credit capacity and compliance with debt covenants.
- Inventory, net of advances and progress billings, was $48.624 billion, versus $46.756 billion at year-end 2014. Total shareholders’ equity declined to $6.740 billion from $8.665 billion.
Outlook, risks and unusual items
- The filing provides no consolidated full-year earnings or EPS guidance. Management cited a long-term commercial-aircraft market outlook of approximately 38,000 aircraft, or $5.6 trillion, over 20 years, with average annual traffic growth projected at 5%.
- KC-46A: Boeing recorded a $835 million reach-forward loss in the second quarter of 2015, in addition to a $425 million loss in 2014. The company said it continued to expect delivery of 18 fully operational aircraft by August 2017, but warned that further technical, quality, schedule or cost issues could cause additional losses.
- 787 and 747: Both programs had breakeven or near-breakeven gross margins in the periods reported. Boeing cited 787 production and schedule challenges, customer and supplier claims risk, and substantial deferred production costs. The 747 faced weak demand, pricing pressure and unsold production positions; either program could incur a material reach-forward loss if risks are not mitigated.
- Defense spending: Budget and appropriation uncertainty, sequestration risk and a federal continuing resolution could delay or reduce programs. Boeing also identified possible future C-17 production shutdown and F/A-18 production-end risks if additional orders do not materialize.
- Other exposures include $17.858 billion of aircraft financing commitments, most relating to customers considered below investment grade; $583 million of recorded environmental remediation liabilities; and potential exposure from guarantees, contract disputes and legal matters. The Export-Import Bank’s charter had expired, potentially increasing Boeing’s financing role for some international customers.
- The effective tax rate was 31.5% for the first nine months, versus 23.6% a year earlier; the prior-year period included $524 million of tax benefits. Boeing noted that reinstatement of the expired research tax credit could benefit its 2015 tax rate.
Important facts for investors to verify
- Whether KC-46A costs, testing and delivery milestones remain on plan and whether further contract losses arise.
- 787 and 747 program cost recovery assumptions, production-rate plans, deferred costs and exposure to customer or supplier claims.
- Commercial-aircraft order activity and backlog conversion, including how deliveries and new orders affect backlog.
- Cash generation and capital allocation relative to buybacks, dividends, capital spending and the substantial financing commitments.
- Defense budget developments, Export-Import Bank status, and outcomes of material tax, environmental, guarantee and legal contingencies.