Boeing Co. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Unaudited interim results are not necessarily indicative of full-year results. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $22.632 billion | $22.149 billion |
| Earnings from operations; operating margin | $1.788 billion; 7.9% | $2.019 billion; 9.1% |
| Net earnings | $1.219 billion | $1.336 billion |
| Diluted EPS | $1.83 | $1.87 |
| Core operating earnings and margin (non-GAAP) | $1.694 billion; 7.5% | $2.132 billion; 9.6% |
| Core EPS (non-GAAP) | $1.74 | $1.97 |
| Operating cash flow | $1.231 billion | $88 million |
| Cash and cash equivalents, March 31 | $7.886 billion | $11.302 billion at December 31, 2015 |
| Total debt, March 31 | Approximately $10.0 billion | Approximately $10.0 billion at December 31, 2015 |
| Shareholders’ equity, March 31 | $4.043 billion | $6.335 billion at December 31, 2015 |
| Contractual backlog, March 31 | $470.161 billion | $476.595 billion at December 31, 2015 |
Cash used in investing was $438 million and cash used in financing was $4.221 billion. The financing outflow included $3.501 billion of share repurchases and $717 million of dividends. Boeing had $5.0 billion of unused revolving credit capacity and no commercial paper borrowings outstanding at quarter-end. It reported compliance with debt and credit-facility covenants.
Cost of sales was 84.4% of revenue, versus 83.5% a year earlier. Cash flow from operations improved mainly because inventory growth was lower than in Q1 2015; Boeing still reported a $400 million increase in gross inventories during Q1 2016.
Material changes and segment results
- Revenue increased 2%, as Defense, Space & Security (DSS) growth more than offset lower Commercial Airplanes revenue.
- Commercial Airplanes revenue declined 6% to $14.399 billion, and operating earnings fell to $1.033 billion from $1.617 billion. The segment’s operating margin fell to 7.2% from 10.5%.
- DSS revenue rose 19% to $7.956 billion and operating earnings increased to $822 million from $743 million. Its operating margin declined to 10.3% from 11.1%.
- Boeing Capital revenue was $64 million versus $86 million; operating earnings were $5 million versus $20 million, primarily reflecting lower lease income.
- Research and development expense rose to $917 million from $769 million, primarily due to higher 777X spending.
- Unallocated pension and postretirement items shifted from a $113 million expense in Q1 2015 to a $94 million benefit in Q1 2016. Boeing’s non-GAAP core measures exclude certain such costs and should be considered alongside GAAP results.
Outlook, management commentary and risks
- KC-46A: Boeing recorded a further $243 million reach-forward loss in Q1, including $158 million on engineering, manufacturing and development work and $85 million on low-rate initial production. The filing cites certification and test rework and design-change impacts. Boeing continued to expect delivery of 18 fully operational aircraft by August 2017, while warning further technical, quality, schedule or cost problems could cause additional losses.
- 747: Boeing recorded an additional $70 million reach-forward loss after an $885 million charge in Q4 2015. It planned to reduce production from 1.0 to 0.5 aircraft per month in September 2016 and targeted a return to 1.0 per month in 2019. Insufficient orders or further market and production pressures could lead to additional material losses.
- 787: Boeing described gross margins as near breakeven and cited production, supply-chain, schedule, early-aircraft modification and pricing pressures. It planned to increase production from 10 to 12 aircraft per month in 2016; the 787-10’s first delivery was targeted for 2018. The filing identifies potential further claims, profitability pressure or reach-forward losses. At quarter-end, $8.757 billion of 787 deferred production, tooling and other non-recurring costs was expected to be recovered from units representing future orders.
- Other production plans: Boeing planned 737 production-rate increases to 47 per month in 2017, 52 in 2018 and 57 in 2019, with first 737 MAX delivery expected in 2017. It planned to reduce 777 production to 7 per month in 2017 and increase 787 production to 12 per month in 2016. These plans depend on execution, demand and certification.
- F/A-18: Production could end in 2018 if additional orders do not materialize; Boeing was still evaluating the financial impact of a possible shutdown.
- Liquidity and commitments: Aircraft financing commitments totaled $17.026 billion, of which $17.021 billion related to customers Boeing believed had below-investment-grade credit. Boeing said it did not expect to fund a significant portion, but noted there was no assurance actual funding needs would remain limited. Export-Import Bank approval limits could also affect customer financing.
- Government and other risks: Future U.S. defense spending, appropriations and sequestration remain uncertain. Fixed-price development contracts, supplier or customer disruption related to Russia and Ukraine, aircraft financing and collateral values, and environmental remediation are additional risks. Recorded environmental liabilities were $578 million; the high end of estimated remediation costs exceeded recorded liabilities by $873 million.
- Guidance: The filing text does not provide a clear consolidated earnings or EPS forecast for 2016. Boeing expected 2016 capital expenditures to be consistent with 2015.
Most important facts for investors to verify
- Whether KC-46A certification, testing and production milestones remain on schedule and whether further contract losses arise.
- Whether 747 and 787 orders, production rates, cost reductions and program-accounting recoverability assumptions support the recorded inventory and margins.
- How the $17.026 billion of aircraft financing commitments, customer credit quality and Ex-Im Bank limitations may affect Boeing’s cash needs.
- Whether operating cash generation can sustain shareholder returns while cash balances have declined and the company continues substantial repurchases.
- Developments in defense appropriations, F/A-18 orders, environmental remediation estimates and other disclosed contingencies.