Boeing Co. (The Boeing Company) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report; fourth-quarter results are noted separately below. Amounts are in U.S. dollars.
Business context
Boeing designs, manufactures, sells and supports commercial aircraft, defense and space products, and related services, with customer financing through Boeing Capital. Its principal reporting segments are Commercial Airplanes, three Defense, Space & Security businesses, and Boeing Capital. Commercial aircraft generated 69% of 2015 revenue; U.S. government contracts represented 27% of consolidated revenue, and non-U.S. customers accounted for approximately 59%.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $96.1 billion | $90.8 billion |
| GAAP earnings from operations / margin | $7.44 billion / 7.7% | $7.47 billion / 8.2% |
| Net earnings | $5.18 billion | $5.45 billion |
| Diluted EPS | $7.44 | $7.38 |
| Operating cash flow | $9.36 billion | $8.86 billion |
| Cash and cash equivalents at year-end | $11.30 billion | $11.73 billion |
| Total debt at year-end | $9.96 billion | $9.07 billion |
| Working capital at year-end | $17.82 billion | $19.53 billion |
| Contractual backlog at year-end | $476.6 billion | $487.1 billion |
Revenue rose 6%, principally on higher commercial-aircraft deliveries and mix. Commercial Airplanes revenue increased 10% to $66.0 billion, while Defense, Space & Security revenue fell 2% to $30.4 billion. GAAP operating earnings were nearly flat; the reported margin declined from 8.2% to 7.7%. Management’s non-GAAP core operating earnings were $7.74 billion, down from $8.86 billion, and core operating margin was 8.1%, down from 9.8%. These core measures exclude specified pension and postretirement costs.
Net earnings declined 5%, while diluted EPS increased slightly, reflecting a lower weighted-average share count. Operating cash flow improved by $0.5 billion, primarily due to lower inventory growth, partly offset by lower customer advances and progress billings. Capital expenditures were $2.45 billion. Boeing repurchased $6.75 billion of shares and paid $2.49 billion in dividends during the year. Year-end cash exceeded total debt by approximately $1.34 billion.
Fourth quarter: Revenue was $23.57 billion versus $24.47 billion a year earlier; operating earnings were $1.16 billion versus $2.03 billion; net earnings were $1.03 billion versus $1.47 billion; and diluted EPS was $1.51 versus $2.02. The quarter included the $885 million 747 program loss.
Material changes and unusual items
- Commercial Airplanes operating earnings fell 20% to $5.16 billion, despite higher revenue. The decline reflected the 747 charge, higher KC-46A charges, increased research and development spending, and 787 delivery mix.
- Boeing recorded an $885 million fourth-quarter 2015 reach-forward loss on the 747 program, reflecting weaker large-freighter demand, pricing pressure, and higher estimated costs following planned production-rate cuts. The program was in a reach-forward loss position at year-end.
- The USAF KC-46A contract generated an $835 million second-quarter 2015 reach-forward loss, in addition to a $425 million loss in 2014. The 2015 charge reflected design changes, testing and manufacturing complexity. Boeing continued to expect delivery of 18 fully operational aircraft by August 2017.
- The 787 program had near-breakeven gross margins in 2015. Boeing reported $34.7 billion of 787 work in process, including $28.5 billion of deferred production costs; part of the program’s recovery estimate depends on anticipated future orders.
- BDS operating earnings increased 5% to $3.27 billion despite lower revenue. Boeing Capital operating earnings fell to $50 million from $92 million, primarily due to higher asset impairment expense.
- Effective tax rate increased to 27.7% from 23.7%; 2014 included $524 million of tax benefits from tax-basis adjustments and federal audit settlements. 2015 included a $235 million research tax-credit benefit.
- Pension plans were underfunded by $17.9 billion on a GAAP basis at year-end. Shareholders’ equity declined to $6.34 billion from $8.67 billion, including the effects of pension and other comprehensive income items and substantial share repurchases.
Outlook, management commentary and risks
Boeing forecast long-term commercial demand of approximately 38,000 new aircraft worth $5.6 trillion over 20 years, based on projected passenger traffic growth of 4.9% annually. It expected airline profitability to continue growing in 2016, supported by passenger demand and relatively low fuel prices. These are industry expectations, not company earnings guidance; the filing does not provide a clear consolidated 2016 revenue or earnings forecast.
Near-term production plans included increasing 737 output to 47 per month in 2017, 52 in 2018 and 57 in 2019; raising 787 output to 12 per month in 2016; and reducing 747 production to 0.5 per month in September 2016, with a planned return to 1.0 per month in 2019. The 737 MAX’s first delivery was expected in 2017, the 787-10 in 2018, and the 777X in 2020. Boeing expected 2016 capital expenditures to be consistent with 2015 and pension contributions of approximately $100 million.
Key risks include additional 747 losses if orders and market conditions do not improve; 787 production, cost recovery and delivery risks; further KC-46A cost overruns or schedule delays; defense budget and appropriation uncertainty; fixed-price contract exposure; supplier and production disruptions; international market, currency and customer-financing risks; and the sensitivity of results to program accounting estimates. Boeing cited continued Russia-Ukraine monitoring, though it had not experienced significant production or delivery disruption by year-end. The Export-Import Bank was reauthorized through September 2019, but a board quorum was still needed to approve transactions over $10 million. The filing also identifies pension, environmental, legal and customer-financing exposures.
Recorded environmental remediation liabilities were $566 million, with the high end of the estimated reasonably possible range exceeding the recorded amount by $853 million. Commercial aircraft financing commitments totaled $16.3 billion; Boeing stated that it historically had not funded a significant portion, but could not assure future funding would remain limited. Total contractual obligations were $171.0 billion, including $123.1 billion of unrecorded purchase obligations.
Most important facts for investors to verify
- Whether 747 orders, production-rate reductions and cost actions avert further material reach-forward losses.
- Whether Boeing meets KC-46A milestones and delivery commitments, and whether additional contract losses arise.
- Whether 787 rate increases, early-aircraft rework and anticipated-order assumptions support recovery of deferred production costs without further charges.
- How pension funding, discount-rate assumptions and the transition of many employees to defined-contribution plans affect future cash requirements and earnings.
- Whether defense appropriations, Ex-Im Bank financing availability, customer credit quality or supplier disruptions change deliveries, orders or financing needs.
- The status and potential financial effects of legal proceedings, environmental remediation, tax positions and other guarantees or contingent obligations.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2015.