Boeing Co. — Q1 2011 Form 10-Q
Business context and reporting period
Boeing reported unaudited results for the three months ended March 31, 2011, compared with the same quarter of 2010. Its principal businesses are Commercial Airplanes, Boeing Defense, Space & Security (BDS), and Boeing Capital Corporation (BCC). The interim statements were reviewed by Deloitte, not audited; Boeing cautioned that quarterly results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $14.910 billion | $15.216 billion; down 2% |
| Operating earnings / margin | $1.000 billion / 6.7% | $1.174 billion / 7.7% |
| Net earnings | $586 million | $519 million |
| Diluted EPS | $0.78 | $0.70 |
| Operating cash flow | Use of $953 million | Use of $285 million |
| Cash and cash equivalents | $5.670 billion at March 31 | $5.359 billion at December 31, 2010 |
| Total debt | $11.689 billion | $12.421 billion at December 31, 2010 |
All amounts are U.S. dollars. Net earnings benefited from a lower effective tax rate: 33.4%, versus 50.6% a year earlier, principally because Q1 2010 included a $150 million healthcare-law tax charge and 2011 had research-and-development tax-credit benefits. Q1 2011 included a $2 million after-tax loss on disposal of discontinued operations. Cash and short-term/other investments totaled $7.772 billion at March 31. Boeing reported $4.376 billion of unused revolving credit capacity, including $1.5 billion exclusively available to BCC; no commercial paper borrowings were outstanding.
Working-capital changes used $2.063 billion of cash, driven in part by a $2.622 billion increase in inventories, as Boeing prepared for 787 and 747-8 deliveries and production ramp-up. Investing activities provided $2.707 billion, mainly reflecting investment maturities and proceeds; financing activities used $1.468 billion, including $812 million of debt repayments and $309 million of dividends. Capital spending was expected to exceed 2010 levels.
Commercial Airplanes revenue was $7.118 billion, down 5%, and operating earnings fell to $509 million from $679 million; margin declined to 7.2% from 9.1%. BDS revenue was essentially flat at $7.617 billion, while operating earnings rose to $671 million from $664 million. BCC revenue declined to $143 million from $162 million, but operating earnings increased to $52 million from $46 million. Contractual backlog was $310.731 billion, up from $303.955 billion at year-end 2010.
Material changes versus the prior comparable period
- Revenue declined $306 million, mainly because of lower new-airplane deliveries. Commercial Airplanes deliveries were 104 versus 108 in Q1 2010; 777 deliveries fell to 13 from 19.
- Operating earnings decreased $174 million. Commercial Airplanes accounted for most of the decline, with lower deliveries reducing earnings by $152 million; higher R&D spending also weighed on results.
- Operating cash use increased by $668 million, chiefly reflecting inventory growth and other working-capital demands.
- Net earnings rose despite lower operating earnings, largely because the effective tax rate declined substantially.
- Net periodic pension and other postretirement benefit costs were $764 million, versus $469 million. Boeing cited increased pension expense, including higher amortization of prior actuarial losses, lower discount rates, and C-17-related curtailment charges.
Outlook, management commentary, risks and contingencies
The filing gives no consolidated earnings or revenue guidance. Management reported a $4.4 billion fixed-price incentive firm contract for the initial four KC-46A tankers; if all production options are exercised, the expected contract value is approximately $30 billion. Boeing warned that cost-estimate changes on this complex development contract could result in a material charge.
- 787: First delivery was expected in Q3 2011 after flight-test and certification delays. The company said the program was not then in a reach-forward loss position, but expected zero margin on initial deliveries. Design changes, production rework, supply-chain coordination, customer claims, and delivery delays could pressure profitability and cause additional charges.
- 747-8: Freighter certification and first delivery were expected in mid-2011; Intercontinental certification and first delivery were expected in Q4 2011. Boeing noted continuing test, certification, and modification risks.
- C-17 and F-15: Boeing cited approximately $885 million of inventory and potential supplier termination liabilities associated primarily with C-17 aircraft not under contract, and approximately $875 million related to probable F-15 international orders. Failure of expected orders to materialize could lead to write-offs or termination costs. A future C-17 production shutdown remained possible.
- Market and supply conditions: Management said Middle East and North Africa turmoil and Japan’s earthquake increased downside risk to the 2011 airline outlook, including through higher oil prices. No Japan-related production interruption had occurred by the filing date, but the supply chain was being monitored.
- Contingencies: Boeing recorded $712 million for environmental remediation; its reasonably possible highest-cost estimate exceeded the recorded liability by $940 million. It also disclosed $9.934 billion of financing commitments and approximately $7.545 billion of contingent liabilities on letters of credit and surety bonds. Sea Launch receivables of $356 million were disputed, with a potential pre-tax charge up to that amount if unrecovered.
- Legal proceedings: The A-12 case remained before the U.S. Supreme Court; the filing described a possible total pre-tax loss of approximately $1.715 billion under an adverse outcome, or a possible recovery of approximately $1.165 billion if an earlier judgment were reinstated. The NLRB issued a complaint alleging Boeing’s South Carolina 787-line decision was retaliatory; Boeing disputed the claim. Other disclosed matters included satellite litigation and shareholder derivative suits concerning 787 disclosures.
Most important facts for investors to verify
- Whether 787 and 747-8 testing, certification, delivery, production-rate plans, and initial-delivery margin assumptions progressed as expected.
- Whether inventory and working-capital growth converts to deliveries and operating cash flow, and whether planned capital spending remains on track.
- Whether KC-46A and other fixed-price development programs remain within cost estimates, and whether C-17/F-15 orders materialize before associated supplier and inventory exposures escalate.
- Developments in the A-12 case, NLRB complaint, Sea Launch recovery efforts, and environmental and other contingent liabilities.
- Changes in airline demand, fuel prices, Japan-related supply risks, and BCC’s concentrated aircraft/customer financing exposures, particularly AirTran, which represented approximately 27% of BCC’s gross customer-financing portfolio carrying value.