Boeing Co. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited results compared with Q1 2018. Boeing operates Commercial Airplanes (BCA), Defense, Space & Security (BDS), Global Services (BGS), and Boeing Capital (BCC).
Financial results and position
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Revenue | $22.917 billion | $23.382 billion; down 2% |
| Operating earnings / margin | $2.350 billion / 10.3% | $2.875 billion / 12.3% |
| Net earnings | $2.149 billion | $2.477 billion |
| Diluted EPS | $3.75 | $4.15 |
| Core operating earnings / margin (non-GAAP) | $1.986 billion / 8.7% | $2.510 billion / 10.7% |
| Operating cash flow | $2.788 billion | $3.136 billion |
| Cash and cash equivalents at quarter-end | $6.836 billion | $7.637 billion at Dec. 31, 2018 |
| Debt, including current portion | $14.744 billion | $13.847 billion at Dec. 31, 2018 |
| Total assets / total equity | $120.209 billion / $232 million | $117.359 billion / $410 million at Dec. 31, 2018 |
| Backlog | $486.849 billion | $490.481 billion at Dec. 31, 2018 |
Capital expenditures were $501 million. Cash declined by $801 million during the quarter, including restricted cash. Current assets were $89.509 billion and current liabilities were $83.615 billion. Boeing issued $1.5 billion of senior notes in February. It repurchased $2.341 billion of shares and paid $1.161 billion in dividends; the share-repurchase plan was subsequently reported as suspended. Boeing cited $5.1 billion of unused revolving-credit capacity and said it was in compliance with debt covenants.
Material changes and segment performance
- BCA: Revenue fell to $11.822 billion from $12.945 billion; operating earnings declined to $1.173 billion from $1.412 billion. Lower deliveries, particularly amid the 737 MAX grounding, drove the decline.
- BDS: Revenue increased to $6.611 billion from $6.481 billion; operating earnings rose to $847 million from $757 million, helped by a property-sale gain and lower KC-46A losses.
- BGS: Revenue grew to $4.619 billion from $3.950 billion, primarily reflecting the KLX acquisition and higher government services revenue. Operating earnings were $653 million versus $647 million.
- BCC: Revenue and operating earnings were broadly unchanged at $66 million and $20 million, respectively. Consolidated results included a $250 million impairment of lease incentives for a customer experiencing liquidity problems.
- Inventories rose to $65.369 billion from $62.567 billion at year-end, primarily as MAX deliveries were suspended. Operating cash flow was lower year over year, with higher inventory spending partly offset by working-capital movements.
Outlook, risks, contingencies, and unusual items
- 737 MAX grounding: Following two fatal accidents, the FAA and other authorities grounded the fleet on March 13. Deliveries were suspended pending regulatory clearance; production continued. Boeing was developing an MCAS software update and pilot training program. On April 5, Boeing announced a production-rate reduction from 52 to 42 aircraft per month effective April 15; the filing says related impacts increased costs for aircraft in the current accounting quantity by $1.016 billion and reduced BCA margins. Boeing could not reasonably estimate total future financial impacts or any loss range. Further delays, production cuts, customer or supplier claims, and adverse effects on revenue, earnings, and cash flow were identified as risks.
- Boeing expected operating cash flow in future quarters to be adversely affected by the grounding. It expected 2019 capital expenditures to exceed 2018 levels. No specific full-year financial guidance is provided in the supplied filing text.
- Customer financing exposure included the $250 million lease-incentive impairment. Financing commitments totaled $18.265 billion, most associated with customers Boeing considered below investment grade; Boeing said it did not expect to fund a significant portion, but noted funding could exceed historical levels.
- Fixed-price development programs carry cost and schedule risk. Boeing cited potential additional KC-46A losses and risks on Commercial Crew, T-X, MQ-25, and other programs. Prior reach-forward losses included $400 million for T-X aircraft options and $291 million for MQ-25 EMD.
- Other exposures include $548 million of recorded environmental remediation liabilities, with reasonably possible costs potentially higher; ongoing accident-related litigation and investigations for which Boeing could not estimate a loss range; and uncertainty over future U.S. government appropriations and defense spending.
- Boeing entered definitive documents for a proposed Embraer commercial-aircraft and services joint venture, under which it would acquire 80% for $4.2 billion. Closing was expected by year-end 2019, subject to regulatory and other approvals; a $100 million termination fee could apply if antitrust approval failed.
- Q1 effective tax rate was 7.9%, versus 12.8%, mainly due to tax benefits related to non-U.S. intangible income and share-based payments. Boeing noted uncertainty around tax audits and possible reductions in unrecognized tax benefits.
Key facts for investors to verify
- Timing, conditions, and jurisdiction-by-jurisdiction approvals for the 737 MAX return to service; delivery resumption, production rates, and resulting cash and cost effects.
- Whether the $1.016 billion production-cost impact and rising aircraft inventory lead to further charges, delivery delays, or customer and supplier claims.
- Progress on MAX-related litigation, investigations, and potential liabilities, which Boeing said it could not yet estimate.
- Customer credit and collateral performance, including the impaired lease incentives and the scale and likelihood of funding financing commitments.
- KC-46A and other fixed-price program costs, milestones, and potential additional reach-forward losses.
- Regulatory approval and closing terms for the Embraer transaction, and the company’s capital allocation and liquidity needs while share repurchases are suspended.