Boeing 2016 Form 10-K Summary
Business context and reporting period. The Boeing Company is a global aerospace manufacturer and services provider, operating Commercial Airplanes, Defense, Space & Security (BDS), and Boeing Capital. This is the fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $94.6 billion | $96.1 billion |
| GAAP operating earnings / margin | $5.8 billion / 6.2% | $7.4 billion / 7.7% |
| Net earnings | $4.9 billion | $5.2 billion |
| Diluted EPS | $7.61 | $7.44 |
| Operating cash flow | $10.5 billion | $9.4 billion |
| Cash and cash equivalents at year-end | $8.8 billion | $11.3 billion |
| Total debt at year-end | $10.0 billion | $10.0 billion |
| Working capital | $12.4 billion | $17.8 billion |
| Shareholders’ equity | $0.8 billion | $6.3 billion |
| Contractual backlog | $458.3 billion | $476.6 billion |
Revenue fell 2%, while GAAP operating earnings declined 22% and net earnings declined 5%. Diluted EPS increased 2%, supported by a lower weighted-average share count following repurchases. The 2016 effective tax rate was 12.1%, versus 27.7%, reflecting $617 million in tax benefits related to tax-basis adjustments and federal audit settlements. Operating cash flow rose 12%, primarily reflecting lower commercial-aircraft inventory expenditures; cash declined as investing and financing outflows exceeded operating cash flow.
Fourth-quarter 2016 revenue was $23.3 billion, operating earnings $2.2 billion, net earnings $1.6 billion, and diluted EPS $2.59. In fourth-quarter 2015, these were $23.6 billion, $1.2 billion, $1.0 billion, and $1.51, respectively.
Commercial Airplanes generated $65.1 billion in revenue and $3.1 billion in operating earnings, down from $66.0 billion and $5.2 billion in 2015. BDS revenue was $29.5 billion and operating earnings $3.0 billion, compared with $30.4 billion and $3.3 billion. Boeing Capital revenue declined to $298 million, while operating earnings rose to $59 million.
Material changes and unusual items
- Commercial Airplanes results were pressured by $1.235 billion of 787 flight-test aircraft costs reclassified from inventory to R&D after the aircraft were deemed not commercially saleable; higher R&D spending; and reach-forward losses on the 747 and KC-46A programs.
- Boeing recorded 2016 reach-forward losses of $1.258 billion on the 747 program and $1.128 billion on the KC-46A Tanker program. The KC-46A charge reflected design, testing, certification, manufacturing complexity, and schedule issues. The program also recorded losses in 2015 and 2014.
- BDS recorded a $162 million charge on Commercial Crew. Across contracts, net unfavorable cumulative catch-up adjustments, including reach-forward losses, reduced operating earnings by $912 million in 2016, versus $224 million in 2015.
- Share repurchases totaled $7.0 billion and dividends paid were $2.8 billion. The Board authorized a new $14 billion share-repurchase plan in December 2016.
- GAAP pension underfunding increased to $20.1 billion from $17.9 billion. The company reported shareholders’ equity of only $817 million at year-end, with pension-related accumulated other comprehensive losses a significant factor.
Outlook, risks, and contingencies
The filing does not provide consolidated financial guidance for 2017. Management expected 2017 capital expenditures to be lower than 2016. Program milestones included first 737 MAX delivery in 2017, first 787-10 delivery targeted for 2018, and 777X delivery targeted for 2020. Boeing expected the first KC-46A tanker delivery in late 2017 and 18 fully operational aircraft in early 2018. The company planned to increase 737 production to 47 aircraft per month in 2017, while reducing 777 production to 7 per month at the start of 2017 and to 5 per month in the second half.
Boeing cautioned that commercial-aircraft demand, pricing, delivery schedules, production rates, supplier performance, certification, and cost estimates could materially affect results. The 747 program was producing at 0.5 aircraft per month; further losses could be material, and Boeing stated it could decide to end production. The 787 program had near-breakeven gross margins and substantial deferred production costs, creating exposure if planned productivity improvements, sales, or production assumptions are not achieved. Fixed-price development contracts, especially KC-46A and Commercial Crew, remain vulnerable to further overruns and delays.
Other risks include uncertainty in U.S. defense budgets and appropriations, international-market and currency exposure, dependence on suppliers and sole-source components, customer-financing concentration, labor disruptions, cyber and operational interruptions, and pension assumptions. Boeing had $14.8 billion in aircraft financing commitments, all associated with customers it considered below investment grade; Ex-Im Bank approval constraints could increase Boeing’s financing role. Contractual obligations totaled $157.7 billion, including $107.6 billion of purchase obligations not recorded on the balance sheet.
Environmental remediation liabilities were $562 million; the high end of the estimated reasonably possible range exceeded the recorded liability by $857 million. Boeing disclosed ongoing legal proceedings and government inquiries, but stated that, based on information available, it did not expect their outcomes to materially affect its financial position, results, or cash flows. Certain ULA indemnifications and unresolved recoveries from Sea Launch partners could result in additional losses. Management identified no material weakness in internal controls; the independent auditor issued unqualified opinions on the financial statements and internal control.
Most important facts for investors to verify
- Whether 747 and KC-46A cost estimates, production plans, and remaining exposure change; assess the possibility of additional charges or 747 program termination.
- Whether the 787’s $27.3 billion of deferred production costs and other program costs are recoverable, particularly the $7.1 billion expected to be recovered from anticipated future orders.
- Whether aircraft delivery targets and production-rate plans are met, including certification and delivery milestones for the 737 MAX, 787-10, 777X, and KC-46A.
- How the $20.1 billion GAAP pension deficit, discount-rate assumptions, and planned 2017 pension contributions affect earnings, equity, and cash flow.
- Whether cash generation can support dividends and repurchases while preserving liquidity, given lower year-end cash, $10.0 billion of debt, and significant contractual commitments.
- Whether aircraft financing commitments, environmental liabilities, ULA indemnifications, and Sea Launch receivables result in cash funding needs or additional charges.