Boeing Co. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited interim financial statements; the independent accountant performed a review, not an audit. Comparisons are with Q1 2012 unless otherwise noted. Boeing operates Commercial Airplanes, Defense, Space & Security, Boeing Capital, and other businesses.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $18.893 billion | $19.383 billion |
| GAAP operating earnings / margin | $1.528 billion / 8.1% | $1.565 billion / 8.1% |
| Net earnings | $1.106 billion | $923 million |
| Diluted EPS | $1.44 | $1.22 |
| Core operating earnings / margin (non-GAAP) | $1.867 billion / 9.9% | $1.773 billion / 9.1% |
| Core EPS (non-GAAP) | $1.73 | $1.40 |
| Operating cash flow | $524 million | $837 million |
| Capital expenditures | $521 million | $424 million |
| Cash and cash equivalents at period-end | $8.335 billion | $6.718 billion |
| Total debt at March 31, 2013 | $9.171 billion | Not stated here for the comparable date |
Revenue fell 3%, primarily reflecting the January suspension of 787 deliveries and lower services-spares revenue, partly offset by higher deliveries on other airplane programs. GAAP operating earnings declined $37 million; higher pension costs and a favorable satellite-litigation judgment in Q1 2012 were offsets to stronger Commercial Airplanes and BDS results. Net earnings and EPS rose mainly because the effective tax rate fell to 23.1% from 36.8%; the 2013 rate included a $145 million benefit from retroactive renewal of the R&D tax credit.
Operating cash flow decreased amid working-capital investment, including a $3.0 billion increase in inventories net of advances and progress billings. Cash decreased $2.006 billion during the quarter, after $1.705 billion of net financing outflows, including $1.262 billion of debt repayments and $367 million of dividends. Boeing reported $4.6 billion of unused revolving credit capacity and no commercial-paper borrowings outstanding. Current assets were $59.490 billion and current liabilities were $45.666 billion.
Material changes and segment performance
- Commercial Airplanes: Revenue decreased 2% to $10.690 billion; operating earnings rose to $1.219 billion and margin to 11.4% from 9.9%. Q1 deliveries totaled 137 aircraft, including one 787 versus five a year earlier. Commercial-airplane contractual backlog was $321.981 billion.
- Defense, Space & Security: Revenue decreased 1% to $8.110 billion, while operating earnings increased to $832 million and margin to 10.3% from 9.0%. The increase reflected improved earnings across its three businesses. Sequestration began in March; specific program effects were not yet determined.
- Boeing Capital: Revenue declined to $105 million, while operating earnings increased to $44 million. Its debt-to-equity ratio was 5.0-to-1. Boeing guaranteed BCC’s outstanding publicly issued debt and expects to fund BCC through intercompany loans.
- Backlog: Total contractual backlog increased to $373.597 billion from $372.355 billion at year-end 2012, primarily because commercial-aircraft orders exceeded deliveries, partly offset by cancellations.
Outlook, risks, contingencies, and unusual items
- 787: After battery incidents, regulators grounded the fleet and Boeing suspended deliveries. The FAA approved proposed battery improvements on April 19, 2013, allowing modifications and the process of returning aircraft to service and resuming deliveries. Boeing expected 787 production to reach 10 per month by year-end 2013 and first 787-9 delivery in early 2014. Costs, customer claims, supplier assertions, further delays, and program profitability remain risks. Q1 inventory included $24.358 billion of 787 work in process, including $17.095 billion of deferred production costs; recovery depends partly on expected future orders.
- Other airplane programs: Boeing planned 737 rate increases and announced a 747 rate reduction to 1.75 aircraft per month beginning January 2014 amid weak freighter demand. The filing warns that the 747 program could incur a material additional reach-forward loss if risks are not mitigated. C-17 production could be ended in the future if additional orders do not materialize; approximately $410 million of inventory expenditures and potential supplier termination liabilities related to 12 international aircraft not under contract were noted.
- Defense contracts and sequestration: Fixed-price development contracts, including KC-46A and other complex programs, carry cost and schedule risks that could result in charges. FY2013 sequestration canceled $42.7 billion of planned defense spending; Boeing could not yet quantify effects on its contracts.
- Contingencies: The A-12 litigation could result in additional pre-tax charges of up to $1.743 billion under an adverse outcome, while a favorable outcome could entitle Boeing to approximately $1.189 billion. Environmental remediation liabilities were $707 million; the estimated high end exceeded recorded liabilities by $857 million. Aircraft financing commitments totaled $17.714 billion, of which $16.640 billion related to customers believed to have below-investment-grade credit.
- Other exposures: Boeing disclosed $112 million of unbillable LightSquared receivables in its bankruptcy, and a possible charge of up to $356 million if Sea Launch partners do not reimburse amounts owed. BDS contract estimates included net favorable cumulative catch-up adjustments of $105 million in Q1 2013, increasing operating earnings.
- Management outlook and capital allocation: Boeing expected 2013 capital expenditures to remain higher to support growth and planned $1.5–$2.0 billion of share repurchases during 2013. No consolidated full-year revenue or earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether the 787 fleet returned to service and deliveries resumed as planned, and the full cost and customer/supplier impact of the battery incidents.
- Whether 787 deferred production costs and other program balances remain recoverable, and whether the 747 program avoids an additional reach-forward loss.
- The timing and financial effects of U.S. defense sequestration, fixed-price development contracts, and potential C-17 production closure.
- Cash conversion and inventory growth, including the extent to which customer advances and progress billings fund production.
- Potential outcomes of the A-12 and other litigation, environmental obligations, and aircraft financing commitments to weaker-credit customers.
- The sustainability of earnings excluding pension/postretirement costs and the tax benefit that materially lowered the Q1 2013 effective tax rate.