Boeing Co. — Q2 2013 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. Boeing operates Commercial Airplanes, Defense, Space & Security (BDS), Boeing Capital and other businesses. The interim results are not necessarily indicative of full-year performance.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $21.815B | $20.005B | $40.708B | $39.388B |
| Operating earnings (GAAP) | $1.716B | $1.542B | $3.244B | $3.107B |
| Operating margin (GAAP) | 7.9% | 7.7% | 8.0% | 7.9% |
| Net earnings from continuing operations | $1.087B | $0.967B | $2.193B | $1.891B |
| Diluted EPS | $1.41 | $1.27 | $2.85 | $2.49 |
| Core operating earnings (non-GAAP) | $2.028B | $1.787B | $3.895B | $3.560B |
| Core operating margin (non-GAAP) | 9.3% | 8.9% | 9.6% | 9.0% |
| Core EPS (non-GAAP) | $1.67 | $1.48 | $3.40 | $2.88 |
For the six months, operating cash flow was $3.991B, versus $1.745B in 2012; capital expenditures were $0.976B. Cash and cash equivalents fell $1.647B from year-end 2012 to $8.694B. Operating cash flow improvement reflected lower working-capital growth, including higher customer advances and billings.
At June 30, cash was $8.694B and short-term and other investments were $5.631B. Current assets were $61.310B and current liabilities $46.949B. Recorded debt was approximately $9.6B, including $0.9B current and $8.7B long-term. Boeing reported $4.6B of unused revolving credit and no commercial-paper borrowings. Dividends paid in the first half were $0.97 per share.
Material changes and business performance
- Revenue increased 9% in Q2 and 3% in the first half, primarily from higher Commercial Airplanes deliveries. Commercial Airplanes first-half revenue rose 7% to $24.314B; its operating margin increased to 11.0% from 10.1%.
- BDS first-half revenue declined slightly to $16.296B, while operating earnings rose to $1.608B and margin to 9.9%. Boeing Capital first-half revenue and operating earnings declined to $209M and $63M, respectively.
- Commercial jet deliveries totaled 306 in the first half, compared with 287 in 2012. Total contractual backlog rose to $389.231B from $372.355B at year-end.
- GAAP operating earnings rose $137M in the first half, but included higher pension costs and compared with a $121M favorable litigation benefit in 2012. Core operating earnings exclude specified unallocated pension and postretirement costs; these non-GAAP measures are not substitutes for GAAP results.
- First-half effective tax rate was 28.6%, versus 35.0%, primarily reflecting the reinstated U.S. R&D tax credit, including a $145M credit for 2012 recorded in Q1 2013. First-half R&D expense declined to $1.468B from $1.692B.
Outlook, risks and contingencies
- The filing provides no consolidated full-year revenue or earnings guidance. Management expected 737 production to rise to 42 per month in 2014 and 787 production to reach 10 per month by year-end 2013, with first deliveries at that rate in early 2014. The 787-9 first customer delivery was expected in mid-2014; the 787-10 was launched with first delivery targeted for 2018.
- The 787 battery-related incidents had suspended deliveries in Q1; Boeing reported battery improvements on 50 delivered aircraft and resumed customer deliveries in Q2. Production increases, derivative development, schedule execution, supplier performance and customer claims remained risks. At June 30, 787 inventory included $18.733B of deferred production costs; the filing warned of possible further profitability pressure, claims or a material reach-forward loss if risks are not mitigated.
- The 747 program had near-breakeven or near-breakeven gross margins, weak cargo demand, pricing pressure and unsold production positions. Boeing reduced planned production from 2 to 1.75 aircraft per month in January 2014 and warned that further rate reductions, production without firm orders or a material reach-forward loss could result.
- U.S. defense sequestration and budget reductions could cause contract delays, cancellations or lower demand; Boeing said specific effects were not yet determinable. Potential C-17 production closure was under evaluation if additional orders did not materialize. Fixed-price development programs, including KC-46A, also carried cost and schedule risks.
- Material exposures include $17.815B of aircraft financing commitments, most associated with customers believed to be below investment grade; $4.566B of standby letters of credit and surety bonds; and environmental remediation liabilities of $698M. Boeing noted reasonably possible remediation costs could exceed recorded liabilities by $886M.
- The A-12 litigation could result in additional pre-tax losses, with the filing describing potential outcomes ranging up to approximately $1.745B in charges under an adverse combination of rulings. Other items to monitor include the $356M Sea Launch receivable dispute, LightSquared receivables, and possible tax-audit resolution that could increase earnings by up to $260M.
- Boeing repurchased approximately 10.2 million shares for $1.0B in the first half and expected 2013 repurchases of $1.5B–$2.0B. The company said it was in compliance with debt covenants and believed available capital access adequate, while noting future borrowing cost and availability were not assured.
Important facts for investors to verify
- Whether planned 787 production increases, deliveries and derivative schedules were achieved, and how deferred production costs and program profitability evolved.
- Subsequent 747 orders, production-rate decisions and any changes to estimated program losses.
- The realized effect of sequestration and U.S. defense budget reductions on BDS contracts, backlog and cash flow.
- Operating cash generation, inventory growth, customer advances and billings, and the use of cash for investment, debt repayment, dividends and repurchases.
- Developments in A-12, Sea Launch, LightSquared, tax audits and environmental matters, including any change in estimated exposure.