Boeing Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Financial statements are unaudited. Boeing reported across Commercial Airplanes, Defense, Space & Security (BDS), Boeing Capital, and Other.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $19.383 billion | $14.910 billion |
| Earnings from operations | $1.570 billion | $1.000 billion |
| Operating margin | 8.1% | 6.7% |
| Net earnings | $923 million | $586 million |
| Diluted EPS | $1.22 | $0.78 |
| Operating cash flow | $837 million | $(953) million |
| Cash and cash equivalents | $6.718 billion | $10.049 billion at Dec. 31, 2011 |
| Short-term and other investments | $3.798 billion | $1.223 billion at Dec. 31, 2011 |
| Total debt | $11.624 billion | $12.371 billion at Dec. 31, 2011 |
| Total contractual backlog | $358.576 billion | $339.657 billion at Dec. 31, 2011 |
Revenue rose 30%, led by Commercial Airplanes, where higher deliveries and favorable mix lifted revenue 54% to $10.937 billion and operating earnings to $1.081 billion. BDS revenue increased 8% to $8.233 billion and operating earnings rose to $742 million. Boeing Capital revenue and earnings declined to $125 million and $38 million, respectively; Other reported an operating loss of $79 million.
Commercial airplane deliveries increased to 137 from 104. Boeing said operating cash flow improved by $1.790 billion year over year, reflecting higher earnings and lower working-capital growth. Investing activities used $3.003 billion, principally reflecting net investment contributions; financing activities used $1.187 billion, including $811 million of debt repayments and $328 million of dividends. Cash declined by $3.331 billion during the quarter.
At March 31, total assets were $80.205 billion, current assets $50.131 billion, and current liabilities $41.305 billion. Long-term debt was $8.817 billion. Boeing reported $4.6 billion of unused revolving credit capacity, no commercial paper borrowings, and compliance with debt and credit-facility covenants. Its $19.607 billion of aircraft-related financing commitments were not expected to require significant funding, but Boeing cautioned that actual requirements could be higher.
Material changes and notable items
- Commercial Airplanes drove most of the earnings increase, benefiting from deliveries and lower research and development spending. Its operating margin improved to 9.9% from 7.2%.
- BDS operating margin increased to 9.0% from 8.8%. BMA and Global Services & Support improved, while Network & Space Systems weakened; N&SS revenue fell 23% and operating earnings fell 48%.
- The effective tax rate rose to 36.8% from 33.4%, primarily because U.S. research and development tax credits expired at year-end 2011. An extension would reduce Boeing’s 2012 tax rate.
- Q1 earnings included a $131 million benefit from a favorable satellite-litigation judgment. Favorable BDS contract cumulative catch-up adjustments, including reach-forward losses, increased operating earnings by $112 million, versus $53 million in Q1 2011.
- Pension and other postretirement benefit cost increased to $843 million from $763 million, principally due to higher amortization of actuarial losses and higher service costs associated with lower discount rates.
Outlook, risks, and contingencies
- Production plans: Boeing planned to raise 737 production to 38 aircraft per month in 2013 and 42 in 2014. It targeted 787 final assembly of 10 aircraft per month by year-end 2013, with deliveries at that rate expected in early 2014. Boeing also planned to increase 747-8 production from 1.5 to 2 aircraft per month in mid-2012. These are operational expectations, not consolidated financial guidance; the filing does not provide clear full-year financial guidance.
- 787 and 747-8: Boeing cited design-change incorporation, production ramp-up, supplier coordination, delivery schedules, customer claims, and program profitability as risks. The 787 accounting quantity remained 1,100 aircraft; $4.202 billion of related deferred production and other costs was expected to be recovered from anticipated future orders, making recovery dependent partly on orders not yet firm. Additional costs could pressure margins or lead to a reach-forward loss.
- Defense programs: Fixed-price development work, including the KC-46A tanker and other complex programs, carries cost and schedule risk. Boeing warned that estimate changes could reduce margins or result in material charges. It said a decision to end C-17 production at a future date could be made in 2012 if further orders do not materialize.
- Financing exposure: The Export-Import Bank’s charter was due to expire May 31, 2012, and its funding limit could be reached earlier. If customer financing were constrained, Boeing might need to fund additional commitments or arrange financing. Aircraft financing commitments totaled $19.607 billion.
- Contingencies: Potential exposures include up to $1.731 billion of pre-tax charges in the A-12 litigation under specified adverse outcomes; up to $356 million related to disputed Sea Launch partner receivables; and potential ULA-related losses, including up to $317 million for questioned deferred costs and up to $280 million tied to satellite contract pricing disputes. These are disclosed possible exposures, not amounts Boeing said it expected to pay.
- Other risks: Environmental remediation liabilities were $758 million; the high end of the estimated range exceeded recorded liabilities by $1.027 billion. Warranty liabilities were $1.083 billion. Boeing also highlighted supplier and production-system dependence, customer concentration, government-contract exposure, litigation, pension assumptions, and market and financing conditions.
Important facts for investors to verify
- Whether planned 737, 787, and 747-8 production increases are achieved without further delays, cost overruns, or customer and supplier claims.
- Whether 787 program costs—including amounts expected to be recovered from future orders—remain recoverable and program margins improve.
- Whether BDS contract estimates and favorable catch-up adjustments are sustainable, and whether C-17 production continues.
- How the Export-Import Bank’s authorization and customer access to financing affect orders, delivery timing, and Boeing’s financing commitments.
- Developments in A-12, ULA, Sea Launch, environmental, and other legal or contingent exposures, and any resulting charges or cash requirements.
- Cash generation and liquidity after investment spending, debt repayments, dividends, and any aircraft financing Boeing may need to provide.