Boeing Co. (The Boeing Company) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $16.967B | $16.688B | $47.756B | $50.344B |
| Operating earnings/(loss) | $1.387B | $(2.151)B | $3.868B | $0.403B |
| Operating margin | 8.2% | (12.9)% | 8.1% | 0.8% |
| Net earnings/(loss) | $837M | $(1.564)B | $2.143B | $44M |
| Diluted EPS | $1.12 | $(2.23) | $2.89 | $0.06 |
- Revenue and segment trends: Nine-month revenue fell 5%, reflecting fewer 747 and 777 deliveries at Commercial Airplanes and lower Network & Space Systems revenue. Q3 revenue rose 2%, with higher commercial airplane deliveries and services partly offset by lower BDS revenue.
- Profit comparison: The large year-over-year earnings improvement mainly reflects the absence of 2009 charges: $2.619B for the first three 787 flight-test aircraft and 747 program reach-forward losses of $1.352B for the first nine months ($1.005B in Q3). BDS earnings declined year over year.
- Cash flow: Nine-month operating cash flow was $1.836B, down from $2.391B. Inventory growth, including a $4.686B cash use, was a major working-capital factor as Boeing prepared for 787 and 747-8 production and deliveries. Investing cash outflow was $6.480B, including $5.088B of net investment contributions, primarily time deposits, and the Argon acquisition. Financing cash outflow was $1.645B.
- Liquidity and debt: September 30 cash and cash equivalents were $2.864B, versus $9.215B at year-end 2009; short-term and other investments were $7.102B, versus $2.008B. Total debt was $12.419B, including $953M current debt, compared with $12.924B at year-end. Boeing reported $3.550B of unused revolving credit capacity and compliance with debt covenants.
- Margins and other metrics: Commercial Airplanes nine-month operating margin was 10.1%, versus (6.4)% in 2009; BDS was 8.7%, versus 9.8%. Contractual backlog was $301.471B at September 30, up from $296.500B at year-end.
Material changes and outlook
- Boeing acquired Argon ST on August 5 for $782M, net of cash acquired, to expand C4ISR, cyber and intelligence capabilities.
- The 787 first delivery was moved to mid-first-quarter 2011, citing supplier workmanship, instrumentation and engine availability issues. The 747-8 Freighter first delivery was moved to mid-2011 after flight-test issues; Boeing said the schedule change was not expected to materially affect 2010 results. Boeing continued to cite cost, schedule, supplier and customer-claim risks for both programs.
- Production plans include raising 737 output to 35 per month in 2012 and 38 in 2013, and increasing 777 production to seven per month in mid-2011. The 777 rate had fallen to five per month in June 2010. C-17 production was reduced from 15 to 10 annually, with a possible 2011 production-end decision if additional orders do not materialize.
- No explicit consolidated full-year earnings or revenue guidance is stated in the provided filing text. Boeing expected 2010 capital spending to exceed 2009, partly because of a second 787 final assembly line. Management cited improving airline traffic and cargo demand; these industry forecasts are not Boeing financial guidance.
Risks, contingencies and unusual items
- Development and fixed-price program exposure: Technical, certification, supplier and production issues could increase costs, delay deliveries, prompt cancellations or contractual claims, and create additional reach-forward losses. Boeing disclosed $7.805B of 787 work in process, including deferred production costs, at September 30.
- Sea Launch: Boeing reported $398M of net receivables and could incur up to $356M of additional pre-tax charges if it cannot obtain specified partner reimbursements. A bankruptcy reorganization plan was confirmed, but expected cancellation of Boeing’s existing 40% interest and treatment of claims remained subject to plan effectiveness.
- A-12 litigation: The U.S. Supreme Court agreed to review the case, with a decision expected in 2011. An adverse outcome could produce approximately $1.706B in pre-tax charges, according to the filing; Boeing said its existing provision remained adequate.
- Other exposures: Possible ULA contract-pricing losses could reach $283M; environmental remediation liabilities were $743M, with reasonably possible highest estimates $933M above recorded liabilities. Financing commitments totaled $10.770B, and outstanding letters of credit and surety bonds were approximately $7.353B.
- Customer finance: Mexicana and its affiliate Click entered bankruptcy proceedings; Boeing recorded an $81M impairment on 717 aircraft and may record further impairment if aircraft cannot be re-leased at expected rates. AirTran represented approximately 25% of BCC’s gross customer financing portfolio, and Boeing was evaluating the proposed Southwest merger.
- Tax and other matters: Boeing said IRS audit settlements could increase earnings by up to $700M within 12 months, depending on timing and outcomes. A $150M first-quarter tax charge reflected health-care legislation. A securities class action concerning the 787 schedule remained in discovery; Boeing said it would contest the claims.
Most important facts for investors to verify
- Whether the 787 and 747-8 delivery schedules, certification milestones, production ramps and program cost estimates remain achievable.
- Whether rising inventory converts to deliveries and cash, and how operating cash flow and cash/investment balances develop.
- Whether BDS revenue and margins stabilize, and whether C-17 production receives additional orders or ends.
- Recovery of Sea Launch receivables and resolution of A-12, ULA, environmental and other material contingencies.
- Further losses, lease recoveries and customer concentration exposure within Boeing Capital Corporation, including the impact of the Mexicana/Click bankruptcy and AirTran developments.