Boeing Co. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited interim results; the independent accountant performed a review, not an audit. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $15,573 | $17,154 | $30,789 | $33,656 |
| Earnings from operations | $1,307 | $1,529 | $2,481 | $2,554 |
| Operating margin | 8.4% | 8.9% | 8.1% | 7.6% |
| Net earnings from continuing operations | $789 | $997 | $1,308 | $1,612 |
| Diluted EPS | $1.06 | $1.41 | $1.76 | $2.28 |
| Operating cash flow | Not stated separately for Q2 | $(19) | $1,194 |
Six-month revenue fell 9%, largely because of lower commercial-aircraft deliveries and reduced Network & Space Systems activity. Six-month operating earnings were down modestly, while the operating margin improved year over year in part because 2009 included a $347 million 747 program reach-forward loss. Q2 earnings and margin declined year over year. The six-month effective tax rate rose to 42.1% from 33.6%, including a $150 million charge tied to health-care legislation and the absence of the prior-year R&D tax credit.
Financial position and liquidity
- At June 30, cash and cash equivalents were $4,468, down from $9,215 at December 31, 2009. Short-term and other investments were $5,558; cash plus this balance totaled $10,026.
- Total debt was $12,946, including $1,507 current debt, versus $12,924 at year-end. Boeing reported no commercial paper outstanding and $3,550 of unused revolving credit capacity, including $1,500 reserved for Boeing Capital Corporation (BCC). It said it remained compliant with debt covenants.
- Six-month operating cash flow was $(19), compared with $1,194 provided in the prior-year period. Boeing attributed the change primarily to higher working capital, including a $3,425 increase in inventory cash use as it prepared for 787 and 747-8 production and deliveries.
- Investing cash outflow was $3,892, driven mainly by time-deposit investments; financing cash outflow was $778. Dividends paid were $637. Six-month capital spending was $443; Boeing expected full-year 2010 capital spending to exceed 2009.
- Total assets were $63,755 and total equity $3,173. Inventories rose to $20,368 from $16,933 at year-end.
- Contractual backlog was $297,568, nearly unchanged from year-end; unobligated backlog declined to $14,720 from $19,058.
Segments and material changes
- Commercial Airplanes: Six-month revenue decreased 12% to $14,901. Operating earnings rose to $1,362 from $1,234, mainly because the prior-year period included the 747 charge; Q2 earnings fell to $683 from $817. Lower deliveries, supplier seat-production issues, and the 747-400-to-747-8 transition weighed on revenue.
- Boeing Defense, Space & Security: Six-month revenue declined to $15,596 from $16,370 and operating earnings to $1,375 from $1,585. Lower Network & Space Systems volume was partly offset by higher Boeing Military Aircraft revenue.
- BCC: Six-month operating earnings increased to $101 from $73 despite slightly lower revenue. Its customer financing and investment portfolio was $5,290; its debt was $4,042 and debt-to-equity ratio 5.3-to-1.
Outlook, risks, contingencies and unusual items
- Boeing gave no clear consolidated revenue or earnings guidance in the supplied filing text. Management cited an improved airline-industry outlook, including IATA’s 2010 forecasts of 7% passenger-traffic growth and 19% cargo-traffic growth; these are industry forecasts, not Boeing guidance.
- 787 first delivery remained targeted for year-end 2010, but management warned of schedule pressure, possible slippage, supply-chain and rework challenges, and customer or supplier claims. 787 program inventory was $6,236, versus $3,885 at year-end. Boeing continued flight testing and reported inspection and repair work related to supplier workmanship issues.
- The 747-8 Freighter’s first delivery was targeted for Q4 2010, with increasing risk of movement into early 2011. Boeing planned a 737 production-rate increase in early 2012 and a 777 rate reduction through mid-2011, followed by an accelerated increase in mid-2011.
- C-17 production was being reduced from 15 to 10 aircraft annually; absent further orders, Boeing said it could decide in 2011 to end production. It cited about $265 of inventory expenditures and potential supplier termination liabilities associated primarily with aircraft not yet under contract.
- Boeing agreed to acquire Argon ST for approximately $775, subject to approvals and expected to close by the end of Q3 2010; it did not expect a material 2010 earnings impact.
- Notable exposures include a $759 environmental-remediation liability, with reasonably possible high-end estimates exceeding recorded liabilities by $937; Sea Launch receivables with up to $398 of potential additional pre-tax charges; and up to $383 of potential pre-tax losses under ULA-related pricing indemnities. A satellite launch exposure had an estimated uninsured amount of approximately $360.
- The A-12 litigation remained pending before the U.S. Supreme Court. Boeing disclosed a possible additional loss of up to $275 in one scenario, and potential total pre-tax charges of approximately $1,700 if specified adverse rulings and repayment obligations occur. Other material proceedings included ICO and Telesat disputes and renewed securities litigation relating to the 787 schedule.
- Other risks include fixed-price development overruns, program delays or cancellations, commercial-airline conditions, government-contract funding, pension assumptions, and access to financing. Management said market-risk disclosures had not changed significantly since year-end and risk factors had no material changes from the 2009 Form 10-K.
Important facts for investors to verify
- Whether 787 and 747-8 delivery targets were achieved, and the resulting program costs, inventory levels, customer remedies and supplier claims.
- Whether inventory growth converts into deliveries and operating cash flow, and how cash, investments and debt evolve.
- Defense segment trends, including Network & Space Systems volume, C-17 orders and production plans, and resolution of AEW&C and ULA program risks.
- Developments in A-12, Sea Launch, ICO, Telesat and securities litigation, and any resulting changes to reserves or contingent exposure.
- Completion and financing of the Argon ST acquisition, and actual 2010 capital spending versus management’s stated expectation.