Boeing Co. 10-Q Summary
Reporting period: Quarter ended September 30, 2018. Financial statements are unaudited. Dollar amounts are in millions except per-share data.
Financial performance and key metrics
| Metric | Nine months 2018 | Prior-year period | Q3 2018 | Q3 2017 |
|---|---|---|---|---|
| Revenue | $72,786 | $69,235 | $25,146 | $24,223 |
| Operating earnings | $7,812 | $7,366 | $2,227 | $2,630 |
| Operating margin | 10.7% | 10.6% | 8.9% | 10.9% |
| Net earnings | $7,036 | $5,138 | $2,363 | $1,810 |
| Diluted EPS | $11.95 | $8.39 | $4.07 | $2.99 |
| Operating cash flow | $12,375 | $10,443 | Not stated | Not stated |
- Nine-month revenue increased 5%, while operating earnings rose 6%. Boeing reported non-GAAP core operating earnings of $6,793 and core EPS of $10.55 for the nine months; these measures exclude specified pension and postretirement costs.
- Operating cash flow improved by $1,932 year over year, reflecting higher earnings and lower inventory spending, partly offset by lower customer advances. Investing cash use was $2,197; financing cash use was $10,866, including $8,415 of share repurchases and $2,976 of dividends.
- Cash and cash equivalents were $8,034 at September 30, down from $8,813 at year-end 2017. Total debt was approximately $11,876, including $1,389 of short-term debt and current maturities. Boeing reported $5,000 of unused revolving credit capacity and compliance with debt covenants.
- Total assets were $114,659 and total equity was negative $1,209, compared with positive equity of $1,713 at year-end. Treasury stock increased to $51,781, largely reflecting repurchases.
- Current assets were $87,686 and current liabilities $79,417. Customer advances and progress billings were $51,496; inventories were $62,038, including $28,905 of 787 program work in process.
Changes versus the prior comparable period
- For the first nine months, Commercial Airplanes (BCA) revenue rose to $43,409 and operating earnings increased to $5,175, principally on higher 787 margins and improved cost performance. BCA operating margin increased to 11.9% from 8.6%.
- Defense, Space & Security (BDS) revenue rose to $17,084, but operating earnings fell to $925 from $1,649. Q3 BDS recorded an operating loss of $245, versus earnings of $486 a year earlier, reflecting development-program charges.
- Global Services revenue grew to $12,124 and operating earnings to $1,790, driven primarily by parts volume. Its nine-month operating margin declined to 14.8% from 15.6%.
- Backlog increased to $491,179 from $474,180 at year-end 2017. Boeing expected approximately 24% to convert to revenue through 2019 and 69% through 2022.
- Cash dividends paid per share for the nine months were $5.13 versus $4.26. Weighted average diluted shares declined to 588.9 million from 612.8 million.
Outlook, commentary, risks and unusual items
- No consolidated financial guidance was provided in the filing. Management cited planned production-rate increases: 737 production to 57 per month in 2019, 787 to 14 per month in 2019, and 767 to 3 per month in 2020. Initial KC-46A deliveries were expected in Q4 2018; 777X first delivery was targeted for 2020.
- Boeing recorded $686 of KC-46A reach-forward losses in the first nine months of 2018, including $179 in Q3, due to rework, higher-than-expected effort, and testing and certification delays. Further losses or delivery delays remain possible.
- In Q3, BDS recorded $400 of anticipated losses on options for 346 T-X Trainer aircraft and $291 on the MQ-25 development contract. Boeing reported $1,618 of orders associated with the two awards and a combined $691 of charges.
- The Q3 tax benefit was $230, versus tax expense of $773 a year earlier. The 2018 nine-month effective tax rate was 6.9%; Q3’s rate was negative 10.8%. The filing attributes the 2018 rates to U.S. tax-law changes and other benefits; Q3 included $412 of additional tax benefits from settlement of a 2013–2014 federal tax audit.
- Key risks include fixed-price development programs, supplier and production execution, technical and certification challenges, U.S. defense funding uncertainty, tariffs and trade developments, customer financing exposure, and environmental and legal contingencies. Environmental remediation liabilities were $568; the high end of reasonably possible costs exceeded recorded liabilities by $800.
- Aircraft financing commitments rose to $19,744, of which $18,540 related to customers Boeing viewed as below investment grade. Standby letters of credit and surety bonds totaled approximately $3,762. The filing says funding of a significant portion of financing commitments was not expected, but provides no assurance that actual funding will remain limited.
- Subsequent to quarter-end, Boeing acquired KLX for $4,316, including assumption of $1,029 of net debt. A proposed 80%-owned Embraer commercial-aircraft joint venture remained subject to definitive agreements and regulatory and shareholder approvals; closing was expected by the end of 2019 if approvals were timely.
Most important facts for investors to verify
- Whether KC-46A testing, certification, rework and delivery progress leads to additional reach-forward losses or schedule changes.
- Whether the T-X and MQ-25 contracts, including anticipated options and future production, achieve the cost and profitability assumptions underlying the Q3 charges.
- Whether BCA production plans are achieved despite Q3 supply-chain delivery delays, and how 787 program cost recovery and 747 production viability develop.
- How much of the $19.7 billion financing commitments and other guarantees ultimately requires Boeing funding, particularly given the Export-Import Bank’s limited approval capacity noted in the filing.
- The cash, debt, earnings and integration effects of the KLX acquisition, and the status and terms of the proposed Embraer partnership.