Boeing Co. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Boeing operates Commercial Airplanes (BCA), Defense, Space & Security (BDS), Global Services (BGS), and Boeing Capital (BCC).
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $93.392 billion | $94.571 billion |
| Operating earnings (GAAP) | $10.278 billion | $5.834 billion |
| Operating margin (GAAP) | 11.0% | 6.2% |
| Net earnings | $8.197 billion | $4.895 billion |
| Diluted EPS | $13.43 | $7.61 |
| Operating cash flow | $13.344 billion | $10.499 billion |
| Cash and cash equivalents, year-end | $8.813 billion | $8.801 billion |
| Total debt, year-end | $11.117 billion | $9.952 billion |
| Total backlog, year-end | $488.145 billion | $473.492 billion |
Revenue declined 1.2% year over year. GAAP operating earnings rose substantially, driven mainly by lower BCA program losses and R&D expense, improved performance, and higher unallocated pension income. The 2017 effective tax rate was 18.4%; the Tax Cuts and Jobs Act reduced it and produced a reported $1.051 billion incremental tax benefit, principally from deferred-tax remeasurement.
Segment revenue and operating earnings were: BCA $56.729 billion and $5.432 billion; BDS $21.057 billion and $2.223 billion; BGS $14.639 billion and $2.256 billion; BCC $307 million and $114 million. BCA margin increased to 9.6% from 3.4%; BDS margin was 10.6% versus 8.7%; BGS margin was 15.4% versus 15.6%.
Cash, debt and capital allocation
- Operating cash flow increased by $2.845 billion, mainly as customer advances and progress billings rose; inventory increases partly offset this benefit.
- Cash used in investing was $2.062 billion; capital expenditures were $1.739 billion. Management expected 2018 capital expenditures to exceed 2017.
- Cash used in financing was $11.350 billion, including $9.236 billion of share repurchases and $3.417 billion of dividends. A new repurchase authorization of up to $18 billion was approved in December 2017.
- Year-end total debt was $11.117 billion, including $1.335 billion classified as short-term. Boeing reported $5.0 billion of unused revolving-credit capacity and compliance with debt covenants.
- Shareholders’ equity was $412 million at year-end, down from $877 million. GAAP pension underfunding was $16.4 billion; the company said its plans were over 100% funded on an ERISA basis and expected no pension contributions in 2018.
Material changes and unusual items
- 2017 revenue fell $1.179 billion: lower BCA and BDS revenue, including fewer twin-aisle and C-17 deliveries, was partly offset by BGS growth, particularly commercial parts.
- BCA recorded $1.258 billion of 747 reach-forward losses in 2016 and $885 million in 2015; no comparable 747 loss was reported for 2017. Boeing said it continued to evaluate the 747 program and could decide to end production.
- The KC-46A program recorded $471 million in additional reach-forward losses in 2017, primarily for certification and LRIP changes, following losses of $1.128 billion in 2016 and $835 million in 2015. The company expected delivery of 18 fully operational aircraft in 2018; further losses or delays remained possible.
- In 2016, Boeing reclassified $1.235 billion of 787 flight-test aircraft inventory costs to R&D after determining two aircraft were no longer commercially saleable. This increased the year-over-year comparison benefit to 2017 results.
- Boeing planned to adopt the new revenue-recognition standard in 2018 and restate 2016 and 2017. The filing estimated approximately $10 billion of revenue and $1.3 billion of operating earnings would shift into years before 2016, with a $900 million increase to retained earnings effective January 1, 2016. The reported 2017 and 2016 figures therefore differ from the filing’s estimated restated presentation.
- Backlog rose to $488.145 billion, primarily as orders and funding exceeded deliveries. Backlog is not guaranteed revenue and excludes options and certain orders with outstanding contingencies.
Outlook, risks and contingencies
- Management described commercial aviation fundamentals as positive: 2017 passenger traffic growth was estimated above 7%, and its 20-year forecast projected 4.7% annual passenger-traffic growth. These are management and industry estimates, not company revenue guidance.
- Production plans included increasing 737 output from 47 to 52 aircraft per month in 2018 and 57 in 2019; 787 output was 12 per month with a planned increase to 14 in 2019. The 787-10 first delivery and 777X first delivery were targeted for 2018 and 2020, respectively.
- Key risks include aircraft certification, production execution, supplier performance, fixed-price contract cost overruns, customer cancellations or deferrals, intense competition, U.S. defense budget and appropriation uncertainty, and international financing and political risks.
- Export-Import Bank authority extended through September 2019, but the bank lacked a board quorum to approve transactions over $10 million; this could increase Boeing financing exposure or affect customer purchases.
- Contractual obligations totaled $158.163 billion, including $115.064 billion of purchase obligations not recorded on the balance sheet. Commercial commitments included $10.221 billion of aircraft financing commitments, primarily for customers Boeing considered below investment grade.
- Recorded environmental remediation liabilities were $524 million; the high end of the reasonably possible cost range exceeded recorded liabilities by $868 million. The filing also describes pending legal proceedings and government inquiries but says their outcomes were not expected, based on then-current information, to materially affect results or financial position.
Most important facts for investors to verify
- How 2018 delivery, certification and cost performance developed for KC-46A, 777X, 787-10 and the 737 production ramp.
- Whether BCA’s margin recovery persisted after excluding the effects of prior-period 747 and 787 charges and lower R&D spending.
- The realized cash impact of customer advances, inventory investment, share repurchases and pension funding.
- How the revenue-standard restatement changed reported comparisons, contract balances and the timing of earnings.
- Whether defense appropriations, Export-Import Bank capacity, financing commitments or environmental and legal contingencies changed materially.