Boeing Co. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017. Financial statements are unaudited. Unless noted, dollar amounts are in millions. Boeing reorganized its reporting segments effective July 1, 2017; prior-period segment figures were reclassified.
Financial results and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $24,309 | $23,898 | $68,024 | $71,285 |
| Operating earnings | $2,689 | $2,282 | $7,248 | $3,651 |
| Operating margin | 11.1% | 9.5% | 10.7% | 5.1% |
| Net earnings | $1,853 | $2,279 | $5,065 | $3,264 |
| Diluted EPS | $3.06 | $3.60 | $8.27 | $5.04 |
| Core operating earnings (non-GAAP) | $2,373 | $2,194 | $6,294 | $3,400 |
| Core diluted EPS (non-GAAP) | $2.72 | $3.51 | $7.26 | $4.79 |
Nine-month revenue declined 4.6%, mainly because of fewer Commercial Airplanes and Defense, Space & Security deliveries. Operating earnings improved substantially, reflecting lower program losses and the absence of the prior-year 787 flight-test cost reclassification; the comparison also benefited from higher unallocated pension income. Q3 revenue rose 1.7%, while net earnings and diluted EPS fell; the effective tax rate was 30.0%, versus a tax benefit in Q3 2016. Nine-month effective tax rates were 28.4% and 5.8%, respectively.
- Segment results, nine months: Commercial Airplanes revenue was $41,263 and operating earnings $3,648; Defense, Space & Security revenue was $15,520 and operating earnings $1,670; Global Services revenue was $10,638 and operating earnings $1,639; Boeing Capital revenue was $234 and operating earnings $87.
- Cash flow: Operating cash flow was $10,440 for the first nine months, compared with $7,667 in 2016. Investing activities used $1,636, including $1,304 of capital expenditures; financing activities used $9,109. Cash declined $232 from year-end to $8,569.
- Liquidity and debt: Cash and cash equivalents were $8,569; current assets were $64,142 and current liabilities $54,409. Recorded debt was $10,768, including $988 classified as short-term. Boeing reported $5,000 of unused revolving credit capacity, no commercial paper outstanding, and compliance with debt covenants.
- Capital returns and pension: Boeing repurchased $7,500 of shares and paid $2,575 of dividends during the nine months. It contributed $3,500 of shares and $500 cash to pension plans in Q3, exceeding its previously announced approximately $500 cash contribution plan.
- Backlog: Total backlog was $474,288 at September 30, up from $473,492 at year-end; contractual backlog was $459,871.
Material changes and developments
- Commercial Airplanes nine-month revenue decreased $2,367 year over year, mainly due to fewer deliveries; Defense, Space & Security revenue decreased $1,761, primarily due to fewer C-17 deliveries. Global Services revenue increased $130.
- Commercial Airplanes nine-month operating earnings rose to $3,648 from $804, largely due to lower reach-forward losses, lower R&D expense and improved cost performance. Prior-year results included a $1,258 747 program loss and $1,235 of 787 flight-test costs reclassified to R&D.
- Revenue recognition standard adoption (ASC 606) is planned for January 1, 2018, retrospectively. Boeing expects a material income-statement and balance-sheet impact, including approximately $20 billion higher assets and liabilities, and a cumulative retained-earnings increase of approximately $1 billion as of January 1, 2016. It expects timing changes for many defense and military-derivative contracts; commercial airplane program accounting and delivery-based revenue recognition are expected to remain unchanged.
- The filing reports total equity of $1,145 at September 30, compared with $877 at year-end. Treasury share repurchases and pension-related equity transactions materially affected reported equity.
Outlook, commentary and risks
- KC-46A Tanker: Boeing recorded $329 of additional Q3 reach-forward losses, bringing 2017 nine-month losses to $471. It expects 18 fully operational aircraft to be delivered in 2018. Further technical, quality, certification or schedule problems could cause additional losses or delays.
- Commercial production: Boeing planned 737 production increases from 47 per month to 52 in 2018 and 57 in 2019; 787 production was 12 per month, with a planned increase to 14 in 2019. The 777 rate was reduced to five per month in Q3. The 747 was being produced at 0.5 per month; Boeing warned that weak demand and pricing could lead to material losses and that ending production remained possible.
- Spending: Boeing expected 2017 capital expenditures to be lower than 2016. The filing does not provide consolidated earnings or revenue guidance.
- Government funding and contracts: A continuing resolution funded the U.S. government at fiscal 2017 rates through December 8, 2017. Budget uncertainty, possible shutdowns or sequestration, and fixed-price development contract risks could affect orders, performance, cash flow and results.
- Other exposures: Financing commitments totaled $13,106, all related to customers Boeing believed were below investment grade; management expected third-party financing to cover much of the need but gave no assurance. Environmental remediation liabilities were $543, with reasonably possible costs potentially $873 higher. Boeing also disclosed ULA indemnities, potential supplier termination liabilities, and unresolved collection/litigation matters involving Sea Launch and Spirit AeroSystems.
- Management said it had experienced no significant production or delivery disruption from Russia-Ukraine tensions to date, but disruption to suppliers or customers could materially affect operations. Boeing also cited aircraft-program execution, supplier, customer-financing, pension, legal, environmental and market risks.
Most important facts for investors to verify
- Whether the KC-46A reaches certification and delivery milestones, and whether further program losses arise.
- Whether the 747 program can secure adequate orders or faces a production decision, and how planned 737, 787 and 777 rates affect costs and margins.
- The actual effects of ASC 606 adoption versus Boeing’s preliminary estimates, including the timing of revenue, earnings and balance-sheet changes.
- Whether strong operating cash flow is sustained and how customer advances, inventory investment, share repurchases and pension funding affect cash and equity.
- Whether the $13.1 billion financing commitments, government funding uncertainty, and disclosed legal, environmental and indemnification exposures result in material funding needs or charges.