Boeing Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Figures are in millions of dollars unless stated otherwise. Interim results are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $24,543 | $22,045 | $46,692 | $42,510 |
| Operating earnings (GAAP) | $1,683 | $1,787 | $3,702 | $3,329 |
| Operating margin | 6.9% | 8.1% | 7.9% | 7.8% |
| Net earnings | $1,110 | $1,653 | $2,446 | $2,618 |
| Diluted EPS | $1.59 | $2.24 | $3.46 | $3.50 |
| Operating cash flow | Not separately stated | Not separately stated | $3,385 | $2,921 |
Q2 revenue rose 11%, while operating earnings declined 6% and net earnings declined 33%. For the first half, revenue increased 10%; GAAP operating earnings rose 11%, but net earnings fell 7%. The higher 2015 effective tax rate (31.5% for six months; 31.6% for Q2) compared with 2014 (17.6% and 3.7%) chiefly reflects $524 million of prior-year tax benefits from tax-basis adjustments and federal audit settlements.
Management’s non-GAAP core operating earnings were $1,713 million for Q2 and $3,845 million for six months, versus $1,991 million and $4,086 million a year earlier. Core operating margins were 7.0% and 8.2%, versus 9.0% and 9.6%. These measures exclude specified unallocated pension and postretirement costs.
Cash, liquidity and capital
- Cash and cash equivalents were $9,157 million at June 30, down from $11,733 million at year-end 2014. First-half operating cash flow was $3,385 million; investing used $412 million and financing used $5,540 million.
- Cash uses included $4,501 million of share repurchases and $1,264 million of dividends in the first half. Boeing repurchased 30.5 million shares during that period; $7.5 billion remained available under the repurchase plan at June 30.
- Total recorded debt was approximately $9.0 billion, including $112 million classified as short-term; long-term debt was $8,904 million. Boeing issued $750 million of senior notes in February. It reported $5.0 billion of unused revolving credit capacity, no commercial-paper borrowings, and compliance with debt covenants.
- Total assets were $98.1 billion and total equity was $6.3 billion at June 30. Inventories, net of advances and progress billings, were $49.0 billion, up from $46.8 billion at year-end.
Business trends and changes
- Commercial Airplanes: First-half revenue rose 19% to $32.3 billion, mainly on higher deliveries and mix, but operating earnings fell to $2.8 billion from $3.1 billion and margin fell to 8.8% from 11.3%. Deliveries increased to 381 from 342. Segment contractual backlog was $430.7 billion.
- Defense, Space & Security: First-half revenue declined 7% to $14.3 billion and operating earnings fell to $1.3 billion from $1.4 billion. Lower deliveries and program activity weighed on results. Segment contractual backlog was $48.4 billion.
- Boeing Capital: First-half revenue increased to $201 million, but operating earnings declined to $31 million from $77 million, primarily due to higher asset impairment expense and the prior-year benefit from a customer-rating change.
- Total contractual backlog was $479.2 billion at June 30, down from $487.1 billion at year-end, primarily because deliveries exceeded orders.
Outlook, risks and unusual items
- KC-46A tanker: Boeing recorded an $835 million second-quarter reach-forward loss—$670 million on engineering, manufacturing and development work and $165 million on low-rate initial production aircraft. Higher estimated costs reflected design changes, testing and manufacturing complexity. Boeing said it continued to expect delivery of 18 fully operational aircraft by August 2017; further technical, quality, schedule or cost problems could cause additional losses.
- Commercial programs: The 747 rate was planned to fall to 1.3 aircraft per month in September 2015 and 1.0 per month in March 2016. Boeing warned that the program could incur a material reach-forward loss if risks are not mitigated. The 787 program remained under profitability pressure from production challenges, change incorporation, delays and customer or supplier matters; management cited planned rate increases and the 787-10 schedule as risks. Boeing continued to target 787 production-rate increases and first 787-10 delivery in 2018.
- Other production and defense risks: Boeing planned to end C-17 production in 2015; one aircraft remained unsold, and a write-down could result if an expected order does not materialize. Additional F/A-18 orders were uncertain, creating a possible future production shutdown decision. U.S. defense-budget and appropriation uncertainty could delay, reduce or cancel programs.
- Financing and external risks: The Export-Import Bank’s charter expired June 30, 2015. If it is not reauthorized or cannot meet customer needs, Boeing may need to provide additional financing, and some customers could delay purchases. Russia/Ukraine disruption had not materially affected production or deliveries through the filing date, but could do so if suppliers or customers are affected.
- Aircraft financing commitments totaled $17.8 billion, of which $17.7 billion related to customers Boeing classified as below investment grade; Boeing reported no reserve was required based on commitment terms. Environmental remediation liabilities were $593 million, with the high end of estimated reasonably possible costs exceeding recorded liabilities by $864 million. Other contingencies include guarantees, litigation, tax audits and disputed ULA-related costs.
- Unfavorable cumulative catch-up adjustments, including reach-forward losses, reduced earnings from operations by $594 million for the first half and $724 million for Q2, compared with reductions of $145 million and $312 million in the 2014 periods. The filing states that contract estimates involve judgment and may change.
Key facts for investors to verify
- Progress, remaining cost estimates and delivery milestones for the KC-46A contract after the $835 million Q2 loss.
- 787 and 747 program cost recovery assumptions, production plans, order demand and exposure to further reach-forward losses; in particular, $27.7 billion of 787 deferred production costs were included in inventory.
- Whether the Ex-Im Bank’s lapse affects customer financing, orders or Boeing’s own financing commitments.
- Cash generation relative to inventory investment, dividends and repurchases, and the effect of the $17.8 billion financing commitments on liquidity.
- Resolution and potential financial impact of ULA, environmental, tax, legal and other contingent matters; the filing does not provide a clear estimate for some exposures.