Boeing Co. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Financial statements are unaudited. Boeing reported under U.S. GAAP.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $22.149 billion | $20.465 billion | Up 8% |
| GAAP earnings from operations | $2.019 billion | $1.542 billion | Up $477 million |
| GAAP operating margin | 9.1% | 7.5% | Up 1.6 percentage points |
| Net earnings | $1.336 billion | $965 million | Up 38% |
| Diluted EPS | $1.87 | $1.28 | Up 46% |
| Core operating earnings and margin (non-GAAP) | $2.132 billion; 9.6% | $2.095 billion; 10.2% | Earnings up slightly; margin down |
| Operating cash flow | $88 million | $1.112 billion | Down $1.024 billion |
Financial position and capital
- Cash and cash equivalents were $8.655 billion at March 31, down from $11.733 billion at year-end 2014. Total assets were $97.775 billion and shareholders’ equity was $7.906 billion.
- Debt was approximately $9.0 billion, including $133 million current and $8.905 billion long-term, versus approximately $9.1 billion at December 31. Boeing issued $750 million of senior notes during the quarter.
- Current assets were $66.421 billion and current liabilities $55.256 billion. Inventories were $48.502 billion, including $34.309 billion associated with the 787 program.
- Cash used in financing was $2.935 billion, including $2.5 billion of share repurchases and $639 million of dividends. Cash dividends were $0.91 per share, compared with $0.73.
- Boeing reported $5.0 billion of unused revolving credit capacity, no commercial paper outstanding, and compliance with debt covenants. Financing commitments totaled $15.853 billion.
Business performance and changes
- Commercial Airplanes: Revenue increased 21% to $15.381 billion, primarily from higher deliveries; operating earnings rose to $1.617 billion. Margin fell to 10.5% from 11.8%, mainly due to the dilutive effect of 787 deliveries. Deliveries increased to 184 from 161.
- Defense, Space & Security: Revenue fell 12% to $6.709 billion and operating earnings declined to $743 million. Lower military aircraft revenue, including the C-17 program wind-down, was partly offset by improved Global Services & Support earnings. Segment margin rose to 11.1% from 10.2%.
- Boeing Capital: Revenue was broadly steady at $86 million; operating earnings fell to $20 million from $44 million, largely because the prior-year period benefited from a reduction in the credit-loss allowance.
- Contractual backlog was $482.568 billion, down from $487.092 billion at year-end, primarily reflecting commercial deliveries exceeding orders and lower projected revenue escalation.
- GAAP operating earnings benefited from $440 million lower unallocated pension and postretirement expense than in Q1 2014, which included $334 million of pension curtailment charges. Excluding specified benefit costs, core operating earnings increased only modestly and core margin declined.
Cash flow, outlook and material risks
- Operating cash flow was limited by working-capital use: inventories increased $1.822 billion net of advances and progress billings, while accounts receivable also rose. Management attributed the year-over-year cash-flow decline mainly to advances and progress billings, partly offset by lower inventory growth.
- Management expected 2015 capital expenditures to exceed 2014 levels to support growth. The filing text does not provide a clear consolidated full-year revenue or earnings guidance figure.
- Production plans included 737 rate increases to 47 per month in 2017 and 52 per month in 2018; 787 increases to 12 per month in 2016 and 14 by the end of the decade; and a 747 rate reduction to 1.3 per month in September 2015. The 737 MAX first delivery was expected in 2017, the 787-10 in 2018, and the 777X in 2020.
- 787: Production and schedule challenges, supplier and customer claims, planned rate increases, and the 787-10 introduction could further pressure profitability or result in a material reach-forward loss. Of $26.942 billion in deferred 787 production costs, $22.357 billion was expected to be recovered from units with firm orders and $8.498 billion from expected future orders.
- 747 and defense programs: The 747 had unsold production positions and near-break-even or lower-than-expected program economics; a material reach-forward loss remained possible. Boeing planned to end C-17 production in 2015 and had seven unsold aircraft. Additional F/A-18 orders were uncertain, with a potential production shutdown under evaluation.
- KC-46A: Boeing had recorded a $425 million reach-forward loss in 2014. Flight-test preparation delays continued to create schedule and cost pressure; further delays or cost increases could cause another loss.
- Other exposures included U.S. defense budget and sequestration uncertainty, Russia/Ukraine supply or customer disruption risk, $15.853 billion of aircraft financing commitments (all for customers Boeing considered below investment grade), environmental remediation liabilities of $590 million, and legal and guarantee contingencies. Boeing noted possible additional remediation costs above recorded liabilities and potential losses on certain ULA matters.
- Favorable cumulative contract catch-up adjustments, including reach-forward losses, increased operating earnings by $130 million in Q1 2015, versus $167 million in Q1 2014.
Most important facts for investors to verify
- Whether the 787’s planned production increases and cost-reduction efforts improve program margins, and whether deferred production costs remain recoverable.
- Whether 747 demand, unsold positions, and the planned rate reduction lead to additional charges.
- KC-46A schedule and cost performance after the previously recorded $425 million loss.
- Whether weak operating cash flow persists as inventory and other working-capital requirements evolve.
- How defense appropriations, C-17 and F/A-18 production decisions, and aircraft financing commitments affect future cash needs and results.
- The effect of pension assumptions and contract-estimate revisions on reported GAAP earnings versus non-GAAP core results.