Business context and reporting period
The Boeing Company’s unaudited Form 10-Q covers the three months ended March 31, 2014, compared primarily with the three months ended March 31, 2013. Boeing reported higher commercial-aircraft revenue and lower Defense, Space & Security revenue. The interim results are not necessarily indicative of full-year results.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $20.465 billion | $18.893 billion |
| Earnings from operations | $1.542 billion | $1.528 billion |
| GAAP operating margin | 7.5% | 8.1% |
| Net earnings | $965 million | $1.106 billion |
| Diluted EPS | $1.28 | $1.44 |
| Operating cash flow | $1.112 billion | $524 million |
| Capital expenditures | $497 million | $521 million |
| Cash and cash equivalents at period end | $6.942 billion | $8.335 billion |
| Debt at March 31, 2014 | $8.935 billion | $9.635 billion at Dec. 31, 2013 |
Revenue rose 8%, while net earnings fell 13%. The effective tax rate increased to 33.9% from 23.1%, principally because the 2013 comparison included a $145 million benefit from retroactive reinstatement of the U.S. research tax credit. Cost of sales increased to 84.5% of revenue from 83.4%, with higher unallocated pension expense, including pension curtailment charges, a major factor in the lower GAAP margin.
Boeing’s non-GAAP core operating earnings, which exclude specified unallocated pension and postretirement costs, increased to $2.095 billion from $1.867 billion; core operating margin rose to 10.2% from 9.9%, and core EPS increased to $1.76 from $1.73. These measures are not substitutes for GAAP results.
Operating cash flow improved year over year, but working-capital investment remained significant: inventory net of advances and progress billings rose to $44.941 billion from $42.912 billion at year-end. Boeing repurchased $2.5 billion of shares and paid $540 million in dividends during the quarter. Financing activities used $3.668 billion; cash declined by $2.146 billion from year-end. Boeing reported $4.8 billion of unused revolving credit capacity and no commercial-paper borrowings outstanding.
Segment results
- Commercial Airplanes: Revenue increased 19% to $12.737 billion; operating earnings rose to $1.502 billion from $1.219 billion and margin improved to 11.8% from 11.4%, reflecting higher deliveries, particularly 737s. Deliveries totaled 161 aircraft versus 137.
- Defense, Space & Security: Revenue decreased to $7.633 billion from $8.110 billion; operating earnings fell to $778 million from $832 million. Lower BMA revenue and earnings were partly offset by growth in Global Services & Support.
- Boeing Capital: Revenue was $82 million versus $105 million; operating earnings were $44 million in both periods.
Material changes versus the prior comparable period
- Commercial-aircraft revenue increased with higher deliveries; the prior-year quarter included a temporary suspension of 787 deliveries.
- R&D expense rose to $809 million from $705 million, mainly from increased 737 MAX and 777X spending.
- Defined-benefit plan changes will move approximately 100,000 employees to a company-funded defined-contribution plan in 2016. The changes generated $334 million of pension curtailment charges in Q1 and a $966 million net actuarial gain in other comprehensive income.
- Cash dividends per share increased to $0.73 from $0.49. Boeing repurchased 19.4 million shares for $2.5 billion.
- Total contractual backlog was $422.690 billion, broadly unchanged from $422.661 billion at year-end; Commercial Airplanes backlog rose slightly while BDS backlog declined.
Outlook, risks, contingencies and unusual items
The filing provides no consolidated full-year earnings or revenue guidance. It describes operating plans and program expectations, including a planned 737 production-rate increase from 38 to 42 per month in Q2 2014 and to 47 per month in 2017; 787 production at 10 per month, with the first 787-9 customer delivery expected in mid-2014; and 777X first delivery expected in 2020.
- Aircraft program exposure: Boeing said 747 and 787 gross margins were breakeven or near breakeven in Q1. Weak 747 demand and pricing pressure could result in a material reach-forward loss. 787 production challenges, planned rate increases, derivative development, schedule delays, and customer or supplier claims could further pressure profitability or result in a material loss. The 787 inventory included $23.123 billion of deferred production costs; $8.737 billion of deferred production costs and related tooling was expected to be recovered from anticipated future orders.
- Development contracts and defense demand: The KC-46A fixed-price development contract remained at breakeven gross margin; cost increases could cause a material charge. Defense appropriations, sequestration and government funding remain uncertain. A $48 million charge was recorded related to the decision to produce three fewer C-17s in 2015; unsold aircraft could require further charges. The President’s FY2015 budget request did not include additional F/A-18 funding, creating possible future production-shutdown exposure.
- Pensions and taxes: A $115 million tax benefit was expected to be recorded in Q2 following completion of review of 2007–2008 tax years. Potential resolution of the 2009–2010 IRS audit could increase earnings by up to $130 million, subject to timing and outcome. Extension of the research tax credit could also benefit the 2014 tax rate.
- Contingencies: Environmental remediation liabilities were $646 million; the high end of reasonably possible remediation costs exceeded recorded liabilities by $923 million. Product-warranty liabilities were $1.649 billion. Outstanding financing commitments were $17.599 billion, all for customers Boeing believed were below investment grade; Boeing said it did not consider a loss reserve necessary based on commitment terms.
- Other specific exposures: Boeing had $356 million of Sea Launch partner receivables subject to disputed recovery and possible full write-off. LightSquared-related unbillable receivables were $112 million amid bankruptcy proceedings. Potential ULA indemnification exposure included up to $278 million on contract pricing disputes and up to $317 million related to questioned deferred costs.
- Geopolitical and market risks: Boeing reported no production or delivery disruption from Russia-Ukraine unrest as of the filing, but noted exposure through titanium suppliers, operations and customers. Customer financing is concentrated in older aircraft models and depends on collateral values and airline-market conditions.
Most important facts an investor should verify
- Whether 787 production-rate increases and 787-9/787-10 schedules are achieved, and whether deferred production costs can be recovered from firm and expected orders.
- Whether 747 demand, pricing and unsold production positions stabilize enough to avoid a material reach-forward loss.
- How the KC-46A and other fixed-price development contracts perform, and whether C-17 or F/A-18 production decisions produce additional charges.
- The cash-flow effect of inventory growth, aircraft production investment, share repurchases and customer advances, alongside available borrowing capacity.
- Outcomes of tax audits, Sea Launch and ULA disputes, environmental matters, and other disclosed contingent exposures.