Business context and reporting period
The Boeing Company’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Boeing operates Commercial Airplanes, Defense, Space & Security (BDS), and Boeing Capital. The interim statements received an independent accountant’s review, not an audit.
Financial performance and position
- Revenue: Third-quarter revenue was $23.8 billion, up 7% year over year; nine-month revenue was $66.3 billion, up 5%. Commercial Airplanes’ nine-month revenue rose 13% to $43.2 billion, mainly on higher deliveries. BDS revenue declined 4% to $23.3 billion.
- Profit and margins: Third-quarter net earnings were $1.36 billion and diluted EPS was $1.86, versus $1.16 billion and $1.51 a year earlier. Nine-month net earnings were $3.98 billion and diluted EPS was $5.36, versus $3.35 billion and $4.36. GAAP operating margin was 8.9% for the quarter and 8.2% for nine months, compared with 8.1% and 8.0%. Boeing’s non-GAAP core EPS was $2.14 for the quarter and $6.30 for nine months; it excludes specified pension and postretirement costs.
- Cash flow: Nine-month operating cash flow was $3.86 billion, down from $6.80 billion, primarily reflecting lower customer advances and higher inventory growth. Investing activities provided $1.03 billion; financing activities used $7.29 billion, including $5.0 billion of share repurchases and $1.60 billion of dividends.
- Liquidity and debt: September 30 cash and cash equivalents were $6.66 billion, down from $9.09 billion at year-end 2013; short-term and other investments were $3.42 billion. Current assets were $65.2 billion and current liabilities $53.2 billion. Recorded debt was approximately $8.9 billion, including $1.6 billion classified as short-term. Boeing reported $4.8 billion of unused revolving credit capacity and compliance with debt covenants.
- Backlog and inventory: Contractual backlog was $475.0 billion, up from $422.7 billion at year-end. Inventory increased to $47.1 billion from $42.9 billion; 787 work in process included $25.2 billion of deferred production costs.
Material changes versus the prior comparable period
- Commercial Airplanes drove most revenue and operating-earnings growth; total deliveries rose to 528 aircraft in the first nine months from 476 in 2013. Commercial Airplanes’ nine-month operating margin was unchanged at 11.2%.
- BDS nine-month operating earnings declined to $2.22 billion from $2.28 billion, although third-quarter earnings increased to $856 million from $673 million. Boeing Capital’s nine-month operating earnings fell to $66 million from $98 million; it recorded an $11 million operating loss in the third quarter.
- The nine-month effective tax rate fell to 23.6% from 30.1%, mainly due to $265 million of tax-basis benefits and $259 million from federal audit settlements. The quarter’s tax rate was 32.9%, versus 32.8%.
- Share repurchases totaled $5.0 billion for the nine months, versus $1.8 billion in the prior-year period. Pension and postretirement costs declined overall, but Boeing recorded a $334 million pension curtailment charge associated with retirement-plan changes.
Outlook, commentary, risks and unusual items
- Program execution: Boeing recorded a $425 million second-quarter reach-forward loss on the fixed-price KC-46A tanker contract, citing engineering and design issues requiring rework. The company said contractual milestones had been met; low-rate production authorization was expected in 2015 subject to development progress.
- Commercial aircraft: Boeing planned to stabilize 787 production at 10 aircraft per month and cited risks from manufacturing, supply-chain, schedule, customer and supplier issues. It warned that further claims or a material reach-forward loss remained possible if risks were not mitigated. The 747 program faced weak demand, pricing pressure and unsold production positions, with a potential material reach-forward loss. Planned production-rate increases and development/certification schedules for the 737 MAX, 777X and 787 derivatives also carry execution risk.
- Production and defense outlook: Boeing announced plans to raise 737 production to 52 per month in 2018; the 737 MAX’s first delivery was expected in 2017. C-17 production was planned to end earlier than previously expected; after quarter-end Boeing received an order for two aircraft and was pursuing orders for eight unsold aircraft. The U.S. FY2015 budget request did not fund additional F/A-18s beyond the 76 aircraft under contract, creating potential future production-shutdown costs.
- Government funding and financing: Boeing cited uncertainty in future U.S. defense appropriations and sequestration, and a continuing resolution funding programs through December 11, 2014. The Export-Import Bank charter was extended only through June 30, 2015; nonrenewal or limited funding could affect customer financing and deliveries. Financing commitments totaled $16.7 billion and related to customers Boeing considered below investment grade.
- Other exposures: Environmental remediation liabilities were $638 million; reasonably possible costs could exceed recorded amounts by $884 million. Boeing disclosed potential losses of up to $356 million on contested Sea Launch receivables, up to $278 million related to ULA contract-pricing indemnification, and up to $317 million related to questioned ULA costs. Political unrest in Russia and Ukraine had not disrupted production or deliveries as of the filing, but could affect suppliers or customers. The company also disclosed $112 million of unbillable LightSquared receivables and stated a loss was reasonably possible in the bankruptcy.
- Other unusual items: Boeing changed certain retirement plans so approximately 100,000 employees would transition to defined-contribution plans in 2016; the changes produced a $966 million actuarial gain in other comprehensive income, partly offset by the curtailment charge. The filing reports licensed third-quarter sales to Iran Air of aircraft manuals, drawings, and navigation data, generating approximately $120,000 gross revenue and $12,000 net profit.
- The filing does not provide a clear consolidated full-year earnings or revenue forecast. Management said capital expenditures were expected to be higher in 2014 than in 2013. Boeing noted that 2014 results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether 787 production, planned rate increases, and derivatives meet schedule and improve program economics; monitor deferred costs and any customer or supplier claims.
- Whether KC-46A costs stabilize after the $425 million loss and whether planned production authorization proceeds.
- Commercial aircraft order, delivery and margin trends, particularly the 747, and funding or production decisions affecting C-17 and F/A-18 programs.
- Operating cash flow and inventory growth, including the ability to convert backlog into deliveries and cash; assess the sustainability of repurchases and dividends against cash needs.
- Tax benefits that lowered the nine-month effective rate, and the effect of any research tax credit extension or further tax-audit developments.
- Developments in U.S. defense funding, Export-Import Bank authorization, and the disclosed ULA, Sea Launch, environmental, financing and LightSquared exposures.