Boeing Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; comparisons are with the third quarter and nine months ended September 30, 2010. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $17.727 billion | $16.967 billion | $49.180 billion | $47.756 billion |
| Operating earnings | $1.714 billion | $1.387 billion | $4.247 billion | $3.868 billion |
| Operating margin | 9.7% | 8.2% | 8.6% | 8.1% |
| Net earnings | $1.098 billion | $837 million | $2.625 billion | $2.143 billion |
| Diluted EPS | $1.46 | $1.12 | $3.49 | $2.89 |
| Operating cash flow | Not separately presented for the quarter | $1.092 billion | $1.836 billion |
Revenue growth reflected higher commercial airplane and aviation-services sales. Nine-month operating earnings improved across Commercial Airplanes and Boeing Defense, Space & Security (BDS); increased unallocated pension and postretirement costs partly offset those gains. The nine-month effective tax rate fell to 33.6% from 38.8%, chiefly due to the prior-year healthcare-law charge and 2011 research and development tax credits.
Financial position and liquidity
- At September 30, cash and cash equivalents were $5.954 billion; short-term and other investments were $3.279 billion. Current assets were $46.347 billion and current liabilities $37.593 billion.
- Total debt was $12.380 billion, including $1.603 billion current. Total shareholders’ equity was $5.967 billion, versus $2.766 billion at year-end 2010.
- Operating cash flow declined year over year, principally because inventory increased as Boeing prepared for 787 and 747-8 deliveries and production increases. Inventory was $30.493 billion, up from $24.317 billion at year-end 2010.
- Cash increased $595 million during the nine months. Investing activities provided $856 million, while financing activities used $1.354 billion. Capital spending was $1.142 billion.
- Boeing reported $4.376 billion of unused revolving credit capacity and no commercial-paper borrowings. Financing commitments totaled $15.624 billion; management expected not to fund a significant portion, but gave no assurance. The company reported compliance with debt covenants.
Material changes and business developments
- Commercial Airplanes nine-month revenue rose 8% to $25.476 billion, while operating earnings increased to $2.514 billion; margin eased to 9.9% from 10.1%. Deliveries totaled 349 aircraft versus 346.
- BDS nine-month revenue declined to $23.505 billion, but operating earnings rose to $2.293 billion and margin to 9.8%. BDS backlog declined to $59.106 billion from $65.186 billion at year-end, reflecting deliveries, prior-year contract activity and partial U.S. Army terminations.
- Contractual company backlog increased to $316.859 billion from $303.955 billion, primarily due to Commercial Airplanes. Unobligated backlog decreased to $14.727 billion.
- Boeing received 787-8 design and production certifications and delivered its first 787 in September. The initial accounting quantity was set at 1,100 aircraft. The 787 inventory included $9.699 billion of deferred production costs; Boeing expected recovery of related deferred costs and tooling from firm orders and anticipated future orders.
- The 747-8 Freighter was certified and its first delivery occurred in October. The 747-8 Intercontinental first delivery was shifted to the first quarter of 2012. Boeing launched the 737 MAX and planned 737 production increases; the 777 rate reached seven aircraft per month in June.
Outlook, risks and unusual items
- The filing provides no consolidated earnings or EPS guidance. Management described a positive long-term commercial-aircraft market outlook, while noting near-term airline-industry pressures from economic uncertainty, high fuel prices and geopolitical and financial-market risks.
- Management warned that 787 and 747-8 production, certification, cost, schedule and supplier challenges could lead to customer claims, supplier assertions, reduced profitability or reach-forward losses. The 787-9 first delivery was expected in early 2014; the company continued to seek schedule recovery.
- Potential C-17 production termination was under evaluation if additional orders did not materialize. Boeing cited approximately $735 million of inventory expenditures and potential supplier termination liabilities tied to probable orders. A probable international F-15 order carried approximately $1.735 billion of similar exposure if it failed to materialize.
- BDS fixed-price development contracts—including KC-46A, AEW&C, P-8I and satellite programs—carry cost and schedule risks. The KC-46A initial contract was valued at $4.9 billion; Boeing said exercised options could bring expected contract value to approximately $30 billion.
- Unusual items included a $196 million nine-month reduction in customer-financing loss allowance after AirTran’s internal credit rating was upgraded following its acquisition by Southwest; a $294 million postretirement-obligation adjustment; and $34 million of first-quarter C-17 pension curtailment charges.
- Recorded environmental remediation liabilities were $787 million; the reasonably possible highest estimate exceeded recorded liabilities by $1.045 billion. The A-12 litigation could result in substantial additional losses or, if Boeing prevails, a recovery. Other legal matters include the NLRB complaint concerning the South Carolina 787 line and satellite-related litigation and arbitration.
- Boeing identified ongoing exposure to government-contract dependence, fixed-price work, program execution, pension assumptions, customer financing concentration, litigation, environmental obligations and access to financing. Management stated there had been no material change in previously disclosed risk factors.
Investor verification priorities
- Track 787 deferred production-cost recovery, production-rate progress, 787-9 schedule, customer claims and supplier assertions.
- Assess whether inventory growth and working-capital demands convert into deliveries and cash flow as planned.
- Monitor BDS backlog, U.S. defense funding and the C-17 and F-15 order outlook.
- Review pension and postretirement assumptions, obligations and expense, including the reported adjustment.
- Evaluate AirTran/Southwest exposure and the concentration and credit quality of Boeing Capital’s financing portfolio.
- Follow the A-12, environmental, ULA and other legal or contingent exposures, and the timing and funding of outstanding financing commitments.