Boeing Company — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Dollar amounts are in millions unless noted. Interim financial statements were reviewed, not audited.
Business context and key results
Boeing operates Commercial Airplanes, Integrated Defense Systems (IDS), Boeing Capital Corporation (BCC), and other businesses. The filing describes a severe global aviation downturn, reduced airline traffic and financing availability, and continuing pressure on aircraft orders and delivery schedules.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $17,154 | $16,962 | $33,656 | $32,952 |
| Operating earnings | $1,529 | $1,247 | $2,554 | $3,046 |
| Operating margin | 8.9% | 7.4% | 7.6% | 9.2% |
| Net earnings from continuing operations | $997 | $851 | $1,612 | $2,057 |
| Diluted EPS | $1.41 | $1.16 | $2.27 | $2.79 |
- Q2 revenue rose 1% and operating earnings rose 23% year over year; six-month revenue rose 2%, while operating earnings fell 16% and continuing-operations earnings fell 22%.
- Commercial Airplanes six-month operating earnings declined to $1,234 from $1,760, principally reflecting a $347 increase in the 747 program reach-forward loss, weaker margins, lower services volume, and delay-related costs. IDS six-month operating earnings increased to $1,585 from $1,497.
- Contractual backlog was $305,272 at June 30, down from $323,860 at year-end 2008; Commercial Airplanes backlog was $257,443, down from $278,575.
Cash flow, liquidity, debt, and balance sheet
- Six-month operating cash flow was $1,194, versus $1,682 in 2008. Management attributed the decline mainly to lower earnings and higher working-capital investment, including increased receivables, development-program investment, and lower commercial-aircraft advances.
- Investing cash outflow was $846; financing cash inflow was $960, including $1,843 of new borrowings. Cash increased $1,331 to $4,599 from year-end.
- Total debt was reported as $9,116 at June 30, compared with $7,512 at December 31, 2008; long-term debt was $8,700 and current debt $416. Boeing issued $1,850 of notes in March 2009.
- Current assets were $30,120 and current liabilities $31,272, a $1,152 working-capital deficit. Total assets were $57,712; total shareholders’ equity was $334, compared with a deficit of $1,142 at year-end. Boeing said it remained compliant with debt covenants and did not expect the prior negative equity position to affect dividends or covenant compliance.
- Unused revolving credit lines totaled $3,000, including $1,500 reserved for BCC. Boeing said it expected adequate access to external capital, while noting future borrowing availability and cost could be affected by further market disruption. S&P and Fitch had negative outlooks; S&P had placed the rating on negative credit watch.
Material changes, outlook, risks, and contingencies
- 787: First flight was postponed after Boeing identified a need to reinforce the wing-to-fuselage area. Revised first-flight and delivery targets and financial effects were not yet determinable; Boeing expected to establish them in Q3 2009 after finalizing the modification and testing plan. Supply-chain, assembly, weight, and systems-integration challenges and customer or supplier claims remained risks.
- 747: Boeing recorded a $347 reach-forward charge in Q1 2009, following a $685 charge in Q4 2008. It targeted first 747-8 Freighter delivery for Q3 2010 and 747-8 Intercontinental delivery for Q4 2011; estimates remained exposed to development and cost risks.
- Production and demand: Boeing announced lower 777 production and delayed planned 747 and 767 rate increases. Management cited contracting passenger traffic, a sharp air-cargo decline, airline losses, and customer requests to cancel, modify, or reschedule orders. The company’s long-term forecast projected 5% annual traffic growth and a $3.2 trillion market for 29,000 new aircraft over 20 years; these are forecasts, not assured outcomes.
- Sea Launch: The venture filed for Chapter 11 in June. Boeing paid $448 under a guarantee on July 1 and recorded a Q2 pre-tax charge of $35. The filing estimated up to $478 of additional pre-tax charges if expected partner and venture recoveries are not obtained.
- Other program exposure: Boeing had directed suppliers to begin work on 23 C-17 aircraft beyond contracted backlog; related inventory and potential termination liabilities were about $265. A production shutdown was possible if further orders did not materialize. A post-quarter U.S. Army partial termination of part of the FCS contract was also disclosed; backlog had not yet reflected it.
- Financing and guarantees: Financing commitments totaled $9,542, and contingent performance letters of credit and surety bonds totaled about $7,105. Boeing said a significant portion of financing commitments might not be exercised, but market disruption could require greater funding. Satellite launch exposure could be about $360 per launch where insurance is unavailable or uneconomic.
- Legal, tax, and environmental matters: The A-12 litigation could result in an additional loss of about $1,673 pre-tax under an adverse outcome, while Boeing continued to appeal. An ICO judgment of $604 was under appeal; Telesat sought $263 in arbitration. Environmental liabilities were $742, with the reasonably possible highest-cost estimate exceeding recorded liabilities by $1,206. Potential tax settlements could increase earnings by up to $500, subject to significant uncertainty.
- Subsequent event: Boeing agreed to acquire Vought’s North Charleston 787 business for expected cash consideration of about $580 and release of $422 in prior advances, subject to closing adjustments and conditions.
No specific consolidated earnings guidance was provided in the supplied filing text. Management said the 787 schedule and financial impacts would be assessed after the revised modification and testing plans were finalized.
Most important facts for investors to verify
- Whether Boeing’s Q3 2009 787 schedule, cost, delivery, and customer-claim updates resolved the uncertainty identified in this filing.
- Further changes to the 747-8 program’s estimated costs, production schedule, and reach-forward loss.
- Actual cash recovery from Sea Launch, partners, and other counterparties, relative to the $478 potential additional charge.
- Subsequent effects of airline credit conditions, order changes, customer financing requests, and Boeing’s $9,542 financing commitments on cash flow and liquidity.
- Defense budget and contract developments, including C-17 production decisions and the financial impact of the FCS termination and restructuring.
- Changes in litigation, environmental, tax, pension, and guarantee exposures, as well as Boeing’s debt and credit ratings.