Boeing Company (The) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited interim results; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $22.739B | $24.755B | $43.715B | $47.387B |
| Operating earnings (GAAP) | $2.535B | $(0.419)B | $4.559B | $1.369B |
| Operating margin (GAAP) | 11.1% | (1.7)% | 10.4% | 2.9% |
| Net earnings/(loss) | $1.761B | $(0.234)B | $3.212B | $0.985B |
| Diluted EPS | $2.89 | $(0.37) | $5.22 | $1.51 |
| Core operating earnings (non-GAAP) | $2.212B | $(0.488)B | $3.921B | $1.206B |
| Core operating margin (non-GAAP) | 9.7% | (2.0)% | 9.0% | 2.5% |
Revenue fell year over year, principally because of fewer Commercial Airplanes deliveries and lower Defense, Space & Security revenue. Earnings improved sharply against prior-year results that included large 747 and KC-46A reach-forward losses and a $1.235B charge to R&D for 787 flight-test aircraft. 2017 results also included $638M of unallocated pension and postretirement benefit income; Boeing’s non-GAAP core measures exclude this income. Six-month cost of sales declined to 81.6% of revenue from 87.4%.
Cash, debt and balance sheet
- Six-month operating cash flow was $7.044B, compared with $4.465B in 2016; cash and cash equivalents were $8.737B at June 30, versus $8.801B at year-end 2016.
- Investing cash outflow was $1.386B; financing cash outflow was $5.774B, including $5.0B of share repurchases and $1.720B of dividends paid.
- Recorded debt was approximately $10.8B, including $0.7B classified as short-term, compared with approximately $10.0B at December 31, 2016. Boeing issued $0.9B of senior notes during the half.
- Boeing reported $5.0B of unused revolving credit capacity, no commercial paper outstanding, and compliance with debt and credit-facility covenants.
- Total equity was negative $1.978B, versus positive $0.877B at year-end, with treasury stock increasing by $4.633B, largely reflecting repurchases. Inventory, net of advances and billings, was $42.453B, down from $43.199B.
Segments, backlog and material changes
- Commercial Airplanes: Six-month revenue declined 6% to $30.018B, while operating earnings rose to $2.782B from $60M. The improvement primarily reflected lower reach-forward losses and lower R&D, not higher deliveries. Boeing delivered 352 commercial aircraft in the half, versus 375 a year earlier.
- Defense, Space & Security: Revenue declined to $13.418B from $15.130B, while operating earnings increased to $1.627B from $1.415B. Segment backlog was $58.340B at June 30.
- Boeing Capital: Six-month revenue was $164M and operating earnings were $64M, up from $148M and $23M, respectively; lower impairment expense contributed to the earnings increase.
- Total contractual backlog was $467.601B, up from $458.277B at year-end 2016. This excludes options, unsigned announced orders and unfunded government backlog.
Outlook, risks and unusual items
- Boeing planned to increase 737 production from 42 per month to 47 in Q3 2017, then to 52 per month in 2018 and 57 in 2019. It planned to reduce 777 production to five per month in the second half of 2017. The 787 was being produced at 12 per month, with a planned increase to 14 by the end of the decade.
- The 787 program remained near breakeven gross margin. Boeing cited production and supply-chain challenges, early-aircraft changes, schedule issues and price-escalation factors; failure to mitigate risks could pressure profitability or cause a material reach-forward loss.
- For the 747, Boeing cited weak demand, pricing pressure and completed aircraft in inventory. Production was 0.5 aircraft per month; further losses were possible, and ending production remained under consideration.
- The fixed-price KC-46A program incurred a further $142M reach-forward loss in Q1 2017. Boeing warned of potential further losses or delivery delays from technical, quality, certification or production issues. First tanker delivery was expected in late 2017, with 18 fully operational aircraft expected in early 2018.
- Boeing planned Q3 pension contributions of $0.5B in cash and $3.5B in Boeing stock, exceeding its previously announced 2017 contribution plan. It expected 2017 capital expenditures to be below 2016 levels.
- Financing commitments totaled $13.467B and related to customers Boeing believed had below-investment-grade credit. The company said it did not expect to fund a significant portion, but noted funding needs could exceed historical levels. The Export-Import Bank’s lack of a board quorum could limit financing for non-U.S. customers.
- Other exposures include $520M of environmental remediation liabilities; the high end of reasonably possible remediation costs exceeded recorded liabilities by $852M. Boeing also disclosed $3.858B of standby letters of credit and surety bonds. It said pending legal matters were not expected, based on current information, to have a material effect.
- Boeing expected to adopt the new revenue standard in 2018 and anticipated a material impact on reported income statement and balance sheet amounts. Its preliminary estimate included an approximately $1.0B increase to retained earnings at adoption and approximately $20B increases in both assets and liabilities, primarily from customer advances reclassified as liabilities.
- Boeing Global Services became operational July 1, 2017; the company expected to report four principal segments beginning in Q3 2017.
Important facts for investors to verify
- Whether earnings and cash generation remain strong after accounting for pension-related benefits, prior-period program charges, working-capital movements and customer advances.
- Progress and cost estimates for the 787, 747 and KC-46A programs, including delivery schedules, production plans and potential additional losses.
- Whether planned pension contributions, repurchases and dividends affect liquidity, debt and the already negative reported equity balance.
- Potential customer-funding requirements under financing commitments, and developments affecting U.S. government budgets and Export-Import Bank financing.
- Final implementation effects of the 2018 revenue-recognition standard and changes to segment reporting.