Boeing Co. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context and financial performance
Boeing operates Commercial Airplanes, Defense, Space & Security (BDS), Boeing Capital and other activities. Commercial Airplanes accounted for 60% of 2012 revenue; BDS accounted for 40%. The company delivered 601 commercial aircraft during the year, including 46 787s.
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $81.698 billion | $68.735 billion |
| Operating earnings | $6.311 billion | $5.844 billion |
| Operating margin | 7.7% | 8.5% |
| Net earnings | $3.900 billion | $4.018 billion |
| Diluted EPS | $5.11 | $5.34 |
| Operating cash flow | $7.508 billion | $4.023 billion |
| Capital expenditures | $1.703 billion | $1.713 billion |
| Cash and cash equivalents at year-end | $10.341 billion | $10.049 billion |
| Total debt at year-end | $10.409 billion | $12.371 billion |
| Working capital | $12.327 billion | $8.536 billion |
| Contractual backlog | $372.355 billion | $339.657 billion |
Revenue rose 19%, mainly on higher commercial-aircraft deliveries. Operating earnings increased 8%, but the operating margin declined. Net earnings fell 3%, with a higher effective tax rate of 34.0% versus 25.6% contributing to the decline. Operating cash flow less capital expenditures was approximately $5.8 billion, a derived measure.
Fourth quarter: Revenue was $22.302 billion versus $19.555 billion in Q4 2011; net earnings were $978 million versus $1.393 billion, and diluted EPS was $1.28 versus $1.84.
Material changes and segment trends
- Commercial Airplanes: Revenue increased 36% to $49.127 billion and operating earnings rose to $4.711 billion. Margin eased to 9.6% from 9.7%, partly due to the delivery mix of the 787 and 747-8. Backlog increased to $317.287 billion.
- BDS: Revenue increased 2% to $32.607 billion, while operating earnings declined to $3.068 billion and margin fell to 9.4% from 9.9%. Network & Space Systems revenue and earnings decreased; Boeing Military Aircraft and Global Services & Support improved.
- Boeing Capital: Revenue fell to $441 million and operating earnings to $82 million, reflecting lower lease income and a smaller portfolio. Its financing portfolio was $4.066 billion at year-end.
- Contractual backlog increased approximately 10%, primarily because commercial-aircraft orders exceeded deliveries. U.S. government revenue, including foreign military sales through the U.S. government, declined to 33% of consolidated revenue from 37%.
Liquidity, obligations and other financial matters
Cash and short-term and other investments totaled $13.558 billion at year-end, compared with total debt of $10.409 billion. Boeing reported $4.6 billion of unused revolving credit capacity and no commercial-paper borrowings outstanding. Pension plans were underfunded by $19.7 billion on a GAAP basis; Boeing expected approximately $1.5 billion of discretionary pension contributions in 2013. Total contractual obligations were $177.558 billion, including $118.002 billion of purchase obligations not recorded on the balance sheet. Commercial-aircraft financing commitments were $18.083 billion.
Outlook, risks and unusual items
- 787 battery incidents: Two battery incidents occurred in January 2013. Regulators grounded the 787 fleet, and Boeing suspended deliveries pending regulatory clearance while production continued. The company could not estimate a loss or range; the eventual resolution could materially affect results, financial position or cash flow.
- Production and program risk: Boeing planned to increase 737, 777 and 787 production rates, and expected first 787-9 deliveries in early 2014. Management warned that the 787 faced substantial profitability pressure and that the 747 and 787 programs could incur material additional reach-forward losses. The 747 also faced weak freighter demand and unsold production positions beyond 2013.
- Defense spending: Potential U.S. sequestration and continuing budget constraints could reduce BDS revenue, cash flow, profit and backlog. The filing describes possible sequestration reductions but does not provide a clear company-specific quantified impact.
- Contract estimates: BDS relies on estimates for long-term contracts, including fixed-price development programs. Management estimated that a 1% change in BDS contract gross margin would change 2012 pre-tax income by approximately $326 million. Commercial-aircraft program estimates are also sensitive; Boeing disclosed that a 1% lower combined cost-of-sales estimate would have increased 2012 pre-tax income by approximately $420 million.
- Pensions and accounting: Pension and postretirement benefit costs rose, and the lower discount rate was expected to increase 2013 pension expense. Boeing’s 2012 results included $379 million of favorable cumulative contract catch-up adjustments across BDS contracts. The 2012 effective tax rate was elevated; legislation enacted in January 2013 was expected to provide an approximately $150 million 2012 R&D tax credit in Q1 2013.
- Contingencies: Recorded environmental remediation liabilities were $710 million; the high end of reasonably possible remediation costs exceeded recorded liabilities by $865 million. The Sea Launch receivable exposure was $356 million, with potential additional pre-tax charges up to that amount if recovery fails. The A-12 litigation could result in significant additional losses under adverse outcomes; Boeing disclosed potential pre-tax charges of approximately $1.741 billion in one such scenario.
- Capital returns: Boeing resumed its share repurchase program and expected repurchases of $1.5–$2.0 billion in 2013. The declared annual dividend increased to $1.81 per share from $1.70.
Management cited a positive long-term commercial aviation outlook, forecasting 5% annual passenger and cargo traffic growth over 20 years and a $4.5 trillion market for 34,000 new airplanes. These are forecasts, not guarantees. The filing provides no formal consolidated earnings or revenue guidance for 2013.
Most important facts for investors to verify
- Subsequent regulatory findings and the timing and financial effects of returning the 787 to service and resuming deliveries.
- 787 and 747 program cost estimates, deferred production costs, delivery schedules, and risk of reach-forward losses; also planned production-rate increases and 787-9 certification and delivery timing.
- Actual U.S. defense budget actions and their impact on Boeing’s funded programs, backlog and cash flows.
- Pension assumptions, required and discretionary contributions, and the effect of discount-rate changes on expense and funding.
- Recoverability of the Sea Launch receivable and developments in A-12, environmental, and other material contingencies.
- Conversion of backlog and financing commitments into funded orders, deliveries and cash receipts.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.