Boeing Co. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing is an annual report, not a standalone Q4 filing; quarterly results are noted below where relevant. Amounts are in U.S. dollars.
Business context
Boeing operates Commercial Airplanes, three Boeing Defense, Space & Security (BDS) businesses, Boeing Capital Corporation (BCC), and Other. Commercial Airplanes and BDS are its principal businesses. In 2009, U.S. government contracts generated 43% of revenue, and non-U.S. customers accounted for approximately 42%.
Financial performance and position
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue | $68.281 billion | $60.909 billion |
| Operating earnings | $2.096 billion | $3.950 billion |
| Operating margin | 3.1% | 6.5% |
| Net earnings | $1.312 billion | $2.672 billion |
| Diluted EPS | $1.84 | $3.67 |
| Cash from operations | $5.603 billion | $(0.401) billion |
| Capital expenditures | $1.186 billion | $1.674 billion |
| Cash and short-term investments at year-end | $11.223 billion | $3.279 billion |
| Total debt at year-end | $12.924 billion | $7.512 billion |
| Shareholders’ equity at year-end | $2.225 billion | $(1.142) billion |
| Contractual backlog | $296.5 billion | $323.9 billion |
Revenue increased 12%, principally because Commercial Airplanes delivered 481 aircraft versus 375 in 2008, when the IAM strike disrupted production. Operating earnings fell 47%; reported operating margin was pressured by Commercial Airplanes’ loss. Cash from operations improved substantially, including as strike-related inventory was delivered. Operating cash flow less capital expenditures was approximately $4.4 billion. Boeing declared dividends of $1.68 per share.
Commercial Airplanes revenue rose to $34.051 billion, but the segment recorded an operating loss of $583 million (a negative 1.7% margin), versus earnings of $1.186 billion in 2008. BDS revenue was $33.661 billion and operating earnings were $3.299 billion (9.8% margin). BCC revenue was $660 million and operating earnings were $126 million.
In Q4 2009, revenue was $17.937 billion and net earnings were $1.268 billion, compared with Q4 2008 revenue of $12.664 billion and a net loss of $86 million. Q3 2009 included a net loss of $1.564 billion.
Material changes and unusual items
- Boeing expensed $2.693 billion for the first three 787 flight-test aircraft after concluding they could not be sold: $2.481 billion was reclassified from inventory and $212 million was additional 2009 production cost. It expects further flight-test costs in 2010.
- The 747 program incurred $1.352 billion of additional reach-forward losses in 2009, following a $685 million charge in 2008. The year-end forward-loss liability was part of $2.738 billion in accrued forward-loss recognition, primarily relating to the 747 and AEW&C programs.
- Commercial Airplanes’ contractual backlog declined to $250.5 billion from $278.6 billion, reflecting deliveries exceeding orders, order cancellations and changes in projected escalation. Total contractual backlog declined about 8%.
- Boeing issued $5.961 billion of debt and contributed $1.5 billion of its shares to pension plans. Pension plans were underfunded by $6.356 billion under GAAP at year-end, compared with $8.420 billion in 2008.
- BCC’s financing portfolio fell to $5.666 billion; its valuation allowance rose to 2.5% of total receivables from 2.1%, and its debt-to-equity ratio rose to 5.8-to-1 from 5.0-to-1.
Outlook, management commentary and risks
- Management expected 2010 operating cash flow to be lower as Boeing built inventory ahead of 787 and 747-8 deliveries, and capital spending to be higher due to construction of a second 787 final-assembly line in North Charleston.
- Boeing targeted 787 certification and first delivery in Q4 2010; the flight-test program was expected to continue through 2010. The first 747-8 Freighter flight was expected in Q1 2010 and first delivery in Q4 2010. These were expectations, not guarantees.
- Management described near-term airline-market indicators as improving, while noting persistent uncertainty. Airlines faced weak passenger and cargo traffic, financing constraints, bankruptcies and requests to cancel, modify or reschedule orders. Boeing’s long-term forecast anticipated 5% annual traffic growth and a $3.2 trillion market for 29,000 aircraft over 20 years.
- Boeing expected lower BDS revenue in 2010 in Network & Space Systems, primarily because of lower BCTM and GMD program activity. Management also cited U.S. defense budget pressures, acquisition reform and potential program restructuring or cancellation.
- Major risks include fixed-price cost overruns and further program delays; supplier and production execution; airline credit quality and aircraft values; government funding and contract changes; labor disruptions; and the sensitivity of program accounting estimates. A 1% change in estimated combined BDS contract margins would change pretax income by approximately $337 million; a 1% change in Commercial Airplanes cost-of-sales estimates, excluding the 747, would change pretax income by approximately $275 million.
- Contingencies include the Sea Launch bankruptcy, with up to $438 million of potential additional pretax charges if recoveries fail; a potential ULA-related loss of up to $382 million; and an estimated potential uninsured exposure of about $360 million for a planned 2010 satellite launch. The A-12 litigation also carried significant potential exposure: Boeing disclosed a possible total of approximately $1.690 billion in pretax charges under specified adverse outcomes. These are contingent exposures, not recorded losses at those maximum amounts.
- Environmental remediation liabilities were $706 million; Boeing’s reasonably possible highest-cost estimate exceeded recorded liabilities by $948 million. Credit-rating outlooks were negative at Fitch and Moody’s; S&P’s outlook was stable.
Investor verification priorities
- Track 787 certification, delivery timing, production ramp, remaining flight-test aircraft costs and any further customer or supplier claims.
- Review 747-8 cost estimates, production-rate assumptions, delivery-price escalation and the adequacy of the recorded reach-forward-loss provision.
- Assess whether airline demand, cancellations and rescheduling affect Commercial Airplanes backlog, cash generation and BCC credit losses or collateral values.
- Monitor debt growth, liquidity access, pension funding and 2010 cash-flow and capital-spending outcomes against management’s stated expectations.
- Follow developments and potential recoveries in Sea Launch, ULA, A-12, satellite-insurance and environmental matters; distinguish maximum exposures from amounts accrued.