Boeing Co. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars unless otherwise noted.
Business context
Boeing operates Commercial Airplanes, Defense, Space & Security (BDS), and Boeing Capital. Commercial Airplanes develops and supports commercial jets; BDS supplies military aircraft, space, and defense systems; Boeing Capital provides selective customer financing. Commercial aviation generated 66% of 2014 revenue, while BDS generated 34%. Non-U.S. customers accounted for approximately 58% of revenue; U.S. government contracts, including foreign military sales, accounted for 30%.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $90.762 billion | $86.623 billion |
| Earnings from operations (GAAP) | $7.473 billion | $6.562 billion |
| Operating margin (GAAP) | 8.2% | 7.6% |
| Net earnings | $5.446 billion | $4.585 billion |
| Diluted EPS | $7.38 | $5.96 |
| Operating cash flow | $8.858 billion | $8.179 billion |
| Cash and cash equivalents | $11.733 billion | $9.088 billion |
| Total debt | $9.070 billion | $9.635 billion |
| Working capital | $11.068 billion | $13.588 billion |
| Contractual backlog | $487.092 billion | $422.661 billion |
Revenue increased 5%, mainly from higher commercial aircraft deliveries, while BDS revenue declined. Net earnings rose about 19%; diluted EPS rose about 24%. The effective tax rate fell to 23.7% from 26.4%, benefiting from tax-basis adjustments and federal audit settlements. Core operating earnings, a company-defined non-GAAP measure excluding specified pension and postretirement costs, were $8.860 billion, with a 9.8% margin, versus $7.876 billion and 9.1% in 2013.
Fourth-quarter revenue was $24.468 billion versus $23.785 billion; net earnings were $1.466 billion versus $1.233 billion, and diluted EPS was $2.02 versus $1.61.
Segment results
- Commercial Airplanes: Revenue rose 13% to $59.990 billion; operating earnings increased to $6.411 billion. Margin eased to 10.7% from 10.9%, reflecting delivery mix and the KC-46A charge. Deliveries rose to 723 from 648; contractual backlog grew to $440.118 billion.
- BDS: Revenue declined 7% to $30.881 billion and operating earnings declined to $3.133 billion. Margin improved to 10.1% from 9.7%; total backlog declined 8% to $61.913 billion.
- Boeing Capital: Revenue was $416 million and operating earnings were $92 million, down from $107 million. Customer financing assets were $3.561 billion.
Cash, debt, and liquidity
Operating cash flow increased to $8.858 billion. Capital expenditures were $2.236 billion, and the company said it expected 2015 capital expenditures to be higher to support growth. Financing activities used $8.593 billion, including $6.001 billion of share repurchases and $2.115 billion of dividends paid. Cash and cash equivalents rose, but short-term and other investments fell to $1.359 billion from $6.170 billion. Boeing reported approximately $5.0 billion of unused revolving credit capacity and no commercial-paper borrowings at year-end. Financing commitments for aircraft totaled $16.723 billion; Boeing expected alternative financing to limit its funding needs but gave no assurance.
Shareholders’ equity fell to $8.665 billion from $14.875 billion, in part reflecting a $4.009 billion other comprehensive loss, primarily pension-related. The GAAP pension underfunding increased to $17.3 billion from $10.5 billion, largely because the discount rate fell to 3.90% from 4.80%. Boeing stated that plans were more than 100% funded on an ERISA basis and expected minimal required contributions in 2015.
Material changes, outlook, and risks
- Commercial Airplanes drove growth; BDS revenue and backlog contracted. Total contractual backlog increased approximately 15%, primarily on commercial aircraft orders and funding reclassifications.
- Boeing recorded a $425 million reach-forward loss on the fixed-price KC-46A development contract, citing engineering and design issues requiring rework. It reported that contractual milestones had been met; low-rate initial production was expected to be authorized in 2015 subject to development progress.
- The 787 program remained under profitability pressure from production challenges, schedule changes, rework, and customer and supplier impacts. Boeing warned that additional claims or a material reach-forward loss could result if risks, production-rate increases, or 787-10 development are not managed. The 787 inventory included $26.149 billion of deferred production costs.
- The 747 program had breakeven or near-breakeven gross margins in 2014, unsold production positions, and a planned rate reduction. Boeing warned of a potentially material reach-forward loss if market and production risks are not mitigated. C-17 production was scheduled to end in 2015; unsold aircraft and supplier commitments could create further charges.
- Management’s industry outlook cited approximately 5% annual long-term passenger and cargo traffic growth and a projected $5.2 trillion market for about 37,000 new aircraft over 20 years. It expected lower oil prices to support airline profitability in 2015. These are market projections, not company revenue or earnings guidance.
- Key risks include commercial airline cyclicality and customer financing, production and certification execution, supplier performance and sole-source dependencies, intense competition, U.S. defense budget uncertainty, fixed-price contract cost overruns, pension assumptions, environmental liabilities, litigation, cyber and operational disruptions, and Russia/Ukraine-related supply or customer disruption. Boeing reported no significant production or delivery disruption from Russia/Ukraine to date.
- Recorded environmental remediation liabilities were $601 million; the high end of reasonably possible costs exceeded the recorded liability by $874 million. Unrecognized tax benefits were $1.312 billion. Boeing also disclosed unresolved litigation and contingent exposures, including Sea Launch receivables of $356 million and ULA-related indemnifications; outcomes and potential losses are uncertain.
- Other notable items: Boeing repurchased $6.001 billion of shares and authorized a new $12 billion repurchase plan. It announced that most nonunion and participating union employees would transition from defined-benefit pensions to a company-funded defined-contribution plan in 2016. The research tax credit expired at year-end 2014; Boeing said failure to extend it would adversely affect the 2015 effective tax rate.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track KC-46A development costs, milestones, production-option decisions, and whether further loss provisions are needed.
- Assess Boeing’s 787 production execution, deferred-cost recovery assumptions, customer claims, and progress toward program profitability; also monitor 747 demand and unsold positions.
- Reconcile cash generation with inventory growth, customer advances, capital spending, repurchases, and dividends; review the decline in working capital and investments.
- Monitor pension discount rates, funded status, contributions, and the effect of the 2016 retirement-plan transition on costs and cash flows.
- Review BDS funding and backlog trends, the potential C-17 and F/A-18 production impacts, and the company’s exposure to fixed-price development contracts.
- Follow the resolution and any updated estimates for environmental matters, litigation, tax positions, financing commitments, and ULA/Sea Launch contingencies.