Boeing Co. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited; Deloitte & Touche performed an interim review, not an audit. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $22.130 billion | $20.008 billion | $62.838 billion | $59.396 billion |
| Operating earnings (GAAP) | $1.803 billion | $1.559 billion | $5.047 billion | $4.666 billion |
| Operating margin (GAAP) | 8.1% | 7.8% | 8.0% | 7.9% |
| Net earnings | $1.158 billion | $1.032 billion | $3.352 billion | $2.922 billion |
| Diluted EPS | $1.51 | $1.35 | $4.36 | $3.84 |
| Operating cash flow | Not separately stated | Not separately stated | $6.799 billion | $3.341 billion |
Management’s non-GAAP core operating earnings were $2.143 billion for Q3 and $6.038 billion for the nine months, excluding specified unallocated pension and postretirement costs; core diluted EPS was $1.80 and $5.20, respectively. These measures are not substitutes for GAAP results.
Business context and material changes
- Commercial Airplanes drove growth: nine-month revenue rose 10% to $38.301 billion and operating earnings increased to $4.289 billion from $3.445 billion. Deliveries reached 476 aircraft versus 436 in the first nine months of 2012.
- Defense, Space & Security revenue was broadly flat at $24.342 billion, while operating earnings declined to $2.281 billion from $2.317 billion. Lower Boeing Military Aircraft results were partly offset by Network & Space Systems and Global Services & Support.
- Total contractual backlog increased to $395.188 billion from $372.355 billion at year-end 2012, primarily on commercial orders exceeding deliveries, partly offset by cancellations.
- Research and development expense declined to $2.223 billion from $2.545 billion, mainly due to lower 787 spending. Pension and postretirement costs increased, including higher amortization of actuarial losses.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $10.041 billion; short-term and other investments were $5.870 billion. Total debt was approximately $9.596 billion, comprising $919 million current and $8.677 billion long-term.
- Current assets were $64.162 billion and current liabilities $49.680 billion. The balance sheet also included $41.240 billion of inventory and $20.216 billion of advances and billings in excess of related costs.
- Nine-month operating cash flow increased $3.458 billion year over year, with management attributing the improvement primarily to higher customer advances and progress billings. These increased $5.4 billion in the period, compared with $0.9 billion in the prior-year period.
- Investing cash outflow was $4.082 billion and financing cash outflow $2.993 billion. Boeing repurchased $1.799 billion of shares, paid $1.102 billion in dividends, and made $1.513 billion of discretionary pension contributions. Capital expenditures were $1.460 billion.
- Boeing reported $4.6 billion of unused revolving credit capacity and no commercial paper outstanding. It said it was in compliance with debt and credit-facility covenants.
Outlook, commentary and principal risks
- Management expected capital expenditures to remain elevated through the rest of 2013 to support growth, and said 2013 share repurchases were expected to exceed its prior $1.5–$2 billion estimate.
- Production plans included a 737 rate increase to 42 per month in 2014; a 777 rate of 8.3 per month; and a planned 787 rate of 10 per month by year-end 2013, with first deliveries at that rate expected in early 2014. The 787-9 was targeted for first delivery in mid-2014 and the 787-10 in 2018. These are forward-looking targets, not guarantees.
- The 747 production rate was scheduled to fall to 1.5 per month starting February 2014 amid weak cargo demand and pricing pressure. Boeing decided to end C-17 production in 2015; it recorded a $92 million charge, primarily for pension curtailment. It also recorded a $64 million charge related to South Korea restarting its fighter competition.
- The 747 and 787 programs were described as having breakeven or near-breakeven gross margins. Boeing warned that production, schedule, supplier, customer-claim, rate-increase and derivative-development risks could materially pressure profitability or result in reach-forward losses. 787 deferred production costs and unamortized tooling were substantial, and recovery partly depended on expected future orders.
- U.S. defense sequestration and spending limits could cause contract reductions, delays or cancellations; Boeing said the program-level effects were not yet determinable. Fixed-price development contracts also carry cost and schedule risk.
- Significant contingencies include $689 million of recorded environmental remediation liabilities, with the high end of the estimated reasonably possible range exceeding recorded amounts by $905 million; A-12 litigation, with potential outcomes ranging from a further loss of up to $1.748 billion to a possible recovery; and $356 million due from former Sea Launch partners that Boeing was pursuing in court.
- Boeing cited possible IRS audit resolutions within 12 months that could increase earnings by up to $420 million based on current estimates. The LightSquared bankruptcy also creates possible loss exposure on $112 million of unbillable receivables.
- Management identified airline demand, aircraft production and certification, U.S. government budgets, supplier performance, fixed-price contracts, litigation, pension assumptions and customer-financing collateral values among key risks. No significant market-risk changes were reported.
Most important facts for investors to verify
- Whether 787 production increases, deliveries and derivative schedules are achieved, and whether program costs and deferred production balances remain recoverable.
- Whether 747 demand, pricing and production reductions avoid a material reach-forward loss.
- Whether operating cash flow remains supported by customer advances, and how inventory and working-capital needs evolve.
- How sequestration and other U.S. budget actions affect defense programs, backlog and margins.
- Progress and financial outcomes in the A-12, Sea Launch, tax-audit, environmental and other disclosed contingencies.
- Actual full-year capital spending and share repurchases compared with management’s stated expectations.