BOEING CO quarterly report, Q3 FY2012

Boeing Co. — Q3 2012 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2012. Unaudited interim financial statements were reviewed by Deloitte; the filing notes that interim results are not necessarily indicative of full-year results.

Financial performance

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Revenue	$20.008 billion	$17.727 billion	$59.396 billion	$49.180 billion
Operating earnings	$1.564 billion	$1.714 billion	$4.682 billion	$4.247 billion
Operating margin	7.8%	9.7%	7.9%	8.6%
Net earnings from continuing operations	$1.034 billion	$1.094 billion	$2.925 billion	$2.624 billion
Diluted EPS	$1.35	$1.46	$3.84	$3.49

Revenue growth was driven mainly by Commercial Airplanes, up 37% for the nine months and 28% for Q3, reflecting higher deliveries. Commercial Airplanes revenue was $34.966 billion for the nine months; segment operating margin was 9.9%, unchanged year over year. Q3 margin fell to 9.5% from 11.4%.
Defense, Space & Security (BDS) revenue rose 3% for the nine months but declined 4% in Q3. Nine-month segment margin was 9.5%, versus 9.8% a year earlier. Boeing Capital revenue declined, while its Q3 earnings improved on lower asset impairment expense.
Nine-month operating earnings benefited from higher Commercial Airplanes earnings, a favorable litigation resolution, and lower unallocated postretirement expense. Higher unallocated pension expense partly offset those gains. Q3 operating earnings declined 9% year over year.
Cash dividends paid were $0.44 per share in Q3 and $1.32 for the nine months, compared with $0.42 and $1.26, respectively, in 2011.

Cash flow, balance sheet and liquidity

Nine-month operating cash flow was $3.341 billion, versus $1.092 billion in 2011. The improvement reflected higher earnings and slower inventory growth, partly offset by larger pension contributions.
Investing activities used $4.593 billion, principally reflecting net investment contributions, compared with $856 million provided in 2011. Financing activities used $2.234 billion, including $1.273 billion of debt repayments and $990 million of dividends.
Cash and cash equivalents were $6.582 billion at September 30, down from $10.049 billion at year-end 2011. Short-term and other investments were $4.590 billion, up from $1.223 billion.
Total debt was $11.186 billion, including $2.172 billion classified as short-term, compared with $12.371 billion at December 31, 2011. The filing reports $4.6 billion of available revolving credit capacity, including $1.5 billion reserved for Boeing Capital; no commercial paper was outstanding. Boeing reported compliance with debt and credit-facility covenants.
Total assets were $83.654 billion and shareholders’ equity was $7.588 billion. Inventory rose to $36.817 billion from $32.240 billion, including substantial 787 program work in process and deferred production costs.
Contractual backlog increased to $357.739 billion from $339.657 billion at year-end; unobligated backlog rose to $19.924 billion from $15.775 billion.

Material changes, outlook and commentary

Commercial aircraft deliveries increased to 436 in the first nine months, from 349 a year earlier; 787 deliveries were 23 versus one. Boeing reported 149 total deliveries in Q3 versus 127.
Production plans included increasing 737 output to 38 per month in 2013 and 42 in 2014; increasing 777 production to 8.3 per month in 2013; and raising 787 final-assembly production to 10 per month by year-end 2013, with deliveries at that rate expected in early 2014. First 787-9 delivery was expected in early 2014; first 737 MAX delivery was expected in 2017.
Management identified continuing 787 and 747-8 production, rework, cost and customer/supplier issues. Boeing said these programs had low margins on deliveries to date and could face additional claims, pressure on profitability or reach-forward losses if risks are not mitigated. The 747-8 outlook was also exposed to a weak air-cargo market.
Boeing expected 2012 capital expenditures to exceed 2011, partly to support commercial production-rate increases. The filing gives no consolidated earnings or revenue guidance.
Defense budget sequestration scheduled to begin in January 2013 could reduce defense and other government spending and lead to program cancellations or delays; the filing cited OMB estimates of reductions of about 9.4% in non-exempt defense discretionary accounts and 8.2% in non-defense budgets. Continuing appropriations were enacted through March 27, 2013.
Fixed-price development contracts, including the KC-46A, AEW&C, India P-8I, Saudi F-15 and satellite programs, carry cost and schedule risks. Boeing said changes in estimates could reduce margins or result in material charges.
The C-17 backlog included five U.S. Air Force and 12 international aircraft. If further orders do not materialize, Boeing said it could decide in 2013 to end production at a future date; the potential financial impact remained under evaluation.
The SPEEA collective bargaining agreement covering approximately 23,600 employees expired October 6, 2012; negotiations were ongoing, with employees committed to work through November 25 under a termination notice.

Contingencies and unusual items

Favorable BDS cumulative contract catch-up adjustments, net of reach-forward losses, added $308 million to nine-month operating earnings and $74 million in Q3, versus $178 million and $25 million in the comparable 2011 periods.
Warranty liabilities rose to $1.381 billion from $1.046 billion at year-end, including $212 million of changes in estimates. Environmental remediation liabilities were $762 million; the high end of the reasonably possible cost range exceeded recorded liabilities by $925 million.
The A-12 litigation remains unresolved. Boeing disclosed potential additional pre-tax charges of up to $1.738 billion in an adverse outcome, including possible repayment and interest; a favorable outcome could result in approximately $1.185 billion of recovery.
Boeing carried $356 million of Sea Launch-related receivables subject to contested recovery claims; failure to recover could lead to additional pre-tax charges up to that amount. LightSquared entered Chapter 11; Boeing reported $112 million of related unbillable receivables and said it did not expect losses, citing its rights in the satellite and related assets.
Other material exposures include $17.998 billion of aircraft financing commitments, $4.621 billion of standby letters of credit and surety bonds, and ULA indemnification matters that could result in losses, including up to $317 million for disputed costs and up to $280 million related to contract pricing claims.
American Airlines’ bankruptcy exposure included $556 million in Boeing customer financing receivables; Boeing said it considered the receivables sufficiently collateralized and had recorded no related loss allowance.

Most important facts for investors to verify

Whether planned 787, 737, 777 and 747-8 production increases are achieved without further cost overruns, delivery disruption or reach-forward losses.
How much of 787 deferred production costs and other program inventory is ultimately recovered, particularly the $5.117 billion tied to expected future orders.
Effects of U.S. defense budget reductions, sequestration and contract funding decisions on BDS backlog, margins and fixed-price programs.
Developments in the A-12 case, Sea Launch recovery efforts, ULA indemnification claims and other disclosed legal or environmental contingencies.
Cash generation and liquidity as inventory and capital spending grow, and the extent to which Boeing must fund its aircraft financing commitments.