Boeing Co. (BA) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Boeing manufactures commercial aircraft, defense and space systems, and provides related services. The interim financial statements were reviewed by Deloitte; a review is narrower in scope than an audit.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $15.751B | $24.258B | $38.668B | $47.640B |
| Operating income (loss) | ($3.380B) | $2.710B | ($1.030B) | $5.585B |
| Operating margin | (21.5%) | 11.2% | (2.7%) | 11.7% |
| Net income (loss) | ($2.942B) | $2.196B | ($793M) | $4.673B |
| Diluted EPS | ($5.21) | $3.73 | ($1.40) | $7.88 |
| Operating cash flow | Not presented by quarter | $2.198B | $7.816B |
Q2 cost of sales was 113.1% of revenue, versus 80.5% a year earlier, reflecting the sharp revenue decline associated with the 737 MAX grounding. Six-month commercial aircraft deliveries fell to 239 from 378, including 113 737s versus 269.
At June 30, cash and cash equivalents were $9.167B; total recorded debt was approximately $19.2B, including $4.4B classified as short-term. Boeing reported $6.6B of unused revolving credit capacity. Total current assets were $95.111B and current liabilities $92.189B. Total equity was negative $4.943B. Backlog was $474.251B, down from $490.481B at year-end 2018.
Material changes and segment performance
- Revenue declined $8.507B in Q2 and $8.972B for the first half year over year. Commercial Airplanes revenue fell sharply; Defense, Space & Security and Global Services revenue increased.
- Boeing recorded a $5.610B Q2 charge for estimated customer concessions and other considerations related to 737 MAX disruption and delivery delays, net of estimated insurance recoveries of $500M. The estimate depends on uncertain assumptions and negotiations.
- Commercial Airplanes recorded a six-month operating loss of $3.773B, compared with $3.197B operating income in 2018. Defense, Space & Security operating income increased to $1.822B from $1.133B; Global Services rose to $1.340B from $1.251B.
- Operating cash flow dropped to $2.198B from $7.816B, with increased inventory spending and lower growth in customer advances contributing. Inventories rose to $68.492B from $62.567B at December 31, primarily reflecting commercial aircraft inventory and the suspended 737 MAX deliveries.
- Debt increased from $13.847B at year-end to $19.216B. Boeing issued $5.0B of senior notes during the first half and reported $11.670B of new borrowings and $6.422B of repayments. It paid $2.317B in dividends and repurchased $2.651B of shares; repurchases were suspended.
Outlook, risks and contingencies
- The 737 MAX remained grounded, with deliveries suspended pending regulatory clearance. Boeing was developing software updates and pilot training; the FAA also required changes addressing a flight condition unrelated to MCAS. Boeing said it would not offer the aircraft for certification until requirements were satisfied.
- For its Q2 estimates, Boeing assumed return-to-service regulatory approvals would begin early in Q4 2019, and production would gradually rise from 42 aircraft per month to 57 per month in 2020. These were assumptions, not assured outcomes. Boeing warned that further delays, production cuts or a temporary shutdown could materially affect results, financial position and cash flows; it could not reasonably estimate additional potential impacts.
- The lower 737 production rate increased estimated costs for aircraft in the current accounting quantity by $1.748B in Q2, following a $1.016B increase in Q1. Boeing continued to evaluate potential further production-rate reductions.
- Other exposures include ongoing accident-related lawsuits and government investigations for which Boeing could not estimate a range of loss; fixed-price development program risks, including KC-46A; $548M of recorded environmental remediation liabilities; and $14.277B of aircraft financing commitments. Boeing also noted U.S. government budget and appropriations uncertainty.
- Boeing expected 29% of its backlog to convert to revenue through 2020 and approximately 73% through 2023. No formal consolidated earnings or revenue guidance is provided in the supplied filing text.
- Management stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Actual timing and conditions for 737 MAX certification and return to service, and the pace of subsequent deliveries.
- Whether the $5.610B customer-concession estimate and production-cost assumptions prove sufficient, including any additional customer, supplier or insurance effects.
- Inventory growth, operating cash generation, debt levels and access to financing as the grounding continues.
- Commercial Airplanes program cost estimates and exposure to further losses or delays, including 777X and KC-46A development schedules and costs.
- Developments in accident-related litigation and investigations, and potential changes to other disclosed contingencies.