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| BA > SEC Filings for BA > Form 10-Q on 22-Apr-2009 | All Recent SEC Filings |
22-Apr-2009
Quarterly Report
Consolidated Operating Results
The following table summarizes key indicators of consolidated results of
operations:
Three months ended
(Dollars in millions, except per share data) March 31
2009 2008
Revenues $ 16,502 $ 15,990
Earnings from operations $ 1,025 $ 1,799
Operating margins 6.2 % 11.3 %
Effective income tax rate 34.0 % 34.9 %
Net earnings from continuing operations $ 615 $ 1,206
Diluted earnings per share $ 0.86 $ 1.62
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March 31 December 31
(Dollars in millions) 2009 2008
Contractual backlog $ 314,718 $ 323,860
Unobligated backlog 24,734 28,165
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Revenues
The following table summarizes revenues:
Three months ended
(Dollars in millions) March 31
2009 2008
Commercial Airplanes $ 8,554 $ 8,161
Integrated Defense Systems 7,720 7,575
Boeing Capital Corporation 163 185
Other 39 75
Unallocated items and eliminations 26 (6 )
Revenues $ 16,502 $ 15,990
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Revenues for the three months ended March 31, 2009 grew $512 million, a 3% increase compared with the same period in 2008. Commercial Airplanes revenues increased by $393 million a 5% increase, due to higher new airplane deliveries partially offset by decreased commercial aviation support business. Integrated Defense Systems (IDS) revenues increased by $145 million due to increased volume in Global Services and Support (GS&S), more than offsetting decreases in Boeing Military Aircraft (BMA) and Network and Space Systems (N&SS). Boeing Capital Corporation (BCC) revenues decreased by $22 million primarily due to a decrease in the customer financing portfolio.
Earnings from Operations
The following table summarizes earnings from operations:
Three months ended
(Dollars in millions) March 31
2009 2008
Commercial Airplanes $ 417 $ 983
Integrated Defense Systems 709 860
Boeing Capital Corporation 37 61
Other (23 ) (50 )
Unallocated items and eliminations (115 ) (55 )
Earnings from operations $ 1,025 $ 1,799
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Operating earnings for the three months ended March 31, 2009 decreased by $774 million compared with the same period in 2008. Commercial Airplanes earnings decreased by $566 million compared with the same period in 2008 as the reach forward loss on the 747 program grew by $347 million and margins were reduced on other programs, both primarily due to lower projected delivery pricing on all programs associated with lower industry escalation indices and lower planned future production rates on several programs, somewhat offset by refined cost estimates. Increased research and development expense and higher infrastructure costs allocations related to 2008 schedule delays and strike also contributed to Commercial Airplanes earnings decrease. IDS earnings decreased by $151 million compared with the same period in 2008 primarily due to lower earnings in the BMA and N&SS segments offsetting GS&S earnings growth. BCC operating earnings decreased $24 million due to lower revenues, higher impairment expense and a provision for losses partially offset by lower interest expense.
The most significant expense items not allocated to segments are shown in the table below.
Three months ended
(Dollars in millions) March 31
2009 2008
Pension $ 23 $ (67 )
Postretirement (23 ) (20 )
Share-based plans (57 ) (30 )
Deferred compensation 23 61
Other unallocated items and eliminations (81 ) 1
Total $ (115 ) $ (55 )
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Other unallocated items and eliminations expense increased by $82 million in 2009 primarily due to timing of intercompany expense allocations and elimination of profit on intercompany items.
Unallocated pension and other postretirement expense represents the difference between costs recognized under Generally Accepted Accounting Principles in the consolidated financial statements and federal cost accounting standards required to be utilized by our business segments for U.S. government contracting purposes.
We recorded net periodic benefit cost related to pensions and other postretirement benefits of $454 million and $283 million for the three months ended March 31, 2009 and 2008. The increase was primarily due to higher amortization pension actuarial losses. Not all net periodic benefit cost is recognized in earnings in the period incurred because it is allocated to production as product costs and a portion remains in inventory at the end of the reporting period. A portion of pension and other
postretirement expense is recorded in the business segments and the remainder is included in unallocated pension and other postretirement expense.
Earnings from operations included the following amounts allocated to business segments and Other unallocated items and eliminations.
Other
Postretirement
(Dollars in millions) Pension Benefits
Three months ended March 31, 2009 2008 2009 2008
Net periodic benefit costs allocated
to business segments $ (242 ) $ (124 ) $ (134 ) $ (117 )
Net periodic benefit costs in Other
unallocated items and eliminations 23 (67 ) (23 ) (20 )
Net periodic benefit cost included
in Earnings from operations $ (219 ) $ (191 ) $ (157 ) $ (137 )
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Other Earnings Items
Three months ended
(Dollars in millions) March 31
2009 2008
Earnings from operations $ 1,025 $ 1,799
Other (loss)/income, net (36 ) 100
Interest and debt expense (57 ) (46 )
Earnings before income taxes 932 1,853
Income tax expense (317 ) (647 )
Net earnings from continuing operations $ 615 $ 1,206
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Other income for the three months ended March 31, 2009 decreased $136 million compared with the same period in 2008 primarily driven by a reduction in investment income of approximately $100 million.
The effective tax rates were 34.0% and 34.9% for the three months ended March 31, 2009 and 2008. The first quarter 2009 tax provision reflects a projected 2009 annual tax rate of 31.0% and discrete first quarter 2009 charges of $27 million. The first quarter 2008 tax provision was based on an estimated 2008 annual tax rate of 35.2% and discrete first quarter 2008 benefits of $5 million. The decrease in the annual effective tax rate as compared with the prior year was primarily due to Research and Development tax credit benefits that exist in 2009, but did not exist in the first quarter of 2008, partially offset by a reduction in deferred tax assets resulting from lower projected state income tax rates due to legislative changes enacted in the first quarter of 2009.
For additional discussion related to Income Taxes see Note 3.
Backlog
Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed and unobligated U.S. and non-U.S. government contract funding. The decrease in contractual backlog during the three months ended March 31, 2009 was primarily due to deliveries in excess of orders for our 737, 747, 767 and 777 programs, changes in projected revenue escalation and cancellations of 787 orders.
Unobligated backlog includes U.S. and foreign government definitive contracts for which funding has not been authorized. The decrease in unobligated backlog during the three months ended March 31, 2009 is primarily due to funding of existing multi-year contracts including the V-22, Future Combat Systems (FCS) and Chinook programs.
Segment Results of Operations
Commercial Airplanes
Business Environment and Trends
The world economy grew at an average 3.5% annual rate between 2004 and 2008 compared with the long-term trend rate of 3.2%. The global economy is now forecasted to contract in 2009.
The air transport industry incurred estimated losses of $8.5 billion in 2008 and is estimated to incur $4.7 billion of losses in 2009. Given recent financial market volatility and economic impacts, the near-term profit outlook for global airlines is uncertain. Forecasted airline losses in 2009 are concentrated outside the United States. Approximately 90% of our Commercial Airplanes' backlog is destined for non-U.S. airlines.
Air cargo traffic is currently contracting. Air cargo traffic declined approximately 20% in the fourth quarter of 2008. Early 2009 reports show this rate continuing and even accelerating for some carriers. World trade in 2009 is forecasted to decline for the first time since 1982 indicating continued near-term contraction and suggesting that air cargo will contract for the second straight year in 2009.
These conditions may cause customers to request cancellations, modifications, or rescheduling of their existing orders to meet revised fleet plans. Whether such requests will result in a material adverse impact on our earnings, cash flow or financial position depends on a number of factors including whether the request is granted, the type of aircraft, how much compensation is paid to us for costs already incurred and our ability to reschedule other orders to replace those canceled, modified, or rescheduled.
In April 2009, we announced a plan to reduce production rates on the 777 and to delay planned increases to 747 and 767 production rates in response to requests from customers. These changes are not expected to affect 2009 revenues but did reduce margins on airplane programs and increased the reach-forward loss on the 747 program. Separately, changes in escalation price indices during the three months ended March 31, 2009 also reduced margins on all programs and increased the reach-forward loss on the 747 program. The reduction in escalation indices had the effect of lowering estimated revenues for deliveries after 2009. The escalation indices are driven by commodity and other inflation price indices and could remain volatile in the current economic environment.
Operating Results
Three months ended
(Dollars in millions) March 31
2009 2008
Revenues $ 8,554 $ 8,161
Earnings from operations $ 417 $ 983
Operating margins 4.9 % 12.0 %
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March 31 December 31
(Dollars in millions) 2009 2008
Contractual backlog $ 266,023 $ 278,575
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Revenues
Year over year changes in Revenue are shown in the following table:
Three months ended
March 31, 2009
(Dollars in millions) vs March 31, 2008
New airplane sales $ 602
Commercial aviation services business (203 )
Other (6 )
Total $ 393
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Revenues for the three months ended March 31, 2009 increased by $393 million compared with the same period of 2008. This increase in revenue was primarily attributable to higher new airplane deliveries. The decrease in revenues from commercial aviation services business was driven by decreased passenger to freighter conversions.
Commercial jet aircraft deliveries, including intercompany deliveries were as follows:
Program 737 747 767 777 Total
Cumulative deliveries as of 3/31/2009 2,847 1,414 972 771
Deliveries during the first quarter of 2009 91 4 3 23 121
Cumulative deliveries as of 12/31/2008 2,756 1,410 969 748
Deliveries during the first quarter of 2008 87 4 3 21 115
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Earnings from Operations
Earnings from operations for the three months ended March 31, 2009 decreased by $566 million and operating margins decreased by 7.1 percentage points to 4.9% compared with the same period of 2008. The reach forward loss on the 747 program grew by $347 million and margins were reduced on other programs, both primarily due to lower projected delivery pricing associated with the lower industry escalation indices and lower planned future production rates on the 747, 767 and 777 programs, somewhat offset by refined cost estimates. The escalation and production rate impact, together with warranty and other expenses drove reduced earnings on other programs of $135 million. Higher infrastructure cost allocations related to the 787 and 747-8 schedule delays announced in 2008 and infrastructure costs incurred during the 2008 IAM strike reduced earnings by $115 million. Lower commercial aviation services volume primarily due to fewer passenger to freighter conversions reduced earnings by $69 million. A $78 million increase in research and development costs was primarily due to lower supplier cost sharing payments. These decreases were offset by increased earnings of $178 million from new airplane deliveries.
Backlog
The decrease in contractual backlog during the three months ended March 31, 2009 compared with December 31, 2008 was due to deliveries in excess of orders for our 737, 747, 767 and 777 programs, changes in projected revenue escalation and cancellations of 787 orders.
A number of our customers may have contractual remedies that may be implicated by program delays. We continue to address customer claims and requests for other contractual relief as they arise. However, once orders are included in firm backlog, orders remain in backlog until canceled or fulfilled, although the value of orders is adjusted based upon changing revenue escalation assumptions and as changes to price and schedule are agreed to with customers.
Accounting Quantity
The accounting quantities, undelivered units under firm orders and percentage of
anticipated orders included in the program accounting estimates as compared with
the number of cumulative firm orders were as follows:
Program
As of 3/31/2009 737 747 767 777 787
Program accounting quantities 4,200 1,499 1,023 1,050 *
Undelivered units under firm orders1 2,203 110 67 331 878
Cumulative firm orders2 5,050 1,524 1,039 1,102
Program
As of 12/31/2008 737 747 767 777 787
Program accounting quantities 4,200 1,499 1,023 1,050 *
Undelivered units under firm orders1 2,270 114 70 350 910
Cumulative firm orders2 5,026 1,524 1,039 1,098
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* The accounting quantity for the 787 program will be determined in the year of first airplane delivery, targeted for 2010.
1 Undelivered units are not adjusted for cancellations subsequent to March 31, 2009 and December 31, 2008.
2 Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders.
737 Program There was no change in the accounting quantity for the 737 program during the three months ended March 31, 2009.
747 Program There was no change in the accounting quantity for the 747 program during the three months ended March 31, 2009. In the third quarter of 2008, we increased our cost estimates to incorporate the anticipated schedule delay and design changes and reduced margins on the 747 program to zero. We experienced further cost growth in the fourth quarter of 2008 and recorded a charge of $685 million to recognize a reach-forward loss. The charge was primarily related to higher than anticipated costs due to late changes to wing design which drove new load requirements into the fuselage and created other statement of work changes for our suppliers. Design and load changes also reduced commonality with the 747-400 and resulted in increased costs for components and systems. Higher pension costs, infrastructure cost shifts, delays in transitioning certain components to suppliers and higher internal production costs also increased cost estimates. During the first quarter of 2009, an additional charge of $347 million was recorded. This charge was primarily caused by a reduction in projected delivery price increases associated with escalation and production rate changes. Delivery of the first 747-8 Freighter is targeted for the third quarter of 2010. Targeted delivery of the 747-8 Intercontinental has moved from the second quarter of 2011 to the fourth quarter of 2011. A gap between when the last 747-400 is produced and the first 747-8 is delivered will contribute to lower 747 program revenues until deliveries of the 747-8 begin. We believe that the cost and revenue estimates incorporated in the financial statements are appropriate; however, this remains a development program, with the associated inherent risks.
767 Program There was no change in the accounting quantity for the 767 program during the three months ended March 31, 2009. In April 2009, we announced a delay in previous plans to increase production.
777 Program There was no change in the accounting quantity for the 777 program during the three months ended March 31, 2009. Delivery of the first 777 Freighter occurred in February 2009. In April 2009, we announced that we will lower the production rate on our 777 airplane program, affecting deliveries beginning in June 2010.
787 Program We are in the final stages of assembly of the initial airplanes and planning for flight test. The risks that are always inherent in the latter stages of new airplane program production remain. We continue to address challenges associated with assembly of the first few airplanes, including management of our extended global supply chain, completion and integration of traveled work, weight and systems integration. We are also continuing efforts to satisfy customer mission and performance needs in light of the anticipated weight of their respective aircraft. First flight of the 787-8 is targeted for the second quarter of 2009 with delivery in the first quarter of 2010. The schedule reflects the cumulative impacts of disruption caused by the 2008 IAM strike, the requirement to replace certain fasteners in early production airplanes, as well as the impact from the challenges mentioned above. We continue to work with our customers and suppliers to assess the specific impacts of schedule changes, including delivery delays and supplier assertions associated with such changes. A number of our customers have contractual remedies that may be implicated by our revised plan for the 787. We continue to address customer claims and requests for other contractual relief as they arise.
Additional Considerations
In 2008, we announced delays and challenges on the 787 and 747-8 programs. In addition, we recorded reach-forward losses on the 747 program in 2008 and 2009. These events highlight the risks that are always inherent in new airplane programs and new derivative airplanes. Costs related to development of new programs and derivative airplanes are generally expensed as incurred. Costs to produce new aircraft are included in inventory and accounted for using program accounting. Airplane programs have risk for reach-forward losses if our estimated production costs exceed our estimated program revenues for the accounting quantity. Generally commercial airplanes are sold on a firm fixed-price basis with an indexed price escalation clause and are often sold several years before scheduled delivery. Each customer purchase agreement contains an escalation clause to account for the effects of economic fluctuations over the period of time from airplane sale to airplane delivery. A price escalation formula based on pre-defined factors is used to determine the final price of the airplane at the time of customer delivery. While firm fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost overruns. Many new airplanes and derivatives have highly complex designs and require extensive coordination and integration with supplier partners. As technical or quality issues arise, we may experience schedule delays and higher costs to complete new programs and derivative aircraft. Additionally, price escalation factors may also impact margins by reducing the estimated price of airplanes delivered in the future. Both of these factors may ultimately result in a material charge if the program has or is determined to have a reach forward loss. Changes to estimates of the program accounting quantity, production costs and rates, learning curve, costs of derivatives, customer negotiations/settlements, supplier claims and certification issues could also result in lower margins or reach-forward losses. While we believe the cost and revenue estimates incorporated in the financial statements are appropriate, the technical complexity of these programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, order cancellations or other financially significant exposure.
Integrated Defense Systems
Business Environment and Trends
In April 2009, the U.S. Department of Defense announced changes it is recommending for inclusion in the fiscal year 2010 budget that the White House submits to Congress. These changes if included in the budget and then approved by Congress could reduce future funding for a number of our programs including C-17, FCS, and F-22 Raptor. We will continue to evaluate the defense budget as it progresses through Congress.
IDS Realignment
Effective January 1, 2009, certain programs were realigned between IDS segments. Business segment data for all periods presented have been adjusted to reflect the realignment. See Note 13.
Operating Results
Three months ended
(Dollars in millions) March 31
2009 2008
Revenues $ 7,720 $ 7,575
Earnings from operations $ 709 $ 860
Operating margins 9.2 % 11.4 %
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March 31 December 31
(Dollars in millions) 2009 2008
Contractual backlog $ 48,695 $ 45,285
Unobligated backlog 24,312 27,719
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Revenues
IDS revenues for the three months ended March 31, 2009 increased by $145 million, a 2% increase from the same period in 2008. The increase was due to increased volume in GS&S, offset by decreases in BMA and N&SS.
Earnings from Operations
IDS operating earnings for the three months ended March 31, 2009 decreased $151 million and operating margins decreased 2.2% to 9.2% when compared to the same period in 2008. The decreased margin was due to lower margins in all three segments.
Backlog
IDS total backlog was $73,007 million at March 31, 2009, virtually unchanged from $73,004 million at December 31, 2008.
For further details on the changes between periods, refer to the discussions of the individual segments below.
Additional Considerations
Our business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases the associated financial risks are primarily in lower profit rates or program cancellation if milestones and . . .
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