Boeing Q2 revenue fell 9% vs. 2009

The Boeing Company reported second-quarter net income of $800 million, or $1.06 per share, on revenue of $15.6 billion. The results reflect solid performance across the company's core businesses on lower volumes. The company also reaffirmed its 2010 revenue, earnings per share and operating cash flow outlook.

"Continued strong results from our major businesses drove another solid quarter of operational performance for the company," said Jim McNerney, Boeing chairman, president and chief executive officer. "We are making progress on key commercial and military development programs, our production programs and services businesses are running well, and our enterprise focus on productivity improvement is funding investment in growth while maintaining our financial strength. With our commercial markets recovering, and the priorities of our government customers gaining clarity, we remain well positioned for growth in 2011 and beyond."

Boeing's quarterly operating cash flow was $300 million, reflecting continued investment in development programs. For the first half of 2010, operating cash flow was ($19) million. Free cash flow* was $9 million in the quarter and ($0.5) billion in the first half (Table 2).  

Cash and investments in marketable securities totaled $10.0 billion at quarter-end (Table 3), down $0.4 billion on planned investments in development programs. Debt was unchanged in the quarter, and the company did not acquire any of its shares.

Total company backlog at quarter-end was $312 billion, down 1 percent in the quarter, as backlog for Defense, Space & Security declined during the period and was somewhat offset by an increase in Commercial Airplanes backlog.

Segment Results  

Commercial Airplanes

Boeing Commercial Airplanes second-quarter revenue was $7.4 billion, on 9 percent fewer airplane deliveries driven by anticipated seat supplier challenges and lower planned wide-body deliveries.  Operating margin was 9.2 percent as strong performance partially offset the impact of lower deliveries (Table 4).  

Commercial Airplanes booked 88 gross orders during the quarter while 20 orders were removed from its order book.  This contrasts with the year-ago period when net orders were five airplanes.  Contractual backlog remains strong with 3,304 airplanes valued at $252 billion, more than seven times the unit's projected 2010 revenue.  

The 787 program continued flight test during the quarter, as a fifth airplane joined the four airplanes already in the flight test program.  The Dreamliner completed key flight test milestones, including extreme weather, icing and cruise performance testing.  On July 1, the program completed another key milestone with the completion of 787-9 firm configuration.  First delivery continues to be planned for the end of this year, although there is added pressure to the schedule and risk that initial delivery may move a few weeks as the company completes flight test and certification requirements.  Total firm orders for the 787 program at quarter-end were 863 airplanes from 56 customers.  

The 747-8 program continued flight test during the quarter achieving expanded Type Inspection Authorization on June 11.  On July 22, the 747-8 added a fourth flight test airplane to its flight test fleet.  The company continues to work toward first delivery in the fourth quarter of 2010, although there is increasing pressure on that schedule and risk that it may move into early 2011.

Boeing Defense, Space & Security

Boeing Defense, Space & Security's second-quarter revenue declined 8 percent to $8.0 billion primarily on lower Network & Space Systems volume.  Operating margins were 8.9 percent on lower margins in military aircraft and services (Table 5).

Boeing Military Aircraft (BMA) second-quarter revenue rose 4 percent to $3.6 billion driven by higher Chinook deliveries and volume.  Operating margin was 9.9 percent, as strong execution across its programs was offset by the impact of labor disruptions and a charge on the Airborne Early Warning & Control program.  During the quarter, the DoD announced its intent to pursue a new F/A-18 and EA-18G multi-year contract, the US Air Force signed a contract for eight C-17's and three Wedgetail aircraft were delivered to Australia.

Network & Space Systems second-quarter revenue was $2.4 billion, reduced by expected lower volume on Brigade Combat Team Modernization and Ground-based Midcourse Defense (GMD).  Operating margin was 7.1 percent reflecting solid performance across the segment's array of programs.  During the quarter, GMD successfully completed a two stage flight test and the first Global Positioning System IIF-1 satellite was launched.

Global Services & Support (GS&S) revenue decreased by 3 percent to $2.0 billion on lower maintenance modifications and upgrades volume.  Operating margin was 9.2 percent, impacted by lower margins on integrated logistics and maintenance modifications and upgrades.  In this segment, the C-130 Avionics Modernization

Program entered production and the company was awarded contracts for the FAA Next-Generation Air Transportation System, and the US Air Force KC-10 cockpit upgrade.

Backlog at Defense, Space & Security is $60.6 billion, approximately two times the unit's projected 2010 revenue.  The backlog declined by $3.6 billion as run-off of multi-year contracts exceeded additions to backlog in the quarter.

Boeing Capital Corporation

Boeing Capital Corporation (BCC) reported second-quarter pre-tax earnings of $55 million compared to $36 million in the same period last year (Table 6).  Earnings improvement was primarily driven by lower asset impairments and provision for loss requirements.  During the quarter, BCC's portfolio balance declined to $5.3 billion, down from $5.7 billion at year end, on normal run-off, asset pre-payments and depreciation.  BCC's debt-to-equity ratio decreased to 5.3-to-1.

Additional Information

The "Other" segment consists primarily of Boeing Engineering, Operations and Technology, as well as certain results related to the financial consolidation of all business units.  Other segment expense was $72 million in the second quarter, up from $46 million in the same period last year driven by higher environmental remediation expense.

Total pension expense for the second quarter was $283 million, as compared to $207 million in the same period last year.  A total of $305 million was recognized in the operating segments in the quarter (up from $229 million in the same period last year), partially offset by a $22 million contribution to earnings in unallocated items.  

Unallocated expense was $70 million, down from $154 million in the same quarter last year, driven by lower deferred compensation expense.

Interest expense for the quarter was $132 million, up from $80 million in the same period last year due to debt issued in 2009.

Outlook

2010 financial guidance (Table 7) is reaffirmed for revenue, earnings per share, and operating cash flow, although the business segment margin guidance has been adjusted.  Capital expenditures guidance has been decreased.

Boeing's 2010 revenue guidance is reaffirmed at $64 billion to $66 billion.  Earnings guidance for 2010 remains at $3.50 to $3.80 per share and continues to include some provision for risks.  Operating cash flow guidance is reaffirmed at approximately zero in 2010, as the company continues to build inventory on key commercial development programs.

The company continues to expect that 2011 revenue will be higher than 2010, primarily driven by projected 787 and 747-8 deliveries.  Combining higher projected deliveries with spending plans for R&D investments and other factors, operating cash flow in 2011 is still expected to be greater than $5 billion.

Commercial Airplanes' 2010 delivery guidance remains unchanged at between 460 and 465 airplanes and is sold out. It includes the first few 787 and 747-8 deliveries.  The unit's 2010 revenue guidance is reaffirmed at $31 billion to $32 billion and operating margin guidance is increased to between 7.5 percent and 8.5 percent, up from 6.5 percent to 7.5 percent on strong core operating performance.  

Defense, Space & Security's revenue guidance for 2010 is reaffirmed at between $32 billion and $33 billion with operating margins reduced to approximately 9.5 percent, from approximately 10 percent, reflecting performance to date and the current contracting environment.  

Boeing Capital Corporation has reaffirmed its expectation that its aircraft finance portfolio will continue to reduce as its expected new aircraft financing for 2010 remains at less than $0.5 billion, below normal portfolio runoff through customer payments and depreciation.  BCC continues to expect its debt-to-equity ratio to return to the 5.0-to-1 level in the second half of 2010.

Boeing's 2010 R&D forecast is unchanged at $3.9 billion to $4.1 billion on continued investment in development programs.  The company continues to expect R&D to decrease at an amount greater than $0.5 billion in 2011.  Capital expenditures for 2010 have been reduced to approximately $1.7 billion, down from $1.9 billion.  The company's 2010 non-cash pension expense is expected to be approximately $1.2 billion.

Non-GAAP Measure Disclosure

Management believes that the non-GAAP (Generally Accepted Accounting Principles) measures (indicated by an asterisk *) used in this report provide investors with important perspectives into the company's ongoing business performance.  The company does not intend for the information to be considered in isolation or as a substitute for the related GAAP measures.  Other companies may define the measures differently.  The following definitions are provided:

Free Cash Flow

Free cash flow is defined as GAAP operating cash flow less capital expenditures for property, plant and equipment additions.  Management believes free cash flow provides investors with an important perspective on the cash available for shareholders, debt repayment, and acquisitions after making the capital investments required to support ongoing business operations and long term value creation.  Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures such as repayment of maturing debt. Management uses free cash flow internally to assess both business performance and overall liquidity.  Table 2 provides a reconciliation between GAAP operating cash flow and free cash flow.