Is The Financial Condition Of Boeing Flying High?

| About: The Boeing (BA)

Before selecting a stock, there are a number of things that you need to consider in order to ensure that you are buying the stock of a high-quality company whose shares are poised to grow in value over time. Some of these concerns include what the company does, its competitive advantages, valuation, dividend payouts and sustainability, and earnings consistency.

Another important thing that you need to consider is the financial condition of the company in question. You want to know if the company is able to continue paying its bills, and how much debt it carries. The balance sheet is one of the most effective tools that you can use to evaluate a company's financial condition. In this article, I will discuss the balance sheet of Boeing (BA) in order to get some clues as to how well this company is doing.

I will go through the balance sheet, reviewing the most important items, in order to assess the financial condition of Boeing. The information that I am using for this article comes from Boeing's most recent financial reports, which can be found here. Note that this article is not a comprehensive review as to whether Boeing should be bought or sold, but rather, just an important piece of the puzzle when doing the proper due diligence.

This article might be a bit too basic for some and too long-winded for others, but I hope that some of you can derive benefit from it.

Background

Boeing's business is divided into five segments. They are Commercial Airplanes, Boeing Military Aircraft, Network and Space Systems, Global Services and Support, and Boeing Capital.

The Commercial Airplanes segment develops, manufactures, and sells commercial jet aircraft and provides related support services, mostly to airline companies worldwide. This segment accounted for 60% of the company's revenue in 2012.

The Boeing Military Aircraft segment produces manned and unmanned military aircraft and weapons systems, such as fighter and combat aircraft, missile systems, transport aircraft, tankers, and airborne anti-submarine aircraft. This segment accounted for 20% of the company's revenue in 2012.

Boeing's Network and Space Systems segment provides electronics and information systems, cyber and information solutions, missile and defense systems, satellites, and communication satellite launch vehicles. This segment was responsible for 9% of Boeing's 2012 revenue.

Global Services and Support provides global customers with mission readiness through total support services, like integrated logistics, supply chain management, engineering support, maintenance, upgrades for aircraft, and pilot training. This segment produced 11% of the company's sales last year.

Of the company's Boeing Military Aircraft, Network and Space Systems, and Global Services and Support segments, the U.S. Department of Defense was the biggest customer, accounting for 70% of the combined revenues from these three segments.

Boeing Capital structures and provides financing for Commercial Airplanes customers, as well as government customers. This segment accounted for less than 1% of the company's revenues.

The company's revenue in 2012 was fairly diversified from a geographical standpoint, with 46% of sales coming from the U.S., and 13% each from Europe, the Middle East, and Asia (ex-China). China accounted for 7% of 2012 revenue, with Latin America accounting for approximately 4%.

Cash and Cash Equivalents

The first line in the Assets column of the balance sheet is for the amount of cash and cash equivalents that the company has in its possession. Generally speaking, the more cash the better, as a company with a lot of cash can invest more in acquisitions, repurchase stock, pay down debt, and pay out dividends. Some people also value stocks according to their cash positions. Some of the larger and more mature companies tend not to carry a lot of cash on their balance sheets, as they might be more inclined to buy back stock with it, or pay out dividends.

As of Sept. 30, 2013, Boeing had $15.9B in cash and short-term investments that can easily be converted into cash. Their short-term investments consisted mostly of time deposits. This is a lot of cash for a company that has a market capitalization of $97.5B. This means that the company is trading at just 6 times its cash position, which might make the stock very attractive to value-oriented investors.

Over the last 12 months, the company paid out $1.43B in dividends and bought back $900M worth of stock. These activities were well supported by Boeing's $9.02B in free cash flow.

Net Receivables

Receivables constitute money that is owed to a company for products or services that have already been provided. Of course, the risk with having a lot of receivables is that some of your customers might end up not paying. For this reason, you usually like to see net receivables making up a relatively small percentage of the company's sales.

Boeing had a total of $6.65B in net receivables on its most recent balance sheet, which represents 7.81% of its trailing 12-month sales of $85.1B. For fiscal 2012, 6.87% of its sales were booked as receivables, while that percentage was at 8.43% for fiscal 2011.

Given that receivables, as a percentage of total sales, are relatively small and consistent over the last 2-3 years, I don't see much to worry about here.

Inventory

With manufacturing companies like Boeing, I like to keep an eye on inventory levels. I usually like to see inventory levels stable or slightly rising from one year to the next. If I see inventory levels rising, then I want to see revenues rising as well, to indicate higher demand for the company's products. I don't like to see rapidly fluctuating inventory levels that are indicative of boom and bust cycles. In some instances, if inventory ramps up without increases in volumes or revenues, then it may indicate that some of the company's products are going obsolete.

As of Sept. 30, 2013, Boeing had $41.2B worth of inventory, which amounts to 48.4% of the company's sales for the last 12 months. At the end of fiscal 2012, this level was at 46.3% of sales, while at the end of fiscal 2011, it was at 46.9% of sales. If you go back to the end of fiscal 2010, inventory levels were equal to 37.8% of the company's sales for that year. These are very high percentages for inventory, but given that these percentages have been consistently high over the last few years, this is more than likely due to the business that they are in more than anything else.

Current Ratio

Another factor that I like to look at is the current ratio. This helps to provide an idea as to whether or not the company can meet its short-term financial obligations in the event of a disruption of its operations. To calculate this ratio, you need the amount of current assets and the amount of current liabilities. Current assets are the assets of a company that are either cash or assets that can be converted into cash within the fiscal year. In addition to cash and short-term investments, some of these assets include inventory, accounts receivable, and prepaid expenses. Current liabilities are expenses that the company will have to pay within the fiscal year. These might include short-term debt and long-term debt that is maturing within the year, as well as accounts payable (money owed to suppliers and others in the normal course of business). Once you have these two figures, simply divide the amount of current assets by the amount of current liabilities to get your current ratio.

If a company's operations are disrupted due to a labor strike or a natural disaster, then the current assets will need to be used to pay for the current liabilities until the company's operations can get going again. For this reason, you generally like to see a current ratio of at least 1.0, although some like to see it as high as 1.5.

The current ratio of Boeing is 1.29, which is decent.

Quick Ratio

Most of the time when it comes to short-term liquidity, I end the discussion at the current ratio. However, with companies that have a large chunk of their current assets in inventories, one has to wonder whether all of that inventory can quickly be converted into cash in the event that the company suddenly needs it. Some of the inventory might be obsolete, or have to be disposed of for less than it was originally valued at. Given that inventories currently constitute nearly two-thirds of Boeing's current assets, this is a very real concern here.

To address this issue, I calculate what I call the quick ratio. The quick ratio is calculated simply by subtracting the inventory from the total current assets and then dividing the remainder by the current liabilities. I usually like to see a quick ratio of at least 1.0. That way, even if the company's inventory is worthless, they will still have enough other current assets on hand to meet their short-term financial obligations in the event of an unlikely disruption to their operations.

The quick ratio of Boeing is 0.46, which is much less than ideal. If Boeing's inventory ended up getting marked down by more than 35%, their current liabilities would exceed their current assets, which might raise the question as to whether the company can continue to meet its short-term financial obligations in the event of an unexpected bump in the road.

Property, Plant, and Equipment

For manufacturing companies like Boeing to operate, a certain amount of capital expenditure is required. Land has to be bought, factories have to be built, machinery has to be purchased, and so on. However, less may be more when it comes to outlays for property, plant, and equipment, as companies that constantly have to upgrade and change their facilities to keep up with competition may be at a bit of a disadvantage. However, another way of looking at it is that large amounts of money invested in this area may present a large barrier-to-entry for competitors.

Right now, Boeing has $9.99B worth of property, plant, and equipment on its balance sheet. This figure is inline with the $9.66B that it reported at the end of fiscal 2012, as well as the $9.31B that the company reported at the end of fiscal 2011. In its 10-K filing, the company said that 49% of these assets are in machinery and equipment, while 44% is in buildings, with construction in progress accounting for 5% of the company's PP&E assets.

Goodwill

Goodwill is the price paid for an acquisition that's in excess of the acquired company's book value. The problem with a lot of goodwill on the balance sheet is that if the acquisition doesn't produce the value that was originally expected, then some of that goodwill might come off of the balance sheet, which could, in turn lead to the stock going downhill. Then again, acquisitions have to be judged on a case-by-case basis, as good companies are rarely purchased at or below book value.

Boeing has $5.05B worth of goodwill on its most recent balance sheet, which is inline with the $5.04B worth of goodwill that it reported 9 months prior. It is also inline with the $4.95B that was reported at the end of fiscal 2011.

Usually, I don't like to see goodwill account for more than 20% of a company's total assets for the reason that I discussed at the beginning of this section. Since goodwill currently accounts for just over 5% of the company's total assets, I don't see anything to be concerned about here.

Intangible Assets

Intangible assets that are listed on the balance sheet include items such as licensed technology, patents, brand names, copyrights, and trademarks that have been purchased from someone else. They are listed on the balance sheet at their fair market values. Internally developed intangible assets do not go on the balance sheet in order to keep companies from artificially inflating their net worth by slapping any old fantasy valuation onto their assets. Many intangible assets like patents have finite lives, over which their values are amortized. This amortization goes as annual subtractions from assets on the balance sheet and as charges to the income statement. If the company that you are researching has intangible assets, with finite lives, that represent a very large part of its total asset base, then you need to be aware that with time, those assets are going to go away, resulting in a reduction in net worth, which may result in a reduction in share price, unless those intangible assets are replaced with other assets.

Boeing currently has $2.96B worth of intangible assets on its balance sheet. This is inline with the $3.11B that it had 9 months prior, as well as the $3.04B that the company reported at the end of fiscal 2011. Most of these assets are in distribution rights, developed technology, customer relationships, and product know-how, all of which have finite lives.

While the eventual loss of $2.96B from the balance sheet is not a good thing, considering that amount accounts for just 3% of the company's total assets, and the fact that a lot of this amortization will go on for many years, I don't see anything to be alarmed about here, going forward.

Return on Assets

The return on assets is simply a measure of the efficiency in which management is using the company's assets. It tells you how much earnings management is generating for every dollar of assets at its disposal. For the most part, the higher the better, although lower returns due to large asset totals can serve as effective barriers-to-entry for would-be competitors. The formula for calculating return on assets looks like this:

Return on Assets = Net Income / Total Assets.

For Boeing, the return on assets would be $7.88B in core earnings over the last 12 months, divided by $94.6B in total assets. This gives a trailing twelve-month return on assets of 8.33%, which is decent. I also calculated Boeing's returns on assets over fiscal 2012, fiscal 2011, and fiscal 2010 for comparative purposes. This can be seen in the table below.

Symbol

ttm

2012

2011

2010

BA

8.33%

8.11%

7.95%

7.24%

Table 1: Strong and Steady Returns on Assets at Boeing

Here, it can be seen that Boeing's returns on assets over the last three years have been strong, and slowly rising. This shows that management is doing a good job with the assets at its disposal.

Short-Term Debt Versus Long-Term Debt

In general, you don't want to invest in a company that has a large amount of short-term debt when compared to the company's long-term debt. If the company in question has an exorbitant amount of debt due in the coming year, then there may be questions as to whether the company is prepared to handle it.

Fortunately, this is not much of a problem for Boeing, as they only have $919M in short-term debt. With trailing twelve-month free cash flow of $9B, this shouldn't be a problem at all for Boeing.

Long-Term Debt

Long-term debt is debt that is due more than a year from now. However, an excessive amount of it can be crippling in some cases. For this reason, the less of it, the better. Companies that have sustainable competitive advantages in their fields usually don't need much debt in order to finance their operations. Their earnings are usually enough to take care of that. A company should generally be able to pay off its long-term debt with 3-4 years' worth of earnings.

Right now, Boeing carries $8.68B of long-term debt. This is slightly below the $8.97B that it carried at the end of fiscal 2012, and significantly below the $10B that they carried at the end of fiscal 2011, and the $11.5B that was carried at the end of fiscal 2010. This shows that the company has been paying down its debt, which is great.

Of the company's existing long-term debt, the maturities range from next year out to 2043, with rates ranging anywhere from 1.5% to 8.5%.

In determining how many years' worth of earnings it will take to pay off the long-term debt, I use the average of the company's core earnings over the last 3 fiscal years. The average core earnings of Boeing over this period is $6.18B. When you divide the long-term debt by the average earnings of the company, here is what we find.

Years of Earnings to Pay off LT Debt = LT Debt / Average Earnings

For Boeing, here is how it looks: $8.68B / $6.18B = 1.40 years

This is great for Boeing, in that it can pay off its long-term debt with an amount that is equal to less than two years worth of core earnings. Due to the core earnings power and cash flow generation of Boeing, the company's long-term debt should definitely be manageable.

Treasury Stock

In the equity portion of the balance sheet, you will find the treasury stock. This figure represents the shares that the company in question has repurchased over the years, but has yet to cancel, giving the company the opportunity to reissue them later on if the need arises. Even though treasury stock appears as a negative on the balance sheet, you generally want to see a lot of treasury stock, as strong, fundamentally sound companies will often use their huge cash flows to buy back their stock. For this reason, I will often exclude treasury stock from my calculations of return on equity and the debt-to-equity ratio in the case of historically strong companies, as the negative effect of the treasury stock on the equity will make the company in question appear to be mediocre, or even severely distressed, when doing the debt-to-equity calculation, when in reality, it might be a very strong company. In this case, I will try to calculate the debt-to-equity ratio and the return on equity both ways to help give the reader an idea as to how much effect the treasury stock really has.

Boeing currently has $16.9B in treasury stock.

Debt-To-Equity Ratio

The debt-to-equity ratio is simply the total liabilities divided by the amount of shareholders' equity. The lower this number, the better. Companies with sustainable competitive advantages can finance most of their operations with their earnings power rather than by debt, giving many of them a lower debt-to-equity ratio. I usually like to see companies with this ratio below 1.0, although some raise the bar (or lower the bar if you're playing limbo) with a maximum of 0.8. Let's see how Boeing stacks up here.

Debt-To-Equity Ratio = Total Liabilities / Shareholders' Equity

For Boeing, it looks like this: $85.5B / $8.95B = 9.56

This is an extremely high debt-to-equity ratio. Let's see how this ratio has changed over the last few years.

Symbol

Q3 2013

2012

2011

2010

BA

9.56

14.1

21.7

23.7

Table 2: Debt-To-Equity Ratio at Boeing

Table 2 shows that the debt-to-equity ratio has been extremely high for at least the last three years. However, it has been coming down a lot.

These high values imply that Boeing is a severely distressed company.

However, when you cancel out the negative effects that the treasury stock has on the equity, we see something a little bit different.

In these instances, I calculate what I like to call the adjusted debt-to-equity ratio. It is calculated as follows.

Adjusted Debt-To-Equity Ratio = Total Liabilities / (Shareholders' Equity + Treasury Stock)

Using the data from the most recent balance sheet of Boeing, this figure is calculated as: $85.5B / $25.9B = 3.30. The table below shows how this figure has changed over the last few years.

Symbol

Q3 2013

2012

2011

2010

BA

3.30

3.81

3.80

3.29

Table 3: Adjusted Debt-To-Equity Ratios of Boeing

As can be seen from the table above, the adjusted debt-to-equity ratio of Boeing is still a lot higher than ideal, as we usually like to see this figure significantly lower, but it's a heck of a lot better than its non-adjusted debt-to-equity ratio.

One might ask why the debt-to-equity ratio is so high, when the company's short and long-term borrowings appear to be very manageable, as discussed earlier. The reason why is that Boeing has many liabilities that have nothing to do with money that was borrowed under formal arrangements. Such liabilities include accounts payable, accrued compensation and employee benefit costs, advances and billing in excess of related costs (unearned revenue), and accrued pension plan liabilities. A breakdown of these are given below.

Accounts payable: $10.7B

Accrued liabilities (accrued compensation and employee benefit costs): $12.4B

Advances and billing in excess of related costs: $20.2B

Deferred income taxes and taxes payable: $5.5B

Accrued pension plan liability: $18.6B

Accrued retiree health care: $7.42B

These items add up to nearly $75B in liabilities that have nothing to do with formal borrowings. Many people will not include these liabilities in the debt-to-equity calculation for this reason, but I do because they still represent money for which Boeing is on the hook.

Return On Equity

Like the return on assets, the return on equity helps to give you an idea as to how efficient management is with the assets that it has at its disposal. It is calculated by using this formula.

Return On Equity = Net Income / Shareholders' Equity

Generally speaking, the higher this figure, the better. However, it can be misleading, as management can juice this figure by taking on lots of debt, reducing the equity. This is why the return on equity should be used in conjunction with other metrics when determining whether a stock makes a good investment. Also, it should be mentioned that some companies are so profitable that they don't need to retain their earnings, so they buy back stock, reducing the equity, making the return on equity higher than it really should be. Some of these companies even have negative equity on account of buybacks.

However, Boeing is not one of these companies. The return on equity for Boeing over the last 12 months is equal to $7.88B in core earnings, divided by shareholder equity of $8.95B, which is equal to a whopping 88%.

To illustrate how the returns on equity of Boeing have changed over the last few years, I have created the table below for the return on equity.

Symbol

ttm

2012

2011

2010

BA

88%

123%

181%

179%

Table 4: Returns On Equity at Boeing

These are enormous returns on equity that are due more than anything else to the small equity position that the company has when treasury stock counts as a negative. To calculate the return on equity without the equity-shrinking effects of the treasury stock, I calculate what I call the adjusted debt-to-equity ratio.

Adjusted Return On Equity = Net Income / (Shareholders' Equity + Treasury Stock)

When I strip out the negative effects of the treasury stock, here is what I come up with when using the data from the most recent balance sheet.

Adjusted Return On Equity = $7.88B / $25.9B = 30.4%.

This appears to be a pretty solid return on equity. In the table below, you can see how the adjusted return on equity has fared over the past three years.

Symbol

ttm

2012

2011

2010

BA

30.4%

33.1%

31.6%

24.9%

Table 5: Adjusted Returns on Equity at Boeing

It can be seen from Table 5 that Boeing's returns on equity have been very strong over the last few years, just like its returns on assets.

Retained Earnings

Retained earnings are earnings that management chooses to reinvest into the company as opposed to paying it out to shareholders through dividends or buybacks. It is simply calculated as:

Retained Earnings = Net Income-Dividend Payments-Stock Buybacks

On the balance sheet, retained earnings is an accumulated number, as it adds up the retained earnings from every year. Growth in this area means that the net worth of the company is growing. You generally want to see a strong growth rate in this area, especially if you're dealing with a growth stock that doesn't pay much in dividends or buybacks. More mature companies, however, tend to have lower growth rates in this area, as they are more likely to pay out higher dividends.

On its most recent balance sheet, Boeing shows a retained earnings figure of $32.6B. In the table below, you can see how this figure has grown over the last three years. Over this time period, we see that retained earnings grew at a cumulative rate of 32%. This is great, as it shows that the company has money left over to plow back into its business for future growth.

Symbol

2012

2011

2010

2009

BA

$30.0B

$27.5B

$24.8B

$22.7B

Table 6: Retained Earnings at Boeing

Conclusion

After reviewing the most recent balance sheet, there are a few things to like about Boeing's financial condition. One is the fact that the company has a sizable cash position relative to its market capitalization, which may make the stock attractive to value-oriented investors. It also gives the company flexibility when it comes to paying down debt, buying back stock, and paying dividends. The company's goodwill and intangible assets constitute a small percentage of the company's total assets, so that any declines in these areas due to poor acquisitions won't severely damage the company's net worth. Boeing has shown strong and consistent returns on assets and equity over the last few years, showing that management is being effective with the assets that are at its disposal. Its borrowings are manageable when stacked up against its earnings power and cash flow generation.

The biggest concern that I have with Boeing is its very high debt-to-equity ratio. Even when stripping out the negative effects of treasury stock, this ratio is still higher than where we as investors would like it to be. As discussed earlier, this issue is due to more high operating expenses and pension liabilities than to borrowings. However, it is encouraging to see that Boeing is bringing their debt-to-equity ratio down by paying off some of their long-term debt.

While this is not a comprehensive review as to whether Boeing should be bought or sold, I think that its overall financial condition is fair. Investors should not let the company's debt-to-equity ratio alone deter them from buying the company's shares or doing further due diligence.

To learn more about how I analyze financial statements, please visit my new website at this link. It's a new site that I created just for fun, as well as for the purpose of helping others make good financial decisions.

Thanks for reading and I look forward to your comments!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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