Executive Summary
This paper examines the financial condition and performance of the Boeing Company for the year 2001. Annual reports filed by Boeing in accordance with the General Accepted Accounting Principles and Securities and Exchange Commission regulations serve as primary data sources. Industry average financial ratios, outlook, and data are used to gauge Boeing's financial status. Recommendations are presented based upon analysis, generally accepted management practice, and research. This 2001 financial analysis of Boeing is based on information from the Boeing 2001 and 2000 annual reports unless otherwise noted. Recommendations are made after analyzing key financial calculations, ratios, and industry averages. Dollars and shares are in millions unless otherwise indicated.
Analysis Overview
Boeing is widely recognized as a leader in the commercial jet manufacturing business (Friedman, 2002). The company manufacturers a wide variety of military aircraft and weapon systems including jet fighters, helicopters, rockets, and missiles. The aerospace company provides major components and support to NASA's Space Shuttle program (Siegel, M., 2002, p.1). Founded in 1916 (Boeing, 2002), Boeing has acquired a number of companies over the years and presently employees about 188,000 people (Siegel, M., p. 1). Boeing and Airbus Integrated Company are the only two companies manufacturing large commercial aircraft (Elia, 2002, ¶ 3).
Evidential Matter
The terrorist attacks on the World Trade Center caused a major negative economic effect throughout the United States and the world. Airlines were severely impacted do to a sudden and huge drop in passengers (Siegel, M., p. 551). Air travel has still not fully recovered from this catastrophic event. The resultant drop in commercial jet orders has hurt Boeing (Friedman, p 13). In the third quarter of 2001, Boeing experienced a 46% decrease in orders compared to 2000 (Friedman, p. 19). The commercial aircraft segment accounted for about 60% of Boeings revenues before September 11 (Standard & Poor's, 2002, p. 2). Deliveries for aircraft are expected to be 380 for 2002 vs.527 in 2001 (Siegel, M., p. 551). As reported in the 2001 Consolidated Statement of Operations, Boeing recorded a $935 million charge for "special charges due to events of September 11, 2001" (Boeing, p. 35).
Contrary to the depressed commercial jet market, the military hardware and support segments are experiencing some strength because of U.S. military actions (Siegel, M., P. 4). The U.S. Department of Defense (DOD) recently awarded a huge Joint Strike Fighter (JSF) contract to Lockheed Martin Company, a major Boeing competitor (Friedman, p. 11). The estimated $200 billion contract could have been an offset to the commercial jet business (Friedman, p. 11). Despite losing this contract, analysts anticipate Boeing will benefit from increases in DOD spending programs (Siegel, M., p. 5; Squeo & Lunsford, 2002; Elia, ¶ 2).
Auditors Role and Report
The auditor's report documents an opinion as to if the financial statements accuracy and fairness in representing the company's financial condition (Siegel, J., 2002, p.35). External parties including investors, creditors and customers are all interested in assurance that the company has expressed its financial condition with integrity (Fraser & Ormiston, p. 14). For internal users, the report provides credible information regarding the financial strengths and weaknesses of the company. Favorable opinions provide credibility for the accounting methods management uses.
The auditors walk a fine line, because they have to balance accuracy, integrity and the law with meeting the needs of the client. There is an inherent conflict of interest because the firm being audited pays the auditors (Fraser; Ormiston, p. 14). The widely reported financial collapse of Enron Corporation is a prime example where this conflict of interest can lead, if not managed with integrity. Enron auditors, Arthur Anderson, LLP, find their firm under criminal indictment for obstruction of justice, because, among other allegations, the chief auditor has admitted to ordering the shredding of supporting documents after becoming aware of state and federal investigations (Flood, 2002). Deloitte & Touche LLP was the audit firm for the Boeing 2001 financials. The auditors issued an unqualified opinion that the financial statements contained in the 2001 annual report present fairly the financial position of Boeing consistent with "accounting principles generally accepted in the United States" (Boeing, p. 84).
Stock
Common stock represents ownership in a publicly traded corporation. Boeing trades on the New York stock exchange and other secondary exchanges (Standard & Poor's, 2002, p. 1). Holders of common stock have voting, dividend, and liquidation rights (Downes, 1998, p. 108). Treasury stocks are reacquired shares, that are excluded in calculations of shares outstanding, and pay no dividends (Downes, p. 303 & 661). Boeing reports that 1.2 billion ($5 par value) common shares were authorized and 1,011,870,159 were issued (p. 36). Outstanding common stock are shares issued less treasury shares (Siegel, J., p. 315). Calculations: Outstanding Common Stock = 1,011.8 - 174.2 = 837.6 shares. The total amount of cash dividends declared (dividends authorized for payment in 2001) on common stock, $577, is listed on the Consolidated Statements of Shareholders' Equity (p. 38). Preferred Stock is capital stock, having no voting rights, preference over common stock to receive dividends or liquidation funds (Siegel, J., p. 334). Boeing has no preferred stock.
The book value per share of common stock (dollars and cents) is calculated by dividing the total shareholders' equity by the number of shares outstanding (Finkler, 2002, p.32). Calculations:
Book value per share of common stock = $ 10,825 ÷ 837.6 = $ 12.92.
The total paid-in-capital is listed on the Consolidated Statement of Financial Position as a long-term debt (p. 36). Additional paid-in-capital represents the amount received for the stock in excess of par value (Warren, 2001b, p. 248). The total paid-in-capital is the sum of the common shares par value and additional paid-in-capital (Warren, 2001b, p. 246). Calculations: Total paid-in-capital = $ 5,059 + 1,975 = $ 7,034.
The average price per share (dollars and cents) received since inception of the company is the total paid-in-capital divided by the total number of shares issued (Fraser & Ormiston, 2001, p. 69). Calculations: Average price per share since inception = $ 7,034 ÷ 1,011.9 = $ 6.95.
Current Position Analysis
The working capital is a measure of a company's ability to pay short-term debt and is calculated as current assets less current liabilities (Warren, 2001b, p. 284). 2001 working capital calculations: = $ 16,206 - 20,486 = $ (4,280). The negative number indicates a deficiency of working capital. Current assets divided by current liabilities is termed the current ratio. The following table captures two years of data from Boeing (p. 36), and displays working capital and current ratios. The industry median current ratio is from a Dun & Bradstreet 2002 report (p. 96).
Table 1
Millions $
2001
2000
Industry
Current Assets
16,206
16,513
-
Current Liabilities
20,486
18,927
-
Working Capital
(4,280)
(2,414)
-
Current Ratio
0.8
0.9
1.7
Compared to 2001, current assets decreased $307 million while working capital decreased $1,866 million. ValueLine reports working capital for Boeing has been declining since 1996 (Siegel, M., p. 2). Boeings' current ratio (half the industry median) and the negative trend indicate an unfavorable position in short-term liquidity.
Asset Management
The faster a company collects receivables the better its solvency position will be (Warren, 2001b, p. 286). Accounts receivable turnover is the ratio between credit sales and average accounts receivable.
Table 2
Millions $
2001
2000
Net Sales on Acct.
58,198
51,321
Acct. Receivable (beg. of year)
5,519
4,928
Acct. Receivable (end of year)
5,516
5,519
Total
11,035
10,477
Average Receivables (total ÷ 2)
5,518
5,224
Accounts Receivable Turnover
10.6
9.8
The increase of accounts receivable turnover ratio indicates improvement in the collection of receivables.
The number of days' in receivables is a measure of the length of time receivables have been outstanding (Warren, 2001b, p. 286). This ratio is calculated by dividing the net accounts receivable at the end of the year by the average daily sales on account.
Table 3
Millions $
2001
2000
Acct. Receivable (end of year)
5,516
5,519
Net Sales on Acct.
58,198
51,321
Avg. Daily Sales on Acct. (sales ÷ 365)
159.5
140.6
Number of Days' Sales in Receivables
34.6
39.3
Receivable collections are slightly faster in 2001 compared to 2000. This analysis combined with the accounts receivable turnover analysis indicate an increased efficiency in the collection of receivables and management of debt (Warren, 2001a).
Inventory Analysis
Warren points out that a well run business will maintain enough inventory on hand to meet customers' needs and allow for unplanned events (2001b, p. 287). Excessive inventory leads to inefficiencies and higher costs (Warren, 2001b, p. 287). The inventory turnover and number of days' sales in inventory are measures of inventory management. Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory (Siegel, J., p. 241). The number of days' sales in inventory is equal to the inventory at the end of the year divided by the average daily COGS (Warren, 2001b, p. 287). These two ratios and supporting data (Boeing, pg. 36) are summarized below:
Table 4
Millions $
2001
2000
Cost of Goods Sold (COGS)
48,788
43,712
Inventory (beginning of year)
6,852
6,539
Inventory (end of year)
6,920
6,852
Inventory Total
13,772
13,391
Inventory average (total ÷ 2)
6,886
6,696
Inventory Turnover Ratio
7.1
6.5
Average Daily Cost of Goods Sold (COGS ÷ 365)
133.6
119.8
Number of Days' Sales in Inventory
51.8
57.2
Inventory turnover and the number of days' sales in inventory improved since 2000. These ratios indicate that Boeing is improving its inventory management, thus lowering costs. The average Inventory Turnover Ratio was 7.0 for 1999 (Troy, p. 155). Boeing is on target with this industry average.
The liability to stock holders equity ratio, also known as the debt to equity ratio (Siegel, J., p. 124), is a measure of solvency and relative safety for creditors (Warren, 2001b, p. 288).
Table 5
Millions $
2001
2000
Industry Median
Total Liabilities
37,518
31,657
-
Total Stock Holders' Equity
10,825
11,020
-
Debt to Equity Ratio
3.47
2.87
2.75
This ratio has increased 21% since 2000, largely due to the September 11 special charges of $935. This unfavorable trend indicates liabilities are increasing at a fast rate. In 2000, this ratio was only slightly over the industry mean (Dun & Bradstreet, p. 96)-and has now increased supporting the finding that Boeing has higher relative debt compared to industry. The number of times interest charges earned, also called "interest coverage" (Siegel, J., p. 232), indicates relative risk to debt holders and general financial strength of the company (Warren, 2001b, p. 289). This ratio is calculated by adding interest expense to income before taxes and dividing by interest expense (Warren, 2001b, p. 289).
Table 6
Millions $
2001
2000
Income before income tax
3,564
2,999
Add interest expense
650
445
Amount available to meet interest charges
4,214
3,444
Interest Coverage
6.5
7.7
This calculation shows earnings relative to interest charges has declined since 2000. This indicates a weakening financial condition.
Profitability
The net profit margin is widely used as a measure of profitability. Net profit margin is the net income expressed as a percentage of net sales (Downes, p. 390). The margin is calculated by dividing net profit by sales and multiplying by 100.
Table 7
Millions $
2001
2000
Net Income
2,826
2,128
Net Sales
58,198
51,321
Net Profit Margin (%)
4.9
4.2
The net profit margin has favorably increased from 2000 to 2001.
The rate earned on total assets is a return on asset (ROA) measure that considers profitability irrespective how the assets are financed (Warren, 2001b, p. 290). Warren (2001b) advocates calculating this rate by adding interest expense to net income and dividing by the average assets (multiplied by 100 to give a percentage).
Table 8
Millions $
2001
20001
Industry Average
Net Income
2,827
2,128
-
Plus Interest Expense
650
445
-
Total
3,477
2,573
-
Total Assets:
(beginning of year)
42,677
36,147
-
(end of year)
48,343
42,677
-
Total
91,020
78,824
-
Average (total ÷ 2)
45,510
39,412
-
Rate Earned on Total Assets (%)
7.6
6.5
6.0
This analysis shows the return on assets have improved 17% from 2000 indicating a positive profitability. Boeing's return on total assets is above the industry average of 6.0 for the year 2000 (Troy, p. 156). The rate earned on stockholders' equity, also known as return on equity (ROE), is calculated by dividing net income by the average stockholders' equity. This profitability measure considers how effectively management is using the funds received from the sale of stock (Warren, 2001a).
Table 9
Millions $
2001
20001
Industry Median
Net Income
2,827
2,128
-
Stockholders' Equity:
(beginning of year)
11,020
11,462
-
(end of year)
10,825
11,020
-
Total
21,845
22,482
-
Average (total ÷ 2)
10,923
11,241
-
Return on Equity (%)
25.9
18.9
6.1
Comparing 2001 to 2000 shows that Boeing has sharply increased its leverage on the use of shareholders' equity. Boeings' ROE is very strong compared with the industry median of 6.1 (Dun & Bradstreet, p. 96).
Cash Flow
Boeing uses the indirect method for recording cash flow in their annual statement (Boeing, p. 37). This method although not recommended by the Federal Accounting Standards Board (FASB), is less expensive to produce and shows the relationship between the cash flow and other financial statements (Warren, 2001a). It is useful to examine cash flow from the perspective of cash generated from operating, investing, and financing activities (Warren, 2001b, p. 272). A condensed comparative cash flow analysis provides an overview of these key activities.
Table 10
Millions $
Change
2001
20001
Net Cash from Operating Activities
(2,128)
3,814
5,942
Net Cash from Investing Activities
2,914
(4,714)
(7,628)
Net Cash from Financing Activities
11,181
523
(658)
Total Cash Flow for Year
1,967
(377)
(2,344)
This data shows that net cash provided by operating and financing activities was positive, while cash from investing activity was an outflow. Operations accounts for the bulk of cash inflows in contrast to the cash drain of investing activities. The total net cash flow has been negative for the last two years; however: improvement is evident as the total cash flow for 2001 was ($377) vs. ($2,344) for year 2000. Cash flow is a key element of financial health and Boeing should take steps to increase cash flow.
Summary analysis of Boeing's Financial Condition
Solvency
Boeing's current assets and working capital have decreased since year 2000. Working capital has been declining since 1996 (Siegel, M., p. 2). The current ratio trend has also been down-indicating a weakness in current position (see page 6).
Boeing has managed receivables more effectively since 2000 as revealed by the accounts receivable turnover and number of days' sales in receivables (see pages 6-7). Inventory management has improved as evidenced by the decrease in the number of days' sales in inventory (see page7).
Debt management is a concern as demonstrated by the debt to equity ratio trend (see table 5); however: cash flow has been improving despite the increase in debt.
Profitability
Boeing's net profit margin (table 7) has increased to nearly 5% and is favorable given the soft commercial airline market (Elia, 2002, ¶ 5). The rate earned on total assets has also increased (over 1%) and is above the industry average. Combined with a very strong return of equity of nearly 26%, these metrics indicate good profitability for Boeing (see page 9).
Cash Position
The cash position of Boeing needs continuing attention by management. Operating and financing activities are positive; however: this is offset by a large out flow from investing activities. The drop in deliverable aircraft likely hurt the cash flow.
Recommendations
Boeing should evaluate steps to decrease expenses, which would increase stockholders' equity and relieve the pressure on cash flow. Considerations should include:
laying off workers in the commercial jet segment (Elia, 2002, ¶ 5; Squeo & Lynn, p. 1),
selling some long term assets to increase the cash position, and
reducing general and administrative expenses.
Boeing should continue evaluating new business products to increase diversification. This will allow the company to better ride out down markets of individual segments. Products and services to consider include:
maintenance, repair and overhaul (MRO) of jet engines,
support services MRO activities, and
exploring the feasibility of long term research and development contracts with governments for the development un-manned military aircraft (Elia, 2002, ¶ 4).
Management should consider developing a strategic relationship with competitor Lockheed Martin to assist Boeing with its troubled future imagery spy satellite project (Squeo & Lynn, p. 1) in exchange for a sub contractor role in the huge JSF contract. Boeing should consider renegotiating existing contracts to increase the number of deliverable commercial aircraft for 2002-03-this may necessitate providing favorable terms for customers; however: it may have positive effect on cash flow. This effort could be combined with the development of new product lines such as MRO services. Management should appoint a task force to study alternatives to better manage the rising debt to equity trend-outside aerospace consultants should be part of this team. These recommendations combined with sound general management practices and good fiscal management will help Boeing navigate the turbulence it currently is experiencing.
