10 Overlooked Risks in Boeing’s 2016 Annual Report

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Boeing Co. (NYSE: BA) filed its 2016 Form 10-K annual report with the U.S. Securities and Exchange Commission (SEC) on Thursday. Like nearly all required filings for every company, the Boeing 10-K contains a range of detailed information that is often not included in quarterly press announcements or even quarterly SEC filings.

We’ve read through the Boeing 10-K with an eye to finding some of those details that investors might not find in other documents. We paid special attention to the section of the 10-K related to risk factors.

Here are some things we found that may not be on investors’ radar. Italic text indicates a direct quote from the filing.

We enter into firm fixed-price aircraft sales contracts with indexed price escalation clauses which could subject us to losses if we have cost overruns or if increases in our costs exceed the applicable escalation rate.

Boeing’s defense systems segment generated approximately 71% of 2016 revenues from fixed-price contracts. Cost-overruns (what Boeing calls reach-forward losses) totaled $1.13 billion last year on the KC-46A tanker fixed-price contract.

In 2016, 23% of our revenues were earned pursuant to U.S. government contracts, which include foreign military sales through the U.S. government. Business conducted pursuant to such contracts is subject to extensive procurement regulations and other unique risks.

In 2016, non-U.S. customers accounted for approximately 59% of our revenues. We expect that non-U.S. sales will continue to account for a significant portion of our revenues for the foreseeable future.

As of December 31, 2016 and 2015, our airplane financing commitments totaled $14,847 million and $16,283 million.

Boeing finances these commitments, in part, with debt. Rising interest rates will affect the company’s interest payments. Boeing paid $306 million in interest expense last year, an increase of more than 10% from 2015.

Approximately 57,000 employees, which constitute 38% of our total workforce, were union represented as of December 31, 2016.

Boeing currently has relationships with 11 U.S. unions and seven non-U.S. labor organizations. Union labor at the company’s suppliers may also affect the company’s ability to meet its commitments.

The decrease in contractual backlog during 2016 and 2015 was primarily due to deliveries in excess of net orders.

This is the company’s book-to-bill ratio expressed in dollars. Since the banner year of 2014, backlogs have been shrinking as new orders slow. Commercial contractual backlog at the end of 2016 is $416.2 billion, down from $440.12 billion in 2014 and $431.41 billion in 2015. Including the defense segment’s backlog, total contractual backlog for 2016 is $458.28 billion, down from $487.1 billion in 2014 and $476.6 billion in 2015.

Many of our non-U.S. customers finance purchases through the Export-Import Bank of the United States. Following the expiration of the bank’s charter on June 30, 2015, the bank’s charter was reauthorized in December 2015. The bank is now authorized through September 30, 2019. However, until the U.S. Senate confirms members sufficient to reconstitute a quorum of the bank’s board of directors, the bank will not be able to approve any transaction totaling more than $10 million.

Boeing may find itself in the position of having to fund additional commitments or entering into new financial arrangements with customers if the Ex-Im Bank doesn’t attain a quorum. This diverts liquidity from other places the company might prefer to use it.