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Should The Boeing Company Investors Worry About This Troublesome Figure?

Daniel Miller
February 13, 2014

Boeing's (NYSE: BA) share price soared 77% in 2013 and this stock performance wasn't a fluke. Boeing's cash and marketable securities have ballooned over the last three years while its total consolidated debt has steadily declined. Its revenues, earnings per share, and free cash flow continue to post strong results. But one figure lagging behind the rest has been the company's operating margin. There's one specific factor that investors often overlook with Boeing's operating margin. Here's the story, from the top down.

Graph by author; Source: Boeing's quarterly financial statements

What gives?
When scratching the surface of Boeing's results you won't find any answers to questions about why its operating margins have been in a slight decline. Take Boeing's biggest money maker, its commercial airplanes segment, for example. Deliveries increased 8% last year to 648, up from 601 in 2012. With revenue increasing 8%, and Boeing focusing on improving production and minimizing costs, earnings from operations increased by 23%. Those factors enabled its operating margin for the commercial airplane segment to increase by 130 basis points last year to 10.9%.

With an improvingĀ operating margin in its largest business segment, the logical leap for investors is to assume the problem lies within its other business: defense, space, and security. It's an especially easy assumption as revenues from military aircraft have been in decline due to massive budget cuts by the government which could total $1 trillion over the next nine years. But after looking at the numbers, the blame for declining operating margins doesn't land on defense, space, and security, either.

Source: Boeing's Q4 and full-year 2013 results

As you can see, for the full year the segment improved its operating margin by 30 basis points. So, if Boeing's two business segments both improved their respective operating margin, how is it that the overall operating margin of the company continues to decline? The answer is an obligation shared by many large corporations today: pension costs.

Source: Boeing's annual financial statements

Like other large industrial companies, such as Ford and General Motors, Boeing has been forced to contribute more to its pension plan as its obligations have risen due to record low interest and discount rates. As the amount of its contributions rose and its operating margins declined, the company separated some pension costs to report non-GAAP "core" operating earnings, which helps show a slightly clearer picture of its operating health.

The root cause of the decline in operating margin remains, so investors should expect the trend to continue. This is especially true because Boeing recently increased its production rate of the 787 Dreamliner, which is, at least initially, much less profitable than planned. With the Dreamliner's lower margins becoming a larger part of the segment's earnings, it will be even more important for Boeing to shore up its pension costs to impr