September 2005 
Volume 04, Issue 5 
Focus on Finance

Cash keeps 'engine running'

Cash keeps 'engine running'

Why operating cash flow is an important financial metric

This article is the third in a four-part series on the Enterprise Financial Targets, the new, aggressive company-level financial metrics introduced earlier this year. In this article, Boeing Frontiers looks at the importance of operating cash flow as a percentage of sales in helping drive sustained value creation.

What will Boeing do with several billion dollars in cash?

"Most of our investors say 'cash is king,'" said Dave Dohnalek, vice president, Investor Relations for Boeing. "Fortunately, Boeing is doing a good job generating cash. We need to keep that engine running and deploy our cash resources wisely."

When companies disclose their quarterly financial results, news reports generally will focus on changes in earnings and revenues. Yet operating cash flow is another metric that plays an important part in explaining a company's overall financial performance.

Boeing's cash and liquid investment balances as of June 30 totaled $7.9 billion. Cash flow builds this balance. Boeing's second-quarter operating cash flow was $2.7 billion. The company expects operating cash flow to exceed $6 billion this year and to top $5.5 billion in 2006.

Although cash flow may not be as commonly cited as other metrics such as earnings, cash flow as a concept is straightforward: It reflects the money coming in and going out. All things being equal, if more money comes in and/or less goes out, a company has more to invest in its future.

Technically speaking, operating cash flow is cash received from or used by the operations of the business driven by cash earnings and changes in working capital (see chart below).

Some financial analysts believe operating cash flow provides a better measure of a company's profits than earnings. The reason: A business can show positive net earnings on its income statement and still not be able to pay its debts. Cash flow pays the bills and keeps the operating engine of Boeing running. That's in part why operating cash flow as a percent of revenue was established as one of four Enterprise Financial Targets by which the company measures its overall financial performance. This year Boeing will likely exceed its 10 percent goal for this metric. The challenge will be to achieve such performance year after year.

Boeing has clear priorities for its cash, including funding growth programs such as the 787 and Future Combat Systems, continuing to repurchase company stock, paying dividends to investors, and repaying maturing debt, company officials said. Options for cash use also include supporting pension plans. Boeing's retirement plans are secure and well-funded in part because of $4.4 billion in discretionary pension contributions during 2004 and $1 billion so far this year. Another $550 million contribution is expected before year's end, according to a recent Boeing filing with the U.S. Securities and Exchange Commission.

A large, strategic acquisition is not currently a high priority. Chief Financial Officer James Bell recently told analysts and media that "we haven't seen any larger targets yet that we felt made sense.... Having the cash is just half of the story. You've got to have the right place to put it, and we're going to be disciplined in how we go through making those determinations."

Although the members of the Finance organization keep the closest tabs on cash flow, every employee can help improve cash flow—and generate the money that will expand Boeing's global aerospace leadership. Actions that can boost cash flow include negotiating better contract terms and improving billings and collections.

Said Diana Sands, Boeing vice president, Financial Planning and Analysis: "Whether it's negotiating cash terms with suppliers or customers or paying the most favorable price for the pencils we use, everyone can have an impact."

Know the flow

Operating cash flow is a measure of how well current liabilities are covered by the cash flow generated from a company's operations. According to Boeing's Enterprise Financial Targets (the four balanced metrics by which the company measures its overall financial performance), the goal is to generate an operating cash flow of more than 10 percent of revenues.

In the example below from Boeing's year-end 2004 earnings release, operating cash flow can be calculated as the sum of net earnings; depreciation and other non-cash items; and working capital (current assets such as cash, accounts receivable and inventories, less current liabilities such as accounts payable and other short-term liabilities)—minus pension contributions, among other items.


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