Business Context and Reporting Period
This Form 10-Q covers The Boeing Company for the quarterly and nine-month periods ended September 30, 2006. The company operates through three primary segments: Commercial Airplanes, Integrated Defense Systems (IDS), and Boeing Capital Corporation (BCC). During this period, Boeing realigned its IDS segment into three capabilities-driven businesses: Precision Engagement and Mobility Systems, Network and Space Systems, and Support Systems. The company also completed the acquisition of Aviall, Inc. for $1.78 billion in September 2006.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2005 | Three Months Ended Sep 30, 2006 | Three Months Ended Sep 30, 2005 |
|---|---|---|---|---|
| Total Revenues | $43,989 million | $39,720 million | $14,739 million | $12,355 million |
| Earnings from Operations | $1,862 million | $2,268 million | $951 million | $763 million |
| Operating Margin | 4.2% | 5.7% | 6.5% | 6.2% |
| Net Earnings | $1,226 million | $2,112 million | $694 million | $1,011 million |
| Diluted EPS | $1.57 | $2.62 | $0.89 | $1.26 |
| Net Cash from Operating Activities | $5,058 million | $4,613 million | N/A | N/A |
| Total Debt | $10,131 million | $10,727 million (Dec 31, 2005) | N/A | N/A |
| Cash and Cash Equivalents | $5,198 million | $5,412 million (Dec 31, 2005) | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased by $4.27 billion (10.8%) for the nine months ended September 30, 2006, primarily driven by a $5.03 billion increase in Commercial Airplanes revenues due to higher airplane deliveries.
- Earnings Decline: Net earnings decreased by $886 million for the nine-month period. This decline was driven by a $571 million settlement with the U.S. Department of Justice, a $280 million pre-tax charge for exiting the Connexion by Boeing business, and a $496 million charge in the Precision Engagement and Mobility Systems segment related to the AEW&C development program.
- Segment Performance:
- Commercial Airplanes: Operating earnings increased significantly to $2.07 billion (nine months) due to higher deliveries and improved cost performance, offset by increased R&D spending on the 787 and 747-8 programs.
- Integrated Defense Systems: Operating earnings decreased to $2.01 billion (nine months) compared to $2.98 billion in 2005, largely due to the absence of a $569 million gain from the sale of Rocketdyne in the prior year and the aforementioned AEW&C charge.
- Acquisition: The acquisition of Aviall, Inc. added $1.03 billion in revenue for the period from January 1 to September 20, 2006.
Guidance, Outlook, and Risks
- Outlook: Management expects the 787 program to deliver on schedule with flight testing starting in 2007. The company anticipates continued pressure on the 787 program regarding weight and supplier implementation, leading to raised R&D expense forecasts for 2006 and 2007.
- Connexion Exit: The exit from the Connexion by Boeing business is expected to result in total pre-tax charges of up to $320 million, with approximately $40 million potentially incurred in the fourth quarter of 2006.
- Legal and Contingencies:
- A-12 Litigation: Ongoing litigation regarding the A-12 aircraft contract termination. If the courts determine a termination for default was appropriate, Boeing could incur an additional loss of approximately $1.57 billion.
- Satellite Litigation: Significant arbitration claims exist regarding the Thuraya and Anik F1 satellites, with potential exposures up to $365 million and $395 million, respectively, though Boeing believes these claims lack merit.
- 767 Program: Production of the 767 may be completed in 2007 if a USAF tanker contract is not secured, which would reduce program margins but is not expected to result in a forward loss.
- Accounting Changes: The company adopted SFAS No. 154 retrospectively, changing the accounting for vendor concessions to reduce Cost of Products rather than recognizing them as revenue. This reduced reported revenues and costs by equal amounts.
Investor Verification Checklist
- AEW&C Program Status: Verify the progress of the Airborne Early Warning & Control program and the likelihood of further cost overruns or schedule delays following the $496 million charge.
- 787 Development Costs: Monitor R&D spending trends for the 787 program, as management has indicated rising costs and technical pressures.
- Legal Settlements: Track the status of the A-12 litigation and satellite arbitration cases (Thuraya, Telesat) to assess potential future liabilities.
- Connexion Wind-down: Confirm the final costs associated with the exit of the Connexion by Boeing business in the fourth quarter.
- 767 Tanker Contract: Assess the probability of securing the USAF tanker contract to ensure the continuation of the 767 production line.
- Aviall Integration: Review the final purchase price allocation for the Aviall acquisition and its impact on goodwill and intangible assets.