Business Context and Reporting Period
Company: The Boeing Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Context: The report covers the second quarter and first six months of fiscal 2006. The company realigned its Integrated Defense Systems (IDS) segment into three new capabilities-driven businesses: Precision Engagement and Mobility Systems, Network and Space Systems, and Support Systems. The period was significantly impacted by a global settlement with the U.S. Department of Justice and a major charge related to the Airborne Early Warning & Control (AEW&C) program.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 2006 |
Six Months Ended June 30, 2005 |
Three Months Ended June 30, 2006 |
Three Months Ended June 30, 2005 |
|---|---|---|---|---|
| Total Revenues | $29,250 | $27,365 | $14,986 | $14,684 |
| Earnings from Operations | $911 | $1,505 | $(48) | $818 |
| Operating Margin | 3.1% | 5.5% | (0.3)% | 5.6% |
| Net Earnings | $532 | $1,101 | $(160) | $566 |
| Diluted EPS | $0.69 | $1.36 | $(0.21) | $0.70 |
| Cash from Operations | $4,498 | $4,091 | N/A | N/A |
| Cash and Equivalents (End of Period) | $7,567 | $4,961 | N/A | N/A |
| Total Debt | $10,461 | $10,727 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased by $1,885 million (6.9%) for the six months ended June 30, 2006, driven primarily by a $2,958 million increase in Commercial Airplanes revenues due to higher aircraft deliveries. This was partially offset by declines in Integrated Defense Systems (IDS) and the "Other" segment.
- Profitability Decline: Earnings from operations decreased by $594 million for the six-month period. The decline was primarily caused by a $571 million charge for a global settlement with the U.S. Department of Justice and a $496 million charge in the IDS segment related to the AEW&C program.
- Segment Performance:
- Commercial Airplanes: Operating earnings increased to $1,422 million (10.0% margin) from $863 million (7.7% margin) due to higher deliveries and improved cost performance, despite increased R&D spending on the 747-8 and 787 programs.
- Integrated Defense Systems: Operating earnings fell to $1,126 million (7.5% margin) from $1,671 million (10.8% margin). The Precision Engagement and Mobility Systems segment recorded a $496 million charge due to technical and flight test issues on the AEW&C program.
- Accounting Change: The company adopted a new accounting method for vendor concessions (EITF 02-16), recognizing them as a reduction in Cost of Products rather than revenue. This change reduced reported revenues and costs by equal amounts but had no effect on net earnings.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- DOJ Settlement: A $571 million pre-tax charge was recorded in Q2 2006 to settle potential criminal and civil claims related to the EELV and Druyun matters. The payment of $615 million was made in July 2006.
- AEW&C Charge: A $496 million charge was recorded in the Precision Engagement and Mobility Systems segment due to technical complexities, schedule delays, and cost growth on the international Airborne Surveillance Program.
- Outlook and Contingencies:
- Connexion by Boeing: The company is accelerating the evaluation of options for this business, with potential pre-tax charges up to $350 million in the second half of 2006.
- Aviall Acquisition: Boeing agreed to acquire Aviall, Inc. for $1.7 billion, expected to close in Q3 2006.
- Program Risks: The 767 program faces uncertainty regarding the USAF tanker contract; a decision to complete production could be made in 2006. The Delta IV program faces potential charges if re-pricing negotiations fail.
- Legal Proceedings: Significant ongoing litigation includes the A-12 aircraft contract dispute, shareholder derivative lawsuits (settled pending court approval), and employment discrimination class actions.
- Liquidity: Cash and cash equivalents increased to $7.567 billion. The company maintains strong credit ratings (A+ from Fitch, A2 from Moody's, A from S&P) and has $3 billion in unused borrowing capacity.
Investor Verification Checklist
- DOJ Settlement Impact: Verify the cash outflow timing for the $615 million DOJ settlement payment and confirm no further penalties are expected under the agreement.
- AEW&C Program Viability: Assess the revised cost estimates and delivery schedule for the AEW&C program to determine if further charges are likely.
- Connexion by Boeing: Monitor the evaluation of the Connexion business for potential impairment charges up to $350 million in the second half of 2006.
- 767 Tanker Program: Track the status of the USAF tanker competition and the potential for a production termination decision.
- Aviall Integration: Review the financial impact and integration progress of the $1.7 billion Aviall acquisition upon closing.
- Customer Credit Risk: Evaluate the exposure to airline bankruptcies (Delta, Northwest, VARIG) and the adequacy of valuation allowances on the Boeing Capital Corporation portfolio.