Business Context and Reporting Period
This Form 10-Q covers The Boeing Company for the quarterly period ended September 30, 2003. The company operates through six principal segments: Commercial Airplanes, Integrated Defense Systems (comprising Aircraft and Weapon Systems, Network Systems, Support Systems, and Launch and Orbital Systems), Boeing Capital Corporation (BCC), and Other. The reporting period reflects a severe downturn in the commercial aviation market, significant legal and regulatory challenges, and strategic restructuring decisions.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 | Three Months Ended Sep 30, 2003 | Three Months Ended Sep 30, 2002 |
|---|---|---|---|---|
| Revenues | $37,287 million | $40,368 million | $12,242 million | $12,690 million |
| Operating Earnings (Loss) | $(233) million | $2,532 million | $433 million | $454 million |
| Net Earnings (Loss) | $(414) million | $(98) million | $256 million | $372 million |
| Diluted EPS | $(0.52) | $(0.12) | $0.32 | $0.46 |
| Operating Margin | (0.6)% | 6.3% | 3.5% | 3.6% |
| Cash and Equivalents | $1,733 million | $2,333 million (Dec 31, 2002) | ||
| Total Debt | $14,870 million | $14,403 million (Dec 31, 2002) | ||
| Operating Cash Flow | $249 million | $2,966 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by approximately 7.6% for the nine months ended September 30, 2003, primarily due to reduced deliveries of commercial airplanes resulting from the depressed airline industry.
- Operating Loss: The company reported an operating loss of $233 million for the nine-month period, a significant reversal from the $2.5 billion operating profit in the same period in 2002. This was driven by lower commercial deliveries, pension income reductions, and substantial impairment charges.
- Impairment Charges:
- Goodwill: A $913 million goodwill impairment charge was recorded in the first quarter of 2003 following the reorganization of defense segments into Integrated Defense Systems (IDS).
- Launch & Orbital Systems: A $1.03 billion charge was recorded in the second quarter related to the Delta IV and satellite businesses due to market reassessment and cost growth.
- Customer Financing: BCC recorded $237 million in impairment and valuation allowance charges due to deteriorating airline credit ratings and declining aircraft values.
- 757 Program Termination: In October 2003, Boeing announced the end of 757 production, resulting in a $184 million pre-tax charge recorded in the third quarter.
- Working Capital: Investment in working capital increased by approximately $1.9 billion, largely due to $1.7 billion in discretionary pension contributions made during the period.
Guidance, Outlook, Risks, and Contingencies
- Commercial Aviation Outlook: Management expects the commercial aviation market downturn to persist, with an over-supply of aircraft and weak demand. Total commercial jet deliveries for 2003 are projected to approximate 280 aircraft.
- 7E7 Program: Boeing plans to seek Board approval to offer the new 7E7 airplane in late 2003 or early 2004, with entry into service targeted for 2008.
- USAF Tanker Program: The Department of Defense has submitted a decision to order 100 KC-767 tankers. Congressional approval is anticipated in 2003. If not approved, potential termination costs could reach approximately $270 million by year-end.
- Legal and Regulatory Risks:
- EELV Program: The U.S. Air Force suspended certain space launch business units and terminated seven launches due to alleged possession of competitor information. Lockheed Martin has filed a lawsuit against Boeing and former employees.
- A-12 Litigation: Ongoing litigation regarding the termination of the A-12 contract. If the court rules for a termination for default, Boeing could face additional losses of approximately $1.485 billion.
- Shareholder Derivative Suits: Three lawsuits filed against the Board of Directors alleging breach of fiduciary duties related to internal controls and the EELV matter.
- Pension Obligations: Continued decline in interest rates may require an additional pre-tax non-cash charge of $350–$400 million in accumulated other comprehensive income at year-end, increasing future pension expenses and cash contributions.
- Customer Concentration: Significant exposure to airline customers in bankruptcy (United, ATA, Hawaiian). United accounts for 9.8% of BCC's portfolio; restructuring agreements are in place but subject to bankruptcy court approval.
Investor Verification Checklist
- 757 Program Impact: Verify the long-term effect of ending 757 production on collateral values and secondary market liquidity for BCC's portfolio.
- USAF Tanker Contract: Monitor Congressional approval status for the 100 KC-767 tanker order, which is critical for the 767 program's accounting quantity and margin.
- EELV Suspension: Track the status of the U.S. Air Force suspension of Boeing's space launch services and the outcome of the Lockheed Martin lawsuit.
- Pension Funding: Assess the impact of falling interest rates on future pension contributions and non-cash charges to earnings.
- Airline Bankruptcies: Review the progress of restructuring negotiations with United, ATA, and Hawaiian Airlines to gauge potential further credit losses in the BCC portfolio.
- Goodwill Impairments: Monitor future SFAS 142 reviews, particularly for the Launch and Orbital Systems segment, given the significant charges already taken.