Business Context and Reporting Period
Company: The Boeing Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Boeing operates in six principal segments: Commercial Airplanes; Integrated Defense Systems (IDS), comprising Aircraft and Weapon Systems, Network Systems, Support Systems, and Launch and Orbital Systems; Boeing Capital Corporation (BCC); and Other. The company is a global leader in aerospace, manufacturing commercial jetliners, military aircraft, satellites, and providing related support services and financing.
Key Financial Metrics
| Metric (in millions, except per share) | 2003 | 2002 | 2001 |
|---|---|---|---|
| Total Revenues | $50,485 | $54,061 | $58,198 |
| Operating Earnings | $449 | $3,462 | $3,586 |
| Operating Margin | 0.9% | 6.4% | 6.2% |
| Net Earnings | $718 | $492 | $2,827 |
| Diluted EPS | $0.89 | $0.61 | $3.41 |
| Free Cash Flow (Operating) | $3,881 | $4,236 | $3,735 |
| Total Debt | $14,443 | $14,403 | $12,265 |
| Cash and Short-term Investments | $4,633 | $2,333 | $633 |
| Contractual Backlog | $104,812 | $104,173 | $106,591 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 6.6% to $50.5 billion, primarily driven by a 21% drop in Commercial Airplanes revenues due to reduced deliveries (281 aircraft in 2003 vs. 381 in 2002) resulting from the airline industry downturn.
- Operating Earnings Collapse: Operating earnings fell 87% to $449 million. This was caused by lower commercial deliveries, a $913 million goodwill impairment charge (triggered by segment reorganization), a $1.1 billion charge related to satellite and launch businesses, and a $184 million charge for ending 757 production.
- Net Earnings Increase: Despite lower operating earnings, Net Earnings rose to $718 million (from $492 million) due to a $727 million benefit from federal tax audit settlements and interest income.
- Segment Performance:
- Commercial Airplanes: Operating earnings dropped to $707 million (from $2.0 billion) due to volume declines and program charges.
- Integrated Defense Systems (IDS): Operating earnings fell to $766 million (from $2.0 billion), heavily impacted by a $1.6 billion loss in the Launch and Orbital Systems segment.
- Boeing Capital Corporation (BCC): Operating earnings improved to $143 million (from $72 million) despite increased valuation allowances for airline customer credit deterioration.
Guidance, Outlook, and Risks
- 2004 Revenue Guidance: Management projects total 2004 revenues of approximately $52 billion.
- Commercial Outlook: The company expects the airline industry to generate a small aggregate profit in 2004, leading to an order recovery in 2005 and delivery growth in 2006. The 7E7 new airplane program is scheduled to begin full development in 2004.
- Pension Outlook: Due to declining interest rates, the company expects pension income to turn into a pension expense of $350 million to $400 million in 2004, and potentially $600 million to $700 million in 2005.
- Key Risks and Contingencies:
- Legal Proceedings: Significant exposure exists regarding the A-12 litigation (potential additional loss of $275 million to $1.49 billion depending on court rulings) and the EELV litigation (Lockheed Martin lawsuit seeking over $2 billion).
- Government Investigations: Ongoing investigations into the hiring of former government official Darleen Druyun and the dismissal of CFO Mike Sears.
- Program Risks: Potential $400 million charge if the 717 program is terminated; potential $261 million to $310 million charge if the USAF 767 Tanker order is not received.
- Customer Credit: Continued risk from airline bankruptcies (United, ATA, Hawaiian) impacting BCC's portfolio and collateral values.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the $913 million goodwill impairment charge and the impact of the segment reorganization on future testing.
- Tax Settlements: Confirm the sustainability of the $727 million tax benefit; this was a one-time event from prior year audits.
- 767 Tanker Program: Monitor the status of the USAF review for the 100-tanker order, as failure to secure it could trigger significant write-offs ($261M+).
- Pension Assumptions: Review the sensitivity of pension liabilities to changes in discount rates and expected asset returns, given the shift from income to expense in 2004.
- Legal Exposure: Track the progress of the A-12 and EELV litigation, as adverse rulings could result in multi-billion dollar liabilities.
- BCC Portfolio Quality: Assess the adequacy of valuation allowances for aircraft financing given the continued distress in the commercial airline sector.