Business Context and Reporting Period
This Form 10-Q covers The Boeing Company for the quarterly period ended September 30, 2002, and the nine months ended on that date. The Company operates in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications, and Boeing Capital Corporation (BCC). The reporting period is characterized by a severe downturn in the commercial aviation market, the ongoing financial impact of the September 11, 2001 terrorist attacks, and the adoption of new accounting standards regarding goodwill.
Key Financial Metrics
| Metric (Dollars in millions) | 9 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2001 | 3 Months Ended Sep 30, 2002 | 3 Months Ended Sep 30, 2001 |
|---|---|---|---|---|
| Sales and Operating Revenues | $40,368 | $42,495 | $12,690 | $13,686 |
| Earnings from Operations | $2,829 | $3,651 | $562 | $1,066 |
| Net Earnings (Loss) | $(98) | $2,727 | $372 | $650 |
| Net Earnings (Excl. Accounting Change) | $1,729 | $2,726 | $372 | $650 |
| Cash Provided by Operating Activities | $2,663 | $3,668 | N/A | N/A |
| Cash and Cash Equivalents (End of Period) | $1,702 | $1,572 | $1,702 | $1,572 |
| Total Debt (Short & Long Term) | $13,605 | $12,265 | $13,605 | $12,265 |
| Shareholders' Equity | $10,903 | $10,825 | $10,903 | $10,825 |
Operating Margins: Earnings from operations margin was 7.0% for the nine months ended September 30, 2002, compared to 8.6% in the prior year period. For the third quarter, the margin was 4.4% compared to 7.8% in the prior year.
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 5.0% for the nine months and 7.3% for the quarter compared to 2001, primarily driven by a decline in commercial aircraft deliveries (295 delivered in 9 months 2002 vs. 383 in 2001) due to the aviation market downturn.
- Accounting Change Impact: The adoption of SFAS No. 142 (Goodwill and Other Intangible Assets) resulted in a one-time, non-cash cumulative effect charge of $1,827 million (net of tax) in the first quarter of 2002. This charge turned a reported net profit of $1,729 million into a net loss of $98 million for the nine-month period.
- Asset Impairments: Significant charges were recorded in the third quarter, including a $100 million write-down of an equity investment in Teledesic, LLC, and a $250 million pre-tax expense related to deteriorated aircraft values and customer credit ratings (primarily United Airlines).
- September 11 Charges: Special charges related to the September 11, 2001 attacks totaled $34 million for the nine months ended September 30, 2002, compared to $100 million in the same period of 2001.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the commercial aviation market downturn remains severe, with recovery in key U.S. domestic and transpacific markets slowing. The Company anticipates a higher than normal quantity of used airplane purchases through 2003. The Company announced the creation of Integrated Defense Systems (IDS) to merge space, defense, and government capabilities, though financial reporting will not reflect this new structure until 2003.
Risks and Contingencies:
- United Airlines Exposure: United Airlines, BCC's largest customer, filed for Chapter 11 protection and is seeking federal loan guarantees. While United remains current on payments, a default could have a material adverse effect on earnings and cash flows.
- A-12 Litigation: The U.S. Navy has demanded $2.347 billion related to the terminated A-12 contract. The Company disputes this, but a loss on appeal could result in pre-tax charges of approximately $1.46 billion.
- Pension and Health Care: Due to low interest rates and market declines, the Company expects a significant non-cash charge to equity (potentially up to $4 billion) in the fourth quarter of 2002. Retiree medical expenses are expected to increase by approximately $200 million in 2003.
- WTO Rulings: Ongoing disputes regarding U.S. export tax subsidies (FSC/ETI) could result in significant loss of tax benefits if replacement legislation is not enacted.
Investor Verification Checklist
- Goodwill Impairment: Verify the $1,827 million non-cash charge related to SFAS No. 142 adoption and its impact on reported net loss versus operating cash flow.
- United Airlines Status: Monitor United Airlines' bankruptcy proceedings and the status of its $1.8 billion federal loan guarantee request, as this represents a significant concentration risk for Boeing Capital Corporation.
- A-12 Contract Litigation: Track the appeal of the U.S. Court of Federal Claims decision regarding the A-12 contract termination, which carries a potential exposure of $1.46 billion.
- Pension Funding: Review the fourth-quarter financial statements for the anticipated non-cash charge to equity related to pension plan underfunding.
- Commercial Backlog: Assess the $68.9 billion commercial backlog and the impact of delivery rescheduling on near-term cash flows from advance payments.