Business Context and Reporting Period
Company: The Boeing Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Boeing is a major global aerospace firm operating in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications, and Boeing Capital Corporation (BCC). The company also maintains an "Other" segment for activities including Connexion by Boeing and Air Traffic Management.
Key Financial Metrics
| Metric (in millions) | 2002 | 2001 | 2000 |
|---|---|---|---|
| Total Revenues | $54,069 | $58,198 | $51,321 |
| Operating Earnings | $3,868 | $3,896 | $3,058 |
| Operating Margin | 7.2% | 6.7% | 6.0% |
| Net Earnings | $492 | $2,827 | $2,128 |
| Diluted EPS | $0.61 | $3.41 | $2.44 |
| Operating Cash Flow | $4,375 | $3,894 | $6,226 |
| Total Debt | $14,403 | $12,265 | $8,799 |
| Cash & Short-term Investments | $2,333 | $633 | $1,010 |
| Contractual Backlog | $104,173 | $106,591 | $120,600 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 7.1% to $54.1 billion, primarily driven by a significant drop in Commercial Airplane deliveries (381 units in 2002 vs. 527 in 2001) due to the post-September 11, 2001, aviation downturn.
- Net Earnings Collapse: Net earnings fell 82.6% to $492 million. This was largely due to a one-time, non-cash goodwill impairment charge of $1,827 million (net of tax) resulting from the adoption of SFAS No. 142.
- Segment Performance:
- Commercial Airplanes: Revenues dropped to $28.4 billion. Operating earnings (unit cost basis) rose slightly to $2.85 billion due to efficiency gains, but program accounting earnings declined.
- Military & Space: Military Aircraft revenues grew 12.4% to $14.0 billion. Space and Communications revenues grew 5.8% to $11.0 billion, though operating earnings declined due to commercial satellite losses.
- BCC: Revenues increased to $994 million, but operating earnings fell to $482 million due to $426 million in asset impairment and valuation charges related to airline credit deterioration.
- Backlog Reduction: Total contractual backlog decreased 2.3% to $104.2 billion, reflecting higher delivery volumes relative to new orders in the commercial sector.
Guidance, Outlook, and Risks
- 2003 Revenue Guidance: Management projects total 2003 revenues to be approximately $49 billion. Commercial Airplane deliveries are projected at approximately 280 units for 2003.
- Pension Outlook: Due to market declines and a reduction in the expected long-term rate of asset return, pension income included in operating earnings is expected to drop from $537 million in 2002 to approximately $75 million in 2003. A non-cash pension expense of $200-$300 million is anticipated in 2004.
- Key Risks & Contingencies:
- A-12 Litigation: Pending appeal regarding the termination of the A-12 aircraft contract. A loss of approximately $1.465 billion could occur if the court upholds the default termination and enters a money judgment against the company.
- Trade-in Commitments: The company has $1.99 billion in contractual trade-in values for used aircraft. Declining aircraft values increase the probability of these commitments being exercised, potentially leading to future charges.
- Off-Balance Sheet Guarantees: Significant exposure exists through asset-related and credit guarantees, particularly for the Sea Launch venture and commercial aircraft financing.
- United Airlines Bankruptcy: United filed for Chapter 11 protection in December 2002. The company has significant financing assets and guarantees tied to United, creating potential for material adverse effects.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the SFAS No. 142 goodwill impairment test, particularly the discount rates and cash flow forecasts, given the $2.4 billion pre-tax charge.
- Commercial Backlog Quality: Assess the risk of order cancellations or rescheduling within the $68.2 billion Commercial Airplanes backlog, noting that 34% of units are scheduled for delivery beyond 2005.
- BCC Asset Valuation: Review the adequacy of the $342 million valuation allowance for customer financing assets, especially regarding exposure to airlines with sub-investment-grade credit ratings.
- Pension Liability: Monitor the funded status of pension plans, which showed a significant unfunded status increase due to market losses and lower discount rates.
- A-12 Legal Exposure: Track the status of the A-12 contract litigation appeal, as the potential loss exceeds $1.4 billion.