Business Context and Reporting Period
Company: The Boeing Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1993
Business Overview: Boeing operates primarily in two segments: Commercial Aircraft (development, production, and marketing of jet transports) and Defense and Space (military aircraft, helicopters, space systems, and missile systems). The company is a leading producer of commercial transport aircraft, including the 737, 747, 757, and 767 series, and is in the development phase of the 777 twinjet, with initial deliveries scheduled for mid-1995.
Key Financial Metrics
| Metric (in millions) | 1993 | 1992 | 1991 |
|---|---|---|---|
| Operating Revenues | $25,438 | $30,184 | $29,314 |
| Net Earnings (Reported) | $1,244 | $552 | $1,567 |
| Net Earnings (Comparable Basis*) | $1,244 | $1,554 | $1,497 |
| Earnings Per Share (Reported) | $3.66 | $1.62 | $4.56 |
| Operating Profit | $1,691 | $2,040 | $1,954 |
| Research & Development Expense | $1,661 | $1,846 | $1,417 |
| Contractual Backlog | $73.5 billion | $87.9 billion | $97.9 billion |
| Cash and Short-term Investments | $3,108 | $3,614 | $3,453 |
| Total Debt | $2,630 | $1,793 | $1,317 |
*Comparable basis excludes the cumulative effect of the SFAS No. 106 accounting change for retiree health care adopted in 1992.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 16% to $25.4 billion from $30.2 billion in 1992. This was driven primarily by lower commercial aircraft deliveries (330 units in 1993 vs. 441 in 1992) and reduced Defense and Space sales ($4.4 billion vs. $5.4 billion), largely due to declining B-2 bomber subcontract work.
- Earnings Volatility: Reported net earnings were $1.244 billion, a significant increase from the $552 million reported in 1992. However, on a comparable basis (excluding the one-time $1.002 billion charge for retiree health care in 1992), earnings decreased by approximately 20% ($1.244 billion vs. $1.554 billion). The decline was attributed to lower sales, reduced investment income, and high R&D spending for the 777 program.
- Backlog Reduction: Total contractual backlog fell to $73.5 billion from $87.9 billion. Commercial backlog dropped to $69.0 billion, while Defense and Space backlog decreased to $4.2 billion.
- Debt Increase: Total debt increased to $2.63 billion from $1.79 billion, reflecting new long-term debt issuances to support liquidity needs.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 1994 Sales Projection: Total sales for 1994 are projected to be in the $21 billion range, lower than 1993 levels.
- Profitability: Management expects operating profit margins (excluding R&D for new models) to be substantially maintained through process improvements. However, net earnings as a percent of sales are expected to decline significantly in 1994 due to lower sales and continued high R&D expenditures.
- Production Rates: Commercial production rates were reduced in 1993 and are projected to be adjusted further in 1994-1995 to match customer orders. The 777 program is on schedule for flight tests in mid-1994 and deliveries in mid-1995.
- Defense Outlook: NASA's selection of Boeing as the prime contractor for the restructured Space Station program is expected to increase Defense and Space sales by approximately 10% in 1994.
Risks and Contingencies
- Peace Shield Program: The U.S. Government terminated the Peace Shield air defense system program for alleged default, demanding repayment of $605 million in unliquidated progress payments. Boeing is appealing the termination, arguing it should be converted to a termination for convenience. If the appeal fails, Boeing could face a pre-tax loss approximating the unliquidated payments plus interest and potential damages.
- Government Investigations: Boeing is subject to several U.S. Government investigations regarding business and cost classification practices, including a grand jury proceeding. Management believes these will not have a materially adverse effect.
- Market Conditions: The commercial aircraft market faces intense competition, weak airline profitability, and excess fleet capacity. Approximately 60% of the commercial backlog is scheduled for delivery after 1995, exposing the company to potential order cancellations or rescheduling due to economic shifts.
- Environmental Liabilities: While environmental remediation costs have averaged less than 2% of annual net earnings, the company faces ongoing obligations for contaminated sites.
Investor Verification Checklist
- Peace Shield Litigation Status: Verify the current status of the appeal regarding the $605 million termination for default and the potential for reprocurement claims.
- 777 Program Progress: Confirm the timeline for flight tests (mid-1994) and initial deliveries (mid-1995) to ensure R&D capitalization and inventory buildup align with cash flow projections.
- Airline Industry Health: Monitor the financial stability of major airline customers, as 62% of the backlog is with non-U.S. customers and 60% of commercial deliveries are scheduled post-1995.
- Government Contract Funding: Assess the impact of shrinking U.S. defense budgets on the Space Station, F-22, and V-22 programs, which are critical to the Defense and Space segment's recovery.
- Debt Service Coverage: Review the ratio of earnings to fixed charges (8.6x in 1993) against the increased debt load ($2.63 billion) to ensure liquidity remains sufficient for the projected cash outflows through mid-1995.