BOEING CO quarterly report, Q3 FY2003

Business Context and Reporting Period

Company: The Boeing Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 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 navigating a severe downturn in the commercial aviation market, impacting delivery volumes and asset valuations.

Key Financial Metrics

Metric (Dollars in Millions) Six Months Ended
June 30, 2003
Six Months Ended
June 30, 2002
Three Months Ended
June 30, 2003
Three Months Ended
June 30, 2002
Sales and Operating Revenues $25,045 $27,679 $12,785 $13,858
Operating Earnings (Loss) $(666) $2,078 $(293) $1,176
Operating Margin (2.7)% 7.5% (2.3)% 8.5%
Net Earnings (Loss) $(670) $(470) $(192) $779
Net Cash Provided by Operating Activities $417 $1,686 N/A N/A
Cash and Cash Equivalents (End of Period) $1,879 $816 $1,879 $816
Total Debt $14,588 $14,403 $14,588 $14,403
Contractual Backlog $104,746 $104,173 $104,746 $104,173

Material Changes vs. Prior Period

  • Revenue Decline: Revenues decreased 9.5% year-over-year for the six-month period, primarily driven by reduced commercial airplane deliveries due to the depressed airline industry.
  • Operating Loss: The company reported an operating loss of $666 million for the six months ended June 30, 2003, compared to an operating profit of $2,078 million in the prior year. This shift was driven by significant impairment charges and lower volume.
  • Impairment Charges:
    • Goodwill: A $913 million goodwill impairment charge was recorded in Q1 2003 following the reorganization of segments into Integrated Defense Systems (IDS).
    • Launch & Orbital Systems (L&OS): A $1.1 billion charge was recognized in Q2 2003 due to loss positions on Delta IV launches and satellite business costs.
    • Customer Financing: Boeing Capital Corporation (BCC) recorded $203 million in pre-tax expenses related to valuation allowances and asset impairments due to airline bankruptcies and declining aircraft values.
  • Segment Performance:
    • Commercial Airplanes: Operating earnings dropped to $201 million (6 months) from $1,199 million, with margins falling to 1.7% from 7.5%.
    • Integrated Defense Systems: Reported an operating loss of $398 million (6 months) compared to $1,044 million profit in 2002, heavily impacted by L&OS charges.
    • Boeing Capital Corporation: Operating earnings turned negative at $(41) million (6 months) from $139 million profit.

Guidance, Outlook, Risks, and Contingencies

  • Commercial Aviation Outlook: Management projects total commercial jet aircraft deliveries for 2003 to approximate 280 units. The market remains characterized by over-supply, with approximately 2,000 parked airplanes globally. The company is monitoring the 757 program closely; termination could result in a pre-tax charge of approximately $200 million.
  • Defense and Space: The commercial space launch market remains weak. The company is focusing the Delta IV program on the government launch market. Unobligated backlog rose by approximately $9 billion, largely due to the U.S. Army's Future Combat System.
  • Legal and Regulatory Risks:
    • EELV Program: The U.S. Air Force suspended certain Boeing organizations from government contracts and reallocated seven launches to a competitor following an investigation into employee possession of competitor information. Lockheed Martin has also filed a lawsuit.
    • A-12 Litigation: Ongoing litigation regarding the A-12 aircraft contract termination. A loss provision of $350 million exists; potential additional loss could reach $1,480 million if courts rule against Boeing.
    • Bankruptcies: United Airlines and Hawaiian Holdings have filed for Chapter 11 protection, creating uncertainty regarding lease payments and asset recovery.
  • Accounting Changes: The company is assessing the impact of FASB Interpretation No. 46 (FIN 46) regarding the consolidation of variable interest entities, with potential impacts expected in Q3 2003.

Investor Verification Checklist

  • 757 Program Viability: Verify the status of sales campaigns and the likelihood of program termination, which could trigger a $200 million charge.
  • Customer Financing Exposure: Review the specific exposure to United Airlines and Hawaiian Holdings, including the value of collateral and potential write-downs.
  • L&OS Charges: Confirm the extent of the $1.1 billion charge in Launch and Orbital Systems and its impact on future government contract eligibility.
  • Goodwill Impairment: Assess whether further goodwill impairments are likely given the continued low stock price and segment reorganization.
  • FIN 46 Consolidation: Monitor Q3 2003 filings for the impact of consolidating variable interest entities (SPEs) and the associated debt and asset recognition.
  • Backlog Quality: Analyze the composition of the $104.7 billion backlog, specifically the portion dependent on U.S. Government appropriations and the 100 KC-767 tanker order pending Congressional approval.