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.