BA

Business Context and Reporting Period

Company: The Boeing Company (NYSE: BA)
Filing Type: Form 8-K (Current Report)
Date of Report: October 4, 2002
Reporting Period: Third Quarter ending September 30, 2002
Context: Boeing and its financing subsidiary, Boeing Capital Corporation (BCC), updated their assessment of the financing unit portfolio. The update addresses the continuing commercial aviation downturn, deteriorating airline credit ratings, and significant reductions in commercial aircraft values, particularly for older models.

Key Financial Metrics

Non-Cash Charges:

• Total Pre-Tax Charge: Approximately $250 million.
• Impact on Operating Earnings: Reduction of approximately $250 million.
• Impact on Net Earnings (After-Tax): Approximately $158 million.
• Impact Per Share: $0.20 per share.

Portfolio Overview (BCC):

• Total Financing Assets: $11.5 billion (as of end of Q3 2002).
• Assets Related to Boeing Products: $8.8 billion (primarily commercial aircraft).
• Valuation Allowance: Increased to 3.1% of applicable receivables (up from 2.1% at June 30, 2002).

Segment Allocation of Charges:

• Boeing Capital Corporation (BCC): $149 million reduction in operating earnings.
• Boeing "Other" Segment: $101 million reduction due to parent guarantees.

Material Changes and Specific Adjustments

The $250 million charge consists of three primary non-cash adjustments:

1. Increased Valuation Allowance ($110 million):
   • $75 million recorded by BCC and $35 million by the "Other" segment.
   • Driven by deteriorating airline credit ratings and depressed aircraft collateral valuations.
   • No significant receivable write-offs or substantial deterioration in delinquency rates occurred in Q3, but reserves were strengthened proactively.
2. Revaluation of United Airlines Investments ($79 million):
   • Write-down of equipment trust certificates ($79 million) held-to-maturity, deemed other than temporary.
   • Allocation: $13 million to BCC; $66 million to "Other" segment (parent guarantees).
   • United Airlines represents ~12% of the BCC portfolio ($1.3 billion). United remains current on payments.
3. Revaluation of Joint Venture and Other Assets ($61 million):
   • Joint Venture Impairment ($48 million): Related to 24 Boeing 727 aircraft (avg. age 20+ years) held for lease/conversion to cargo. Recorded entirely at BCC.
   • Other Asset Revaluation ($13 million): Primarily regional turboprops and other assets. Recorded entirely at BCC.

Outlook, Risks, and Management Commentary

Management Commentary:

• Boeing anticipated a gradual recovery post-September 11, 2001, but recent data indicates recovery will be slower than expected.
• BCC will continue to provide financing but with prudent standards regarding credit, equipment, return, and loan-to-value ratios.
• Portfolio growth is expected to slow due to fewer commercial airplane deliveries.

Risks and Uncertainties:

• Market Conditions: Continued volatility in the commercial aviation market and global economic conditions.
• Credit Risk: Further deterioration of airline credit ratings and potential defaults.
• Collateral Value: Continued decline in aircraft values, especially for older models.
• Operational Risks: Labor disputes, supplier performance, regulatory approvals, and government procurement timing.
• Forward-Looking Statements: Actual results may differ materially due to factors including the impact of the September 11 attacks, political stability, and trade policies.

Investor Verification Checklist

• Verify the full Q3 2002 earnings report scheduled for release on October 16, 2002, to confirm the final impact on net income and cash flow.
• Monitor United Airlines' credit rating and payment status, as they represent a significant portion (~12%) of the BCC portfolio.
• Review the trend of the valuation allowance percentage (currently 3.1%) in future quarters to assess the severity of the credit environment.
• Assess the market value of older aircraft models (e.g., 727s) and regional turboprops to gauge potential future impairment risks.
• Track the recovery timeline of the commercial aviation industry and its impact on Boeing's delivery rates and financing demand.