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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2001
Commission file number: 1-442
THE BOEING COMPANY
100 N. Riverside
Chicago, Illinois 60606
Telephone: (312) 544-2000
State of incorporation: Delaware
IRS identification number: 91-0425694
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
As of October 19, 2001, there were 797,972,254 shares of common stock, $5.00 par
value, issued and outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data)
(Unaudited)
Nine months ended Three months ended
September 30 September 30
-------------------------------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------------------------------
Sales and other operating revenues $42,496 $36,628 $13,687 $11,877
Cost of products and services 35,447 31,484 11,410 9,993
-------------------------------------------------------------------------------
7,049 5,144 2,277 1,884
Equity in income from joint ventures 72 38 28 8
General and administrative expense 1,713 1,639 546 607
Research and development expense 1,398 1,024 515 361
Gain on dispositions, net 20 20 20 7
Share-based plans expense 279 193 98 66
Special charges due to events of
September 11, 2001 100 100
-------------------------------------------------------------------------------
Earnings from operations 3,651 2,346 1,066 865
Other income, principally interest 280 343 28 121
Interest and debt expense (477) (320) (157) (110)
-------------------------------------------------------------------------------
Earnings before income taxes 3,454 2,369 937 876
Income taxes 728 722 287 267
-------------------------------------------------------------------------------
Net earnings before cumulative effect of
accounting change 2,726 1,647 650 609
Cumulative effect of accounting change, net 1
-------------------------------------------------------------------------------
Net earnings $ 2,727 $ 1,647 $ 650 $ 609
===============================================================================
Basic earnings per share $ 3.32 $ 1.91 $ .81 $ .71
===============================================================================
Diluted earnings per share $ 3.26 $ 1.89 $ .80 $ .70
===============================================================================
Cash dividends paid per share $ .51 $ .42 $ .17 $ .14
===============================================================================
See notes to condensed consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
September 30 December 31
2001 2000
-------------------------------------------------------------------------------
Assets (Unaudited)
-------------------------------------------------------------------------------
Cash and cash equivalents $ 1,572 $ 1,010
Accounts receivable 4,804 4,928
Current portion of customer and commercial financing 1,605 995
Deferred income taxes 2,176 2,137
Inventories, net of advances and progress billings 7,776 6,794
-------------------------------------------------------------------------------
Total current assets 17,933 15,864
Customer and commercial financing 7,613 5,964
Property, plant and equipment, net 8,695 8,814
Goodwill and acquired intangibles, net 6,536 5,214
Prepaid pension expense 5,602 4,845
Deferred income taxes 60
Other assets 1,526 1,267
-------------------------------------------------------------------------------
$47,905 $42,028
===============================================================================
Liabilities and Shareholders' Equity
-------------------------------------------------------------------------------
Accounts payable and other liabilities $12,529 $11,979
Advances in excess of related costs 4,713 3,517
Income taxes payable 1,751 1,561
Short-term debt and current portion of long-term debt 2,347 1,232
-------------------------------------------------------------------------------
Total current liabilities 21,340 18,289
Deferred income taxes 52
Accrued retiree health care 5,246 5,152
Deferred lease income 641
Long-term debt 9,306 7,567
Minority interest in subsidiaries 16
Shareholders' equity:
Common shares, par value $5.00 -
1,200,000,000 shares authorized;
Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059
Additional paid-in capital 1,657 2,693
Treasury shares, at cost - 174,421,299 and 136,385,222 (8,516) (6,221)
Retained earnings 14,526 12,090
Accumulated other comprehensive income (88) (2)
Unearned compensation (4) (7)
ShareValue Trust shares - 39,511,640 and 39,156,280 (1,330) (2,592)
-------------------------------------------------------------------------------
Total shareholders' equity 11,304 11,020
-------------------------------------------------------------------------------
$47,905 $42,028
===============================================================================
See notes to condensed consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine months ended
September 30
-------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $ 2,727 $ 1,647
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Share-based plans 279 193
Depreciation 877 970
Amortization of goodwill and intangibles 215 89
Customer and commercial financing valuation provision 55 9
Gain on dispositions, net (20) (20)
Changes in assets and liabilities -
Accounts receivable 103 (193)
Inventories, net of advances and progress billings (961) 477
Accounts payable and other liabilities 702 254
Advances in excess of related costs 1,196 533
Income taxes payable and deferred 264 328
Deferred lease income 641
Prepaid pension expense (757) (404)
Goodwill (1,465)
Accrued retiree health care 116 132
Other (304) (171)
-------------------------------------------------------------------------------
Net cash provided by operating activities 3,668 3,844
-------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing and properties on lease, additions (3,483) (1,121)
Customer financing and properties on lease, reductions 994 1,026
Property, plant and equipment, net additions (712) (617)
Acquisitions, net of cash acquired (22) (316)
Proceeds from dispositions 135 120
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Net cash used by investing activities (3,088) (908)
-------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 3,453 1,610
Debt repayments (691) (569)
Common shares purchased (2,417) (894)
Stock options exercised, other 76 104
Dividends paid (439) (379)
-------------------------------------------------------------------------------
Net cash used by financing activities (18) (128)
-------------------------------------------------------------------------------
Net increase in cash and cash equivalents 562 2,808
Cash and cash equivalents at beginning of year 1,010 3,354
-------------------------------------------------------------------------------
Cash and cash equivalents at end of 3rd quarter $ 1,572 $ 6,162
===============================================================================
See notes to condensed consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 1 - Condensed Consolidated Interim Financial Statements
The condensed consolidated interim financial statements included in this
report have been prepared by The Boeing Company and subsidiaries
(the "Company") without audit. In the opinion of management, all adjustments
necessary for a fair presentation are reflected in the interim financial
statements. Such adjustments are of a normal and recurring nature. The results
of operations for the period ended September 30, 2001, are not necessarily
indicative of the operating results for the full year. The interim financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 2000 Annual
Report. Certain reclassifications have been made to prior periods to conform
with current reporting.
Note 2 - Accounting for the Impact of the September 11, 2001, Terrorist Attacks
On September 11, 2001, the United States was the target of severe terrorist
attacks that involved the use of U.S. commercial aircraft manufactured by the
Company. These attacks resulted in a significant loss of life and property,
and caused major disruptions in business activities and in the U.S. economy
overall.
To address the widespread impact of the attacks, the Emerging Issues Task
Force (EITF) released Issue No. 01-10, "Accounting for the Impact of
Terrorist Attacks of September 11, 2001." This issue specifically prohibits
treating costs and losses resulting from the events of September 11, 2001,
as extraordinary items; however, it observes that any portion of these
costs and losses deemed to be unusual or infrequently occurring should be
presented as a separate line item in income from continuing operations.
For the quarter ended September 30, 2001, the Company recorded an initial
charge of $100 in the caption 'Special charges due to events of
September 11, 2001'. This charge related to certain severance costs that
were probable and estimable, and are expected to be principally incurred
by year-end 2001. The employment reductions resulted from the decrease in
aircraft demand, which directly related to the attacks of
September 11, 2001.
The Company has undertaken an assessment of other losses and costs it
expects to incur in relation to the attacks. These costs are not yet
reasonably estimable due to the period of time required for resolution.
The Company expects many of these costs to become estimable within the
next three to twelve months, and will continue to be recognized as a
separate component of earnings from operations entitled 'Special charges
due to events of September 11, 2001'. These losses and costs are expected
to relate principally to additional employee severance and out-placement,
vendor termination, valuation of receivables, impairment of assets,
inventory impairment, guarantees extended by the Company and certain
other items.
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Note 2 - Accounting for the Impact of the September 11, 2001, Terrorist
Attacks (continued)
As stated in Note 1 of the Company's 2000 Annual Report, cost of sales for
the commercial aircraft programs is determined under the program method of
accounting based on estimated average total cost and revenue for the current
program quantity. The estimated program average costs and revenues are
reviewed and reassessed quarterly. The Company expects that the events of
September 11, 2001, will result in a decrease in deliveries and demand for
the commercial aircraft programs that will impact the cost and revenue
estimates for the applicable program quantities. The Company expects to
reflect the estimate adjustments attributable to the events of
September 11, 2001, as they become reasonably estimable over the next five
quarters.
Note 3 - Acquisitions
On October 6, 2000, the Company acquired the Hughes Electronics Corporation
(Hughes) space and communications and related businesses. The acquisition
was accounted for under the purchase method, by which the purchase price was
allocated to the net assets acquired based on preliminary estimates of their
fair values. The original purchase price was $3,849, initial goodwill was
valued at $740 and the other intangible assets were valued at $631. During
the period from acquisition to the third quarter of 2001, the Company
completed its assessment of the net assets acquired and goodwill was increased
to a balance of $2,205. The majority of the goodwill adjustments relate to
claims submitted to Hughes for resolution as contractual purchase price
contingencies. The Company anticipates finalizing the Hughes purchase price
allocation during 2002, at the conclusion of arbitration procedures related
to these contingencies. Other adjustments were recorded to reflect finalization
of fair value assessments for the net assets acquired and the impact of the
Company's accounting policies on acquired balances.
The purchase price and related allocation, reflecting adjustments made through
September 30, 2001, were as follows:
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Working capital $ (940)
Property, plant and equipment 875
Prepaid pension assets 626
Other assets 54
Goodwill 2,205
Other acquired intangibles 647
In-process research and development 500
Retiree health care (118)
-------------------------------------------------------------------------------
Purchase price $3,849
===============================================================================
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Note 3 - Acquisitions (continued)
In July 2001, the Financial Accounting Standards Board issued two new
pronouncements: Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company is required to adopt SFAS No. 141 for all business
combinations completed after June 30, 2001. This standard requires that
business combinations initiated after June 30, 2001, be accounted for under
the purchase method. Goodwill and other intangible assets that resulted from
business combinations before July 1, 2001, must be reclassified to conform to
the requirements of SFAS No. 142, as of the statement adoption date.
Additionally, the Company will be required to adopt SFAS No. 142 at the
beginning of 2002 for all goodwill and other intangible assets recognized
in the Company's statement of financial position as of January 1, 2002.
This statement changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of this
standard. The standard is immediately applicable for any goodwill acquired
after June 30, 2001. Goodwill and intangible assets acquired after
June 30, 2001, should be tested for impairment and written down and charged
to results of operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. The Company is
evaluating the impact of the adoption of this standard and has not yet
determined the effect, if any, that this statement will have on its financial
position and results of operations.
Note 4 - Earnings per Share
The weighted average number of shares outstanding (in millions) used to compute
earnings per share are as follows:
Nine months ended Three months ended
September 30 September 30
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic shares 821.7 864.4 804.4 858.2
Diluted shares 837.4 873.5 814.7 873.3
Basic earnings per share are calculated based on the weighted average number of
shares outstanding, excluding treasury shares and the outstanding shares held by
the ShareValue Trust. Diluted earnings per share are calculated based on that
same number of shares plus additional dilutive shares representing stock
distributable under stock option and stock unit plans computed using the
treasury stock method, plus contingently issuable shares from other share-based
plans on an as-if converted basis.
Note 5 - Income Taxes
The effective tax rate of 21.1% for the first nine months of 2001 is principally
due to a one-time benefit of $343 reflecting a settlement with the Internal
Revenue Service (IRS) relating to research credit claims on McDonnell Douglas
Corporation fixed-price government contracts applicable to the 1986-1992
federal income tax returns.
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Note 5 - Income Taxes (continued)
Absent this settlement, the effective tax rate for the first nine months
would have been 30.6%. The 30.6% effective tax rate differs from the federal
statutory rate of 35% due to Foreign Sales Corporation (FSC) tax benefits,
extra-territorial income exclusion, tax credits, state income taxes and the
non-deductibility of certain goodwill, primarily the goodwill associated with
the acquisition of Rockwell International Corporation in 1996. Income tax
payments, net of refunds and settlements, were $747 and $362 for the nine
months ended September 30, 2001 and 2000. Payments for the nine months ended
September 30, 2001, included approximately $900 due principally to the
closeout of contracts accounted for under the completed contract method for
tax purposes.
In December 1996, The Boeing Company filed suit in the U.S. District Court for
the Western District of Washington for the refund of over $400 in federal income
taxes and related interest. The suit challenged the IRS method of allocating
research and development costs for the purpose of determining tax incentive
benefits on export sales through the Company's Domestic International Sales
Corporation (DISC) and its Foreign Sales Corporation for the years 1979
through 1987. In September 1998, the District Court granted the Company's
motion for summary judgment. The U.S. Department of Justice appealed this
decision. On August 2, 2001, The United States Court of Appeals for the Ninth
Circuit reversed the District Court's summary judgment. The Company has fully
provided for any potential earnings impact that may result from this decision.
The Company has filed a petition for rehearing with the Ninth Circuit Court
of Appeals.
Note 6 - Accounts Receivable
Accounts receivable consisted of the following:
September 30 December 31
2001 2000
-------------------------------------------------------------------------------
U.S. Government contracts $2,427 $2,693
Other 2,377 2,235
-------------------------------------------------------------------------------
$4,804 $4,928
===============================================================================
Note 7 - Inventories
Inventories consisted of the following:
September 30 December 31
2001 2000
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Commercial aircraft programs and
long-term contracts in progress $ 20,362 $ 19,399
Commercial spare parts, general
stock materials and other 2,018 1,972
-------------------------------------------------------------------------------
22,380 21,371
Less advances and progress billings (14,604) (14,577)
-------------------------------------------------------------------------------
$ 7,776 $ 6,794
===============================================================================
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Note 7 - Inventories (continued)
Inventory costs at September 30, 2001, included unamortized tooling of $889 and
$351 relating to the 777 and Next Generation 737 programs, and excess deferred
production costs of $930 and $509 relating to the 777 and Next Generation 737
programs. There were no significant deferred production costs or unamortized
tooling associated with the 717 program.
Note 8 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
September 30 December 31
2001 2000
-------------------------------------------------------------------------------
Aircraft financing
Notes receivable $1,070 $ 593
Investment in sales-type/financing leases 2,393 1,119
Operating lease equipment, at cost,
less accumulated depreciation of $320 and $305 3,303 3,098
Commercial equipment financing
Notes receivable 931 915
Investment in sales-type/financing leases 879 697
Operating lease equipment, at cost,
less accumulated depreciation of $90 and $95 803 710
-------------------------------------------------------------------------------
Less valuation allowance (161) (173)
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$9,218 $6,959
===============================================================================
Financing for aircraft is collateralized by security in the related asset, and
historically the Company has not experienced difficulty in accessing such
collateral when necessary. Commercial equipment financing also includes amounts
attributable to regional aircraft, principally with fewer than 80 seats.
The change in the valuation allowance for the first nine months of 2001
consisted of the following:
Valuation
Allowance
-------------------------------------------------------------------------------
Beginning balance - December 31, 2000 $(173)
Charged to costs and expenses (15)
Reduction in customer and commercial financing assets 27
-------------------------------------------------------------------------------
Ending balance - September 30, 2001 $(161)
===============================================================================
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Note 9 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
September 30 December 31
2001 2000
-------------------------------------------------------------------------------
Accounts payable $ 5,285 $ 5,040
Accrued compensation and employee benefit costs 3,043 2,938
Lease and other deposits 357 731
Dividends payable 149
Other 3,844 3,121
-------------------------------------------------------------------------------
$12,529 $11,979
===============================================================================
Note 10 - Deferred Lease Income
The Company entered into an agreement with the United Kingdom Royal Air Force
(UKRAF) to lease four C-17 transport aircraft, delivered during the second and
third quarters of 2001. The lease term is seven years, at the end of which the
UKRAF has the right to purchase the aircraft for a stipulated value, continue
the lease for two additional years, or return the aircraft. Concurrent with the
negotiation of this lease, the Company and the UKRAF arranged to assign the
contractual lease payments to an independent financial institution. The Company
received proceeds from the financial institution in consideration of the
assignment of the future lease receivables from the UKRAF. The assignment of
lease receivables is non-recourse to the Company. The proceeds represent the
present value of the assigned total lease receivables discounted at a rate of
6.6%. The C-17 deliveries are accounted for as operating leases.
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Note 11 - Debt
Short- and long-term debt consisted of the following:
September 30 December 31
2001 2000
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Non-recourse debt and notes
Enhanced Equipment Trust Certificates $ 635 $ -
9.9% - 14.3% notes due through 2010 67 74
Unsecured debentures and notes
$174, 8 3/8% due Feb. 15, 2001 174
$49, 7.565% due Mar. 30, 2002 48 49
$120, 9.25% due Apr. 1, 2002 120 120
$300, 6 3/4% due Sep. 15, 2002 299 299
$300, 6.35% due Jun. 15, 2003 300 300
$200, 7 7/8% due Feb. 15, 2005 205 206
$300, 6 5/8% due Jun. 1, 2005 295 294
$250, 6.875% due Nov. 1, 2006 249 248
$175, 8 1/10% due Nov. 15, 2006 175 175
$350, 9.75% due Apr. 1, 2012 348 348
$400, 8 3/4% due Aug. 15, 2021 398 398
$300, 7.95% due Aug. 15, 2024 300 300
$250, 7 1/4% due Jun. 15, 2025 247 247
$250, 8 3/4% due Sep. 15, 2031 248 248
$175, 8 5/8% due Nov. 15, 2031 173 173
$300, 6 5/8% due Feb. 15, 2038 300 300
$100, 7.50% due Aug. 15, 2042 100 100
$175, 7 7/8% due Apr. 15, 2043 173 173
$125, 6 7/8% due Oct. 15, 2043 125 125
Senior debt securities
2.7% - 9.2% due through 2012 3,359 1,547
Senior medium-term notes
2.7% - 7.6% due through 2017 2,159 1,775
Subordinated medium-term notes
6.0% - 8.3% due through 2012 20 25
Capital lease obligations due through 2021 312 315
Commercial paper 862 651
Other notes 136 135
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$11,653 $8,799
===============================================================================
Of the debt balances reported above, $6,303 and $4,318 are attributed to
Boeing Capital Corporation (BCC), a wholly owned subsidiary of the Company,
for September 30, 2001, and December 31, 2000.
The Company has $3,000 currently available under credit line agreements with a
group of commercial banks. The Company has complied with the restrictive
covenants contained in various debt agreements. Total debt interest, including
amounts capitalized, was $489 and $388 for the nine months ended
September 30, 2001 and 2000. Interest payments were $478 and $459 for the same
respective periods.
On February 16, 2001, BCC filed a public shelf registration of $5,000 with the
Securities and Exchange Commission (SEC). From this $5,000 shelf, BCC received
proceeds on March 8, 2001, from the issuance of $750 in 6.10% senior notes due
2011. On May 10, 2001, BCC received proceeds from the issuance of $1,000 in
5.65% senior notes due 2006.
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Note 11 - Debt (continued)
On May 24, 2001, American Airlines issued Enhanced Equipment Trust Certificates
(EETC), and the Company through BCC received proceeds attributable to 32 MD-83
aircraft owned by BCC and on lease to American Airlines. The effective interest
rates of these non-recourse borrowings range from 6.82% to 7.69%.
Short-term debt and the current portion of long-term debt as of
September 30, 2001, consisted of the following: $869 of senior debt securities,
senior medium-term notes, subordinated medium-term notes, $862 of commercial
paper, $420 of unsecured debentures and notes, $37 of capital lease
obligations, $68 of non-recourse debt and notes, and $91 of other notes.
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Note 12 - Shareholders' Equity
Changes in shareholders' equity for the nine month periods ended September 30,
2001 and 2000, consisted of the following:
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2001 2000
(Shares in thousands) Shares Amount Shares Amount
-------------------------------------------------------------------------------
Common stock
Beginning balance - January 1 1,011,870 $ 5,059 1,011,870 $ 5,059
-------------------------------------------------------------------------------
Ending balance - September 30 1,011,870 $ 5,059 1,011,870 $ 5,059
===============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 2,693 $ 1,684
Share-based compensation 279 193
Treasury shares issued for stock plans, net (66) (174)
Tax benefit related to stock plans 13 21
ShareValue Trust market value adjustment (1,262) 833
-------------------------------------------------------------------------------
Ending balance - September 30 $ 1,657 $ 2,557
===============================================================================
Treasury stock
Beginning balance - January 1 136,385 $(6,221) 102,357 $(4,161)
Treasury shares issued for
stock plans, net (2,698) 122 (3,976) 153
Treasury shares acquired 40,734 (2,417) 19,295 (894)
-------------------------------------------------------------------------------
Ending balance - September 30 174,421 $(8,516) 117,676 $(4,902)
===============================================================================
Retained earnings
Beginning balance - January 1 $12,090 $10,487
Net earnings 2,727 1,647
Cash dividends declared (291) (252)
-------------------------------------------------------------------------------
Ending balance - September 30 $14,526 $11,882
===============================================================================
Accumulated other comprehensive income
Beginning balance - January 1 $ (2) $ 6
Losses on certain investments, net of tax (6) (11)
Losses on derivative instruments, net of tax (67)
Foreign currency translation adjustment (13) 5
-------------------------------------------------------------------------------
Ending balance - September 30 $ (88) $ 0
===============================================================================
Unearned compensation
Beginning balance - January 1 $ (7) $ (12)
Amortization and forfeitures 3 3
-------------------------------------------------------------------------------
Ending balance - September 30 $ (4) $ (9)
===============================================================================
ShareValue Trust
Beginning balance - January 1 39,156 $(2,592) 38,696 $(1,601)
Shares acquired from dividend reinvestment,
net of fees 356 380
Market value adjustment 1,262 (833)
-------------------------------------------------------------------------------
Ending balance - September 30 39,512 $(1,330) 39,076 $(2,434)
===============================================================================
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Note 12 - Shareholders' Equity (continued)
For the nine months ended September 30, 2001 and 2000, comprehensive income and
net earnings differed only by the changes in accumulated other comprehensive
income shown above.
Note 13 - Share-Based Compensation
Share-based plans expense consisted of the following:
Nine months ended Three months ended
September 30 September 30
-------------------------------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------------------------------
Performance shares $168 $ 91 $60 $33
ShareValue Trust 54 54 18 18
Stock options, other 57 48 20 15
-------------------------------------------------------------------------------
$279 $193 $98 $66
===============================================================================
Note 14 - General and Administrative Expense
The Company has issued 7,477,518 stock units as of September 30, 2001, that
are convertible to either stock or a cash equivalent, of which 6,549,986 are
vested, and the remainder vest with employee service. These stock units
principally represent a method of deferring employee compensation by which a
liability is established based upon the current stock price. An expense or
reduction in expense is recognized associated with the change in that
liability balance and is recorded against general and administrative expense.
For the nine months ended September 30, 2001, general and administrative
expense related to deferred stock compensation was decreased by $198.
Note 15 - Derivatives and Hedging Activities
As of January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This standard
requires that all derivative instruments, such as interest rate swap contracts
and other derivative contracts, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
accumulated other comprehensive income), depending on whether the derivative
is being used to hedge changes in fair value or cash flows. The adoption of
SFAS No. 133 resulted in a transition gain of $1 on the consolidated
statements of operations shown under the caption 'Cumulative effect of
accounting changes, net', and a loss of $11 (net of tax of $7) recorded to
accumulated other comprehensive income.
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Note 15 - Derivatives and Hedging Activities (continued)
Use of Derivative Financial Instruments
The Company uses derivative financial instruments principally to manage the
risk that changes in interest rates will affect either the fair value of its
debt obligations or the amount of its future interest payments and to manage
currency and price risk associated with forecasted transactions. On a limited
basis, the Company enters into derivative instruments that are not eligible
for hedge accounting under SFAS No. 133. The following is a summary of the
Company's risk management strategies and the effect of these strategies on
the consolidated financial statements.
Interest Rate Risk Management
The Company uses interest rate swap contracts to adjust the amount of total
debt that is subject to variable and fixed interest rates. Pursuant to SFAS
No. 133, the Company accounts for its interest rate swap contracts
differently depending upon whether the contract receives hedge accounting
treatment and upon the nature of the exposure being hedged. Interest rate
swap contracts are entered into with a number of major financial institutions
in order to minimize counterparty credit risk.
Interest rate swap contracts under which the Company agrees to pay variable
rates of interest are generally designated as hedges of changes in the fair
value of the Company's fixed-rate debt obligations. At September 30, 2001,
the Company held eleven interest rate swaps that are accounted for as fair
value hedges. During the quarter ended September 30, 2001, the Company had
no terminated interest rate swaps and entered into no additional interest
rate swaps that are accounted for as fair value hedges.
Interest rate swap contracts under which the Company agrees to pay fixed
rates of interest are generally designated as hedges of changes in the
amount of future cash flows associated with the Company's interest payments
on variable-rate debt obligations. At September 30, 2001, the Company held
two interest rate swaps that are accounted for as cash flow hedges. During
the quarter ended September 30, 2001, the Company had no terminated interest
rate swaps and entered into one additional interest rate swap that is
accounted for as a cash flow hedge.
As of September 30, 2001, interest rate swaps were reflected at a fair value
of $110 in other assets and $21 in other liabilities. Related amounts were
reflected in accumulated other comprehensive income of $10 ($7 after tax),
underlying long-term senior debt of $92 and net other expense of $2. During
the next twelve months, the Company expects to reclassify to expense $3 from
the amount recorded in accumulated other comprehensive income and recognize
income of $11 related to the basis adjustment of certain underlying liabilities.
The Company also entered into forward-starting interest rate swap agreements
to effectively lock in the cost of funding a firmly committed lease for which
payment terms are fixed in advance of funding. This hedge relationship mitigates
the changes in fair value of the hedged portion of the firm commitment caused by
changes in interest rates. The interest rate swap during the commitment period
does not match that of the firmly committed lease payments as a result of the
forward-starting period. Therefore, in addition to identifying the specific
firmly committed cash flows being hedged, it is necessary to specify that only a
percentage thereof is being hedged during the commitment period.
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Note 15 - Derivatives and Hedging Activities (continued)
This hedge ratio is updated periodically during the commitment period and, as
necessary, the forward-starting swap is redesignated prospectively as a hedge
of a new percentage of the identified firmly committed cash flows. At the end
of each quarter, the cumulative change in fair value of the forward-starting
swap is compared to that of the hedged portion of the lease commitment. Any
net changes in fair value of the hedged portion of the firm commitment and the
interest rate swap are reported in earnings as ineffectiveness. For the nine
months ended September 30, 2001, total ineffectiveness of $1 in income
resulted from firm commitment income of $15 offset by the interest rate swap
expense of $14.
Commodity Derivatives
The Company uses commodity derivatives such as fixed-price purchase
commitments to hedge against potentially unfavorable price changes for items
used in production.
On June 29, 2001, the Derivatives Implementation Group, in support of the
Financial Accounting Standards Board, issued Statement 133 Implementation
Issue C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception
for Option-Type Contracts and Forward Contracts in Electricity." This
Implementation Issue concluded that the normal purchases and normal sales
exceptions as described in SFAS No. 133, applied to electricity contracts
only to the extent that the power purchaser is an entity engaged in selling
electricity to retail or wholesale customers. The effective date of this
implementation guidance for the Company was July 1, 2001.
The Company entered into certain commitments to purchase electricity at fixed
prices over a three-year period. As a result of Implementation Issue C15, these
commitments are deemed to be derivatives and are stated at fair value on the
statement of financial position. These derivatives qualify for cash flow hedge
treatment, with the initial valuation resulting in an unrecognized loss in
accumulated other comprehensive income of $84 (net of tax of $49). For the
three month period ended September 30, 2001, these derivatives resulted in
expense of $12. During the next twelve months, the Company expects to
reclassify to expense $22 from the amount recorded in accumulated other
comprehensive income attributable to these derivatives.
Foreign Currency Exchange Derivatives
The Company has foreign currency forward contracts that were entered into to
hedge receipt and expenditure commitments made in foreign currencies. As of
September 30, 2001, the notional amount of foreign currency forward contracts
accounted for as cash flow hedges was $362. These hedges are carried at market
value, resulting in $34 recorded in other assets and $10 recorded in other
liabilities, offset by a net gain in accumulated other comprehensive income
($15 net of tax).
Derivative Financial Instruments Not Receiving Hedge Treatment
The Company also holds other interest rate swaps and interest exchange
agreements. Economically, the intent of these interest rate swaps is to
"hedge" the exposure created by the interest exchange agreements.
16
17
Note 15 - Derivatives and Hedging Activities (continued)
However, because the exposure being hedged is a derivative instrument, this
relationship does not qualify for hedge accounting under SFAS No. 133. As a
result, changes in fair value of both instruments are immediately recognized
in income. For the nine months ended September 30, 2001, these interest rate
swaps resulted in expense of $14 and the interest exchange agreements
resulted in income of $12.
The Company uses derivatives in the form of convertible debt and warrants
in certain transactions to enhance the income potential in financing
transactions. As of September 30, 2001, the conversion feature of the
convertible debt and warrants were reflected at a fair value of $6 in other
assets. These were initially recorded together based on their fair values as
a discount to notes receivable of $20. The remaining portion of the
conversion feature of the convertible debt and warrants had a decrease
in fair value, resulting in $2 recorded as a reduction in other
income for the nine months ended September 30, 2001.
At September 30, 2001, the Company has foreign currency forward contracts
with a notional value of $200 that were not accounted for as hedges and
carried at market value, resulting in $34 recorded in other liabilities.
The Company realized a pretax loss of $11 attributable to these forward
contracts during the nine months ended September 30, 2001.
Other derivatives held by the Company include a forward-starting interest
rate swap that is not accounted for as a hedge, and as of September 30, 2001,
other assets included $18 as a result of marking to market this interest rate
swap. Accumulated other comprehensive income included a gain of $9 (net of
tax of $5) attributable to this swap due to the transition adjustment
resulting from implementation of SFAS No. 133, as amended. This transition
adjustment is amortized to other income over a period of 13 years.
The Company believes that it is unlikely that any of its counterparties
will be unable to perform under the terms of derivative financial instruments.
Note 16 - Contingencies
Various legal proceedings, claims and investigations related to products,
contracts and other matters are pending against the Company. Most
significant legal proceedings are related to matters covered by insurance.
Major contingencies are discussed below.
The Company is subject to U.S. Government investigations of its
practices from which civil, criminal or administrative proceedings
could result. Such proceedings could involve claims by the Government
for fines, penalties, compensatory and treble damages, restitution and/or
forfeitures. Under government regulations, a company, or one or more
of its operating divisions or subdivisions, can also be suspended or
debarred from government contracts, or lose its export privileges,
based on the results of investigations. The Company believes, based
upon all available information, that the outcome of any such government
disputes and investigations will not have a material adverse effect on
its financial position or continuing operations.
17
18
Note 16 - Contingencies (continued)
In 1991, the U.S. Navy notified McDonnell Douglas (now a subsidiary of
the Company) and General Dynamics Corporation (the "Team") that it was
terminating for default the Team's contract for development and initial
production of the A-12 aircraft. The Team filed a legal action to contest
the Navy's default termination, to assert its rights to convert the
termination to one for "the convenience of the Government," and to obtain
payment for work done and costs incurred on the A-12 contract but not paid
to date. As of September 30, 2001, inventories included approximately $582
of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350. The amount of the provision, which was
established in 1990, was based on McDonnell Douglas's belief, supported by
an opinion of outside counsel, that the termination for default would be
converted to a termination for convenience, and that the upper range of
possible loss on termination for convenience was $350.
On August 31, 2001, the U.S. Court of Federal Claims issued a decision after
trial upholding the Government's default termination of the A-12 contract on
the ground that the Team could not meet the revised contract schedule
unilaterally imposed by the Government after the Government had waived the
original schedule. The court did not, however, enter a judgment for the
Government on its claim that the Team be required, as a consequence of the
alleged default, to repay progress payments that had not been liquidated by
deliveries at the time of termination. These unliquidated progress payments
total $1,350. On October 4, 2001, the court confirmed that it would not be
entering judgment in favor of the Government in the amount of these
unliquidated progress payments. This is the latest decision relating to
long-running litigation resulting from the A-12 contract termination in 1991,
and follows an earlier trial court decision in favor of the contractors and
reversal of that initial decision on appeal.
The Company believes, supported by an opinion of outside counsel, that the
trial court's rulings with respect to the enforceability of the unilateral
schedule and the termination for default are contrary to law and fact. The
Company believes the decision raises valid issues for appeal and intends to
pursue its right to the appeal.
If, contrary to the Company's belief, the decision of the trial court on
termination were sustained on appeal, the Company would incur an additional
loss of approximately $275, consisting principally of remaining inventory
costs and adjustments. And if, contrary to the Company's belief, the appeals
court further held that a money judgment should be entered against the Team
in the amount of the unliquidated progress payments, the Team would be
required to pay the Government $1,350 plus statutory interest from February
1991 (currently totaling approximately $900). Under this outcome, the
Company would be obligated to pay one half of these amounts. The additional
loss to the Company would total approximately $1,400 in pretax charges,
consisting principally of the repayment obligations and the remaining
inventory costs and adjustments.
The Company believes that the loss provision established by McDonnell
Douglas in 1990 continues to provide adequately for the reasonably possible
reduction in value of A-12 net contracts in process as of September 30, 2001.
Final resolution of the A-12 litigation will depend upon the outcome of
further proceedings or possible negotiations with the Government.
18
19
Note 16 - Contingencies (continued)
On October 31, 1997, a federal securities lawsuit was filed against the
Company in the U.S. District Court for the Western District of Washington,
in Seattle. The lawsuit names as defendants the Company and three of its
then executive officers. Additional lawsuits of a similar nature have been
filed in the same court. These lawsuits were consolidated on
February 24, 1998. The lawsuits generally allege that the defendants
desired to keep the Company's share price as high as possible in order to
ensure that the McDonnell Douglas shareholders would approve the merger
and, in the case of the individual defendants, to benefit directly from
the sale of Boeing stock during the period from April 7, 1997 through
October 22, 1997. By order dated May 1, 2000, the Court certified two
subclasses of plaintiffs in the action: a. all persons or entities who
purchased Boeing stock or call options or who sold put options during the
period from July 21, 1997 through October 22, 1997, and b. all persons or
entities who purchased McDonnell Douglas stock on or after April 7, 1997,
and who held such stock until it converted to Boeing stock pursuant to the
merger. The plaintiffs sought compensatory damages and treble damages. On
September 17, 2001, the Company reached agreement with class counsel to
settle the lawsuit for $92.5. The settlement will have no effect on the
Company's earnings, cash flow or financial position, as it is within
insurance limits. The settlement is conditioned on notice to the class
members and Court approval, which is expected to occur in 2002.
On October 19, 1999, an indictment was returned by a federal grand jury
sitting in the District of Columbia charging that McDonnell Douglas
Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's
Douglas Aircraft Company division, conspired to and made false statements
and concealed material facts on export license applications and in
connection with export licenses, and possessed and sold machine tools
in violation of the Export Administration Act. The indictment also charged
one employee with participation in the alleged conspiracy. The indictment
has since been dismissed as against this employee. That dismissal was
affirmed by the U.S. Court of Appeals for the D.C. Circuit on May 8, 2001.
The indictment relates to the sale and export to China in 1993-1995 of
surplus, used machine tools sold by Douglas Aircraft Company to China
National Aero-Technology Import and Export Corporation for use in
connection with the MD-80/90 commercial aircraft Trunkliner Program
in China.
As a result of the indictment, the Department of State has discretion
to deny defense-related export privileges to MDC or a division or
subsidiary of MDC. The agency exercised that discretion on
January 5, 2000, by establishing a "denial policy" with respect to
defense-related exports of MDC and its subsidiaries. Most of MDC's major
existing defense programs were, however, excepted from that policy due
to overriding U.S. foreign policy and national security interests. Other
exceptions have been granted. There can, however, be no assurance as to
how the Department will exercise its discretion as to program or
transaction exceptions for other programs or future defense-related
exports. In addition, the Department of Commerce has authority to
temporarily deny other export privileges to, and the Department of
Defense has authority to suspend or debar from contracting with the
military departments, MDC or a division or subsidiary of MDC. Neither
agency has taken action adverse to MDC or its divisions or subsidiaries
thus far.
19
20
Note 16 - Contingencies (continued)
Based upon all available information, the Company does not expect actions
that would have a material adverse effect on its financial position or
continuing operations. In the unanticipated event of a conviction, MDC
would be subject to Department of State and Department of Commerce denials
or revocations of MDC export licenses. MDC also would be subject to
Department of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender
discrimination and harassment was filed against The Boeing Company, Boeing
North American, Inc., and McDonnell Douglas Corporation. The complaint, filed
with the United States District Court in Seattle, alleges that the Company has
engaged in a pattern and practice of unlawful discrimination, harassment and
retaliation against females over the course of many years. The complaint,
Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound
area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On
March 15, 2000, an amended complaint was filed naming an additional 10
plaintiffs, including the first from California. The lawsuit attempts to
represent all women who currently work for the Company, or who have worked
for the Company in the past several years.
The Company has denied the allegation that it has engaged in any unlawful
"pattern and practice." Plaintiffs' motion for class certification was filed
in May 2001. The class they sought included salaried employees in Puget Sound,
Wichita, St. Louis, and Long Beach, and hourly employees in Puget Sound,
Wichita, and St. Louis.
On October 19, 2001, the court granted class certification to a segment of
the population sought by the plaintiffs. The court ruled that the action
could proceed on the basis of two limited subclasses: a. all non-executive
salaried women (including engineers) in the Puget Sound area, and b. all
hourly women covered by the Machinists' Bargaining Agreement in the Puget
Sound area. The claims to be litigated are alleged gender discrimination in
compensation and promotion. The court also held that the plaintiffs could not
seek back pay. Rather, should liability be found, the potential remedies
include some form of injunctive relief and the potential of punitive damages.
The Company intends to continue its aggressive defense of this case.
20
21
Note 17 - Business Segment Data
Segment information for revenues, earnings, and research and development
consisted of the following: Nine months ended Three months ended
September 30 September 30
-------------------------------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------------------------------
Revenues:
Commercial Airplanes $25,714 $22,512 $ 7,954 $ 7,461
Military Aircraft and Missiles 9,005 8,764 3,289 2,826
Space and Communications 7,456 5,071 2,691 1,614
Customer and Commercial Financing 616 504 176 160
Other 288 209 122 79
Accounting differences/eliminations (583) (432) (545) (263)
-------------------------------------------------------------------------------
Operating revenues $42,496 $36,628 $13,687 $11,877
===============================================================================
Earnings from operations:
Commercial Airplanes $ 2,650 $ 1,880 $ 835 $ 739
Military Aircraft and Missiles 1,068 907 412 367
Space and Communications 395 41 181 5
Customer and Commercial Financing 434 358 107 121
Other (227) (33) (101) (10)
Accounting differences/eliminations (267) (360) (253) (113)
Share-based plans (279) (193) (98) (66)
Unallocated expense (123) (254) (17) (178)
-------------------------------------------------------------------------------
Earnings from operations 3,651 2,346 1,066 865
Other income, principally interest 280 343 28 121
Interest and debt expense (477) (320) (157) (110)
-------------------------------------------------------------------------------
Earnings before income taxes 3,454 2,369 937 876
Income taxes 728 722 287 267
-------------------------------------------------------------------------------
Net earnings before cumulative effect
of accounting change $ 2,726 $ 1,647 $ 650 $ 609
===============================================================================
Research and development:
Commercial Airplanes $ 622 $ 394 $ 237 $ 131
Military Aircraft and Missiles 198 187 75 64
Space and Communications 375 407 127 146
Other 203 36 76 20
-------------------------------------------------------------------------------
Total research and development expense $ 1,398 $ 1,024 $ 515 $ 361
===============================================================================
In the first quarter of 2001, the Company adjusted the segment classification
of certain business activities. The Company established an 'Other' segment
classification which principally includes the activities of Connexion by
BoeingSM, a two-way data communications service for global travelers; Air
Traffic Management, a business unit developing new approaches to a global
solution to address air traffic management issues; and Phantom Works, an
advanced research and development organization focused on innovative
technologies, improved processes and the creation of new products. The
2000 results have been reclassified to conform to the revised segment
classifications. 21
22
Note 17 - Business Segment Data (continued)
For internal reporting purposes, the Company records Commercial Airplanes
segment revenues and operating profits for airplanes transferred to other
segments, and such transfers may include airplanes accounted for as operating
leases that are considered transferred to the Customer and Commercial
Financing segment. The revenues for these transfers are eliminated in the
'Accounting differences/eliminations' caption. In the event an airplane
accounted for as an operating lease is subsequently sold, the 'Accounting
differences/eliminations' caption would reflect the recognition of revenue
and operating profit for the consolidated financial statements.
In the second quarter of 2001, concurrent with an asset purchase agreement
of Trans World Airlines by American Airlines, 32 MD-83s previously accounted
for as operating leases were accounted for as sales-type leases, with no gain
or loss recorded. Accordingly, the 'Accounting differences/eliminations'
caption reflected $792 of revenue in the second quarter of 2001 related to
this transaction.
The $100 charge recognized in the third quarter of 2001 related to the caption
'Special Charges due to the events of September 11, 2001' in the consolidated
statements of operations is included in the 'Unallocated expense' caption.
For internal reporting purposes, the Company recorded Military Aircraft and
Missiles segment revenues and operating profit relating to the delivery of
C-17 transport aircraft described in Note 10. The transaction was treated
as a transfer to the 'Other' segment, where the related lease income and
expense will be recorded.
The Company records cost of sales for 7-series commercial airplane programs
under the program method of accounting described in Note 1 of the Company's
2000 Annual Report. For internal measurement purposes, the Commercial
Airplanes segment records cost of sales based on the cost of specific units
delivered, and to the extent that inventoriable costs exceed estimated
revenues, a loss is not recognized until delivery is made, which is not in
accordance with generally accepted accounting principles. For the 717 program
and certain commercial modification programs, the cost of the specific units
delivered is reduced, on a per-unit basis, by the amount previously recognized
for forward losses. Proceeds from certain Commercial Airplanes segment
suppliers attributable to participation in development efforts are accounted
for as a reduction in the cost of inventory received from the supplier under
the program accounting method, and as an expense reduction in the period the
proceeds are received for internal measurement purposes. These adjustments
between the internal measurement method and the program accounting method are
included in the 'Accounting differences/eliminations' caption of net earnings.
These adjustments totaled $(483) and $(545) for the nine months ended
September 30, 2001 and 2000.
22
23
Note 17 - Business Segment Data (continued)
The 'Accounting differences/eliminations' caption of net earnings also
includes the impact of cost measurement differences between generally
accepted accounting principles and federal cost accounting standards. This
includes the following: the differences between pension costs recognized
under SFAS No. 87, "Employers' Accounting for Pensions," and under federal
cost accounting standards, principally on a funding basis; the differences
between retiree health care costs recognized under SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and under federal
cost accounting standards, principally on a cash basis; and the differences
in timing of cost recognition related to certain activities, such as facilities
consolidation, undertaken as a result of mergers and acquisitions whereby
such costs are expensed under generally accepted accounting principles and
deferred under federal cost accounting standards. Additionally, the
amortization of costs capitalized in accordance with SFAS No. 34,
"Capitalization of Interest Cost," is included in the 'Accounting
differences/eliminations' caption.
The costs attributable to share-based plans are not allocated. Other
unallocated costs include corporate costs not allocated to the operating
segments, including goodwill amortization resulting from acquisitions
prior to 1998.
23
24
-------------------------------------------------------------------------------
|Forward-Looking Information Is Subject to Risk and Uncertainty |
| |
|Certain statements in this report contain "forward-looking" information that |
|involves risk and uncertainty, including projections for new products |
|(including, without limitation, the "sonic cruiser"), deliveries, realization|
|of technical and market benefits from acquisitions, revenues, operating |
|margins, free cash flow, taxes, research and development expenses, and other |
|trend projections. This forward-looking information is based upon a number |
|of assumptions including assumptions regarding global economic, passenger |
|and freight growth; current and future markets for the Company's products |
|and services; demand for the Company's products and services; performance |
|of internal plans, including, without limitation, plans for productivity |
|gains, reductions in cycle time and improvements in design processes, |
|production processes and asset utilization; product performance; customer |
|financing; customer, supplier and subcontractor performance; customer model |
|selections; favorable outcomes of certain pending sales campaigns and U.S. |
|and foreign government procurement actions (including the Joint Strike |
|Fighter program); supplier contract negotiations; price escalation; |
|government policies and actions; successful negotiation of contracts with the|
|Company's labor unions; regulatory approvals; and successful execution of |
|acquisition and divestiture plans; and the Company's assessment of the |
|impact of the attacks of September 11, 2001. Actual results and future trends|
|may differ materially depending on a variety of factors, including the |
|availability of capital financing, the Company's successful execution of |
|internal performance plans, including continued research and development, |
|production rate increases and decreases, product stoppages or cancellations, |
|production system initiatives, timing of product deliveries and launches, |
|supplier contract negotiations, asset management plans, acquisition and |
|divestiture plans, procurement plans, and other cost-reduction efforts; the |
|actual outcomes of certain pending sales campaigns and U.S. and foreign |
|government procurement activities (including the Joint Strike Fighter |
|program); acceptance of new products and services; product performance risks;|
|the cyclical nature of some of the Company's businesses; volatility of the |
|market for certain products and services; domestic and international |
|competition in the defense, space and commercial areas; continued integration|
|of acquired businesses; uncertainties associated with regulatory |
|certifications of the Company's commercial aircraft by the U.S. Government |
|and foreign governments; other regulatory uncertainties; collective |
|bargaining labor disputes; performance issues with key suppliers, |
|subcontractors and customers; governmental export and import policies; |
|factors that result in significant and prolonged disruption to air travel |
|worldwide; global trade policies; worldwide political stability; domestic and|
|international economic conditions; price escalation trends; the outcome of |
|political and legal processes, including uncertainty regarding government |
|funding of certain programs; changing priorities or reductions in the U.S. |
|Government or foreign government defense and space budgets; termination of |
|government contracts due to unilateral government action or failure to |
|perform; legal, financial and governmental risks related to international |
|transactions; legal proceedings; and other economic, political and |
|technological risks and uncertainties. Additional information regarding |
|these factors is contained in the Company's SEC filings, including, without |
|limitation, the Company's Annual Report on Form 10-K for the year ended |
|December 31, 2000, and the Form 10-Qs for the quarters ending March 31, 2001,|
|and June 30, 2001. |
-------------------------------------------------------------------------------
24
25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues
--------
Sales of $42.5 billion for the first nine months of 2001 were 16% higher
than sales for the comparable period of 2000. For the first nine months
of 2001, a total of 383 commercial aircraft were delivered, compared with
359 for the same period in 2000. In the third quarter of 2001, 120
commercial aircraft were delivered compared with 117 in the third quarter
of 2000. Anticipated future commercial aircraft deliveries have been
adversely impacted due to the terrorist attacks of September 11, 2001, which
reduced demand. Based on preliminary assessments with airline customers,
previous projections of approximately 538 deliveries have been reduced to
approximately 522 for the full year of 2001, compared with actual
deliveries of 489 in 2000.
Commercial jet aircraft deliveries were as follows:
Nine months ended Three months ended
September 30 September 30
--------------------------------------------------------------------
Model 2001 2000 2001 2000
--------------------------------------------------------------------
717 37 (10) 20 (12) 13 (1) 9 (6)
737 Classic - 2 - -
737 Next Generation 214 *(3) 209 * 69 (1) 68 *
747 24 19 ** 8 7
757 32 37 12 9
767 29 30 6 12
777 45 38 12 11
MD-11 2 4 - 1
--------------------------------------------------------------------
Total 383 359 120 117
====================================================================
*Includes one intercompany C-40 737 aircraft
**Includes one Airborne Laser 747
Commercial jet aircraft deliveries included deliveries under operating lease,
which are identified by parentheses in the table above. Aircraft accounted for
as operating leases have minimal revenues recorded at the time of delivery.
25
26
Military Aircraft and Missiles segment deliveries included the following:
Nine months ended Three months ended
September 30 September 30
----------------------------------------------------------------
Model 2001 2000 2001 2000
----------------------------------------------------------------
C-17 9 (4) 10 3 (2) 4
F-15 - 5 - -
F/A-18C/D - 16 - 2
F/A-18E/F 27 17 11 6
T-45TS 11 13 3 4
CH-47 8 5 2 1
C-40 4 - 2 -
AH-64 Apache 6 6 3 2
The C-17s identified in parentheses represent deliveries under operating
lease.
Space and Communications segment deliveries included the following:
Nine months ended Three months ended
September 30 September 30
----------------------------------------------------------------
Model 2001 2000 2001 2000
----------------------------------------------------------------
Delta II 4 2 1 -
Satellites 6 - 1 -
The first nine months of 2001 included revenues of $792 million, with no
associated gain or loss, attributable to 32 MD-83s previously accounted for
as operating leases, as described in Note 17.
Earnings
--------
Net earnings for the third quarter of 2001 were $650 million, compared
with $609 million for the same period in 2000. Net earnings included
$28 million of other income in the third quarter of 2001, compared with
$121 million in 2000. The lower other income in 2001 related principally
to lower returns on cash and cash equivalents, reflecting lower cash
balances and lower interest rates. Interest expense for the third quarter
of 2001 was $157 million, compared with $110 million in 2000. The higher
interest expense resulted from increased debt in support of Customer and
Commercial Financing transactions, and interest associated with C-17
deferred lease income.
26
27
Net earnings for the first nine months of 2001 were $2,727 million, compared
with $1,647 million for the same period in 2000. Other income was $280
million and $343 million for the first nine months of 2001 and 2000. Included
in 2001 other income is $210 million of interest income relating to a
non-recurring tax benefit resulting from a final agreement with the Internal
Revenue Service (IRS) described below. Included in 2000 other income is $53
million of interest income from a federal income tax audit settlement and $41
million related to the sale of a long-held equity instrument. Interest expense
was $477 million and $320 million for the first nine months of 2001 and 2000,
also reflecting increased debt in support of Customer and Commercial Financing
transactions.
Research and development expense totaled $1,398 million for the first nine
months of 2001, compared with $1,024 million for the same period of 2000.
Research and development expense totaled $515 million for the quarter,
compared with $361 million for the same period of 2000. Commercial Airplanes
segment research and development expense of $237 million for the third
quarter of 2001 reflected an increase over the $131 million expense for the
third quarter of 2000. Space and Communications segment research and
development expense of $127 million for the third quarter was lower than the
$146 million expense for the third quarter of 2000. Research and development
in the 'Other' segment relates principally to Connexion by BoeingSM.
Income tax expense for the first nine months of 2001 was $728 million, or
21.1% of pretax earnings, compared with $722 million, or 30.5% of pretax
earnings in 2000. The 2001 tax provision includes a non-recurring earnings
tax benefit resulting from a final agreement with the IRS primarily regarding
previously filed claims for refund of research and development tax credits.
These claims dealt primarily with historical fixed-price development program
expenses incurred by McDonnell Douglas from 1986 to 1992. The agreement with
the IRS resulted in financial recognition during the first quarter of $343
million of tax credit and $210 million of related interest income. Absent
this settlement, the effective tax rate for the first nine months would have
been 30.6%.
In December 1996, The Boeing Company filed suit in the U.S. District Court
for the Western District of Washington for the refund of over $400 million
in federal income taxes and related interest. The suit challenged the IRS
method of allocating research and development costs for the purpose of
determining tax incentive benefits on export sales through the Company's
Domestic International Sales Corporation (DISC) and its Foreign Sales
Corporation (FSC) for the years 1979 through 1987. In September 1998, the
District Court granted the Company's motion for summary judgment. The U.S.
Department of Justice appealed this decision. On August 2, 2001, the United
States Court of Appeals for the Ninth Circuit reversed the District Court's
summary judgment. The Company has fully provided for any potential earnings
impact that may result from this decision. The Company has filed a petition
for rehearing with the Ninth Circuit Court of Appeals.
In response to an adverse World Trade Organization (WTO) finding relative to
the U.S. FSC tax provisions, the U.S. repealed FSC and enacted replacement
legislation (Extra-territorial Income Exclusion Act of 2000). The European
Union filed a WTO challenge to the new law and the WTO dispute panel hearing
the case rejected the U.S. position. The U.S. has announced its intention to
appeal the panel decision. Resolution of the appellate process will extend
the final resolution of this matter into early 2002. It is not possible to
predict what impact, if any, this issue will have on future earnings pending
final resolution of the challenge.
27
28
Operating Earnings
------------------
Events of September 11, 2001
Net earnings for the three and nine months ended September 30, 2001,
included unusual expenses of $100 million, presented as 'Special charges
due to events of September 11, 2001'. These charges related to severance
costs primarily incurred by the Commercial Airplanes segment and related
support organizations that are probable and estimable, and a significant
portion is expected to be incurred by year-end 2001. The employment
reductions are the result of decreased aircraft demand, which directly
relates to the attacks of September 11, 2001.
The Company has undertaken an assessment of other losses and costs it
expects to incur in relation to the attacks. These costs are not yet
reasonably estimable due to the period of time required for resolution.
The Company expects many of these costs to become estimable within the
next three to twelve months, and will continue to be recognized as a
separate component of earnings from operations entitled 'Special charges
due to events of September 11, 2001'. These losses and costs are expected
to relate principally to additional employee severance and out-placement,
vendor termination, valuation of receivables, impairment of assets,
inventory impairment, guarantees extended by the Company and certain
other items.
As stated in Note 1 of the Company's 2000 Annual Report, cost of sales
for the commercial aircraft programs is determined under the program
method of accounting based on estimated average total cost and revenue
for the current program quantity. The estimated program average costs
and revenues are reviewed and reassessed quarterly. The Company expects
that the events of September 11, 2001, will result in a decrease in
deliveries and demand for the commercial aircraft programs that will
impact the cost and revenue estimates for the applicable program
quantities. The Company expects to reflect the estimate adjustments
attributable to the events of September 11, 2001, as they become
reasonably estimable over the next five quarters.
Commercial Airplanes
Third quarter 2001 commercial jet aircraft deliveries totaled 120,
compared with 117 during the same period in 2000 and 141 for second
quarter 2001. Third quarter 2001 deliveries were impacted by the
September 11, 2001, terrorist attacks on the United States. Prior to
September 11, 2001, Commercial Airplanes expected to deliver 139
airplanes during the third quarter. Commercial Airplanes segment third
quarter 2001 operating earnings, based on the unit cost of airplanes
delivered, were $835 million, compared with $739 million for the same
period in 2000. The overall Commercial Airplanes segment operating
profit margin was 10.5% for the third quarter of 2001, compared with
9.9% for the same period in 2000.
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The third quarter 2001 margin increase over the same period in 2000
primarily reflects continued improvement in the production process,
offset by increased research and development expense. Research and
development expense in the third quarter 2001 was $237 million compared
to $131 million for the same period in 2000. The increase in research
and development expense over 2000 for the quarter and year to date relate
principally to development of longer-range 767 and 777 models, as well as
research attributable to a sonic cruiser airplane.
As discussed in Note 2, other than initial severance charges which were
identified as unallocated for segment reporting, the third quarter 2001
results and year to date results do not reflect the potential impact of
the events of September 11, 2001, on program margins. Commercial Airplanes
segment earnings, as determined under generally accepted accounting
principles (GAAP) and including intercompany transactions, reflect the
program method of accounting and incorporate a portion of the 'Accounting
differences/eliminations' caption as discussed in Note 17. Commercial
Airplanes segment earnings under GAAP were $530 million and $514 million
for the third quarter of 2001 and 2000. The GAAP determined segment
margin of 6.7% in 2001 compares with 6.9% for the same period in 2000.
The decrease in GAAP margin is attributable to the increased research
and development expense offset by the continued improvements in the
production process identified above. In addition, GAAP earnings and
margins reflect the impact of additional units within the accounting
quantity for the Next Generation 737 and the 777. The Next Generation
737 program accounting quantity was 1,800 units as of September 30, 2001,
and 1,650 units as of September 30, 2000. The 777 program accounting
quantity was 600 units as of September 30, 2001, and 500 units as of
September 30, 2000.
For the nine months ended September 30, 2001, Commercial Airplanes
segment earnings were $2,650 million, compared with $1,880 million
for the same period in 2000, based on the unit cost of airplanes
delivered, and segment operating margins were 10.3% and 8.4% for
the first nine months of 2001 and 2000. Commercial jet aircraft
deliveries totaled 383 for the first nine months ended
September 30, 2001, compared with 359 for the same period in 2000.
The improved margins in 2001 also reflect continued production process
improvements, offset by increased research and development expense.
Research and development expense for the first nine months of 2001
totaled $622 million, compared with $394 million for the same period
in 2000. Commercial Airplanes earnings, as determined under GAAP
described above, were $2,167 million for the first nine months of 2001,
compared with $1,335 million for the same period in 2000, and the related
nine month margins were 8.4% and 5.9% for 2001 and 2000.
As of September 30, 2001, the Company is recording 717 deliveries on a
break-even basis. The Company has significant financial exposure related
to the 717 program, principally attributable to pricing pressures and the
slow buildup of firm orders. The slow buildup of firm orders could result
in schedule slides, which could require a reevaluation of the cost of the
200 airplanes in the program accounting quantity. As of September 30, 2001,
Commercial Airplanes cumulatively delivered 81 717 program aircraft. The
717 program is accounted for under the program method of accounting
described in Note 1 of the Company's 2000 Annual Report. The Company is
assessing the impact of market conditions on the 717 program.
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A range of alternatives is being evaluated, including the stoppage of
production. While no decision has been made, a decision to stop
production on the 717 program would likely result in material charges.
The September 11, 2001, terrorist attacks on the United States resulted
in significant disruption in the airline industry. Commercial Airplanes
is taking action to continue efficient and profitable delivery of
airplanes and services. This includes rephasing product development
activities. Critical path technology work continues on the sonic cruiser
airplane, which is the primary focus of Commercial Airplanes product
development activity. The longer-range 777-200 program has been rephased
approximately 18 months as a result of the recent world events.
Military Aircraft and Missiles
Third quarter 2001 Military Aircraft and Missiles segment operating
earnings were $412 million, compared with $367 million for the third
quarter of 2000. Operating margins for third quarter 2001 were 12.5%,
compared with 13.0% for the same period in 2000. Earnings in both years
include favorable adjustments for contract settlements. The decrease in
margin between the third quarter 2001 and the third quarter 2000 is
attributable to the mix of products delivered in the respective quarters.
Operating earnings for the first nine months of 2001 were $1,068 million,
compared with $907 million for the same period in 2000. Operating margins
for the nine month periods were 11.9% for 2001, or 11.2% excluding the
$57 million non-recurring F-15 program earnings adjustment, compared with
10.3% for the same period in 2000.
During the quarter, Military Aircraft and Missiles continued to secure
its growth opportunities and to strengthen its competitiveness in key
U.S. and international defense markets.
The Company was selected by the Italian defense administration for a
new tanker/transport aircraft late in the second quarter. Military
Aircraft and Missiles initiated the 767 Tanker program in the third
quarter, and as part of this effort signed a Memorandum of Agreement
with Alenia Aerospazio and Aeronavali, both Finmeccanica companies,
to become partners in the development, production and support of a
tanker/transport version of the 767 commercial aircraft.
The Boeing Joint Strike Fighter (JSF) X-32B completed flight testing
in July 2001, highlighted by a series of supersonic flights. The
flight-test program demonstrated the range of performance characteristics
typical of the operational JSF: a short takeoff, transition to
conventional flight, supersonic flight and transition back to STOVL
(Short Take-Off/Vertical Landing) mode before making a slow landing.
The Department of Defense is scheduled to make a source selection
decision on October 26, 2001.
Military Aircraft and Missiles accomplished numerous milestones in
keeping its current product lines sold. On the F-22 program, the
Defense Acquisition Board approved production of 10 F-22 aircraft,
allowing the program to enter initial low-rate production. The
F/A-18 program delivered to the U.S. Navy its first full-rate
production F/A-18E/F Super Hornet ahead of schedule. The Apache
program secured two key wins in the Asian market.
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The Republic of Singapore signed a letter of offer and acceptance
with the U.S. Government for 12 additional AH-64D Apache Longbow
helicopters. The government of Japan announced a decision to purchase
10 AH-64D helicopters from the Company through a direct commercial sale.
The C-17 program completed deliveries of four C-17 Globemaster III
to the United Kingdom Royal Air Force. These transports are fully
operational and are supporting allied operations currently under way.
Military Aircraft and Missiles segment revenues, and operating margins
reflect these C-17 deliveries, but these transactions are accounted
for as operating leases on a consolidated basis.
Space and Communications
Space and Communications segment operating earnings for third quarter
2001 were $181 million, compared with $5 million in the same period of
2000. Operating margins for third quarter 2001 were 6.7%, compared with
0.3% for the same period in 2000, or 1.7% excluding the non-recurring charge.
The third quarter 2000 results included a charge of $23 million associated
with the incurred costs of a Delta III demonstration launch. The increased
operating earnings are primarily attributed to increased volume in missile
defense and classified programs and continuing improved performance throughout
Space and Communications.
During the third quarter of 2001, Space and Communications successfully
launched the first prototype missile designed and built for the
Ground-based Midcourse Defense Segment as well as accomplishing a target
intercept exercise on the July 14, 2001, integrated test flight.
Contracts awarded to Space and Communications during the third quarter
of 2001 include a long-lead contract for NATO AWACS upgrades and a
contract to provide weather instrumentation for payloads to support
the next United States weather satellites. Additionally, Space and
Communications delivered three Delta III rockets, completed development
and certification testing of the Delta IV RS-68 engine and completed
Phase II of the International Space Station.
Segment operating earnings for the first nine months of 2001 were $395
million, compared with $41 million for the same period in 2000. Operating
margins for the nine month periods were 5.3% for 2001, compared with
0.8% for the same period in 2000, or 2.3% excluding the non-recurring charges.
The first nine months earnings in 2000 had a charge for the Delta III
demonstration launch of $78 million. The improved operating earnings
performance was primarily due to increased volume and improved performance in
missile defense and classified programs, the acquisition of Boeing Satellite
Systems, and continued improved program performance throughout Space and
Communications along with lower research and development spending.
On October 6, 2000, the Company acquired the Hughes Electronics
Corporation (Hughes) space and communications and related businesses.
The acquisition was accounted for under the purchase method, by which the
purchase price was allocated to the net assets acquired based on
preliminary estimates of their fair values. The original purchase price was
$3,849 million, initial goodwill was valued at $740 million and the other
intangible assets were valued at $631 million. During the period from
acquisition to the third quarter of 2001, the Company completed its
assessment of the net assets acquired and goodwill was increased to a
balance of $2,205 million. The majority of the goodwill adjustments relate
to claims submitted to Hughes for resolution as contractual purchase price
contingencies.
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The Company anticipates finalizing the Hughes purchase price allocation during
2002, at the conclusion of arbitration procedures related to these
contingencies. Other adjustments were recorded to reflect finalization of fair
value assessments for the net assets acquired and the impact of the Company's
accounting policies on acquired balances.
The Company continues to monitor the impact of the softening satellite
launch market on the Delta III program and the Sea Launch venture.
Potential exposure on the Delta III program is monitored by assessing the
estimated revenues attributable to future Delta III launches, including
revenue for launch positions that are currently unsold, along with assessing
inventory and supplier commitments. The next Delta III launch is anticipated
for 2003.
The Company has ongoing financial exposure due to the Sea Launch venture.
This financial exposure primarily results from Company guarantees extended
on partnership loans. The Company's maximum exposure to credit-related
losses associated with Sea Launch credit guarantees is $399 million. It is
projected that the Sea Launch joint venture may require additional cash
infusions from the partners in the near term. This would likely result in
additional cash requirements and/or loan guarantees imposed on the Company.
Customer and Commercial Financing
Revenues consisted principally of interest from financing receivables and
lease income from operating lease equipment. Segment earnings additionally
reflected depreciation on leased equipment and expenses attributable to
potentially uncollectible receivables. No interest expense on debt is
included in Customer and Commercial Financing segment earnings reflected
in Note 17; however, interest expense of $69 million for third quarter 2001
and $233 million for the first nine months of 2001 is associated with debt
relating to financing activities.
Operating earnings for the Customer and Commercial Financing segment were
$107 million for third quarter 2001, compared with $121 million for third
quarter 2000, exclusive of interest expense. Included in the third quarter
2001 results was a $21 million loss on a derivative associated with an
equity investment. Operating earnings for the first nine months of 2001
were $434 million, compared with $358 million for the same period in 2000.
The increase was due principally to an increase in financing assets.
The Customer and Commercial Financing segment is likely to experience losses
in its aircraft financial services portfolio of financing receivables as a
result of the attacks of September 11, 2001. The impact of any resulting
losses to the portfolio as of September 30, 2001, cannot be quantified at this
time and could be in excess of the Company's valuation allowance. In addition,
aircraft subject to operating leases could become impaired due to lower
aircraft values or lease rates causing write-downs to their carrying value.
In the second quarter of 2001, concurrent with an asset purchase
agreement of Trans World Airlines by American Airlines, 32 MD-83s
previously accounted for as operating leases were accounted for as
sales-type leases, with no gain or loss recorded. Accordingly, the
'Accounting differences/eliminations' caption reflected $792 million
of revenue in the second quarter of 2001 related to this transaction.
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Liquidity and Capital Resources
-------------------------------
As of September 30, 2001, the Company's cash position totaled $1,572
million. During the first nine months of 2001, the Company repurchased
40.7 million shares for $2,417 million under an 85 million share repurchase
plan.
During the second quarter of 2001, the Company made a tax payment of
approximately $900 million due to the closeout of contracts accounted
for under the completed contract method for tax purposes.
Excluding non-recourse debt and Boeing Capital Corporation (BCC), a
financing subsidiary wholly owned by the Company, total debt represents
32% of total shareholders' equity plus debt. The consolidated debt,
including BCC and non-recourse, represents 49% of total shareholders'
equity plus debt.
Revolving credit line agreements with a group of major banks, totaling
$3.0 billion, remain available but unused.
The Company has available $3.0 billion under commercial paper programs, of
which $1.0 billion is attributable to BCC. These programs are backed up by
the $3.0 billion revolving credit line agreements. As of the end of the third
quarter, the Company had an outstanding commercial paper balance of $862
million, of which $474 million related to BCC.
The events that occurred on September 11, 2001, have negatively impacted the
liquidity and capital resources of the Company:
a) The Company has provided guidance on free cash flow (cash flow from
operations less capital expenditures) for both 2001 and 2002. Free cash
flow for the first nine months of 2001 was $3.0 billion. The Company
expects to generate $2.5+/- billion of free cash flow in 2001 and $3.0+/-
billion in 2002. Both levels are substantially below previous cash flow
guidance, which was $3.5 billion to $4.5 billion for 2001 and >$5.0
billion for 2002.
b) Due to their concern about the effects of the events of September 11, 2001,
on the Company's business, on September 21, 2001, the rating agencies took
the following actions: Standard & Poor's placed both the Company's and
BCC's ratings on watch with negative implications; Moody's Investor
Services placed the Company's ratings, except for the short-term debt
rating, under review for possible downgrade; and placed BCC's ratings under
review for possible downgrade. The Company intends to review its
performance, position and outlook with both agencies in the near future to
resolve the watch/review status on the ratings.
The Company has the following Standard & Poor's credit ratings:
short-term, A-1+; senior debt, AA-. BCC has the following Standard &
Poor's credit ratings: short-term, A-1+; senior debt, AA-. The Company
has the following Moody's credit ratings: short-term, P-1; senior
debt, A1. BCC has the following Moody's credit ratings: short-term, P-1;
senior debt, A2.
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c) The Company has extended 364-day credit agreement previously expiring
September 21, 2001, by 60 days. The Company is in the process of
increasing this facility to $3.0 billion as it renews this agreement. When
completed, the Company's revolving credit agreements will total
$4.5 billion, of which $2.0 billion will be allocated to BCC.
d) Following the events of September 11, 2001, the Company utilized the
commercial paper program for the first time, providing additional
short-term liquidity. Commercial paper remains a significant liquidity
source for the Company, and its subsidiaries and the Company plans to
increase the authorized commercial paper program size.
The events of September 11, 2001, have created an uncertain environment. In
light of its assessment of the current business environment, the Company
believes its expected levels of cash flow, coupled with its access to external
credit and capital resources will be sufficient to satisfy existing
commitments and the ability to execute business plans.
Standards Issued and Not Implemented
------------------------------------
In July 2001, the Financial Accounting Standards Board issued two new
pronouncements: Statement of Financial Accounting Standard (SFAS)
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The Company is required to adopt SFAS No. 141 for
all business combinations completed after June 30, 2001. This standard
requires that business combinations initiated after June 30, 2001, be
accounted for under the purchase method. Goodwill and other intangible
assets that resulted from business combinations before July 1, 2001,
must be reclassified to conform to the requirements of SFAS No. 142, as
of the statement adoption date.
Additionally, the Company will be required to adopt SFAS No. 142 at the
beginning of 2002 for all goodwill and other intangible assets
recognized in the Company's statement of financial position as of
January 1, 2002. This statement changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this standard. The standard is immediately
applicable for any goodwill acquired after June 30, 2001. Goodwill and
intangible assets acquired after June 30, 2001, should be tested for
impairment and written down and charged to results of operations only
in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company is evaluating the
impact of the adoption of this standard and has not yet determined the
effect, if any, that this statement will have on its financial position
and results of operations.
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Backlog
-------
Contractual backlog of unfilled orders (which excludes purchase options and
announced orders for which definitive contracts have not been executed, and
unobligated U.S. Government contract funding) was as follows (dollars in
billions):
September 30 June 30 December 31
----------------------------------------------------------------
2001 2001 2000
----------------------------------------------------------------
Commercial Airplanes $ 82.7 $ 86.9 $ 89.8
Military Aircraft and Missiles 17.8 19.9 17.1
Space and Communications 13.7 14.2 13.7
----------------------------------------------------------------
Total contractual backlog $114.2 $121.0 $120.6
================================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$27.1 billion at September 30, 2001, compared with $31.3 billion at
December 31, 2000.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company uses derivatives in the form of convertible debt and warrants
in certain transactions to enhance the income potential in financing
transactions. As of September 30, 2001, the conversion feature of the
convertible debt and warrants were reflected at a fair value of $6 million
in other assets. These were initially recorded together based on their fair
value as a discount to notes receivable of $20 million. The remaining portion
of the conversion feature of the convertible debt and warrants had a decrease
in fair value, resulting in $2 million recorded as a reduction in other income
for the nine months ended September 30, 2001.
The Company has financial instruments that are subject to interest rate
risk, principally short-term investments, fixed-rate notes receivable
attributable to customer financing, and debt obligations issued at a
fixed rate. Historically, the Company has not experienced material gains
or losses due to interest rate changes when selling short-term investments
or fixed-rate notes receivable. Additionally, the Company uses interest
rate swaps to manage exposure to interest rate changes. Based on the
current holdings of short-term investments and fixed-rate notes, as well
as underlying swaps, the exposure to interest rate risk is not material.
Fixed-rate debt obligations issued by the Company are generally not
callable until maturity.
The Company is subject to foreign currency exchange rate risk relating
to receipts from customers and payments to suppliers in foreign currencies.
As a general policy, the Company substantially hedges foreign currency
commitments of future payments and receipts by purchasing foreign
currency forward contracts. As of January 1, 2001, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended. As of
September 30, 2001, the notional value of such derivatives was $362 million,
with a net unrealized gain of $24 million. Additionally, the Company had
foreign currency forward contracts with a notional value of $200 million
that were carried at market value. The Company realized a net loss of
$1 million attributable to these forward contracts during the quarter.
Less than two percent of receipts and expenditures are contracted in
foreign currencies, and the market risk exposure relating to currency
exchange is not material.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings, claims and investigations related to products,
contracts and other matters are pending against the Company. Most significant
legal proceedings are related to matters covered by insurance. Major
contingencies are discussed below.
The Company is subject to U.S. Government investigations of its practices
from which civil, criminal or administrative proceedings could result.
Such proceedings could involve claims by the Government for fines,
penalties, compensatory and treble damages, restitution and/or forfeitures.
Under government regulations, a company, or one or more of its operating
divisions or subdivisions, can also be suspended or debarred from government
contracts, or lose its export privileges, based on the results of
investigations. The Company believes, based upon all available information,
that the outcome of any such government disputes and investigations will
not have a material adverse effect on its financial position or continuing
operations.
In 1991, the U.S. Navy notified McDonnell Douglas (now a subsidiary of the
Company) and General Dynamics Corporation (the "Team") that it was terminating
for default the Team's contract for development and initial production of
the A-12 aircraft. The Team filed a legal action to contest the Navy's default
termination, to assert its rights to convert the termination to one for
"the convenience of the Government," and to obtain payment for work done and
costs incurred on the A-12 contract but not paid to date. As of
September 30, 2001, inventories included approximately $582 million of
recorded costs on the A-12 contract, against which the Company has established
a loss provision of $350 million. The amount of the provision, which was
established in 1990, was based on McDonnell Douglas's belief, supported by an
opinion of outside counsel, that the termination for default would be
converted to a termination for convenience, and that the upper range of
possible loss on termination for convenience was $350 million.
On August 31, 2001, the U.S. Court of Federal Claims issued a decision after
trial upholding the Government's default termination of the A-12 contract on
the ground that the Team could not meet the revised contract schedule
unilaterally imposed by the Government after the Government had waived the
original schedule. The court did not, however, enter a judgment for the
Government on its claim that the Team be required, as a consequence of the
alleged default, to repay progress payments that had not been liquidated by
deliveries at the time of termination. These unliquidated progress payments
total $1,350 million. On October 4, 2001, the court confirmed that it would
not be entering judgment in favor of the Government in the amount of these
unliquidated progress payments. This is the latest decision relating to
long-running litigation resulting from the A-12 contract termination in 1991,
and follows an earlier trial court decision in favor of the contractors and
reversal of that initial decision on appeal.
The Company believes, supported by an opinion of outside counsel, that the
trial court's rulings with respect to the enforceability of the unilateral
schedule and the termination for default are contrary to law and fact. The
Company believes the decision raises valid issues for appeal and intends to
pursue its right to the appeal.
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If, contrary to the Company's belief, the decision of the trial court on
termination were sustained on appeal, the Company would incur an additional
loss of approximately $275 million, consisting principally of remaining
inventory costs and adjustments. And if, contrary to the Company's belief,
the appeals court further held that a money judgment should be entered against
the Team in the amount of the unliquidated progress payments, the Team would be
required to pay the Government $1,350 million plus statutory interest from
February 1991 (currently totaling approximately $900 million). Under this
outcome, the Company would be obligated to pay one half of these amounts.
The additional loss to the Company would total approximately $1,400 million
in pretax charges, consisting principally of the repayment obligations and
the remaining inventory costs and adjustments.
The Company believes that the loss provision established by McDonnell Douglas
in 1990 continues to provide adequately for the reasonably possible reduction
in value of A-12 net contracts in process as of September 30, 2001. Final
resolution of the A-12 litigation will depend upon the outcome of further
proceedings or possible negotiations with the Government.
On October 31, 1997, a federal securities lawsuit was filed against the
Company in the U.S. District Court for the Western District of Washington,
in Seattle. The lawsuit names as defendants the Company and three of its
then executive officers. Additional lawsuits of a similar nature have been
filed in the same court. These lawsuits were consolidated on February 24, 1998.
The lawsuits generally allege that the defendants desired to keep the Company's
share price as high as possible in order to ensure that the McDonnell Douglas
shareholders would approve the merger and, in the case of the individual
defendants, to benefit directly from the sale of Boeing stock during the
period from April 7, 1997 through October 22, 1997. By order dated
May 1, 2000, the Court certified two subclasses of plaintiffs in the action:
a. all persons or entities who purchased Boeing stock or call options or who
sold put options during the period from July 21, 1997 through October 22, 1997,
and b. all persons or entities who purchased McDonnell Douglas stock on or
after April 7, 1997, and who held such stock until it converted to Boeing stock
pursuant to the merger. The plaintiffs sought compensatory damages and treble
damages. On September 17, 2001, the Company reached agreement with class
counsel to settle the lawsuit for $92.5 million. The settlement will have
no effect on the Company's earnings, cash flow or financial position,
as it is within insurance limits. The settlement is conditioned on notice
to the class members and Court approval, which is expected to occur in 2002.
On October 19, 1999, an indictment was returned by a federal grand jury
sitting in the District of Columbia charging that McDonnell Douglas
Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's
Douglas Aircraft Company division, conspired to and made false statements
and concealed material facts on export license applications and in connection
with export licenses, and possessed and sold machine tools in violation of
the Export Administration Act. The indictment also charged one employee with
participation in the alleged conspiracy. The indictment has since been
dismissed as against this employee. That dismissal was affirmed by the U.S.
Court of Appeals for the D.C. Circuit on May 8, 2001. The indictment relates
to the sale and export to China in 1993-1995 of surplus, used machine tools
sold by Douglas Aircraft Company to China National Aero-Technology Import and
Export Corporation for use in connection with the MD-80/90 commercial aircraft
Trunkliner Program in China.
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As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC.
The agency exercised that discretion on January 5, 2000, by establishing a
"denial policy" with respect to defense-related exports of MDC and its
subsidiaries. Most of MDC's major existing defense programs were, however,
excepted from that policy due to overriding U.S. foreign policy and national
security interests. Other exceptions have been granted. There can, however,
be no assurance as to how the Department will exercise its discretion as to
program or transaction exceptions for other programs or future defense-related
exports. In addition, the Department of Commerce has authority to temporarily
deny other export privileges to, and the Department of Defense has authority
to suspend or debar from contracting with the military departments, MDC or a
division or subsidiary of MDC. Neither agency has taken action adverse to MDC
or its divisions or subsidiaries thus far. Based upon all available information,
the Company does not expect actions that would have a material adverse effect on
its financial position or continuing operations. In the unanticipated event of a
conviction, MDC would be subject to Department of State and Department of
Commerce denials or revocations of MDC export licenses. MDC also would be
subject to Department of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender
discrimination and harassment was filed against The Boeing Company, Boeing
North American, Inc., and McDonnell Douglas Corporation. The complaint, filed
with the United States District Court in Seattle, alleges that the Company has
engaged in a pattern and practice of unlawful discrimination, harassment and
retaliation against females over the course of many years. The complaint,
Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound
area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On
March 15, 2000, an amended complaint was filed naming an additional 10
plaintiffs, including the first from California. The lawsuit attempts to
represent all women who currently work for the Company, or who have worked
for the Company in the past several years.
The Company has denied the allegation that it has engaged in any unlawful
"pattern and practice." Plaintiffs' motion for class certification was filed
in May 2001. The class they sought included salaried employees in Puget Sound,
Wichita, St. Louis, and Long Beach, and hourly employees in Puget Sound,
Wichita, and St. Louis.
On October 19, 2001, the court granted class certification to a segment of the
population sought by the Plaintiffs. The court ruled that the action could
proceed on the basis of two limited subclasses: a. all non-executive
salaried women (including engineers) in the Puget Sound area, and b. all
hourly women covered by the Machinists' Bargaining Agreement in the Puget
Sound area. The claims to be litigated are alleged gender discrimination in
compensation and promotion. The court also held that the plaintiffs could not
seek back pay. Rather, should liability be found, the potential remedies
include some form of injunctive relief and the potential for punitive damages.
The Company intends to continue its aggressive defense of this case.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(15) Letter from independent accountants regarding unaudited
interim financial information. Filed herewith.
(b) Reports on Form 8-K:
On September 10, 2001, the Company filed a Form 8-K regarding
the U.S. Court of Federal Claims decision upholding the U.S.
Government's default termination of McDonnell Douglas (now a
subsidiary of The Boeing Company) and General Dynamics.
On September 20, 2001, the Company filed a Form 8-K regarding
the impact of the September 11, 2001, terrorist attacks.
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REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The condensed consolidated statement of financial position as of
September 30, 2001, the condensed consolidated statements of operations
for the three- and nine-month periods ended September 30, 2001 and 2000,
and the condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 2001 and 2000, have been reviewed by the
registrant's independent accountants, Deloitte & Touche LLP, whose report
covering their review of the financial statements follows.
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
The Boeing Company
Chicago, Illinois
We have reviewed the accompanying condensed consolidated statement of financial
position of The Boeing Company and subsidiaries (the "Company") as of
September 30, 2001, and the related condensed consolidated statements of
operations for the three- and nine-month periods ended September 30, 2001 and
2000, and the related condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial position of the Company as of December 31, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 26,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial position as of December 31, 2000
is fairly stated, in all material respects, in relation to the consolidated
statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
October 22, 2001
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BOEING COMPANY
------------------------------
(Registrant)
October 25, 2001 /s/ James A. Bell
---------------- ------------------------------
(Date) James A. Bell
Vice President of Finance
& Corporate Controller
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