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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-442
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THE BOEING COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 91-0425694
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 N. Riverside, Chicago, IL 60606-1596
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(Address of principal executive offices) (Zip Code)
(312) 544-2000
--------------------------
(Registrant's telephone number, including area code)
P.O. Box 3707, Seattle, WA 98124
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 2002, there were 799,017,148 shares of common stock, $5.00 par
value, issued and outstanding.
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THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended March 31, 2002
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Statements of Operations 3
Statements of Financial Position 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 39
Part II. Other Information
Item 1. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 6. Exhibits and Reports on Form 8-K 47
Signature 50
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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)
Three months ended
March 31
------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------
Sales and other operating revenues $13,821 $13,293
Cost of products and services 11,571 11,070
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2,250 2,223
Equity in income from joint ventures 11 22
General and administrative expense 672 523
Research and development expense 459 422
Share-based plans expense 104 82
Special charges due to events of September 11, 2001 34
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Earnings from operations 992 1,218
Other income, principally interest 12 235
Interest and debt expense (172) (148)
------------------------------------------------------------------------------
Earnings before income taxes 832 1,305
Income taxes 254 69
------------------------------------------------------------------------------
Net earnings before cumulative effect of accounting change 578 1,236
Cumulative effect of accounting change, net of tax (1,827) 1
------------------------------------------------------------------------------
Net earnings (loss) $(1,249) $ 1,237
==============================================================================
Basic earnings per share before cumulative effect of
accounting change $ 0.72 $1.48
Cumulative effect of accounting change, net of tax (2.28)
------------------------------------------------------------------------------
Basic earnings (loss) per share $(1.56) $1.48
==============================================================================
Diluted earnings per share before cumulative effect of
accounting change $ 0.72 $1.45
Cumulative effect of accounting change, net of tax (2.26)
------------------------------------------------------------------------------
Diluted earnings (loss) per share $(1.54) $1.45
==============================================================================
Cash dividends paid per share $0.17 $0.17
==============================================================================
See notes to condensed consolidated financial statements.
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4
THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
March 31 December 31
2002 2001
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Assets (Unaudited)
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Cash and cash equivalents $ 643 $ 633
Accounts receivable 5,696 5,156
Current portion of customer and commercial financing 1,107 1,053
Deferred income taxes 2,543 2,444
Inventories, net of advances and progress billings 6,084 6,635
------------------------------------------------------------------------------
Total current assets 16,073 15,921
Customer and commercial financing 9,991 9,345
Property, plant and equipment, net 8,444 8,459
Goodwill 2,751 5,127
Other acquired intangibles, net 1,144 1,320
Prepaid pension expense 5,996 5,838
Other assets 2,152 2,048
------------------------------------------------------------------------------
$46,551 $48,058
==============================================================================
Liabilities and Shareholders' Equity
------------------------------------------------------------------------------
Accounts payable and other liabilities $13,691 $13,872
Advances in excess of related costs 3,588 4,021
Income taxes payable 385 909
Short-term debt and current portion of long-term debt 1,551 1,399
------------------------------------------------------------------------------
Total current liabilities 19,215 20,201
Deferred income taxes 236 177
Accrued retiree health care 5,420 5,367
Deferred lease income 602 622
Long-term debt 11,325 10,866
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 2,421 1,975
Treasury shares, at cost - 173,164,773 and 174,289,720 (8,454) (8,509)
Retained earnings 13,091 14,340
Accumulated other comprehensive income (446) (485)
Unearned compensation (2) (3)
ShareValue Trust shares - 39,832,429 and 39,691,015 (1,916) (1,552)
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Total shareholders' equity 9,753 10,825
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$46,551 $48,058
==============================================================================
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)
Three months ended
March 31
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2002 2001
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Cash flows - operating activities:
Net earnings (loss) $(1,249) $1,237
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change, net 1,827 (1)
Share-based plans 104 82
Depreciation 294 315
Amortization of intangibles and goodwill 28 69
Customer and commercial financing valuation provision 8 4
Changes in assets and liabilities -
Accounts receivable (525) 404
Inventories, net of advances and progress billings 551 (1,227)
Accounts payable and other liabilities (41) 343
Advances in excess of related costs (433) 426
Income taxes payable and deferred 104 (128)
Deferred lease income (20)
Prepaid pension expense (158) (249)
Accrued retiree health care 53 53
Other (44) (238)
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Net cash provided by operating activities 499 1,090
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Cash flows - investing activities:
Customer financing and properties on lease, additions (1,064) (470)
Customer financing and properties on lease, reductions 410 264
Property, plant and equipment, net additions (223) (240)
Proceeds from dispositions 68
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Net cash used by investing activities (877) (378)
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Cash flows - financing activities:
New borrowings 740 850
Debt repayments (244) (770)
Common shares purchased (131)
Stock options exercised, other 34 29
Dividends paid (142) (148)
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Net cash provided (used) by financing activities 388 (170)
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Net increase in cash and cash equivalents 10 542
Cash and cash equivalents at beginning of year 633 1,010
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Cash and cash equivalents at end of 1st quarter $ 643 $1,552
==============================================================================
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 March 31, 2002, 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 2001 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 financial 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.
As of December 31, 2001, the Company completed an assessment of the impact due
to events of September 11, 2001 and recorded liabilities totaling $542. Of
this amount, $402 related to liabilities to be primarily settled in cash and
the remaining $140 was recorded as asset impairments on used aircraft purchase
contracts.
During the first quarter of 2002, the Company identified and recorded a
further charge of $34 attributable to the events of September 11, 2001. Of
this charge, $12 was associated with guarantee commitments and $22 related to
a further decrease in used airplane values. Three used airplanes on purchase
contracts were returned from customers during the quarter, resulting in an
inventory write-down and a reduction to the liability of $19.
The Company will continue to assess other potential losses and costs it might
incur in relation to the attacks. These future costs are not yet accruable;
however, the Company expects that such costs may be incurred throughout 2002.
Any costs or adjustments in estimates will continue to be recognized as a
separate component of earnings from operations entitled 'Special charges due
to events of September 11, 2001.'
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Note 2 - Accounting for the Impact of the September 11, 2001 Terrorist
Attacks (continued)
Liabilities to be primarily settled in cash attributable to September 11, 2001
as of March 31, 2002 and December 31, 2001, were as follows:
December 31 Change in March 31
2001 Payments Estimate 2002
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Employee severance $285 $(73) $ - $212
Vendor penalties 68 (11) 57
Guarantees 49 12 61
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$402 $(84) $12 $330
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Note 3 - Goodwill and Acquired Intangibles
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
This statement changed the accounting for goodwill and indefinite-lived
intangible assets from an amortization approach to an impairment-only
approach. The SFAS No. 142 goodwill impairment model is a two-step process.
First, it requires a comparison of the book value of net assets to the fair
value of the related operations that have goodwill assigned to them. The
Company estimates the fair values of the related operations using discounted
cash flows, subject to adjustments based upon the Company's market
capitalization at the date of evaluation. If fair value is determined to be
less than book value, a second step is performed to compute the amount of
impairment. In this process, a fair value for goodwill is estimated, based in
part on the fair value of the operations used in the first step, and is
compared to its carrying value. The shortfall of the fair value below carrying
value represents the amount of goodwill impairment.
Upon adoption, goodwill and indefinite-lived intangible assets ceased being
amortized, and were tested for impairment. Using the SFAS No. 142 approach
described above, the Company recorded a transitional goodwill impairment
charge of $2,410 ($1,827 net of tax), presented as a cumulative effect of
accounting change. This charge relates to the Company's segments as follows:
Space and Communications $1,586; Commercial Airplanes $430; and Other $394.
The Other segment charge relates to Connexion by BoeingSM and Air Traffic
Management.
The transitional impairment charge resulted from application of the new
impairment methodology introduced by SFAS No. 142. Previous accounting rules
incorporated a comparison of book value to undiscounted cash flows, whereas
new rules require a comparison of book value to discounted cash flows, which
are lower. Under previous requirements, no goodwill impairment would have been
recorded on January 1, 2002.
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Note 3 - Goodwill and Acquired Intangibles (continued)
The following tables reconcile net earnings (loss), basic earnings (loss) per
share and diluted earnings (loss) per share adjusted for SFAS No. 142.
Net earnings (loss):
Quarter ended March 31, 2002 2001
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Net earnings before cumulative effect of
accounting change $ 578 $1,236
Add back: Goodwill and assembled workforce
amortization, net of tax 36
Add back: Tradename amortization, net of tax 1
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Adjusted net earnings before cumulative effect of
accounting change 578 1,273
Cumulative effect of accounting change, net of tax (1,827) 1
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Adjusted net earnings (loss) $(1,249) $1,274
===============================================================================
Basic earnings (loss) per share:
Quarter ended March 31, 2002 2001
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Basic earnings per share before cumulative
effect of accounting change $ 0.72 $1.48
Add back: Goodwill and assembled workforce
amortization, net of tax 0.04
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Adjusted basic earnings per share before
cumulative effect of accounting change 0.72 1.52
Cumulative effect of accounting change, net of tax (2.28)
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Adjusted basic earnings (loss) per share $(1.56) $1.52
===============================================================================
Diluted earnings (loss) per share:
Quarter ended March 31, 2002 2001
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Diluted earnings per share before cumulative
effect of accounting change $ 0.72 $1.45
Add back: Goodwill and assembled workforce
amortization, net of tax 0.04
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Adjusted diluted earnings per share before
cumulative effect of accounting change 0.72 1.49
Cumulative effect of accounting change, net of tax (2.26)
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Adjusted diluted earnings (loss) per share $(1.54) $1.49
===============================================================================
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Note 3 - Goodwill and Acquired Intangibles (continued)
The balance of goodwill subsequent to the recognition of the transitional
impairment charge discussed above was $2,751. Included in goodwill are certain
claims submitted to Hughes for resolution as contractual purchase price
contingencies relating to the acquisition of Hughes Electronics Corporation
space and communications and related businesses in October 2000. The Company
anticipates finalizing the Hughes purchase price allocation during 2002 or
early 2003, at the conclusion of arbitration procedures related to these
contingencies.
As a result of the adoption of SFAS No. 142 and the transition provisions of
SFAS No. 141, "Business Combinations," the Company has reclassified assembled
workforce with goodwill, ceased amortization of goodwill and recorded an
impairment loss. The changes in the carrying amount of goodwill by reportable
segment for the three months ended March 31, 2002, were as follows:
Reclassifi-
cation of
December 31 Goodwill(1) Assembled Impairment March 31
2001 Adjustments Workforce Losses 2002
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Space and Communications $3,264 $(115) $133 $(1,586) $1,696
Commercial Airplanes 1,032 (5) 21 (430) 618
Military Aircraft and
Missile Systems 434 434
Other 397 (394) 3
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Total(2) $5,127 $(120) $154 $(2,410) $2,751
===============================================================================
(1) The goodwill adjustments primarily represent post-acquisition adjustments
of deferred tax assets established in purchase accounting relating to the
Hughes acquisition.
(2) Boeing Capital Corporation, one of the Company's reporting segments, did
not have a goodwill balance as of March 31, 2002 and December 31, 2001.
In conjunction with the adoption of SFAS No. 142, the Company reassessed the
useful lives and the classification of its finite-lived acquired intangible
assets and determined that no revisions were necessary. The gross carrying
amount and accumulated amortization of the Company's acquired intangible
assets as of March 31, 2002 and December 31, 2001 were as follows:
March 31, 2002 December 31, 2001
--------------------- ---------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
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Developed technology $ 566 $ 90 $ 566 $ 75
Product know-how 308 15 308 13
Assembled workforce 172 18
Other 201 23 201 18
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Total $1,075 $128 $1,247 $124
===============================================================================
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Note 3 - Goodwill and Acquired Intangibles (continued)
Amortization expense for acquired intangible assets during the first quarter
of 2002 was $22. Estimated amortization expense for the remainder of 2002 and
the five succeeding years are as follows:
Estimated
Amortization
Expense
------------
2002 (remainder) $65
2003 $86
2004 $86
2005 $83
2006 $76
2007 $76
As of March 31, 2002 and December 31, 2001, the Company had one indefinite-
lived intangible asset, a trademark, with a carrying amount of $197.
Note 4 - Earnings per Share
The weighted average number of shares outstanding (in millions) used to
compute earnings per share are as follows:
Three months ended
March 31
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2002 2001
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Basic shares 798.5 835.1
Diluted shares 807.8 852.2
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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 - General and Administrative Expense
The Company has issued 7,865,285 stock units as of March 31, 2002, that are
convertible to either stock or a cash equivalent, of which 6,774,055 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 to expense is recognized associated with the change in that
liability balance and is recorded in general and administrative expense. For
the three months ended March 31, 2002 and 2001, general and administrative
expense (reduction to expense) related to deferred stock compensation was $62
and $(55).
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Note 6 - Income Taxes
The effective tax rate of 30.5% for the first three months of 2002 differs
from the federal statutory rate of 35% due primarily to Foreign Sales
Corporation (FSC) and Extraterritorial Income (ETI) exclusion tax benefits,
tax credits, and state income taxes. Income tax payments, net of refunds and
settlements, were $137 and $4 for the three months ended March 31, 2002 and
2001.
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 Internal Revenue
Service (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 filed a petition for rehearing with the Ninth
Circuit Court of Appeals and was denied such rehearing. The Company filed a
petition for writ of certiorari with the United States Supreme Court and is
awaiting the Court's decision on whether to grant hearing of this case before
the Court. The Company has fully provided for any potential earnings impact
that may result from this decision. If the Company were to prevail, the
refund would include interest computed to the payment date.
Note 7 - Accounts Receivable
Accounts receivable consisted of the following:
March 31 December 31
2002 2001
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U.S. Government contracts $3,060 $2,597
Commercial Airplanes segment customers 750 679
Other 1,951 1,944
Less valuation allowance (65) (64)
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$5,696 $5,156
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Note 8 - Inventories
Inventories consisted of the following:
March 31 December 31
2002 2001
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Commercial aircraft programs $ 8,902 $ 10,138
Long-term contracts in progress 8,467 7,329
Commercial spare parts, used aircraft,
general stock materials and other 2,546 2,629
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19,915 20,096
Less advances and progress billings (13,831) (13,461)
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$ 6,084 $ 6,635
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Inventory costs at March 31, 2002, included unamortized tooling of $770 and
$277 relating to the 777 and Next Generation 737 programs, and excess deferred
production costs of $823 and $182 relating to the 777 and Next Generation 737
programs. There were no significant deferred production costs or unamortized
tooling associated with the 717 program.
Used aircraft in inventory totaled $339 as of March 31, 2002.
Note 9 - Property, Plant and Equipment
Property, plant and equipment consisted of the following:
March 31 December 31
2002 2001
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Property, plant and equipment $ 20,958 $ 20,828
Less accumulated depreciation (12,514) (12,369)
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$ 8,444 $ 8,459
===============================================================================
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Note 10 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
March 31 December 31
2002 2001
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Aircraft financing
Notes receivable $ 1,932 $ 1,398
Investment in sales-type/financing leases 2,861 2,796
Operating lease equipment, at cost,
less accumulated depreciation
of $382 and $337 3,947 3,846
Commercial equipment financing
Notes receivable 957 1,008
Investment in sales-type/financing leases 791 776
Operating lease equipment, at cost,
less accumulated depreciation
of $90 and $85 751 716
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Less valuation allowance (141) (142)
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$11,098 $10,398
===============================================================================
The change in the valuation allowance for the first three months of 2002
consisted of the following:
Valuation
Allowance
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Beginning balance - December 31, 2001 $(142)
Charged to costs and expenses (8)
Reduction in customer and commercial financing assets 9
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Ending balance - March 31, 2002 $(141)
===============================================================================
Commercial equipment financing consists principally of executive aircraft,
machine tools and production equipment, containers and marine equipment,
chemical, oil and gas equipment, and other equipment that the Company expects
will maintain strong collateral and residual values.
Aircraft financing and commercial equipment financing operating lease
equipment is recorded at cost and depreciated over its useful life to an
estimated salvage value, primarily on a straight-line basis.
Financing for aircraft is collateralized by security in the related asset, and
historically the Company has not experienced a problem in accessing such
collateral. The operating lease aircraft category includes new and used jet
and commuter aircraft engines and spare parts.
As of March 31, 2002 and December 31, 2001, the net book value of aircraft
financing operating lease equipment held for lease totaled $546 and $513.
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Note 11 - Investments
Investments included in other assets consisted of the following:
March 31, 2002 December 31, 2001
-------------------------------------------------------------------------------
Gross Gross Esti- Gross Esti-
Unreal- Unreal- mated Unreal- mated
Amortized ized ized Fair Amortized ized Fair
Cost Gain Loss Value Cost Loss Value
-------------------------------------------------------------------------------
Available-for-Sale
Equity $ 22 $- $ 7 $ 15 $ 44 $24 $ 20
Debt 264 4 268 4 4
Held-to-Maturity
Debt 163 77 86 158 74 84
-------------------------------------------------------------------------------
$449 $4 $84 $369 $206 $98 $108
===============================================================================
Debt maturities at March 31, 2002, were as follows:
Available-for-Sale Held-to-Maturity
------------------------ ---------------------
Esimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------------------------------------------
Due in 1 year or less $ - $ - $ - $ -
Due from 1 to 5 years 260 264 3 2
Due from 5 to 10 years
Due after 10 years 4 4 160 84
-------------------------------------------------------------------------------
$264 $268 $163 $86
===============================================================================
There were no gross unrealized gains as of December 31, 2001.
As of March 31, 2002 and December 31, 2001, $20 of unrealized loss was
recorded in accumulated other comprehensive income related to an investment
that was previously classified as available-for-sale. At December 31, 2001,
that investment was reclassified to held-to-maturity at its fair value.
As of March 31, 2002, $24 of unrealized loss was reclassified from accumulated
other comprehensive income to net earnings related to an available-for-sale
investment that was revalued due to a business combination of the investee.
Included in held-to-maturity investments carried at amortized cost as of March
31, 2002 and December 31, 2001, were $132 and $128 of Equipment Trust
Certificates, of which $54 and $52 were Enhanced Equipment Trust Certificates.
Included in available-for-sale investments as of March 31, 2002, were $263 of
Enhanced Equipment Trust Certificates carried at estimated fair value. There
were no Enhanced Equipment Trust Certificates classified as available-for-sale
investments at December 31, 2001.
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Note 11 - Investments (continued)
The Company also held securities of $219 and $274 at March 31, 2002 and
December 31, 2001, which were recorded at a cost basis that approximated the
fair value of those investments.
Note 12 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
March 31 December 31
2002 2001
-------------------------------------------------------------------------------
Accounts payable $ 5,006 $ 4,793
Accrued compensation and employee benefit costs 3,653 3,890
Lease and other deposits 538 354
Dividends payable 143
Other 4,494 4,692
-------------------------------------------------------------------------------
$13,691 $13,872
===============================================================================
Accounts payable included $698 and $351 as of March 31, 2002 and December 31,
2001, attributable to checks written but not yet cleared by the bank. Other
liabilities as of March 31, 2002, included $473 attributable to the special
charges due to the events of September 11, 2001, as described in Note 2.
Note 13 - Deferred Lease Income
In 2001, the Company delivered four C-17 transport aircraft to the United
Kingdom Royal Air Force (UKRAF), which were accounted for as operating leases.
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 initial proceeds represented
the present value of the assigned total lease receivables discounted at a rate
of 6.6%. As of March 31, 2002, the balance of $602 represents the present
value of the remaining deferred lease income.
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Note 14 - Debt
Short- and long-term debt consisted of the following:
March 31 December 31
2002 2001
-------------------------------------------------------------------------------
Non-recourse debt and notes
Enhanced equipment trust $ 593 $ 593
9.9% - 14.3% notes due through 2010 13 14
Unsecured debentures and notes
$46, 7.565% due Mar. 30, 2002 46 46
$120, 9.25% due Apr. 1, 2002 120 120
$300, 6 3/4% due Sep. 15, 2002 300 300
$300, 6.35% due Jun. 15, 2003 300 300
$200, 7 7/8% due Feb. 15, 2005 204 204
$300, 6 5/8% due Jun. 1, 2005 296 295
$250, 6.875% due Nov. 1, 2006 249 249
$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
2.1% - 7.4% due through 2012 4,836 4,782
Senior medium-term notes
2.1% - 7.6% due through 2017 2,339 2,109
Subordinated notes
4.3% - 8.3% due through 2012 24 24
Capital lease obligations
due through 2021 453 460
Retail notes
6.0% due through 2009 21
Commercial paper 360 43
Other notes 135 139
-------------------------------------------------------------------------------
$12,876 $12,265
===============================================================================
Of the debt balances reported above, $7,903 and $7,295 are attributed to
Boeing Capital Corporation (BCC), a wholly owned subsidiary of the Company,
for March 31, 2002 and December 31, 2001.
The above table includes a note valued at $46 with a maturity date of March
30, 2002, which was paid by the Company on April 1, 2002, the first business
day following the maturity date.
16
17
Note 14 - Debt (continued)
The Company has $4,500 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 $174 and $158 for the three months ended March 31,
2002 and 2001. Interest payments were $240 and $192 for the same respective
periods.
On February 16, 2001, BCC filed with the Securities and Exchange Commission
(SEC) a Form S-3 Registration Statement for a public shelf registration of
$5,000 of debt securities. Effective October 31, 2001, $1,000 was allocated to
BCC's Series XI medium-term note program. In March 2002, BCC issued $100 of
fixed rate medium-term notes due 2004 at an interest rate of 4.13% and $296 of
variable rate medium-term notes due through 2005. Subsequent to March 31,
2002, BCC issued $100 of variable rate medium-term notes due through 2005.
After inception to date issuances, an aggregate amount of $1,288 remains
available under this Registration Statement for potential debt issuance.
On February 22, 2002, BCC filed with the SEC a Form S-3 Registration Statement
for a public shelf registration of $5,000 of debt securities, which was
declared effective on March 4, 2002. BCC allocated $1,000 to a new retail
medium-term note program. In March 2002, BCC issued $21 of fixed rate notes
due 2009 at an interest rate of 6.0%. Subsequent to March 31, 2002, BCC issued
$91 of fixed rate notes due through 2017 at interest rates ranging from 5.7%
to 6.8%. After the above issuances, the aggregate amount of $4,888 remains
available under this Registration Statement for potential debt issuance.
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 March 31,
2002, consisted of the following: $588 of senior debt securities, senior
medium-term notes, subordinated notes, $360 of commercial paper, $469 of
unsecured debentures and notes, $61 of capital lease obligations, $36 of non-
recourse debt and notes, and $37 of other notes.
17
18
Note 15 - Shareholders' Equity
Changes in shareholders' equity for the three month periods ended March 31,
2002 and 2001, consisted of the following:
-------------------------------------------------------------------------------
2002 2001
(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 - March 31 1,011,870 $ 5,059 1,011,870 $ 5,059
===============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 1,975 $ 2,693
Share-based compensation 104 82
Treasury shares issued for stock plans, net (27) (20)
Tax benefit related to stock plans 5 8
ShareValue Trust market value adjustment 364 (382)
-------------------------------------------------------------------------------
Ending balance - March 31 $ 2,421 $ 2,381
===============================================================================
Treasury stock
Beginning balance - January 1 174,290 $(8,509) 136,385 $(6,221)
Treasury shares issued for
stock plans, net (1,125) 55 (1,004) 45
Treasury shares acquired 2,223 (131)
-------------------------------------------------------------------------------
Ending balance - March 31 173,165 $(8,454) 137,604 $(6,307)
===============================================================================
Retained earnings
Beginning balance - January 1 $14,340 $12,090
Net earnings (loss) (1,249) 1,237
-------------------------------------------------------------------------------
Ending balance - March 31 $13,091 $13,327
===============================================================================
Accumulated other comprehensive income
Beginning balance - January 1 $ (485) $ (2)
Reclassification adjustment for loss
realized in net earnings, net of tax 15
Gain (Loss) on derivative instruments,
net of tax 20 (18)
Foreign currency translation adjustment 4 (6)
-------------------------------------------------------------------------------
Ending balance - March 31 $ (446) $ (26)
===============================================================================
Unearned compensation
Beginning balance - January 1 $ (3) $ (7)
Amortization and forfeitures 1 1
-------------------------------------------------------------------------------
Ending balance - March 31 $ (2) $ (6)
===============================================================================
ShareValue Trust
Beginning balance - January 1 39,691 $(1,552) 39,156 $(2,592)
Shares acquired from dividend
reinvestment, net of fees 141 110
Market value adjustment (364) 382
-------------------------------------------------------------------------------
Ending balance - March 31 39,832 $(1,916) 39,266 $(2,210)
=====================================18========================================
19
Note 15 - Shareholders' Equity (continued)
For the three months ended March 31, 2002 and 2001, the Company did not incur
items to be reported in comprehensive income that were not already included in
reported net earnings (loss), except for the $20 and $(18) on derivative
instruments and the $4 and $(6) on foreign currency translation adjustments.
Note 16 - Share-Based Compensation
Share-based plans expense consisted of the following:
Three months ended
March 31
------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------
Performance Shares $ 67 $46
ShareValue Trust 18 18
Stock options, other 19 18
------------------------------------------------------------------------------
$104 $82
==============================================================================
Note 17 - Derivative Financial Instruments
Derivative and hedging activities
As adopted January 1, 2001, the Company accounts for derivatives pursuant to
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended. This standard requires that all derivative instruments be
recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them.
The Company is exposed to a variety of market risks, including the effects of
changes in interest rates, foreign currency exchange rates, and commodity
prices. These exposures are managed, in part, with the use of derivatives.
The following is a summary of the Company's risk management strategies and the
effect of these strategies on the consolidated financial statements.
Fair value hedges
Fair value hedges used by the Company include certain interest rate swaps,
including forward-starting interest rate swap agreements. The Company holds
forward-starting interest rate swap agreements to fix the cost of funding a
firmly committed lease for which payment terms are determined 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
net change in fair value of the swap and the hedged portion of the firm
commitment is reported in earnings.
For the three months ended March 31, 2002, $1 of gain related to the basis
adjustment of certain terminated interest rate swaps was recorded in other
income. There were no basis adjustment gains or losses for the three months
ended March 31, 2001.
19
20
Note 17 - Derivative Financial Instruments (continued)
Cash flow hedges
Cash flow hedges used by the Company include certain interest rate swaps,
foreign currency forward contracts, and commodity purchase contracts.
Portions of the Company's contracts for the purchase of electricity and
natural gas do not qualify for cash flow hedge treatment, which resulted in a
gain of $1 recorded in other income for the three months ended March 31, 2002.
As of March 31, 2002 and December 31, 2001, net unrecognized losses of $140
($88 net of tax) and $172 ($108 net of tax) were recorded in accumulated other
comprehensive income associated with the Company's cash flow hedging
transactions. A net unrecognized loss of $27 ($17 net of tax) was due to the
Company's transition adjustment upon implementation of SFAS No. 133, at
January 1, 2001.
For the three months ended March 31, 2002 and 2001, unrecognized losses
included in accumulated other comprehensive income of $4 and $1 (net of tax)
were reclassified to other income. During the next twelve months, the Company
expects to reclassify to other income a loss of $42 (net of tax) from the
amount recorded in accumulated other comprehensive income.
Derivative financial instruments not receiving hedge treatment
The Company holds interest exchange agreements and related interest rate
swaps. The intent of these interest rate swaps is to economically hedge the
exposures created by the interest exchange agreements. However, because the
exposures being hedged are derivative instruments, 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 other income. For the
three months ended March 31, 2002 and 2001, the interest exchange agreements
resulted in a loss of $4 and a gain of $5 and the related interest rate swaps
resulted in a gain of $3 and a loss of $6. The Company also holds a forward-
starting interest rate swap that is not accounted for as a hedge.
As of March 31, 2002, the conversion features of certain convertible debt and
warrants were reflected in other assets at their combined fair values of $10.
For the three months ended March 31, 2002, the conversion feature of the
convertible debt and warrants recorded in other assets had a decrease in fair
value, resulting in a reduction of other income of $2. The Company did not
hold convertible debt or warrants as of March 31, 2001.
As of March 31, 2002, the Company had foreign currency forward contracts
carried at fair value that did not qualify for hedge accounting. The Company
realized a pretax gain of $9 and a pretax loss of $5 within other income
attributable to these forward contracts during the three months ended March
31, 2002 and 2001.
Upon adoption of SFAS No. 133, the Company recorded an unrecognized net gain
of $9 ($6 net of tax) in accumulated other comprehensive income attributable
to derivatives not receiving hedge treatment. The components of this
transition adjustment are being amortized to other income, with a net loss of
$1 expected to be reclassified to other income during the next twelve months.
As of March 31, 2002, the unamortized balance in accumulated other
comprehensive income was a net gain of $9 ($6 net of tax).
20
21
Note 17 - Derivative Financial Instruments (continued)
Interest rate swap contracts and foreign currency forward contracts are
entered into with a number of major financial institutions in order to
minimize counterparty credit risk. The Company generally does not require
collateral or other security supporting derivative contracts with its
counterparties. 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 18 - Arrangements with Off-Balance-Sheet Risk
Financial instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business, principally relating to customer financing
activities. Financial instruments with off-balance-sheet risk include
financing commitments, credit guarantees, asset value guarantees, and
participations in customer financing receivables with third-party investors
that involve interest rate terms different from the underlying receivables.
Irrevocable financing commitments related to aircraft on order, including
options, scheduled for delivery through 2007 totaled $4,712 as of March 31,
2002. The Company anticipates that not all of these commitments will be
utilized and that it will be able to arrange for third-party investors to
assume a portion of the remaining commitments, if necessary. The Company has
additional commitments to arrange for commercial equipment financing totaling
$507 as of March 31, 2002.
During the first quarter of 2002, there have been no significant changes in
participations in customer financing receivables with third-party investors
that involve interest rate terms different from underlying receivables, the
Company's maximum exposure to losses associated with credit or asset value
guarantees, or the amounts recorded in accounts payable and other liabilities
attributable to risks associated with credit or asset value guarantees.
Other arrangements
During the first quarter of 2002, there have been no significant changes in
future lease commitments on aircraft not recorded on the Condensed
Consolidated Statements of Financial Position, commitments to purchase used
aircraft under trade-in agreements, or the amounts recorded in accounts payable
and other liabilities attributable to adverse commitments under these
arrangements.
The maximum potential exposure in excess of the asset value of Equipment Trust
Certificates due to certain liquidity obligations of the Company to other
parties in the event of default by the lessee has not changed significantly.
Note 19 - 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.
21
22
Note 19 - Contingencies (continued)
The Company is subject to federal and state requirements for protection of the
environment, including those for discharge of hazardous materials and
remediation of contaminated sites. Due in part to their complexity and
pervasiveness, such requirements have resulted in the Company being involved
with related legal proceedings, claims and remediation obligations since the
1980s.
The Company routinely assesses, based on in-depth studies, expert analyses and
legal reviews, its contingencies, obligations and commitments for remediation
of contaminated sites, including assessments of ranges and probabilities of
recoveries from other responsible parties who have and have not agreed to a
settlement and of recoveries from insurance carriers. The Company's policy is
to immediately accrue and charge to current expense identified exposures
related to environmental remediation sites based on estimates of
investigation, cleanup and monitoring costs to be incurred.
The costs incurred and expected to be incurred in connection with such
activities have not had, and are not expected to have, a material impact to
the Company's financial position. With respect to results of operations,
related charges have averaged less than 2% of annual net earnings. Such
accruals as of March 31, 2002, without consideration for the related
contingent recoveries from insurance carriers, are less than 2% of total
liabilities.
Because of the regulatory complexities and risk of unidentified contaminated
sites and circumstances, the potential exists for environmental remediation
costs to be materially different from the estimated costs accrued for
identified contaminated sites. However, based on all known facts and expert
analyses, the Company believes it is not reasonably likely that identified
environmental contingencies will result in additional costs that would have a
material adverse impact to the Company's financial position or operating
results and cash flow trends.
The Company is subject to U.S. Government investigations 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.
22
23
Note 19 - 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 March 31, 2002,
inventories included approximately $583 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 formally
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 is pursuing
its 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 $970). Under this outcome, the Company would
be obligated to pay one half of these amounts. The additional loss to the
Company would total approximately $1,430 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 March 31, 2002. Final
resolution of the A-12 litigation will depend upon the outcome of further
proceedings or possible negotiations with the Government.
23
24
Note 19 - 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 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 as well as punitive damages. The U.S. Ninth Circuit Court of
Appeals has accepted the Company's interlocutory appeal of the class
certification decision, particularly the ruling that leaves open the
possibility of punitive damages.
24
25
Note 19 - Contingencies (continued)
In January 2002 and March 2002, four other gender discrimination class actions
were filed in locations that were originally part of the Beck case but
subsequently excluded from the class certified by the district court. The four
new cases cover females employed in California, Missouri, Kansas, and
Oklahoma. Many of the named plaintiffs in these new cases were also named
plaintiffs in Beck. Like Beck, these new cases focus on compensation and
promotion decisions.
The Company intends to continue its aggressive defense of these cases. It is
not possible to predict what impact, if any, these cases could have on the
financial statements.
25
26
Note 20 - Business Segment Data
Segment information for revenues, earnings, and research and development
consisted of the following:
Three months ended
March 31
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Revenues:
Commercial Airplanes $ 8,313 $ 8,443
Military Aircraft and Missile Systems 2,972 2,427
Space and Communications 2,332 2,246
Boeing Capital Corporation 228 161
Other 126 116
Accounting differences/eliminations (150) (100)
-------------------------------------------------------------------------------
Operating revenues $13,821 $13,293
===============================================================================
Earnings from operations:
Commercial Airplanes $ 973 $ 860
Military Aircraft and Missile Systems 363 246
Space and Communications 42 84
Boeing Capital Corporation 156 113
Other (52) (22)
Accounting differences/eliminations (265) 25
Share-based plans (104) (82)
Unallocated expense (121) (6)
-------------------------------------------------------------------------------
Earnings from operations 992 1,218
-------------------------------------------------------------------------------
Other income, principally interest 12 235
Interest and debt expense
Boeing Capital Corporation (90) (73)
Other (82) (75)
-------------------------------------------------------------------------------
Earnings before income taxes 832 1,305
Income taxes 254 69
-------------------------------------------------------------------------------
Net earnings before cumulative effect of
accounting change $ 578 $ 1,236
===============================================================================
Research and development:
Commercial Airplanes $ 223 $ 195
Military Aircraft and Missile Systems 82 53
Space and Communications 128 123
Other 26 51
-------------------------------------------------------------------------------
Total research and development expense $ 459 $ 422
===============================================================================
26
27
Note 20 - Business Segment Data (continued)
In the first quarter of 2002, the segment formerly identified as Customer and
Commercial Financing was reclassified as Boeing Capital Corporation (BCC).
Financing activities other than Boeing Capital Corporation, consisting
principally of four C-17 transport aircraft under lease to the United Kingdom
Royal Air Force, are included within the 'Other' segment classification. In
the first quarter of 2001, 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 Boeing Technology, an
advanced research and development organization focused on innovative
technologies, improved processes and the creation of new products. The 2001
results have been reclassified to conform to the revised segment
classifications.
BCC segment revenues consist principally of interest from financing
receivables and lease income from operating lease equipment. Additionally,
segment earnings reflect depreciation on leased equipment and expenses
recorded against the valuation allowance presented in Note 10. No interest
expense on debt is included in BCC segment earnings. The Company has extended
certain intercompany guarantees to BCC, including guarantees on lease income
from operating lease equipment. For the three months ended March 31, 2002,
BCC's segment earnings included $23 of income under guarantees, $10 of which
related to impairment loss abatements at a consolidated level. There was no
significant earnings impact related to guarantees for the three months ended
March 31, 2001.
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 Boeing Capital Corporation. 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.
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
2001 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 $(335) and $(111) for the three months ended March
2002 and 2001.
27
28
Note 20 - Business Segment Data (continued)
The Other segment loss includes expenses resulting from certain intercompany
guarantees extended to BCC discussed in the paragraph above. During the first
quarter of 2002, the Other segment loss included $23 of expense, $10 of which
related to impairment losses. There was no significant earnings impact related
to guarantees for the three months ended March 31, 2001.
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, for the period ended March 31, 2001, goodwill
amortization resulting from acquisitions prior to 1998. For the period ended
March 31, 2002, unallocated costs do not include goodwill amortization as a
result of the Company adopting SFAS No. 142, "Goodwill and Other Intangible
Assets," as described in Note 3.
Note 21 - Standard Issued and Not Yet Implemented
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," effective to the Company on January 1, 2003. The Company does
not believe that the implementation of this standard will have a significant
impact on the financial statements.
28
29
-------------------------------------------------------------------------------
| 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, |
| deliveries, realization of technical and market benefits from acquisitions, |
| revenues, operating margins, free cash flow, taxes, research and |
| development expenses, prospects for delivery stream recovery in commercial |
| aircraft, 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, program performance, |
| benefits from reorganizations, 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 timing of procurement of tankers, 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 |
| 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 Company's successful execution of internal |
| performance plans, including continued research and development, production |
| rate increases and decreases (particularly with respect to wide body |
| production), production system initiatives, timing of product deliveries |
| and launches, supplier contract negotiations, asset management plans, |
| acquisition and divestiture plans, procurement plans, credit rating agency |
| assessments, and other cost-reduction efforts; the actual outcomes of |
| certain pending sales campaigns and U.S. and foreign government procurement |
| activities; including the timing of procurement of tankers, 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; any |
| additional impacts from the attacks of September 11, 2001; 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 2001 and the 10Q's for the |
| quarters ended 31 March 2001, 30 June 2001 and 30 September 2001. |
-------------------------------------------------------------------------------
29
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Consolidated Results of Operations
----------------------------------
Sales of $13.8 billion for the first three months of 2002 were 4% higher than
sales for the comparable period of 2001. For the first three months of 2002, a
total of 110 commercial aircraft were delivered, compared with 122 for the
same period in 2001. Approximately 380 commercial aircraft deliveries are
currently projected for the full year of 2002, compared with 527 in 2001.
Net loss for the first quarter of 2002 was $1,249 million, compared with net
earnings of $1,237 million for the same period in 2001. The first quarter of
2002 net loss included a $(1,827) million cumulative effect of accounting
change as a result of the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." The first
quarter of 2002 also included a net non-recurring after tax charge of $24
million. This charge included a $15 million benefit related to continuing F-15
program supplier termination negotiations; a $24 million charge related to
decreased valuations of commercial aircraft and adverse exposure under certain
guarantees and commitments related to the events of September 11; and a $15
million loss recognized on a long-held equity investment. A non-recurring
after tax benefit of $475 million was recorded during the comparable period of
2001 related to a research and development tax settlement.
Research and development expense totaled $459 million for the first three
months of 2002, compared with $422 million for the same period of 2001.
Commercial Airplanes segment research and development expense of $223 million
for the first quarter of 2002 reflected an increase over the $195 million
expense for the first quarter of 2001. Space and Communications segment
research and development expense of $128 million for the first quarter of 2002
is in line with the spending levels for the same period in 2001. Military
Aircraft and Missile Systems segment research and development expense of $82
million for the first quarter of 2002 was higher than the $53 million expense
for the first quarter of 2001. Research and development in the Other segment
relates principally to Connexion by BoeingSM and Air Traffic Management.
Income tax expense for the first three months of 2002 was $254 million, or
30.5% of pretax earnings, compared with $69 million, or 5.3% of pretax
earnings in 2001. These rates differ from the federal statutory rate of 35%
due primarily to Foreign Sales Corporation (FSC) and Extraterritorial Income
(ETI) exclusion tax benefits, tax credits, and state income taxes, and for
2001 due to a one-time audit settlement benefit for research credits at
McDonnell Douglas Corporation.
30
31
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 Internal Revenue
Service (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 filed a petition for rehearing with the Ninth
Circuit Court of Appeals and was denied such rehearing. The Company filed a
petition for writ of certiorari with the United States Supreme Court and is
awaiting the Court's decision on whether to grant hearing of this case before
the Court. The Company has fully provided for any potential earnings impact
that may result from this decision. If the Company were to prevail, the
refund would include interest computed to the payment date.
In February 2000, the World Trade Organization (WTO) Appellate Body upheld a
panel decision that U.S. FSC tax provisions constituted a prohibited export
subsidy. In response, in November 2000, the United States enacted legislation
to repeal the FSC tax provisions, subject to transition rules, and enacted
replacement legislation (the Extraterritorial Income Exclusion Act of 2000).
The European Union objected to this ETI exclusion, and in November 2001 asked
the WTO to authorize trade sanctions on a list of goods, including aircraft,
produced in the United States. At this point the WTO has not yet ruled on the
request for sanctions and it is not known if, and to what extent, any
sanctions will be authorized. In January 2002, the Appellate Body of the WTO
upheld a ruling that the United States had failed to withdraw the prohibited
FSC export subsidy. The U.S. Government is currently reviewing its options in
response to this decision. It is not possible to predict what impact, if any,
this issue will have on future earnings pending final resolution of the
challenge.
Segment Results of Operations
-----------------------------
The Company operates in four principal segments: Commercial Airplanes,
Military Aircraft and Missile Systems, Space and Communications, and Boeing
Capital Corporation. All other activities fall within the Other segment,
principally made up of Boeing Technology, Connexion by BoeingSM and Air
Traffic Management.
Commercial Airplanes
First quarter 2002 commercial jet aircraft deliveries totaled 110 compared
with 122 during the same period in 2001. Commercial Airplanes segment revenues
were $8.3 billion in the first quarter 2002 compared with $8.4 billion for the
same period in 2001. The decline in revenue was due primarily to the decline
in the spare parts market resulting from the events of September 11, 2001. The
decline in jet aircraft deliveries did not have a significant impact on total
revenue due to favorable mix of aircraft sold.
31
32
Commercial jet aircraft deliveries were as follows:
Three months ended
March 31
-------------------------------------------------
Model 2002 2001
-------------------------------------------------
717 3 7 (1)
737 Next Generation 59*(1) 72*
747 8 7
757 12 8
767 12 10
777 16 16
MD-11 - 2
-------------------------------------------------
Total 110 122
=================================================
*Included one intercompany C-40 737 aircraft
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.
Commercial Airplanes segment first quarter 2002 operating earnings, based on
the unit cost of airplanes delivered, were $973 million, compared with $860
million for the same period in 2001. The overall Commercial Airplanes segment
operating profit margin was 11.7% for the first quarter of 2002, compared with
10.2% for the same period in 2001. The first quarter 2002 margin increase over
the same period in 2001 primarily reflects favorable cost performance on the
737NG program, offset by the decline in spare parts sales and increased
research and development expense.
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 20. Commercial
Airplanes segment earnings under GAAP were $639 million and $749 million for
the first quarter of 2002 and 2001. The GAAP determined segment margin of 7.7%
in 2002 compares with 8.9% for the same three month period in 2001. In
addition to the impacts to the segment margins caused by the decline in spare
parts sales and increased research and development expense identified above,
the GAAP segment margins have been adversely impacted due to the near-term
aircraft market decline resulting from the events of September 11.
The favorable cost performance on the 737NG program reflected in the current
period earnings and margin based on unit cost of sales is recognized over
current and future deliveries under the program method of accounting. For
segment reporting purposes, the favorable cost performance is a cumulative
adjustment over current and prior deliveries. Program quantities for the 737NG
and 777 are 1,800 and 600 units, unchanged from March 31, 2001.
32
33
As of March 31, 2002, the Company had cumulatively delivered 96 717 program
aircraft. The 717 program is accounted for under the program method of
accounting. The Company will record 717 deliveries on a break-even basis until
such time as program reviews indicate positive gross profit within the program
accounting quantity. Such program reviews could include revised assumptions of
revenues and costs. The Company has potentially material exposures related to
the 717 program, principally attributable to vendor termination costs that
could result from a lack of longer-term market acceptance. Additionally, the
Company has potential exposure relating to the valuation of 717 customer
financing assets.
Military Aircraft and Missile Systems
Military Aircraft and Missile Systems segment revenues for the first quarter
of 2002 increased 22% to $3.0 billion compared to $2.4 billion for the same
period in 2001. Aircraft, rotorcraft, and tactical weapons program deliveries
were all higher, as were revenues from military aerospace support.
Military Aircraft and Missile Systems segment deliveries included
the following:
Three months ended
March 31
------------------------------------------------
Model 2002 2001
------------------------------------------------
C-17 3 2
F/A-18E/F 10 7
T-45TS 2 4
CH-47 2 2
AH-64 Apache (New Builds) 5 2
First quarter 2002 segment earnings and operating margins totaled $363 million
and 12.2%. This compares to segment earnings and operating margins of $246
million and 10.1% during the first quarter of 2001. The increase in earnings
from 2001 is primarily due to the additional delivery volume and program
performance improvements. Research and development expense in the first
quarter of 2002 was $82 million compared to $53 million during the first
quarter of 2001. Additional spending on the 767 Tanker program primarily drove
the increase in research and development expense from a year ago.
Military Aircraft and Missile Systems took steps towards securing significant
growth opportunities during the quarter. On March 13, 2002, Military Aircraft
and Missile Systems received additional Joint Direct Attack Munitions (JDAM)
orders increasing production rates and accelerating deliveries in support of
increasing national security needs. In April 2002, the Korean Ministry of
National Defense announced that Boeing's F-15K was selected for its F-X fighter
program, with expected contract finalization in the second quarter of 2002. On
March 29, 2002, the U.S. Air Force selected Boeing to proceed in negotiations
on a tanker program. Tanker negotiations, including lease arrangements, are
currently expected to be complete this summer.
On March 18, 2002, the Company signed an agreement to sell its ordnance
business located in Mesa, AZ to Alliant Techsystems (ATK) pending regulatory
approvals. The transaction is expected to be completed in the second quarter
of 2002.
33
34
Space and Communications
Space and Communications segment revenues were $2.3 billion in the first
quarter of 2002 compared with $2.2 billion for the same period in 2001.
Space and Communications segment deliveries included the following:
Three months ended
March 31
------------------------------------------------
Model 2002 2001
------------------------------------------------
Delta II 1 -
Satellites 3 1
The greatest segment revenue growth was in the Missile Defense sector, with
the Company being named the missile defense architecture System Integration
Lead for the newly established National Team. Growth will also continue in
the Integrated Battlespace market.
Space and Communications segment operating earnings for the first quarter of
2002 were $42 million compared with $84 million in the first quarter of 2001.
Operating margins were 1.8% for the first quarter of 2002 compared to 3.7% for
the first quarter of 2001. The lower earnings and margins were a result of
issues in the commercial satellite market and with technical issue resolution
and its impact on satellite production.
In February 2002, Space and Communications undertook a reorganization of their
commercial satellite manufacturing activities in response to unfavorable
market conditions. This action will enhance factory efficiencies and
competitiveness via the infusion of proven Boeing lean manufacturing
processes. The restructuring includes facilities consolidation, workforce
rightsizing, and design and production streamlining with an enhanced focus on
quality. These actions are expected to improve the profitability of satellite
manufacturing for the remainder of the year despite the current downturn in
the commercial satellite market.
Major events during the first quarter of 2002 included another successful
Ground-based Midcourse Defense program integrated flight test. As previously
mentioned, Space and Communications also assumed the Systems Integration Lead
for the new national industry team established by the Missile Defense Agency.
In addition, Space and Communications achieved a significant milestone in
their Integrated Battlespace growth strategy by being selected as the prime
contractor to develop the Army's future combat system.
Significant risk remains related to work in process inventory and supplier
commitments for the Delta III program. Space and Communications is actively
working to mitigate much of this risk, primarily through the conversion of
Delta IIIs to Delta IIs. This risk assessment remains closely monitored, and
additional opportunities for conversions are under review.
34
35
The Sea Launch program in which Boeing is a 40% partner with RSC Energia (25%)
of Russia, Kvaerner Maritime (20%) of Norway, and KB Yuzhnoye/PO Yuzhmach
(15%) of Ukraine had no launches in the first quarter of 2002, however,
several launches are planned for the year. Boeing's investment in this
venture as of March 31, 2002 is reported at zero, which reflects the prior
recognition of losses reported by Sea Launch. Boeing has financial exposure
with respect to the venture, which relates to guarantees by the Company
provided to certain Sea Launch creditors, performance guarantees provided by
the Company to a Sea Launch customer and financial exposure related to
accounts receivable/inventory. Net of liabilities established, the Company's
maximum exposure to credit-related losses associated with credit guarantees is
$351 million as of March 31, 2002. Financial exposure related to performance
guarantees and accounts receivable/inventory amounted to $162 million at March
31, 2002.
The Company and Lockheed Martin are 50-50 partners in United Space Alliance,
which is responsible for all ground processing of the Space Shuttle fleet and
for space-related operations with the U.S. Air Force. United Space Alliance
also performs modifications, testing and checkout operations that are required
to ready the Space Shuttle for launch. The joint venture operations are not
included in the Company's consolidated statements; however, the Company's
proportionate share of joint venture earnings is recognized as income.
Included in Space and Communications operating earnings for the first quarter
of 2002 were $15 million compared to $18 million in the first quarter of 2001
related to United Space Alliance operations. The lower income was primarily
due to one less shuttle flight in the current quarter versus the first quarter
of 2001.
Space and Communications continues to invest in its key development programs -
Delta IV and 737 Airborne Early Warning & Control. First quarter 2002 company-
sponsored research and development spending was $47 million, which was
slightly lower than first quarter 2001 spending of $53 million. This was
primarily due to the transition of the Delta IV launch vehicle into production
later this year. Additionally, overall research and development investment was
comparable year over year with first quarter 2002 spending of $128 million
compared to first quarter 2001 spending of $123 million.
Boeing Capital Corporation
Revenues for Boeing Capital Corporation (BCC) consisted principally of income
earned on funds employed in financing activities (direct finance leases,
operating leases, notes receivable, and investments). Earnings are net of
depreciation on leased equipment and operating expenses. No interest expense
on debt is included in BCC's earnings reflected in Note 20; however, interest
expense of $90 million and $73 million was associated with debt relating to
financing activities as of March 31, 2002 and 2001.
Operating earnings for BCC were $156 million for the first quarter of 2002,
compared with $113 million for the first quarter of 2001, exclusive of
interest expense. The increase was due principally to an increase in financing
assets.
35
36
Since the terrorist attacks of September 11, 2001, BCC has continued to
closely monitor the value and utility of equipment securing its financing
assets. The effects of the terrorist attacks have not had, and BCC believes
they are not likely to have, a material adverse impact on BCC's earnings, cash
flows or financial position. However, no assurance can be given that such
impact will not become material if the economy and the airline industry do not
recover as currently expected.
In the first quarter of 2002, $242 million of financing assets secured by
aircraft operated by United Airlines were transferred from the Company to BCC.
Other
Other segment earnings were a loss of $52 million in the first quarter of 2002
and a loss of $22 million for the same period in 2001. The increase in losses
between periods was primarily due to research and development activity related
to Connexion by BoeingSM and, to a lesser extent, Air Traffic Management and
Boeing Technology. Research and development expense attributable to the Other
segment was $26 million in the first quarter of 2002 and $51 million for the
same period in 2001. Also included in the Other segment for first quarter of
2002 were losses relating to intercompany guarantees made to BCC amounting to
$23 million, $10 million of which related to impairment losses, at a
consolidated level, and operating earnings of $11 million attributable to
financing assets not intended to be transferred to BCC. As of March 31, 2002,
these financing assets consisted of four C-17 transport aircraft leased to the
United Kingdom Royal Air Force.
Events of September 11, 2001
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 financial 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.
As of December 31, 2001, the Company completed an assessment of the impact due
to events of September 11, 2001 and recorded liabilities totaling $542
million. Of this amount, $402 million related to liabilities to be primarily
settled in cash and the remaining $140 million was recorded as asset
impairments on used aircraft purchase contracts.
36
37
During the first quarter of 2002, the Company identified and recorded a
further charge of $34 million attributable to the events of September 11,
2001. Of this charge, $12 million was associated with guarantee commitments
and $22 million related to a further decrease in used airplane values. Three
used airplanes on purchase contracts were returned from customers during the
quarter resulting in an inventory write-down and a reduction to the liability
of $19 million. See Note 2 for a reconciliation of the liabilities recorded as
of March 31, 2002 and December 31, 2001.
The Company will continue to assess other potential losses and costs it might
incur in relation to the attacks. These future costs are not yet accruable;
however, the Company expects that such costs may be incurred throughout 2002.
Any costs or adjustments in estimates will continue to be recognized as a
separate component of earnings from operations entitled 'Special charges due
to events of September 11, 2001.'
Liquidity and Capital Resources
-------------------------------
As of March 31, 2002, the Company's cash position totaled $643 million.
Excluding non-recourse debt and Boeing Capital Corporation (BCC), a financing
subsidiary wholly owned by the Company, total debt represents 35% of total
shareholders' equity plus debt. The consolidated debt, including BCC and non-
recourse, represents 57% of total shareholders' equity plus debt.
Revolving credit line agreements with a group of major banks, totaling $4.5
billion, remain available but unused. The Company also has available $4.0
billion under commercial paper programs, of which $2.0 billion is attributable
to BCC, and are backed by the $4.5 billion revolving credit line agreements.
As of the end of the first quarter of 2002, the Company had an outstanding
commercial paper balance of $360 million, which is related to BCC.
On April 15, 2002, Boeing contributed $325 million to three of the Company's
defined benefit plans. These three plans, like all of Boeing's major domestic
plans, remain fully funded under the Internal Revenue Code. The Company
elected to contribute enough funds to ensure that each of Boeing's plans would
have assets that were at least approximately equal to (and in most cases
greater than) the liability for vested benefits as measured by the Pension
Benefit Guaranty Corporation.
The Company has the following Standard & Poor's credit ratings: short-term, A-
1; senior debt, A+. BCC has the following Standard & Poor's credit ratings:
short-term, A-1; senior debt, A+. The Company has the following Moody's credit
ratings: short-term, P-1; senior debt, A2. BCC has the following Moody's
credit ratings: short-term, P-2; senior debt, A3.
37
38
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):
March 31 December 31
2002 2001
------------------------------------------------------------
Commercial Airplanes $ 71.6 $ 75.9
Military Aircraft and Missile Systems 22.5 17.6
Space and Communications 16.1 13.1
------------------------------------------------------------
Total contractual backlog $110.2 $106.6
============================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$20.9 billion at March 31, 2002, compared with $27.5 billion at December 31,
2001.
Standard Issued and Not Yet Implemented
---------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," effective to the Company on January 1, 2003. The Company does not
believe that the implementation of this standard will have a significant
impact on the financial statements.
38
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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. 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.
The Company is subject to commodity price risk relating principally to energy
used in production. The Company uses commodity derivatives, such as fixed-
price purchase commitments, to hedge against potentially unfavorable price
changes of commodities. Commodity price exposure related to these contracts is
not material.
39
40
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 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 March 31, 2002,
inventories included approximately $583 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 formally
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 is pursuing
its appeal.
40
41
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 $970 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 $1,430 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 March 31, 2002. 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 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.
41
42
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 as well as punitive damages. The U.S. Ninth Circuit Court of
Appeals has accepted the Company's interlocutory appeal of the class
certification decision, particularly the ruling that leaves open the
possibility of punitive damages.
In January 2002 and March 2002, four other gender discrimination class actions
were filed in locations that were originally part of the Beck case but
subsequently excluded from the class certified by the district court. The four
new cases cover females employed in California, Missouri, Kansas, and
Oklahoma. Many of the named plaintiffs in these new cases were also named
plaintiffs in Beck. Like Beck, these new cases focus on compensation and
promotion decisions.
The Company intends to continue its aggressive defense of these cases. It is
not possible to predict what impact, if any, these cases could have on the
financial statements.
42
43
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on
April 29, 2002.
(b) At the Annual Meeting, in an uncontested election, four nominees
of the Board of Directors were elected directors for three-year
terms expiring on the date of the annual meeting in 2005. The
votes were as follows:
For Withheld
----------- ----------
Philip M. Condit 661,819,185 36,181,148
Kenneth M. Duberstein 676,077,380 21,922,952
W. James McNerney, Jr. 676,597,445 21,402,887
Lewis E. Platt 671,873,413 26,126,919
The terms of the following directors continued after the annual
meeting:
John H. Biggs John F. McDonnell Harry C. Stonecipher
John E. Bryson Rozanne L. Ridgway
Paul E. Gray John M. Shalikashvili
(c) The results of voting on Proposals 2 through 13 were as follows:
2. A Company proposal to ratify the appointment of Deloitte &
Touche as independent auditors for the fiscal year ending
December 31, 2002.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 663,867,890 83.17% 95.11% 95.62%
Against 30,380,272 3.81% 4.35% 4.38%
Abstain 3,752,170 0.47% 0.54%
3. A shareholder proposal requesting the Company to provide a
comprehensive report describing the Company's involvement in
space-based weaponization.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 34,766,117 4.36% 6.31% 6.58%
Against 493,652,543 61.85% 89.55% 93.42%
Abstain 22,844,187 2.86% 4.14%
Broker non-votes 146,737,484 18.38%
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4. A shareholder proposal requesting the Board to institute a
special Executive Compensation Review to find ways to link
compensation of its key executives with corporate social
performance.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 46,820,143 5.87% 8.49% 8.85%
Against 482,294,666 60.42% 87.49% 91.15%
Abstain 22,147,034 2.77% 4.02%
Broker non-votes 146,738,488 18.38%
5. A shareholder proposal requesting the Compensation Committee of
the Board to incorporate measures of human capital in
establishing and administering standards for calculating
performance-based executive compensation.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 46,332,964 5.80% 8.40% 8.71%
Against 485,379,663 60.81% 88.05% 91.29%
Abstain 19,550,214 2.45% 3.55%
Broker non-votes 146,737,490 18.38%
6. A shareholder proposal requesting the Board to amend its
written diversity and equal employment opportunity policies to
exclude any reference to sexual orientation.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 45,447,870 5.69% 8.24% 8.53%
Against 487,169,818 61.03% 88.37% 91.47%
Abstain 18,645,165 2.34% 3.38%
Broker non-votes 146,737,478 18.38%
7. A shareholder proposal requesting the Board to adopt annual
election of all directors.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 272,775,797 34.17% 49.48% 50.49%
Against 267,526,989 33.52% 48.53% 49.51%
Abstain 10,960,065 1.37% 2.01%
Broker non-votes 146,737,480 18.38%
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8. A shareholder proposal recommending that the Company not
adopt or maintain a shareholder rights plan, unless such plan
has been previously approved by a shareholder vote.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 272,641,696 34.16% 49.46% 50.66%
Against 265,554,557 33.27% 48.17% 49.34%
Abstain 13,066,587 1.64% 2.37%
Broker non-votes 146,737,491 18.38%
9. A shareholder proposal recommending the adoption of a bylaw
provision to nominate independent directors to key board
committees.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 121,312,431 15.20% 22.01% 22.80%
Against 410,866,547 51.47% 74.53% 77.20%
Abstain 19,083,867 2.39% 3.46%
Broker non-votes 146,737,486 18.38%
10. A shareholder proposal recommending that the Board obtain
prior shareholder approval for all future severance agreements
for senior executives if there is a change in control of the
Company.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 150,399,024 18.84% 27.28% 28.16%
Against 383,647,304 48.06% 69.59% 71.84%
Abstain 17,216,511 2.16% 3.12%
Broker non-votes 146,737,492 18.38%
11. A shareholder proposal requesting the Board to adopt simple
majority vote on all issues submitted for shareholder vote.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 271,438,087 34.01% 49.54% 50.69%
Against 264,023,853 33.08% 48.18% 49.31%
Abstain 12,501,402 1.57% 2.28%
Broker non-votes 150,036,990 18.80%
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12. A shareholder proposal requesting that the Company adopt a
Directors' compensation bylaw requiring that the Company's
Directors be paid with Boeing common stock as the major or full
amount of their retainer.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 47,374,443 5.94% 8.65% 8.95%
Against 481,689,866 60.35% 87.91% 91.05%
Abstain 18,899,036 2.37% 3.45%
Broker non-votes 150,036,987 18.80%
13. A shareholder proposal requesting the Board of Directors to
give all non-represented employees a choice of pension plans at
the time of termination or retirement.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 63,931,783 8.01% 11.67% 11.98%
Against 469,673,734 58.84% 85.71% 88.02%
Abstain 14,357,814 1.80% 2.62%
Broker non-votes 150,037,000 18.80%
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) Articles of Incorporation and By-Laws
(i) By-Laws, as amended and restated on February 25, 2002.
Filed herewith.
(15) Letter from independent accountants regarding unaudited interim
financial information. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this report.
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REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The condensed consolidated statement of financial position as of March 31,
2002, the condensed consolidated statements of operations for the three-month
periods ended March 31, 2002 and 2001, and the condensed consolidated
statements of cash flows for the three-month periods ended March 31, 2002 and
2001, 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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49
INDEPENDENT ACCOUNTANTS' REVIEW 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 March 31, 2002, and the related condensed consolidated statements of
operations and cash flows for the three-month periods ended March 31, 2002 and
2001. 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, 2001, 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 28, 2002, 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, 2001 is fairly stated, in all material respects, in relation to
the consolidated statement of financial position from which it has been
derived.
As discussed in Note 3 to the condensed consolidated financial statements,
on January 1, 2002, the Company changed its method of accounting for
goodwill and other intangible assets to conform to Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
April 23, 2002
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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)
May 7, 2002 /s/ James A. Bell
---------------- ------------------------------
(Date) James A. Bell
Vice President of Finance
& Corporate Controller
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