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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2001
Commission file number 1-442
THE BOEING COMPANY
7755 East Marginal Way South
Seattle, Washington 98108
Telephone: (206) 655-2121
State of incorporation: Delaware
IRS identification number: 91-0425694
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and has been subject to such filing requirements for the past 90 days.
As of April 30, 2001, there were 872,379,018 shares of common stock, $5.00 par
value, issued and outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data)
(Unaudited)
Three months ended
March 31
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
Sales and other operating revenues $13,293 $9,910
Cost of products and services 11,070 8,547
- ------------------------------------------------------------------------------
2,223 1,363
Equity in income from joint ventures 22 31
General and administrative expense 523 490
Research and development expense 422 288
Share-based plans expense 82 60
- ------------------------------------------------------------------------------
Earnings from operations 1,218 556
Other income, principally interest 235 149
Interest and debt expense (148) (103)
- ------------------------------------------------------------------------------
Earnings before income taxes 1,305 602
Income taxes 69 184
- ------------------------------------------------------------------------------
Net earnings before cumulative effect of accounting change 1,236 418
Cumulative effect of accounting changes, net 1
- ------------------------------------------------------------------------------
Net Earnings $1,237 $418
==============================================================================
Basic earnings per share $1.48 $.48
==============================================================================
Diluted earnings per share $1.45 $.48
==============================================================================
Cash dividends paid per share $.17 $.14
==============================================================================
See notes to condensed consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
March 31 December 31
2001 2000
- ------------------------------------------------------------------------------
Assets (Unaudited)
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 1,552 $ 1,010
Accounts receivable 4,524 4,928
Current portion of customer and commercial financing 926 995
Deferred income taxes 2,153 2,137
Inventories, net of advances and progress billings 8,016 6,794
- ------------------------------------------------------------------------------
Total current assets 17,171 15,864
Customer and commercial financing 6,185 5,964
Property, plant and equipment, net 8,712 8,814
Goodwill and acquired intangibles, net 5,247 5,214
Prepaid pension expense 5,080 4,845
Deferred income taxes 60
Other assets 1,403 1,267
- ------------------------------------------------------------------------------
$43,798 $42,028
==============================================================================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------
Accounts payable and other liabilities $12,169 $11,979
Advances in excess of related costs 3,943 3,517
Income taxes payable 1,336 1,561
Short-term debt and current portion of long-term debt 658 1,232
- ------------------------------------------------------------------------------
Total current liabilities 18,106 18,289
Deferred income taxes 38
Accrued retiree health care 5,182 5,152
Long-term debt 8,238 7,567
Minority interest in subsidiaries 16
Shareholders' equity:
Common shares, par value $5.00 -
1,200,000,000 shares authorized;
Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059
Additional paid-in capital 2,381 2,693
Treasury shares, at cost - 137,604,401 and 136,385,222 (6,307) (6,221)
Retained earnings 13,327 12,090
Accumulated other comprehensive income (26) (2)
Unearned compensation (6) (7)
ShareValue Trust shares - 39,266,086 and 39,156,280 (2,210) (2,592)
- ------------------------------------------------------------------------------
Total shareholders' equity 12,218 11,020
- ------------------------------------------------------------------------------
$43,798 $42,028
==============================================================================
See notes to condensed consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three months ended
March 31
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $ 1,237 $ 418
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Share-based plans 82 60
Depreciation 315 323
Amortization of goodwill and intangibles 69 29
Customer and commercial financing valuation provision 4 1
Changes in assets and liabilities -
Short-term investments 1
Accounts receivable 404 31
Inventories, net of advances and progress billings (1,227) (1,435)
Accounts payable and other liabilities 343 (211)
Advances in excess of related costs 426 36
Income taxes payable and deferred (128) 15
Other (488) (274)
Accrued retiree health care 53 45
- ------------------------------------------------------------------------------
Net cash provided (used) by operating activities 1,090 (961)
- ------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing and properties on lease, additions (470) (397)
Customer financing and properties on lease, reductions 264 1,011
Property, plant and equipment, net additions (240) (205)
Proceeds from dispositions 68 17
- ------------------------------------------------------------------------------
Net cash provided (used) by investing activities (378) 426
- ------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 850 125
Debt repayments (770) (104)
Common shares purchased (131) (104)
Stock options exercised, other 29 19
Dividends paid (148) (127)
- ------------------------------------------------------------------------------
Net cash used by financing activities (170) (191)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 542 (726)
Cash and cash equivalents at beginning of year 1,010 3,354
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of 1st quarter $ 1,552 $2,628
==============================================================================
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 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, 2001, are not necessarily
indicative of the operating results for the full year. The interim financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's 2000 Annual Report.
Certain reclassifications have been made to prior periods to conform with
current reporting.
Note 2 - Acquisitions
On October 6, 2000, the Company acquired Hughes space and communications and
related businesses. The acquisition was accounted for under the purchase method,
by which the purchase price was allocated to the net assets acquired based on
preliminary estimates of their fair values. At December 31, 2000, the purchase
price was $3,849, the initial goodwill was valued at $740 and the other
intangible assets were valued at $631. As of March 31, 2001, the initial
goodwill was valued at $829 and other intangible assets were valued at $647. The
purchase price remains subject to future adjustments based upon ongoing
negotiations. The goodwill and other intangible asset values also remain subject
to future adjustment.
There were no significant changes to the intangible asset balances of the other
acquisitions that occurred in 2000, but the allocation of the net assets
acquired remain subject to future adjustments.
Note 3 - Earnings per Share
The weighted average number of shares outstanding (in millions) used to compute
earnings per share for the periods ended March 31, 2001 and 2000, are as
follows:
Three months ended
March 31
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
Basic shares 835.1 869.3
Diluted shares 852.2 878.0
- ------------------------------------------------------------------------------
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.
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Note 4 - Subsequent Event
On January 10, 2001, TWA and certain of its domestic subsidiaries filed
voluntary petitions in the U.S. District Court in Wilmington, Delaware, for
relief under Chapter 11 of the U.S. Bankruptcy Code. On April 9, 2001, TWA
received final approval from the Court for an asset purchase agreement with
American Airlines. Under this agreement, American Airlines as lessee has assumed
various aircraft leases from TWA whereby the Company is the lessor. The
restructured lease payments from American Airlines are at rates that are lower
than those contracted with TWA; however, none of the associated leased assets
have been deemed to be impaired.
Note 5 - Income Taxes
The effective tax rate of 5.3% for the first quarter of 2001 is principally due
to a one-time benefit of $343 reflecting a settlement with the Internal Revenue
Service relating to research credit claims on McDonnell Douglas Corporation
fixed price government contracts applicable to the 1986-1992 federal income tax
returns. Absent this settlement, the effective tax rate for the first quarter
would be 30.5%. The 30.5% effective tax rate differs from the federal statutory
rate of 35% due to Foreign Sales Corporation tax benefits, extra-territorial
income exclusion, tax credits, state income taxes and the non-deductibility of
certain goodwill, primarily the goodwill associated with the acquisition of
Rockwell International Corporation in 1996. Net income tax payments were $4 and
$175 for the three months ended March 31, 2001 and 2000.
Note 6 - Accounts Receivable
Accounts receivable consisted of the following:
March 31 December 31
2001 2000
- ------------------------------------------------------------------------------
U.S. Government contracts $2,582 $2,693
Other 1,942 2,235
- ------------------------------------------------------------------------------
$4,524 $4,928
==============================================================================
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Note 7 - Inventories
Inventories consisted of the following:
March 31 December 31
2001 2000
- ------------------------------------------------------------------------------
Commercial aircraft programs and long-term
contracts in progress $ 20,330 $ 19,399
Commercial spare parts, general stock
materials and other 2,020 1,972
- ------------------------------------------------------------------------------
22,350 21,371
Less advances and progress billings (14,334) (14,577)
- ------------------------------------------------------------------------------
$ 8,016 $ 6,794
==============================================================================
Inventory costs at March 31, 2001, included unamortized tooling of $1,053 and
$399 relating to the 777 and Next-Generation 737 programs, and excess deferred
production costs of $1,071 and $644 relating to the 777 and Next-Generation 737
programs. There are no significant deferred production costs or unamortized
tooling associated with the 717 program.
Note 8 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
March 31 December 31
2001 2000
- ------------------------------------------------------------------------------
Aircraft financing
Notes receivable $ 595 $ 593
Investment in sales-type/financing leases 1,277 1,119
Operating lease equipment, at cost,
Less accumulated depreciation of $347 and $305 3,077 3,098
Commercial equipment financing
Notes receivable 959 915
Investment in sales-type/financing leases 700 697
Operating lease equipment, at cost,
Less accumulated depreciation of $96 and $95 672 710
- ------------------------------------------------------------------------------
Less valuation allowance (169) (173)
- ------------------------------------------------------------------------------
$7,111 $6,959
==============================================================================
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Note 8 - Customer and Commercial Financing (continued)
Financing for aircraft is collateralized by security in the related asset, and
historically the Company has not experienced a problem in accessing such
collateral when necessary. Commercial equipment financing also includes amounts
attributable to regional aircraft, principally with fewer than 80 seats.
The change in the valuation allowance for the first three months of 2001
consisted of the following:
Valuation
Allowance
- ------------------------------------------------------------------------------
Beginning balance - December 31, 2000 $(173)
Charged to costs and expenses (4)
Reduction in customer and commercial financing assets 8
- ------------------------------------------------------------------------------
Ending balance - March 31, 2001 $(169)
==============================================================================
Note 9 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
March 31 December 31
2001 2000
- ------------------------------------------------------------------------------
Accounts payable $ 5,421 $ 5,040
Accrued compensation and employee benefit costs 2,830 2,938
Dividends payable 149
Lease and other deposits 890 731
Other 3,028 3,121
- ------------------------------------------------------------------------------
$12,169 $11,979
==============================================================================
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Note 10 - Debt
Short- and long-term debt consisted of the following: March 31 December 31
2001 2000
- -------------------------------------------------------------------------------
Unsecured debentures and notes:
$174, 8 3/8% due Feb. 15, 2001 174
$49, 7.565% due Mar. 30, 2002 48 49
$120, 9.25% due Apr. 1, 2002 120 120
$300, 6 3/4% due Sep. 15, 2002 299 299
$300, 6.35% due Jun. 15, 2003 300 300
$200, 7 7/8% due Feb. 15, 2005 205 206
$300, 6 5/8% due Jun. 1, 2005 295 294
$250, 6.875% due Nov. 1, 2006 249 248
$175, 8 1/10% due Nov. 15, 2006 175 175
$350, 9.75% due Apr. 1, 2012 348 348
$400, 8 3/4% due Aug. 15, 2021 398 398
$300, 7.95% due Aug. 15, 2024 300 300
$250, 7 1/4% due Jun. 15, 2025 247 247
$250, 8 3/4% due Sep. 15, 2031 248 248
$175, 8 5/8% due Nov. 15, 2031 173 173
$300, 6 5/8% due Feb. 15, 2038 300 300
$100, 7.50% due Aug. 15, 2042 100 100
$175, 7 7/8% due Apr. 15, 2043 173 173
$125, 6 7/8% due Oct. 15, 2043 125 125
Senior debt securities
6.0% - 9.4% due through 2011 2,310 1,563
Senior medium-term notes,
5.6% - 10.0% due through 2017 1,810 1,775
Subordinated medium-term notes
6.4% - 8.3% due through 2004 25 25
Capital lease obligations
due through 2008 364 380
Other notes 284 779
- -------------------------------------------------------------------------------
$8,896 $8,799
===============================================================================
The Company has $3,000 currently available under credit line agreements with a
group of commercial banks. The Company has complied with the restrictive
covenants contained in various debt agreements. Total debt interest, including
amounts capitalized, was $158 and $128 for the three-month periods ended March
31, 2001 and 2000, and interest payments were $192 and $143, respectively.
Additionally, Boeing Capital Corporation (BCC), a wholly owned subsidiary of the
Company, has filed a shelf registration with the Securities and Exchange
Commission totaling $2,640. From this $2,640 shelf, $1,500 was issued in Senior
Global Notes, and the remaining $1,140 was allocated to a new Medium Term Note
(MTN) Program made effective August 31, 2000. BCC had issued and sold $600 in
aggregate principal amounts of MTN, at interest rates ranging from 5.33% to
6.68% and maturities ranging from one to seven years.
On February 16, 2001, BCC filed a public shelf registration of $5,000 with the
Securities and Exchange Commission. From this $5,000 shelf, BCC received pro-
ceeds on March 8, 2001 from the issuance of $750 in 6.10% senior notes due 2011.
Short-term debt and current portion of long-term debt as of March 31, 2001,
consist of the following: $448 of senior debt securities, senior medium-term
notes, subordinated medium-term notes, $51 of capital lease obligations, and
$160 of other notes.
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Note 11 - Shareholders' Equity
Changes in shareholders' equity for the three-month periods ended March 31, 2001
and 2001, consisted of the following:
- ------------------------------------------------------------------------------
2001 2000
(Shares in thousands) Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Common stock
Beginning balance - January 1 1,011,870 $ 5,059 1,011,870 $ 5,059
- ------------------------------------------------------------------------------
Ending balance - March 31 1,011,870 $ 5,059 1,011,870 $ 5,059
==============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 2,693 $ 1,684
Share-based compensation 82 60
Treasury shares issued for
stock plans, net (20) (12)
Tax benefit related to stock plans 8 2
ShareValue Trust market value adjustment (382) (113)
- ------------------------------------------------------------------------------
Ending balance - March 31 $ 2,381 $ 1,621
==============================================================================
Treasury stock
Beginning balance - January 1 136,385 $(6,221) 102,357 $(4,161)
Treasury shares issued for
stock plans, net (1,004) 45 (608) 25
Treasury shares acquired 2,223 (131) 2,450 (104)
- ------------------------------------------------------------------------------
Ending balance - March 31 137,604 $(6,307) 104,199 $(4,240)
==============================================================================
Retained earnings
Beginning balance - January 1 $12,090 $10,487
Net earnings 1,237 418
- ------------------------------------------------------------------------------
Ending balance - March 31 $13,327 $10,905
==============================================================================
Accumulated other comprehensive income
Beginning balance - January 1 $ (2) $ 6
Losses on derivative instruments, net (18)
Foreign currency translation adjustment (6) 3
- ------------------------------------------------------------------------------
Ending balance - March 31 $ (26) $ 9
==============================================================================
Unearned compensation
Beginning balance - January 1 $ (7) $ (12)
Amortization 1 1
- ------------------------------------------------------------------------------
Ending balance - March 31 $ (6) $ (11)
==============================================================================
ShareValue Trust
Beginning balance - January 1 39,156 $(2,592) 38,696 $(1,601)
Shares acquired from dividend
reinvestment 110 150
Market value adjustment 382 113
- ------------------------------------------------------------------------------
Ending balance - March 31 39,266 $(2,210) 38,846 $(1,488)
==============================================================================
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Note 11 - Shareholders' Equity (continued)
For the three months ended March 31, 2001 and 2000, the Company did not incur
items to be reported in comprehensive income that were not already included in
the reported net earnings, except for the $(6) and $3 foreign currency
translation adjustment and the $18 and $0 loss on derivative instruments.
As a result, comprehensive income and net earnings were substantially the same
for these periods.
Note 12 - Share-Based Compensation
Share-based plans expense consisted of the following:
Three months ended
March 31
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
Performance shares $46 $26
ShareValue Trust 18 18
Stock options, other 18 16
- ------------------------------------------------------------------------------
$82 $60
==============================================================================
As of March 31, 2001, the Company has issued 7,466,866 stock units that are
convertible to either stock or a cash equivalent, of which 6,033,157 are vested,
and the remainder vest with employee service. These stock units principally
represent a method of deferring employee compensation by which a liability is
established based upon the current stock price. An expense or reduction in
expense is recognized associated with the change in that liability balance and
is recorded against general and administrative expense. During the first quarter
of 2001, general and administrative expenses related to deferred stock
compensation was decreased by $55.
Note 13 - Derivatives and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. This standard
requires that all derivative financial instruments, such as interest rate swap
contracts and forward currency contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments
are either recognized periodically in income or shareholders' equity (as a
component of accumulated other comprehensive income), depending on whether the
derivative is being used to hedge changes in fair value or cash flows. The
adoption of SFAS No. 133 resulted in a transition gain of $1 on the Condensed
Consolidated Statements of Operations shown under the caption "Cumulative
effect of accounting changes, net," and a loss of $11 (net of tax of $7)
recorded to accumulated other comprehensive income.
Use of Derivative Financial Instruments
The Company uses derivative financial instruments principally to manage the risk
that changes in interest rates will affect either the fair value of its debt
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Note 13 - Derivatives and Hedging Activities (continued)
obligations or the amount of its future interest payments and to manage risk
associated with future cash flows in foreign currencies. The following is a
summary of the Company's risk management strategies and the effect of these
strategies on the consolidated financial statements.
Interest Rate Risk Management
The Company uses interest rate swap contracts to adjust the amount of total debt
that is subject to variable and fixed interest rates. Under an interest rate
swap contract, the Company either agrees to pay amounts equal to a specified
variable-rate of interest multiplied by a notional principal amount, and to
receive amounts in return equal to a specified fixed-rate of interest multiplied
by the same notional principal amount or, vice versa, to receive a variable-rate
amount and to pay a fixed-rate amount. The notional amounts of the contract are
not exchanged. No other cash payments are made unless the contract is terminated
prior to maturity, in which case the amount paid or received in settlement is
established by agreement at the time of termination and usually represents the
market quotation, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract. Interest rate swap contracts
are entered into with a number of major financial institutions in order to
minimize counterparty credit risk.
Pursuant to SFAS No. 133, the Company accounts for its interest rate swap
contracts differently depending upon whether the contract receives hedge
accounting treatment and the nature of the exposure being hedged. Interest rate
swap contracts under which the Company agrees to pay variable-rates of interest
are generally designated as hedges of changes in the fair value of the Company's
fixed-rate debt obligations. Accordingly, such interest rate swap contracts are
reflected at fair value on the Company's consolidated statements of financial
position and the related portion of fixed-rate debt being hedged is reflected at
an amount equal to the sum of its carrying value plus an adjustment representing
the change in fair value of the debt obligations attributable to the interest
rate risk being hedged. The net effect of this accounting on the Company's
operating results is that interest expense on the portion of fixed-rate debt
being hedged is generally recorded based on variable interest rates. These
interest rate swaps are considered to be perfectly effective because they
qualify for the "short-cut method" under SFAS No. 133, and therefore there is
no net change in fair value to be recognized in income.
In addition to the interest rate swaps that qualify for the short-cut method,
the Company holds other interest rate swaps and interest exchange agreements.
Under SFAS No. 133, both the interest rate swaps and the interest exchange
agreements qualify as derivative instruments. Economically, the intent of the
interest rate swaps is to "hedge" the exposure created by the interest exchange
agreements. However, because the exposure being hedged is a derivative
instrument, this relationship does not qualify for hedge accounting under SFAS
No. 133. As a result, changes in fair value of both instruments are immediately
recognized in income. Although changes in the fair value from these derivative
instruments are recognized in income, these instruments are structured so that
changes in the fair value of interest rate swaps are significantly offset by any
changes in the fair value of interest exchange agreements in income. For the
period ended March 31, 2001, these interest rate swaps resulted in income of $5
and the interest exchange agreements resulted in an expense of $6.
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Note 13 - Derivatives and Hedging Activities (continued)
The Company entered into interest rate swaps with third-party investors whereby
the interest rate terms differ from the terms in the original receivable. These
interest rate swaps related to $54 of customer financing receivables as of
December 31, 2000. With the adoption of SFAS No. 133, as amended, these swaps
resulted in the recognition of a liability of $4 and a loss in accumulated other
comprehensive income of $3 (net of tax of $1).
As of March 31, 2001, interest rate swaps are reflected at a fair value of $43
in other assets and $20 in other liabilities. Offsetting amount are a loss
reflected in accumulated other comprehensive income of $10, and an adjustment to
increase underlying long term senior debt by $33. During the next twelve months,
the Company expects to reclassify to expense $4 from the transition adjustment
loss that was recorded in accumulated other comprehensive income and recognize
income of $4 related to the basis adjustment of certain underlying liabilities.
Other Derivative Financial Instruments
The Company has foreign currency forward contracts that were entered into to
hedge receipt and expenditure commitments made in foreign currencies. As of
March 31, 2001, the notional amount of foreign currency forward contracts
accounted for as cash flow hedges is $463. These hedges are carried at market
value, resulting in $32 recorded in other liabilities offset by a loss in
accumulated other comprehensive income ($20 net of tax). Additionally, at March
31, 2001, the Company had foreign currency forward contracts with a notional
value of $231 that were not accounted for as hedges and carried at market value,
resulting in $28 recorded in other liabilities. The Company realized a pretax
loss of $5 attributable to these forward contracts during the quarter ended
March 31, 2001.
Other derivatives held by the Company include a forward-starting interest rate
swap that is not accounted for as a hedge, and as of March 31, 2001, other
assets include $15 as a result of marking to market this interest rate swap.
Accumulated other comprehensive income includes a gain of $9 (net of tax of $5)
attributable to this swap due to the transition adjustment resulting from
implementation of SFAS No. 133, as amended. This transition adjustment is
amortized to income over a period of 13 years.
The Company believes that there is no significant credit risk associated with
the potential failure of any counterparty to perform under the terms of any
derivative financial instrument.
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Note 14 - Contingencies
Various legal proceedings, claims and investigations related to products,
contracts and other matters are pending against the Company. Most significant
legal proceedings are related to matters covered by insurance. Major
contingencies are discussed below.
The Company is subject to U.S. Government investigations of its practices from
which civil, criminal or administrative proceedings could result. Such
proceedings could involve claims by the Government for fines, penalties,
compensatory and treble damages, restitution and/or forfeitures. Under
government regulations, a company, or one or more of its operating divisions or
subdivisions, can also be suspended or debarred from government contracts, or
lose its export privileges, based on the results of investigations. The Company
believes, based upon all available information, that the outcome of any such
government disputes and investigations will not have a material adverse effect
on its financial position or continuing operations.
In 1991, the U.S. Navy notified 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, 2001, inventories included approximately $581 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 the Company's belief, supported by an opinion of outside
counsel, that the termination for default would be converted to a termination
for convenience, that the Team would establish a claim for contract adjustments
for a minimum of $250, that there was a range of reasonably possible results on
termination for convenience, and that it was prudent to provide for what the
Company then believed was the upper range of possible loss on termination for
convenience, which was $350.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the Government
had not exercised the required discretion before issuing a termination for
default. It converted the termination to a termination for convenience, and
determined the Team was entitled to be paid $1,200, plus statutory interest from
June 26, 1991, until paid. The Court of Appeals remanded the case to the Court
of Federal Claims for a determination as to whether the Government is able to
sustain the burden of showing a default was justified and other proceedings.
Final resolution of the A-12 litigation will depend on the outcome of such
litigation and possible further appeals or negotiations with the Government.
In the Company's opinion, the loss provision continues to provide adequately for
the reasonably possible reduction in value of A-12 net contracts in process as
of March 31, 2001, as a result of a termination of the contract for the
convenience of the Government. The Company has been provided with an opinion of
outside counsel that (i) the Government's termination of the contract for
default was contrary to law and fact, (ii) the rights and obligations of the
Company are the same as if the termination had been issued for the convenience
of the Government, and (iii) subject to prevailing on the issue that the
termination is properly one for the convenience of the Government, the probable
recovery by the Company is not less than $250.
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Note 14 - 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 seek compensatory damages and treble damages. The action
is currently set for trial on March 7, 2002. The Company believes that the
allegations are without merit and that the outcome of these lawsuits will not
have a material adverse effect on its earnings, cash flow or financial position.
On October 19, 1999, an indictment was returned by a federal grand jury sitting
in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a
wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company
division, conspired to and made false statements and concealed material facts on
export license applications and in connection with export licenses, and
possessed and sold machine tools in violation of the Export Administration Act.
The indictment also charged one employee with participation in the alleged
conspiracy. The indictment has since been dismissed as against this employee,
but that dismissal is the subject of a pending appeal by the government to the
U.S. Court of Appeals for the D.C. Circuit. The indictment relates to the sale
and export to China in 1993-1995 of surplus, used machine tools sold by Douglas
Aircraft Company to China National Aero-Technology Import and Export Corporation
for use in connection with the MD-80/90 commercial aircraft Trunkliner Program
in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC. The
agency exercised that discretion on January 5, 2000, by establishing a "denial
policy" with respect to defense-related exports of MDC and its subsidiaries.
Most of MDC's major existing defense programs were, however, excepted from that
policy due to overriding U.S. foreign policy and national security interests.
Other exceptions may be granted. There can, however, be no assurance as to how
the Department will exercise its discretion as to program or transaction
exceptions for other programs or future defense-related exports. In addition,
the Department of Commerce has authority to temporarily deny other export
privileges to, and the Department of Defense has authority to suspend or debar
from contracting with the military departments, MDC or a division or subsidiary
of MDC. Neither agency has taken action adverse to MDC or its divisions or
subsidiaries thus far. Based upon all available information, the Company does
not expect actions that would have a material adverse effect on its financial
position or continuing operations. In the unanticipated event of a conviction,
MDC would be subject to Department of State and Department of Commerce denials
or revocations of MDC export licenses. MDC also would be subject to Department
of Defense debarment proceedings.
15
16
Note 14 - Contingencies (continued)
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, 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" and believes that the plaintiffs cannot satisfy the
rigorous requirements necessary to achieve the class action status they seek.
Plaintiffs' motion for class certification will be filed by early May 2001. The
Company intends to vigorously contest this lawsuit.
16
17
Note 15 - Business Segment Data
Segment information for revenues, earnings, and research and development
consisted of the following:
- -------------------------------------------------------------------------------
Three months ended
March 31
2001 2000
- -------------------------------------------------------------------------------
Revenues:
Commercial Airplanes $ 8,443 $5,171
Military Aircraft and Missiles 2,427 2,846
Space and Communications 2,246 1,659
Customer and Commercial Financing 206 167
Other 71 61
Accounting differences/eliminations (100) 6
- -------------------------------------------------------------------------------
Operating revenues $13,293 $9,910
===============================================================================
Earnings from operations:
Commercial Airplanes $ 860 $ 259
Military Aircraft and Missiles 246 294
Space and Communications 84 60
Customer and Commercial Financing 142 107
Other (51) 2
Accounting differences/eliminations 25 (48)
Share-based plans (82) (60)
Unallocated expense (6) (58)
- -------------------------------------------------------------------------------
Earnings from operations 1,218 556
- -------------------------------------------------------------------------------
Other income, principally interest 235 149
Interest and debt expense (148) (103)
- -------------------------------------------------------------------------------
Earnings before income taxes 1,305 602
Income taxes 69 184
- -------------------------------------------------------------------------------
Net earnings before cumulative effect of
accounting change $1,236 $ 418
===============================================================================
Research and development:
Commercial Airplanes $ 195 $ 103
Military Aircraft and Missiles 53 61
Space and Communications 123 124
Other 51
- -------------------------------------------------------------------------------
Total research and development expense $ 422 $ 288
===============================================================================
17
18
Note 15 - Business Segment Data (continued)
In the first quarter of 2001, the Company adjusted the segment classification of
certain business activities. The Company established an "Other" segment classi-
fication which principally includes the activities of Connexion by BoeingSM, a
two-way data communications service for global travelers; Air Traffic Manage-
ment, a business unit developing new approaches to a global solution to address
air traffic management issues; and Phantom Works, an advanced research and
development organization focused on innovative technologies, improved processes
and the creation of new products. First quarter 2000 results have been
reclassified to conform to the revised segment classifications.
For internal reporting purposes, the Company records Commercial Airplanes
segment revenues and operating profits for airplanes transferred to other
segments, and such transfers may include airplanes accounted for as operating
leases that are considered transferred to the Customer and Commercial Financing
segment. The revenues for these transfers are eliminated in the 'Accounting
differences/eliminations' caption. In the event an airplane accounted for as an
operating lease is subsequently sold, the 'Accounting differences/eliminations'
caption would reflect the recognition of revenue and operating profit for the
consolidated financial statements.
The Company records cost of sales for 7-series commercial airplane programs
under the program method of accounting described in Note 1 to the audited
consolidated financial statements included in the Company's 2000 Annual Report.
For internal measurement purposes, the Commercial Airplanes segment records cost
of sales based on the cost of specific units delivered, and to the extent that
inventoriable costs exceed estimated revenues, a loss is not recognized until
delivery is made, which is not in accordance with generally accepted accounting
principles. For the 717 program, 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 attribut-
able 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 $(111) and $(78) for the three months ended March 31, 2001 and 2000.
The 'Accounting differences/eliminations' caption of net earnings also includes
the impact of cost measurement differences between generally accepted accounting
principles and federal cost accounting standards. This includes the following:
the differences between pension costs recognized under SFAS No. 87, Employers'
Accounting for Pensions, and under federal cost accounting standards,
principally on a funding basis; the differences between retiree health care
costs recognized under SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and under federal cost accounting standards,
principally on a cash basis; and the differences in timing of cost recognition
related to certain activities, such as facilities consolidation, undertaken as a
result of mergers and acquisitions whereby such costs are expensed under
generally accepted accounting principles and deferred under federal cost
accounting standards. Additionally, the amortization of costs capitalized in
accordance with SFAS No. 34, Capitalization of Interest Cost, is included in the
'Accounting differences/eliminations' caption.
The costs attributable to share-based plans are not allocated. Other unallocated
costs include corporate costs not allocated to the operating segments, including
goodwill amortization resulting from acquisitions prior to 1998.
18
19
===============================================================================
|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 income recognition |
|in connection with interest rate swaps, deliveries, launches, cash |
|requirements and/or loan guarantees in connection with the Sea Launch joint |
|venture, estimated tax payments, and other trend projections. This |
|forward-looking information is based upon a number of assumptions including |
|assumptions regarding global economic conditions, earnings, government |
|policies and actions; successful negotiation of contracts with the Company's |
|labor unions and regulatory approvals. Actual future results and trends may |
|differ materially depending on a variety of factors, including the Company's |
|successful execution of internal performance plans, production rate increases|
|and decreases, production system initiatives, timing of product deliveries |
|and launches, supplier contract negotiations, asset management plans, acqui- |
|sition and divestiture plans, procurement plans, and other cost-reduction |
|efforts; the actual outcomes of certain pending sales campaigns and U. S. and|
|foreign government procurement activities; acceptance of new products and |
|services; product performance risks; the cyclical nature of some of the |
|Company's businesses; volatility of the market for certain products and |
|services; domestic and international competition in the defense, space and |
|commercial areas; continued integration of acquired businesses; uncertainties|
|associated with regulatory certifications of the Company's commercial |
|aircraft by the U.S. Government and foreign governments; other regulatory |
|uncertainties; collective bargaining labor disputes; performance issues with |
|key suppliers, subcontractors and customers; governmental export and import |
|policies; factors that result in significant and prolonged disruption to air |
|travel worldwide; global trade policies; worldwide political stability; |
|domestic and international economic conditions; price escalation trends; the |
|outcome of political and legal processes, including uncertainty regarding |
|government funding of certain programs; changing priorities or reductions in |
|the U.S. Government or foreign government defense and space budgets; |
|termination of government contracts due to unilateral government action or |
|failure to perform; legal, financial and governmental risks related to |
|international transactions; legal proceedings; and other economic, political |
|and technological risks and uncertainties. Additional information regarding |
|these factors is contained in the Company's SEC filings, including, without |
|limitation and the Company's Annual Report on Form 10-K for the year ended |
|December 31, 2000. |
===============================================================================
19
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenues
- --------
Sales of $13.3 billion for the first three months of 2001 were 34% higher than
sales for the comparable period of 2000. For the first three months of 2001, a
total of 122 commercial aircraft were delivered, compared with 75 for the same
period in 2000. The commercial aircraft deliveries in first quarter 2000 were
impacted by a 40-day work stoppage due to a strike by the Society of
Professional Engineering Employees in Aerospace (SPEEA). Approximately 530
commercial aircraft deliveries are currently projected for the full year 2001,
compared with 489 in 2000.
Commercial jet aircraft deliveries were as follows:
Three months ended
March 31
-------------------------------------------------
Model 2001 2000
-------------------------------------------------
717 7 (1) 3 (1)
737 Classic - 2
737 Next-Generation 72* 39*
747 7 4**
757 8 10
767 10 5
777 16 10
MD-11 2 2
-------------------------------------------------
Total 122 75
=================================================
*Includes one C-40 Aircraft
**Includes one Airborne Laser 747
Commercial jet aircraft deliveries included deliveries under operating lease,
which are identified by parentheses in the table above. Aircraft accounted for
as operating leases have minimal revenues recorded at the time of delivery.
20
21
Military Aircraft and Missiles segment deliveries included the following:
Three months ended
March 31
------------------------------------------------
Model 2001 2000
------------------------------------------------
C-17 2 3
F-15 - 4
F/A-18C/D - 6
F/A-18E/F 7 4
T-45TS 4 4
CH-47 2 1
AH-64 Intl (New Builds) 2 2
Space and Communications segment deliveries included the following:
Three months ended
March 31
------------------------------------------------
Model 2001 2000
------------------------------------------------
Delta II - 2
Delta III - -
Satellites 1 -
Earnings
- --------
Net earnings for the first quarter of 2001 were $1,237 million, compared with
$418 million for the same period in 2000. The first quarter 2001 results
included a non-recurring earnings tax benefit resulting from a final agreement
with the Internal Revenue Service primarily regarding previously filed claims
for refund of research and development tax credits. These claims dealt primarily
with historical fixed-price development program expenses incurred by McDonnell
Douglas from 1986 to 1992. The agreement with the IRS resulted in financial
recognition during the quarter of $343 million of tax credit and $210 million
($132 million after-tax) of related interest income.
Research and development expense totaled $422 million for the quarter, compared
with $288 million for the same period of 2000. Commercial Airplanes segment
research and development expense of $195 million reflects an increase over the
$103 million expense for the first quarter of 2000 which was also affected by
the SPEEA work stoppage. Space and Communications segment research and
development expense of $123 million for the first quarter is in line with the
spending levels for the same period in 2000. Research and development in the
other segment relates principally to Connexion by BoeingSM.
21
22
In December 1996, The Boeing Company filed suit in the U.S. District Court for
the Western District of Washington for the refund of over $400 million in
federal income taxes and related interest. The suit challenged the IRS method of
allocating research and development costs for the purpose of determining tax
incentive benefits on export sales through the Company's Domestic International
Sales Corporation (DISC) and its Foreign Sales Corporation (FSC) for the years
1979 through 1987. In September 1998, the Company's position prevailed when the
District Court granted the Company's motion for summary judgment. The U.S.
Department of Justice has appealed this decision. If the Company were to
prevail, the refund would include interest computed to the payment date. The
issue could affect tax computations for subsequent years; however, the financial
impact would depend on the final resolution of audits for those years.
In response to an adverse World Trade Organization (WTO) finding relative to the
U.S. FSC tax provisions, the U.S. repealed FSC and enacted replacement
legislation (Extraterritorial Income Exclusion Act of 2000). The European Union
has filed a WTO challenge to the new law. It is not possible to predict what
impact, if any, this issue will have on future earnings pending final resolution
of the challenge.
The Company has significant financing assets and off-balance-sheet commitments
that are impacted by the market value of various jet aircraft. The Company
believes that it has appropriately assessed the impact of aircraft market values
on accounting for such commitments and financing assets. A significant
deterioration in the market value, however, could result in the requirement to
adjust related reserves. The Company will continue to monitor this market.
Operating Earnings
- ------------------
Commercial Airplanes
First quarter 2001 commercial jet aircraft deliveries totaled 122 compared with
75 during the same period in 2000. Commercial Airplanes segment first quarter
2001 operating earnings, based on the unit cost of airplanes delivered, were
$860 million, compared with $259 million for the same period in 2000. The
overall Commercial Airplanes segment operating profit margin was approximately
10.2% for the first quarter of 2001, compared with 5.0% for the same period in
2000. The first quarter 2001 margin increase over the same period in 2000
primarily reflects the effects of a work stoppage in 2000 and continued
improvement in the production process offset by 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 16. Commercial Airplanes
segment earnings under GAAP were $749 million and $181 million for the first
quarter 2001 and 2000. The GAAP determined segment margin of 8.9% in 2001
compares with 3.5% for the same three-month period in 2000. In addition to the
impacts to the segment margins identified above, the improving GAAP earnings and
margins reflect the impact of additional units within the accounting quantity
for the Next-Generation 737 and the 777. The Next-Generation 737 program
accounting quantity was 1,800 units as of March 31, 2001, and 1,400 units as of
March 31, 2000. The 777 program accounting quantity was 600 units as of March
31, 2001, and 500 units as of March 31, 2000.
22
23
As of March 31, 2001, the Company had cumulatively delivered 51 717 program
aircraft. The 717 program is accounted for under the program method of
accounting described in Note 1 to the audited consolidated financial statements
in the Company's 2000 Annual Report. The Company has established the program
accounting quantity at 200 units. 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, or an increase in the program
quantity if warranted by additional program orders. The Company has significant
exposures related to the 717 program, principally attributable to pricing
pressures and the slow buildup of firm orders.
As a result of the asset purchase agreement between TWA and American Airlines
discussed in Note 4, American Airlines has assumed the lease of 15 717s and
committed to take delivery, under lease, of an additional 15 717s. These lease
terms are of a shorter duration than the terms originally contracted with TWA.
During the first quarter of 2001, Commercial Airplanes announced plans to focus
its product development activities on a faster, longer-range sonic cruiser
airplane.
Military Aircraft and Missiles
First quarter 2000 segment revenues and operating earnings have been restated to
reclassify Phantom Works activity from the Military Aircraft and Missiles
segment to the Other segment. See Note 16.
Military Aircraft and Missiles segment first quarter 2001 operating earnings
were $246 million, compared with $294 million for the same period in 2000. The
operating margin of 10.1% for first quarter 2001 compares with a first quarter
2000 margin of 10.3%. The lower earnings in first quarter 2001 reflect fewer C-
17 and F-15 deliveries and the end of F/A-18C/D production.
On February 5, 2001, the Boeing JSF X-32A concept demonstrator completed flight
testing. The flight test program successfully demonstrated the program's ability
to meet all government test objectives as well as provided many additional
capabilities. On March 29, the Boeing JSF X-32B demonstrator successfully
completed its first flight, entering a four month test program to validate the
Boeing approach to short-takeoff and vertical landing (STOVL) flight.
Space and Communications
The Space and Communications segment had operating earnings of $84 million for
the first quarter of 2001, compared with operating earnings of $60 million in
the same period in 2000. The increase from 2000 was primarily a result of the
acquisition of Boeing Satellite Systems in the fourth quarter of 2000.
During the quarter, the Company successfully completed extended duration testing
on the RS-68 engine for the Delta IV, and the first Delta IV commercial launch
customer was announced. On March 18, 2001, a Boeing Satellite Systems 702
satellite was successfully launched by Sea Launch, a joint venture of which
Boeing is a 40% partner.
23
24
The Company continues to monitor the impact of the softening satellite launch
market on the Delta III program and the Sea Launch venture. The Company
continues to monitor potential exposures for the Delta III program by assessing
the estimated revenues attributable to future Delta III launches, including
revenue for launch positions that are currently unsold, along with assessing
inventory and supplier commitments. The next Delta III launch is anticipated for
2003.
The Company has ongoing financial exposure due to the Sea Launch venture. This
financial exposure primarily results from company guarantees extended on
partnership loans. The Company's maximum exposure to credit related losses
associated with Sea Launch credit guarantees is $373 million.
The Company projects that the Sea Launch joint venture may require additional
infusions from the partners in the near term. This would be expected to result
in additional cash requirements and-or loan guarantees imposed on the Company.
Customer and Commercial Financing
Revenues consist principally of interest from financing receivables and lease
income from operating lease equipment. Segment earnings additionally reflect
depreciation on leased equipment and expenses attributable to potentially
uncollectible receivables. No interest expense on debt is included in Customer
and Commercial Financing segment earnings reflected in Note 15; however, $74
million of first quarter 2001 interest expense is associated with debt relating
to financing activities.
Operating earnings for the Customer and Commercial Financing segment were $142
million for first quarter 2001, compared with $107 million for first quarter
2000, exclusive of interest expense. The increase was due principally to an
increase in financing assets.
On January 10, 2001, TWA and certain of its domestic subsidiaries filed
voluntary petitions in the U.S. District Court in Wilmington, Delaware, for
relief under Chapter 11 of the U.S. Bankruptcy Code. On April 9, 2001, TWA
received final approval from the Court for an asset purchase agreement with
American Airlines. Under this agreement, American Airlines as lessee has assumed
various aircraft leases from TWA whereby the Company is the lessor. The
restructured lease payments from American Airlines are at rates that are lower
than those contracted with TWA; however, none of the associated leased assets
have been deemed to be impaired.
Liquidity and Capital Resources
- -------------------------------
The Company's financial liquidity position as of March 31, 2001, included cash
and short-term investments totaling $1.6 billion. During the first three months
of 2001, the Company repurchased 2.2 million shares for $131 million under an 85
million share repurchase plan.
Excluding Boeing Capital Corporation (BCC), a financing subsidiary wholly owned
by the Company, total long-term debt is at 27% of total shareholders' equity
plus debt. The consolidated long-term debt, including BCC, is at 42% of total
shareholders' equity plus debt. Revolving credit line agreements with a group
of major banks, totaling $3.0 billion, remain available but unused.
24
25
The Company believes its internally generated liquidity, together with access to
external capital resources, will be sufficient to satisfy existing commitments
and plans, and also to provide adequate financial flexibility to take advantage
of potential strategic business opportunities should they arise. During the
second quarter of 2001, the Company projects it will make a tax payment of
approximately $1 billion due to, among other factors, the closeout of contracts
accounted for under the completed contract method for tax purposes.
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
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Commercial Airplanes $ 88.6 $ 89.8
Military Aircraft and Missiles 20.4 17.1
Space and Communications 15.1 13.7
------------------------------------------------------------
Total contractual backlog $124.1 $120.6
============================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$29.2 billion at March 31, 2001, compared with $31.3 billion at December 31,
2000.
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.
As of January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. As of March 31, 2001, the notional value of such deriva-
tives was $463 million, with a net unrealized loss of $32 million. Additionally,
the Company had foreign currency forward contracts with a notional value of $231
million that were carried at market value. The Company realized a net loss of $5
million attributable to these forward contracts during the quarter.
Less than two percent of receipts and expenditures are contracted in foreign
currencies, and the market risk exposure relating to currency exchange is not
material.
25
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings, claims and investigations related to products,
contracts and other matters are pending against the Company. Most significant
legal proceedings are related to matters covered by insurance. Major
contingencies are discussed below.
The Company is subject to U.S. Government investigations of its practices from
which civil, criminal or administrative proceedings could result. Such
proceedings could involve claims by the Government for fines, penalties,
compensatory and treble damages, restitution and/or forfeitures. Under
government regulations, a company, or one or more of its operating divisions or
subdivisions, can also be suspended or debarred from government contracts, or
lose its export privileges, based on the results of investigations. The Company
believes, based upon all available information, that the outcome of any such
government disputes and investigations will not have a material adverse effect
on its financial position or continuing operations.
In 1991, the U.S. Navy notified 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, 2001, inventories included approximately $581
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 the Company's belief, supported by an
opinion of outside counsel, that the termination for default would be converted
to a termination for convenience, that the Team would establish a claim for
contract adjustments for a minimum of $250 million, that there was a range of
reasonably possible results on termination for convenience, and that it was
prudent to provide for what the Company then believed was the upper range of
possible loss on termination for convenience, which was $350 million.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the Government
had not exercised the required discretion before issuing a termination for
default. It converted the termination to a termination for convenience, and
determined the Team was entitled to be paid $1,200 million, plus statutory
interest from June 26, 1991, until paid. The Court of Appeals remanded the case
to the Court of Federal Claims for a determination as to whether the Government
is able to sustain the burden of showing a default was justified and other
proceedings. Final resolution of the A-12 litigation will depend on the outcome
of such litigation and possible further appeals or negotiations with the
Government.
In the Company's opinion, the loss provision continues to provide adequately for
the reasonably possible reduction in value of A-12 net contracts in process as
of March 31, 2001, as a result of a termination of the contract for the
convenience of the Government. The Company has been provided with an opinion of
outside counsel that (i) the Government's termination of the contract for
default was contrary to law and fact, (ii) the rights and obligations of the
Company are the same as if the termination had been issued for the convenience
of the Government, and (iii) subject to prevailing on the issue that the
26
27
termination is properly one for the convenience of the Government, the probable
recovery by the Company is not less than $250 million.
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 seek compensatory damages and treble damages. The action is currently
set for trial on March 7, 2002. The Company believes that the allegations are
without merit and that the outcome of these lawsuits will not have a material
adverse effect on its earnings, cash flow or financial position.
On October 19, 1999, an indictment was returned by a federal grand jury sitting
in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a
wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company
division, conspired to and made false statements and concealed material facts on
export license applications and in connection with export licenses, and
possessed and sold machine tools in violation of the Export Administration Act.
The indictment also charged one employee with participation in the alleged
conspiracy. The indictment has since been dismissed as against this employee,
but that dismissal is the subject of a pending appeal by the government to the
U.S. Court of Appeals for the D.C. Circuit. The indictment relates to the sale
and export to China in 1993-1995 of surplus, used machine tools sold by Douglas
Aircraft Company to China National Aero-Technology Import and Export Corporation
for use in connection with the MD-80/90 commercial aircraft Trunkliner Program
in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC. The
agency exercised that discretion on January 5, 2000, by establishing a "denial
policy" with respect to defense-related exports of MDC and its subsidiaries.
Most of MDC's major existing defense programs were, however, excepted from that
policy due to overriding U.S. foreign policy and national security interests.
Other exceptions may be granted. There can, however, be no assurance as to how
the Department will exercise its discretion as to program or transaction
exceptions for other programs or future defense-related exports. In addition,
the Department of Commerce has authority to temporarily deny other export
privileges to, and the Department of Defense has authority to suspend or debar
from contracting with the military departments, MDC or a division or subsidiary
of MDC. Neither agency has taken action adverse to MDC or its divisions or
subsidiaries thus far. Based upon all available information, the Company does
not expect actions that would have a material adverse effect on its financial
position or continuing operations. In the unanticipated event of a conviction,
MDC would be subject to Department of State and Department of Commerce denials
or revocations of MDC export licenses. MDC also would be subject to Department
of Defense debarment proceedings.
27
28
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, 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" and believes that the plaintiffs cannot satisfy the
rigorous requirements necessary to achieve the class action status they seek.
Plaintiffs' motion for class certification will be filed by early May 2001. The
Company intends to vigorously contest this lawsuit.
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Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on
April 30, 2001.
(b) At the Annual Meeting, in an uncontested election, three nominees
of the Board of Directors were elected directors for three-year
terms expiring on the date of the annual meeting in 2004. The
votes were as follows:
For Withheld
----------- ----------
John H. Biggs 700,108,597 18,470,619
John E. Bryson 691,211,109 27,368,108
Rozanne L. Ridgway 690,828,326 27,750,891
The terms of the following directors continued after the annual
meeting:
Philip M. Condit Paul E. Gray John M. Shalikashvili
Kenneth M. Duberstein John F. McDonnell Harry C. Stonecipher
John F. Fery Lewis E. Platt
(c) The results of voting on Proposals 2 through 9 were as follows:
2. A shareholder proposal requesting the Company to disclose all
significant promises made to foreign governments or foreign
firms in connection with foreign military sales, intended to
offset the U.S. dollar cost of weapons purchased by foreign
nations.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 37,586,524 4.51% 6.27% 6.51%
Against 539,596,943 64.72% 89.97% 93.49%
Abstain 22,546,468 2.70% 3.76%
Broker non-votes 118,849,280 14.25%
3. A shareholder proposal requesting the Board of Directors to
report on the Company's involvement in miliary activities
in space.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 51,847,856 6.22% 8.65% 9.13%
Against 516,334,383 61.93% 86.09% 90.87%
Abstain 31,547,696 3.78% 5.26%
Broker non-votes 118,849,280 14.25%
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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 59,785,413 7.17% 9.97% 10.27%
Against 522,474,003 62.66% 87.12% 89.73%
Abstain 17,470,519 2.10% 2.91%
Broker non-votes 118,849,280 14.25%
5. A shareholder proposal requesting the Board to adopt a 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 284,235,748 34.09% 47.39% 48.43%
Against 302,698,080 36.30% 50.47% 51.57%
Abstain 12,796,107 1.53% 2.13%
Broker non-votes 118,849,280 14.25%
6. A shareholder proposal requesting the Board to adopt annual
election of all directors as corporate policy.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 270,249,844 32.41% 45.06% 45.97%
Against 317,614,189 38.09% 52.96% 54.03%
Abstain 11,865,903 1.42% 1.98%
Broker non-votes 118,849,280 14.25%
7. A shareholder proposal asking 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 52,305,988 6.27% 8.72% 8.95%
Against 532,071,551 63.81% 88.72% 91.05%
Abstain 15,352,396 1.84% 2.56%
Broker non-votes 118,849,280 14.25%
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8. A shareholder proposal requesting the Board to adopt a
shareholder advisory vote on the members of the audit
committee.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 56,381,591 6.76% 9.40% 9.64%
Against 528,286,074 63.36% 88.09% 90.36%
Abstain 15,062,271 1.81% 2.51%
Broker non-votes 118,849,280 14.25%
9. A shareholder proposal recommending that the Company not present
to shareholders any stock option proposal that could make the
Company's total stock option dilution greater than its industry
peer group.
Number of % of Eligible % of Votes % of Votes
Votes Votes Present For or Against
----------- ------------- ---------- --------------
For 70,100,037 8.41% 11.69% 11.96%
Against 516,019,042 61.89% 86.04% 88.04%
Abstain 13,610,856 1.63% 2.27%
Broker non-votes 118,849,280 14.25%
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(15) Letter from independent accountants regarding unaudited
interim financial information. Filed herewith.
(27) Financial Data Schedule for the three-month period ending
March 31, 2001. 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, 2001,
the condensed consolidated statements of operations for the three-month period
ended March 31, 2001 and 2000, and the condensed consolidated statements of cash
flows for the three-month period ended March 31, 2001 and 2000, have been
reviewed by the registrant's independent accountants, Deloitte & Touche LLP,
whose report covering their review of the financial statements follows.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
The Boeing Company
Seattle, Washington
We have reviewed the accompanying condensed consolidated statement of financial
position of The Boeing Company and subsidiaries (the "Company") as of March 31,
2001, and the related condensed consolidated statements of operations and cash
flows for the three-month periods ended March 31, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial position of the Company as of December 31, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated
January 26, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated statement of financial position as of
December 31, 2000 is fairly stated, in all material respects, in relation to
the consolidated statement of financial position from which it has been
derived.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
April 25, 2001
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- - - - - - -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BOEING COMPANY
------------------------------
(Registrant)
May 8, 2001 /s/ James A. Bell
------------- ---------------------------------------
(Date) James A. Bell
Vice President of Finance
& Corporate Controller
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