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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
June 30, 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 July 31, 2001, there were 806,094,449 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)
Six months ended Three months ended
June 30 June 30
- -------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Sales and other operating revenues $28,809 $24,751 $15,516 $14,841
Cost of products and services 24,037 21,491 12,967 12,944
- -------------------------------------------------------------------------------
4,772 3,260 2,549 1,897
Equity in income (loss) from joint ventures 44 30 22 (1)
General and administrative expense 1,167 1,032 644 542
Research and development expense 883 663 461 375
Gain on dispositions, net 13 13
Share-based plans expense 181 127 99 67
- -------------------------------------------------------------------------------
Operating earnings 2,585 1,481 1,367 925
Other income, principally interest 252 222 17 73
Interest and debt expense (320) (210) (172) (107)
- -------------------------------------------------------------------------------
Earnings before income taxes 2,517 1,493 1,212 891
Income taxes 441 455 372 271
- -------------------------------------------------------------------------------
Net earnings before cumulative effect of
accounting change 2,076 1,038 840 620
Cumulative effect of accounting change, net 1
- -------------------------------------------------------------------------------
Net Earnings $ 2,077 $ 1,038 $ 840 $ 620
===============================================================================
Basic earnings per share $2.50 $1.20 $1.02 $.71
===============================================================================
Diluted earnings per share $2.45 $1.18 $ .99 $.71
===============================================================================
Cash dividends paid per share $ .34 $ .28 $ .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)
June 30 December 31
2001 2000
- -------------------------------------------------------------------------------
Assets (Unaudited)
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 1,502 $ 1,010
Accounts receivable 4,710 4,928
Current portion of customer and commercial financing 1,409 995
Deferred income taxes 2,161 2,137
Inventories, net of advances and progress billings 7,407 6,794
- -------------------------------------------------------------------------------
Total current assets 17,189 15,864
Customer and commercial financing 6,800 5,964
Property, plant and equipment, net 8,701 8,814
Goodwill and acquired intangibles, net 5,223 5,214
Prepaid pension expense 5,315 4,845
Deferred income taxes 60
Other assets 1,469 1,267
- -------------------------------------------------------------------------------
$44,697 $42,028
===============================================================================
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------
Accounts payable and other liabilities $11,981 $11,979
Advances in excess of related costs 4,210 3,517
Income taxes payable 802 1,561
Short-term debt and current portion of long-term debt 780 1,232
- -------------------------------------------------------------------------------
Total current liabilities 17,773 18,289
Deferred income taxes 84
Accrued retiree health care 5,215 5,152
Deferred lease income 306
Long-term debt 9,810 7,567
Minority interest in subsidiaries 14
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 2,468 2,693
Treasury shares, at cost - 158,881,036 and 136,385,222 (7,658) (6,221)
Retained earnings 13,873 12,090
Accumulated other comprehensive income (16) (2)
Unearned compensation (5) (7)
ShareValue Trust shares - 39,369,118 and 39,156,280 (2,226) (2,592)
- -------------------------------------------------------------------------------
Total shareholders' equity 11,495 11,020
- -------------------------------------------------------------------------------
$44,697 $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)
Six months ended
June 30
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $2,077 $1,038
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Share-based plans 181 127
Depreciation 600 641
Amortization of goodwill and intangibles 141 57
Customer and commercial financing valuation provision 1 9
Gain on dispositions, net (13)
Changes in assets and liabilities -
Accounts receivable 218 (102)
Inventories, net of advances and progress billings (618) 350
Accounts payable and other liabilities 10 51
Advances in excess of related costs 693 234
Income taxes payable and deferred (638) 72
Deferred lease income 306
Other (831) (416)
Accrued retiree health care 86 91
- -------------------------------------------------------------------------------
Net cash provided by operating activities 2,226 2,139
- -------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing and properties on lease, additions (1,913) (669)
Customer financing and properties on lease, reductions 568 1,040
Property, plant and equipment, net additions (470) (452)
Proceeds from dispositions 68 75
- -------------------------------------------------------------------------------
Net cash used by investing activities (1,747) (6)
- -------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 2,300 196
Debt repayments (517) (338)
Common shares purchased (1,540) (348)
Stock options exercised, other 67 29
Dividends paid (297) (254)
- -------------------------------------------------------------------------------
Net cash provided (used) by financing activities 13 (715)
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 492 1,418
Cash and cash equivalents at beginning of year 1,010 3,354
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of 2nd quarter $1,502 $4,772
===============================================================================
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 June 30, 2001, are not necessarily
indicative of the operating results for the full year. The interim financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's 2000 Annual Report.
Certain reclassifications have been made to prior periods to conform with
current reporting.
Note 2 - 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 June 30, 2001, the initial goodwill
was valued at $848 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.
In July 2001, the Financial Accounting Standards Board issued two new
pronouncements: Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company will be required to adopt SFAS No. 141 for all business
combinations completed after June 30, 2001. This standard requires that
business combinations completed after June 30, 2001, be accounted for under
the purchase method. Business combinations completed before July 1, 2001,
that were accounted for by the purchase method must meet the requirements of
SFAS No. 142 for classification of intangibles. Previously acquired
intangibles not meeting the prescribed criteria must be reclassified to
goodwill as of the statement adoption date. The Company is evaluating the
impact of the adoption of this standard and has not yet determined the effect,
if any, that this statement will have on its financial position and results of
operations.
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Note 2 - Acquisitions (continued)
Additionally, the Company will be required to adopt SFAS No. 142 at the
beginning of 2002 for all goodwill and other intangible assets recognized in the
Company's statement of financial position as of January 1, 2002. This statement
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will cease upon adoption of this standard. The
standard is immediately applicable for any goodwill acquired after June 30,
2001. Goodwill and intangible assets acquired after June 30, 2001, should be
tested for impairment and written down and charged to results of operations only
in the periods in which the recorded value of goodwill and certain intangibles
is more than its fair value. The Company does not expect any expense recognition
from application of the impairment test, but has not completed the testing
necessary for a final determination. If goodwill amortization were to cease,
goodwill expense of approximately $150 per year would no longer be recognized in
the consolidated statement of operations.
Note 3 - Earnings per Share
The weighted average number of shares outstanding (in millions) used to compute
earnings per share are as follows:
Six Months ended Three months ended
June 30 June 30
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic shares 830.4 867.8 826.9 866.6
Diluted shares 848.1 876.9 845.1 867.1
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 4 - Income Taxes
The effective tax rate of 17.5% for the first six months 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 six months would be 30.6%. The 30.6% 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 $925 and $351 for the six months ended June 30, 2001 and 2000.
Payments for the six months ended June 30, 2001, included approximately $900 due
principally to the closeout of contracts accounted for under the completed
contract method for tax purposes.
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Note 4 - Income Taxes (continued)
In December 1996, The Boeing Company filed suit in the U.S. District Court for
the Western District of Washington for the refund of over $400 in federal income
taxes and related interest. The suit challenged the IRS method of allocating
research and development costs for the purpose of determining tax incentive
benefits on export sales through the Company's Domestic International Sales
Corporation (DISC) and its Foreign Sales Corporation (FSC) for the years 1979
through 1987. In September 1998, the District Court granted the Company's motion
for summary judgment. The U.S. Department of Justice has appealed this decision.
On August 2, 2001, The United States Court of Appeals for the ninth Circuit
reversed the District Court's summary judgment that was in the Company's
favor. The Company has fully provided for any potential earnings impact that
may result from this decision. The Company is assessing its options as a
result of the Court of Appeals' actions.
Note 5 - Accounts Receivable
Accounts receivable consisted of the following:
June 30 December 31
2001 2000
- -------------------------------------------------------------------------------
U.S. Government contracts $2,249 $2,693
Other 2,461 2,235
- -------------------------------------------------------------------------------
$4,710 $4,928
===============================================================================
Note 6 - Inventories
Inventories consisted of the following:
June 30 December 31
2001 2000
- -------------------------------------------------------------------------------
Commercial aircraft programs and
long-term contracts in progress $ 19,719 $ 19,399
Commercial spare parts, general
stock materials and other 1,973 1,972
- -------------------------------------------------------------------------------
21,692 21,371
Less advances and progress billings (14,285) (14,577)
- -------------------------------------------------------------------------------
$ 7,407 $ 6,794
===============================================================================
Inventory costs at June 30, 2001, included unamortized tooling of $946 and $378
relating to the 777 and Next-Generation 737 programs, and excess deferred
production costs of $1,007 and $609 relating to the 777 and Next-Generation 737
programs. There are no significant deferred production costs or unamortized
tooling associated with the 717 program.
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Note 7 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
June 30 December 31
2001 2000
- -------------------------------------------------------------------------------
Aircraft financing
Notes receivable $ 677 $ 593
Investment in sales-type/financing leases 2,222 1,119
Operating lease equipment, at cost,
Less accumulated depreciation of $263 and $305 2,758 3,098
Commercial equipment financing
Notes receivable 988 915
Investment in sales-type/financing leases 922 697
Operating lease equipment, at cost,
Less accumulated depreciation of $108 and $95 798 710
- -------------------------------------------------------------------------------
Less valuation allowance (156) (173)
- -------------------------------------------------------------------------------
$8,209 $6,959
===============================================================================
Financing for aircraft is collateralized by security in the related asset, and
historically the Company has not experienced difficulty in accessing such
collateral when necessary. Commercial equipment financing also includes amounts
attributable to regional aircraft, principally with fewer than 80 seats.
The change in the valuation allowance for the first six months of 2001 consisted
of the following:
Valuation
Allowance
- -------------------------------------------------------------------------------
Beginning balance - December 31, 2000 $(173)
Charged to costs and expenses (1)
Reduction in customer and commercial financing assets 18
- -------------------------------------------------------------------------------
Ending balance - June 30, 2001 $(156)
===============================================================================
Note 8 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
June 30 December 31
2001 2000
- -------------------------------------------------------------------------------
Accounts payable $ 5,216 $ 5,040
Accrued compensation and employee benefit costs 3,157 2,938
Dividends payable 146 149
Lease and other deposits 345 731
Other 3,117 3,121
- -------------------------------------------------------------------------------
$11,981 $11,979
===============================================================================
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Note 9 - Deferred Lease Income
The Company has entered into an agreement with the United Kingdom Royal Air
Force (UKRAF) to lease four C-17 transport aircraft, with delivery taking place
during 2001. The lease terms are for seven years, at which time 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, and as of
June 30, 2001, the Company has received a significant portion of the $646 of
scheduled advances from the financial institution in consideration of the
assignment of the future lease receivables from the UKRAF. These proceeds
initially are accounted for as advances and progress billings against inventory.
At the time of delivery of each C-17, the related portion of inventory advances
are reclassified as deferred lease income. Two of the four C-17 transport
aircraft were delivered in the second quarter of 2001. The assignment of lease
receivables is non-recourse to the Company. The scheduled advances of $646
represent the present value of the assigned total lease receivables discounted
at an effective rate of 6.6%. The C-17 deliveries were and will be accounted for
as operating leases.
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Note 10 - Debt
Short- and long-term debt consisted of the following:
June 30 December 31
2001 2000
- -------------------------------------------------------------------------------
Non-recourse debt and notes
Enhanced Equipment Trust Certificates $ 635 $ -
9.9% - 14.3% notes due through 2003 68 74
Unsecured debentures and notes:
$174, 8 3/8% due Feb. 15, 2001 174
$49, 7.565% due Mar. 30, 2002 48 49
$120, 9.25% due Apr. 1, 2002 120 120
$300, 6 3/4% due Sep. 15, 2002 299 299
$300, 6.35% due Jun. 15, 2003 300 300
$200, 7 7/8% due Feb. 15, 2005 205 206
$300, 6 5/8% due Jun. 1, 2005 295 294
$250, 6.875% due Nov. 1, 2006 249 248
$175, 8 1/10% due Nov. 15, 2006 175 175
$350, 9.75% due Apr. 1, 2012 348 348
$400, 8 3/4% due Aug. 15, 2021 398 398
$300, 7.95% due Aug. 15, 2024 300 300
$250, 7 1/4% due June. 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,
5.5% - 10.6%, due through 2012 3,278 1,547
Senior medium-term notes,
3.8% - 7.6%, due through 2017 1,881 1,775
General term notes
6.0% - 8.3% due through 2011 6 7
Subordinated medium-term notes,
6.9% - 8.3%, due through 2012 20 25
Capital lease obligations due through 2008 300 315
Other notes 299 779
- -------------------------------------------------------------------------------
$10,590 $8,799
===============================================================================
Of the debt balances reported above, $5,508 and $3,677 are attributed to Boeing
Capital Corporation (BCC) for June 30, 2001, and December 31, 2000.
The Company has $3,000 currently available under credit line agreements with a
group of commercial banks. The Company has complied with the restrictive
covenants contained in various debt agreements. Total debt interest, including
amounts capitalized, was $335 and $259 for the six-month periods ended June 30,
2001 and 2000, and interest payments were $306 and $253.
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Note 10 - Debt (continued)
Additionally, 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 $800 in aggregate principal amounts of
MTN, at interest rates ranging from 4.07% 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
proceeds on March 8, 2001, from the issuance of $750 in 6.10% senior notes due
2011. On May 10, 2001, BCC received proceeds from the issuance of $1,000 in
5.65% senior notes due 2006.
On May 24, 2001, American Airlines issued Enhanced Equipment Trust Certificates
(EETC), and the Company, through its subsidiary Boeing Capital Corporation,
received proceeds of $635 attributable to 32 MD-83 aircraft owned by the Boeing
Capital Corporation 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 current portion of long-term debt as of June 30, 2001,
consist of the following: $321 of senior debt securities, senior medium-term
notes, subordinated medium-term notes, $36 of capital lease obligations, $67 of
non-recourse debt and notes, and $356 of other notes.
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Note 11 - Shareholders' Equity
Changes in shareholders' equity for the six-month periods ended June 30, 2001
and 2000, 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 - June 30 1,011,870 $ 5,059 1,011,870 $ 5,059
===============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 2,693 $ 1,684
Share-based compensation 181 127
Treasury shares issued for stock plans, net (52) (22)
Tax benefit related to stock plans 12 4
ShareValue Trust market value adjustment (366) 21
- -------------------------------------------------------------------------------
Ending balance - June 30 $ 2,468 $ 1,814
===============================================================================
Treasury stock
Beginning balance - January 1 136,385 $(6,221) 102,357 $(4,161)
Treasury shares issued for
stock plans, net (2,315) 103 (1,017) 41
Treasury shares acquired 24,811 (1,540) 8,700 (348)
- -------------------------------------------------------------------------------
Ending balance - June 30 158,881 $(7,658) 110,040 $(4,468)
===============================================================================
Retained earnings
Beginning balance - January 1 $12,090 $10,487
Net earnings 2,077 1,038
Cash dividends declared (294) (253)
- -------------------------------------------------------------------------------
Ending balance - June 30 $13,873 $11,272
===============================================================================
Accumulated other comprehensive income
Beginning balance - January 1 $ (2) $ 6
Gains (losses) on certain investments, net of tax 4 (6)
Losses on derivative instruments, net of tax (13)
Foreign currency translation adjustment (5) 4
- -------------------------------------------------------------------------------
Ending balance - June 30 $ (16) $ 4
===============================================================================
Unearned compensation
Beginning balance - January 1 $ (7) $ (12)
Amortization and forfeitures 2 2
- -------------------------------------------------------------------------------
Ending balance - June 30 $ (5) $ (10)
===============================================================================
ShareValue Trust
Beginning balance - January 1 39,156 $(2,592) 38,696 $(1,601)
Shares acquired from dividend reinvestment,
net of fees 213 281
Market value adjustment 366 (21)
- -------------------------------------------------------------------------------
Ending balance - June 30 39,369 $(2,226) 38,977 $(1,622)
===============================================================================
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Note 11 - Shareholders' Equity (continued)
For the six months ended June 30, 2001 and 2000, comprehensive income and net
earnings were substantially the same, and differed only by the changes in
accumulated other comprehensive income shown above.
Note 12 - Share-Based Compensation
Share-based plans expense consisted of the following:
Six months ended Three months ended
June 30 June 30
- -------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Performance shares $107 $ 58 $61 $32
ShareValue Trust 36 36 18 18
Stock Options, other 38 33 20 17
- -------------------------------------------------------------------------------
$181 $127 $99 $67
===============================================================================
In addition to the plans above, the Company has issued 7,490,408 stock units as
of June 30, 2001, that are convertible to either stock or a cash equivalent, of
which 6,375,277 are vested, and the remainder vest with employee service. These
stock units principally represent a method of deferring employee compensation by
which a liability is established based upon the current stock price. An expense
or reduction in expense is recognized associated with the change in that
liability balance and is recorded against general and administrative expense.
For the six months ended June 30, 2001, general and administrative expense
related to deferred stock compensation was decreased by $51.
Note 13 - Derivatives and Hedging Activities
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. This standard requires that all derivative
instruments, such as interest rate swap contracts and forward foreign 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
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.
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Note 13 - Derivatives and Hedging Activities (continued)
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 six
month period ended June 30, 2001, these interest rate swaps resulted in expense
of $2 and the interest exchange agreements resulted in income of $1.
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).
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Note 13 - Derivatives and Hedging Activities (continued)
As of June 30, 2001, interest rate swaps are reflected at a fair value of $24 in
other assets and $22 in other liabilities. Offsetting amounts are a loss
reflected in accumulated other comprehensive income of $9, an adjustment to
underlying long-term senior debt of $9 and net other expense of $2. During the
next twelve months, the Company expects to reclassify to expense $3 from the
transition adjustment loss that was recorded in accumulated other comprehensive
income and recognize income of $12 related to the basis adjustment of certain
underlying liabilities.
Commodity Derivatives
The Company uses commodity derivatives such as fixed-price purchase commitments
to hedge against potentially unfavorable price changes for items used in
production.
On June 29, 2001, the Derivatives Implementation Group, in support of the
Financial Accounting Standards Board, issued Statement 133 Implementation Issue
C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for
Option-Type Contracts and Forward Contracts in Electricity." This
Implementation Issue concluded that the normal purchases and normal sales
exceptions as described in Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, applied to
electricity contracts only to the extent that the power purchaser is an entity
engaged in selling electricity to retail or wholesale customers. The
effective date of this implementation guidance for the Company will be July 1,
2001.
The Company has entered into certain commitments to purchase electricity at
fixed prices over a three-year period. As a result of Implementation Issue C15,
these commitments are deemed to be derivatives and will be stated at fair value
on the statement of financial position. The Company projects that the initial
valuation of these commitments will result in a derivative liability of
approximately $64. The Company also projects the derivative will qualify for
cash flow hedge treatment, with the initial valuation resulting in an
unrecognized loss in the accumulated other comprehensive income. Approximately
$22 of expense attributable to this derivative is projected to be recognized in
earnings for the twelve month period beginning July 1, 2001.
Other Derivative Financial Instruments
The Company uses equity conversion options and warrants in certain transactions
to enhance the income potential of these transactions. As of June 30, 2001,
equity conversion options and warrants are reflected at a fair value of $38 in
other assets. These were initially recorded on the balance sheet with a
corresponding discount in notes receivable of $20. The change in fair value for
the six-month period ended June 30, 2001, of $18 was recorded in sales and other
operating revenue.
15
<page> 16
Note 13 - Derivatives and Hedging Activities (continued)
The Company has foreign currency forward contracts that were entered into to
hedge receipt and expenditure commitments made in foreign currencies. As of June
30, 2001, the notional amount of foreign currency forward contracts accounted
for as cash flow hedges is $556. These hedges are carried at market value,
resulting in $25 recorded in other liabilities offset by a loss in accumulated
other comprehensive income ($16 net of tax). Additionally, at June 30, 2001, the
Company had foreign currency forward contracts with a notional value of $206
that were not accounted for as hedges and carried at market value, resulting in
$33 recorded in other liabilities. The Company realized a pretax loss of $10
attributable to these forward contracts during the six months ended June 30,
2001.
Other derivatives held by the Company include a forward-starting interest rate
swap that is not accounted for as a hedge, and as of June 30, 2001, other assets
include $12 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.
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 June 30, 2001, inventories included approximately $582 of
recorded costs on the A-12 contract, against which the Company has established a
loss provision of $350. The amount of the provision, which was established in
1990, was based on the Company's belief, supported by an opinion of outside
16
<page> 17
Note 14 - Contingencies (continued)
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 June 30, 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.
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. On July 13, 2001, the Court
certified certain questions of state law for consideration by the Washington
Supreme Court. 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.
17
<page> 18
Note 14 - Contingencies (continued)
On October 19, 1999, an indictment was returned by a federal grand jury sitting
in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a
wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company
division, conspired to and made false statements and concealed material facts on
export license applications and in connection with export licenses, and
possessed and sold machine tools in violation of the Export Administration Act.
The indictment also charged one employee with participation in the alleged
conspiracy. The indictment has since been dismissed as against this employee.
That dismissal was affirmed by the U.S. Court of Appeals for the D.C. Circuit on
May 8, 2001. The indictment relates to the sale and export to China in 1993-1995
of surplus, used machine tools sold by Douglas Aircraft Company to China
National Aero-Technology Import and Export Corporation for use in connection
with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC. The
agency exercised that discretion on January 5, 2000, by establishing a "denial
policy" with respect to defense-related exports of MDC and its subsidiaries.
Most of MDC's major existing defense programs were, however, excepted from that
policy due to overriding U.S. foreign policy and national security interests.
Other exceptions have been granted. There can, however, be no assurance as to
how the Department will exercise its discretion as to program or transaction
exceptions for other programs or future defense-related exports. In addition,
the Department of Commerce has authority to temporarily deny other export
privileges to, and the Department of Defense has authority to suspend or debar
from contracting with the military departments, MDC or a division or subsidiary
of MDC. Neither agency has taken action adverse to MDC or its divisions or
subsidiaries thus far. Based upon all available information, the Company does
not expect actions that would have a material adverse effect on its financial
position or continuing operations. In the unanticipated event of a conviction,
MDC would be subject to Department of State and Department of Commerce denials
or revocations of MDC export licenses. MDC also would be subject to Department
of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender
discrimination and harassment was filed against The Boeing Company, Boeing North
American, Inc., and McDonnell Douglas Corporation. The complaint, filed with the
United States District Court in Seattle, alleges that the Company has engaged in
a pattern and practice of unlawful discrimination, harassment and retaliation
against females over the course of many years. The complaint, Beck v. Boeing,
names 28 women who have worked for Boeing in the Puget Sound area; Wichita,
Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, 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 was filed in May 2001. The court will
hear argument on the motion in August. The Company intends to vigorously contest
this lawsuit.
18
<page> 19
Note 15 - Business Segment Data
Segment information for revenues, earnings, and research and development
consisted of the following: Six months ended Three months ended
June 30 June 30
- -------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Revenues:
Commercial Airplanes $17,760 $15,051 $ 9,317 $ 9,880
Military Aircraft and Missiles 5,716 5,938 3,289 3,092
Space and Communications 4,765 3,457 2,519 1,798
Customer and Commercial Financing 440 344 234 177
Other 166 130 95 69
Accounting differences/eliminations (38) (169) 62 (175)
- -------------------------------------------------------------------------------
Operating revenues $28,809 $24,751 $15,516 $14,841
===============================================================================
Earnings from operations:
Commercial Airplanes $ 1,815 $ 1,141 $ 955 $ 882
Military Aircraft and Missiles 656 540 410 246
Space and Communications 214 36 130 (24)
Customer and Commercial Financing 327 237 185 130
Other (126) (23) (75) (25)
Accounting differences/eliminations (14) (247) (39) (199)
Share-based plans (181) (127) (99) (67)
Unallocated expense (106) (76) (100) (18)
- -------------------------------------------------------------------------------
Earnings from operations 2,585 1,481 1,367 925
Other income, principally interest 252 222 17 73
Interest and debt expense (320) (210) (172) (107)
- -------------------------------------------------------------------------------
Earnings before income taxes 2,517 1,493 1,212 891
Income taxes 441 455 372 271
- -------------------------------------------------------------------------------
Net earnings before cumulative effect
of accounting change $ 2,076 $ 1,038 $ 840 $ 620
===============================================================================
Research and development:
Commercial Airplanes $ 385 $ 263 $ 190 $ 160
Military Aircraft and Missiles 123 123 70 62
Space and Communications 248 261 125 137
Other 127 16 76 16
- -------------------------------------------------------------------------------
Total research and development expense $ 883 $ 663 $ 461 $ 375
===============================================================================
In the first quarter of 2001, the Company adjusted the segment classification of
certain business activities. The Company established an "Other" segment class-
ification 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. The 2000 results have been
reclassified to conform to the revised segment classifications.
19
<page> 20
Note 15 - Business Segment Data (continued)
For internal reporting purposes, the Company records Commercial Airplanes
segment revenues and operating profits for airplanes transferred to other
segments, and such transfers may include airplanes accounted for as operating
leases that are considered transferred to the Customer and Commercial Financing
segment. The revenues for these transfers are eliminated in the 'Accounting
differences/eliminations' caption. In the event an airplane accounted for as an
operating lease is subsequently sold, the 'Accounting differences/eliminations'
caption would reflect the recognition of revenue and operating profit for the
consolidated financial statements.
In the second quarter of 2001, Trans World Airlines (TWA) received final
approval from the U.S. District Court in Wilmington, Delaware, for an asset
purchase agreement with American Airlines (AA). Under this agreement, AA as
lessee has assumed various aircraft leases from TWA whereby the Company is the
lessor. The restructured lease payments from AA are at rates that are lower than
those contracted with TWA; however, none of the associated lease assets have
been deemed to be impaired. As a result of this restructuring, 32 MD-83s
previously accounted for as operating leases were accounted for as sales-type
leases in the second quarter of 2001, with no gain or loss recorded.
Accordingly, the 'Accounting differences/eliminations' caption reflected $792 of
revenue in the second quarter of 2001 related to this transaction.
For internal reporting purposes, the Company recorded Military Aircraft and
Missiles segment revenues and operating profit relating to the delivery of C-17
transport aircraft described in Note 9. The transaction was treated as a
transfer to the 'Other' segment, where the related lease income and expense will
be recorded.
The Company records cost of sales for 7-series commercial airplane programs
under the program method of accounting described in Note 1 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 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
$(179) and $(321) for the six months ended June 30, 2001 and 2000.
20
<page> 21
Note 15 - Business Segment Data (continued)
The 'Accounting differences/eliminations' caption of net earnings also includes
the impact of cost measurement differences between generally accepted accounting
principles and federal cost accounting standards. This includes the following:
the differences between pension costs recognized under SFAS No. 87, Employers'
Accounting for Pensions, and under federal cost accounting standards,
principally on a funding basis; the differences between retiree health care
costs recognized under SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," and under federal cost accounting standards,
principally on a cash basis; and the differences in timing of cost recognition
related to certain activities, such as facilities consolidation, undertaken as a
result of mergers and acquisitions whereby such costs are expensed under
generally accepted accounting principles and deferred under federal cost
accounting standards. Additionally, the amortization of costs capitalized in
accordance with SFAS No. 34, "Capitalization of Interest Cost," is included in
the 'Accounting differences/eliminations' caption.
The costs attributable to share-based plans are not allocated. Other unallocated
costs include corporate costs not allocated to the operating segments, including
goodwill amortization resulting from acquisitions prior to 1998.
21
<page> 22
- -------------------------------------------------------------------------------
| 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, |
|acquisition and divestiture plans, price adjustments associated with |
|acquisitions and divestitures, 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 and the Quarterly Report on Form 10-Q for the quarter|
|ended March 31, 2001. |
- ------------------------------------------------------------------------------
22
<page> 23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues
- --------
Sales of $28.8 billion for the first six months of 2001 were 16% higher than
sales for the comparable period of 2000. For the first six months of 2001, a
total of 263 commercial aircraft were delivered, compared with 242 for the same
period in 2000. In second quarter 2001, 141 commercial aircraft were delivered
compared with 167 in second quarter 2000. Approximately 538 commercial aircraft
deliveries are currently projected for the full year 2001, compared with 489 in
2000.
Commercial jet aircraft deliveries were as follows:
Six months ended Three months ended
June 30 June 30
--------------------------------------------------------------------
Model 2001 2000 2001 2000
--------------------------------------------------------------------
717 24 (9) 11 (5) 17 (8) 8 (4)
737 Classic - 2 - -
737 Next-Generation 145 (2)* 141 73 (2) 102
747 16 12 ** 9 8
757 20 28 12 18
767 23 18 13 13
777 33 27 17 17
MD-11 2 3 - 1
--------------------------------------------------------------------
Total 263 242 141 167
====================================================================
*Includes one intercompany C-40 737 Aircraft
**Includes one Airborne Laser 747
Commercial jet aircraft deliveries included deliveries under operating lease,
which are identified by parentheses in the table above. Aircraft accounted for
as operating leases have minimal revenues recorded at the time of delivery.
23
<page> 24
Military Aircraft and Missiles segment deliveries included the following:
Six months ended Three months ended
June 30 June 30
----------------------------------------------------------------
Model 2001 2000 2001 2000
----------------------------------------------------------------
C-17 6 (2) 6 4 (2) 3
F-15 - 5 - 1
F/A-18C/D - 14 - 8
F/A-18E/F 16 11 9 7
T-45TS 8 9 4 5
CH-47 6 4 4 3
C-40 2 - 2 -
AH-64 Apache 3 4 1 2
The C-17s identified in parentheses represent deliveries under operating
lease.
Space and Communications segment deliveries included the following:
Six months ended Three months ended
June 30 June 30
----------------------------------------------------------------
Model 2001 2000 2001 2000
----------------------------------------------------------------
Delta II 3 2 3 -
Satellites 5 - 4 -
In the second quarter of 2001, Trans World Airlines (TWA) received final
approval from the U.S. District Court in Wilmington, Delaware, for an asset
purchase agreement with American Airlines (AA). Under this agreement, AA as
lessee has assumed various aircraft leases from TWA whereby the Company is the
lessor. The restructured lease payments from AA are at rates that are lower than
those contracted with TWA; however, none of the associated lease assets have
been deemed to be impaired. As a result of this restructuring, 32 MD-83s
previously accounted for as operating leases were accounted for as sales-type
leases in the second quarter of 2001, with no gain or loss recorded.
Accordingly, the 'Accounting differences/eliminations' caption reflected $792
milliion of revenue in the second quarter of 2001 related to this transaction.
Earnings
- --------
Net earnings for the second quarter of 2001 were $840 million, compared with
$620 million for the same period in 2000. Net earnings included $17 million of
other income in the second quarter of 2001, compared with $73 million in 2000.
The lower other income in 2001 relates principally to lower returns on cash and
cash equivalents, reflecting lower cash balances and lower interest rates.
Interest expense for the second quarter of 2001 was $172 million, compared with
$107 million in 2000. The higher interest expense results from increased debt
in support of Customer and Commercial Financing transactions.
24
<page> 25
Net earnings for the first six months of 2001 were $2,077 million, compared with
$1,038 million for the same period in 2000. Other income was $252 million and
$222 million for the first six months of 2001 and 2000. Included in 2001 other
income is $210 million of interest income relating to a non-recurring tax
benefit resulting from a final agreement with the Internal Revenue Service (IRS)
described below. Included in 2000 other income is $53 million of interest income
from a federal income tax audit settlement and $41 million related to the sale
of a long-held equity instrument. Interest expense was $320 million and $210
million for the first six months of 2001 and 2000, also reflecting increased
debt in support of Customer and Commercial Financing transactions.
Income tax expense for the first six months of 2001 was $441 million, or 17.5%
of pretax earnings, compared with $455 million, or 30.5% of pretax earnings in
2000. The 2001 tax provision includes a non-recurring earnings tax benefit
resulting from a final agreement with the IRS primarily regarding previously
filed claims for refund of research and development tax credits. These claims
dealt primarily with historical fixed-price development program expenses
incurred by McDonnell Douglas from 1986 to 1992. The agreement with the IRS
resulted in financial recognition during the first quarter of $343 million of
tax credit and $210 million of related interest income.
Research and development expense totaled $883 million for the first six months
of 2001, compared with $663 million for the same period of 2000. Research and
development expense totaled $461 million for the quarter, compared with $375
million for the same period of 2000. Commercial Airplanes segment research and
development expense of $190 million for the second quarter of 2001 reflects an
increase over the $160 million expense for the second quarter of 2000. Space and
Communications segment research and development expense of $125 million for the
second quarter was lower than the $137 million expense for the second quarter of
2000. Research and development in the 'Other' segment relates principally to
Connexion by BoeingSM.
In December 1996, The Boeing Company filed suit in the U.S. District Court for
the Western District of Washington for the refund of over $400 million in
federal income taxes and related interest. The suit challenged the IRS method of
allocating research and development costs for the purpose of determining tax
incentive benefits on export sales through the Company's Domestic International
Sales Corporation (DISC) and its Foreign Sales Corporation (FSC) for the years
1979 through 1987. In September 1998, the District Court granted the Company's
motion for summary judgment. The U.S. Department of Justice has appealed this
decision. On August 2, 2001, The United States Court of Appeals for the ninth
Circuit reversed the District Court's summary judgment that was in the
Company's favor. The Company has fully provided for any potential earnings
impact that may result from this decision. The Company is assessing its
options as a result of the Court of Appeals' actions.
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
filed a WTO challenge to the new law and the WTO dispute panel hearing the case
rejected the U.S. position. The final panel report will be circulated to the WTO
membership in August 2001. If appealed, the appellate process would extend into
the third quarter of 2001 and final resolution of this matter could extend into
2002. The U.S Government and industry groups are evaluating options. It is not
possible to predict what impact, if any, this issue will have on future earnings
pending final resolution of the challenge.
25
<page> 26
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
Second quarter 2001 commercial jet aircraft deliveries totaled 141, compared
with 167 during the same period in 2000 and 122 for first quarter 2001. The
decrease in second quarter 2001 deliveries relative to the same period in 2000
resulted from the Company substantially recovering from the first-quarter 2000
Society of Professional Engineering Employees in Aerospace (SPEEA) work
stoppage. Commercial Airplanes segment second quarter 2001 operating earnings,
based on the unit cost of airplanes delivered, were $955 million, compared with
$882 million for the same period in 2000. The overall Commercial Airplanes
segment operating profit margin was 10.3% for the second quarter of 2001,
compared with 8.9% for the same period in 2000. The second quarter 2001 margin
increase over the same period in 2000 primarily reflects continued improvement
in the production process, offset by increased research and development expense.
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 15. Commercial Airplanes
segment earnings under GAAP were $887 million and $639 million for the second
quarter of 2001 and 2000. The GAAP determined segment margin of 9.5% in 2001
compares with 6.5% for the same 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 June 30, 2001, and 1,400 units as of June 30,
2000. The 777 program accounting quantity was 600 units as of June 30, 2001, and
500 units as of June 30, 2000.
For the six months ended June 30, 2001, Commercial Airplanes segment earnings
were $1,815 million, compared with $1,141 million for the same period in 2000,
and segment operating margins were 10.2% and 7.6% for the first six months of
2001 and 2000. Commercial jet aircraft deliveries totaled 263 for the first half
of 2001, compared with 242 for the same period in 2000. The improved margins in
2001 also reflect continued production process improvements, offset by
increased research and development expense. Research and development expense for
the first six months of 2001 totaled $385 million, compared with $263 million
for the same period in 2000. Commercial Airplanes earnings, as determined
under GAAP described above, were $1,636 million for the first six months of
2001, compared with $820 million for the same period in 2000, and the related
six-month margins were 9.2% and 5.4% for 2001 and 2000.
26
<page> 27
As of June 30, 2001, the Company had cumulatively delivered 68 717 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
financial exposure related to the 717 program, principally attributable to
pricing pressures and the slow buildup of firm orders. The slow buildup of firm
orders could result in schedule slides which could require a reevaluation of the
cost of the 200 airplanes in the program accounting quantity.
As a result of the asset purchase agreement between TWA and American Airlines in
April 2001, American Airlines assumed the lease of 15 717s, took delivery under
lease of an additional 8 717s and committed to take delivery under lease of an
additional 7 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. During the second quarter of 2001, Commercial Airplanes continued to
work together with customers on the sonic cruiser. In addition, the first 737-
900s were delivered to Alaska Airlines, Continental Airlines and KLM and firm
orders for the new Longer-Range 747-400 Freighter were received from Air France
and ILFC.
Military Aircraft and Missiles
Second quarter 2001 Military Aircraft and Missiles segment operating earnings
were $410 million, compared with $246 million for the second quarter of 2000.
Second quarter 2001 results included a non-recurring earnings increase of $57
million, described below, attributable to the F-15 program. Operating margins
for second quarter 2001 were 12.5%, or 10.7% without the non-recurring earnings
adjustment, compared with 8.0% for the same period in 2000. The increase in
operating margin for 2001 reflects the impact of one additional C-17 transport
aircraft delivery, and lower earnings in the second quarter of 2000 attributable
both to less favorable program performance on certain helicopter programs, and
lower margins associated with various aerospace support contracts.
The Company had procured and committed to long-lead items in anticipation of
orders during 1999 for as many as 24 F-15 fighter aircraft. In the third quarter
of 1999, the Company assessed that there was a limited near-term market for F-
15s. As a result of this revised market assessment, the Company recorded a non-
recurring $225 million pretax charge. In the second quarter of 2001, the U.S.
Air Force ordered an additional 10 F-15Es, which improved the financial outlook
of the program. As a result, the non-recurring charge was adjusted, resulting in
additional operating earnings of $57 million during the quarter.
Operating earnings for the first six months of 2001 were $656 million, compared
with $540 million for the same period in 2000. Operating margins for the six
month period were 11.5% for 2001, or 10.5% excluding the non-recurring F-15
program earnings adjustment, compared with 9.1% for the same period in 2000.
During the quarter, Military Aircraft and Missiles continued to expand its
military aerospace support business and to strengthen its competitiveness in key
U.S. and international defense markets.
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<page> 28
The Company was selected to lead the C-130 Avionics Modernization Program for
the U.S. Air Force. Under the program, the Company will develop a modern,
common cockpit avionics system for the approximately 500 C-130 transport
aircraft in U.S. Air Force service. Other Military Aerospace Support wins
include the Canadian F/A-18 Update Program and the F/A-18E/F Integrated
Readiness Support Teaming, or FIRST, program for the U.S. Navy.
The Boeing Joint Strike Fighter (JSF) X-32B accomplished a major aerospace
milestone and a JSF program first on June 24 when it transitioned from wingborne
flight to a hover at the naval air station at Patuxent River, MD. The X-32B
then made its first vertical landing after transitioning from conventional to
short-takeoff-and-vertical-landing, or STOVL, flight. The Company has success-
fully completed all governmental flight-test requirements for the
Joint Strike Fighter.
Also during the second quarter, Italy selected a Boeing-led international
partnership to deliver 4 767 tanker transports. The Company delivered the first
two of four C-17 transport aircraft leased to the United Kingdom Royal Air
Force, the first international customer for the cargo transport. The delivery of
the first aircraft occurred just a year and a day after the United Kingdom
announced its selection of the C-17 to enhance its military transport
capabilities. Military Aircraft and Missiles Systems segment revenues and
operating margin reflect these two C-17 deliveries, but these transactions are
accounted for as operating leases on a consolidated basis.
Space and Communications
Space and Communications segment operating earnings for the second quarter 2001
were $130 million, compared with a loss of $24 million in the same period in
2000. The second quarter 2000 results included a charge of $55 million
associated with the incurred costs of a Delta III demonstration launch. The
increased operating earnings from 2000 also resulted from three additional
Delta II launches in the second quarter of 2001 and the acquisition of Boeing
Satellite Systems in the fourth quarter of 2000.
During the quarter, the Company successfully completed test firings of the RS-68
engine and Common Booster Core for the Delta IV. The first launch of Delta IV is
scheduled for 2002, and assigned payloads have been received from the United
States Air Force for launches in August 2002 and second quarter 2003 and from
Loral Skynet do Brasil for the second half of 2002. Four Boeing Satellite
Systems satellites were successfully launched during the quarter, including the
XM "Roll" satellite launched by Sea Launch, a joint venture of which Boeing is a
40% partner.
Segment operating earnings for the first six months of 2001 were $214 million,
compared with $36 million for the same period in 2000. The increased operating
earnings in 2001 result from the $55 million Delta III demonstration launch
charge discussed above, and the increased volume of activity attributable to the
acquisition of Boeing Satellite Systems. Additionally, research and development
expense has declined in the first six months of 2001 to $248 million, from $261
million in 2000.
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. 28
<page> 29
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 $403 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,
interest expense of $90 million for second quarter 2001 and $164 million for the
first six months of 2001 is associated with debt relating to financing
activities.
Operating earnings for the Customer and Commercial Financing segment were $185
million for second quarter 2001, compared with $130 million for first quarter
2000, exclusive of interest expense. Operating earnings for the first six months
of 2001 were $327 million, compared with $237 million for the same period in
2000. The increase was due principally to an increase in financing assets.
In the second quarter of 2001, Trans World Airlines (TWA) received final
approval from the U.S. District Court in Wilmington, Delaware, for an asset
purchase agreement with American Airlines (AA). Under this agreement, AA as
lessee has assumed various aircraft leases from TWA whereby the Company is the
lessor. The restructured lease payments from AA are at rates that are lower than
those contracted with TWA; however, none of the associated lease assets have
been deemed to be impaired. As a result of this restructuring, 32 MD-83s
previously accounted for as operating leases were accounted for as sales-type
leases, with no gain or loss recorded.
Liquidity and Capital Resources
- -------------------------------
The Company's financial liquidity position as of June 30, 2001, included cash
and short-term investments totaling $1.5 billion. During the first six months of
2001, the Company repurchased 24.8 million shares for $1.5 billion under an 85
million share repurchase plan.
Excluding non-recourse debt and Boeing Capital Corporation (BCC), a financing
subsidiary wholly owned by the Company, total long-term debt is at 26% of total
shareholders' equity plus debt. The consolidated long-term debt, including BCC,
is at 46% of total shareholders' equity plus debt. Revolving credit line
agreements with a group of major banks, totaling $3.0 billion, remain available
but unused.
The Company 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 made a tax payment of approximately $900
million due to, among other factors, the closeout of contracts accounted for
under the completed contract method for tax purposes.
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<page> 30
Standards Issued and Not Implemented
- ------------------------------------
In July 2001, the Financial Accounting Standards Board issued two new
pronouncements: Statement of Financial Accounting Standard (SFAS) No. 141,
Business Combinations and SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company will be required to adopt SFAS No. 141 for all business
combinations completed after June 30, 2001. This standard requires that
business combinations completed after June 30, 2001, be accounted for under
the purchase method. Business combinations completed before July 1, 2001,
that were accounted for by the purchase method must meet the requirements of
SFAS No. 142. Intangibles not meeting the prescribed criteria must be
reclassified to goodwill as of the statement adoption date. The Company is
evaluating the impact of the adoption of this standard and has not yet
determined the effect, if any, that this statement will have on its financial
position and results of operations.
Additionally, the Company will be required to adopt SFAS No. 142 at the
beginning of 2002 for all goodwill and other intangible assets recognized in the
Company's statement of financial position as of January 1, 2002. This statement
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will cease upon adoption of this standard. The
standard is immediately applicable for any goodwill acquired after June 30,
2001. Goodwill and intangible assets acquired after June 30, 2001, should be
tested for impairment and written down and charged to results of operations only
in the periods in which the recorded value of goodwill and certain intangibles
is more than its fair value. The Company does not expect any expense recognition
from application of the impairment test, but has not completed the testing
necessary for a final determination. If goodwill amortization were to cease,
goodwill expenses of approximately $150 millions per year would no longer be
recognized in the consolidated statement of operations.
On June 29, 2001, the Derivatives Implementation Group, in support of the
Financial Accounting Standards Board, issued Statement 133 Implementation Issue
C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for
Option-Type Contracts and Forward Contracts in Electricity." This
Implementation Issue concluded that the normal purchases and normal sales
exceptions as described in Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, applied to
electricity contracts only to the extent that the power purchaser is an entity
engaged in selling electricity to retail or wholesale customers. The
effective date of this implementation guidance for the Company will be July 1,
2001.
The Company has entered into certain commitments to purchase electricity at
fixed prices over a three-year period. As a result of Implementation Issue C15,
these commitments are deemed to be derivatives and will be stated at fair value
on the Statement of Financial Position. The Company projects that the initial
valuation of these commitments will result in a derivative liability of
approximately $65 million. The Company also projects the derivative will qualify
for cash flow hedge treatment, with the initial valuation resulting in an
unrecognized loss in the accumulated other comprehensive income. Approximately
$51 million of expense attributable to this derivative is projected to be
recognized in earnings for the twelve-month period beginning July 1, 2001.
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<page> 31
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):
June 30 March 31 December 31
----------------------------------------------------------------
2001 2001 2000
----------------------------------------------------------------
Commercial Airplanes $ 86.9 $ 88.6 $ 89.8
Military Aircraft and Missiles 19.9 20.4 17.1
Space and Communications 14.2 15.1 13.7
----------------------------------------------------------------
Total contractual backlog $121.0 $124.1 $120.6
================================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$27.5 billion at June 30, 2001, compared with $31.3 billion at December 31,
2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company uses equity conversion options and warrants in certain transactions
to enhance the credit worthiness of these transactions. As of June 30, 2001,
equity conversion options and warrants are reflected at a fair value of $38
million in other assets. These were initially recorded on the balance sheet with
a corresponding discount in notes receivable of $20 million. The change in fair
value for the six-month period ended June 30, 2001, of $18 million was recorded
in sales and other operating revenue.
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.
31
<page> 32
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 June 30, 2001, the notional value of such
derivatives was $556 million, with a net unrealized loss of $25 million.
Additionally, the Company had foreign currency forward contracts with a notional
value of $206 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.
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<page> 33
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 June 30, 2001, inventories included approximately $582
million of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350 million. The amount of the provision, which
was established in 1990, was based on 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.
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<page> 34
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 June 30, 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 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. On July 13, 2001, the Court
certified certain questions of state law for consideration by the Washington
Supreme Court. 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.
That dismissal was affirmed by the U.S. Court of Appeals for the D.C. Circuit on
May 8, 2001. The indictment relates to the sale and export to China in 1993-1995
of surplus, used machine tools sold by Douglas Aircraft Company to China
National Aero-Technology Import and Export Corporation for use in connection
with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC. The
agency exercised that discretion on January 5, 2000, by establishing a "denial
policy" with respect to defense-related exports of MDC and its subsidiaries.
Most of MDC's major existing defense programs were, however, excepted from that
policy due to overriding U.S. foreign policy and national security interests.
Other exceptions have been granted. There can, however, be no assurance as to
34
<page> 35
how the Department will exercise its discretion as to program or transaction
exceptions for other programs or future defense-related exports. In addition,
the Department of Commerce has authority to temporarily deny other export
privileges to, and the Department of Defense has authority to suspend or debar
from contracting with the military departments, MDC or a division or subsidiary
of MDC. Neither agency has taken action adverse to MDC or its divisions or
subsidiaries thus far. Based upon all available information, the Company does
not expect actions that would have a material adverse effect on its financial
position or continuing operations. In the unanticipated event of a conviction,
MDC would be subject to Department of State and Department of Commerce denials
or revocations of MDC export licenses. MDC also would be subject to Department
of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender
discrimination and harassment was filed against The Boeing Company, Boeing North
American, Inc., and McDonnell Douglas Corporation. The complaint, filed with the
United States District Court in Seattle, alleges that the Company has engaged in
a pattern and practice of unlawful discrimination, harassment and retaliation
against females over the course of many years. The complaint, Beck v. Boeing,
names 28 women who have worked for Boeing in the Puget Sound area; Wichita,
Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, 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 was filed in May 2001. The court will
hear argument on the motion in August. The Company intends to vigorously contest
this lawsuit.
35
<page> 36
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 June 25, 2001.
Filed herewith.
(10) Material Contracts
Management Contracts and Compensatory Plans
(i) The Boeing Company Executive Layoff Benefits Plan
as Amended and Restated effective April 1, 2001.
Filed herewith.
(15) Letter from independent accountants regarding unaudited
interim financial information. Filed herewith.
(27) Financial Data Schedule for the six-month period ending
June 30, 2000. Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter covered by
this report.
36
<page> 37
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The condensed consolidated statement of financial position as of June 30, 2001,
the condensed consolidated statements of operations for the three- and six-month
periods ended June 30, 2001 and 2000, and the condensed consolidated statements
of cash flows for the six-month period ended June 30, 2001 and 2000, have been
reviewed by the registrant's independent accountants, Deloitte & Touche LLP,
whose report covering their review of the financial statements follows.
37
<page> 38
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 June 30,
2001, and the related condensed consolidated statements of operations for the
three- and six-month periods ended June 30, 2001 and 2000, and the related
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 2001 and 2000. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial position of the Company as of December 31, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 26,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial position as of December 31, 2000
is fairly stated, in all material respects, in relation to the consolidated
statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
July 25, 2001
38
<page> 39
- - - - - - -
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)
August 8, 2001 /s/ James A. Bell
---------------- ------------------------------
(Date) James A. Bell
Vice President of Finance
& Corporate Controller
39