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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1999
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 October 31, 1999, there were 934,539,810 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
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data)
(Unaudited)
Nine months ended Three months ended
September 30 September 30
- -------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Sales and other operating revenues $42,793 $39,055 $13,279 $12,721
Cost of products and services 37,980 35,004 11,802 11,248
- -------------------------------------------------------------------------------
Gross profit 4,813 4,051 1,477 1,473
Equity in income (loss) from joint ventures 3 (70) (9) (27)
General and administrative expense 1,509 1,488 493 528
Research and development expense 1,026 1,431 315 455
Gain on dispositions, net 70 9 63 10
Share-based plans expense 151 106 55 43
- -------------------------------------------------------------------------------
Operating earnings 2,200 965 668 430
Other income, principally interest 501 219 126 88
Interest and debt expense (330) (341) (111) (114)
- -------------------------------------------------------------------------------
Earnings before income taxes 2,371 843 683 404
Income taxes 724 188 206 57
- -------------------------------------------------------------------------------
Net earnings $ 1,647 $ 655 $ 477 $ 347
===============================================================================
Basic earnings per share $1.78 $.67 $.52 $.36
===============================================================================
Diluted earnings per share $1.76 $.67 $.52 $.36
===============================================================================
Cash dividends per share $ .42 $.42 $.14 $.14
===============================================================================
See notes to consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
September 30 December 31
1999 1998
- -------------------------------------------------------------------------------
Assets (Unaudited)
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 2,673 $ 2,183
Short-term investments 100 279
Accounts receivable 3,200 3,288
Current portion of customer and commercial financing 595 781
Deferred income taxes 1,423 1,495
Inventories, net of advances and progress billings 8,729 8,349
- -------------------------------------------------------------------------------
Total current assets 16,720 16,375
Customer and commercial financing 4,970 4,930
Property, plant and equipment, net 8,435 8,589
Deferred income taxes 415 411
Goodwill 2,250 2,312
Prepaid pension expense 3,559 3,513
Other assets 845 542
- -------------------------------------------------------------------------------
$37,194 $36,672
===============================================================================
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------
Accounts payable and other liabilities $11,552 $10,733
Advances in excess of related costs 1,062 1,251
Income taxes payable 813 569
Short-term debt and current portion of long-term debt 744 869
- -------------------------------------------------------------------------------
Total current liabilities 14,171 13,422
Accrued retiree health care 4,894 4,831
Long-term debt 5,909 6,103
Shareholders' equity:
Common shares, par value $5.00 -
1,200,000,000 shares authorized;
Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059
Additional paid-in capital 1,686 1,147
Treasury shares, at cost - 72,493,182 and 35,845,731 (2,922) (1,321)
Retained earnings 10,083 8,706
Accumulated other comprehensive income (23) (23)
Unearned compensation (13) (17)
ShareValue Trust shares - 38,561,375 and 38,166,601 (1,650) (1,235)
- -------------------------------------------------------------------------------
Total shareholders' equity 12,220 12,316
- -------------------------------------------------------------------------------
$37,194 $36,672
===============================================================================
See notes to consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine months ended
September 30
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $ 1,647 $ 655
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Share-based plans 151 106
Depreciation and amortization 1,203 1,225
Gain on dispositions, net (70) (9)
Changes in assets and liabilities -
Short-term investments 179 450
Accounts receivable 25 (134)
Inventories, net of advances and progress billings (386) (1,564)
Accounts payable and other liabilities 969 (492)
Advances in excess of related costs (189) (91)
Income taxes payable and deferred 312 250
Other (378) (227)
Accrued retiree health care 63 (7)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 3,526 162
- -------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing and properties on lease, additions (1,559) (978)
Customer financing and properties on lease, reductions 1,590 983
Property, plant and equipment, net additions (1,042) (1,228)
Proceeds from dispositions 324 24
- -------------------------------------------------------------------------------
Net cash used by investing activities (687) (1,199)
- -------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 267 548
Debt repayments (586) (607)
Common shares purchased (1,681) (479)
Stock options exercised, other 58 15
Dividends paid (407) (425)
- -------------------------------------------------------------------------------
Net cash used by financing activities (2,349) (948)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 490 (1,985)
Cash and cash equivalents at beginning of year 2,183 4,420
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of 3rd quarter $ 2,673 $ 2,435
===============================================================================
See notes to consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 1 - Consolidated Interim Financial Statements
The 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 September 30, 1999, 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 1998 Annual
Report. Certain reclassifications have been made to prior periods to conform
with current reporting.
Note 2 - Summary of Significant Accounting Policies
Gain on dispositions, net
Gains and losses resulting from the sale of businesses, along with gains and
losses resulting from the disposition of real property, are reported on a net
basis in the caption "Gain on dispositions, net" on the Consolidated Statements
of Operations. In the third quarter of 1999, the Company recorded a gain of
$95 due to the sale of Boeing Information Systems, Inc.
Note 3 - Inventory Valuation Adjustment Associated with the F-15 Program
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 for international
customers. In the third quarter of 1999, the Company assessed that there was a
limited near-term market for F-15s based on revised market analysis, recent
international customer decisions, and actions then pending in Congress. As a
result of this revised market assessment, the Company recorded in the third
quarter of 1999 a $225 pretax charge associated with inventory on the F-15
program.
In the second quarter of 1999, the Company recognized a pretax charge $45
attributable to the impairment of certain F-15 inventory costs incurred in
support of a potential sale to the government of Greece. This charge was
recognized when the government of Greece announced its intention to purchase
Lockheed Martin F-16 aircraft and Dassault Mirage 2000-5 aircraft.
Note 4 - Recognition of Forward Loss for the Next-Generation 737 Program
During the first quarter of 1998, the Company recognized a forward loss pretax
charge of $350 attributable to the Next-Generation 737 program. This charge
represented an increase to the forward loss charge of $700 recognized by the
Company in the third quarter of 1997. The cumulative forward loss of $1,050 at
the end of the first quarter of 1998 represented the amount by which the
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estimated production costs exceed the estimated revenue for the first 400 units
of the program. The current accounting quantity for the Next-Generation 737
program is 1,200 units. As of September 30, 1999, cumulative Next-Generation
737 airplane deliveries totaled 375.
Note 5 - Earnings per Share
The weighted average number of shares outstanding (in millions) used to compute
earnings per share for the periods ended September 30, 1999 and 1998, are as
follows:
First Nine Months Third Quarter
----------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Basic shares 927.5 972.0 914.5 969.3
Diluted shares 936.3 982.4 924.3 977.3
Basic earnings per share are calculated based on the weighted average number of
shares outstanding, excluding treasury shares and the outstanding shares held by
the ShareValue Trust. Diluted earnings per share are calculated based on that
same number of shares plus additional dilutive shares representing stock
distributable under stock option plans computed using the treasury stock method,
plus contingently issuable shares from other share-based plans.
Note 6 - Income Taxes
The effective income tax provision rate of 30.5% for the first nine months of
1999 is lower than the statutory federal rate, principally due to Foreign Sales
Corporation tax benefits and current-year research and development tax credits.
Partially offsetting this reduction from the statutory federal rate are state
income taxes and non-deductibility of goodwill. Net income tax payments were
$387 and $3 for the nine months ended September 30, 1999 and 1998.
In the second quarter of 1999, the Internal Revenue Service (IRS) and the
Company reached a partial agreement on an IRS examination of the years 1988
through 1991. As a result of the partial agreement between the Company and the
IRS for these years, refunds and payments of tax and interest were due to or
payable by the Company. Second quarter 1999 net earnings included net interest
income of $289 pretax associated with this partial agreement.
Note 7 - Accounts Receivable
Accounts receivable consisted of the following:
September 30 December 31
1999 1998
- -------------------------------------------------------------------------------
U.S. Government contracts $1,760 $2,058
Other 1,440 1,230
- -------------------------------------------------------------------------------
$3,200 $3,288
===============================================================================
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Note 8 - Inventories
Inventories consisted of the following:
September 30 December 31
1999 1998
- -------------------------------------------------------------------------------
Commercial aircraft programs
and long-term contracts in progress $ 22,569 $ 24,812
Commercial spare parts, general stock
materials and other 2,191 2,162
- -------------------------------------------------------------------------------
24,760 26,974
Less advances and progress billings (16,031) (18,625)
- -------------------------------------------------------------------------------
$ 8,729 $ 8,349
===============================================================================
Inventory costs at September 30, 1999, included unamortized tooling of $1,605
and $651 relating to the 777 and Next-Generation 737 programs, and excess
deferred production costs of $1,531 and $687 relating to the 777 and Next-
Generation 737 programs. There are no significant unamortized tooling or
deferred production costs associated with the 717 program.
In the third quarter of 1999, the Company delivered the initial two units of the
717 program. 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 1998 Annual Report. The initial accounting quantity has been
established at 200 units.
Note 9 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
September 30 December 31
1999 1998
- -------------------------------------------------------------------------------
Aircraft financing
Notes receivable $ 737 $ 859
Investment in sales-type/financing leases 1,406 1,325
Operating lease equipment, at cost,
less accumulated depreciation of $272 and $195 2,193 2,201
Commercial equipment financing
Notes receivable 643 534
Investment in sales-type/financing leases 468 548
Operating lease equipment, at cost,
less accumulated depreciation of $90 and $129 397 510
- -------------------------------------------------------------------------------
Less valuation allowance (279) (266)
- -------------------------------------------------------------------------------
$5,565 $5,711
===============================================================================
Financing for aircraft is collateralized by security in the related asset, and
historically the Company has not experienced a problem in accessing such
collateral when necessary. Commercial equipment financing also includes amounts
attributable to regional aircraft, principally with fewer than 80 seats.
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The change in the valuation allowance for the first nine months of 1999
consisted of the following:
Valuation
Allowance
- -------------------------------------------------------------------------------
Beginning balance - December 31, 1998 $(266)
Charged to costs and expenses (54)
Transfer from accrued liabilities (45)
Reduction in customer and commercial financing assets 86
- -------------------------------------------------------------------------------
Ending balance - September 30, 1999 $(279)
===============================================================================
Accrued liabilities of $45 associated with off-balance-sheet credit guarantees
were transferred to the valuation allowance principally because the
Company elected to purchase certain notes receivable under which the Company
previously had extended credit guarantees and had established a liability
reserve for those guarantees.
Note 10 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
September 30 December 31
1999 1998
- -------------------------------------------------------------------------------
Accounts payable $ 5,465 $ 5,263
Accrued compensation and employee benefit costs 2,608 2,326
Lease and other deposits 364 539
Other 3,115 2,605
- -------------------------------------------------------------------------------
$11,552 $10,733
===============================================================================
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Note 11 - Debt
Short- and long-term debt consisted of the following:
September 30 December 31
1999 1998
- -------------------------------------------------------------------------------
Unsecured debentures and notes:
8 7/8% due Sep. 15, 1999 $ - $ 304
8.25% due Jul. 1, 2000 200 200
8 3/8% due Feb. 15, 2001 178 180
7.565% due Mar. 30, 2002 53 54
9.25% due Apr. 1, 2002 120 120
6 3/4% due Sep. 15, 2002 298 298
6.35% due Jun. 15, 2003 300 299
7 7/8% due Feb. 15, 2005 207 208
6 5/8% due Jun. 1, 2005 293 292
6.875% due Nov. 1, 2006 248 248
8 1/10% due Nov. 15, 2006 175 175
9.75% due Apr. 1, 2012 348 348
8 3/4% due Aug. 15, 2021 398 398
7.95% due Aug. 15, 2024 300 300
7 1/4% due Jun. 15, 2025 247 247
8 3/4% due Sep. 15, 2031 248 248
8 5/8% due Nov. 15, 2031 173 173
6 5/8% due Feb. 15, 2038 300 300
7.50% due Aug. 15, 2042 100 100
7 7/8% due Apr. 15, 2043 173 173
6 7/8% due Oct. 15, 2043 125 125
Senior debt securities,
5.0% - 9.4%, due through 2011 45 55
Senior medium-term notes,
5.5% - 13.6%, due through 2017 1,390 1,320
Subordinated medium-term notes,
6.1% - 9.4%, due through 2004 45 55
Capital lease obligations due through 2008 397 433
Other notes 292 319
- -------------------------------------------------------------------------------
$6,653 $6,972
===============================================================================
The Company has $2,400 currently available, but unused, under credit line
agreements with a group of commercial banks. The Company has complied with the
restrictive covenants contained in various debt agreements. In addition, Boeing
Capital Corporation (BCC), a corporation wholly owned by the Company, has $240
available, but unused, under a credit line agreement with a group of commercial
banks. Total debt interest, including amounts capitalized, was $390 and $390
for the nine-month periods ended September 30, 1999 and 1998, and interest
payments were $419 and $367, respectively.
During the fourth quarter of 1997, BCC filed a shelf registration statement with
the Securities and Exchange Commission (SEC) for up to $1,200 aggregate
principal amount of debt securities. As of September 30, 1999, BCC issued $838
of the $1,200 medium-term notes authorized. On July 7, 1999, BCC filed with the
SEC a Form S-3 Registration Statement for a public shelf registration of $2,500
in debt securities.
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Note 12 - Shareholders' Equity
Changes in shareholders' equity for the nine-month periods ended September 30,
1999 and 1998, consisted of the following:
- -------------------------------------------------------------------------------
1999 1998
(Shares in thousands) Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Common stock
Beginning balance - January 1 1,011,870 $ 5,059 1,000,030 $ 5,000
Shares issued for the ShareValue Trust 11,253 56
Shares issued for incentive stock plans 587 3
- -------------------------------------------------------------------------------
Ending balance - September 30 1,011,870 $ 5,059 1,011,870 $ 5,059
===============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 1,147 $ 1,090
Share-based compensation, net of tax impact 152 69
Treasury shares issued for
incentive stock plans, net (35) (37)
Tax benefit related to incentive stock plans 8 13
Stock appreciation rights expired
or surrendered 6
Shares issued for the ShareValue Trust 494
ShareValue Trust market value adjustment 414 (464)
- -------------------------------------------------------------------------------
Ending balance - September 30 $ 1,686 $ 1,171
===============================================================================
Treasury stock
Beginning balance - January 1 35,846 $(1,321) 165 $ (9)
Treasury shares issued for incentive
stock plans, net (2,156) 80 (1,407) 71
Treasury shares acquired 38,803 (1,681) 12,911 (479)
- -------------------------------------------------------------------------------
Ending balance - September 30 72,493 $(2,922) 11,669 $ (417)
===============================================================================
Retained earnings
Beginning balance - January 1 $ 8,706 $ 8,147
Net earnings 1,647 655
Cash dividends declared (270) (284)
- -------------------------------------------------------------------------------
Ending balance - September 30 $10,083 $ 8,518
===============================================================================
Accumulated other comprehensive income
Beginning balance - January 1 $ (23)
- -------------------------------------------------------------------------------
Ending balance - September 30 $ (23)
===============================================================================
Unearned compensation
Beginning balance - January 1 $ (17) $ (20)
Forfeitures 2 6
Amortization 2 (4)
- -------------------------------------------------------------------------------
Ending balance - September 30 $ (13) $ (18)
===============================================================================
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Note 12 - Shareholders' Equity (continued)
Changes in shareholders' equity for the nine-month periods ended September 30,
1999 and 1998, consisted of the following:
- -------------------------------------------------------------------------------
1999 1998
(Shares in thousands) Shares Amount Shares Amount
- -------------------------------------------------------------------------------
ShareValue Trust
Beginning balance - January 1 38,167 $(1,235) 26,385 $(1,255)
Shares acquired from dividend
reinvestment 394 368
Shares issued from common stock 11,253 (550)
Market value adjustment (415) 464
- -------------------------------------------------------------------------------
Ending balance - September 30 38,561 $(1,650) 38,006 $(1,341)
===============================================================================
For the nine months ended September 30, 1999 and 1998, the Company did not incur
items to be reported in comprehensive income that were not already included in
the reported net earnings. As a result, comprehensive income and net earnings
were the same for these periods.
Note 13 - Share-Based Compensation
Beginning in the first quarter of 1998, the Company adopted the expense
recognition provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, which applies to Performance Share
awards, the ShareValue Trust plan, and stock options.
Share-based plans expense for the nine months ended September 30 included $56,
$54 and $41 in 1999 and $31, $54 and $21 in 1998 attributable to Performance
Shares, ShareValue Trust, and stock option and other, respectively.
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.
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. At September 30, 1999, inventories included approximately $581 of
recorded costs on the A-12 contract, against which the Company has established a
loss provision of $350. The amount of the provision, which was established in
1990, was based on the Company's belief, supported by an opinion of outside
counsel, that the termination for default would be converted to a termination
for convenience, that the Team would establish a claim for contract adjustments
for a minimum of $250, that there was a range of reasonably possible results on
termination for convenience, and that it was prudent to provide for what the
Company then believed was the upper range of possible loss on termination for
convenience, which was $350.
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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 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 September 30, 1999, 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. Initially, the
plaintiffs sought to represent a class of purchasers of Boeing stock between
July 21, 1997, and October 22, 1997, (the "Class Period"), including recipients
of Boeing stock in the McDonnell Douglas merger. July 21, 1997, was the date on
which the Company announced its second quarter results, and October 22, 1997,
was the date on which the Company announced charges to earnings associated with
production problems being experienced on commercial aircraft programs. 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 two of the individual
defendants, to benefit directly from the sale of Boeing stock during the Class
Period. In response to a summary judgment motion filed by the Company,
plaintiffs on September 15, 1999, were granted leave to amend their complaint to
broaden their allegations to include certain purported statements going back to
April 7, 1997, and to add, as potential additional plaintiffs with state law
causes of action, purchasers of Boeing stock during the period April 7, 1997,
through July 20, 1997. The plaintiffs seek compensatory damages and treble
damages. 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 March 27, 1997, Gerald Verdine filed an action in California State Court
alleging claims based on race and age discrimination, retaliation, and breach of
contract against the Douglas Aircraft Company. On July 7, 1998, a jury returned
a verdict against the Company on the retaliation and breach of contract claims
but reached no decision on the other claims. The jury awarded Verdine $2 in
economic and non-economic damages and $26 in punitive damages. The trial court
reduced the jury award to $10.4, but the Company has appealed and seeks to have
the judgment overturned in its entirety.
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On June 6, 1998, sixteen (16) African American employees of The Boeing Company,
previously employed at several distinct units of The Boeing Company, McDonnell
Douglas Corporation and Rockwell International Corporation, filed a complaint in
U.S. District Court for the Western District of Washington alleging
discrimination on the basis of race in connection with promotions and training.
The plaintiffs also allege retaliation and harassment and seek, among other
things, an order certifying a class of all African American employees who are
currently working or worked for the three companies over the past few years.
Also, on July 31, 1998, seven African American employees of the helicopter
division of the Military Aircraft and Missiles Group in Philadelphia filed an
overlapping class action in the U.S. District Court for the Eastern District of
Pennsylvania alleging discrimination on the basis of race in compensation,
promotions and terminations. The complaint also alleged retaliation at that
division. By order dated September 30, 1999, the U.S. District Court for the
Western District of Washington approved terms of a proposed settlement under
which the Company would resolve the claims of class members under both
lawsuits (except opt-out plaintiffs) by paying a total of $15 to resolve all
monetary claims, the request for injunctive relief, and claims for attorneys'
fees. The matter is now on appeal. The Company believes that the outcome of
the 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, committed
wire fraud, and possessed and sold machine tools in violation of the Export
Administration Act. The indictment also charges one employee with participation
in the alleged conspiracy. 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.
There can be no assurance as to how the Department will exercise its discretion.
Also, the Department of Commerce has authority to temporarily deny export
privileges to, and the Department of Defense has authority to suspend government
contracting with, MDC or a division or subsidiary of MDC. 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 denials of defense-related export licenses and Department of Commerce
denials or revocations of MDC export licenses. MDC also would be subject to
Department of Defense debarment proceedings.
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Note 15 - Business Segment Data
Segment information for revenues, earnings, and research and development
consisted of the following:
- -------------------------------------------------------------------------------
Nine months ended Three months ended
September 30 September 30
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Revenues:
Commercial Airplanes $28,419 $24,600 $ 8,529 $ 7,809
Military Aircraft and Missiles 8,937 9,115 2,760 3,214
Space and Communications 4,935 5,203 1,663 1,621
Customer and Commercial Financing / Other 603 569 219 164
Accounting differences / eliminations (101) (432) 108 (87)
- -------------------------------------------------------------------------------
Operating revenues $42,793 $39,055 $13,279 $12,721
===============================================================================
Earnings (loss):
Commercial Airplanes $ 1,318 $ (320) $ 501 $ (142)
Military Aircraft and Missiles 792 922 102 370
Space and Communications 292 157 137 (8)
Customer and Commercial Financing / Other 330 333 111 98
Accounting differences / eliminations (164) 181 (44) 231
Share-based plans (151) (106) (55) (43)
Other unallocated expense (217) (202) (84) (76)
- -------------------------------------------------------------------------------
Operating earnings 2,200 965 668 430
Other income, principally interest 501 219 126 88
Interest and debt expense (330) (341) (111) (114)
- -------------------------------------------------------------------------------
Earnings before income taxes 2,371 843 683 404
Income taxes 724 188 206 57
- -------------------------------------------------------------------------------
Net earnings $ 1,647 $ 655 $ 477 $ 347
===============================================================================
Research and development:
Commercial Airplanes $ 496 $ 799 $ 130 $ 235
Military Aircraft and Missiles 175 213 56 76
Space and Communications 355 419 129 144
- -------------------------------------------------------------------------------
Total research and development expense $ 1,026 $ 1,431 $ 315 $ 455
===============================================================================
For internal reporting purposes, the Company records Commercial Airplanes
segment revenue 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 / Other
segment. The revenue for these transfers is eliminated in the 'Accounting
differences / eliminations' caption.
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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 1998 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 revenue, a loss is not recognized until
delivery is made, which is not in accordance with generally accepted accounting
principles. The adjustment between the internal measurement method and the
program accounting method of recording cost of sales is included in the
'Accounting differences / eliminations' caption of net earnings. This
adjustment totaled $(62) and $165 for the nine months ended September 30, 1999
and 1998.
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 difference 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.
15
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenue
- -------
Sales of $42.8 billion for the first nine months of 1999 were 10% higher than
sales for the comparable period of 1998. A total of 455 commercial jet aircraft
were delivered, compared with 368 in the first nine months of 1998.
Approximately 620 commercial aircraft deliveries are currently projected for the
full year 1999, compared with 559 in 1998. Total sales for 1999 are projected
to be in the $58 billion range, compared with $56 billion in 1998.
Commercial jet aircraft deliveries were as follows:
Nine Months 3rd Quarter
-------------------------------------------------------------
Model 1999 1998 1999 1998
-------------------------------------------------------------
717 2 (2) - 2 (2) -
737 Classic 34 92 9 25
737 Next-Generation 207 91 68 41
747 38 32 12 11
757 51 35 15 12
767 33 (1) 35 8 (1) 11
777 61 52 16 15
MD-80 17 (14) 5 (2) 9 (6) 2 (2)
MD-90 6 18 - 4
MD-11 6 8 (2) 3 2
-------------------------------------------------------------
Total 455 368 142 123
=============================================================
===============================================================================
| 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 deliveries, |
| launches, new business and business opportunities, current and future |
| markets for the Company's products, sales, revenues, operating margins, |
| earnings, cash, disposition of certain Company businesses, research and |
| development expenditures, outcomes of pending litigation and WTO |
| proceedings, taxes, and other trend projections. This forward-looking |
| information is based upon a number of assumptions including assumptions |
| regarding demand; internal performance; customer financing; supplier and |
| subcontractor performance; customer model selections; government policies |
| and actions; price escalation; successful negotiation of contracts with |
| the Company's labor unions and favorable outcomes of certain pending sales |
| campaigns, supplier contract negotiations and asset dispositions. Actual |
| future results and trends may differ materially depending on a variety of |
| factors, including the Company's successful execution of internal |
| performance plans including research and development, production recovery, |
| production rate increases and decreases, production system initiatives, |
| asset management plans, procurement plans, other cost-reduction efforts, |
| and Y2K readiness plans; the cyclical nature of the Company's business, |
| volatility of the market for certain products, continued integration of |
| McDonnell Douglas Corporation; product performance risks associated with |
16
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| 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; customer model selections; governmental export|
| and import policies; factors that result in significant and prolonged |
| disruption to air travel worldwide; global trade policies; worldwide |
| political stability and economic conditions, particularly in Asia; real |
| estate market fluctuations in areas where Company facilities are located; |
| price escalation trends; 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; and legal proceedings. Additional information regarding these |
| factors is contained in the Company's Annual Report on Form 10-K for the |
| year ended 1998. |
===============================================================================
Commercial jet aircraft deliveries included deliveries under operating lease,
which are identified by parentheses in the previous table. Aircraft accounted
for as operating leases have minimal revenue recorded at the time of delivery.
Military Aircraft and Missiles segment deliveries included the following:
Nine Months 3rd Quarter
--------------------------------------------------------------
Model 1999 1998 1999 1998
--------------------------------------------------------------
C-17 8 6 3 2
F-15 27 25 6 12
F/A-18 C/D 20 24 6 8
F/A-18 E/F 10 - 4 -
T-45TS 9 11 3 4
CH-47 10 14 3 8
757-C-32A - 2 - -
AH-64 43 28 14 13
The F/A-18 E/F aircraft are under a cost-type contract; sales are recognized as
work progresses rather than upon delivery. AH-64 deliveries include
remanufactured units of 34 and 25 for the nine months of 1999 and 1998, and 11
and 11 for the third quarter of 1999 and 1998.
Space and Communications segment deliveries included the following:
Nine Months 3rd Quarter
--------------------------------------------------------------
Model 1999 1998 1999 1998
--------------------------------------------------------------
767 AWACS 2 2 - -
Delta II 8 8 3 1
Delta III 1 1 - 1
Earnings
- --------
Net earnings for the third quarter of 1999 were $477 million, compared with $347
million for the same period last year. Third quarter net earnings included, on
a pretax basis, a gain of $95 million associated with the sale of Boeing
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Information Services, a non-core business, and a gain of $66 million
included in other income associated with receipt and subsequent sale of shares
resulting from an initial public offering of an insurer. In addition, the
quarter included a charge of $225 million associated with long-lead inventory
on the F-15 fighter program.
Research and development expense totaled $315 million for the quarter, compared
with $455 million for the same period of 1998. Commercial Airplanes segment
research and development expense of $130 million for third quarter 1999 was
lower than the $235 million expense for third quarter 1998, principally due to
reduced spending attributable to the 767-400ER, 757-300 and 737 Next-Generation
models. Based on current programs and schedules, research and development
expense for the full year 1999 is projected to be in the $1.4 billion to $1.6
billion range, compared with $1.9 billion in 1998.
Income taxes have been settled with the Internal Revenue Service (IRS) for all
years through 1978, and all IRS examinations have been completed through 1991.
Issues not resolved at the IRS examination stage are either in appeals with
the IRS or are being litigated. The Company has filed refund claims for
additional research and development tax credits, primarily in relation to its
fixed-price government development programs. Successful resolutions will
result in increased income to the Company.
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. If the Company were to prevail, the refund would include interest
computed to the payment date. The issue could affect tax computations for
subsequent years; however, the financial impact would depend on the final
resolution of audits for those years.
The European Union has filed a challenge to U.S. FSC tax provisions with the
World Trade Organization (WTO). This challenge has been upheld at the first
level of WTO review, but that determination is being appealed by the United
States. It is not possible to say what, if any, impact this challenge would
have on future earnings pending final conclusion of the WTO process and
determination of the manner and scope of the U.S. Government response.
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
Third-quarter 1999 commercial jet aircraft deliveries totaled 142, compared with
123 in the same period in 1998. Commercial Airplanes segment third quarter 1999
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operating earnings, based on the unit cost of airplanes delivered, were $501
million, compared with a loss of $142 million for the same period in 1998. The
overall Commercial Airplanes segment operating profit margin was approximately
5.9 percent for the third quarter of 1999, compared with negative 1.8 percent
for the same period in 1998. Significant cost improvement on Next-Generation
737s and 777s more than offset a less favorable model mix.
The Next-Generation 737 received United States Federal Aviation Administration
(FAA) approval for 180-minute extended-range twin-engine operations. This
extension from 120 minutes gives airlines the ability to offer economical point-
to-point service, with the long-range twinjets providing more direct routes and
shorter travel times for passengers.
On August 26, the Company rolled out the 767-400ER, and first flight occurred on
October 9. This extended-range derivative provides higher capacity and range
capability. It also incorporates an all-new interior fashioned after the 777
and an upgraded flight deck.
During the quarter, the 717 received joint certification from the FAA and
Europe's Joint Aviation Authorities. The first 717 was delivered to launch
customer AirTran on September 23 and was put into revenue service in October.
Hawaiian Airlines announced its intent to purchase 13 717s with options for
seven more, with first delivery in 2001. The 717 is designed to serve high
frequency, short- to medium-range routes.
In the third quarter of 1999, the Company delivered the initial two units of the
717 program. 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 1998 Annual Report. The Company has established the program
accounting quantity at 200 units, and believes this represents a conservative
initial accounting quantity. As of September 30, 1999, the Company had firm
contracts for 105 units and an additional 50 units under option.
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.
During the quarter, China Airlines ordered 13 747-400 freighters. This order,
along with recent economic trends in Asia, indicates that the economic situation
in the region is improving. The Company also confirmed during the quarter that
the production rate for the 747 program will stay at two per month throughout
2000.
Military Aircraft and Missiles
Military Aircraft and Missiles segment third quarter 1999 operating earnings
were $102 million, compared with $370 million operating earnings for the same
period in 1998. The segment's operating margin was 3.7 percent for the
quarter, down from 11.5 percent in the comparable period for 1998. Increased
deliveries of the C-17 were offset by fewer F-15 deliveries and a
non-recurring pretax charge of $225 million related to valuation adjustments
of long-lead inventory for the F-15 fighter program. Without this charge, the
third quarter 1999 operating margin was 11.8 percent.
19
20
The Company had procured and commited to long-lead items in anticipation of
orders during 1999 for as many as 24 F-15 fighter aircraft for international
customers. In the third quarter of 1999, the Company assessed that there was
a limited near-term market for F-15s, based on revised market analysis, recent
international customer decisions, and actions then pending in Congress. As a
result of this revised market assessment, the Company recorded the $225 pretax
charge discussed above.
The Company's tactical aircraft, transport, rotorcraft, and missile programs
have received strong support in the Department of Defense fiscal year 2000
budget process. Also, the defense appropriations conference committee
recently approved additional U.S. Air Force F-15 procurement. The Company
believes these additional orders will preclude the requirement for any
additional charges associated with F-15 program inventory.
In the third quarter, the Company announced an expansion to its aerospace
support business by establishing a new modification and upgrade center for
tactical aircraft in Jacksonville, Florida. Also in the aerospace support
business, the facility for large aircraft in San Antonio, Texas, has reached
near capacity in the past 12 months, its first year of operation. In a major
milestone toward flight testing next year, the Company connected electrical
power to its first Joint Strike Fighter demonstrator aircraft and successfully
mated the wing to the second airframe.
Space and Communications
Space and Communications segment third-quarter 1999 operating earnings were $137
million, compared with a loss of $8 million for the same period in 1998. The
segment's operating margin for the third quarter was 8.2 percent, compared with
negative .5 percent for the same period in 1998, which included higher research
and development expense primarily related to the Delta IV launch vehicle, and
joint venture development costs for the Sea Launch program. This year's third
quarter included a pretax gain of approximately $95 million from the sale of
Boeing Information Services.
During the third quarter the Company won a large, multi-year future-imagery
architecture contract with the National Reconnaissance Office. The Company
believes this contract is key to establishing a leadership position in the area
of space imaging.
In addition to the National Reconnaissance Office contract, a Boeing-led team
won the competition to provide Australia with the next-generation airborne
early warning and control (AEW&C) system. The program includes seven 737
AEW&C systems plus ground support, training and mission support worth more
than $1 billion.
During the third quarter, three Delta II launches set a record by deploying 17
satellites in 68 days. On October 9, Sea Launch successfully conducted the
launch of the first commercial satellite from a floating platform at sea. This
was the second launch and followed a successful demonstration launch in March
1999. The Company is a 40 percent partner in the enterprise.
The primary factor that is evaluated in building projections for the need for
commercial launch services is the commercial satellite market. Recent
commercial satellite program start-up delays and system changes have caused a
softening of the market. Depending on the outcome of these programs, and a
successful demonstration of the Delta III system, forward-looking financial
20
21
projections for the Company's launch business, principally for the Delta III
vehicle, may be adversely impacted. The Company continues to closely monitor
these issues.
Customer and Commercial Financing / Other
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 recorded against the valuation
allowance. No interest expense on debt is included in Customer and Commercial
Financing / Other segment earnings.
Liquidity and Capital Resources
- -------------------------------
The Company's financial liquidity position remains strong, with cash and short-
term investments totaling $2.8 billion at September 30, 1999, after repurchasing
38.8 million shares for $1.7 billion during the first nine months of 1999. To
date the Company has repurchased 74.0 million shares for $3.0 billion under a
share repurchase plan approved by the Board of Directors. Total long-term debt
is at 35% of total shareholders' equity plus debt. Revolving credit line
agreements with a group of major banks, totaling $2.64 billion, remain available
but unused. Also, Boeing Capital Corporation, a subsidiary wholly owned by the
Company, has an unused balance of $362 million on its $1.2 billion shelf
registration, and an additional shelf registration of $2.5 billion.
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):
Sep. 30 June 30 Dec. 31
-----------------------------------------------------------
1999 1999 1998
-----------------------------------------------------------
Commercial Airplanes $ 75.7 $ 76.9 $ 86.1
Military Aircraft and Missiles 16.5 18.0 17.0
Space and Communications 8.7 9.5 9.8
-----------------------------------------------------------
Total contractual backlog $100.9 $104.4 $112.9
===========================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$20.1 billion at September 30, 1999, compared with $20.1 billion at June 30,
1999, and $23.5 billion at December 31, 1998.
21
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Year 2000 (Y2K) Date Conversion
- -------------------------------
The Y2K issue exists because many systems, including computer, product-embedded,
facilities, and factory-floor production equipment systems, utilize a two-digit
date field to designate a year. As the century date change occurs, date-
sensitive systems may recognize the year 2000 as the year 1900, or not at all.
This inability to recognize or properly treat the year 2000 may cause systems to
process financial or operations information incorrectly.
State of readiness: The Company recognized this challenge early, and each
operating group started working on the problem in 1993. The Company's Y2K
strategy, to make systems "Y2K-ready," includes a common companywide focus on
policies, methods and correction tools, and coordination with customers and
suppliers. This focus has been on all systems potentially impacted by the Y2K
issue, including information technology (IT) systems and non-IT systems, such as
product-embedded, facilities and factory floor systems. Each operating group
has responsibility for its own conversion, in line with overall guidance and
oversight provided by a corporate-level steering committee.
The Company has capitalized on its history of integrating large complex systems,
and has an experienced Y2K team and Program Management Office, headed by the
Company's chief information officer. Since 1993 the Company has identified,
assessed and remediated, if necessary, over 53,000 IT and non-IT systems for Y2K
readiness. The Company believes these systems will be substantially operational
during and after the Year 2000 rollover.
A companywide, coordinated process to assess supplier readiness began in the
second quarter of 1998. This process encompasses four major activities: survey
of suppliers, assessment of supplier preparedness, risk mitigation, and
contingency planning. The first two activities were completed in 1998 and the
remaining activities are scheduled for completion during the fourth quarter of
1999. The Company is currently conducting on-site visits to selected suppliers
as part of its contingency planning. The Company has been generally satisfied
with the results of these supplier visits.
Costs to address Y2K issues: The Company's Y2K conversion efforts have not been
budgeted and tracked as independent projects, but have occurred in conjunction
with normal sustaining activities. The Company estimates that IT Y2K conversion
efforts represent the majority of conversion efforts, and have averaged annually
approximately $35 million over the last three years, representing on average
approximately 10% of the total application-sustaining IT costs during that
period. Y2K conversion costs are expected to represent a lower percentage of
total application sustaining IT costs in 1999. In addition to these sustaining
costs, the discretely identifiable IT costs associated with Y2K conversion
activities are expected to total $16 million. The Company does not expect a
reduction in sustaining costs when Y2K conversion activities are completed
because normal sustaining activities will be ongoing. Reprioritizing sustaining
activities to support Y2K has not had, and is not expected to have, an adverse
impact on operations.
Risks associated with Y2K issues: Due to the Company's early recognition and
start on resolving the Y2K issue, the Company believes there is low risk of any
internal critical system, product-embedded system, or other critical Company
asset not being Y2K-ready by the end of 1999. The Company continues to assess
its risk exposure due to external factors and suppliers, including suppliers
outside the United States. Additionally, the Company is working with its
customers and suppliers, conducting test scenarios to assess Y2K readiness. The
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23
Company has no reason to conclude that any specific supplier represents a
significant risk. Although the most reasonably likely worst-case Y2K scenario
would entail production disruption due to inability of suppliers to deliver
critical parts, the Company has no reason to conclude that any specific supplier
represents a significant risk.
The Company's contingency planning has been divided into two phases: Phase I -
Develop a Year 2000 Corporate Business Continuity and Contingency Plan; and
Phase II - Implement Business Continuity and Contingency Plan through the Site
Transition Plan. Phase I is complete. The Company has developed a risk
assessment-based Year 2000 Business Continuity and Contingency Plan consistent
with the Company's computing disaster preparedness goal, which is to "reduce
vulnerability and enhance risk management." Where appropriate, this plan
leverages existing Company system and supplier contingency and disaster recovery
planning. This contingency planning incorporates information from leading
information technology organizations in the industry and government, including
the U.S. General Accounting Office (GAO) guideline, "Year 2000 Computing Crisis:
Business Continuity and Contingency Planning," dated August 1998. The plan
provides a structured approach to assist operating groups with business
continuity and contingency planning. Phase II - Implement Business Continuity
and Contingency Plan through the Site Transition Plan - is ongoing. A Site
Year 2000 Transition Plan template has been developed which outlines the
specific staffing and contingency plans for before, during and after the year
2000 rollover, and further describes the major elements required to complete
the plan. Each operating group is developing and implementing a Site Year
2000 Transition Plan. Each group's progress is reported to the Year 2000
Program Management Office on a monthly basis.
An enterprise-wide test was successfully conducted during the third quarter to
validate the Company's ability to communicate under multiple emergency
scenarios. Additional testing will be conducted during the fourth quarter.
While the Company does not anticipate significant challenges during the Y2K
rollover period, its communication centers will be fully staffed during the
transition. The Company continues to work closely with local, state and federal
emergency management organizations to ensure coordinated plans are in place
should infrastructure problems occur in the year 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments, fixed-rate notes receivable attributable to
customer financing, and debt obligations issued at a fixed rate. Historically,
the Company has not experienced material gains or losses due to interest rate
changes when selling short-term investments or fixed-rate notes receivable.
Additionally, the Company uses interest rate swaps to manage exposure to
interest rate changes. Based on the current holdings of short-term investments
and fixed-rate notes, as well as underlying swaps, the exposure to interest rate
risk is not material. Fixed-rate debt obligations issued by the Company are
generally not callable until maturity.
The Company is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers in foreign currencies. As a
general policy, the Company substantially hedges foreign currency commitments of
future payments and receipts by purchasing foreign currency-forward contracts.
As of September 30, 1999, the notional value of such derivatives was $487
million, with a net unrealized gain of $3 million. 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.
23
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REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated statement of financial position as of September 30, 1999, the
consolidated statements of operations for the three- and nine-month periods
ended September 30, 1999 and 1998, and the consolidated statements of cash flows
for the nine-month periods ended September 30, 1999 and 1998, have been reviewed
by the registrant's independent accountants, Deloitte & Touche LLP, whose
report covering their review of the financial statements follows.
24
25
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 September
30, 1999, and the related condensed consolidated statements of operations for
the three- and nine-month periods ended September 30, 1999 and 1998, and the
related condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of the Company as of
December 31, 1998, 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, 1999, 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, 1998, 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
October 14, 1999
25
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings, claims and investigations related to products,
contracts and other matters are pending against the Company. Most significant
legal proceedings are related to matters covered by insurance.
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. At September 30, 1999, inventories included approximately $581
million of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350 million. The amount of the provision,
which was established in 1990, was based on the Company's belief, supported by
an opinion of outside counsel, that the termination for default would be
converted to a termination for convenience, that the Team would establish a
claim for contract adjustments for a minimum of $250 million, that there was a
range of reasonably possible results on termination for convenience, and that it
was prudent to provide for what the Company then believed was the upper range of
possible loss on termination for convenience, which was $350 million.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the
Government had not exercised the required discretion before issuing a
termination for default. It converted the termination to a termination for
convenience, and determined the Team was entitled to be paid $1,200 million,
plus statutory interest from June 26, 1991, until paid. The Court of Appeals
remanded the case to the Court of Federal Claims for a determination as to
whether the Government is able to sustain the burden of showing a default was
justified and other proceedings. Final resolution of the A-12 litigation will
depend on 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 September 30, 1999, 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.
26
27
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. Initially, the
plaintiffs sought to represent a class of purchasers of Boeing stock between
July 21, 1997, and October 22, 1997, (the "Class Period"), including recipients
of Boeing stock in the McDonnell Douglas merger. July 21, 1997, was the date on
which the Company announced its second quarter results, and October 22, 1997,
was the date on which the Company announced charges to earnings associated with
production problems being experienced on commercial aircraft programs. 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 two of the individual
defendants, to benefit directly from the sale of Boeing stock during the Class
Period. In response to a summary judgment motion filed by the Company,
plaintiffs on September 15, 1999, were granted leave to amend their complaint to
broaden their allegations to include certain purported statements going back to
April 7, 1997, and to add, as potential additional plaintiffs with state law
causes of action, purchasers of Boeing stock during the period April 7, 1997,
through July 20, 1997. The plaintiffs seek compensatory damages and treble
damages. 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 March 27, 1997, Gerald Verdine filed an action in California State Court
alleging claims based on race and age discrimination, retaliation, and breach of
contract against the Douglas Aircraft Company. On July 7, 1998, a jury returned
a verdict against the Company on the retaliation and breach of contract claims
but reached no decision on the other claims. The jury awarded Verdine $2
million in economic and non-economic damages and $26 million in punitive
damages. The trial court reduced the jury award to $10.4 million, but the
Company has appealed and seeks to have the judgment overturned in its entirety.
On June 6, 1998, sixteen (16) African American employees of The Boeing Company,
previously employed at several distinct units of The Boeing Company, McDonnell
Douglas Corporation and Rockwell International Corporation, filed a complaint in
U.S. District Court for the Western District of Washington alleging
discrimination on the basis of race in connection with promotions and training.
The plaintiffs also allege retaliation and harassment and seek, among other
things, an order certifying a class of all African American employees who are
currently working or worked for the three companies over the past few years.
Also, on July 31, 1998, seven African American employees of the helicopter
division of the Military Aircraft and Missiles Group in Philadelphia filed an
overlapping class action in the U.S. District Court for the Eastern District of
Pennsylvania alleging discrimination on the basis of race in compensation,
promotions and terminations. The complaint also alleged retaliation at that
division. By order dated September 30, 1999, the U.S. District Court for the
Western District of Washington approved terms of a proposed settlement under
which the Company would resolve the claims of class members under both
lawsuits (except opt-out plaintiffs) by paying a total of $15 million to
resolve all monetary claims, the request for injunctive relief, and claims for
attorneys' fees. The matter is now on appeal. The Company believes that the
outcome of the lawsuits will not have a material adverse effect on its
earnings, cash flow or financial position.
27
28
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, committed
wire fraud, and possessed and sold machine tools in violation of the Export
Administration Act. The indictment also charges one employee with participation
in the alleged conspiracy. 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.
There can be no assurance as to how the Department will exercise its discretion.
Also, the Department of Commerce has authority to temporarily deny export
privileges to, and the Department of Defense has authority to suspend government
contracting with, MDC or a division or subsidiary of MDC. 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 denials of defense-related export licenses and Department of Commerce
denials or revocations of MDC export licenses. MDC also would be subject to
Department of Defense debarment proceedings.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(15) Letter from independent accountants regarding unaudited
interim financial information. Page 30.
(27) Financial Data Schedule for the nine-month period ending
September 30, 1999. Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed September 2, 1999, to
report under Item 5 the announcement of a charge associated
with inventory on the F-15 program.
- - - - - - -
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)
November 11, 1999 /s/ Laurette T. Koellner
----------------- ---------------------------------------
(Date) Laurette T. Koellner
Vice President and Corporate Controller
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30
EXHIBIT (15)
Letter from Independent Accountants Regarding
Unaudited Interim Financial Information
The Boeing Company and Subsidiaries
The consolidated statement of financial position as of September 30, 1999, the
consolidated statements of operations for the three- and nine-month periods
ended September 30, 1999 and 1998, and the consolidated statements of cash flows
for the nine-month periods ended September 30, 1999 and 1998, have been reviewed
by the registrant's independent accountants, Deloitte & Touche LLP, whose
letter regarding such unaudited interim financial information follows.
November 11, 1999
The Boeing Company
Seattle, Washington
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of The Boeing Company and subsidiaries (the "Company") for the
three- and nine-month periods ended September 30, 1999 and 1998 as indicated in
our report dated October 14, 1999; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, is
incorporated by reference in Registration Statement Nos. 2-48576, 33-25332, 33-
31434, 33-43854, 33-58798, 333-03191, 333-16363, 333-26867, 333-32461, 333-
32491, 333-32499, and 333-32567 of The Boeing Company on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of any registration
statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
30