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| BA > SEC Filings for BA > Form 10-Q on 23-Jul-2008 | All Recent SEC Filings |
23-Jul-2008
Quarterly Report
Consolidated Operating Results
The following table summarizes key indicators of consolidated results of
operations:
Six months ended Three months ended
June 30 June 30
(Dollars in millions, except per share
data) 2008 2007 2008 2007
Revenues $ 32,952 $ 32,393 $ 16,962 $ 17,028
Earnings from operations $ 3,046 $ 2,815 $ 1,247 $ 1,506
Operating margins 9.2 % 8.7 % 7.4 % 8.8 %
Effective income tax rate 34.7 % 34.6 % 34.5 % 33.8 %
Net earnings from continuing
operations $ 2,057 $ 1,922 $ 851 $ 1,049
Diluted earnings per share $ 2.79 $ 2.48 $ 1.16 $ 1.35
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June 30 December 31
(Dollars in millions) 2008 2007
Contractual backlog $ 320,108 $ 296,964
Unobligated backlog 26,047 30,248
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Revenues
The following table summarizes revenues:
Six months ended Three months ended
(Dollars in millions) June 30 June 30
2008 2007 2008 2007
Commercial Airplanes $ 16,728 $ 16,262 $ 8,567 $ 8,707
Integrated Defense Systems 15,509 15,689 7,934 7,972
Boeing Capital Corporation 364 422 179 209
Other 227 157 152 81
Accounting differences/eliminations 124 (137 ) 130 59
Revenues $ 32,952 $ 32,393 $ 16,962 $ 17,028
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Revenues for the six and three months ended June 30, 2008 increased by $559 million and decreased $66 million, a 2% increase and less than 1% decrease compared with the same periods in 2007. Commercial Airplanes revenues increased by $466 million and decreased by $140 million. The increase for the six months was primarily due to increases in new airplane deliveries and commercial aviation services partially offset by lower aircraft trading. The decrease for the three months was due to lower new airplane revenues, lower aircraft trading and lower aviation support business. Integrated Defense Systems (IDS) revenues decreased by $180 million and $38 million, due to lower volume in the Precision Engagement and Mobility Systems (PE&MS) and Network and Space Systems (N&SS) segments, partially offset by higher volume in the Support Systems segment. Boeing Capital Corporation (BCC) revenues decreased by $58 million and $30 million primarily due to a decrease in the customer financing portfolio. Other segment revenues increased by $70 million and $71 million primarily due to the sale of a C-17 aircraft held under operating lease. Accounting differences/eliminations revenues increased by $261 million and $71 million. The increase for the six months is primarily due to higher revenues in our P-8A program, a portion of which is recorded in Accounting differences/eliminations for segment reporting purposes, and a reduction in intercompany eliminations which occurred as a result of two aircraft deliveries to the customer in the first quarter of this year partially offset by higher intercompany deliveries compared to the same period of the prior year. The increase for the three months was due to higher P-8A revenues in the current year partially offset by two aircraft deliveries to the customer that occurred in the same period of the prior year.
Earnings from Operations
The following table summarizes earnings from operations:
Six months ended Three months ended
(Dollars in millions) June 30 June 30
2008 2007 2008 2007
Commercial Airplanes $ 1,760 $ 1,666 $ 777 $ 960
Integrated Defense Systems 1,497 1,639 637 855
Boeing Capital Corporation 106 143 45 70
Other (185 ) (121 ) (135 ) (66 )
Unallocated Expense (132 ) (512 ) (77 ) (313 )
Earnings from operations $ 3,046 $ 2,815 $ 1,247 $ 1,506
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Operating earnings for the six and three months ended June 30, 2008 increased by $231 million and decreased by $259 million compared with the same periods in 2007. Commercial Airplanes earnings increased by $94 million and decreased by $183 million compared with the same periods in 2007. The increase for the six months was primarily due to higher airplane deliveries, lower research and development expense and increased volume in commercial aviation services, offset by costs related to the 787 program. The decrease for the three months was primarily due to costs related to the 787 program and higher period costs. Commercial Airplanes' research and development expense decreased by $154 million to $1,403 million during the six months and remained flat at $770 million during the three months compared with the same periods in 2007. The decrease for the six months was due to reduced spending on the 787 program partially offset by increased spending on the 747 program. The three months remained flat as a result of reduced spending on the 787 program offset by increased spending on the 747 program. IDS earnings decreased by $142 million and $218 million compared with the same periods in 2007 due to lower earnings in the PE&MS segment primarily due to a charge taken on the Airborne Early Warning & Control (AEW&C) program in the second quarter of 2008. BCC operating earnings decreased $37 million and $25 million compared with the same periods in 2007 reflecting lower revenues partially offset by lower interest expense. Other segment losses increased by $64 million and $69 million compared with the same periods in 2007 primarily due to lower airline customer credit ratings.
The most significant expense items not allocated to segments are shown in the table below.
Six months ended Three months ended
(Dollars in millions) June 30 June 30
Unallocated expense 2008 2007 2008 2007
Pension and other postretirement $ (183 ) $ (330 ) $ (96 ) $ (168 )
Share-based plans (45 ) (169 ) (15 ) (133 )
Deferred compensation 81 (63 ) 20 (53 )
Other 15 50 14 41
Total $ (132 ) $ (512 ) $ (77 ) $ (313 )
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We recorded net periodic benefit cost related to pensions and other postretirement benefits of $566 million and $283 million for the six and three months ended June 30, 2008 and $887 million and $444 million for the six and three months ended June 30, 2007. Not all net periodic benefit cost is recognized in earnings in the period incurred because it is allocated to production as product costs and a portion remains in inventory at the end of the reporting period. Accordingly, earnings from operations included $693 million and $365 million of net periodic benefit cost for the six and three months ended June 30, 2008 and $820 million and $410 million for the six and three months ended June 30, 2007. A portion of pension and other postretirement expense is recorded in the business segments and the remainder is included in unallocated pension and other postretirement expense.
Unallocated pension and other postretirement expense represents the difference between costs recognized under Generally Accepted Accounting Principles in the consolidated financial statements and federal cost accounting standards required to be utilized by our business segments for U.S. government contracting purposes. Pension and other postretirement expense decreased during the six and three months ended June 30, 2008 when compared with the same periods of the prior year primarily due to a decrease in pension accounting valuation difference compared to the same period in the prior year. The prior year expense was also higher due to increased overall pension costs recognized in inventory as of December 31, 2006, which were subsequently expensed in cost of sales in 2007.
The reduction in Share-based plans expense is primarily due to lower Performance Shares outstanding during the six and three months ended June 30, 2008 and higher expense acceleration during the six and three months ended June 30, 2007, resulting from five payouts compared with zero payouts in 2008. The year over year changes in deferred compensation expense are primarily driven by changes in our stock price and broad stock market conditions.
Other Earnings Items
Six months ended Three months ended
(Dollars in millions) June 30 June 30
2008 2007 2008 2007
Earnings from operations $ 3,046 $ 2,815 $ 1,247 $ 1,506
Other income, net 202 216 102 125
Interest and debt expense (96 ) (92 ) (50 ) (46 )
Earnings before income taxes 3,152 2,939 1,299 1,585
Income tax expense (1,095 ) (1,017 ) (448 ) (536 )
Net earnings from continuing operations $ 2,057 $ 1,922 $ 851 $ 1,049
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The effective tax rates were 34.7% and 34.6% for the six months ended June 30, 2008 and 2007. The effective tax rate as compared with the prior year remained relatively flat primarily due to U.S. research tax credit benefits that existed in 2007, but did not exist in 2008, offset by nonrecurring 2007 income tax charges. The research tax credit reduced the 2007 tax rate by 2.4%. For additional discussion related to Income Taxes see Note 3.
Backlog
Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed and unobligated U.S. and non-U.S. government contract funding. The increase in contractual backlog during the six months ended June 30, 2008 was primarily due to orders in excess of deliveries on Commercial Airplane programs.
Unobligated backlog includes U.S. and foreign government definitive contracts for which funding have not been authorized. The decrease in unobligated backlog during the six months ended June 30, 2008 is primarily due to funding released from existing multi-year contracts including the Future Combat Systems (FCS), Proprietary, and F/A-18 programs. The decreases were partially offset by a Multi-Year Procurement contract awarded on the V-22 program.
Segment Results of Operations
Commercial Airplanes
Business Environment and Trends
The world economy grew at an average 3.8% annual rate between 2004 and 2007 compared with the long-term trend rate of 3.1%. The global economy is now forecast to slow below the long-term trend rate in 2008 and 2009 led by a slowdown in the United States.
In addition to the slowing economic outlook, oil and jet fuel prices rose over 40% in the first half of 2008. The speed and magnitude of this increase is challenging airline operations and profitability. Airlines are pursuing a wide range of strategies to counter rising fuel prices. Airlines have increased revenues over 50% since 2003 and continue to increase fares, fuel surcharges and fees. On the cost side, airlines continue to cut non-fuel costs including distribution, labor and overhead. Operationally, airlines are cutting unprofitable routes and frequencies, and improving fleet fuel efficiency by parking and replacing older generation aircraft.
Despite these efforts, the number of airline bankruptcies is rising and more are likely if fuel prices remain elevated. The global profitability outlook has fallen from a $5.6 billion profit in 2007 to a $2.3 billion loss in 2008, and the loss is forecast to be higher if oil prices persist at current levels. Forecasted airline losses are concentrated in the United States. Approximately 11% of Commercial Airplanes' backlog is destined for U.S. airlines.
Operating Results
Six months ended Three months ended
(Dollars in millions) June 30 June 30
2008 2007 2008 2007
Revenues $ 16,728 $ 16,262 $ 8,567 $ 8,707
Earnings from operations $ 1,760 $ 1,666 $ 777 $ 960
Operating margins 10.5 % 10.2 % 9.1 % 11.0 %
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June 30 December 31
(Dollars in millions) 2008 2007
Contractual backlog $ 274,546 $ 255,176
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Revenues
Revenues for the six months ended June 30, 2008 increased by $466 million compared with the same period of 2007. This was attributable to a $467 million increase in new airplane revenues and commercial aviation services of $120 million partially offset by a decrease of $121 million primarily from aircraft trading.
Revenues for the three months ended June 30, 2008 decreased by $140 million compared with the same period of 2007. This was attributable to decreases of $72 million in new airplane revenues and $68 million primarily from aircraft trading. The decrease in new airplane revenues reflects lower 777 deliveries and customer mix partially offset by increased 737 and 747 deliveries.
Commercial jet aircraft deliveries, including intercompany deliveries were as follows:
Program 737 NG 747 767 777 Total Deliveries during the first six months of 2008 187 9 6 39 241 Deliveries during the first six months of 2007 169 7 6 38 220 Deliveries during the second quarter of 2008 100 5 3 18 126 Deliveries during the second quarter of 2007 86 4 3 21 114 Cumulative deliveries as of 6/30/2008 2,653 1,405 965 726 Cumulative deliveries as of 12/31/2007 2,466 1,396 959 687 |
Earnings from Operations
Earnings from operations for the six months ended June 30, 2008 increased by $94 million while operating margins increased by 0.3 percentage points to 10.5% compared with the same period of 2007. The increase in earnings was primarily due to higher airplane revenues of $113 million, lower research and development expense of $154 million, and increased volume in commercial aviation services of $23 million. These favorable changes were offset by higher period and other costs of $110 million and additional airplane production program costs primarily related to the previously announced delay in the 787 program schedule of $86 million.
Earnings from operations for the three months ended June 30, 2008 decreased by $183 million, while operating margins decreased by 1.9 percentage points to 9.1% compared with the same period of 2007. The decrease in earnings was due to additional airplane production program costs primarily related to the previously announced delay in the 787 program schedule of $86 million, higher period and other costs of $62 million, lower airplane revenues of $22 million and lower commercial aviation services volume of $13 million.
Backlog
The increase in contractual backlog during the six months ended June 30, 2008 compared with December 31, 2007 was primarily due to orders in excess of deliveries for our 737NG, 777 and 787 programs.
Accounting Quantity
The accounting quantities, undelivered units under firm orders and percentage of
anticipated orders included in the program accounting estimates as compared with
the number of cumulative firm orders were as follows:
Program
As of 6/30/2008 737 NG 747 767 777 787
Program accounting quantities 4,200 1,499 1,010 1,000 *
Undelivered units under firm orders1 2,243 118 46 358 892
Cumulative firm orders (CFO)2 4,896 1,523 1,011 1,084
Anticipated orders N/A N/A N/A N/A
Anticipated orders as a % of CFO N/A N/A N/A N/A
Program
As of 3/31/2008 737 NG 747 767 777 787
Program accounting quantities 4,000 1,474 1,010 1,000 *
Undelivered units under firm orders1 2,175 122 49 362 892
Cumulative firm orders (CFO)2 4,728 1,522 1,011 1,070
Anticipated orders N/A N/A N/A N/A
Anticipated orders as a % of CFO N/A N/A N/A N/A
Program
As of 12/31/2007 737 NG 747 767 777 787
Program accounting quantities 3,800 1,474 998 950 *
Undelivered units under firm orders1 2,076 125 52 357 817
Cumulative firm orders (CFO)2 4,542 1,521 1,011 1,044
Anticipated orders N/A N/A N/A N/A
Anticipated orders as a % of CFO N/A N/A N/A N/A
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* The accounting quantity for the 787 program will be determined in the year of first airplane delivery, scheduled for 2009.
1 Firm orders represent new aircraft purchase agreements where the customers' rights to cancel without penalty have expired.
2 Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders.
737 Next-Generation The accounting quantity for the 737 Next-Generation (NG) program increased by 200 units during the three months ended June 30, 2008 and by 400 units for the six months ended June 30, 2008. This is due to the program's normal progression of obtaining additional orders and delivering aircraft.
747 Program The accounting quantity for the 747 program increased by 25 units during the second quarter of 2008. In the fourth quarter of 2007 we completed firm configuration of the 747-8 Intercontinental airplane and during 2006 we completed firm configuration of the 747-8 Freighter. While there are always risks to development, production and certification schedules in the introduction of a new commercial derivative airplane, deliveries of the first 747-8 Freighter and Intercontinental airplanes are targeted for late 2009 and late 2010.
767 Program On February 29, 2008, the U.S. Air Force announced it had chosen a competitor's bid over our proposed 767 derivative to build 179 replacement tankers for the Air Force's aging KC-135
fleet of air-to-air refueling tankers. On March 11, 2008, we filed a formal protest with the Government Accountability Office, citing irregularities with the process of the tanker competition and the evaluation of the competitors' bids. On June 18, 2008, the Government Accountability Office sustained our protest of the contract award. On July 9, 2008, the U.S. Department of Defense announced it would reopen the competition and intends for the selection to occur near year end.
777 Program Deliveries of the first 777 Freighters are targeted for late 2008.
787 Program We are in the final stages of assembly of airplane number one and planning for flight test. The risks that are always inherent in the latter stages of new airplane program production still remain. We continue to address challenges associated with assembly of the first airplanes, including management of our extended global supply chain, completion and integration of traveled work, weight, and systems integration. In April 2008 we announced a revised plan for the 787. First flight has been moved from the second quarter of 2008 to the fourth quarter of 2008 and deliveries are now expected to begin in the third quarter of 2009 rather than the first quarter of 2009. We continue to work with our customers and suppliers to assess the specific impacts of schedule changes, including delivery delays and supplier assertions associated with such changes. A number of our customers may have contractual remedies that may be implicated by our revised plan for the 787. We will address any customer claims as they arise.
Integrated Defense Systems
IDS Realignment
Effective January 1, 2008, certain programs were realigned between IDS segments and certain environmental remediation contracts (formerly included in N&SS) are included in the Other Segment. Business segment data for all periods presented have been adjusted to reflect the realignment. See Note 11.
Operating Results
Six months ended Three months ended
(Dollars in millions) June 30 June 30
2008 2007 2008 2007
Revenues $ 15,509 $ 15,689 $ 7,934 $ 7,972
Earnings from operations $ 1,497 $ 1,639 $ 637 $ 855
Operating margins 9.7 % 10.4 % 8.0 % 10.7 %
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June 30 December 31
(Dollars in millions) 2008 2007
Contractual backlog $ 45,562 $ 41,788
Unobligated backlog 25,785 29,893
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Revenues
IDS revenues for the six and three months ended June 30, 2008 decreased by $180 million and $38 million, a 1% decrease from the same periods in 2007, resulting from lower volume in the PE&MS and N&SS segments, partially offset by higher volume in the Support Systems segment.
Earnings from Operations
IDS operating earnings for the six and three months ended June 30, 2008 decreased by $142 million and $218 million and operating margins decreased 0.7% and 2.7% when compared to the same periods in 2007. The decreased margins were primarily due to lower margins in the PE&MS segment which resulted from a charge taken on the AEW&C program in the second quarter of 2008.
Backlog
IDS total backlog was $71,347 million at June 30, 2008, a decrease of $334 million from $71,681 million at December 31, 2007. The decrease was primarily due to deliveries and sales on multi-year contracts awarded in prior years with the largest decreases in FCS, C-17 and F/A-18 programs. These decreases were nearly offset by the first quarter 2008 award of a multi-year contract for the V-22 and international orders for F-15 aircraft.
For further details on the changes between periods, refer to the discussions of the individual segments below.
Additional Considerations
Our business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases the associated financial risks are primarily in lower profit rates or program cancellation if milestones and technical progress are not accomplished. Examples of these programs include Airborne Laser, E/A-18G, Family of Beyond Line-of-Sight Terminals, FCS, Ground-based Midcourse Defense (GMD), P-8A and Proprietary programs.
Some of our development programs are contracted on a fixed-price basis. Many of these programs have highly complex designs. As technical or quality issues arise, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the work or reduce our estimated price, either of which could result in a material charge. These programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be missed, which could trigger termination-for-default provisions, the loss of satellite in-orbit incentive payments, or other financially significant exposure. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues. Examples of these programs include AEW&C, international KC-767 Tanker, commercial and military satellites, Vigilare and High Frequency Modernisation.
Precision Engagement and Mobility Systems
Operating Results
Six months ended Three months ended
(Dollars in millions) June 30 June 30
2008 2007 2008 2007
Revenues $ 6,549 $ 6,743 $ 3,293 $ 3,416
Earnings from operations $ 549 $ 838 $ 160 $ 405
Operating margins 8.4 % 12.4 % 4.9 % 11.9 %
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