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| BA > SEC Filings for BA > Form 10-Q on 22-Oct-2008 | All Recent SEC Filings |
22-Oct-2008
Quarterly Report
Consolidated Operating Results
The following table summarizes key indicators of consolidated results of
operations:
(Dollars in millions, except per share Nine months ended Three months ended
data) September 30 September 30
2008 2007 2008 2007
Revenues $ 48,245 $ 48,910 $ 15,293 $ 16,517
Earnings from operations $ 4,193 $ 4,314 $ 1,147 $ 1,499
Operating margins 8.7 % 8.8 % 7.5 % 9.1 %
Effective income tax rate 36.4 % 33.1 % 40.8 % 30.3 %
Net earnings from continuing
operations $ 2,740 $ 3,031 $ 683 $ 1,109
Diluted earnings per share $ 3.76 $ 3.92 $ 0.96 $ 1.44
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September 30 December 31
(Dollars in millions) 2008 2007
Contractual backlog $ 317,269 $ 296,964
Unobligated backlog 32,100 30,248
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Production Disruption Caused by Labor Strike
On September 6, 2008, commercial aircraft production ceased and certain Boeing Military Aircraft (BMA) programs were adversely impacted as a result of a strike by those employees who are represented by the International Association of Machinists and Aerospace Workers (IAM). The IAM announced the commencement of the strike as a result of the failure to reach agreement on a new collective bargaining agreement, covering nearly 27,000 employees mainly in Washington, Oregon and Kansas. Ongoing work stoppages and instability in our union relationships could negatively impact the timely production of our products, which could strain relationships with customers and cause a loss of revenues that would adversely affect our results of operations.
Revenues
The following table summarizes revenues:
Nine months ended Three months ended
(Dollars in millions) September 30 September 30
2008 2007 2008 2007
Commercial Airplanes $ 23,674 $ 24,520 $ 6,946 $ 8,258
Integrated Defense Systems 24,006 23,694 8,497 8,005
Boeing Capital Corporation 535 619 171 197
Other 527 234 300 77
Accounting differences/eliminations (497 ) (157 ) (621 ) (20 )
Revenues $ 48,245 $ 48,910 $ 15,293 $ 16,517
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Revenues for the nine and three months ended September 30, 2008 decreased by $665 million and $1,224 million, a 1% and a 7% decrease compared with the same periods in 2007. Commercial Airplanes revenues decreased by $846 million and $1,312 million. The decrease in Commercial Airplanes for the nine months was primarily due to decreases in new airplane revenues reflecting both the ongoing labor strike and supplier production challenges on customer-furnished galleys for certain
wide-body airplanes. Integrated Defense Systems (IDS) revenues increased by $312 million and $492 million, due to higher volume in the Boeing Military Aircraft (BMA) and the Global Services and Support (GS&S) segments. Boeing Capital Corporation (BCC) revenues decreased by $84 million and $26 million primarily due to lower interest income on financing receivables and notes and a decrease in the customer financing portfolio. Other segment revenues increased by $293 million and $223 million primarily due to the sale of four C-17 aircraft held under operating lease, three of which were sold in the third quarter. Accounting differences/eliminations revenues decreased by $340 million and $601 million, primarily due to the elimination of P-8A program revenues recognized by Commercial Airplanes during the three months ended September 30, 2008.
Earnings from Operations
The following table summarizes earnings from operations:
Nine months ended Three months ended
(Dollars in millions) September 30 September 30
2008 2007 2008 2007
Commercial Airplanes $ 2,154 $ 2,611 $ 394 $ 945
Integrated Defense Systems 2,351 2,461 854 822
Boeing Capital Corporation 143 204 37 61
Other (233 ) (165 ) (48 ) (44 )
Unallocated expense (222 ) (797 ) (90 ) (285 )
Earnings from operations $ 4,193 $ 4,314 $ 1,147 $ 1,499
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Operating earnings for the nine and three months ended September 30, 2008 decreased by $121 million and $352 million compared with the same periods in 2007. Commercial Airplanes earnings decreased by $457 million and $551 million compared with the same periods in 2007. The decrease in Commercial Airplanes for the nine and three months was primarily due to fewer new airplane deliveries which were driven by the strike and supplier production challenges. Commercial Airplanes' research and development expense decreased by $84 million and increased by $70 million to $2,108 million and $705 million during the nine and three months compared with the same periods in 2007. IDS earnings, which include the impacts of the IAM strike, decreased by $110 million and increased by $32 million compared with the same periods in 2007. The decrease for the nine months is primarily due to lower earnings in the BMA segment resulting from a charge taken on the Airborne Early Warning and Control (AEW&C) program in the second quarter of 2008 partially offset by higher earnings in the Network and Space Systems Segment (N&SS). The increase for the three months is primarily due to higher earnings in the N&SS segment partially offset by lower earnings in the GS&S segment. BCC operating earnings decreased $61 million and $24 million compared with the same periods in 2007 reflecting lower revenues, lower recovery of losses and higher asset impairment expense, partially offset by lower interest expense. Other segment losses increased by $68 million and $4 million compared with the same periods in 2007. The increase in the losses for the nine months is primarily due to lower airline customer credit ratings.
The most significant expense items not allocated to segments are shown in the table below.
Nine months ended Three months ended
(Dollars in millions) September 30 September 30
Unallocated expense 2008 2007 2008 2007
Pension and other postretirement $ (254 ) $ (513 ) $ (71 ) $ (183 )
Share-based plans (115 ) (227 ) (70 ) (58 )
Deferred compensation 136 (117 ) 55 (54 )
Other 11 60 (4 ) 10
Total $ (222 ) $ (797 ) $ (90 ) $ (285 )
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We recorded net periodic benefit cost related to pensions and other postretirement benefits of $849 million and $283 million for the nine and three months ended September 30, 2008 and $1,330 million and $443 million for the same periods in the prior year. 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 $1,001 million and $308 million of net periodic benefit cost for the nine and three months ended September 30, 2008 and $1,262 million and $442 million for the same periods in the prior year. 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 nine and three months ended September 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 the expiration of certain Performance Shares during the nine and three months ended September 30, 2008 and higher expense acceleration during the nine and three months ended September 30, 2007, resulting from six 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
Nine months ended Three months ended
(Dollars in millions) September 30 September 30
2008 2007 2008 2007
Earnings from operations $ 4,193 $ 4,314 $ 1,147 $ 1,499
Other income, net 257 355 55 139
Interest and debt expense (145 ) (139 ) (49 ) (47 )
Earnings before income taxes 4,305 4,530 1,153 1,591
Income tax expense (1,565 ) (1,499 ) (470 ) (482 )
Net earnings from continuing operations $ 2,740 $ 3,031 $ 683 $ 1,109
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Other income for the nine and three months ended September 30, 2008 decreased $98 million and $84 million compared with the same periods in 2007 as a result of lower interest rates and lower investment balances.
The effective tax rates were 36.4% and 33.1% for the nine months ended September 30, 2008 and 2007. The increase in the effective tax rate as compared with the prior year was primarily due to Research and Development tax credit benefits that existed in 2007, but did not exist in 2008. The Research and Development tax credit reduced the 2007 tax rate by 2.4%. The effective tax rates were 40.8% and 30.3% for the three months ended September 30, 2008 and 2007. The increase in the effective tax rate as compared with the prior year was primarily due to provision adjustments related to prior years and the absence of the Research and Development tax credit in 2008. As part of the Emergency Economic Stabilization Act of 2008, the credit was legislatively reinstated on October 3, 2008 for 2008 and 2009.
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 nine months ended September 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 has not been authorized. The increase in unobligated backlog during the nine months ended September 30, 2008 is primarily due to Multi-Year Procurement contracts awarded on the V-22 and Chinook programs. These increases were partially offset by funding released from existing multi-year contracts including the Future Combat Systems (FCS), F/A-18, F-22 and Ground-based Midcourse Defense (GMD) programs.
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 3.2%. 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, year to date average oil and jet fuel prices are over 50% higher so far in 2008 compared to 2007. 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.
The global profitability outlook has fallen from a $5.6 billion profit in 2007 to a $5.2 billion loss in 2008. Given recent financial market volatility and economic impacts, the near-term profit outlook for global airlines is uncertain. Forecasted airline losses are concentrated in the United States. Approximately 10% of Commercial Airplanes' backlog is destined for U.S. airlines.
Operating Results
Nine months ended Three months ended
(Dollars in millions) September 30 September 30
2008 2007 2008 2007
Revenues $ 23,674 $ 24,520 $ 6,946 $ 8,258
Earnings from operations $ 2,154 $ 2,611 $ 394 $ 945
Operating margins 9.1 % 10.6 % 5.7 % 11.4 %
September 30 December 31
(Dollars in millions) 2008 2007
Contractual backlog $ 275,869 $ 255,176
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Revenues
Revenues for the nine months ended September 30, 2008 decreased by $846 million compared with the same period of 2007. This was attributable to a $1,545 million decrease in new airplane revenues combined with a decrease of $251 million primarily from aircraft trading partially offset by an increase in commercial aviation services business of $179 million and higher intercompany revenues of $771 million.
Revenues for the three months ended September 30, 2008 decreased by $1,312 million compared with the same period of 2007. This was attributable to decreases of $1,935 million in new airplane revenues and $126 million primarily from aircraft trading partially offset by an increase of $56 million from commercial aviation services and higher intercompany revenues of $693 million. The decrease in new airplane revenue reflects lower airplane deliveries in 2008 due to the ongoing labor strike and supplier production challenges on customer-furnished galleys for certain wide-body airplanes.
Commercial jet aircraft deliveries, including intercompany deliveries were as follows:
Program 737 NG 747 767 777 Total Deliveries during the first nine months of 2008 254 13 8 50 325 Deliveries during the first nine months of 2007 250 12 9 58 329 Deliveries during the third quarter of 2008 67 4 2 11 84 Deliveries during the third quarter of 2007 81 5 3 20 109 Cumulative deliveries as of 9/30/2008 2,720 1,409 967 737 Cumulative deliveries as of 12/31/2007 2,466 1,396 959 687 |
Earnings from Operations
Earnings from operations for the nine months ended September 30, 2008 decreased by $457 million while operating margins decreased by 1.5 percentage points to 9.1% compared with the same period of 2007. Lower new airplane deliveries partially offset by higher intercompany revenues reduced earnings by $283 million. Higher airplane production program infrastructure costs related to the previously announced delay in the 787 program schedule and the IAM strike reduced earnings by $182 million. Higher period and additional 747 program costs partially offset by other margin improvements reduced earnings by $110 million. Earnings improved due to increased volume in commercial aviation services of $34 million and decreased research and development expense of $84 million.
Earnings from operations for the three months ended September 30, 2008 decreased by $551 million, while operating margins decreased by 5.7 percentage points to 5.7% compared with the same period of 2007. Lower new airplane deliveries partially offset by higher intercompany revenues reduced earnings by $396 million. Higher airplane production program infrastructure costs primarily related to the previously announced delay in the 787 program schedule and the IAM strike reduced earnings by $96 million. Research and development expense increased by $70 million reflecting the absence of supplier cost sharing payments in 2008 and higher 747 spending, partially offset by lower 787 spending. Higher commercial aviation services volume increased earnings by $11 million. Additional 747 program costs were offset by other margin improvements.
Backlog
The increase in contractual backlog during the nine months ended September 30, 2008 compared with December 31, 2007 was primarily due to orders in excess of deliveries for our 737NG, 767, 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 9/30/2008 737 NG 747 767 777 787
Program accounting quantities 4,200 1,499 1,023 1,050 *
Undelivered units under firm orders1 2,292 115 64 359 891
Cumulative firm orders (CFO)2 5,012 1,524 1,031 1,096
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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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
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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
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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 There was no change to the accounting quantity for the 737 Next-Generation (NG) program during the third quarter of 2008.
747 Program There was no change to the accounting quantity for the 747 program during the third quarter of 2008. We continue to work on developing the 747-8 Freighter and Intercontinental airplanes.
Deliveries of the first 747-8 Freighter and Intercontinental airplanes are targeted in late 2009 and late 2010, although there is increased risk to this schedule due to challenges in development, production and certification, as well as the IAM strike that began on September 6, 2008.
767 Program The accounting quantity for the 767 program increased by 13 units during the third quarter of 2008. 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 September 10, 2008, the Department of Defense notified the Congress and the two competing contractors, Boeing and Northrop Grumman, that it was terminating the current competition for a U.S. Air Force airborne tanker replacement. We anticipate that the tanker competition will re-open in 2009.
777 Program The accounting quantity for the 777 program increased by 50 units during the third quarter of 2008. Deliveries of the first 777 Freighters are targeted for late 2008 but could be impacted by the IAM strike.
787 Program We are in the final stages of assembly of airplanes number one and two and planning for flight test. The risks that are always inherent in the latter stages of new airplane program production remain. We continue to address challenges associated with assembly of the first few airplanes, including management of our extended global supply chain, completion and integration of traveled work, weight and systems integration. We are also continuing efforts to satisfy customer mission and performance needs in light of the anticipated weight of their respective aircraft. In April 2008 we announced a revised plan for the 787. First flight was moved from the second quarter of 2008 to the fourth quarter of 2008 with deliveries expected to begin in the third quarter of 2009 rather than the first quarter of 2009. Those dates could be impacted by the strike by the IAM at our Everett and other facilities that began on September 6, 2008. 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 continue to address customer claims as they arise.
Integrated Defense Systems
IDS Realignment
Effective January 1, 2008, certain programs were realigned between IDS segments. In addition, certain environmental remediation contracts (formerly included in N&SS) were transferred to the Other Segment. Business segment data for all periods presented have been adjusted to reflect the realignment. See Note 11.
Segment Name Changes
In the third quarter of 2008 we changed the names of the Precision Engagement and Mobility Systems segment to Boeing Military Aircraft (BMA) and the Support Systems segment to Global Services and Support (GS&S).
Operating Results
Nine months ended Three months ended
(Dollars in millions) September 30 September 30
2008 2007 2008 2007
Revenues $ 24,006 $ 23,694 $ 8,497 $ 8,005
Earnings from operations $ 2,351 $ 2,461 $ 854 $ 822
Operating margins 9.8 % 10.4 % 10.1 % 10.3 %
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September 30 December 31
(Dollars in millions) 2008 2007
Contractual backlog $ 41,400 $ 41,788
Unobligated backlog 31,629 29,893
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Revenues
IDS revenues for the nine and three months ended September 30, 2008 increased by $312 million and $492 million, a 1% and 6% increase from the same periods in 2007, resulting from higher revenues in the BMA and GS&S segments.
Earnings from Operations
. . .
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