Item 1.	Business
The Boeing Company, together with its subsidiaries (herein referred to as the "Company"), is one of the world's major aerospace firms. The Company operates in three principal segments: commercial airplanes, military aircraft and missiles, and space and communications.
Commercial airplanes operations - conducted through Boeing Commercial Airplanes Group - involve development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide.
The Military Aircraft and Missiles segment is involved in the research, development, production, modification and support of the following products and related systems: military aircraft, including fighter, transport and attack aircraft; helicopters; and missiles.
The Space and Communications segment is involved in the research, development, production, modification and support of the following products and related systems: space systems; missile defense systems; satellites and satellite launching vehicles; rocket engines; and information and battle management systems.
Revenues, earnings from operations and other financial data of the Company's business segments for the three years ended December 31, 2000, are set forth on pages 72-74 of the Company's 2000 Annual Report to Shareholders and are incorporated herein by reference.
On October 6, 2000, the Company acquired Hughes space and communications businesses and related operations. The acquired businesses will be operated under the name of Boeing Satellite Systems (BSS). BSS provides space-based communications, reconnaissance, surveillance and imaging systems. BSS also manufactures commercial communications satellites. Also included in the acquisitions are Hughes Electron Dynamics, a supplier of electronic components for satellites; Spectrolab, a provider of solar cells and panels for satellites; and a share of HRL Laboratories, a research center.
On October 4, 2000, the Company acquired Jeppesen Sanderson, Inc., a provider of flight information services. Jeppesen Sanderson, Inc. provides a full range of print and electronic flight information services, including navigation data, computerized flight planning, aviation software products, aviation weather services, maintenance information, and pilot training systems and supplies.
On August 2, 2000, the Company acquired Autometric Inc., a geospatial information technology company, and on September 1, 2000, the Company acquired Continental Graphics Corp., a provider of technical information to the aviation industry. Other acquisitions in 2000 include AeroInfo Systems, Inc.; a provider of advanced maintenance software applications for the airline industry; SVS, Inc., which specializes in electro-optical systems; and Hawker de Havilland, which specializes in aircraft parts fabrication.
Boeing Satellite Systems, Autometric and SVS Inc., will be accounted for as part of the Space and Communications segment. Jeppesen Sanderson, Inc., Continental Graphics Corp., AeroInfo Systems, Inc. and Hawker de Havilland will be accounted for as part of the Commercial Airplanes segment.
With respect to the Commercial Airplanes segment, the Company is a leading producer of commercial aircraft and offers a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and foreign airlines. This family of commercial jet aircraft currently includes the 717, 737 Classic, 737 Next-Generation, MD-80, MD-90 and 757 standard-body models and the 767, MD-11, 777 and 747 wide-body models. Final deliveries of the MD-80, MD-90 and 737 Classic aircraft occurred in 2000. Final delivery of the MD-11 aircraft will occur in early 2001.
The worldwide market for commercial jet aircraft is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth, both in developed and emerging countries, and political stability. Demand for the Company's commercial aircraft is further influenced by airline industry profitability, world trade policies, government-to-government relations, environmental constraints imposed upon aircraft operations, technological changes, and price and other competitive factors.
Commercial jet aircraft are normally sold on a firm fixed-price basis with an indexed price escalation clause. The Company's ability to deliver jet aircraft on schedule is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, performance of suppliers and subcontractors, and regulatory certification. The introduction of new commercial aircraft programs and major derivatives involves increased risks associated with meeting development, production and certification schedules.
The Company's commercial aircraft sales are subject to intense competition, including foreign companies that are nationally owned or subsidized. To meet competition, the Company maintains a program directed toward continually enhancing the performance and capability of its products and has a family of commercial aircraft to meet varied and changing airline requirements.
The Company continually evaluates opportunities to improve current models, and assesses the marketplace to ensure that its family of commercial jet aircraft is well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line responsive to changing market conditions by maximizing commonality among the Boeing family of commercial aircraft. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products with the highest standards of quality, safety, technical excellence, economic performance and in- service support.
The major focus of commercial aircraft development activities over the past three years has been the 767-400ER, the Next-Generation 737 family of short-to- medium jetliners (737-600/700/800/900 models), the 717 program, the 757-300 derivative, and the 777-300 derivative. Initial delivery of the 767-400ER, a stretched version of the 767-300ER capable of carrying over 300 passengers in a two-class configuration, occurred in the third quarter of 2000. The certification and initial deliveries of the 737-700 occurred in 1997. Initial delivery of the 737-800, a larger version, occurred in early 1998, and initial delivery of the 737-600, the smallest version, occurred in late 1998. The 737- 900, the longest member of the Next-Generation 737 family, received its initial order in late 1997 with first delivery scheduled for 2001. The Next-Generation 737 models are also being used by Boeing Business Jets, a collaboration between the Company and General Electric, to pursue the business travel market. Certification and first delivery of the Boeing Business Jet occurred in late 1998. First delivery of the 717 occurred in September 1999. Initial delivery of
the 757-300, with approximately 20% more seating and about 10% lower seat-mile operating costs than the -200 model, occurred in 1999. The increased-capacity version 777-300 initial delivery occurred in 1998. Certification and first delivery of the 777-300ER and 777-200LR is scheduled for 2003 and 2004, respectively.
New products under consideration include larger and longer-range versions of the 777. Scheduled to enter into service in the spring of 2004, a longer-range 767-400ER will seat 245 passengers but will have a range 600 miles longer than the current version. Sufficient market demand has not developed to justify committing the very substantial investment levels required to develop either an all-new very large aircraft or significantly larger versions of the 747. The timing of a decision to proceed with a 747 derivative aircraft and the development schedule depend on customer demand and the Company's ability to achieve favorable long-term financial returns on the substantial development costs that would be required.
The Company's acquisition of the defense and space units of Rockwell in 1996; the merger with McDonnell Douglas in 1997; and other acquisitions, such as the Hughes space and communications businesses, have created a large and diversified group of programs in information, space and defense systems. The major trends that shape the current environment of the Military Aircraft and Missiles segment and the Space and Communications segment include significant but relatively flat U.S. Government defense and space budgets; rapid expansion of information and communication technologies, the need for low cost, assured access to space, and a convergence of military, civil and commercial markets.
The U.S. Government, principally through the Department of Defense (DoD) and NASA, remains the primary customer in the Aircraft and Missiles and Space and Communications business segments. DoD procurement funding levels are expected to moderately increase as modernization of used and rapidly aging equipment become an important issue with the U.S. Government. Privatization of some government activities has opened areas of growth for the Company in aerospace support. The Company's DoD programs are subject to uncertain future funding levels, which can result in the stretch-out or termination of some programs. NASA's budget is expected to remain relatively flat over the next several years.
The Company's Military Aircraft and Missiles and Space and Communications business segments are highly sensitive to changes in national priorities and U.S. Government defense and space budgets. The principal contributors to 2000 Military Aircraft and Missiles segment revenues included the C-17,, F/A-18 C/D, F/A-18 E/F, AH-64 Apache, T-45 Goshawk Training System, AV-8B Harrier, the Harpoon missile along with Aerospace Support. The principal contributors to 2000 Space and Communications segment revenues included the International Space Station, National Missile Defense Lead Systems Integrator (NMD LSI), E-3 AWACS (Airborne Warning and Control System) updates and 767 AWACS, Space Shuttle Flight Operations and Delta space launch services. Classified projects for the U.S. Government also continued to contribute to both segments' revenues.
In recent years, a significant percentage of Military Aircraft and Missiles segment business has been in developmental programs under cost-reimbursement- type contracts, which generally have lower profit margins than fixed-price-type contracts. Current major developmental programs include the Raptor, Joint Strike Fighter, V-22 Osprey tiltrotor aircraft, the RAH-66 Comanche helicopter, and the Unmanned Combat Air Vehicle (UCAV) advanced technology demonstrator. The V-22 program is currently transitioning to low-rate initial production.
Space and Communications segment business performed under cost-reimbursement- type contracts currently include the International Space Station, NMD LSI, Space Shuttle Flight Operations and Space Shuttle Main Engine.
The U.S. Government defense market environment is one in which continued intense competition among defense contractors can be expected, especially in light of U.S. Government budget constraints. The Company's ability to successfully compete for and retain such business is highly dependent on its technical excellence, demonstrated management proficiency, strategic alliances, and cost-effective performance.
The acquisition and merger consolidations among U.S. aerospace companies have resulted in three principal prime contractors for the DoD and NASA, including the Company. As a result of the extensive consolidation in the defense and space industry, the Company and its major competitors are also partners or major suppliers to each other on various programs.
The Company and Lockheed Martin are 50-50 partners in United Space Alliance (USA), which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the United States Air Force. USA also performs the modification, testing and checkout operations required to ready the Space Shuttle for launch. Although the joint venture operations are not included in the Company's consolidated statements, the Company's proportionate share of joint venture earnings is recognized in income.
The Sea Launch program in which Boeing is a 40% partner with RSC Energia (25%) of Russia, Kvaerner Maritime (20%) of Norway, and KB Yuzhnoye/PO Yuzhmach (15%) had a successful return to flight in July 2000 after an ICO launch termination earlier in the year.
Research and development expense amounted to $2.0 billion, $1.3 billion and $1.9 billion in 2000, 1999 and 1998, respectively. The amount expensed in 2000 included $557 million attributable to in-process research and development (IPR&D). Based on current programs and plans, research and development expense for 2001 is expected to be in the range of 3.0% to 3.5% of the total projected revenues, of approximately $57 billion.
The Company's backlog of firm contractual orders (in billions) at December 31 follows:
2000 1999 ====== ===== Commercial Airplanes $ 89.8 $73.0 Military Aircraft and Missiles 17.1 15.6 Space and Communications 13.7 10.6 ------ ----- Total contractual backlog $120.6 $99.2 ====== =====
Not included in contractual backlog are purchase options and announced orders for which definitive contracts have not been executed and orders from customers that have filed for bankruptcy protection. Additionally, U.S. Government and foreign military firm backlog is limited to amounts obligated to contracts. Unobligated contract funding not included in backlog at December 31, 2000 and 1999, totaled $31.3 billion and $24.4 billion.
In evaluating the Company's contractual backlog for commercial customers, certain risk factors should be considered. Approximately 31% of the commercial aircraft backlog units are scheduled for delivery beyond 2003. Changes in the economic environment and the financial condition of airlines sometimes result in customer requests for rescheduling or cancellation of contractual orders.
Contracts with the U.S. Government are subject to termination for default or for convenience by the Government if deemed in its best interests. Contracts that are terminated for convenience generally provide for payments to a contractor for its costs and a proportionate share of profit for work accomplished through the date of termination. Contracts that are terminated for default generally provide that the Government pays only for the work it has accepted, can require the contractor to pay the difference between the original contract price and the cost to reprocure the contract items net of the value of the work accepted from the original contractor, and can hold a contractor liable for damages.
The Company is dependent on the availability of energy sources, such as electricity, at affordable prices. The Company is also highly dependent on the availability of essential materials, parts and subassemblies from its suppliers and subcontractors. The most important raw materials required for the Company's aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). Although alternative sources generally exist for these raw materials, qualification of the sources could take a year or more. Many major components and product equipment items are procured or subcontracted on a sole- source basis with a number of domestic and foreign companies. The Company is dependent upon the ability of its large number of suppliers and subcontractors to meet performance specifications, quality standards, and delivery schedules at anticipated costs, and their failure to do so would adversely affect production schedules and contract profitability, while jeopardizing the ability of the Company to fulfill commitments to its customers. The Company maintains an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties.
While the Company owns numerous patents and has licenses under patents owned by others relating to its products and their manufacture, it does not believe that its business would be materially affected by the expiration of any patents or termination of any patent license agreements. The Company has no trademarks, franchises or concessions that are considered to be of material importance to the conduct of its business.
The Company is subject to federal, state and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. The Company believes its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and regulations requires continuing management effort and expenditures by the Company. Compliance with environmental laws and regulations has not had in the past, and, the Company believes, will not have in the future, material effects on the capital expenditures, earnings or competitive position of the Company. (See Item 3, Legal Proceedings, for additional information regarding environmental regulation.)
The Company is subject to business and cost classification regulations associated with its U.S. Government defense and space contracts. Violations can result in civil, criminal or administrative proceedings involving fines,
compensatory and treble damages, restitution, forfeitures, and suspension or debarment from Government contracts.
Sales outside the United States (principally export sales from domestic operations) by geographic area are included on page 73 of the Company's 2000 Annual Report to Shareholders and incorporated herein by reference. Less than 1% of total sales were derived from non-U.S. operations of the Company for each of the three years in the period ended December 31, 2000. Approximately 43% of the Company's contractual backlog value at December 31, 2000, was with non-U.S. customers. Sales outside the United States are influenced by U.S. Government foreign policy, international relationships, and trade policies of governments worldwide. Relative profitability is not significantly different from that experienced in the domestic market.
Approximately 28% of combined accounts receivable and customer and commercial financing consisted of amounts due from customers outside the United States. Substantially all of these amounts are payable in U.S. dollars, and, in management's opinion, related risks are adequately covered by allowance for losses. The Company has not experienced materially adverse financial consequences as a result of sales and financing activities outside the United States.
The Company's workforce level at January 25, 2001, was approximately 198,000, including approximately 3,200 in Canada and 1,500 in Australia.
Item 2.
Item 2. Properties
The locations and floor areas of the Company's principal operating properties at January 1, 2001, are indicated in the following table.
Floor Area (Thousands of square feet) Company- Owned Leased ======== ====== United States Greater Seattle, Washington 42,672 2,958 Greater Southern California 16,706 7,068 Wichita, Kansas 12,206 920 Greater St. Louis, Missouri 8,839 629 Greater Philadelphia, Pennsylvania 3,387 Huntsville - Decatur, Alabama 1,938 357 Mesa, Arizona 1,930 139 Portland, Oregon 1,132 7 Greater Cape Canaveral, Florida 808 90 Spokane, Washington 654 48 Duluth - Macon, Georgia 543 279 Oakridge, Tennessee 492 Irving - Corinth, Texas 456 79 Denver - Pueblo, Colorado 432 362 Greater Houston, Texas 172 211 Tulsa - McAlester, Oklahoma 165 1,734 Melbourne, Arkansas 106 Wilmington, Delaware 102 Salt Lake City - Layton, Utah 35 244 Jacksonville, Florida 9 113 San Antonio, Texas 1,413 Heath, Ohio 791 Greater Washington, D.C. 458 El Paso, Texas 280 Glasgow, Montana 147 Shreveport, Louisiana 135 Bay Saint Louis, Mississippi 94 Albuquerque, New Mexico 33 Bangor, Maine 11 Hampton, Virginia 8 Chicago, Illinois 1 Australia 1,138 783 Canada Toronto, Ontario 1,750 63 Winnipeg, Manitoba 96 520 England 52 Germany 75
Most runways and taxiways used by the Company are located on airport properties owned by others and are used by the Company jointly with others. The Company's rights to use such facilities are provided for under long-term leases with municipal, county, port, or other government authorities. In addition, the U.S. Government furnishes the Company certain office space, installations and equipment at Government bases for use in connection with various contract activities. Facilities at the major locations support all principal industry segments. Work related to a given program may be assigned to various locations based upon periodic review of shop loads and productions capability. The Company continues the evaluation of facilities to consolidate redundant activities. Properties and land that do not meet long-term business requirements will be dispositioned.
The Company's principal properties are well maintained and in good operating condition. Presently existing facilities are sufficient to meet the Company's near-term operating requirements.
Item 3.
Item 3.	Legal Proceedings
Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below.
The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and-remediation obligations since the 1980s.
The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred.
The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings. Such accruals as of December 31, 2000, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities.
Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends.
The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. In 1991, the U.S. Navy notified the Company and General Dynamics Corporation (the Team) that it was terminating for default the Team's contract for development and initial production of the A-12 aircraft. The Team filed a legal action to contest the Navy's default termination, to assert its rights to convert the termination to one for "the convenience of the Government," and to obtain payment for work done and costs incurred on the A-12 contract but not paid to date. As of December 31, 2000, 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. Trial on all issues now is set for May 1, 2001. Final resolution of the A-12 litigation will depend on the outcome of such trial 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 December 31, 2000, as a result of a termination of the contract for the convenience of the Government. The Company has been provided with an opinion of outside counsel that (i) the Government's termination of the contract for default was contrary to law and fact, (ii) the rights and obligations of the Company are the same as if the termination had been issued for the convenience of the Government, and (iii) subject to prevailing on the issue that the termination is properly one for the convenience of the Government, the probable recovery by the Company is not less than $250 million.
On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington, in Seattle. The lawsuit names as defendants the Company and three of its then executive officers. Additional lawsuits of a similar nature have been filed in the same court. These lawsuits were consolidated on February 24, 1998. The lawsuits generally allege that the defendants desired to keep the Company's share price as high as possible in order to ensure that the McDonnell Douglas shareholders would approve the merger and, in the case of the individual defendants, to benefit directly from the sale of Boeing stock during the period from April 7, 1997 through October 22, 1997. By order dated May 1, 2000, the Court certified two subclasses of plaintiffs in the action: a. all persons or entities who purchased Boeing stock or call options or who sold put options during the period from July 21, 1997, through October 22, 1997, and b. all persons or entities who purchased McDonnell Douglas stock on or after April 7, 1997, and who held such stock until it converted to Boeing stock pursuant to the
merger. The plaintiffs seek compensatory damages and treble damages. The action now is set for trial on March 7, 2002. The Company believes that the allegations are without merit and that the outcome of these lawsuits will not have a material adverse effect on its earnings, cash flow or financial position.
On October 19, 1999, an indictment was returned by a federal grand jury sitting in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company division, conspired to and made false statements and concealed material facts on export license applications and in connection with export licenses, and possessed and sold machine tools in violation of the Export Administration Act. The indictment also charged one employee with participation in the alleged conspiracy. (The indictment has since been dismissed as against that employee but his dismissal is the subject of a pending appeal by the government to the U.S. Court of Appeals for the D.C. Circuit.) The indictment relates to the sale and export to China in 1993-1995 of surplus, used machine tools sold by Douglas Aircraft Company to China National Aero-Technology Import and Export Corporation for use in connection with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny defense-related export privileges to MDC or a division or subsidiary of MDC. The agency exercised that discretion on January 5, 2000, by establishing a "denial policy" with respect to defense-related exports of MDC and its subsidiaries. Most of MDC's major existing defense programs were, however, excepted from that policy due to overriding U.S. foreign policy and national security interests. Other exceptions have been granted. There can, however, be no assurance as to how the Department will exercise its discretion as to program or transaction exceptions for other programs or future defense-related exports. In addition, the Department of Commerce has authority to temporarily deny other export privileges to, and the Department of Defense has authority to suspend or debar from contracting with the military departments, MDC or a division or subsidiary of MDC. Neither agency has taken action adverse to MDC or its divisions or subsidiaries thus far. Based upon all available information, the Company does not expect actions that would have a material adverse effect on its financial position or continuing operations. In the unanticipated event of a conviction, MDC would be subject to Department of State and Department of Commerce denials or revocations of MDC export licenses. MDC also would be subject to Department of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender discrimination and harassment was filed against The Boeing Company, Boeing North American, Inc., and McDonnell Douglas Corporation. The complaint, filed with the United States District Court in Seattle, alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against females over the course of many years. The complaint, Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, an amended complaint was filed naming an additional 10 plaintiffs, including the first from California. The lawsuit attempts to represent all women who currently work for the Company, or who have worked for the Company in the past several years (approximately 70,000).
The Company has denied the allegation that it has engaged in any unlawful "pattern and practice" and believes that the plaintiffs cannot satisfy the rigorous requirements necessary to achieve the class action status they seek. The deadline for filing plaintiffs' motion for class certification, originally scheduled to be heard on August 25, 2000, now has been extended until May 2001. The Company intends to vigorously contest this lawsuit.
In October 1999, a number of individual plaintiffs filed a federal court action alleging employment discrimination based upon race and national (sic) origin (Asian). This action was subsequently consolidated with a related suit making similar allegations and class action status was sought in a motion filed on January 3, 2001. The class for which certification is being sought would include all non-management salaried workers of Asian descent employed in Washington State. The action is limited to claims of alleged discrimination in compensation, promotion, transfer, retention rating, and job classification.
The Company has denied the allegations of discrimination and plans to oppose the motion for class certification and vigorously defend the lawsuit. The court's decision on class certification is anticipated to be issued as early as the second quarter of 2001.
Item 4.
Item 4.	Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter ended December 31, 2000.
PART II
Item 5.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters
Information required by this item is included on page 100 and on page 106 of the Company's 2000 Annual Report to Shareholders and is incorporated herein by reference.
Item 6.
Item 6.	Selected Financial Data
Information required by this item is included on page 98 of the Company's 2000 Annual Report to Shareholders and is incorporated herein by reference.
Item 7.
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Information required by this item is included on pages 57-71 of the Company's 2000 Annual Report to Shareholders and is incorporated herein by reference.
Item 8.
Item 8.	Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data, included in the Company's 2000 Annual Report to Shareholders on the pages indicated, are incorporated herein by reference:
Consolidated Statements of Operations - years ended December 31, 2000, 1999 and 1998: Page 75.
Consolidated Statements of Financial Position - December 31, 2000 and 1999: Page 76.
Consolidated Statements of Cash Flows - years ended December 31, 2000, 1999 and 1998: Page 77.
Consolidated Statements of Shareholders' Equity - December 31, 2000, 1999 and 1998: Pages 78-79.
Notes to Consolidated Financial Statements: Pages 80-95.
Supplementary data regarding quarterly results of operations: Page 96.
Independent Auditors' Report: Page 97.
Item 9.
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10.	Directors and Executive Officers of the Registrant
Executive Officers
No family relationships exist among any of the executive officers, directors or director nominees. The executive officers of the Company as of February 28, 2000, are as follows:
Name Age Positions and offices held and business experience ================================================================================ Philip M. Condit 59 Chairman of the Board since February 1997. Chief Executive Officer since April 1996. Director since August 1992. President from August 1992 through January 1997.
Harry C. Stonecipher 64 President and Chief Operating Officer of the Company and Director since August 1997. Prior thereto, President and Chief Executive Officer of McDonnell Douglas Corporation from September 1994.
James F. Albaugh 50 Senior Vice President of the Company and President, Space and Communications Group since September 1998. Prior thereto, President of Boeing Space Transportation from April 1998. Prior thereto, President of Rocketdyne Propulsion and Power, now a business of Space and Communications Group, from March 1997. Prior thereto, Vice President - Operations, Rocketdyne Propulsion and Power from 1994.
Douglas G. Bain 51 Senior Vice President and General Counsel since August 2000. Prior thereto, Vice President and General Counsel from November 1999. Prior thereto, Vice President of Legal, Contracts, Ethics and Government Relations for Boeing Commercial Airplanes Group from 1996.
Scott Carson 54 Senior Vice President of the Company and President, Connexion by Boeing since November 2000. Prior thereto, Executive Vice President and Chief Financial Officer of Boeing Commercial Airplanes Group, from September 1998. Prior thereto, Executive Vice President of Business Resources for Boeing Information, Space and Defense Systems from November 1997. Prior thereto, Executive Vice President of Boeing Commercial Space Company.
James B. Dagnon 61 Senior Vice President - People since May 1997. Prior thereto, Senior Vice President - Employee Relations, Burlington Northern Santa Fe from 1995.
Name Age Positions and offices held and business experience ================================================================================ Gerald E. Daniels 55 Senior Vice President of the Company and President, Military Aircraft and Missile Systems Group since May 2000. Prior thereto, Vice President and General Manager of U.S. Navy and Marine Corps Programs for the Military Aircraft and Missile Systems Group, from February 1997. From October 1998 to May 2000, he also served as St. Louis site manager. From January 1994 until February 1997, Vice President and General Manager of the F/A-18 program for McDonnell Douglas Corporation.
Christopher W. Hansen 52 Senior Vice President - Government Relations since December 1998. Prior thereto, Vice President - Government Affairs from August 1997 and Vice President - U.S. Government Affairs from March 1997. Prior thereto, Staff Vice President of the Washington, D.C., office from September 1994 and Staff Vice President of Congressional Affairs from January 1994.
John B. Hayhurst 53 Senior Vice President of the Company and President, Air Traffic Management since November 2000. Prior thereto, Vice President of Business Development for the Commercial Aviation Services unit of Boeing Commercial Airplanes Group from June 2000. Prior thereto, Vice President and General Manager of 737 Programs and General Manager of the Renton, WA production site from October 1998. Prior thereto, Vice President and General Manager of North and South America Sales from February 1997. Prior thereto, Vice President and General Manager of the 747X Program from June 1996. Prior thereto, Vice President of Boeing Commercial Airplane Group Product Development from December 1994.
Laurette T. Koellner 46 Senior Vice President of the Company and President, Shared Services Group since November 2000. Prior thereto, Vice President and Corporate Controller from March 1999. Prior thereto, Vice President and General Auditor from August 1997. Prior thereto, Vice President of Auditing at McDonnell Douglas Corporation from May 1996. Prior thereto, Division Director of Human Resources at McDonnell Douglas Aerospace Company from May 1994.
Name Age Positions and offices held and business experience ================================================================================ Alan R. Mulally 55 Senior Vice President of the Company since February 1997 and President of Boeing Commercial Airplanes Group since September 1998. Prior thereto, President of Boeing Information, Space & Defense Systems from August 1997 through August 1998. Prior thereto, President of Boeing Defense & Space Group from January 1997. Prior thereto, Senior Vice President of Airplane Development and Definition, Boeing Commercial Airplane Group from 1994.
James F. Palmer 51 Senior Vice President of the Company and President, Boeing Capital Corporation since November 2000. Prior thereto, Senior Vice President of the Company and President of Shared Services Group since August 1997. Prior thereto, Senior Vice President and Chief Financial Officer of McDonnell Douglas Corporation from July 1995.
Thomas R. Pickering 69 Senior Vice President, International Relations since January 2001. Prior thereto, U.S. Undersecretary of State for Political Affairs from May 1997. Prior thereto, President of the Eurasia Foundation, which makes grants and loans in the states of the former Soviet Union, from December 1996 through April 1997. Prior thereto, U.S. Ambassador to the Russian Federation from May 1993 through November 1996.
Michael M. Sears 53 Senior Vice President and Chief Financial Officer of the Company since May 2000. Prior thereto, Senior Vice President of the Company and President, Military Aircraft and Missiles Systems Group from September 1998. Prior thereto, Executive Vice President of Boeing Information, Space & Defense Systems, and President of McDonnell Aircraft and Missile Systems from August 1997. Prior thereto, President of McDonnell Douglas Aerospace from February 1997. Prior thereto, President of Douglas Aircraft Company from April 1996.
David O. Swain 58 Senior Vice President of Engineering & Technology of the Company and President, Phantom Works since September 1999. Prior thereto, Vice President of Engineering of the Company and Executive Vice President of Phantom Works from 1997. Prior thereto, Vice President and General Manager of Advanced Systems and Technology-Phantom Works, McDonnell Douglas Corporation from 1994.
Name Age Positions and offices held and business experience ================================================================================ John D. Warner 61 Senior Vice President and Chief Administrative Officer of the Company since August 1997. Prior thereto, Senior Vice President from February 1997. Prior thereto, President of Boeing Information and Support Services from 1995.
Other information required by Item 10 involving the identification and election of directors is incorporated herein by reference to the registrant's definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year.
Item 11.
Item 11.	Executive Compensation *
Item 12.
Item 12.	Security Ownership of Certain Beneficial Owners and Management *
Item 13.
Item 13.	Certain Relationships and Related Transactions *
*	Information required by Items 11, 12, and 13 is incorporated herein by reference to the registrant's definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year.
PART IV
Item 14.
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)	List of documents filed as part of this report:
1. Financial Statements
All consolidated financial statements of the Company as set forth under Item 8 of this report on Form l0-K.
2. Financial Statement Schedules
Schedule Description Page -------- --------------------------------- ---- II Valuation and Qualifying Accounts 23
The auditors' report with respect to the above-listed financial statement schedule appears on page 22 of this report. All other financial statements and schedules not listed are omitted either because they are not applicable, not required, or the required information is included in the consolidated financial statements.
3. Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. (i) Agreement and Plan of Merger dated as of July 31, 1996, among Rockwell International Corporation, The Boeing Company and Boeing NA, Inc. (Exhibit 2.1 to the Company's Registration Statement on Form S-4 (File No. 333-15001) filed October 29, 1996 (herein referred to as "Form S-4").) (ii) Agreement and Plan of Merger, dated as of December 14, 1996, among The Boeing Company, West Acquisition Corp. and McDonnell Douglas Corporation. (Exhibit (2)(ii) to the Company's Annual Report on Form 10-K (File No. 1-442) for the year ended December 31, 1996, (herein referred to as "1996 Form 10-K").)
(3) Articles of Incorporation and By-Laws. (i) Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on August 14, 1997. (Exhibit (3)(iii) to the Company's Form 10-Q for the quarter ended June 30, 1997.) (ii) By-Laws, as amended and restated on May 1, 2000. (Exhibit (3)(i) to the Company's Form 10-Q for the quarter ended June 30, 2000.)
(4) Instruments Defining the Rights of Security Holders, Including Indentures. (i) Indenture, dated as of August 15, 1991, between the Company and The Chase Manhattan Bank (National Association), Trustee. (Exhibit (4) to the Company's Current Report on Form 8-K (File No. 1-442) dated August 27, 1991.)
(10) Material Contracts. The Boeing Company Bank Credit Agreements. (i) U.S. $1.5 Billion 364-Day Credit Agreement dated as of September 27, 2000, among The Boeing Company, as Borrower, the Lenders party thereto, Salomon Smith Barney Inc. and Chase Securities, Inc., as Joint Lead Arrangers and Joint Book Managers, The Chase Manhattan Bank, as Syndication Agent, and Citibank, N.A., as Administrative Agent for the Lenders. (Exhibit (10) (i) (Bank Credit Agreements) to the Company's Form 10-Q for the quarter ended September 30, 2000.) (ii) U.S. $700 Million Five-Year Credit Agreement dated as of September 27, 2000, among The Boeing Company, as Borrower, the Lenders party thereto, Salomon Smith Barney Inc. and Chase Securities, Inc., as Joint Lead Arrangers and Joint Book Managers, The Chase Manhattan Bank, as Syndication Agent, and Citibank, N.A., as Administrative Agent for the Lenders. (Exhibit (10) (ii) (Bank Credit Agreements) to the Company's Form 10-Q for the quarter ended September 30, 2000.)
Management Contracts and Compensatory Plans (iii) 1988 Stock Option Plan. (a) Plan, as amended on December 14, 1992. (Exhibit (10)(vii)(a) of the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (herein referred to as "1992 Form 10-K").) (b) Form of Notice of Terms of Stock Option Grant. (Exhibit (10)(vii)(b) of the 1992 Form 10-K.) (iv) 1992 Stock Option Plan for Nonemployee Directors. (a) Plan. (Exhibit (19) of the Company's Form 10-Q for the quarter ended March 31, 1992.) (b) Form of Stock Option Agreement. (Exhibit (10)(viii)(b) of the 1992 Form 10-K.)
(v) Supplemental Benefit Plan for Employees of The Boeing Company, as amended on February 22, 1998. (Exhibit (10)(i) of the Company's Form 10-Q for the quarter ended March 31, 1998 (herein referred to as "1st Quarter 1998 Form 10-Q").) (vi) Supplemental Retirement Plan for Executives of The Boeing Company. (Exhibit (10)(ii) of the Company's Form 10-Q for the quarter ended September 30, 1997.) (vii) Deferred Compensation Plan for Employees of The Boeing Company, as amended on February 23, 1998. (Exhibit (10)(ii) to the 1st Quarter 1998 Form 10-Q.) (viii) Deferred Compensation Plan for Directors of The Boeing Company, as amended on August 29, 2000. (Exhibit (10)(i) (Management Contracts) to the Company's Form 10-Q for the quarter ended September 30, 2000.) (ix) 1993 Incentive Stock Plan for Employees. (a) Plan, as amended on December 13, 1993. (Exhibit (10)(ix)(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (herein referred to as "1993 Form 10-K").) (b) Form of Notice of Stock Option Grant. (i) Regular Annual Grant. (Exhibit (10)(ix)(b)(i) to the 1993 Form 10-K.) (ii) Supplemental Grant. (Exhibit (10)(ix)(b)(ii) to the 1993 Form 10-K.) (x) Incentive Compensation Plan for Officers and Employees of the Company and Subsidiaries, as amended on April 28, 1997. (Exhibit (10)(i) to the Company's Form 10-Q for the quarter ended March 31, 1997.) (xi) 1997 Incentive Stock Plan, as amended on May 1, 2000. (Exhibit 99.1 of the Company's Registration Statement on Form S-8 (File No. 333-41920), filed July 21, 2000.) (xii) Employment Agreement with Harry C. Stonecipher dated August 1, 1997. (Exhibit (10)(i) to the Company's Form 10-Q for the quarter ended June 30, 1997.) (a) Amendment No. 1, dated as of June 26, 2000, to Employment Agreement with Harry C. Stonecipher dated August 1, 1997. (Exhibit (10)(i) to th Company's Form 10-Q for the quarter ended June 30, 2000.) (xiii) Boeing Company Executive Layoff Benefits Plan, as amended on June 28, 1999. (Exhibit (10) to the Company's Form 10-Q for the quarter ended June 30, 1999.) (xiv) The McDonnell Douglas 1994 Performance and Equity Incentive Plan. (Exhibit 99.1 of Registration Statement No. 333-32567 on Form S-8 filed on July 31, 1997.) (xv) The Boeing Company ShareValue Program, as amended on December 20, 1996. (Exhibit (10)(xiii) to the 1996 Form 10-K.) (xvi) Stock Purchase and Restriction Agreement dated as of July 1, 1996, between The Boeing Company and Wachovia Bank of North Carolina, N.A. as Trustee, under the ShareValue Trust Agreement dated as of July 1, 1996. (Exhibit 10.20 to the Form S-4.) (xvii) 1999 Bonus and Retention Award Plan, as adopted on April 26, 1999. (Exhibit (10)(ii) to the Company's Form 10-Q for the quarter ended June 30, 2000.) (xviii) Supplemental Pension Agreement with Michael M. Sears, dated February 16, 2000. (Exhibit (10)(xxiii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.)
(xix) Restricted Stock Unit Grant Agreement with James F. Albaugh, dated December 7, 1999. Filed herewith. (xx) Restricted Stock Unit Grant Agreement with Allan R. Mulally, dated June 30, 1998. Filed herewith. (xxi) Restricted Stock Unit Grant Agreement with Michael M. Sears, effective as of October 18, 1999. Filed herewith.
(12) Computation of Ratio of Earnings to Fixed Charges. Page 24.
(13) Portions of the 2000 Annual Report to Shareholders incorporated by reference herein. Filed herewith.
(21) List of Company Subsidiaries. Pages 108-112.
(23) Independent Auditors' Consent and Report on Financial Statement Schedule for use in connection with filings of Form S-8 under the Securities Act of 1933. Page 22.
(99) Additional Exhibits (i) Commercial Program Method of Accounting. (Exhibit (99)(i) to the 1997 Form 10-K.) (ii) Post-Merger Combined Statements of Operations and Financial Position. (Exhibit (99)(i) to the Company's Form 10-Q for the quarter ended June 30, 1997.) (b) Reports on Form 8-K filed during quarter ended December 31, 2000:
No reports on Form 8-K were filed during the quarter covered by this report.
Signatures
Pursuant to the requirements of Section 13 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, on the date indicated.
THE BOEING COMPANY (Registrant)
By: /s/ Philip M. Condit By: /s/ Harry C. Stonecipher ---------------------------------- --------------------------------- Philip M. Condit - Chairman of the Harry C. Stonecipher - President, Board, Chief Executive Officer Chief Operating Officer and Director and Director
By: /s/ Michael M. Sears By: /s/ James A. Bell ----------------------------------- -------------------------------- Michael M. Sears - Senior Vice James A. Bell - Vice President President and Chief Financial Officer Finance and Corporate Controller
Date: February 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ John H. Biggs /s/ John McDonnell - ------------------------ ---------------------------- John H. Biggs - Director John F. McDonnell - Director
/s/ John E. Bryson - ------------------------- ---------------------------- John E. Bryson - Director Charles M. Pigott - Director
/s/ Kenneth M. Duberstein /s/ Lewis E. Platt - -------------------------------- -------------------------- Kenneth M. Duberstein - Director Lewis E. Platt - Director
/s/ John B. Fery /s/ Rozanne L. Ridgeway - ----------------------- ----------------------------- John B. Fery - Director Rozanne L. Ridgway - Director
/s/ Paul E. Gray /s/ John M. Shalikashvili - ----------------------- ------------------------------- Paul E. Gray - Director John M. Shalikashvili- Director
Date: February 26, 2001
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of The Boeing Company Seattle, Washington
We consent to the incorporation by reference in Registration Statement Nos. 2-48576, 33-25332, 33-31434, 33-43854, 33-58798, 33-52773, 333-03191, 333-16363, 333-26867, 333-32461, 333-32491, 333-32499, 333-32567, 333-35324, 333-41920, 333-47450, and 333-54234 of The Boeing Company on Form S-8 of our report dated January 26, 2001, appearing in and incorporated by reference in the Annual Report on Form 10-K of The Boeing Company for the year ended December 31, 2000.
Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of The Boeing Company, listed in Item 14(a) 2 in this Annual Report on Form 10-K for the year ended December 31, 2000. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington
March 9, 2001
SCHEDULE II - Valuation and Qualifying Accounts The Boeing Company and Subsidiaries
Allowance for Doubtful Accounts and Customer Financing (Deducted from assets to which they apply)
(Dollars in millions)
2000 1999 1998 ==============================================================================
Balance at January 1 $ 322 $289 $233
Charged to costs and expenses 49 102 61
Transfer from accrued liabilities 24
Deductions from reserves (accounts charged off) (151) (93) (5) ----- ---- ---- Balance at December 31 $ 220 $322 $289 ===== ==== ====
EXHIBIT (12) - Computation of Ratio of Earnings to Fixed Charges The Boeing Company and Subsidiaries
(Dollars in millions)
Year ended December 31, - ----------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ==== ==== ==== ==== ==== Earnings before federal taxes on income $2,999 $3,324 $1,397 $(341) $2,480
Fixed charges excluding capitalized interest 481 483 507 552 463
Amortization of previously capitalized interest 71 80 75 97 80
Net adjustment for earnings of affiliates (44) (8) (18) 4 (1) ------ ------ ------ ----- ------ Earnings available for fixed charges $3,507 $3,879 $1,961 $ 312 $3,022 ====== ====== ====== ===== ======
Fixed charges:
Interest expense $445 $431 $453 $513 $393
Interest capitalized during the period 82 81 65 61 58
Rentals deemed representative of an interest factor 36 52 54 39 70 ---- ---- ---- ---- ---- Total fixed charges $563 $564 $572 $613 $521 ==== ==== ==== ==== ====
Ratio of earnings to fixed charges 6.2 6.9 3.4 .5 5.8 === === === == ===
EXHIBITS FILED WITH THIS REPORT ON FROM 10-K Commission File Number 1-442
THE BOEING COMPANY Exhibit Index
Annual Report to Share- Form holders 10-K Exhibit Description Page Page - ------------------------------------------------------------------------------- (10) (xix) Restricted Stock Unit Grant Agreement with James F. Albaugh, dated December 7, 1999. 101
(xx) Restricted Stock Unit Grant Agreement with Allan R. Mulally, dated June 30, 1998. 103
(xxi) Restricted Stock Unit Grant Agreement with Michael M. Sears, effective as of October 18, 1999. 105
(12) Computation of Ratio of Earnings to Fixed Charges 24
(13) Portions of the 2000 Annual Report to Shareholders incorporated by reference in Part I and Part II 26
Market for registrant's Common Equity and related Stockholder Matters 106 99 Management's Discussion and Analysis of Financial Position and Results of Operations 57 26 Consolidated Statements of Operations 75 58 Consolidated Statements of Financial Position 76 59 Consolidated Statements of Cash Flows 77 60 Consolidated Statements of Shareholders' Equity 78 61 Notes to Consolidated Financial Statements 80 67 Independent Auditor's Report 97 96 Supplementary Data Regarding Quarterly Financial Data 96 95 Selected Financial Data Five-Year Summary 98 97
(21) List of Subsidiaries 107
(23) Independent Auditors; Consent and Report on Financial Statement Schedule for use in connection with filings of Form S-8 under the Securites Act of 1933. 22
Appendix of graphic and image material pursuant to Rule 304(a) of regulation S-T 112
Exhibit (13) Portions of the 2000 Annual Report to Shareholders Incorporated by Reference in Part I and Part II
MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS, FINANCIAL CONDITION AND BUSINESS ENVIRONMENT
RESULTS OF OPERATIONS - ---------------------
REVENUES
Operating revenues for 2000 were $51.3 billion compared with $58.0 billion in 1999 and $56.2 billion in 1998. The lower revenues for 2000 principally reflect decreased deliveries in the Commercial Airplanes segment, but also reflect an increase in Space and Communications segment revenues of $1.2 billion to $8.0 billion in 2000. The higher revenues in 1999 relative to 1998 principally reflect increased deliveries in the Commercial Airplanes segment.
Revenues by industry segment: [Graphic and image material item Number 1 See appendix on page 112 for description] - ------------------------------------------------------------------------------- | 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, revenues, earnings, operating margins, research and development, | | project completion growth in the integrated defense system sector and NMD | | LSI,increases in net periodic benefit income and net periodic benefit costs,| | increases in employee health care costs, the 717 program, the Delta III | | program, growth in passenger traffic, the commercial aircraft market, the | | commercial aviation support market, increases in Military research and | | development and procurement, the aerospace support market, passenger revenue| | yields, increases in energy costs, fuel costs, long-term productivity | | improvements, environmental contingencies and other trend projections. This | | forward-looking information is based upon a number of assumptions including | | assumptions regarding global economic, passenger and freight growth; current| | and future markets for the Company's products and services; demand for the | | Company's products and services; performance of internal plans, including, | | without limitation, plans for productivity gains, reductions in cycle time | | and improvements in design processes, production processes and asset | | utilization; product performance; customer financing; customer, supplier and| | subcontractor performance; customer model selections; favorable outcomes of | | certain pending sales campaigns and U.S. and foreign government procurement | | actions; supplier contract negotiations; price escalation; government | | policies and actions; successful negotiation of contracts with the Company's| | labor unions; regulatory approvals; and successful execution of acquisition | | and divestiture plans. 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 continued | | research and development, production rate increases and decreases, | | production system initiatives, timing of product deliveries and launches, | | supplier contract negotiations, asset management plans, acquisition and | | divestiture plans, procurement plans, and other cost-reduction efforts; the | | actual outcomes of certain pending sales campaigns and U.S. and foreign | | government procurement activities; acceptance of new products and services; | | product performance risks; the cyclical nature of some of the Company's | | businesses; volatility of the market for certain products and services; | | domestic and international competition in the defense, space and commercial | | areas; continued integration of acquired businesses; uncertainties | | associated with regulatory certifications of the Company's commercial | | aircraft by the U.S. Government and foreign governments; other regulatory | | uncertainties; collective bargaining labor disputes; performance issues with| | key suppliers, subcontractors and customers; governmental export and import | | policies; factors that result in significant and prolonged disruption to air| | travel worldwide; global trade policies; worldwide political stability; | | domestic and international economic conditions; price escalation trends; the| | outcome of political and legal processes, including uncertainty regarding | | government funding of certain programs; changing priorities or reductions in| | the U.S. Government or foreign government defense and space budgets; | | termination of government contracts due to unilateral government action or | | failure to perform; legal, financial and governmental risks related to | | international transactions; legal proceedings; and other economic, political| | and technological risks and uncertainties. Additional information regarding| | these factors is contained in the Company's SEC filings, including, without | | limitation, the Company's Annual Report on Form 10-K for the year ended 1999| | and the Company's Quarterly Report on Form 10-Q for the quarter ended | | September 30, 2000. | - -------------------------------------------------------------------------------
Commercial Airplanes Commercial Airplanes products and services accounted for 61%, 66% and 66% of total operating revenues for the years 2000, 1999 and 1998, respectively.
Total commercial jet aircraft deliveries by model, including deliveries under operating lease, which are identified by the number in parentheses, were as follows:
2000 1999 1998 - --------------------------------------------------- 717 32(23) 12(2) - 737 Classic 2 42 116(6) 737 NG 279 278 165 747 25 47 53(3) 757 45 67 54 767 44 44(1) 47 777 55 83 74 MD-80 - 26(21) 8(4) MD-90 3 13 34 MD-11 4 8 12(2) - --------------------------------------------------- 	 Total 489 620 563 ===================================================
Deliveries in 2000 include intercompany deliveries of four 737 NG aircraft and one ABL 747, and 1998 intercompany deliveries include four 757 aircraft.
Final deliveries of the MD-80 aircraft program occurred in 1999, and final deliveries of the 737 Classic and MD-90 aircraft programs occurred in 2000. Production of the MD-11 aircraft program completed in 2000, with final deliveries completed in early 2001. The first 717 delivery occurred in the third quarter of 1999. The 737-900 derivative was completed in 2000 and first delivery is scheduled for 2001.
Total commercial aircraft deliveries for 2001 are currently projected to be approximately 530 aircraft. Based on current plans, Commercial Airplanes revenue is projected to be in the $35 billion range. Total commercial aircraft deliveries for 2002 are currently projected to approximate total deliveries for 2001. Commercial aircraft transportation trends are discussed in the Commercial Airplanes Business Environment and Trends section on pages 45-48.
Commercial Airplanes sales by geographic region: [Graphic and image material item Number 2 See appendix on page 112 for description]
Military Aircraft and Missiles Military Aircraft and Missiles segment revenues were $12.2 billion in both 2000 and 1999 and $13.0 billion in 1998. The Military Aircraft and Missiles business segment is broadly diversified, and no program other than the C-17 transport program and the F/A-18E/F Super Hornet accounted for more than 8% of total 1999-2000 segment revenues. Revenues include amounts attributable to production programs and amounts recognized on a cost-reimbursement basis for developmental programs such as the Raptor and V-22 Osprey. The principal contributors to 2000 Military Aircraft and Missiles segment revenues included the C-17 Globemaster, F/A-18E/F Super Hornet, F/A-18C/D Hornet, AH-64 Apache, Raptor, Eagle, V-22 Osprey, and CH-47 Chinook programs, along with aerospace support programs.
Deliveries of selected production units were as follows:
2000 1999 1998 - --------------------------------------------------- C-17 13 11 10 5 35 39 F/A-18C/D 16 25 29 F/A-18E/F 26 13 1 T-45TS 16 12 16 CH-47 Chinook 7 14 18 757 C-32A - - 4 AH-64 Apache 8 11 5
Military Aircraft and Missiles segment revenues for 2001 are projected to be in the $12 billion range. Segment business trends are discussed in the Military Aircraft and Missiles Business Environment and Trends section on pages 48-49.
Space and Communications Space and Communications segment revenues were $8.0 billion in 2000, compared with $6.8 billion in 1999 and $6.9 billion in 1998. The segment is broadly diversified. The principal contributors to 2000 Space and Communications segment revenues included National Missile Defense Lead System Integrator (NMD LSI) and the International Space Station, each accounting for approximately 15% of 2000 revenues. Other principal contributors included satellite system programs, principally from the Hughes space and communications businesses acquired from Hughes and renamed Boeing Satellite Systems (BSS), Space Shuttle Flight Operations and Main Engine, E-3 AWACS (Airborne Warning and Control System) updates, Delta space launch services, and classified projects for the U.S. Government.
Deliveries of selected production units were as follows:
2000 1999 1998 - --------------------------------------------------- 767 AWACS - 2 2 Delta II 10 11 13 Delta III - 1 1 BSS Satellites 5 - -
Space and Communications segment revenues for 2001 are projected to be in the $10 billion range, including a full year of revenues for Boeing Satellite Systems. Growth will continue in the Integrated Defense System sector, as well as the NMD LSI program. Segment business trends are discussed in the Space and Communications Business Environment and Trends section on page 50.
Customer and Commercial Financing/Other Operating revenues in the Customer and Commercial Financing/Other segment were $758 million in 2000, compared with $771 million in 1999 and $612 million in 1998. The major revenue components include commercial aircraft financing and commercial equipment leasing.
Additional information about revenues and earnings contributions by business segment is presented on pages 56-57 .
. . . . . .
Based on current schedules and plans, the Company projects total 2001 revenues to be approximately $57 billion.
EARNINGS
Net earnings: [Graphic and image material item Number 3 See appendix on page 112 for description]
Net earnings of $2,128 million for 2000 were $181 million lower than 1999 earnings. Net earnings in 2000 were significantly impacted by $557 million expensed as in-process research and development ($348 million after tax) attributable to the Company's acquisitions in 2000, principally to the acquisition of the Hughes space and communications businesses, which became Boeing Satellite Systems. Net earnings also reflected significant improvement in Commercial Airplanes margins resulting from continued production efficiencies.
In 2000, other income included $73 million of interest income attributable to federal income tax audit settlements, and a $42 million gain on the sale of a long-held equity investment. Share-based plan expense in 2000 included $58 million attributable to compensation arrangements extended to employees of Boeing Satellite Systems who had been covered under various compensation arrangements prior to the acquisition. Also, the Company recognized in the fourth quarter of 2000 an actuarial expense of $38 million attributable to a pension curtailment associated with employees of the St. Louis fabrication operations that were sold in January 2001.
Net earnings of $2,309 million for 1999 were $1,189 million higher than 1998 earnings primarily due to higher earnings from operations that are discussed in the following paragraphs. Increased operating earnings resulted principally
from higher Commercial Airplanes segment margins that reflect improved production efficiencies, as well as earnings from increased Commercial Airplanes revenue ($38.5 billion in 1999 versus $37.0 billion in 1998). A $350 million pretax forward loss ($218 million after tax) recognized on the Next- Generation 737 program also adversely impacted operating earnings for 1998. Additionally, research and development companywide decreased by $554 million to $1,341 million in 1999. Net gain on dispositions for 1999 of $87 million compares with $13 million in 1998 and principally reflect the $95 million gain on the sale of Boeing Information Systems. Offsetting these increases in 1999 net earnings relative to 1998 were charges in 1999 of $270 million ($169 million after tax) associated with the program.
Other income was $585 million in 1999 and $283 million in 1998. The 1999 increase was principally due to $289 million of interest income recorded from the Internal Revenue Service (IRS), and $66 million associated with the receipt and subsequent sale of shares resulting from an initial public offering of an insurer. Interest income from the IRS resulted from a partial agreement on the examination of the years 1988 through 1991.
The net amount recognized in the statement of financial position relative to pensions includes approximately $10.7 billion of unrecognized net actuarial gains. The Company projects that in the near term, net periodic pension benefit income will be significantly increased, and that the 2001 net periodic pension benefit income will be more than $400 million greater than the $428 million recognized in 2000. Additionally, net periodic benefit costs attributable to other postretirement benefits are also projected to increase substantially in the near term. Not all net periodic benefit income or expense is recognized in net earnings in the year incurred since these costs are principally allocated to production as product costs, and a portion remains in inventory at the end of a reported period.
The Company has recently experienced rising employee health care costs, and these costs are projected to increase in the near term, similar to health care costs associated with retirees.
Operating results trends are not significantly influenced by the effect of changing prices since most of the Company's business is performed under contract.
OPERATING EARNINGS
Commercial Airplanes The 2000 Commercial Airplanes segment earnings of $2,736 million (based on the cost of specific airplane units delivered - see discussion under Segment Information on page 53) resulted in an earnings from operations margin of 8.8%, or 10.8% exclusive of research and development expense and in-process research and development expense. The 1999 Commercial Airplanes segment earnings of $2,082 million resulted in an earnings from operations margin of 5.4%, or 6.9% exclusive of research and development expense. The increased earnings and margins for 2000 were principally due to continued improvement in the production process.
Customer advance payments prior to delivery may be delayed or contractually deferred from a baseline schedule, resulting in the recognition of interest income. Beginning in 2000, revenues resulting from deferred customer advances were identified to the Commercial Airplanes segment, and had previously been identified to the Customer and Commercial Financing/Other segment. These
revenues totaled $83 million in 2000, and $66 million and $118 million were reclassified to the Commercial Airplanes segment for 1999 and 1998.
The Commercial Airplanes segment loss of $148 million in 1998 compares with earnings of $2,082 million in 1999. The increased earnings and margins for 1999 were principally due to substantially improved production performance across the segment. Margins on the Next-Generation 737 and 777 programs reflected significant learning curve improvement and unit cost performance. Additionally, Commercial Airplanes segment research and development decreased by $436 million to $585 million in 1999.
Commercial Airplanes segment earnings, as determined under generally accepted accounting principles (GAAP), reflect the program method of accounting and incorporate a portion of the 'Accounting differences/eliminations' caption as discussed in Note 1. Commercial Airplanes segment earnings under GAAP, and including intercompany transactions, were $2,099 million for 2000, $1,778 million for 1999 and $366 for 1998, and comparable margins were 6.7%, 4.6% and 1.0% (or 8.7%, 6.1% and 3.7% excluding R&D) for 2000, 1999 and 1998, respectively.
The improving GAAP margins over this period reflect improved unit costs over the accounting quantity, along with the impact of additional units within the accounting quantity for the Next-Generation 737 and the 777. Because of the higher unit production costs experienced at the beginning of a new program and the substantial investment required for initial tooling and special equipment, new commercial jet aircraft programs normally have lower operating profit margins than established programs. The increase of the accounting quantity for a new program generally results in improved margins. The Next-Generation 737 program accounting quantity was 400 units at the beginning of 1998 (a pretax forward loss of $350 million was recognized in first quarter 1998), 800 units at the end of 1998, 1,200 units at the end of 1999 and 1,650 units at the end of 2000. The 777 accounting quantity was 500 at the end of 1998 and 1999 and 600 at the end of 2000. Improved margins from 1999 to 2000 also reflect an increase in estimated revenue for airplanes within the program accounting quantities.
In 1999, the Company delivered the initial units of the 717 program, and 44 units have cumulatively been delivered as of year-end 2000. The 717 program is accounted for under the program method of accounting described in Note 1 to the consolidated financial statements. The Company has established the program accounting quantity at 200 units. The Company will record 717 deliveries on a break-even basis until program reviews indicate positive gross profit within the program accounting quantity. Such program reviews could include revised assumptions of revenues and costs. The Company has significant exposures related to the 717 program, principally attributable to pricing pressures and the slow buildup of firm orders. Current firm contracts for the 717 program include a contract for 50 airplanes with Trans World Airlines (TWA), of which 15 have been delivered. On January 10, 2001, TWA and certain of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. TWA also filed a motion seeking the court's approval of an asset purchase agreement with American Airlines, Inc., a subsidiary of AMR Corporation, pursuant to section 363 of the bankruptcy code. TWA has received $200 million in Debtor in Possession financing from American. This financing is intended to enable TWA's continued operation during the transition period. The sale of TWA's assets to American Airlines, Inc., is subject to better offers as a result of a bidding process, plus Bankruptcy Court approval. It is unclear if
TWA or any successor company will commit to the delivery of the remaining 717 aircraft. The Company currently believes that these units can be placed with other potential customers, if necessary. See also the discussion in the Customer and Commercial Financing/Other section regarding additional exposure relating to TWA.
The Company projects significant market opportunities for the commercial aviation support market over the next two decades. Factors contributing to the need for aviation support include deregulation, privatization and globalization, which have increased competition and forced airlines to operate more efficiently. The Company will focus on total life-cycle opportunities, which include airplane servicing and maintenance, and airport and route infrastructure services.
The commercial jet aircraft market and the airline industry remain extremely competitive. Competitive pressures and increased lower-fare personal travel have combined to cause a long-term downward trend in passenger revenue yields worldwide (measured in real terms). Market liberalization within Europe has enabled low-cost airlines to enter the market. These airlines increase the downward pressure on airfares, similar to the competitive environment in the United States. Airfares between Asia and the United States are among the lowest yield (airfare divided by revenue passenger miles) of any in the world. These factors result in continued price pressure on the Company's products. Major productivity gains are essential to ensure a favorable market position at acceptable profit margins.
Military Aircraft and Missiles Military Aircraft and Missiles segment operating earnings for 2000 and 1999 were $1,271 million and $1,193 million. The segment operating margins were 10.4% and 9.8% for 2000 and 1999. The 2000 operating results reflect strong profits on major production programs. These programs include the C-17 Globemaster, F/A-18E/F Super Hornet, F/A-18C/D Hornet, T-45 Goshawk Training System, AV-8B Harrier, and the Harpoon missile. The 1999 operating results included a favorable contract settlement amounting to $55 million and pretax charges of $270 million associated with the program. A significant percentage of Military Aircraft and Missiles segment business has been in developmental programs under cost-reimbursement-type contracts, which generally have lower profit margins than fixed-price-type contracts. Current major developmental programs include the Raptor, Joint Strike Fighter, V-22 Osprey tiltrotor aircraft, and the RAH-66 Comanche helicopter. The Raptor and V-22 programs are currently transitioning to low-rate initial production.
Space and Communications Space and Communications segment operating earnings for 2000 and 1999, were $260 million and $320 million, prior to non-recurring items. Operating margins were 3.2% and 4.7% for 2000 and 1999. The 2000 operating results included a non-recurring pretax charge of $500 million associated with the in-process research and development from the acquisitions of Hughes space and communications businesses, along with $78 million in costs associated with a Delta III demonstration launch in August 2000. Operating results for 1999 included a pretax gain of $95 million related to the sale of Boeing Information Systems to Science Applications International Corporation in July 1999.
The segment operating margins were reduced by significant company investments in the development of new products, in particular, the Delta IV launch vehicle and the aircraft internet data service known as Connexion by BoeingSM. Earnings were also impacted by the amortization of goodwill and
acquired intangibles of $28 million, principally associated with the acquisition of Boeing Satellite Systems. 2001 operating earnings will continue to be impacted by new product development expenses but to a lesser degree than prior years primarily due to the transition of development products into production. Connexion by BoeingSM product line was realigned and will begin performance reporting separately in 2001. Operating results for 1999 included favorable contract settlements. Program margins for the Space and Communications segment, excluding non-recurring items, contract settlement in 1999 and research and development, were 10.8% in 2000 and 11.2% in 1999. Margins are expected to increase in 2001 as development programs move closer to entering the operational phase.
Softening of the commercial launch market continued in 2000. As previously mentioned, a Delta III demonstration launch was completed at company expense in August, marking a successful return to flight and proving system reliability. The Company continues to have risk related to work in process inventory and supplier commitments for the Delta III program, and these risk assessments remain closely monitored. The next Delta III launch is anticipated for 2002.
The Sea Launch program in which Boeing is a 40% partner with RSC Energia (25%) of Russia, Kvaerner Maritime (20%) of Norway, and KB Yuzhnoye/PO Yuzhmach (15%) of Ukraine also had a successful return to flight in July 2000. The venture incurred losses in 2000 due to the termination of an ICO launch early in the year and expenses related to initial operations. Space and Communications segment operating earnings include losses of $26 million and $57 million for 2000 and 1999 attributable to the Sea Launch venture. The Company has ongoing operational and financial exposure due to the Sea Launch venture, and the financial exposure principally results from company guarantees extended on partnership loans. The Company's maximum exposure to credit-related losses associated with credit guarantees, disclosed in Note 20 to the Consolidated Financial Statements, includes $373 million attributable to Sea Launch. The Company projects that the Sea Launch joint venture will require additional infusions from the partners during 2001. This is expected to result in additional cash requirements and/or loan guarantees imposed on the Company.
The Company and Lockheed Martin are 50-50 partners in United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the U.S. Air Force. United Space Alliance also performs modifications, testing and checkout operations that are required to ready the Space Shuttle for launch. The joint venture operations are not included in the Company's consolidated statements; however, the Company's proportionate share of joint venture earnings is recognized as income. The segment's operating earnings include earnings of $60 million and $48 million for 2000 and 1999 attributable to United Space Alliance.
Customer and Commercial Financing/Other Operating earnings for the Customer and Commercial Financing/Other segment were $494 million in 2000, $426 million in 1999, and $249 million in 1998, exclusive of interest expense. The increase in earnings during the period occurred principally because of significant provisions for losses and write-downs of equipment under operating lease in 1998 and 1999. The increase in operating earnings from 1998 to 1999 also reflects an increase in segment revenue of $159 million.
Included in this segment's assets is $1,459 million of customer financing with Trans World Airlines (TWA), principally aircraft under operating lease. TWA has undergone bankruptcy proceedings, as previously discussed in the Commercial
Airplanes Operating Earnings section. Based upon the underlying collateral position in these assets, the Company believes that the ultimate outcome of the TWA proceedings will not have a material impact on the Customer and Commercial Financing/Other segment financial position or results of operations.
RESEARCH AND DEVELOPMENT Research and development expenditures charged directly to earnings include design, developmental and related test activities for new and derivative commercial jet aircraft, other company-sponsored product development, and basic research and development, including amounts allocable as overhead costs on U.S. Government contracts.
Research and development expense: [Graphic and image material item Number 4 See appendix on page 113 for description]
In 2000, total research and development was $1,998 million, compared with $1,341 million in 1999 and $1,895 million in 1998. The amount expensed in 2000 included $557 million attributable to in-process research and development (IPR&D) discussed below.
Excluding IPR&D, research and development increased $100 million in 2000, principally due to increases from the Space and Communications segment. In 1999, research and development declined in each operating group relative to 1998. The most significant decline in 1999 was attributable to the Commercial Airplanes segment and related to the timing of major commercial aircraft developmental programs.
Commercial Airplanes Commercial Airplanes research and development expense in 2000 was essentially unchanged from 1999, but reflected reduced spending attributable to the 767- 400ER and 717 programs, and increased spending attributable to the development of two longer-range 777 models.
The principal commercial aircraft developmental programs during the 1998- 2000 period were the 767-400ER, the Next-Generation 737 family, the 717 program, the 757-300 derivative, and the 777-300 wide-body twinjet derivative.
The initial delivery of the 767-400ER, a stretched version of 767-300ER, occurred in the third quarter of 2000. Certification and first deliveries of the 737-700, the first of four new 737 derivative models, occurred in December 1997. Certification and first delivery of the 737-800 and 737-600 occurred in 1998. The 737-900, the longest member of the Next-Generation 737 family, received its first order in late 1997, with first delivery scheduled for 2001. First delivery of the 717 occurred in September 1999. First delivery of the 757-300, a stretched derivative of the 757-200, occurred in March 1999. First delivery of the increased-capacity 777-300 derivative occurred in May 1998. The following chart summarizes the time horizon between go-ahead and certification/initial delivery for major Commercial Airplanes derivatives and programs. [Graphic and image material item Number 5 See appendix on page 113 for description]
Military Aircraft and Missiles The Military Aircraft and Missiles segment continues to pursue business opportunities where it can use its customer knowledge, technical strength and large-scale integration capabilities. The segment's level of research and development expenditures is consistent with this approach, and reflects the recent business environment, which has presented few major new-start opportunities. Current research and development activities are focused on winning the Joint Strike Fighter engineering, manufacturing and development contract. Other research and development efforts include upgrade and technology insertions to enhance the capability and competitiveness of current product lines, as well as exploration of new markets such as unmanned air vehicles (UAVs).
Space and Communications There continued to be significant investment in development programs at the Space and Communications segment in 2000. Research and development expenditures supported the development of the Delta IV launch vehicle, the new 737-based airborne early warning and control aircraft, and the aircraft internet-based data service Connexion by BoeingSM. Delta IV development expense has been reduced by the U.S. Government's participation in developing the Evolved Expendable Launch Vehicle (EELV).
IN-PROCESS RESEARCH AND DEVELOPMENT
The fair value amount of $500 million of in-process research and development (IPR&D) attributed to the Hughes acquisition discussed below was determined by an independent valuation using the income approach.
Thirteen projects were included in the valuation, of which the principal projects were based on the following: technologies associated with high- efficiency solar cells and satellite battery technology ($189 million), phased array and digital processing technology to provide high-speed broadband service ($89 million), and xenon-ion systems for satellite engine propulsion ($82 million). The fair value of identifiable intangibles was also determined by an independent valuation primarily using the income approach. The following risk- adjusted discount rates were used to discount the project cash flows: solar cells and satellite battery technology, 17%; phased array and digital processing technology to provide high-speed broadband service, 18%; xenon-ion systems for satellite engine propulsion, 18%; all other projects, 18.2% weighted average. Operating margins were assumed to be similar to historical margins of similar products. The size of the applicable market was verified for reasonableness with outside research sources. The projects were in various stages of completion ranging from approximately 31% to 92% complete as of the valuation date, with specific percentages complete by project as follows: solar cells and satellite battery technology, 49%; phased array and digital processing technology, 87%; xenon-ion systems for satellite engine propulsion, 82%. The stage of completion for each project was estimated by evaluating the cost to complete, complexity of the technology and time to market. The projects are anticipated to be completed between 2001 and 2003. The estimated cost to complete the projects is $80 million.
The discount rates stated previously are higher than the Company's weighted average cost of capital due to the inherent uncertainties in the estimates described previously, including the uncertainty surrounding the successful completion of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology and the uncertainty of the timing of the related product introduction and then-existing competing products. If these projects are not successfully developed, the future revenue and profitability of Boeing Satellite Systems may be adversely affected. Additionally, the value of the other intangible assets acquired may become impaired.
The fair value amount of $45 million of in-process research and development (IPR&D) attributed to the acquisition of Jeppesen Sanderson Inc., was determined by an independent valuation. The acquired in-process research and development technology consists primarily of three software projects that will work together to store information and extract it for use in various products sold by Jeppesen. The technology will allow the manufacture of end user aeronautical information both backwards and forwards in time, and will allow the extraction of the information on a near real-time basis. Furthermore, the technology will allow the creation of packages of aeronautical information derived from a single source of database information, which can be tailored to individual customers or can be packaged as a new product. These database and extraction capabilities are required in developing new and enhanced charting and mapping products for customers worldwide. These acquired in-process research and development projects are expected to be complete by mid-2001; however, full range and production of the technology is anticipated in the first quarter of 2002. The technology, once completed, can only be used for its specific and intended purpose and as such no alternative future uses exist. The valuation methodology was determined using the income approach, and a risk- adjusted discount rate of 15% was used to discount the project cash flow. As of the date of the acquisition, Jeppesen had incurred approximately $14 million in costs related to IPR&D projects. The estimated cost to complete the projects is $7 million.
Other acquisitions resulting in the recognition of IPR&D during 2000 using a similar income approach included Continental Graphics Corp. ($7 million IPR&D) and Autometric, Inc. ($5 million IPR&D).
Total Company research and development expenditures for 2001 will be influenced by the timing of commercial aircraft derivative programs and commercial space and communication activities. Based on current programs and plans, research and development expense for 2001 is expected to be in the range of 3.0% to 3.5% of total revenues. Research and development activities are further discussed in the Strategic Investments for Long-Term Value section on page 51.
INCOME TAXES
The 2000 effective income tax rate of 29.0% varies from the federal statutory tax rate of 35%, principally due to Foreign Sales Corporation (FSC) tax benefits of $291 million. Offsetting this benefit are state income taxes and the non-deductibility of certain goodwill, principally the goodwill acquired by the acquisition of the aerospace and defense units from Rockwell International Corporation in 1996.
The 1999 effective income tax rate of 30.5% varies from the federal statutory tax rate for the same reasons that apply to the 2000 rate. The relatively smaller reduction from the statutory rate in 1999 relative to 2000 results principally from lower FSC tax benefits in 1999 ($230 million) and the application of net tax credits to a larger pretax earnings amount ($3.3 billion in 1999 compared with $3.0 billion in 2000).
The 1998 effective income tax rate of 19.8% reflects the settlement of prior years' defense-related partnership research and development tax credits of $57 million, as well as FSC tax benefits of $130 million. These credits resulted in a lower effective tax rate in 1998 since they were applied to a significantly smaller pretax earnings amount ($1.4 billion in 1998 compared with $3.3 billion in 1999).
In response to an adverse World Trade Organization (WTO) finding relative to the U.S. FSC tax provisions, the U.S. repealed FSC and enacted replacement legislation (Extraterritorial Income Exclusion Act of 2000). The European Union has filed a WTO challenge to the new law. It is not possible to predict what impact, if any, this issue will have on future earnings pending final resolution of the challenge.
Additional information relating to income taxes is found in Note 13 to the Consolidated Financial Statements on pages 77-79.
ACQUISITIONS
Hughes Space and Communications Businesses On October 6, 2000, the Company acquired the Hughes space and communications and related businesses for $3,849 million in cash. These businesses were renamed Boeing Satellite Systems. The acquisition was accounted for as a purchase. The preliminary purchase price allocation resulted in the following: $500 million charged to earnings for the fair value of acquired in-process research and development (IPR&D) that had not reached technological feasibility and had no future alternative use; $489 million for developed technology; $142 million for assembled workforce; $740 million for goodwill; $626 million for a prepaid pension asset, primarily from an overfunded pension plan; and $118 million for liabilities attributable to other postemployment benefit obligations acquired. Boeing Satellite Systems is a satellite-based communications company with approximately 9,000 employees in Southern California.
Jeppesen Sanderson Inc. On October 4, 2000, the Company acquired Jeppesen Sanderson Inc. for $1,524 million in cash. The acquisition was accounted for as a purchase. The preliminary purchase price allocation resulted in the following: $45 million for IPR&D, $772 million for goodwill, $308 million for product know-how, $205 million for trade name, $91 million for customer lists, and $59 million for other acquired intangibles. Jeppesen Sanderson Inc. is a supplier of flight information services.
Other Acquisitions The principal other acquisitions during 2000 included Autometric, Inc., a geospatial information technology company, and Continental Graphics Corp., a provider of technical information to the aviation industry. These acquisitions were accounted for as a purchase. Autometric, Inc. was acquired for $119 million in cash. The preliminary purchase price allocation resulted in $5 million expensed as IPR&D and $58 million recorded as goodwill.
Continental Graphics Corp. was acquired for $183 million in cash. The preliminary purchase price allocation resulted in the following: $7 million for IPR&D, $62 million for data repository, $49 million for goodwill, and $18 million for assembled workforce.
Boeing Satellite Systems and Autometric, Inc., will be accounted for as part of the Space and Communications segment. Jeppesen Sanderson Inc., and Continental Graphics Corp. will be accounted for as part of the Commercial Airplanes segment.
LABOR NEGOTIATIONS AND WORKFORCE LEVELS
As of December 31, 2000, the Company's principal collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM), representing 26% of employees (current agreements expiring May 2001, September 2002, and October 2002); the Society of Professional Engineering Employees in Aerospace (SPEEA), representing 13% of employees (current agreements will expire in December 2002 and a contract with a new unit is now under negotiation); the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), representing 5% of employees (current agreements expiring September 2002, May 2003, and April 2004 ); and Southern California Professional Engineering Association (SCPEA), representing 3% of employees (current agreement expiring March 2001).
The Company made several acquisitions during the past year. The largest acquisition involved the purchase of the Hughes space and communications businesses. That acquisition was completed in October 2000 and added approximately 9,000 employees to Boeing's workforce. The Company's workforce level was 198,000 at December 31, 2000.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES
As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that the statement of financial position reflect the current market price of derivatives. With the adoption of SFAS No. 133, the Company recognized a transition gain of $1 million after tax, and an adjustment to accumulated other comprehensive income of a loss of $11 million after tax.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The primary factors that affect the Company's investment requirements and liquidity position, other than operating results associated with current sales activity, include the timing of new and derivative programs requiring both high developmental expenditures and initial inventory buildup, cyclical growth and expansion requirements, customer financing assistance, the timing of federal income tax payments, the Company's stock repurchase plan, and potential acquisitions.
CASH FLOW SUMMARY
Following is a summary of Company cash flows based on changes in cash and short-term investments. This cash flow summary is not intended to replace the Consolidated Statements of Cash Flows on page 60 that are prepared in accordance with generally accepted accounting principles, but is intended to highlight and facilitate understanding of the principal cash flow elements. Free cash flow is defined as cash flow from operations less change in short- term investments, reduced by facilities and equipment expenditures.
(Dollars in billions) 2000 1999 1998 - -------------------------------------------------------------- Net earnings $ 2.1 $ 2.3 $ 1.1 Non-cash charges to earnings (a) 2.6 1.8 1.8 Change in gross inventory (b) 1.6 5.6 1.5 Change in customer advances (c) (0.5) (3.6) (0.8) Net changes in receivables, liabilities and deferred income taxes (d) 0.4 0.2 (1.3) Facilities and equipment expenditures (0.9) (1.2) (1.7) Pension income (expense) variance to funding (0.4) (0.3) (0.2) - -------------------------------------------------------------- Free cash flow 4.9 4.8 0.4 Proceeds from dispositions (e) 0.2 0.4 Change in customer and commercial financing (f) (1.1) (0.6) (1.2) Acquisitions, net of cash acquired (5.7) Change in debt (g) 2.0 (0.2) 0.1 Net shares acquired, other (h) (2.3) (2.9) (1.3) Cash dividends (0.5) (0.5) (0.6) - -------------------------------------------------------------- Increase (decrease) in cash and short-term investments $(2.5) $ 1.0 $(2.6) ============================================================== Cash and short-term investments at end of year $ 1.0 $ 3.5 $ 2.5 ==============================================================
(a) Non-cash charges to earnings as presented here consist of depreciation, in-process research and development, amortization, retiree health care accruals, customer and commercial financing valuation provision and share-based plans expense. The Company has not funded retiree health care accruals and, at this time, has no plan to fund these accruals in the future. The share-based plans do not impact current or future cash flow, except for the associated positive cash flow tax implications. Share-based plans expense is projected to increase in the near term as additional annual Performance Share grants are made. See Note 18 to the Consolidated Financial Statements.
(b) Next-Generation 737 program inventory increased substantially during 1998 and 1999. Inventory balances on the 747, 757 and 767 commercial jet programs increased in 1998 due to increased production rates, but the 737 Classic inventory decreased in 1998. The 777 program inventory also decreased in 1998, principally due to reduction of unamortized tooling and deferred production costs. The decrease in inventory in 1999 resulted principally from decreased production rates on the 777 and 747 programs and improved inventory cycle time. The decrease in inventory in 2000 also resulted from decreased production rates and improved inventory turns.
(c) The changes in commercial customer advances during 1998, 1999 and 2000 were broadly distributed among the commercial jet programs, and generally correspond to orders and production rate levels. With regard to the Aircraft and Missiles segment and Space and Communications segment activity, the ratio of progress billings to gross inventory did not significantly change during this period.
(d) The total change in receivables, liabilities, deferred income taxes and other resulted in a net asset increase of $0.7 billion for the three-year period presented. The net increase in cash attributable to changes in income taxes payable and deferred was $1.0 billion. Excluding potential tax settlements discussed in Note 13 to the consolidated financial statements, federal income tax payments in 2001 are projected to substantially exceed income tax expense due to completion of contracts executed under prior tax regulations. The Company projects that the Sea Launch joint venture will require additional infusions from the partners during 2001. This is expected to result in additional cash requirements and-or loan guarantees imposed on the Company.
(e) Proceeds from dispositions include receipts from the sale of subsidiaries and the sale of real property. Included in the proceeds for 1999 are receipts of approximately $162 million related to the sale of Boeing Information Systems.
(f) The changes in customer financing balances have been largely driven by commercial aircraft market conditions. Over the three-year period 1998- 2000, the Company generated $4.6 billion of cash from principal repayments and by selling customer financing receivables and operating lease assets. Over the same period, additions to customer financing amounted to $7.7 billion. As of December 31, 2000, the Company had outstanding commitments of approximately $6.0 billion to arrange or provide financing related to aircraft on order or under option for deliveries scheduled through the year 2005. Not all these commitments are likely to be used; however, a significant portion of these commitments is with parties with relatively low credit ratings. See Note 21 to the consolidated financial statements concerning concentration of credit risk. Outstanding loans and commitments are primarily secured by the underlying aircraft.
(g) Debt maturity during this three-year period included $200 million in 2000, $650 million in 1999, and $300 million in 1998, and $300 million was added in 1998 with maturity in 2038. Additionally, Boeing Capital Corporation (BCC), a corporation wholly owned by the Company, issued $2.0 billion of debt in 2000, $400 million of debt in 1999 and $511 million in 1998. The significant BCC debt issuance in 2000 was performed in conjunction with the transfer of a significant portion of the Company's customer financing assets to BCC.
(h) In the third quarter of 1998, the Company announced a share repurchase program to buy up to 15% of the Company's outstanding shares of common stock. The Company repurchased 35.2 million shares of stock for $1.3 billion in 1998, 68.9 million shares for $2.9 billion in 1999, and 41.8 million shares for $2.4 billion in 2000, which completed the share repurchase program. In the fourth quarter of 2000, the Company authorized an additional share repurchase program for up to 85 million additional shares.
CAPITAL RESOURCES
The Company has long-term debt obligations of $7.6 billion, which are unsecured. Approximately $538 million mature in 2001, and the balance has an average maturity of 12.7 years. Excluding Boeing Capital Corporation (BCC), a financing subsidiary wholly owned by the Company, total long-term debt is at
30% of total shareholders' equity plus debt. The consolidated long-term debt, including BCC, is at 44% of total shareholders' equity plus debt. The Company has substantial additional long-term borrowing capability. Revolving credit line agreements with a group of major banks, totaling $3.0 billion, remain available but unused. The Company believes its internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year.
CONTINGENT ITEMS
Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below.
The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s.
The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred.
The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings. Such accruals as of December 31, 2000, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities.
Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends.
The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company
believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations.
In 1991, the U.S. Navy notified the Company and General Dynamics Corporation (the Team) that it was terminating for default the Team's contract for development and initial production of the A-12 aircraft. The Team filed a legal action to contest the Navy's default termination, to assert its rights to convert the termination to one for "the convenience of the Government," and to obtain payment for work done and costs incurred on the A-12 contract but not paid to date. As of December 31, 2000, 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. Trial on all issues now is set for May 1, 2001. Final resolution of the A-12 litigation will depend on the outcome of such trial 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 December 31, 2000, as a result of a termination of the contract for the convenience of the Government. The Company has been provided with an opinion of outside counsel that (i) the Government's termination of the contract for default was contrary to law and fact, (ii) the rights and obligations of the Company are the same as if the termination had been issued for the convenience of the Government, and (iii) subject to prevailing on the issue that the termination is properly one for the convenience of the Government, the probable recovery by the Company is not less than $250 million.
On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington, in Seattle. The lawsuit names as defendants the Company and three of its then executive officers. Additional lawsuits of a similar nature have been filed in the same court. These lawsuits were consolidated on February 24, 1998. The lawsuits generally allege that the defendants desired to keep the Company's share price as high as possible in order to ensure that the McDonnell Douglas shareholders would approve the merger and, in the case of the individual defendants, to benefit directly from the sale of Boeing stock during the period from April 7, 1997 through October 22, 1997. By order dated May 1, 2000, the Court certified two subclasses of plaintiffs in the action: a. all persons or entities who purchased Boeing stock or call options or who sold put options
during the period from July 21, 1997 , through October 22, 1997, and b. all persons or entities who purchased McDonnell Douglas stock on or after April 7, 1997, and who held such stock until it converted to Boeing stock pursuant to the merger. The plaintiffs seek compensatory damages and treble damages. The action now is set for trial on March 7, 2002. The Company believes that the allegations are without merit and that the outcome of these lawsuits will not have a material adverse effect on its earnings, cash flow or financial position.
On October 19, 1999, an indictment was returned by a federal grand jury sitting in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company division, conspired to and made false statements and concealed material facts on export license applications and in connection with export licenses, and possessed and sold machine tools in violation of the Export Administration Act. The indictment also charged one employee with participation in the alleged conspiracy. (The indictment has since been dismissed as against that employee but his dismissal is the subject of a pending appeal by the government to the U.S. Court of Appeals for the D.C. Circuit.) The indictment relates to the sale and export to China in 1993-1995 of surplus, used machine tools sold by Douglas Aircraft Company to China National Aero-Technology Import and Export Corporation for use in connection with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny defense-related export privileges to MDC or a division or subsidiary of MDC. The agency exercised that discretion on January 5, 2000, by establishing a "denial policy" with respect to defense-related exports of MDC and its subsidiaries. Most of MDC's major existing defense programs were, however, excepted from that policy due to overriding U.S. foreign policy and national security interests. Other exceptions have been granted. There can, however, be no assurance as to how the Department will exercise its discretion as to program or transaction exceptions for other programs or future defense-related exports. In addition, the Department of Commerce has authority to temporarily deny other export privileges to, and the Department of Defense has authority to suspend or debar from contracting with the military departments, MDC or a division or subsidiary of MDC. Neither agency has taken action adverse to MDC or its divisions or subsidiaries thus far. Based upon all available information, the Company does not expect actions that would have a material adverse effect on its financial position or continuing operations. In the unanticipated event of a conviction, MDC would be subject to Department of State and Department of Commerce denials or revocations of MDC export licenses. MDC also would be subject to Department of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender discrimination and harassment was filed against The Boeing Company, Boeing North American, Inc., and McDonnell Douglas Corporation. The complaint, filed with the United States District Court in Seattle, alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against females over the course of many years. The complaint, Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, an amended complaint was filed naming an additional 10 plaintiffs, including the first from California. The lawsuit attempts to represent all women who currently work for the Company, or who have worked for the Company in the past several years (approximately 70,000).
The Company has denied the allegation that it has engaged in any unlawful "pattern and practice" and believes that the plaintiffs cannot satisfy the rigorous requirements necessary to achieve the class action status they seek. The deadline for filing plaintiffs' motion for class certification, originally scheduled to be heard on August 25, 2000, now has been extended until May 2001. The Company intends to vigorously contest this lawsuit.
In October 1999, a number of individual plaintiffs filed a federal court action alleging employment discrimination based upon race and national (sic) origin (Asian). This action was subsequently consolidated with a related suit making similar allegations and class action status was sought in a motion filed on January 3, 2001. The class for which certification is being sought would include all non-management salaried workers of Asian descent employed in Washington State. The action is limited to claims of alleged discrimination in compensation, promotion, transfer, retention rating, and job classification.
The Company has denied the allegations of discrimination and plans to oppose the motion for class certification and vigorously defend the lawsuit. The court's decision on class certification is anticipated to be issued as early as the second quarter of 2001.
ENERGY COSTS IN SUPPORT OF PRODUCTION
During late 2000 and early 2001, the Company experienced significant increases in energy costs, specifically electricity costs in the Southern California area. Although these increases are not expected to be sustained for the long term, the Company could be adversely impacted by both the prospect of continued high energy costs and the potential of mandated production curtailments.
MARKET RISK EXPOSURE
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 December 31, 2000, the notional value of such derivatives was $484 million, with a net unrealized loss of $23 million. Less than 2% of receipts and expenditures are contracted in foreign currencies, and the Company does not consider the market risk exposure relating to currency exchange to be material.
COMMERCIAL AIRPLANES BUSINESS ENVIRONMENT AND TRENDS - ----------------------------------------------------
The worldwide market for commercial jet airplanes is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth, both in developed and emerging countries, and political stability. Demand for the Company's commercial airplanes is further influenced by airline industry profitability, world trade policies, government-to-government relations, environmental constraints imposed upon airplane operations, technological changes, and price and other competitive factors.
GLOBAL ECONOMIC AND PASSENGER TRAFFIC TRENDS
As the major economies of the world experienced economic expansion during the 1990s and in 2000, airline passenger traffic increased. Economic growth worldwide in 2000 was almost 50% above long-term averages. This was led by exceptional and unsustainable performance in the U.S. economy. For the five- year period 1996-2000, the average annual growth rate for worldwide passenger traffic was 5.6%. The Company's 20-year forecast of the average long-term growth rate in passenger traffic is 4.8% annually, based on projected average worldwide annual economic real growth of 3.0%. Based on global economic growth projections over the long term, and taking into consideration increasing utilization levels of the worldwide airplane fleet and requirements to replace older airplanes, the Company projects the total commercial jet airplane market over the next 20 years at approximately $1.5 trillion in current dollars.
Although the Asian region has recently experienced economic difficulties, Company forecasts indicate that the airlines in this region, and especially in China, represent a significant potential market for commercial jet airplanes over the next 20 years. The Company continues to support the Asia Pacific Economic Cooperation (APEC) forum to promote open trade and investment in the region. For other countries in Asia, economic growth must return if the potential of the region is to be realized.
Airlines in Russia and other states in the former Soviet Union operate a limited but increasing number of western-built airplanes. Because of slow economic growth, high customs duties, a shortage of foreign exchange, and legal and financing constraints, new airplane orders have not been significant. The Company expects that the airlines and the airplane manufacturing industry in this region will eventually be integrated into the international economy.
AIRLINE DEREGULATION
Worldwide, the airline industry has experienced progressive deregulation of domestic markets and increasing liberalization of international markets. Twenty-five years ago virtually all air travel took place within a framework of domestic and international regulatory oversight. Since then, an increasing number of countries, most notably the United States, Australia, and the countries in Western Europe, have eliminated restrictive regulations for domestic airline markets and promoted a more open-market climate for international services. Other countries such as Japan have deregulated their domestic markets. Currently, approximately one-half of all air travel takes place within an open-market environment. These trends are expected to continue, but at varying rates in different parts of the world. By 2010, an estimated two-thirds of air travel will be in open markets. Liberalization of government regulations, together with increased airplane range capabilities, gives airlines greater freedom to pursue optimal fleet-mix strategies. This increased flexibility allows the airlines to accommodate traffic growth by selecting the best mix of flight frequencies and airplane size and capabilities for their route systems. In intercontinental markets, more liberal bilateral air service agreements provide an important stimulus to opening new city-pair markets, which favor increased flight frequency over capacity growth. In parallel with regulatory liberalization, developments in improving airplane range performance will continue to allow airlines to expand the number of direct city-to-city routes, thus reducing the reliance on indirect routes through central hubs that require larger capacity airplanes.
AIRLINE INDUSTRY ENVIRONMENT
Through a combination of passenger traffic growth, improved revenue, lower fuel costs and aggressive cost control measures, the airline industry as a whole significantly improved operating profitability and net earnings over the five- year period 1996-2000. In 2000, traffic growth exceeded long-run averages, yields improved, and load factor reached historic highs in many areas of the world. However, the sharp increase in fuel costs in the second half of 2000 dampened the positive effect on airline earnings. Forecasts are for fuel costs to moderate in the future. The outlook for passenger traffic growth in 2001 is generally positive, especially in the United States, Europe, many parts of Asia, and for trans-Atlantic flights. Continued profitability levels depend on sustained economic growth, limited wage increases, and capacity additions in line with traffic increases.
MANDATED NOISE LEVEL COMPLIANCE
A mandate went into effect January 1, 2000, requiring that all operations into and out of U.S. airports must be made with Stage 3 noise level compliant airplanes. A similar mandate will become effective in most European airports in April 2002. Compliance with these policies continues to be a factor for new airplane deliveries. During 2001, the International Civil Aviation Organization (ICAO) will be formulating new noise level standards that will influence airplane manufacturing and may influence retrofitting. The Company supports the mission of ICAO and endorses the continuing development of international noise standards. The Company believes that adoption of common standards worldwide will promote both meaningful control of noise pollution and a healthy economic environment around the world.
INDUSTRY COMPETITIVENESS
Over the past ten years, the Company has maintained, on average, approximately a two-thirds share of the available commercial jet airplane market. The Company currently faces aggressive international competitors that are seeking to increase market share. This competitive factor was recently demonstrated by the public decision of Airbus to introduce the A380, a proposed aircraft with passenger seating greater than the 747, to increase market share at the upper end of the large airplane market. This market environment has resulted in intense pressures on pricing and other competitive factors. The Company's focus on improving processes and other cost reduction efforts is intended to enhance its ability to pursue pricing strategies that enable the Company to maintain leadership at satisfactory margins. Additionally, the Company's extensive customer support services network for airlines throughout the world plays a key role in maintaining high customer satisfaction. As an example, on-line access is available to all airline customers for engineering drawings, parts lists, service bulletins and maintenance manuals.
In July 2000, three major European aerospace companies (Aerospatiale Matra of France, DaimlerChrysler Aerospace of Germany, and Construcciones Aeronautica of Spain) combined to form the European Aeronautic Defence and Space Company (EADS). As a result of the formation, EADS became an 80 percent owner of Airbus Industrie (AI) and is leading the effort for the formation of the Airbus Integrated Company (AIC) in early 2001. The creation of the AIC will effectively change the Airbus role, from that of a marketer/distributor of large commercial airplanes to one including complete manufacturing responsibility. The AIC will be incorporated under French law as a privately held corporation owned 80 percent by EADS and 20 percent by BAE Systems.
Over the past five years, sales outside the United States have accounted for approximately 53% of the Company's total Commercial Airplanes segment sales; approximately 43% of the Commercial Airplanes segment contractual backlog at year-end 2000 was with customers based outside the United States. Continued access to global markets remains vital to the Company's ability to fully realize its sales potential and projected long-term investment returns.
THE IMPACT OF WORLD TRADE POLICIES
In 1992, the United States and the European Union entered into a bilateral agreement disciplining government subsidies to Airbus Industrie. Among other things, the agreement limited the amount of the subsidy to no more than 33% of the total development costs for each airplane program. It also calls for a "progressive reduction" in that level of support. However, in 1994, more than 130 countries, including all the states of the European Union, signed the Subsidies and Countervailing Measures ("SCM") Agreement at the World Trade Organization in Geneva. The 1994 SCM Agreement prohibits government subsidies to virtually all industries, including the aerospace industry. The Company welcomes the restructuring of Airbus into a "Single Corporate Entity" as long as it complies with the 1994 SCM and results in more transparent financial reporting.
The World Trade Organization (WTO), based in Geneva, promotes open and non- discriminatory trade among its members. Among other things, it administers an improved SCM Agreement, applicable to all members, that provides important protections against injurious subsidies by governments. It also uses improved dispute settlement procedures to resolve disagreements among nations - a provision not found in the 1992 bilateral agreement. The 1992 bilateral United States-European Union agreement and the WTO subsidies code constitute the basic limits on government supports of development costs.
See the discussion on page 37 concerning the European Union challenge that has been filed with the WTO related to U.S. Foreign Sales Corporation tax provisions.
Governments and companies in Asia and the former Soviet Union are seeking to develop or expand airplane design and manufacturing capabilities through teaming arrangements with each other or current manufacturers. The Company continues to explore ways to expand its global presence in this environment.
SUMMARY
Although near-term market uncertainties remain, particularly with respect to the economic situation in certain Asian countries and open market access, the long-term market outlook appears favorable. The Company is well positioned in
all segments of the commercial jet airplane market, and intends to remain the airline industry's preferred supplier through emphasis on product offerings and customer service that provide the best overall value in the industry.
MILITARY AIRCRAFT AND MISSILES BUSINESS ENVIRONMENT AND TRENDS - --------------------------------------------------------------
Boeing is the world's largest producer of military aircraft, and the second largest U.S. Department of Defense (DoD) supplier. The Company's programs are well balanced between current production and upgrade activities, post- production aerospace support activities, and major development programs with large potential production quantities.
GENERAL ENVIRONMENT
The DoD remains the principal customer of the Military Aircraft and Missiles segment. Major trends that shape this business segment include the smaller and aging force structure, the level of military engagement around the world, the increasing international demand for military aircraft and missiles, and consolidations within the industry. Continuing demands for peacekeeping operations are driving high usage of equipment and the aging of equipment is creating operating cost affordability pressures.
In fiscal year 2001, the DoD procurement budget reached the $60 billion goal originally set by the 1997 Quadrennial Defense Review (QDR). However, the DoD, the Congressional Budget Office, and several independent studies now agree that the 1997 QDR significantly underestimated the level of funding necessary to modernize heavily used and rapidly aging equipment. Current acquisition rates for aircraft, missiles, ships, etc., are well below the steady-state rates needed to recapitalize aging equipment. Thus, modernization will be an important issue with the new Administration and the new Congress and moderate increases in military research and development and in procurement funding are expected.
The most significant DoD fighter modernization program is the Joint Strike Fighter (JSF), where Boeing is in competition for the follow-on phases of the program (Engineering & Manufacturing Development and Production). JSF variants are planned to replace aging aircraft in several United States and United Kingdom military services. U.S. aircraft being replaced include the, A-10, A-6, and the AV-8B Harrier, while the United Kingdom intends to replace the Sea Harrier and GR7. Additionally, other U.S. allies have voiced interest in the JSF program, and the Company believes there will be a substantial international market for the low-cost, high-performance strike aircraft. The current DoD strategy for the JSF, which has a projected contract value for engineering and manufacturing development of up to $20 billion, is to have one prime contractor, with the selection scheduled to occur in the fourth quarter of 2001. It is expected that the DoD procurement policy regarding JSF will continue to evolve.
The military's search for more economical maintenance of aging equipment has also led to privatization of some government activities and has opened areas of growth for the Company in aerospace support. The C-17 logistics support contract is an example of this trend.
The Company faces strong competition in all market segments. As the result of industry consolidation in the United States, DoD now relies on three principal prime contractors to supply military hardware: Boeing, Lockheed Martin and Raytheon. Given the small number of primes, the Company and its competitors often partner and serve as major suppliers to each other on a various number of programs. While there may be some further niche acquisitions and product portfolio exchanges at the prime contractor level, the major area for further consolidation is likely to be among subcontractors to the primes. General Electric has emerged as a dominant subcontractor with its acquisition of Honeywell. In addition, UK-based BAE Systems has pursued acquisitions in the United States, including the recent purchase of Lockheed Martin's Electronic Systems (Sanders) business. Internationally, Boeing faces strong competition primarily from Europe. The consolidation and rationalization of the European defense and space industry during the past decade has evolved into a defined end-state with two dominant companies: BAE Systems and the European Aeronautics Defence and Space Company (EADS). EADS is now the world's third largest aircraft and defense company behind Boeing and Lockheed Martin. Europe is also consolidating within market segments with the creation of Matra BAE Dynamics Alenia (MBDA) as the primary European weapons provider and Agusta Westland as a single European rotorcraft entity. In response to emerging opportunities and competitive pressures internationally, Boeing is actively pursuing a globalization strategy aimed at improving the Company's competitive position. In Europe, Boeing continues to explore transatlantic partnerships on several programs in the Company's markets of interest. In Asia, Boeing is seeking to expand alliances with indigenous military suppliers in the region.
PRODUCT LINES
The Military Aircraft and Missiles segment produces tactical fighters, trainers, helicopters, military transports, tankers, strike missiles, and special purpose airplanes for the U.S. and foreign governments. This segment also provides aerospace support products and services, which include maintenance and modification, training systems, support systems, support services, and spares, repairs and supply chain management. Several programs are now in production for the DoD, such as the C-17 Transport, F/A-18E/F, T-45 Trainer and V-22 Tiltrotor. Foreign sales approved by the U.S. Government are extending some product lines, such as the Harpoon missile, the AH-64 and CH-47 helicopters. Other programs include those that are transitioning to low-rate initial production, such as the Raptor, those that are still in development, such as the RAH-66 rotorcraft, or in competitive development, such as the Joint Strike Fighter. The Joint Strike Fighter program consists of three variants, which includes a conventional takeoff and landing (CTOL) airplane for the U.S. Air Force to replace the and A-10, a carrier-based strike fighter for the U.S. Navy to replace the A-6, and a short takeoff and vertical landing (STOVL) for the U.S. Marine Corps to replace the AV-8B Harrier. The STOVL variant is also planned to replace the U.K. Royal Navy Sea Harrier and the Royal Air Force GR7.
The basic strategy of the Military Aircraft and Missiles segment is to provide competitive products and services in every selected market. Over time, success in improving the competitive position and market share depends on the ability to provide integrated product and service solutions that best meet customer needs. A real-world implementation of this strategy is provided by the Joint Strike Fighter program, where the Company's "total system" approach will modernize the service's tactical forces at the lowest cost, with low-risk and designed-in growth capacity, while providing a system that surpasses current aircraft in performance, mission effectiveness and supportability.
SPACE AND COMMUNICATIONS BUSINESS ENVIRONMENT AND TRENDS - --------------------------------------------------------
There are four major addressable markets for the Space and Communications segment: launch services, information and communications, human space flight and exploration, missile defense and space control.
Many environmental factors affect the outlook for the launch services business. The near-term softening of the non-geostationary satellite launch market and the resulting forecast of excess capacity in launch vehicle supply will continue to create a highly competitive atmosphere where capability, service availability, reliability, and affordability will be critical success factors. With the Delta family and Sea Launch commercial launch vehicles the Company is well positioned to respond to these changing market conditions. As the launch market continues to evolve, the Space and Communications segment is prepared to play a major role in NASA-driven and industry-driven advanced space transportation technology developments.
The information and communications market targets both government and commercial customers. This market offers the largest opportunity for growth for the Space and Communications segment. The government segment includes airborne mission systems, space systems, satellite systems, and integrated systems-of-systems opportunities. The commercial segment includes satellite manufacturing, hybrid network systems, and telecommunications opportunities. Products serving these markets require strong customer-focused solutions and seamless interfaces with multiple systems and applications. The Space and Communication segments experience in large-scale systems integration projects, along with related expertise in satellite system development and manufacturing and on programs such as Airborne Warning and Control System, will provide the leverage necessary to expand in this market.
The human space flight and exploration market is forecast to be relatively flat over the next ten years. This forecast is based on budget projections for NASA, the primary customer for this market. The near-term focus will be on the successful completion and assembly of the International Space Station (ISS), for which Boeing is the prime contractor. NASA is expected to award contracts for the Crew Return Vehicle and the operations and utilization of ISS. The Space and Communications segment is well positioned to pursue these contracts. Additionally, the Space Shuttle continues to remain the only U.S. vehicle to support human space access, and Boeing plays a key role in Shuttle operations and maintenance through United Space Alliance, the Company's joint venture arrangement with Lockheed Martin. The one-hundredth space shuttle mission was flown in 2000. NASA is expected to pursue future funding for long-term space exploration once the ISS has been assembled.
Funding for the missile defense and space control market is primarily driven by U.S. Government development and procurement budgets. Market components include national missile defense, theater missile defense (weapons and systems of systems solutions) along with space control. The prime contractor role on the National Missile Defense program will demonstrate the Company's ability to provide a system of systems solution for national defense. Accomplishments on the PAC-3 (Patriot Advanced Capability missile) program, and the Theater High Altitude Area Defense program has established the Space and Communications segment as a major player in the missile defense market. We have also established a strong technical position in the emerging laser system applications market. Boeing is well positioned to lead in the missile defense marketplace.
STRATEGIC INVESTMENTS FOR LONG-TERM VALUE - -----------------------------------------
NEW PRODUCT DEVELOPMENT
The Company continually evaluates opportunities to improve current aircraft models, and assesses the marketplace to ensure that its family of commercial jet aircraft is well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line that is responsive to changing market conditions by maximizing commonality among the Boeing family of commercial aircraft. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products with the highest standards of quality, safety, technical excellence, economic performance and in-service support.
The Company continues to invest in the development of the Delta IV expendable launch vehicle. The Sea Launch joint venture offers automated commercial satellite launches from a seagoing launch platform. These products give the Space and Communications segment greater access to a portion of the launch market that was previously unavailable with the Delta II rocket alone. The Company also continues to invest in the development of the Airborne Early Warning & Control systems platform. These investments will also provide leverage in the development of other information, communication and battle management applications.
MAJOR PROCESS IMPROVEMENTS
The Company remains strongly committed to becoming a world-class leader in all aspects of its business and to maintaining a strong focus on customer needs, including product capabilities, technology, in-service economics and product support. Major long-term productivity gains are being aggressively pursued, with resources invested in education and training, restructuring of processes, new technology, and organizational realignment. Recent commercial and government developmental programs, such as the 767-400ER, 737-900 and Joint Strike Fighter, included early commitment of resources for integrated product teams, design interface with customer representatives, use of advanced three- dimensional digital product definition and digital pre-assembly computer applications, and increased use of automated manufacturing processes. Although these measures have required significant current investments, substantial long- term benefits are anticipated from reductions in design changes and rework and improved quality of internally manufactured and supplier parts. Significant initiatives to improve production systems and processes are underway. Efforts to streamline configuration, ordering and shop floor systems continue. Many of the lean manufacturing concepts are being implemented across the enterprise. Efforts are underway on part number reduction, reducing cycle time and maximizing the value of airplane change. The initiatives will enhance the Company's ability to insure standardization where it benefits customers, provide "just in time" feature selection, and allow for more predictable, stable and shorter production flows. These initiatives will improve operational efficiencies and provide better customer product selection.
The Military Aircraft and Missiles segment and the Space and Communications segment continue to aggressively pursue important process improvements through integrated product teams that provide cost-effective solutions and maintain technological superiority. Phantom Works, the advanced research and development organization of Boeing, focuses on improving the Company's competitive position through innovative technologies, improved processes and the creation of new
products. The Company is continuing to assess potential opportunities for improved use and consolidation of facilities across all parts of the Company and to focus on those capabilities and processes that contribute to core competencies resulting in a competitive advantage. Future decisions regarding facilities conversions or consolidations will be based on long-term business objectives. Within the Military Aircraft and Missiles and Space and Communications segments, major restructuring actions will be contingent on demonstration of cost savings for U.S. Government programs and the Company.
The Company is pursuing the means to significantly reduce new product development cost and flow time. Initiatives that have come out of this effort include the formation of the Creation Center, which is tied closely with Phantom Works, and other comparable efforts. Another initiative is the migration to platforms and platform teams modeled after premier benchmarked companies. Other initiatives include design tool automation integrated with manufacturing, improved loads models, and decision support methodologies.
The Company is using Enterprise Process Councils as the structure for realizing synergies companywide. These Councils are made up of the leaders of key processes from each of the operating groups, as well as Phantom Works, and will rapidly share best practices and combine efforts to meet needs across the Company. Enterprise Process Councils have been established for Engineering, Production Operations, Finance, Quality and Procurement processes.
SHAREHOLDER VALUE AS CORPORATE PERFORMANCE MEASURE - --------------------------------------------------
Management performance measures are designed to provide a good balance between short-term and long-term measures and financial and non-financial measures to align all decision processes and operating objectives to increase shareholder value over the long term.
In 1999, the Company initiated a Managing for Value program designed to develop a companywide culture to continuously improve financial performance and growth. Consistent with these objectives, the Company has set performance targets based on economic profit goals. Economic profit, which is calculated by subtracting a capital charge from the Company's net operating profit after taxes, is the metric used to measure overall financial performance. Awards to executives under the Company's Incentive Compensation Plan are based on the achievement of economic profit targets. Effective for 2000, with first payout in 2001, the Company announced an incentive plan that will provide annual cash rewards to non-union, non-executive employees upon achieving annual financial performance objectives based on economic profit.
In 1998, the Company implemented a stock-award plan for executive compensation in place of stock options. Under this plan, rights to receive stock, referred to as Performance Shares, have been issued to plan participants. An increasing portion of the Performance Shares awarded will be convertible to shares of common stock as the stock price reaches and maintains certain threshold levels. These threshold stock price levels represent predetermined compound five-year growth rates relative to the stock price at the time the Performance Shares are granted. During 2000, portions of the Performance Shares granted in 1999 and 2000 were converted to common stock. Any performance shares not converted to common stock after five years from date of grant will expire. This plan is intended to increase executive management's focus on improving shareholder value.
Segment Information Note 24 to the consolidated financial statements
The Company is organized based on the products and services it offers. Under this organizational structure, the Company operates in the following principal areas: Commercial Airplanes, Military Aircraft and Missiles, Space and Communications, and Customer and Commercial Financing. Commercial Airplanes operations principally involve development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide. Military Aircraft and Missiles operations principally involve research, development, production, modification and support of the following products and related systems: military aircraft, both land-based and aircraft-carrier-based, including fighter, transport and attack aircraft with wide mission capability, and vertical/short takeoff and landing capability; helicopters and missiles. Space and Communications operations principally involve research, development, production, modification and support of the following products and related systems: space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines, and information and battle management systems. Although some Military Aircraft and Missiles and Space and Communications products are contracted in the commercial environment, the primary customer is the U.S. Government. The Customer and Commercial Financing/Other segment is primarily engaged in the financing of commercial and private aircraft, commercial equipment, and real estate. In October 2000, the Company announced the creation of two new business units: Connexion by BoeingSM and Air Traffic Management. These business units are included in the segment information for Space and Communications and Commercial Airplanes.
The Commercial Airplanes segment is subject to both operational and external business environment risks. Operational risks that can seriously disrupt the Company's ability to make timely delivery of its commercial jet aircraft and meet its contractual commitments include execution of internal performance plans, product performance risks associated with regulatory certifications of the Company's commercial aircraft by the U.S. Government and foreign governments, other regulatory uncertainties, collective bargaining labor disputes, performance issues with key suppliers and subcontractors and the cost and availability of energy resources, such as electrical power. Aircraft programs, particularly new aircraft models such as the 717 program, face the additional risk of pricing pressures and cost management issues inherent in the design and production of complex products. Financing support may be provided by the Company to airlines, some of which are unable to obtain other financing. While the Company's principal operations are in the United States, Canada, and Australia, some key suppliers and subcontractors are located in Europe and Japan. External business environment risks include adverse governmental export and import policies, factors that result in significant and prolonged disruption to air travel worldwide, and other factors that affect the economic viability of the commercial airline industry. Examples of factors relating to external business environment risks include the volatility of aircraft fuel prices, global trade policies, worldwide political stability and economic growth, escalation trends inherent in pricing the Company's aircraft, and a competitive industry structure which results in market pressure to reduce product prices.
In addition to the foregoing risks associated with the Commercial Airplanes segment, the Military Aircraft and Missiles segment and the Space and Communications segment are subject to changing priorities or reductions in the U.S. Government defense and space budget, and termination of government
contracts due to unilateral government action (termination for convenience) or failure to perform (termination for default). Civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeiture and suspension or debarment from government contracts may result from violations of business and cost classification regulations on U.S. Government contracts.
The launch services market has some degree of uncertainty since global demand is driven in part by the launch customers' access to capital markets. Additionally, some of the Company's competitors for launch services receive direct or indirect government funding.
Risk associated with the Customer and Commercial Financing/Other segment includes interest rate risks, asset valuation risks, and credit and collectability risks of counterparties.
As of December 31, 2000, the Company's principal collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM), representing 26% of employees (current agreements expiring May 2001, September 2002, and October 2002); the Society of Professional Engineering Employees in Aerospace (SPEEA), representing 13% of employees (current agreements will expire in December 2002 and a contract with a new unit is now under negotiation); the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), representing 5% of employees (current agreements expiring September 2002, May 2003, and April 2004); and Southern California Professional Engineering Association (SCPEA), representing 3% of employees (current agreement expiring March 2001).
Sales and other operating revenue by geographic area consisted of the following: (Dollars in millions) Year ended December 31, 2000 1999 1998 ====================================================== Asia, other than China $ 5,568 $10,776 $14,065 China 1,026 1,231 1,572 Europe 9,038 9,678 8,646 Oceania 887 942 844 Africa 542 386 702 Western Hemisphere, other than the United States 559 461 701 - ------------------------------------------------------ 17,620 23,474 26,530 United States 33,701 34,519 29,624 - ------------------------------------------------------ Total sales $51,321 $57,993 $56,154 ======================================================
Military Aircraft and Missiles segment and Space and Communications segment combined sales were approximately 13%, 17% and 16% of total sales in Europe for 2000, 1999 and 1998, respectively. Defense sales were approximately 9%, 17% and 19% of total sales in Asia, excluding China, for the same respective years. Exclusive of these amounts, Military Aircraft and Missiles segment and Space and Communications segment sales were principally to the U.S. Government. Sales to the U.S. Government represented 34%, 25% and 26% of consolidated sales for 2000, 1999 and 1998, respectively.
The information in the following tables is derived directly from the segments' internal financial reporting used for corporate management purposes. The expenses, assets and liabilities attributable to corporate activity are not allocated to the operating segments. Less than 2% of operating assets are located outside the United States.
Customer and Commercial Financing/Other segment revenues consist principally of interest from financing receivables and lease income from operating lease equipment, and segment earnings additionally reflect depreciation on leased equipment and expenses recorded against the valuation allowance presented in Note 10. No interest expense on debt is included in Customer and Commercial Financing/Other segment earnings.
For internal reporting purposes, the Company records Commercial Airplanes segment revenues and operating profits for airplanes transferred to other segments, and such transfers may include airplanes accounted for as operating leases that are considered transferred to the Customer and Commercial Financing/Other segment. The revenues for these transfers are eliminated in the 'Accounting differences/eliminations' caption. In the event an airplane accounted for as an operating lease is subsequently sold, the 'Accounting differences/eliminations' caption would reflect the recognition of revenue and operating profit for the consolidated financial statements.
The Company records cost of sales for 7-series commercial airplane programs under the program method of accounting described in Note 1. For internal measurement purposes, the Commercial Airplanes segment records cost of sales based on the cost of specific units delivered, and to the extent that inventoriable costs exceed estimated revenues, a loss is not recognized until delivery is made, which is not in accordance with generally accepted accounting principles. For the 717 program, the cost of the specific units delivered is reduced, on a per-unit basis, by the amount previously recognized for forward losses. Proceeds from certain Commercial Airplanes segment suppliers attributable to participation in development efforts are accounted for as a reduction in the cost of inventory received from the supplier under the program accounting method, and as an expense reduction in the period the proceeds are received for internal measurement purposes. These adjustments between the internal measurement method and the program accounting method are included in the 'Accounting differences/eliminations' caption of net earnings. These adjustments totaled $(637), $(304) and $514 for the years ended December 31, 2000, 1999 and 1998, respectively.
Customer advance payments prior to delivery may be delayed or contractually deferred from a baseline schedule, resulting in the recognition of interest income. Beginning in 2000, revenues and income resulting from deferred customer advances were identified to the Commercial Airplanes segment, and had previously been identified to the Customer and Commercial Financing/Other segment. For the years 1999 and 1998, $66 and $118 of revenues and operating income had been reclassified from the Customer and Commercial Financing/Other segment to the Commercial Airplanes segment to conform with the 2000 presentation.
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.
The costs attributable to share-based plans are not allocated. Other unallocated costs include corporate costs not allocated to the operating segments, including goodwill amortization resulting from acquisitions prior to 1998. Unallocated assets primarily consist of cash and short-term investments, prepaid pension expense, goodwill acquired prior to 1998, deferred tax assets, and capitalized interest. Unallocated liabilities include various accrued employee compensation and benefit liabilities, including accrued retiree health care, taxes payable, and debentures and notes payable. Unallocated capital expenditures and depreciation relate primarily to shared services assets.
In-process research and development for the year ended December 31, 2000, included $505 associated with the Space and Communications segment and $52 associated with the Commercial Airplanes segment. These amounts are included in the respective segment's depreciation and amortization amounts on the following page.
Sales and other Net earnings (loss) operating revenues (Dollars in millions) ---------------------- ----------------------- Year ended December 31, 2000 1999 1998 2000 1999 1998 =============================================================================== Commercial Airplanes $2,736 $2,082 $ (148) $31,171 $38,475 $36,998 Military Aircraft and Missiles 1,271 1,193 1,283 12,197 12,220 12,990 Space and Communications (323) 415 248 8,039 6,831 6,889 Customer and Commercial Financing/Other 494 426 249 758 771 612 Accounting differences/eliminations (442) (432) 372 (844) (304) (1,335) Share-based plans (316) (209) (153) Other unallocated costs (362) (305) (284) - ------------------------------------------------------------------------------- Earnings (loss) from operations 3,058 3,170 1,567 Other income, principally interest 386 585 283 Interest and debt expense (445) (431) (453) - ------------------------------------------------------------------------------- Earnings (loss) before taxes 2,999 3,324 1,397 Income taxes (benefit) 871 1,015 277 - ------------------------------------------------------------------------------- $2,128 $2,309 $1,120 $51,321 $57,993 $56,154 ===============================================================================
Segment information (continued) (Dollars in millions) Depreciation and Research and Development Amortization ------------------------ ---------------------- Year ended December 31, 2000 1999 1998 2000 1999 1998 ============================================================================== Commercial Airplanes $ 574 $ 585 $1,021 $ 619 $ 595 $ 628 Military Aircraft and Missiles 262 264 304 208 201 208 Space and Communications 605 492 570 686 168 142 Customer and Commercial Financing/Other 159 163 135 Unallocated 364 518 509 - ------------------------------------------------------------------------------ $1,441 $1,341 $1,895 $2,036 $1,645 $1,622 ==============================================================================
Assets Liabilities at December 31 at December 31 ---------------------- ---------------------- 2000 1999 1998 2000 1999 1998 ============================================================================== Commercial Airplanes $ 9,800 $ 8,075 $11,003 $ 7,972 $ 6,135 $ 6,907 Military Aircraft and Missiles 3,321 3,206 3,560 1,189 1,080 743 Space and Communications 9,629 4,245 3,149 2,903 1,350 1,452 Customer and Commercial Financing/Other 6,959 6,004 5,751 240 228 301 Unallocated 12,319 14,617 13,561 18,704 15,892 15,305 - ------------------------------------------------------------------------------ $42,028 $36,147 $37,024 $31,008 $24,685 $24,708 ==============================================================================
Contractual backlog Capital expenditures, net (unaudited) ------------------------- ----------------------- Year ended December 31, 2000 1999 1998 2000 1999 1998 ============================================================================== Commercial Airplanes $237 $ 307 $ 754 $ 89,780 $ 72,972 $ 86,057 Military Aircraft and Missiles 65 215 213 17,113 15,691 17,007 Space and Communications 438 585 339 13,707 10,585 9,832 Customer and Commercial Financing/Other 7 1 1 Unallocated 185 128 358 - ------------------------------------------------------------------------------ $932 $1,236 $1,665 $120,600 $99,248 $112,896 ==============================================================================
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data) Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Sales and other operating revenues $51,321 $57,993 $56,154 Cost of products and services 43,712 51,320 50,492 - ------------------------------------------------------------------------------- 7,609 6,673 5,662 Equity in income (loss) from joint ventures 64 4 (67) General and administrative expense 2,335 2,044 1,993 Research and development expense 1,441 1,341 1,895 In-process research and development expense 557 Gain on dispositions, net 34 87 13 Share-based plans expense 316 209 153 - ------------------------------------------------------------------------------- Earnings from operations 3,058 3,170 1,567 Other income, principally interest 386 585 283 Interest and debt expense (445) (431) (453) - ------------------------------------------------------------------------------- Earnings before income taxes 2,999 3,324 1,397 Income taxes 871 1,015 277 - ------------------------------------------------------------------------------- Net earnings $ 2,128 $ 2,309 $ 1,120 ===============================================================================
Basic earnings per share $2.48 $2.52 $1.16 =============================================================================== Diluted earnings per share $2.44 $2.49 $1.15 =============================================================================== Cash dividends per share $ .59 $ .56 $ .56 ===============================================================================
See notes to consolidated financial statements.
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data) December 31, 2000 1999 - ------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 1,010 $ 3,354 Short-term investments 100 Accounts receivable 4,928 3,453 Current portion of customer and commercial financing 995 799 Deferred income taxes 2,137 1,467 Inventories, net of advances and progress billings 6,794 6,539 - ------------------------------------------------------------------------------ Total current assets 15,864 15,712 Customer and commercial financing 5,964 5,205 Property, plant and equipment, net 8,814 8,245 Goodwill and acquired intangibles, net 5,214 2,233 Prepaid pension expense 4,845 3,845 Deferred income taxes 60 Other assets 1,267 907 - ------------------------------------------------------------------------------ $42,028 $36,147 ==============================================================================
Liabilities and Shareholders' Equity Accounts payable and other liabilities $11,979 $11,269 Advances in excess of related costs 3,517 1,215 Income taxes payable 1,561 420 Short-term debt and current portion of long-term debt 1,232 752 - ------------------------------------------------------------------------------ Total current liabilities 18,289 13,656 Deferred income taxes 172 Accrued retiree health care 5,152 4,877 Long-term debt 7,567 5,980 Shareholders' equity: Common shares, par value $5.00 - 1,200,000,000 shares authorized; Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059 Additional paid-in capital 2,693 1,684 Treasury shares, at cost - 136,385,222 and 102,356,897 (6,221) (4,161) Retained earnings 12,090 10,487 Accumulated other comprehensive income (2) 6 Unearned compensation (7) (12) ShareValue Trust shares - 39,156,280 and 38,696,289 (2,592) (1,601) - ------------------------------------------------------------------------------ Total shareholders' equity 11,020 11,462 - ------------------------------------------------------------------------------ $42,028 $36,147 ==============================================================================
See notes to consolidated financial statements.
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions) Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------ Cash flows - operating activities: Net earnings $ 2,128 $ 2,309 $ 1,120 Adjustments to reconcile net earnings to net cash provided by operating activities: Share-based plans 316 209 153 Depreciation 1,317 1,538 1,517 Amortization of goodwill and intangibles 162 107 105 In-process research and development 557 Customer and commercial financing valuation provision 13 72 61 Gain on dispositions, net (34) (87) (13) Changes in assets and liabilities - Short-term investments 100 179 450 Accounts receivable (768) (225) (167) Inventories, net of advances and progress billings 1,097 2,030 652 Accounts payable and other liabilities (311) 217 (840) Advances in excess of related costs 1,387 (36) (324) Income taxes payable and deferred 421 462 145 Other (712) (597) (479) Accrued retiree health care 269 46 35 - ------------------------------------------------------------------------------ Net cash provided by operating activities 5,942 6,224 2,415 - ------------------------------------------------------------------------------ Cash flows - investing activities: Customer financing and properties on lease, additions (2,571) (2,398) (2,603) Customer financing and properties on lease, reductions 1,433 1,842 1,357 Property, plant and equipment, net additions (932) (1,236) (1,665) Acquisitions, net of cash acquired (5,727) Proceeds from dispositions 169 359 37 - ------------------------------------------------------------------------------ Net cash used by investing activities (7,628) (1,433) (2,874) - ------------------------------------------------------------------------------ Cash flows - financing activities: New borrowings 2,687 437 811 Debt repayments (620) (676) (693) Common shares purchased (2,357) (2,937) (1,397) Stock options exercised, other 136 93 65 Dividends paid (504) (537) (564) - ------------------------------------------------------------------------------ Net cash used by financing activities (658) (3,620) (1,778) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (2,344) 1,171 (2,237) Cash and cash equivalents at beginning of year 3,354 2,183 4,420 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 1,010 $ 3,354 $ 2,183 ============================================================================== See notes to consolidated financial statements. THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Treasury Stock (Dollars in millions / --------------- Paid-In --------------- Shares in thousands) Shares Amount Capital Shares Amount ============================================================================== Balance January 1, 1998 1,000,030 $5,000 $ 1,090 165 $ (9) - ------------------------------------------------------------------------------ Shares issued for ShareValue Trust 11,253 56 494 Shares issued for share-based plans 587 3 Share-based compensation 153 Treasury shares acquired 37,473 (1,397) Treasury shares issued for share-based plans, net (43) (1,792) 85 Tax benefit related to share-based plans 18 Stock appreciation rights expired or surrendered 5 ShareValue Trust market value adjustment (570) Shares acquired from dividend reinvestment Amortization and forfeitures - unearned compensation Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $14 - ------------------------------------------------------------------------------ Balance December 31, 1998 1,011,870 $5,059 $ 1,147 35,846 $(1,321) - ------------------------------------------------------------------------------
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Treasury Stock (Dollars in millions / --------------- Paid-In --------------- Shares in thousands) Shares Amount Capital Shares Amount ============================================================================== Share-based compensation 209 Tax benefit related to share-based plans 9 ShareValue Trust market value adjustment 366 Treasury shares acquired 68,923 (2,937) Treasury shares issued for share-based plans, net (47) (2,412) 97 Shares acquired from dividend reinvestment Amortization and forfeitures - unearned compensation Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $(14) Currency translation adjustment - ------------------------------------------------------------------------------ Balance December 31, 1999 1,011,870 $5,059 $ 1,684 102,357 $(4,161) - ------------------------------------------------------------------------------ Share-based compensation 316 Tax benefit related to share-based plans 160 ShareValue Trust market value adjustment 991 Treasury shares acquired 41,782 (2,357) Treasury shares issued for share-based plans, net (264) (7,754) 297 Performance shares converted to deferred stock units (194) Shares acquired from dividend reinvestment Amortization and forfeitures - unearned compensation Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $3 Unrealized holding loss, net of tax of $7 Currency translation adjustment - ------------------------------------------------------------------------------ Balance December 31, 2000 1,011,870 $5,059 $ 2,693 136,385 $(6,221) ==============================================================================
See notes to consolidated financial statements. THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED)
ShareValue Trust (Dollars in millions / ---------------- Unearned Shares in thousands) Shares Amount Compensation ================================================================== Balance January 1, 1998 26,385 (1,255) $(20) - ------------------------------------------------------------------ Shares issued for ShareValue Trust 11,253 (550) Shares issued for share-based plans Share-based compensation Treasury shares acquired Treasury shares issued for share-based plans, net Tax benefit related to share-based plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment 570 Shares acquired from dividend reinvestment 529 Amortization and forfeitures - unearned compensation 3 Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $14 - ------------------------------------------------------------------ Balance December 31, 1998 38,167 $(1,235) $(17) - ------------------------------------------------------------------
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED)
ShareValue Trust (Dollars in millions / ---------------- Unearned Shares in thousands) Shares Amount Compensation ================================================================== Share-based compensation Tax benefit related to share-based plans ShareValue Trust market value adjustment (366) Treasury shares acquired Treasury shares issued for share-based plans, net Shares acquired from dividend reinvestment 529 Amortization and forfeitures - unearned compensation 5 Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $(14) Currency translation adjustment - ------------------------------------------------------------------ Balance December 31, 1999 38,696 $(1,601) $(12) - ------------------------------------------------------------------ Share-based compensation Tax benefit related to share-based plans ShareValue Trust market value adjustment (991) Treasury shares acquired Treasury shares issued for share-based plans, net Performance shares converted to deferred stock units Shares acquired from dividend reinvestment 460 Amortization and forfeitures - unearned compensation 5 Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $3 Unrealized holding loss, net of tax of $7 Currency translation adjustment - ------------------------------------------------------------------ Balance December 31, 2000 39,156 $(2,592) $(7) ==================================================================
See notes to consolidated financial statements. THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED)
Accumulated Other (Dollars in millions / Comprehensive Retained Comprehensive Shares in thousands) Income Earnings Income =================================================================== Balance January 1, 1998 $ - $8,147 | - -----------------------------------------------------| Shares issued for | ShareValue Trust | Shares issued for | share-based plans | Share-based compensation | Treasury shares acquired | Treasury shares issued for | share-based plans, net | Tax benefit related to | share-based plans | Stock appreciation rights | expired or surrendered | ShareValue Trust market | value adjustment | Shares acquired from | dividend reinvestment | Amortization and forfeitures - | unearned compensation | Net earnings 1,120 | $1,120 Cash dividends declared (561)| Minimum pension liability | adjustment, net of tax of $14 (23) | (23) - ------------------------------------------------------------------- Balance December 31, 1998 $(23) $8,706 | $1,097 - ------------------------------------------------------=============
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED)
Accumulated Other (Dollars in millions / Comprehensive Retained Comprehensive Shares in thousands) Income Earnings Income =================================================================== Share-based compensation | Tax benefit related to | share-based plans | ShareValue Trust market | value adjustment | Treasury shares acquired | Treasury shares issued for | share-based plans, net | Shares acquired from | dividend reinvestment | Amortization and forfeitures - | unearned compensation | Net earnings 2,309 | $2,309 Cash dividends declared (528)| Minimum pension liability | adjustment, net of tax of $(14) 22 | 22 Currency translation adjustment 7 | 7 - ------------------------------------------------------------------- Balance December 31, 1999 $ 6 $10,487 | $2,338 - ------------------------------------------------------============= Share-based compensation | Tax benefit related to | share-based plans | ShareValue Trust market | value adjustment | Treasury shares acquired | Treasury shares issued for | share-based plans, net | Performance shares converted | to deferred stock units | Shares acquired from | dividend reinvestment | Amortization and forfeitures - | unearned compensation | Net earnings 2,218 | $2,218 Cash dividends declared (525)| Minimum pension liability | adjustment, net of tax of $3 (4) | (4) Unrealized holding loss, | net of tax of $7 (12) | (12) Currency translation adjustment 8 | 8 - ------------------------------------------------------------------- Balance December 31, 2000 $ (2) $12,090 | $2,120 ===================================================================
See notes to consolidated financial statements.
THE BOEING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000, 1999 and 1998
(Dollars in millions except per share data)
Note 1 Summary of Significant Accounting Policies - ------------------------------------------
Principles of consolidation The consolidated financial statements include the accounts of all majority- owned subsidiaries. Investments in joint ventures in which the Company does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. Accordingly, the Company's share of net earnings and losses from these ventures is included in the Consolidated Statements of Operations. Intercompany profits, transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to prior periods to conform with current reporting.
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are addressed in these notes to the consolidated financial statements.
Sales and other operating revenues Sales under fixed-price-type contracts are generally recognized as deliveries are made or at the completion of scheduled performance milestones. For certain fixed-price contracts that require substantial performance over an extended period before deliveries begin, sales are recorded based upon attainment of scheduled performance milestones. Sales under cost-reimbursement contracts are recorded as costs are incurred. Certain contracts contain profit incentives based upon performance relative to predetermined targets that may occur during or subsequent to delivery of the product. Incentives, which amounts can be reasonably estimated, are recorded over the performance period of the contract. Incentives and fee awards, which amounts cannot be reasonably estimated, are recorded when awarded. Commercial aircraft sales are recorded as deliveries are made unless transfer of risk and rewards of ownership is not sufficient.
Income associated with customer financing activities is included in sales and other operating revenues.
Contract and program accounting In the Military Aircraft and Missiles segment and Space and Communications segment, operations principally consist of performing work under contract, predominantly for the U.S. Government and foreign governments. Cost of sales for such contracts is determined based on the estimated average total contract cost and revenue.
Commercial aircraft programs are planned, committed and facilitized based on long-term delivery forecasts, normally for quantities in excess of contractually firm orders. Cost of sales for the 717, 737, 747, 757, 767 and 777 commercial aircraft programs is determined under the program method of accounting based on estimated average total cost and revenue for the current program quantity. The program method of accounting effectively amortizes or averages tooling and special equipment costs, as well as unit production costs, over the program quantity. Because of the higher unit production costs experienced at the beginning of a new program and the substantial investment required for initial tooling and special equipment, new commercial jet aircraft programs normally have lower operating profit margins than established programs. The initial program quantity for the 717 program has been established at 200 units. The estimated program average costs and revenues are reviewed and reassessed quarterly, and changes in estimates are recognized over current and future deliveries constituting the program quantity. Cost of sales for the MD- 80, MD-90 and MD-11 aircraft programs is determined on a specific-unit cost method.
To the extent that inventoriable costs are expected to exceed the total estimated sales price, charges are made to current earnings to reduce inventoried costs to estimated net realizable value.
Inventories Inventoried costs on commercial aircraft programs and long-term contracts include direct engineering, production and tooling costs, and applicable overhead, not in excess of estimated net realizable value. In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year. Commercial spare parts and general stock materials are stated at average cost not in excess of net realizable value.
Share-based plans The Company has adopted the expense recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Company values stock options issued based upon an option- pricing model and recognizes this value as an expense over the period in which the options vest. Potential distribution from the ShareValue Trust described in Note 18 have been valued based upon an option-pricing model, with the related expense recognized over the life of the trust. Share-based expense associated with Performance Shares described in Note 18 is determined based on the market value of the Company's stock at the time of the award applied to the maximum number of shares contingently issuable based on stock price and is amortized over a five-year period.
Interest expense Interest and debt expense is presented net of amounts capitalized. Interest expense is subject to capitalization as a construction-period cost of property, plant and equipment and of commercial program tooling. Income taxes Federal, state and foreign income taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes.
Postretirement benefits The Company's funding policy for pension plans is to contribute, at a minimum, the statutorily required amount to an irrevocable trust. Benefits under the plans are generally based on age at retirement, the employee's annual earnings indexed at the U.S. Treasury 30-year bond rate, and years of service. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method.
Cash and cash equivalents Cash and cash equivalents consist of highly liquid instruments, such as certificates of deposit, time deposits, treasury notes and other money market instruments, which generally have maturities of less than three months.
Short-term investments Short-term investments, consisting principally of U.S. Government Treasury obligations, are classified as trading securities with unrealized gains and losses reflected in other income.
Property, plant and equipment Property, plant and equipment are recorded at cost, including applicable construction-period interest, and depreciated principally over the following estimated useful lives: new buildings and land improvements, from 20 to 45 years; and machinery and equipment, from 3 to 13 years. The principal methods of depreciation are as follows: buildings and land improvements, 150% declining balance; and machinery and equipment, sum-of-the-years' digits. The Company periodically evaluates the appropriateness of remaining depreciable lives assigned to long-lived assets subject to a management plan for disposition.
Long-lived assets deemed available for sale are stated at the lower of cost or fair value. Long-lived assets held for use are subject to an impairment adjustment down to fair value if the carrying value is no longer recoverable based upon the sum of undiscounted future cash flows.
Goodwill and acquired intangibles Goodwill, representing the excess of acquisition costs over the fair value of net assets of businesses purchased, is being amortized by the straight-line method over 20 to 30 years. Recoverability of the unamortized goodwill and acquired intangibles balance is primarily based upon assessment of related operational cash flows.
Acquired intangibles and their associated lives, amortized on a straight- line method, include the following: developed technologies, 5 to 20 years; tradename, 20 years; data repositories, 15 to 20 years; assembled workforce, 5 to 15 years; product know-how, 15 to 20 years; and customer lists, 5 to 15 years.
Available-for-sale securities The Company holds certain common stock investments with a readily determinable fair market value. Under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, such equity securities are carried as available for sale and reported at market value. These securities held by the Company are considered long term in nature and included in "Other assets" on the Consolidated Statements of Financial Position.
Note 2 Revenues and Costs Attributable to Customer and Commercial Financing - -------------------------------------------------------------------- The years 2000, 1999 and 1998 include sales and other operating revenues of $803, $686 and $528 and cost of products and services of $259, $218 and $241 attributable to customer and commercial financing. Customer and commercial financing primarily relates to the financing of commercial and private aircraft and commercial equipment. Revenues include interest on notes receivable and sales-type leases and lease income from operating leases. Costs of products and services includes depreciation on leased aircraft and equipment and valuation adjustments of customer and commercial financing assets.
Note 3 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. Net gains of $17 and $118 were recorded for sales of businesses in 2000 and 1999.
Note 4 Mergers and Acquisitions - ------------------------ Accounting for acquisitions The Company's acquisitions in 2000 were accounted for under the purchase method. The purchase price of each acquisition was allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition and was based on preliminary estimates that are subject to future adjustments. The excess of the purchase price over the fair values of the net tangible assets, identifiable intangible assets and liabilities acquired was allocated to goodwill, and is being amortized on a straight-line basis over 20 years. As discussed below, a portion of the purchase price for certain acquisitions was allocated to in-process research and development (IPR&D) which was immediately expensed. Results of operations for the newly acquired entities have been combined with those of the Company from the date of acquisition.
Significant acquisitions The following is a summary of the Company's significant acquisitions in 2000 along with the purchase price and the allocation of the purchase price to IPR&D and intangible assets.
Other Purchase IPR&D Goodwill Intangible Price Assets - ------------------------------------------------------------------------ Hughes space and communications businesses $3,849 $500 $740 $631
Jeppesen Sanderson Inc. 1,524 45 772 663
Continental Graphics Corp. 183 7 49 80
Autometric Inc. 119 5 58 41
On October 6, 2000, the Company acquired Hughes space and communications businesses and related operations. The new entity will be operated as a wholly owned subsidiary named Boeing Satellite Systems (BSS). BSS provides space-based communications, reconnaissance, surveillance and imaging systems. BSS also manufactures commercial communications satellites. Also included in the acquisitions are Hughes Electron Dynamics, a supplier of electronic components for satellites; Spectrolab, a provider of solar cells and panels for satellites; and a share of HRL Laboratories, a research center. Net tangible assets acquired included property, plant and equipment of $824; and prepaid pension assets of $626.
On October 4, 2000, the Company acquired Jeppesen Sanderson Inc., a provider of flight information services. Jeppesen Sanderson Inc. provides a full range of print and electronic flight information services, including navigation data, computerized flight planning, aviation software products, aviation weather services, maintenance information, and pilot training systems and supplies.
On September 1, 2000, the Company acquired Continental Graphics Corp., a provider of technical information to the aviation industry, and on August 2, 2000, the Company acquired Autometric Inc., a geospatial information technology company.
In-process research and development The fair value amount of $500 of in-process research and development (IPR&D) attributed to the Hughes acquisition discussed below was determined by an independent valuation using the income approach.
Thirteen projects were included in the valuation, of which the principal projects were based on the following: technologies associated with high- efficiency solar cells and satellite battery technology ($189), phased array and digital processing technology to provide high-speed broadband service ($89), and xenon-ion systems for satellite engine propulsion ($82). The fair value of identifiable intangibles was also determined by an independent valuation primarily using the income approach. The following risk-adjusted discount rates were used to discount the project cash flows: solar cells and satellite battery technology, 17%; phased array and digital processing technology to provide high-speed broadband service, 18%; xenon-ion systems for satellite engine propulsion, 18%; all other projects, 18.2% weighted average. Operating margins were assumed to be similar to historical margins of similar products. The size of the applicable market was verified for reasonableness with outside research sources. The projects were in various stages of completion ranging from approximately 31% to 92% complete as of the valuation date, with specific percentages complete by project as follows: solar cells and satellite battery technology, 49%; phased array and digital processing
technology, 87%; xenon-ion systems for satellite engine propulsion, 82%. The stage of completion for each project was estimated by evaluating the cost to complete, complexity of the technology and time to market. The projects are anticipated to be completed between 2001 and 2003. The estimated cost to complete the projects is $80.
The discount rates above are higher than the Company's weighted average cost of capital due to the inherent uncertainties in the estimates described above, including the uncertainty surrounding the successful completion of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology and the uncertainty of the timing of the related product introduction and then-existing competing products. If these projects are not successfully developed, the future revenue and profitability of Boeing Satellite Systems may be adversely affected. Additionally, the value of the other intangible assets acquired may become impaired.
The fair value amount of $45 of in-process research and development (IPR&D) attributed to the acquisition of Jeppesen Sanderson Inc., was determined by an independent valuation. The acquired in-process research and development technology consists primarily of three software projects that will work together to store information and extract it for use in various products sold by Jeppesen. The technology will allow the manufacture of end user aeronautical information both backwards and forwards in time, and will allow the extraction of the information on a near real-time basis. Furthermore, the technology will allow the creation of packages of aeronautical information derived from a single source of database information, which can be tailored to individual customers or can be packaged as a new product. These database and extraction capabilities are required in developing new and enhanced charting and mapping products for customers worldwide. These acquired in-process research and development projects are expected to be complete by mid-2001; however, full range and production of the technology is anticipated in the first quarter of 2002. The technology, once completed, can only be used for its specific and intended purpose and as such no alternative future uses exist. The valuation methodology was determined using the income approach, and a risk- adjusted discount rate of 15% was used to discount the project cash flow. As of the date of the acquisition, Jeppesen had incurred approximately $14 in costs related to IPR&D projects. The estimated cost to complete the projects was $7.
Pro forma combined operating results Pro forma combined operating results for 2000 and 1999, which are presented solely as unaudited supplemental information and not necessarily indicative of what results would have been if the acquisitions discussed previously had been effective at the beginning of 1999, are as follows: sales of $52,848 and $60,531, net earnings of $2,141 and $2,295, and diluted earnings per share of $2.46 and $2.48.
Note 5 Equity in Income (Loss) from Joint Ventures - ------------------------------------------- Equity in income (loss) from joint ventures represents the Company's share of income or losses from joint venture arrangements accounted for under the equity method.
The principal joint venture arrangements are United Space Alliance, FlightSafety Boeing Training International (FSBTI), and Sea Launch. The Company has a 50% partnership with Lockheed Martin in United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space- related operations with the U.S. Air Force. The Company is entitled to 50% of the earnings of FSBTI, a partnership with FlightSafety International Inc., which provides pilot and crew training. The Company has a 40% partnership in Sea Launch, a commercial satellite launch venture with Norwegian, Russian and Ukrainian partners. Losses associated with Sea Launch were $26, $57 and $86 for the years ended December 31, 2000, 1999 and 1998 respectively.
As of December 31, 2000 and 1999, other assets included $272 and $164 attributable to investments in joint ventures.
Note 6 Earnings per Share - ------------------ The weighted average number of shares outstanding (in millions) used to compute earnings per share for the years ended December 31, 2000, 1999 and 1998, are as follows:
2000 1999 1998 - ------------------------------------------------------------------------------- Basic shares 859.5 917.1 966.9 Diluted shares 871.3 925.9 976.7 ===============================================================================
Basic earnings per share are calculated based on the weighted average number of shares outstanding, excluding treasury shares and the outstanding shares held by the ShareValue Trust. Diluted earnings per share are calculated based on that same number of shares plus additional dilutive shares representing stock distributable under stock option and stock unit plans computed using the treasury stock method, plus contingently issuable shares from other share-based plans on an as-if converted basis.
Note 7 McDonnell Douglas Products Valuation Adjustment - ----------------------------------------------- In 1997, the Company completed an assessment of the financial impact of its post-merger strategy decisions related to its McDonnell Douglas Corporation commercial product lines and recorded a provision aggregating $1,400 relative to these decisions. The provisions attributable to the commercial airplane programs included $209 related to contractual supplier termination liabilities and $60 related to employee severance liabilities, which were substantially liquidated as of December 31, 2000.
Contractual termination liabilities as of December 31, 2000 and 1999, were as follows: 2000 1999 - ------------------------------------------------------------------------------- Beginning balance $147 $178 Payments (80) (24) Changes in estimate (7) (7) - ------------------------------------------------------------------------------- Ending balance $ 60 $147 =============================================================================== Changes in supplier termination liability estimates result from continued negotiations with suppliers, which are expected to complete in 2002.
Note 8 Accounts Receivable - ------------------- Accounts receivable at December 31 consisted of the following:
2000 1999 - ------------------------------------------------------------------------------- U.S. Government contracts $2,693 $1,970 Other 2,235 1,483 - ------------------------------------------------------------------------------- $4,928 $3,453 ===============================================================================
Accounts receivable included the following as of December 31, 2000 and 1999: amounts not currently billable of $616 and $401 relating primarily to sales values recorded upon attainment of performance milestones that differ from contractual billing milestones and withholds on U.S. Government contracts ($487 and $214 not expected to be collected within one year); $172 and $51 relating to claims and other amounts on U.S. Government contracts subject to future settlement ($56 and $32 not expected to be collected within one year); and $169 and $46 of other receivables not expected to be collected within one year.
Note 9 Inventory - --------- Inventories at December 31 consisted of the following: 2000 1999 - ------------------------------------------------------------------------------- Commercial aircraft programs and long-term contracts in progress $ 19,399 $ 19,537 Commercial spare parts, general stock materials and other 1,972 2,042 - ------------------------------------------------------------------------------- 21,371 21,579 Less advances and progress billings (14,577) (15,040) - ------------------------------------------------------------------------------- $ 6,794 $ 6,539 ===============================================================================
As of December 31, 2000, there were no significant excess deferred production costs (inventory production costs incurred on in-process and delivered units in excess of the estimated average cost of such units determined as described in Note 1) or unamortized tooling costs not recoverable from existing firm orders for commercial programs.
Inventory costs at December 31, 2000, included unamortized tooling of $1,135 and $447 relating to the 777 and Next-Generation 737 programs respectively, and excess deferred production costs of $1,121 and $635 relating to the 777 and Next-Generation 737 programs. Inventory costs at December 31, 1999, included unamortized tooling of $1,444 and $590 relating to the 777 and Next-Generation 737 programs and excess deferred production costs of $1,507 and $646 relating to the 777 and Next-Generation 737 programs. Firm backlog for both the 777 and Next-Generation 737 programs is sufficient to recover all significant amounts
of excess deferred production costs as of December 31, 2000; however, such deferred costs are recognized over the current program accounting quantity in effect at the date of reporting. Due to the charges recorded principally in 1997, there are no excess deferred production costs or unamortized tooling for the 717 program.
Interest capitalized as construction-period tooling costs amounted to $12, $17 and $20 in 2000, 1999 and 1998, respectively.
As of December 31, 2000 and 1999, inventory balances included $231 subject to claims or other uncertainties primarily relating to the A-12 program. See Note 23.
The estimates underlying the average costs of deliveries reflected in the inventory valuations may differ materially from amounts eventually realized for the reasons outlined in Note 24.
Note 10 Customer and Commercial Financing - --------------------------------- Customer and commercial financing at December 31 consisted of the following: 2000 1999 - ------------------------------------------------------------------------------- Aircraft financing Notes receivable $ 593 $ 781 Investment in sales-type/financing leases 1,119 1,497 Operating lease equipment, at cost, less accumulated depreciation of $305 and $304 3,098 2,357 Commercial equipment financing Notes receivable 915 730 Investment in sales-type/financing leases 697 506 Operating lease equipment, at cost, less accumulated depreciation of $95 and $92 710 408 - ------------------------------------------------------------------------------- Less valuation allowance (173) (275) - ------------------------------------------------------------------------------- $6,959 $6,004 =============================================================================== Customer and commercial financing assets that are leased by the Company under capital leases and have been subleased to others totaled $461 and $502 as of December 31, 2000 and 1999, respectively. Commercial equipment financing under operating lease consists principally of real property, highway vehicles, machine tools and production equipment.
Scheduled payments on customer and commercial financing are as follows: Sales-Type/ Operating Principal Financing Lease Lease Payments on Payments Payments Year Notes Receivable Receivable Receivable - ------------------------------------------------------------------- 2001 $459 $536 $644 2002 106 281 521 2003 95 230 481 2004 150 208 405 2005 229 181 377 Beyond 2005 469 789 2,738 The components of investment in sales-type/financing leases at December 31 were as follows: 2000 1999 - ------------------------------------------------------------------------------- Minimum lease payments receivable $2,225 $2,382 Estimated residual value of leased assets 545 479 Unearned income (954) (858) - ------------------------------------------------------------------------------- $1,816 $2,003 ===============================================================================
The Company has entered into interest rate swaps with third-party investors whereby the interest rate terms differ from the terms in the original receivable. These interest rate swaps related to $54 of customer financing receivables as of December 31, 2000. These swaps were settled on January 2, 2001.
Interest rates on fixed-rate notes ranged from 7.17% to 15.01%, and effective interest rates on variable-rate notes ranged from .81% to 5.5% above the London Interbank Offered Rate (LIBOR).
Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral. The operating lease aircraft category includes new and used jet and commuter aircraft, spare engines and spare parts.
The valuation allowance is subject to change depending on estimates of collectability and realizability of the customer financing balances.
Note 11 Property, Plant and Equipment - ----------------------------- Property, plant and equipment at December 31 consisted of the following: 2000 1999 - ------------------------------------------------------------------------------- Land $ 460 $ 430 Buildings 9,241 8,148 Machinery and equipment 10,378 10,411 Construction in progress 891 1,130 - ------------------------------------------------------------------------------- $ 20,970 $ 20,119 Less accumulated depreciation (12,156) (11,874) - ------------------------------------------------------------------------------- $ 8,814 $ 8,245 ===============================================================================
Balances are net of impairment asset valuation reserve adjustments for real property available for sale of $41 and $76 for December 31, 2000 and 1999.
Depreciation expense was $1,159, $1,330 and $1,386 for 2000, 1999 and 1998, respectively. Interest capitalized as construction-period property, plant and equipment costs amounted to $70, $64 and $45 in 2000, 1999 and 1998, respectively.
Rental expense for leased properties was $280, $320 and $349 for 2000, 1999 and 1998, respectively. These expenses, substantially all minimum rentals, are net of sublease income. Minimum rental payments under operating leases with initial or remaining terms of one year or more aggregated $1,081 at December 31, 2000. Payments, net of sublease amounts, due during the next five years are as follows:
2001 2002 2003 2004 2005 ------------------------------------ $218 $181 $142 $126 $110 ====================================
Note 12 Goodwill and Acquired Intangibles - ---------------------------------
Goodwill and acquired intangibles as of December 31 consisted of the following: 2000 1999 - ------------------------------------------------------------------------------- Goodwill $4,189 $2,490 Acquired intangibles 1,415 Accumulated amortization (390) (257) - ------------------------------------------------------------------------------- Net goodwill and acquired intangibles $5,214 $2,233 ===============================================================================
For the year ended December 31, 2000, the amortization of goodwill and acquired intangibles by segment was as follows: Commercial Airplanes, $22; Space and Communications, $28; and unallocated, $83. For the years ended December 31, 1999 and 1998, goodwill amortization of $83 and $83 was identified as unallocated.
Note 13 Income Taxes - ------------ The provision for taxes on income consisted of the following:
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- U.S. Federal Taxes paid or currently payable $1,517 $ 349 $ 352 Change in deferred taxes (770) 534 (123) - ------------------------------------------------------------------------------- 747 883 229
State Taxes paid or currently payable 246 55 51 Change in deferred taxes (122) 77 (3) - ------------------------------------------------------------------------------- 124 132 48 - ------------------------------------------------------------------------------- Income tax provision $ 871 $1,015 $ 277 ===============================================================================
The following is a reconciliation of the tax derived by applying the U.S. federal statutory rate of 35 percent to the earnings before income taxes and comparing that to the recorded income tax provision: 2000 1999 1998 - ------------------------------------------------------------------------------- U.S. federal statutory tax $1,050 $1,163 $ 489 Foreign Sales Corporation tax benefit (291) (230) (130) Research benefit (24) (70) Prior years' research benefit settlement (57) Prior years' tax adjustment (8) Nondeductibility of goodwill 37 31 31 State income tax provision, net of effect on U.S. federal tax 80 86 31 Other provision adjustments (5) (11) (9) - ------------------------------------------------------------------------------- Income tax provision $ 871 $1,015 $ 277 ===============================================================================
At December 31, the deferred tax assets, net of deferred tax liabilities, resulted from temporary differences associated with the following:
Year ended December 31, 2000 1999 - ------------------------------------------------------------------------------- Inventory and long-term contract methods of income recognition $ 1,349 $ 634 In-process research and development related to acquisitions 208 Pension benefit accruals (1,491) (1,215) Retiree health care accruals 1,977 1,821 Other employee benefits accruals 741 565 Customer and commercial financing (597) (510) Other comprehensive income provision 10 - ------------------------------------------------------------------------------- Net deferred tax assets $ 2,197 $ 1,295 ===============================================================================
The temporary differences associated with inventory and long-term contract methods of income recognition encompass related costing differences, including timing and depreciation differences.
Valuation allowances were not required due to the nature of and circumstances associated with the temporary tax differences.
Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and IRS examinations have been completed through 1991. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation. The Company has also 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 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 these years.
The Company believes adequate provision has been made for all open years.
Income tax payments, net of tax refunds, were $405, $575 and $85 in 2000, 1999 and 1998, respectively.
Note 14 Accounts Payable and Other Liabilities - -------------------------------------- Accounts payable and other liabilities at December 31 consisted of the following: 2000 1999 - ------------------------------------------------------------------------------- Accounts payable $ 5,040 $ 4,909 Accrued compensation and employee benefit costs 2,938 2,421 Lease and other deposits 731 647 Dividends payable 149 128 Other 3,121 3,164 - ------------------------------------------------------------------------------- $11,979 $11,269 ===============================================================================
As of December 31, 2000, the Company has issued 6,906,200 stock units that are convertible to either stock or a cash equivalent, of which 5,901,774 are vested, and the remainder vest with employee service. These stock units principally represent a method of deferring employee compensation by which a liability is established based upon the current stock price. An expense is recognized associated with the change in that liability balance and is recorded as general and administrative expense. This liability balance was $390 and $68 as of December 31, 2000 and 1999, respectively, and was included in accrued compensation and employee benefit costs.
Note 15 Debt - ---- Debt at December 31 consisted of the following: 2000 1999 - ------------------------------------------------------------------------------- Unsecured debentures and notes: $200, 8.25% due Jul. 1, 2000 $ - $ 200 $174, 8 3/8% due Feb. 15, 2001 174 177 $49, 7.565% due Mar. 30, 2002 49 52 $120, 9.25% due Apr. 1, 2002 120 120 $300, 6 3/4% due Sep. 15, 2002 299 298 $300, 6.35% due Jun. 15, 2003 300 300 $200, 7 7/8% due Feb. 15, 2005 206 207 $300, 6 5/8% due Jun. 1, 2005 294 293 $250, 6.875% due Nov. 1, 2006 248 248 $175, 8 1/10% due Nov. 15, 2006 175 175 $350, 9.75% due Apr. 1, 2012 348 348 $400, 8 3/4% due Aug. 15, 2021 398 398 $300, 7.95% due Aug. 15, 2024 300 300 $250, 7 1/4% due Jun. 15, 2025 247 247 $250, 8 3/4% due Sep. 15, 2031 248 248 $175, 8 5/8% due Nov. 15, 2031 173 173 $300, 6 5/8% due Feb. 15, 2038 300 300 $100, 7.50% due Aug. 15, 2042 100 100 $175, 7 7/8% due Apr. 15, 2043 173 173 $125, 6 7/8% due Oct. 15, 2043 125 125 Senior debt securities 6.0% - 9.4% due through 2011 1,563 30 Senior medium-term notes, 5.6% - 10.0% due through 2017 1,775 1,426 Subordinated medium-term notes 6.4% - 8.3% due through 2004 25 45 Capital lease obligations due through 2008 380 386 Other notes 779 363 - ------------------------------------------------------------------------------- $8,799 $6,732 ===============================================================================
The $300 debentures due August 15, 2024, are redeemable at the holder's option on August 15, 2012. All other debentures and notes are not redeemable prior to maturity. Maturities of long-term debt for the next five years are as follows:
2001 2002 2003 2004 2005 ------------------------------------ $538 $1,176 $832 $202 $1,209 ====================================
The Company has $3,000 currently available under credit line agreements, which includes $1,000 available but unused under a credit line agreement between Boeing Capital Corporation (BCC), a corporation wholly owned by the Company, and a group of commercial banks. The Company has complied with the restrictive covenants contained in various debt agreements.
Additionally, BCC currently has an effective shelf registration with the Securities and Exchange Commission totaling $2,640. From this $2,640 shelf, on September 17, 2000, $1,500 was issued in Senior Global Notes consisting of three tranches: $500 2-year variable rate notes (variable rate is based upon a 3 month LIBOR, reset quarterly, plus 9 basis points), $500 5-year 7.10% fixed rate notes, and $500 10-year 7.375% fixed rate notes. The remaining $1,140 was allocated to a new Medium-Term Note (MTN) Program made effective August 31, 2000. As of December 31, 2000, BCC had issued and sold $500 in aggregate principal amounts of such notes, at interest rates ranging from 6.35% to 6.68% and with maturities ranging from one to seven years.
At December 31, 2000 and 1999 borrowing under commercial paper and uncommitted short-term bank facilities totaling $653 and $228 were supported by available unused commitments under the revolving credit agreement. Total consolidated debt attributable to BCC amounted to $4,318 and $2,058 as of December 31, 2000 and 1999, respectively.
The $100 note due August 15, 2042, with a stated rate of 7.50% was issued to a private investor in connection with an interest rate swap arrangement that resulted in an effective synthetic rate of 7.865%. This swap arrangement was terminated on December 19, 2000. Additionally, BCC has interest rate swaps totaling $639 relating to capital lease obligations and $310 relating to medium-term and senior notes. Of the swaps attributable to capital lease obligations: $347 have a receive rate that is floating based on LIBOR and a pay rate that is fixed; and $292 have a receive rate that is fixed, and a pay rate that is floating based on LIBOR. Of the swaps attributable to medium-term and senior notes: $280 have a receive rate that is fixed and a pay rate that is floating based on LIBOR; and $30 have a receive rate that is floating based on LIBOR, and a pay rate that is fixed. Interest rate swaps on these capital lease obligations and, medium-term and senior notes are settled on the same dates interest is due on the underlying obligations.
BCC has available approximately $60 in uncommitted, short-term bank credit facilities whereby BCC may borrow, at interest rates which are negotiated at the time of the borrowings, upon such terms as BCC and the banks may mutually agree. At December 31, 2000 and 1999, borrowings on these credit facilities totaled $0 and $90, respectively. The weighted average interest rate on short- term borrowings at December 31, 1999, was 6.0%.
Total debt interest, including amounts capitalized, was $527, $512 and $518 for the years ended December 31, 2000, 1999 and 1998, and interest payments were $599, $517 and $514, respectively.
Short-term debt and current portion of long-term debt as of December 31, 2000, consisted of the following: $179 of unsecured debentures and notes, $311 of senior debt securities, senior medium-term notes, subordinated medium-term notes, $51 of capital lease obligations, and $691 of other notes.
Note 16 Postretirement Plans - -------------------- The following table reconciles the funded status of both pensions and other postretirement benefits (OPB), principally retiree health care, to the balance on the Consolidated Statements of Financial Position. Plan assets consist primarily of equities, fixed income obligations and cash equivalents. The pension benefit obligations and plan assets shown in the table are valued as of September 30.
Other Pensions Postretirement Benefits -------------- ----------------------- 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Benefit obligation Beginning balance $ 27,621 $28,887 $5,569 $ 4,418 Service cost 636 651 138 111 Interest cost 2,079 1,879 418 302 Plan participants' contributions 1 2 Amendments 196 52 (178) Actuarial loss (gain) (666) (2,098) 539 1,036 Acquisitions/dispositions, net 1,160 (17) 129 Benefits paid (1,925) (1,735) (347) (298) - ------------------------------------------------------------------------------- Ending balance $ 29,102 $27,621 $6,268 $5,569 =============================================================================== Plan assets - fair value Beginning balance $ 37,026 $32,609 $22 Acquisitions/dispositions, net 1,684 (143) Actual return on plan assets 6,022 6,242 2 Company contribution 30 22 10 Plan participants' contributions 1 2 Benefits paid (1,898) (1,716) (4) Exchange rate adjustment (9) 10 - ------------------------------------------------------------------------------- Ending balance $ 42,856 $37,026 $30 =============================================================================== Reconciliation of funded status to net amounts recognized Funded status - plan assets in excess of (less than) projected benefit obligation $ 13,754 $ 9,405 $(6,238) $(5,569) Unrecognized net actuarial loss (gain) (10,652) (7,234) 1,484 1,063 Unrecognized prior service costs 1,427 1,418 (502) (371) Unrecognized net transition asset (30) (135) Adjustment for fourth quarter contributions 8 4 93 - ------------------------------------------------------------------------------- Net amount recognized $ 4,507 $3,458 $(5,163) $(4,877) =============================================================================== Amount recognized in statement of financial position Prepaid benefit cost $ 4,845 $ 3,845 Intangible asset 69 64 Accumulated other comprehensive income 8 1 Accrued benefit liability (415) (452) $(5,163) $(4,877) - ------------------------------------------------------------------------------- Net amount recognized $ 4,507 $ 3,458 $(5,163) $(4,877) ===============================================================================
Components of net periodic benefit costs and other supplemental information were as follows:
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Components of net periodic benefit cost - Pensions Service cost $ 636 $ 651 $ 573 Interest cost 2,079 1,879 1,793 Expected return on plan assets (3,117) (2,689) (2,507) Amortization of transition asset (103) (106) (86) Amortization of prior service cost 149 139 101 Recognized net actuarial loss (gain) (72) 1 5 - ------------------------------------------------------------------------------- Net periodic benefit income $ (428) $ (125) $ (121) ===============================================================================
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Components of net periodic benefit cost - OPB Service cost $ 138 $ 111 $ 81 Interest cost 419 302 271 Expected return on plan assets (2) (2) Amortization of prior service cost (66) (47) (45) Recognized net actuarial loss (gain) 44 10 (16) - ------------------------------------------------------------------------------- Net periodic benefit cost $ 533 $ 374 $ 291 ===============================================================================
Weighted average assumptions as of December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Discount rate: pensions and OPB 7.75% 7.50% 6.50% Expected return on plan assets 9.25% 9.00% 8.75% Rate of compensation increase 5.50% 5.50% 4.50%
Effect of 1% change in assumed health care costs 2000 1999 1998 - ------------------------------------------------------------------------------- Effect on total of service and interest cost 1% increase $ 64 $ 51 $ 44 1% decrease (57) (44) (39) Effect on postretirement benefit obligation 1% increase 603 530 452 1% decrease (517) (474) (406)
The Company has various noncontributory plans covering substantially all employees. All major pension plans are funded and have plan assets that exceed accumulated benefit obligations.
Certain of the pension plans provide that, in the event there is a change in control of the Company which is not approved by the Board of Directors and the plans are terminated within five years thereafter, the assets in the plans first will be used to provide the level of retirement benefits required by the Employee Retirement Income Security Act, and then any surplus will be used to fund a trust to continue present and future payments under the postretirement medical and life insurance benefits in the Company's group insurance programs.
The Company has an agreement with the Government with respect to certain of the Company pension plans. Under the agreement, should the Company terminate any of the plans under conditions in which the plan's assets exceed that plan's obligations, the Government will be entitled to a fair allocation of any of the plan's assets based on plan contributions that were reimbursed under Government contracts. Also, the Revenue Reconciliation Act of 1990 imposes a 20% nondeductible excise tax on the gross assets reverted if the Company establishes a qualified replacement plan or amends the terminating plan to provide for benefit increases; otherwise, a 50% tax is applied. Any net amount retained by the Company is treated as taxable income.
Effective January 1, 1999, two new pension plans were created for the salaried, non-represented employees of pre-merger Boeing and McDonnell Douglas. Assets and liabilities associated with benefits earned through 1998 were transferred to the new plans, which will provide substantially the same benefit levels as the prior plans. Effective July 1, 1999, assets and liabilities associated with benefits earned by substantially all salaried, non-represented employees covered under the BNA Retirement Plan were transferred to the new pension plan created for the pre-merger Boeing employees.
Effective October 6, 2000, the Company acquired a substantial portion of Hughes' pension assets and liabilities. The acquired pension plans assets exceeded liabilities by $626. This acquisition comprised a substantial portion of the year 2000 "Acquisition/disposition, net" activity shown previously.
The Company has certain unfunded and partially funded plans with a projected benefit obligation of $488 and $432, plan assets of $17 and $43, and unrecognized prior service costs and actuarial losses of $125 and $124 as of December 31, 2000 and 1999. The net provision for these plans was $56, $63 and $52 for 2000, 1999 and 1998, respectively.
The principal defined contribution plans are the Company-sponsored 401(k) plans and a funded plan for unused sick leave. The provision for these defined contribution plans in 2000, 1999 and 1998 was $406, $409 and $417, respectively.
The Company's postretirement benefits other than pensions consist principally of health care coverage for eligible retirees and qualifying dependents, and to a lesser extent, life insurance to certain groups of retirees. Retiree health care is provided principally until age 65 for approximately half those retirees who are eligible for health care coverage. Certain employee groups, including employees covered by most United Auto Workers bargaining agreements, are provided lifetime health care coverage.
Benefit costs were calculated based on assumed cost growth for retiree health care costs of a 9.5% annual rate for 2000, decreasing to a 5.5% annual growth rate by 2010. In 1999, benefit costs for retiree health care were calculated based on an annual growth rate of 10%, decreasing to a 5.5% annual growth rate by 2010.
Note 17 Shareholders' Equity - -------------------- In August 1998, the Board of Directors approved a resolution authorizing management to repurchase up to 15% of the Company's issued and outstanding stock as of June 30, 1998 (excluding shares held by the ShareValue Trust), which amounted to 145,899,000 shares. This repurchase program was completed in 2000. In December 2000 an additional repurchase program was authorized by the Board of Directors. Under this resolution, management is authorized to repurchase up to 85,000,000 shares.
Twenty million shares of authorized preferred stock remain unissued.
Note 18 Share-Based Plans - ----------------- The share-based plans expense caption on the Consolidated Statements of Operations represents the total expense recognized for all company plans that are payable only in stock. These plans are described below.
Performance Shares Performance Shares are stock units that are convertible to common stock contingent upon stock price performance. If, at any time up to five years after award, the stock price reaches and maintains a price equal to 161.0% of the stock issue price at the date of the award (representing a growth rate of 10% compounded annually for five years), 25% of the Performance Shares awarded are convertible to common stock. Likewise, at stock prices equal to 168.5%, 176.2%, 184.2%, 192.5% and 201.1% of the stock price at the date of award, the cumulative portion of awarded Performance Shares convertible to common stock are 40%, 55%, 75%, 100% and 125%, respectively. Performance Shares awards not converted to common stock expire five years after the date of the award; however, the Compensation Committee of the Board of Directors may, at its discretion, allow vesting of up to 100% of the target Performance Shares if the Company's total shareholder return (stock price appreciation plus dividends) during the five-year performance period exceeds the average total shareholder return of the S&P 500 over the same period.
During 2000, 75% of the Performance Share awards expiring February 22, 2004, were converted to common stock or deferred stock units (cumulative 3,402,874 Performance Shares), and 55% of the Performance Share awards expiring February 28, 2005, were converted to common stock or deferred stock units (cumulative 3,495,725 Performance Shares).
The following table summarizes information about Performance Shares outstanding at December 31, 2000, 1999 and 1998, respectively. Shares outstanding are not reduced for cumulative Performance Shares converted to common stock or deferred stock units.
Performance (shares in thousands) Shares Outstanding Grant Expiration ------------------------ Date Date Issue Price 2000 1999 1998 - ------------------------------------------------------------------ 2/23/98 2/23/03 $50 11/16 3,490 3,459 3,586 12/14/98 33 9/16 46 46 2/22/99 2/22/04 36 1/4 4,524 4,569 2/28/00 2/28/05 37 5,032 10/09/00 2/28/05 37 1,299 ==================================================================
The Company recognized share-based expense of $147, $77 and $38 for 2000, 1999 and 1998, respectively, attributable to Performance Shares.
Other stock unit awards The total number of stock unit awards that are convertible only to common stock and not contingent upon stock price were 1,880,544, 1,629,945 and 1,161,652 as of December 31, 2000, 1999 and 1998, respectively.
ShareValue Trust The ShareValue Trust, established effective July 1, 1996, is a 14-year irrevocable trust that holds Boeing common stock, receives dividends, and distributes to employees appreciation in value above a 3% per annum threshold rate of return. As of December 31, 2000, the Trust held 39,156,280 shares of the Company's common stock, split equally between two funds, "fund 1" and "fund 2." If on June 30, 2002, the market value of fund 1 exceeds $949 (the threshold representing a 3% per annum rate of return), the amount in excess of the threshold will be distributed to employees. The June 30, 2002, market value of fund 1 after distribution (if any) will be the basis for determining any potential distribution on June 30, 2006. Similarly, if on June 30, 2004, the market value of fund 2 exceeds $913, the amount in excess of the threshold will be distributed to employees. Shares held by the Trust on June 30, 2010 after final distribution will revert back to the Company.
The dilutive shares associated with the ShareValue Trust are 5,049,765 at December 31, 2000.
The ShareValue Trust is accounted for as a contra-equity account and stated at market value. Market value adjustments are offset to additional paid-in capital. The Company recognized a share-based expense attributable to the ShareValue Program of $72 for each year presented. The ShareValue Trust expense is calculated under the provisions of SFAS No. 123.
Stock Options The Company's 1997 Incentive Stock Plan permits the grant of stock options, stock appreciation rights (SARs) and restricted stock awards (denominated in stock or stock units) to any employee of the Company or its subsidiaries and contract employees. Under the terms of the plan, 61,000,000 shares are authorized for issuance upon exercise of options, as payment of SARs and as restricted stock awards, of which no more than an aggregate of 6,000,000 shares are available for issuance as restricted stock awards and no more than an aggregate of 3,000,000 shares are available for issuance as restricted stock that is subject to restrictions based on continuous employment for less than three years. This authorization for issuance under the 1997 plan will terminate on April 30, 2007. As of December 31, 2000, no SARs have been granted under the 1997 Plan. The 1993 Incentive Stock Plan permitted the grant of options, SARs and stock to employees of the Company or its subsidiaries. The 1988 and 1984 stock option plans permitted the grant of options or SARs to officers or other key employees of the Company or its subsidiaries. No further grants may be awarded under these three plans.
Options and SARs have been granted with an exercise price equal to the fair market value of the Company's stock on the date of grant and expire ten years after the grant date. Vesting is generally over a five-year period with portions of a grant becoming exercisable at one year, three years and five years after the grant date. SARs, which have been granted only under the 1988 and 1984 plans, were granted in tandem with stock options; therefore, exercise of the SAR cancels the related option and exercise of the option cancels the attached SAR.
In 1994, McDonnell Douglas shareholders approved the 1994 Performance Equity Incentive Plan. Restricted stock issued under this plan prior to 1997 vested upon the merger between McDonnell Douglas and The Boeing Company. As of December 31, 2000, a total of 594,000 shares had been granted and of those 151,892 remain restricted. Substantially all compensation relating to these restricted shares is being amortized to expense over a period of six years. Unearned compensation is reflected as a component of shareholders' equity.
Information concerning stock options issued to directors, officers and other employees is presented in the following table.
2000 1999 1998 ------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Shares in thousands) Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------- Number of shares under option: Outstanding at beginning of year 29,228 $38.02 28,653 $36.03 27,705 $32.36 Granted 3,693 45.63 3,462 43.40 3,772 52.72 Exercised (4,673) 28.30 (2,345) 22.03 (2,493) 20.77 Canceled or expired (328) 46.20 (515) 39.33 (255) 46.35 Exercised as SARs (16) 21.56 (27) 19.70 (76) 19.27 ------ ------ ------ Outstanding at end of year 27,904 40.58 29,228 38.02 28,653 36.03 =============================================================================== Exercisable at end of year 18,710 $37.32 19,749 $34.58 15,577 $29.57 ===============================================================================
As of December 31, 2000, 32,939,588 shares were available for grant under the 1997 Incentive Stock Plan, and 2,007,358 shares were available for grant under the Incentive Compensation Plan.
The following table summarizes information about stock options outstanding at December 31, 2000 (shares in thousands).
Options Outstanding Options Exercisable ----------------------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life(years) Price Shares Price - ------------------------------------------------------------------------------- $10 to $19 2,753 2.8 $16.00 2,753 $16.00 $20 to $29 4,208 3.5 $23.35 4,208 $23.35 $30 to $39 3,845 8.0 $39.17 1,333 $38.51 $40 to $49 7,337 6.8 $42.38 4,422 $41.86 $50 to $59 9,684 7.0 $54.03 5,994 $53.29 $60 to $69 77 10.1 $66.41 - - - ------------------------------------------------------------------------------- 27,904 18,710 ===============================================================================
The Company has determined the weighted average fair values of stock-based arrangements granted, including ShareValue Trust, during 2000, 1999 and 1998 to be $18.18, $17.67 and $19.99, respectively. The fair values of stock-based compensation awards granted and of potential distributions under the ShareValue Trust arrangement were estimated using a binomial option-pricing model with the following assumptions.
Expected Risk-Free Grant ------------------------------------------- Interest Date Option Term Volatility Dividend Yield Rate - ------------------------------------------------------------------------------- 2000 6/21/00 9 years 22% 1.1% 6.1% 10/09/00 9 years 23% 1.1% 5.8% 10/10/00 9 years 23% 1.1% 5.8% - ------------------------------------------------------------------------------- 1999 6/28/99 9 years 22% 1.1% 6.3% - ------------------------------------------------------------------------------- 1998 4/13/98 9 years 20% 1.1% 5.9% ===============================================================================
The Company recognized share-based expense of $41, $35 and $31 in 2000, 1999 and 1998, respectively, attributable to stock options with an offset to additional paid-in capital.
Note 19 Derivative Financial Instruments - -------------------------------- The derivative financial instruments held by the Company at December 31, 2000, primarily consisted of simple and specifically tailored interest rate swaps and foreign currency forward contracts.
The interest rate swaps, which are associated with certain customer financing receivables and long-term debt, are designed to achieve a desired balance of fixed and variable rate positions. These swaps are accounted for as integral components of the associated receivable and debt, with interest accrued and recognized based upon the effective rates. Due to the component nature of these interest rate swaps, there are no associated gains or losses. (See Note 10, 15 and 22.)
The Company has foreign currency forward contracts that were entered into to hedge receipt and expenditure commitments made in foreign currencies. As of December 31, 2000, the notional amount of foreign currency forward contracts through 2003 was $484, with unrealized losses, net of unrealized gains, of $23. Additionally, at December 31, 2000, the Company had foreign currency forward contracts with a notional value of $247 that were carried at market value. The Company realized a net gain of $5 attributable to these currency forward contracts in 2000.
As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that the statement of financial position reflect the current market price of derivatives. With the adoption of SFAS No. 133, the Company recognized a transition gain of $1 after tax, and an adjustment to accumulated other comprehensive income of a loss of $11 after tax.
The Company believes that there is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of derivative financial instruments.
Note 20 Financial Instruments with Off-Balance-Sheet Risk - ------------------------------------------------- The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk include financing commitments, credit guarantees, and participation in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables.
Irrevocable financing commitments related to aircraft on order, including options, scheduled for delivery through 2005 totaled $6,230 and $5,015 as of December 31, 2000 and 1999. The Company anticipates that not all of these commitments will be utilized and that it will be able to arrange for third- party investors to assume a portion of the remaining commitments, if necessary. The Company has additional commitments to arrange for commercial equipment financing totaling $288 and $212 as of December 31, 2000 and 1999.
The Company had financing commitments with TWA related to aircraft on order totaling $642 as of December 31, 2000. On January 10, 2001, TWA and certain of its domestic subsidiaries filed voluntary petitions in the U.S. District Court in Wilmington, Delaware for relief under Chapter 11 of the U.S. Bankruptcy Code. This action eliminated the Company's financing commitment.
Participations in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables totaled $54 and $58 as of December 31, 2000 and 1999.
The Company's maximum exposure to credit-related losses associated with credit guarantees, without regard to collateral, totaled $655 ($261 associated with commercial aircraft and collateralized) and $725 ($336 associated with commercial aircraft and collateralized) as of December 31, 2000 and 1999.
The Company's maximum exposure to losses associated with asset value guarantees, without regard to collateral, totaled $522 and $485 as of December 31, 2000 and 1999. These asset value guarantees relate to commercial aircraft and are collateralized. As of December 31, 2000 and 1999, accounts payable and other liabilities included $468 and $561 attributable to risks associated with off-balance-sheet financing commitments.
Note 21 Significant Group Concentrations of Credit Risk - ----------------------------------------------- Financial instruments involving potential credit risk are predominantly with commercial airline customers and the U.S. Government. As of December 31, 2000, off-balance-sheet financial instruments described in Note 20 predominantly related to commercial aircraft customers. Of the $11,887 in accounts receivable and customer financing included in the Consolidated Statements of Financial Position, $5,358 related to commercial aircraft customers and $2,693 related to the U.S. Government. Other than Trans World Airlines (TWA), discussed hereafter, no single commercial airline customer was associated with a significant portion of all financial instruments relating to customer financing. Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral.
Of the $5,358 of commercial accounts receivable and aircraft customer financing, $4,201 related to customers the Company believes have less than investment-grade credit. Similarly, of the $6,230 of irrevocable financing commitments related to aircraft on order including options, $5,388 related to customers the Company believes have less than investment-grade credit.
As of December 31, 2000, the Company had customer financing in place totaling $1,459 with TWA. The Company also had $642 of financing commitments that have been eliminated as a result of the proceedings noted below. On January 10, 2001, TWA and certain of its domestic subsidiaries filed voluntary petitions in the U.S. District Court in Wilmington, Delaware for relief under Chapter 11 of the U.S. Bankruptcy Code. TWA has received the Court's approval for an asset purchase agreement with American Airlines pursuant to section 363 of the bankruptcy code. The sale of TWA's assets to American is subject to, among other things, higher and better offers as a result of a bidding process plus Bankruptcy Court approval. TWA has received $200 in Debtor in Possession financing from American. This financing is intended to enable TWA's continued operation during the transition period.
Based on the Company's assessment of the underlying collateral position held by the Company, possible future non-performance of financing currently extended to TWA would not have a material adverse impact on the Company's financial position or results of operations.
Note 22 Disclosures about Fair Value of Financial Instruments - ----------------------------------------------------- As of December 31, 2000 and 1999, the carrying amount of accounts receivable was $4,928 and $3,453, and the fair value of accounts receivable was estimated to be $4,807 and $3,385. The lower fair value reflects a discount due to deferred collection for certain receivables that will be collected over an extended period. The carrying value of accounts payable is estimated to approximate fair value.
The carrying amount of notes receivable, net of valuation allowance, is estimated to approximate fair value. Although there are generally no quoted market prices available for customer financing notes receivable, the valuation
assessments were based on the respective interest rates, risk-related rate spreads and collateral considerations.
As of December 31, 2000 and 1999, the carrying amount of debt, net of capital leases, was $8,419 and $6,346 and the fair value of debt, based on current market rates for debt of the same risk and maturities, was estimated at $8,866 and $6,393. The Company's debt, however, is generally not callable until maturity.
With regard to financial instruments with off-balance-sheet risk, it is not practicable to estimate the fair value of future financing commitments, and all other off-balance-sheet financial instruments are estimated to have only a nominal fair value. The terms and conditions reflected in the outstanding guarantees and commitments for financing assistance are not materially different from those that would have been negotiated as of December 31, 2000.
Note 23 Contingencies - ------------- Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below.
The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s.
The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred.
The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings. Such accruals as of December 31, 2000, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities.
Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends.
The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations.
In 1991, the U.S. Navy notified the Company and General Dynamics Corporation (the Team) that it was terminating for default the Team's contract for development and initial production of the A-12 aircraft. The Team filed a legal action to contest the Navy's default termination, to assert its rights to convert the termination to one for "the convenience of the Government," and to obtain payment for work done and costs incurred on the A-12 contract but not paid to date. As of December 31, 2000, inventories included approximately $581 of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350. The amount of the provision, which was established in 1990, was based on the Company's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, that the Team would establish a claim for contract adjustments for a minimum of $250, that there was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company then believed was the upper range of possible loss on termination for convenience, which was $350.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit reversed a March 31, 1998, judgment of the United States Court of Federal Claims for the Team. The 1998 judgment was based on a determination that the Government had not exercised the required discretion before issuing a termination for default. It converted the termination to a termination for convenience, and determined the Team was entitled to be paid $1,200, plus statutory interest from June 26, 1991, until paid. The Court of Appeals remanded the case to the Court of Federal Claims for a determination as to whether the Government is able to sustain the burden of showing a default was justified and other proceedings. Trial on all issues now is set for May 1, 2001. Final resolution of the A-12 litigation will depend on the outcome of such trial 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 December 31, 2000, as a result of a termination of the contract for the convenience of the Government. The Company has been provided with an opinion of outside counsel that (i) the Government's termination of the contract for default was contrary to law and fact, (ii) the rights and obligations of the Company are the same as if the termination had been issued for the convenience of the Government, and (iii) subject to prevailing on the issue that the termination is properly one for the convenience of the Government, the probable recovery by the Company is not less than $250.
On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington, in Seattle. The lawsuit names as defendants the Company and three of its then executive officers. Additional lawsuits of a similar nature have been filed in the same court. These lawsuits were consolidated on February 24, 1998. The
lawsuits generally allege that the defendants desired to keep the Company's share price as high as possible in order to ensure that the McDonnell Douglas shareholders would approve the merger and, in the case of the individual defendants, to benefit directly from the sale of Boeing stock during the period from April 7, 1997 through October 22, 1997. By order dated May 1, 2000, the Court certified two subclasses of plaintiffs in the action: a. all persons or entities who purchased Boeing stock or call options or who sold put options during the period from July 21, 1997, through October 22, 1997, and b. all persons or entities who purchased McDonnell Douglas stock on or after April 7, 1997, and who held such stock until it converted to Boeing stock pursuant to the merger. The plaintiffs seek compensatory damages and treble damages. The action now is set for trial on March 7, 2002. The Company believes that the allegations are without merit and that the outcome of these lawsuits will not have a material adverse effect on its earnings, cash flow or financial position.
On October 19, 1999, an indictment was returned by a federal grand jury sitting in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company division, conspired to and made false statements and concealed material facts on export license applications and in connection with export licenses, and possessed and sold machine tools in violation of the Export Administration Act. The indictment also charged one employee with participation in the alleged conspiracy. (The indictment has since been dismissed as against that employee but his dismissal is the subject of a pending appeal by the government to the U.S. Court of Appeals for the D.C. Circuit.) The indictment relates to the sale and export to China in 1993-1995 of surplus, used machine tools sold by Douglas Aircraft Company to China National Aero-Technology Import and Export Corporation for use in connection with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny defense-related export privileges to MDC or a division or subsidiary of MDC. The agency exercised that discretion on January 5, 2000, by establishing a "denial policy" with respect to defense-related exports of MDC and its subsidiaries. Most of MDC's major existing defense programs were, however, excepted from that policy due to overriding U.S. foreign policy and national security interests. Other exceptions have been granted. There can, however, be no assurance as to how the Department will exercise its discretion as to program or transaction exceptions for other programs or future defense-related exports. In addition, the Department of Commerce has authority to temporarily deny other export privileges to, and the Department of Defense has authority to suspend or debar from contracting with the military departments, MDC or a division or subsidiary of MDC. Neither agency has taken action adverse to MDC or its divisions or subsidiaries thus far. Based upon all available information, the Company does not expect actions that would have a material adverse effect on its financial position or continuing operations. In the unanticipated event of a conviction, MDC would be subject to Department of State and Department of Commerce denials or revocations of MDC export licenses. MDC also would be subject to Department of Defense debarment proceedings.
On February 25, 2000, a purported class action lawsuit alleging gender discrimination and harassment was filed against The Boeing Company, Boeing North American, Inc., and McDonnell Douglas Corporation. The complaint, filed with the United States District Court in Seattle, alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against females over the course of many years. The complaint, Beck
v. Boeing, names 28 women who have worked for Boeing in the Puget Sound area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, an amended complaint was filed naming an additional 10 plaintiffs, including the first from California. The lawsuit attempts to represent all women who currently work for the Company, or who have worked for the Company in the past several years (approximately 70,000).
The Company has denied the allegation that it has engaged in any unlawful "pattern and practice" and believes that the plaintiffs cannot satisfy the rigorous requirements necessary to achieve the class action status they seek. The deadline for filing plaintiffs' motion for class certification, originally scheduled to be heard on August 25, 2000, now has been extended until May 2001. The Company intends to vigorously contest this lawsuit.
In October 1999, a number of individual plaintiffs filed a federal court action alleging employment discrimination based upon race and national (sic) origin (Asian). This action was subsequently consolidated with a related suit making similar allegations and class action status was sought in a motion filed on January 3, 2001. The class for which certification is being sought would include all non-management salaried workers of Asian descent employed in Washington State. The action is limited to claims of alleged discrimination in compensation, promotion, transfer, retention rating, and job classification.
The Company has denied the allegations of discrimination and plans to oppose the motion for class certification and vigorously defend the lawsuit. The court's decision on class certification is anticipated to be issued as early as the second quarter of 2001.
Note 24 Segment Information - ------------------- Segment information may be found on pages 53-57.
THE BOEING COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in millions except per share data)
2000 1999 ----------------------------------------------------------- Quarter 4th 3rd 2nd 1st 4th 3rd 2nd 1st =============================================================================== Sales and other operating revenues $14,693 $11,877 $14,841 $9,910 $15,200 $13,279 $15,122 $14,392
Earnings from operations 712 865 925 556 970 668 793 739
Net earnings 481 609 620 418 662 477 701 469
Basic earnings per share 0.57 0.71 0.71 0.48 0.75 0.52 0.75 0.50
Diluted earnings per share 0.55 0.70 0.71 0.48 0.74 0.52 0.75 0.50 - -------------------------------------------------------------------------------
Cash dividends per share .17 .14 .14 .14 .14 .14 .14 .14 - -------------------------------------------------------------------------------
Market price: High 70.94 66.94 42.25 48.13 46.44 48.50 45.88 37.69 Low 54.00 41.44 34.06 32.00 37.06 41.06 33.50 32.56 Quarter end 66.00 63.13 41.81 37.94 41.44 42.63 44.00 34.00 ===============================================================================
Independent Auditors' Report
Board of Directors and Shareholders, The Boeing Company: We have audited the accompanying consolidated statements of financial position of The Boeing Company and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Boeing Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP ------------------------- Deloitte & Touche LLP Seattle, Washington January 26, 2001
THE BOEING COMPANY AND SUBSIDIARIES
FIVE-YEAR SUMMARY
(Dollars in millions except per share data)
2000 1999 1998 1997 1996 =============================================================================== Operations Sales and other operating revenues Commercial Airplanes (a) $31,171 $38,475 $36,998 $27,479 $19,916 Military Aircraft and Missiles 12,197 12,220 12,990 Space and Communications 8,039 6,831 6,889 ------- ------- ------- Information, Space and Defense Systems (b) 20,236 19,051 19,879 18,125 14,934 Customer and commercial financing, other 758 771 612 746 603 Accounting differences/ eliminations (844) (304) (1,335) (550) - ------------------------------------------------------------------------------- Total $51,321 $57,993 $56,154 $45,800 $35,453 - ------------------------------------------------------------------------------- Net earnings (loss) $ 2,128 $ 2,309 $ 1,120 $ (178) $ 1,818 Basic earnings (loss) per share 2.48 2.52 1.16 (.18) 1.88 Diluted earnings (loss) per share 2.44 2.49 1.15 (.18) 1.85 - -------------------------------------------------------------------------------- Cash dividends paid $ 504 $ 537 $ 564 $ 557 $ 480 Per share .59 .56 .56 .56 .55 - -------------------------------------------------------------------------------- Other income, principally interest 386 585 283 428 388 - -------------------------------------------------------------------------------- Research and development expense 1,441 1,341 1,895 1,924 1,633 General and administrative expense 2,335 2,044 1,993 2,187 1,819 - -------------------------------------------------------------------------------- Additions to plant and equipment, net 932 1,236 1,665 1,391 971 Depreciation of plant and equipment 1,159 1,330 1,386 1,266 1,132 - -------------------------------------------------------------------------------- Employee salaries and wages 11,615 11,019 12,074 11,287 9,225 Year-end workforce 198,000 197,000 231,000 238,000 211,000 ================================================================================ Financial position at December 31 Total assets $42,028 $36,147 $37,024 $38,293 $37,880 Working capital (2,425) 2,056 2,836 5,111 7,783 Net plant and equipment 8,814 8,245 8,589 8,391 8,266 - -------------------------------------------------------------------------------- Cash and short-term investments 1,010 3,454 2,462 5,149 6,352 Total debt 8,799 6,732 6,972 6,854 7,489 Customer and commercial financing assets 6,959 6,004 5,711 4,600 3,888 - --------------------------------------------------------------------------------
THE BOEING COMPANY AND SUBSIDIARIES
FIVE-YEAR SUMMARY (Continued)
(Dollars in millions except per share data)
2000 1999 1998 1997 1996 =============================================================================== Shareholders' equity 11,020 11,462 12,316 12,953 13,502 Per share 13.18 13.16 13.13 13.31 13.96 Common shares outstanding (in millions) (c) 836.3 870.8 937.9 973.5 967.2 ================================================================================ Contractual backlog Commercial Airplanes $ 89,780 $ 72,972 $ 86,057 $ 93,788 $ 86,151 Military Aircraft and Missiles 17,113 15,691 17,007 Space and Communications 13,707 10,585 9,832 -------- -------- -------- Information, Space and Defense Systems 30,820 26,276 26,839 27,852 28,022 - -------------------------------------------------------------------------------- Total $120,600 $ 99,248 $112,896 $121,640 $114,173 ================================================================================
Cash dividends have been paid on common stock every year since 1942.
(a) For Commercial Airplanes segment sales and other operating revenues, year 1996 are reported in accordance with GAAP; years 2000, 1999, 1998, and 1997 are reported in accordance with segment reporting, as discussed in Note 24.
(b) The Information, Space, and Defense Systems segment of the Company was reorganized into two segments: the Military Aircraft and Missile Systems segment and the Space and Communications segment, which have been reported as separate business segments since 1998. It is not practicable to determine the Military Aircraft and Missiles and the Space and Communications break out of the Information, Space and Defense Systems segment information for 1997 and 1996.
(c) Computation excludes treasury shares and the outstanding shares held by the ShareValue Trust.
Market for Registrant's Common Equity and Related Stockholder Matters
THE BOEING COMPANY GENERAL OFFICES The Boeing Company 7755 East Marginal Way South Seattle, WA 98108 (206) 655-2121
TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT The transfer agent is responsible for shareholder records, issuance of stock certificates, distribution of dividends and IRS Form 1099. Requests concerning these or other related shareholder matters are most efficiently answered by contacting EquiServe.
EQUISERVE P.O. Box 43010 Providence, RI 02940-3008 (888) 777-0923 (toll-free for domestic U.S. callers) (781) 575-3400 (non-U.S. callers may call collect)
Boeing registered shareholders can also obtain answers to frequently asked questions, such as transfer instructions, direct deposit, optional cash payments, and terms of the Dividend Reinvestment and Stock Purchase Plan through EquiServe's home page on the World Wide Web at http://www.equiserve.com.
Registered shareholders also have secure Internet access to their accounts through EquiServe's home page (see above website address). They can check account information, view share balances, initiate certain transactions and download a variety of forms related to stock transactions. Initial passwords were sent to registered shareholders with their March 2000 dividends. If you are a registered shareholder and want Internet access but did not receive a password, or have lost your password, please call one of the EquiServe phone numbers shown above, or go to EquiServe's website and click on Account Access.
ANNUAL MEETING The annual meeting of Boeing shareholders is scheduled to be held on Monday, April 30, 2001. Details are provided in the proxy statement.
ELECTRONIC PROXY RECEIPT AND VOTING Shareholders have the option of voting their proxies by Internet or tele- phone, instead of returning their proxy cards through the mail. Instructions are in the proxy statement and attached to the proxy card for the annual meeting.
Registered shareholders can go to http://econsent.com/ba to sign up to receive their annual report and proxy statement in an electronic format in the future. Beneficial owners may contact the brokers or banks that hold their stock to find out whether electronic receipt is available. If you choose electronic receipt, you will not receive the paper form of the annual report and proxy statement. Instead, you will receive notice by e-mail when the materials are available on the Internet.
WRITTEN INQUIRIES MAY BE SENT TO: Shareholder Services Investor Relations The Boeing Company The Boeing Company Mail Code 13-08 Mail Code 10-16 P.O. Box 3707 P.O. Box 3707 Seattle, WA 98124-2207 Seattle, WA 98124-2207 COMPANY SHAREHOLDER SERVICES Pre-recorded shareholder information is available toll-free from Boeing Shareholder Services at (800) 457-7723. You may also speak to a Boeing Shareholder Services representative at (206) 655-1990 between 8:00 a.m. and 4:30 p.m. Pacific Time.
TO REQUEST AN ANNUAL REPORT, PROXY STATEMENT, FORM 10-K, OR FORM 10-Q, CONTACT: Data Shipping The Boeing Company Mail Code 3T-33 P.O. Box 3707 Seattle, WA 98124-2207 or call (425) 393-4964 or (800) 457-7723
BOEING ON THE WORLD WIDE WEB The Boeing home page - http://www.boeing.com - is your entry point for viewing the latest Company information about its products and people or for viewing electronic versions of the annual report, proxy statement, Form 10-K, or Form 10-Q.
DUPLICATE SHAREHOLDER ACCOUNTS Registered shareholders with duplicate accounts may call EquiServe for instructions on consolidating those accounts. The Company recommends that registered shareholders always use the same form of their names in all stock transactions to be handled in the same account. Registered shareholders may also ask EquiServe to eliminate excess mailings of annual reports going to shareholders in the same household.
CHANGE OF ADDRESS For Boeing registered shareholders: EquiServe P.O. Box 43010 Providence, RI 02940-3008 or call (888) 777-0923
For Boeing beneficial owners: Contact your brokerage firm or bank to give notice of your change of address.
STOCK EXCHANGES The Company's common stock is traded principally on the New York Stock Exchange; the trading symbol is BA. Boeing common stock is also listed on the Amsterdam, Brussels, London, Swiss and Tokyo stock exchanges. Additionally, the stock is traded, without being listed, on the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges.
GENERAL AUDITORS Deloitte & Touche LLP 700 Fifth Avenue, Suite 4500 Seattle, Washington 98104-5044 (206) 292-1800
EQUAL OPPORTUNITY EMPLOYER Boeing is an equal opportunity employer and seeks to attract and retain the best-qualified people regardless of race, color, religion, national origin, gender, sexual orientation, age, disability, or status as a disabled or Vietnam Era Veteran.
(10) (xix) Restricted Stock Unit Grant Agreement
This Agreement is entered as of the date indicated below between James F. Albaugh and the Boeing Company (the Company).
TERMS AND CONDITIONS 1. The Company hereby grants to James F. Albaugh Restricted Stock Units (RSUs) pursuant to The Boeing Company 1997 Incentive Stock Plan for Employees (the Plan). Mr. Albaugh will be credited with four million and five humdred thousand dollars of RSUs as set forth below.
2. The number of RSUs to be granted will be determined by dividing the $4,500,000 by the Fair Market Value of the Common Stock of the Company on the Grant Date as determined below in Paragragh 3. The number will be carried to two decimal places. "Fair Market Value" equals the mean of the high and low per share trading prices for the common stock of the Company as reported in The Wall Street Journal.
3. The RSU Grant Date will be October 18, 1999.
4. The RSU grant will vest upon satisfaction of the following performance criteria:
a) One-third of the RSUs and applicable dividend equivalents shall vest if he remains employed with the Company for three years from the Grant Date; and,
b) one-third of the RSUs and applicable dividend equivalents shall vest if he remains employed with the Company for four years following the Grant Date; and
c) the remaining RSUs and applicable dividend equivalents shall vest if he remains employed with the Company for five years following the Grant Date.
5. The RSU account will be credited on a quarterly basis with additional RSUs (earning credit RSUs) equal in number to the number of shares of the Company's common stock that could be purchased with the cash dividends payable on the number of shares of Company stock that equals the number of RSUs in the account. The determination of the number of shares to be credited will be based on the Fair Market Value of the Common Stock of the Company on the dividend payment date (or on the next business day on which the New York Stock Exchange is open, if the Exchange is closed on the dividend payment date). He will be notified annually of the number of earnings credit RSUs in his account. Earnings credit RSUs will vest at the same time as the RSUs will which they are associated.
6. The Company will maintain an account and will annually report the RSU account balance to him.
7. If employment with the Company or a subsidiary is terminated for any reason other than death, layoff or disability his RSUs will be forfeited and canceled. Earnings credit RSUs will be forfeited and canceled along with the RSUs with which they are associated.
8. Distribution for the RSU account will be made within thirty days after the vesting date of the RSUs. Distributions will be in whole shares of the Company's common stock. Distributions of shares will be equal in number to the whole number of vested RSUs in the account. Fractional share values will be applied to income tax withholding.
9. The Company will deduct from any distributions to Mr. Albaugh any tax withholding required by law, and any amounts owed by him to the Company.
Dated December 7, 1999
THE BOEING COMPANY
/s/ James F. Albaugh by /s/ Philip M. Condit - -------------------- -------------------- James F. Albaugh Philip M. Condit
(10) (xx) Restricted Stock Unit Grant Agreement
This Agreement is entered as of the date indicated below between Alan R. Mulally (Mulally) and the Boeing Company (the Company).
TERMS AND CONDITIONS 1. The Company hereby grants to Mulally Restricted Stock Units (RSUs) pursuant to The Boeing Company 1997 Incentive Stock Plan for Employees (the Plan). Mulally will be credited with five million dollars of RSUs as set forth below.
2. The number of RSUs to be granted will be determined by dividing the $5.0 million by the Fair Market Value of the Common Stock of the Company on the Grant Date as determined below in Paragragh 3. "Fair Market Value" equals the mean of the high and low per share trading prices for the common stock of the Company as reported in The Wall Street Journal. The number will be carried out to two decimal places.
3. The RSU Grant Date will be June 29, 1998.
4. The RSU grant will vest upon satisfaction of the following performance criteria:
a) 33% of the RSUs shall vest if Mr. Mulally remains employed with the Company for one year from the Grant Date; and,
b) an additional 33% of the RSUs shall vest if Mr. Mulally remains employed with the Company for two years following the Grant Date; and,
c) the remaining 34% of the RSUs shall vest if he remains employed with the Company for three years following the Grant Date.
5. Mulally's RSU account will be credited on a quarterly basis with additional RSUs (earning credit RSUs) equal in number to the number of shares of the Company's common stock that could be purchased with the cash dividends payable on the number of shares of Company stock that equals the number of RSUs in Mulally's account. The determination of the number of shares to be credited will be based on the Fair Market Value of the Common Stock of the Company on the dividend payment date (or on the next business day on which on the New York Stock Exchange is open, if the Exchange is closed on the dividend payment date). Mulally will be notified annually of the number of earnings credit RSUs in his account. Earnings credit RSUs will vest at the same time as the RSUs will which they are associated.
6. The Company will maintain an account for Mulally and will annually report the RSU account balance to Mulally.
7. If Mulally's employment with the Company or a subsidiary is terminated for any reason other than death, layoff or disability under the Company's Employee Retirement Plan or Long Term Disability Benefit Plan prior to the achievement of the vesting schedule, his RSUs will be forfeited and canceled. Earnings credit RSUs will be forfeited and canceled along with the RSUs with which they are associated.
8. Distribution from Mulally's RSU account will be made within thirty days after the vesting date of the RSUs. Distributions will be in whole shares of the Company's common stock. Distributions of shares will be equal in number to the whole number of vested RSUs in Mulally's account. Fractional share values will be applied to income tax withholding.
9. The Company will deduct from any distributions to Mulally any tax withholding required by law, and any amounts owed by Mulally to the Company.
Dated June 30, 1998
THE BOEING COMPANY
/s/ Alan R. Mulally by /s/ Philip M. Condit - -------------------- -------------------- Alan R. Mulally Philip M. Condit
(10) (xxi) Restricted Stock Unit Grant Agreement
This Agreement is entered as of the date indicated below between Michael M. Sears and the Boeing Company (the Company).
TERMS AND CONDITIONS 1. The Company hereby grants to Michael M. Sears Restricted Stock Units (RSUs) pursuant to The Boeing Company 1997 Incentive Stock Plan for Employees (the Plan). Mr. Sears will be credited with four million and five hundred thousand dollars of RSUs as set forth below.
2. The number of RSUs to be granted will be determined by dividing the $4,500,000 by the Fair Market Value of the Common Stock of the Company on the Grant Date as determined below in Paragragh 3. The number will be carried to two decimal places. "Fair Market Value" equals the mean of the high and low per share trading prices for the common stock of the Company as reported in The Wall Street Journal.
3. The RSU Grant Date will be October 18, 1999.
4. The RSU grant will vest upon satisfaction of the following performance criteria:
a) One-third of the RSUs and applicable dividend equivalents shall vest if he remains employed with the Company for three years from the Grant Date; and,
b) one-third of the RSUs and applicable dividend equivalents shall vest if he remains employed with the Company for four years following the Grant Date; and
c) the remaining RSUs and applicable dividend equivalents shall vest if he remains employed with the Company for five years following the Grant Date.
5. The RSU account will be credited on a quarterly basis with additional RSUs (earning credit RSUs) equal in number to the number of shares of the Company's common stock that could be purchased with the cash dividends payable on the number of shares of Company stock that equals the number of RSUs in the account. The determination of the number of shares to be credited will be based on the Fair Market Value of the Common Stock of the Company on the dividend payment date (or on the next business day on which on the New York Stock Exchange is open, if the Exchange is closed on the dividend payment date). He will be notified annually of the number of earnings credit RSUs in his account. Earnings credit RSUs will vest at the same time as the RSUs will which they are associated.
6. The Company will maintain an account and will annually report the RSU account balance to him.
7. If employment with the Company or a subsidiary is terminated for any reason other than death, layoff or disability his RSUs will be forfeited and canceled. Earnings credit RSUs will be forfeited and canceled along with the RSUs with which they are associated.
8. Distribution for the RSU account will be made within thirty days after the vesting date of the RSUs. Distributions will be in whole shares of the Company's common stock. Distributions of shares will be equal in number to the whole number of vested RSUs in the account. Fractional share values will be applied to income tax withholding.
9. The Company will deduct from any distributions to Mr. Sears any tax withholding required by law, and any amounts owed by him to the Company.
Dated October 18, 1999
THE BOEING COMPANY
/s/ Michael M. Sears by /s/ Philip M. Condit - -------------------- -------------------- Michael M. Sears Philip M. Condit
EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries
Place of Name Incorporation ============================================================================== 2433265 Manitoba Ltd. Manitoba 692567 Ontario Limited Ontario 757UA, Inc. Delaware 767ER, Inc. Delaware ACN 004 471 078 PTY LIMITED Australia AeroInfo Systems, Inc. British Columbia AeroSpace Technologies of Australia Limited Australia Aileron Inc. Delaware Airspace Safety Analysis Corporation Delaware Akash, Inc. Delaware Aldford-1 Corporation Delaware Astro Limited Bermuda Astro-II, Inc. Vermont Autometric, Inc. Maryland Autonetics, Inc. Delaware Aviatek Pty Limited Australia Bahasa Aircraft Corporation Delaware BCC (Aircraft Acquisition) Limited England BCC Alpine Leasing, Inc. Delaware BCC Bolongo Company Delaware BCC Bolongo Limited Virgin Islands BCC Carbita Point Company Delaware BCC Carbita Point Limited Virgin Islands BCC Charlotte Amalie Company Delaware BCC Charlotte Amalie Limited Virgin Islands BCC Drakes Passage Company Delaware BCC Drakes Passage Limited Virgin Islands BCC Grand Cayman Limited Cayman Islands BCC Lindbergh Bay Company Delaware BCC Lindbergh Bay Limited Virgin Islands BCC Mafolie Hill Company Delaware BCC Mafolie Hill Limited Virgin Islands BCC Magens Bay Company Delaware BCC Magens Bay Limited Virgin Islands BCC Mahogany Company Delaware BCC Mahogany Limited Virgin Islands BCC Nazareth Company Delaware BCC Nazareth Limited Virgin Islands BCC Red Hook Company Delaware BCC Red Hook Limited Virgin Islands BCC Smith Bay Company Delaware BCC Smith Bay Limited Virgin Islands BCS Richland, Inc. Washington Beaufoy-1 Corporation Delaware BNA International Systems, Inc. Delaware BNA Operations International, Inc. Delaware BNJ Foreign Sales Corporation Barbados BNJ, Inc. Delaware Boeing - Corinth Co. Delaware Boeing - Irving Co. Delaware
EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries
Place of Name Incorporation ============================================================================== Boeing - Oak Ridge Co. Delaware Boeing Aerospace - TAMS, Inc. Delaware Boeing Aerospace - U.K., Ltd. Delaware Boeing Aerospace (Malaysia) Sdn. Bhd. Malaysia Boeing Aerospace Australia Pty. Ltd. Delaware Boeing Aerospace Ltd. Delaware Boeing Aerospace Middle East Limited Delaware Boeing Aerospace Operations, Inc. Delaware Boeing Aerospace Switzerland, Inc. Delaware Boeing Aircraft Holding Company Delaware Boeing Australia Limited Australia Boeing Business Services Company Delaware Boeing Canada Inc. Ontario Boeing Capital Corporation Delaware Boeing Capital Loan Corporation Delaware Boeing Capital Services Corporation Delaware Boeing Capital Services Loan Corporation Delaware Boeing Capital Washington Corporation Delaware Boeing CAS GmbH Germany Boeing CAS, Inc. Delaware Boeing China Technical Services, Inc. Delaware Boeing China, Inc. Delaware Boeing Commercial Information and Communication Company Delaware Boeing Commercial Space Company Delaware Boeing Constructors Nominees Pty. Ltd. Australia Boeing Constructors, Inc. Texas Boeing Defence UK Limited England Boeing Domestic Sales Corporation Washington Boeing Electron Dynamic Devices, Inc. Delaware Boeing Enterprises, Inc. Delaware Boeing Exchange Holdings, Inc. Delaware Boeing Exchange Operations, Inc. Delaware Boeing Financial Corporation Washington Boeing Finland Oy Finland Boeing Global Sales Corporation Delaware Boeing Global Services, Inc. Delaware Boeing International Corporation Delaware Boeing International Holdings, Ltd. Bermuda Boeing International Logistics Spares, Inc. Delaware Boeing International Overhaul & Repair Inc. Delaware Boeing International Sales Corporation Washington Boeing Investment Company, Inc. Delaware Boeing Leasing Company Delaware Boeing Logistics Spares, Inc. Delaware Boeing Management Company Delaware Boeing Middle East Limited Delaware Boeing Nevada, Inc. Delaware Boeing North American Space Alliance Company Delaware Boeing North American Space Enterprises Canada, Inc. Canada Boeing North American Space Operations Company Delaware Boeing of Canada Ltd. Delaware
EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries
Place of Name Incorporation ============================================================================== Boeing Offset Company, Inc. Delaware Boeing Operations International, Incorporated Delaware Boeing Overseas, Inc. Delaware Boeing Precision Gear, Inc. Delaware Boeing Realty Corporation California Boeing Sales Corporation Guam Boeing Satellite Systems International, Inc. Delaware Boeing Satellite Systems, Inc. Delaware Boeing Service Company Texas Boeing Space Operations Company Delaware Boeing Space Systems International Company Delaware Boeing Space Systems International Service Company Delaware Boeing Spain, Ltd. Delaware Boeing Support Services, Inc. Delaware Boeing Technology International, Inc. Washington Boeing Toronto, Ltd. Canada Boeing Travel Management Company Delaware Boeing Worldwide Operations Limited Bermuda Boeing-SVS, Inc. Nevada CAG, Inc. Oregon Canard Holdings, Inc. Delaware CBSA Leasing II, Inc. Delaware CBSA Leasing, Inc. Delaware Continental DataGraphics Ltd. United Kingdom Continental Graphics Corporation Delaware Continental Graphics Holdings, Inc. Delaware Cougar, Ltd. Bermuda Delmar Photographic & Printing Company North Carolina Delta Launch Services, Inc. Delaware Dillon, Inc. Delaware Douglas Express Limited Virgin Islands Douglas Federal Leasing Limited Virgin Islands Douglas Leasing Inc. Delaware Douglas Realty Company, Inc. California Falcon II Leasing Limited Virgin Islands Falcon Leasing Limited Virgin Islands Fine Chemicals Offset Limited British Virgin Islands Gaucho-1 Inc. Delaware Gaucho-2 Inc. Delaware Hanway Corporation Delaware Hawk Leasing, Inc. Delaware Hawker de Havilland Holdings Pty Ltd Australia Jeppesen DataPlan, Inc. Delaware Jeppesen GmbH Germany Jeppesen Sanderson, Inc. Delaware Jeppesen U.K. Limited England Kerbridge Air Control Pty. Limited Australia Kuta-3 Aircraft Corporation, Limited Delaware Kuta-One Aircraft Corporation, Limited Delaware Kuta-Three Aircraft Corporation Delaware
EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries
Place of Name Incorporation ==============================================================================
Kuta-Two Aircraft Corporation Delaware Longacres Park, Inc. Washington Longbow Golf Club Corporation Delaware McDonnell Douglas Aircraft Finance Corporation Delaware McDonnell Douglas Corporation Maryland McDonnell Douglas Dakota Leasing, Inc. Delaware McDonnell Douglas Express, Inc. Delaware McDonnell Douglas Technical Services Company,Inc. Delaware McDonnell Douglas Finance Corporation - Federal Leasing, Limited Virgin Islands McDonnell Douglas Foreign Sales Corporation Virgin Islands McDonnell Douglas Helicopter Company Delaware McDonnell Douglas Helicopter Support Services, Inc. Delaware McDonnell Douglas Indonesia Leasing, Inc. Delaware McDonnell Douglas Insurance Holdings Corporation Delaware McDonnell Douglas Macedonia Leasing, Inc. Delaware McDonnell Douglas Middle East, Ltd. Delaware McDonnell Douglas Overseas Finance Corporation Delaware McDonnell Douglas Radio Services Corporation Delaware McDonnell Douglas Services, Inc. Missouri McDonnell Douglas Support Services - Military, Inc. Delaware McDonnell Douglas Truck Services, Inc. Delaware MD Dakota Leasing, Ltd. Virgin Islands MD Indonesia Limited Virgin Islands MDAFC - Nashville Company Delaware MD-Air Leasing Limited Virgin Islands MD-Federal Holding Company Delaware MDC Properties, Inc. Michigan MDFC - Aircraft Leasing Company Delaware MDFC - Aircraft Leasing Limited Virgin Islands MDFC - Aircraft Ltd. Ireland MDFC - Bali, Limited Virgin Islands MDFC - Carson Company Delaware MDFC - Carson Limited Virgin Islands MDFC - Express Leasing Company Delaware MDFC - Express Leasing Limited Virgin Islands MDFC - Jakarta, Limited Virgin Islands MDFC - Knoxville Company Delaware MDFC - Knoxville Limited Virgin Islands MDFC - Lakewood Company Delaware MDFC - Lakewood Limited Virgin Islands MDFC - Memphis Company Delaware MDFC - Memphis Ltd. Virgin Islands MDFC - Nashville Ltd. Virgin Islands MDFC - Reno Company Delaware MDFC - Sierra Company Delaware MDFC - Spring Limited Virgin Islands MDFC - Tahoe Company Delaware MDFC Equipment Leasing Corporation Delaware MDFC Loan Corporation Delaware
EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries
Place of Name Incorporation ==============================================================================
MDFC Spring Company Delaware MDRC of Missouri, Inc. Missouri Montana Aviation Research Company Delaware Network Information Service Co., Ltd. Japan Nobeltec Corporation Delaware North American Aviation, Inc. Delaware Pacific Business Enterprises, Inc. Delaware PK DataGraphics GmbH Germany Plaza Realty Holdings Corporation Delaware Processing Properties, Inc. Delaware Radical Pty Limited Australia Rainier Aircraft Leasing, Inc. Delaware Raven Leasing, Inc. Delaware RGL-1 Corporation Delaware RGL-2 Corporation Delaware RGL-3 Corporation Delaware RGL-4 Corporation Delaware RGL-5 Corporation Delaware RGL-6 Corporation Delaware Rocketdyne Technical Services Company Delaware Rocketdyne, Inc. Delaware Spectrolab, Inc. California Sunshine Leasing Company- Delaware SVS Environmental Systems, Inc. Nevada SVS Inspection Technologies Oregon SVS R&D Systems, Inc. New Mexico Taiko Leasing, Inc. Delaware Thayer Leasing Company-1 Delaware The Preston Group Pty Limited Australia TPG America, Inc. Virginia TPG Europe Limited United Kingdom VC-X 757, Inc. Delaware Wingspan, Inc. Delaware
Appendix of graphic and image material pursuant to Rule 304(a) of Regulation S-T
Graphic and image material item Number 1
Revenues by industry segment: A bar chart for the five years 1996-2000 indicating revenues by industry segment (Dollars in billions):
1996 1997 1998 1999 2000
Commercial Airplanes 19.916 26.929 35.663 38.171 30.327
ISDS - Military Aircraft and Missiles 12.990 12.220 12.197 ISDS - Space and Communications 6.889 6.831 8.039 ------ ------ ------ Information, Space and Defense Systems 14.934 18.125 19.879 19.051 20.236
Customer and Commercial Financing/Other 0.603 0.746 0.612 0.771 0.758
Total 35.453 45.800 56.154 57.993 51.321
Graphic and image material item Number 2
Commercial sales by geographic region: A bar chart for the five years 1996-2000 indicating sales by region of customer (Dollars in billions):
1996 1997 1998 1999 2000
United States 8.634 9.625 14.844 18.744 15.954 Asia, Other than China 6.576 9.254 11.337 8.989 4.999 China 0.950 1.265 1.572 1.231 1.013 Europe 2.757 5.886 7.274 8.011 7.799 Oceania 0.536 0.560 0.732 0.770 0.479 Other 0.463 0.339 1.239 0.730 0.927
Total 19.916 26.929 36.998 38.409 31.171
Graphic and image material item Number 3
Net earnings A bar chart of net earnings for the five years 1996-2000 (Dollars in billions):
1996 - 1.818; 1997 - (0.178); 1998 - 1.120; 1999 - 2.309; 2000 - 2.128
Graphic and image material item Number 4
Research and development expensed by segment: A bar chart of research and development expensed for the five years 1996-2000 (Dollars in billions):
1996 1997 1998 1999 2000
Commercial Airplanes 1.156 1.208 1.021 0.585 0.574
ISDS - Military Aircraft and Missiles 0.304 0.264 0.262 ISDS - Space and Communications 0.570 0.492 0.605 ----- ----- ----- Information, Space and Defense Systems 0.477 0.716 0.874 0.756 0.867
Total 1.633 1.924 1.895 1.341 1.441
Graphic and image material item Number 5
Go-ahead and certification/delivery graph: A time line graph indicating go-ahead and certification/delivery for various major airplane programs and derivatives.
Go-ahead Certification/Delivery (month/year) (month/year) 777-200ER < 1/1996 2/1997 777-300 < 1/1996 6/1998 777-300ER 2/2000 9/2003 777-200LR 2/2000 1/2004 737-700 < 1/1996 12/1997 737-800 < 1/1996 3/1998 737-600 < 1/1996 10/1998 737-900 11/1997 4/2001 757-300 9/1996 2/1999 767-400ER 4/1997 8/2000 717-200 < 1/1996 6/1999