<PAGE> 1
..............................................................................
..............................................................................
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1999
Commission file number 1-442
THE BOEING COMPANY
7755 East Marginal Way South
Seattle, Washington 98108
Telephone: (206) 655-2121
State of incorporation: Delaware
IRS identification number: 91-0425694
Securities registered pursuant to Section 12(b) of the Act:
Class of Security: Registered on
---------------------------- -------------------------
Common Stock, $5 par value New York Stock Exchange
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
A disclosure of one delinquent filer pursuant to Item 405 of Regulation S-K will
be contained in the registrant's definitive proxy statement incorporated by
reference in Part III of this Form 10-K.
As of January 31, 2000, there were 868,717,865 common shares outstanding held by
nonaffiliates of the registrant, and the aggregate market value of the common
shares (based upon the closing price of these shares on the New York Stock
Exchange) was approximately $38.5 billion.
Part I and Part II incorporate information by reference to certain portions of
the Company's 1999 Annual Report to Shareholders. Part III incorporates
information by reference to the registrant's definitive proxy statement, to be
filed with the Securities and Exchange Commission within 120 days after the
close of the fiscal year.
1 Exhibit Index on Page 24
<PAGE> 2
PART I
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.
In 1998, the information, space and defense systems operations of the Company
were reorganized into two groups: the Military Aircraft and Missile Systems
Group and the Space and Communications Group.
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; 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, 1999, are set forth on
pages 48-50 of the Company's 1999 Annual Report to Shareholders and are
incorporated herein by reference.
On August 1, 1997, McDonnell Douglas Corporation merged with a subsidiary of the
Company through a stock-for-stock exchange in which 1.3 shares of Company stock
were issued for each share of McDonnell Douglas stock outstanding, and as a
result, McDonnell Douglas became a subsidiary of the Company. The Company issued
277.3 million shares of common stock in connection with the merger. The merger
is accounted for as a pooling of interests. Accordingly, except for adjustments
to reflect conformed accounting policies, the historical results of operations
of the two companies have been combined, and no acquisition revaluation or
goodwill was recorded. The merger was subject to approval by the United States
Federal Trade Commission and the European Commission. Future requirements or
obligations associated with having obtained these approvals are not expected
to have a material impact on future operations or liquidity of the Company.
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. The MD-
80, MD-90 and 737 Classic aircraft will not be produced after early 2000. Final
delivery of the MD-11 aircraft will be in 2001.
2
<PAGE> 3
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 Next-Generation 737 family of short-to-medium-range
jetliners (737-600/700/800/900 models) and the 717-200 program. The
certification and initial deliveries of the 737-700, the first of four new 737
derivative models, occurred in December 1997. The 737-800, a larger version,
delivered in early 1998, and initial delivery of the smallest version, the 737-
600, 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. Certification and delivery of the 777-200ER occurred
in early 1997. The increased-capacity version 777-300 began deliveries in 1998.
Initial delivery of the 757-300 occurred in March 1999. The 757-300 has
approximately 20% more seating and about 10% lower seat-mile operating cost than
the -200 model. The 767-400ER, capable of carrying over 300 passengers in a two-
class configuration, is scheduled for first delivery in 2000.
3
<PAGE> 4
New products under consideration include larger and longer-range versions of the
777. Also being considered is the development of aircraft capable of carrying
more than 500 passengers over longer ranges than the current 747 family.
However, sufficient market demand has not developed to justify committing the
very substantial investment levels required to develop either an all-new
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 and
the merger with McDonnell Douglas in 1997 have created a large and diversified
group of business units in information, space and defense systems. The major
trends that shape the current environment of this business 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.
On January 13, 2000, the Company announced an agreement to acquire the Hughes
space and communications business and related operations for $3.75 billion. The
transaction is subject to regulatory and government reviews and is expected to
be finalized by the end of the second quarter of 2000. Hughes is a technological
leader in space-based communications, reconnaissance, surveillance and imaging
systems. It is also a leading manufacturer of commercial satellites. Under the
definitive agreement, Boeing also will acquire Hughes Electron Dynamics, a
supplier of electronic components for satellites, and Spectrolab, a provider of
solar cells and panels for satellites.
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
remain relatively flat on an inflation-adjusted basis. 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 also 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 1999
Military Aircraft and Missiles segment revenues included the C-17, F-15, F/A-18
C/D, F/A-18 E/F, AH-64 Apache along with Aerospace Support. The principal
contributors to 1999 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.
4
<PAGE> 5
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 that fixed-price-type
contracts. Current major developmental programs include the F-22 Raptor, Joint
Strike Fighter, V-22 Osprey tiltrotor aircraft, and the RAH-66 Comanche
helicopter. The V-22 program is currently transitioning to low-rate initial
production, while the F/A-18 E/F program transitioned to low-rate initial
production during 1999.
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 information and communication market addressed by the Space and
Communications business segment is projected by industry analysts to grow
sevenfold over the next ten years. The majority of the projected growth in
information and communication will be in the commercial marketplace, and the
Government's requirements are expected to be increasingly met by these
commercial systems. The segment continues to selectively pursue commercial-type
business opportunities where it can utilize its technical and large-scale
integration capabilities. Such business pursuits, which are outside the
traditional U.S. Government contracting environment, provide opportunities for
significant market penetration and are expected to require increased levels of
company-sponsored research and development expenditures.
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.
Research and development expense amounted to $1.3 billion, $1.9 billion and $1.9
billion in 1999, 1998 and 1997, respectively. Based on current programs and
plans, research and development expense for 2000 is expected to be approximately
$1.5 billion.
5
<PAGE> 6
The Company's backlog of firm contractual orders (in billions) at December 31
follows:
1999 1998
===== =====
Commercial Airplanes $73.0 $ 86.1
Military Aircraft and Missiles 15.6 17.0
Space and Communications 10.6 9.8
----- -----
Information, Space and Defense Systems 26.2 26.8
----- -----
Total contractual backlog $99.2 $112.9
===== ======
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, 1999 and
1998, totaled $24.4 billion and $23.5 billion.
In evaluating the Company's contractual backlog for commercial customers,
certain risk factors should be considered. Approximately 21% of the commercial
aircraft backlog units are scheduled for delivery beyond 2002. 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 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.
Production problems on the commercial aircraft programs reached unexpected
levels late in the third quarter of 1997. During this period, the Company was in
the midst of an unprecedented production rate buildup for the 7-series
6
<PAGE> 7
commercial aircraft programs, and experienced a number of challenges, including
raw material shortages, internal and supplier parts shortages, and productivity
inefficiencies associated with adding thousands of new employees. These
factors resulted in significant out-of-sequence work. The breadth and
complexity of the entire commercial aircraft production process, especially
during this time of substantial production rate increases, presented a
situation where disrupted process flows caused major inefficiencies throughout
the entire process chain. The 747 and 737 production lines were halted for
approximately one month early in the fourth quarter of 1997. The recovery plan
continued throughout 1998.
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 49 of the Company's 1999
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, 1999. Approximately 50% of the
Company's contractual backlog value at December 31, 1999, 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 22% 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 27, 2000, was approximately 195,000,
including approximately 3,000 in Canada and 2,100 in Australia. The year-end
2000 workforce level is projected to be in the range of 180,000 to 190,000.
7
<PAGE> 8
Item 2. Properties
The locations and floor areas of the Company's principal operating properties at
January 1, 2000, are indicated in the following table.
Floor Area
(Thousands of square feet)
Company-
Owned Leased
======== ======
United States
Greater Seattle, Washington 43,289 3,767
Greater Southern California 18,543 6,257
Wichita, Kansas 12,199 1,181
Greater St. Louis, Missouri 9,454 1,772
Greater Philadelphia, Pennsylvania 3,390 15
Huntsville - Decatur, Alabama 2,173 548
Mesa, Arizona 1,998 206
Portland, Oregon 1,115
Greater Cape Canaveral, Florida 794 1,257
Duluth - Macon, Georgia 543 145
Oakridge, Tennessee 493
Irving - Corinth, Texas 455 76
Spokane, Washington 394 48
Salt Lake City - Layton, Utah 227 81
Chicago, Illinois 204
Pueblo, Colorado 183 200
Tulsa, Oklahoma 162 1,829
Glasgow, Montana 152
Greater Houston, Texas 150 190
San Antonio, Texas 1,310
El Paso, Texas 277
Melbourne, Arkansas 98 46
Greater Washington, D.C. 267
Heath, Ohio 799
Bay Saint Louis, Mississippi 284
Shreveport, Louisiana 155
Wilmington, Delaware 102
Australia 745 310
Canada
Toronto, Ontario 1,881
Winnipeg, Manitoba 617
Arnprior, Ontario 227
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 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 production capability.
8
<PAGE> 9
Because of the acquisition of the aerospace and defense units of Rockwell and
the merger with McDonnell Douglas, the Company continues the evaluation of
facilities to consolidate redundant activities. Properties and land that do not
meet long-term business requirements will be leased out or sold.
The Company's principal properties are well maintained and in good operating
condition. The Company's announced purchase of the Hughes space and
communication business, which is expected to be complete by mid-year 2000, will
add approximately four million square feet to the Company's property inventory.
All other existing facilities are sufficient to meet the Company's near-term
operating requirements.
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, 1999, 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.
9
<PAGE> 10
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, 1999, inventories included approximately $581
million of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350 million. The amount of the provision,
which was established in 1990, was based on the Company's belief, supported by
an opinion of outside counsel, that the termination for default would be
converted to a termination for convenience, that the Team would establish a
claim for contract adjustments for a minimum of $250 million, that there was a
range of reasonably possible results on termination for convenience, and that
it was prudent to provide for what the Company then believed was the upper
range of possible loss on termination for convenience, which was $350 million.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the Government
had not exercised the required discretion before issuing a termination for
default. It converted the termination to a termination for convenience, and
determined the Team was entitled to be paid $1,200 million, plus statutory
interest from June 26, 1991, until paid. The Court of Appeals remanded the case
to the Court of Federal Claims for a determination as to whether the Government
is able to sustain the burden of showing a default was justified and other
proceedings. Final resolution of the A-12 litigation will depend on such
litigation and possible further appeals, or negotiations with the Government.
In the Company's opinion, the loss provision continues to provide adequately for
the reasonably possible reduction in value of A-12 net contracts in process as
of December 31, 1999, as a result of a termination of the contract for the
convenience of the Government. The Company has been provided with an opinion of
outside counsel that (i) the Government's termination of the contract for
default was contrary to law and fact, (ii) the rights and obligations of the
Company are the same as if the termination had been issued for the convenience
of the Government, and (iii) subject to prevailing on the issue that the
termination is properly one for the convenience of the Government, the probable
recovery by the Company is not less than $250 million.
10
<PAGE> 11
On October 31, 1997, a federal securities lawsuit was filed against the Company
in the U.S. District Court for the Western District of Washington, in Seattle.
The lawsuit names as defendants the Company and three of its then-executive
officers. Additional lawsuits of a similar nature have been filed in the same
court. These lawsuits were consolidated on February 24, 1998. Initially, the
plaintiffs sought to represent a class of purchasers of Boeing stock between
July 21, 1997, and October 22, 1997, (the "Class Period"), including recipients
of Boeing stock in the McDonnell Douglas merger. (July 21, 1997, was the date on
which the Company announced its second quarter results, and October 22, 1997,
was the date on which the Company announced charges to earnings associated with
production problems being experienced on commercial aircraft programs.) The
lawsuits generally allege that the defendants desired to keep the Company's
share price as high as possible in order to ensure that the McDonnell Douglas
shareholders would approve the merger and, in the case of two of the individual
defendants, to benefit directly from the sale of Boeing stock during the Class
Period. By orders dated September 15, 1999, and February 3, 2000, plaintiffs
were granted leave to amend their complaint to broaden their action (1) to
encompass claims of the original proposed class members for Boeing securities
purchases made between April 7, 1997 and July 20, 1997; (2) to include certain
alleged misstatements purportedly made by the Company going back to April 7,
1997; and (3) to add allegations that the Company's 10-Q reports for the first
and second quarters of 1997 were false and misleading. The plaintiffs seek
compensatory damages and treble damages. The court has not yet ruled on class
certification. The action is currently set for trial on October 2, 2000. 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 charges one employee with participation in the alleged
conspiracy. The indictment relates to the sale and export to China in 1993-1995
of surplus, used machine tools sold by Douglas Aircraft Company to China
National Aero-Technology Import and Export Corporation for use in connection
with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC. 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 may be 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
11
<PAGE> 12
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.
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, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information required by this item is included on page 80 and the inside
back cover of the Company's 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Item 6. Selected Financial Data
Information required by this item is included on page 74 of the Company's 1999
Annual Report to Shareholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Information required by this item is included on pages 30-47 of the Company's
1999 Annual Report to Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data, included
in the Company's 1999 Annual Report to Shareholders on the pages indicated, are
incorporated herein by reference:
Consolidated Statements of Operations - years ended December 31, 1999, 1998 and
1997: Page 51.
Consolidated Statements of Financial Position - December 31, 1999 and 1998: Page
52.
Consolidated Statements of Cash Flows - years ended December 31, 1999, 1998 and
1997: Page 53.
Consolidated Statements of Shareholders' Equity - December 31, 1999, 1998 and
1997: Pages 54-55.
12
<PAGE> 13
Notes to Consolidated Financial Statements: Pages 56-72.
Supplementary data regarding quarterly results of operations: Page 72.
Independent Auditors' Report: Page 73.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
13
<PAGE> 14
PART III
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 58 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 63 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.
Prior thereto, Chairman of the Board, President,
and Chief Executive Officer of Sundstrand
Corporation from 1991.
James F. Albaugh 49 Senior Vice President of the Company and President
of 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.
Theodore J. Collins 63 Senior Vice President, Law and Contracts since
November 1999. Prior thereto, Senior Vice
President and General Counsel from February 1997.
Prior thereto, Vice President and General Counsel
from 1986. Corporate Secretary from December 1997
through April 1998.
James B. Dagnon 60 Senior Vice President - People since May 1997.
Prior thereto, Senior Vice President - Employee
Relations, Burlington Northern Santa Fe from 1995.
Prior thereto, Executive Vice President, Burlington
Northern from 1992.
Christopher W. Hansen 51 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.
14
<PAGE> 15
Name Age Positions and offices held and business experience
================================================================================
Deborah C. Hopkins 45 Senior Vice President and Chief Financial Officer
since December 1998. Prior thereto, Vice President
of Finance and Chief Financial Officer for General
Motors Europe from October 1997. Prior thereto,
General Auditor for General Motors from November
1995. Prior thereto, Vice President & General
Manager Worldwide Information Systems from August
1995. Prior thereto, Vice President and Corporate
Controller and Chief Accounting Officer for Unisys
Corporation from January 1993.
Alan R. Mulally 54 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 50 Senior Vice President of the Company and President
of Boeing Shared Services Group since August 1997.
Prior thereto, Senior Vice President and Chief
Financial Officer of McDonnell Douglas Corporation
from July 1995. Prior thereto, Vice President and
Treasurer of McDonnell Douglas Corporation from
1993.
Michael M. Sears 52 Senior Vice President of the Company and President
of Military Aircraft and Missiles Systems Group
since 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. Prior thereto,
Vice President and General Manager of the F/A-18
program, McDonnell Douglas Aerospace from 1991.
David O. Swain 57 Senior Vice President of Engineering & Technology
of the Company and President of 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.
John D. Warner 60 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 April 1995. Prior thereto,
President Boeing Computer Services from July 1993.
15
<PAGE> 16
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. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
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. 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 22
The auditors' report with respect to the above-listed financial statement
schedule appears on page 21 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").)
16
<PAGE> 17
(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 August 26, 1996. (Exhibit
(3)(i) to the Form S-4.)
(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. $ One Billion Five Hundred Million 7-Year Bank Credit
Agreement among The Boeing Company, as Borrower, the Banks
party thereto, Citibank, N.A., as Administrative Agent, and
The Chase Manhattan Bank, as Syndication Agent, dated as of
December 8, 1997. (Exhibit (10)(i) to the Company's Annual
Report on Form 10-K (File No. 1-442) for the year ended
December 31, 1997 (herein referred to as "1997 Form 10-K").)
(ii) U.S. $ One Billion Five Hundred Million 364-Day Bank Credit
Agreement among The Boeing Company, as Borrower, the Banks
party thereto, Citibank, N.A., as Administrative Agent, and
The Chase Manhattan Bank, as Syndication Agent, as amended
on September 30, 1998. (Exhibit (10)(i) of the Company's Form
10-Q for the quarter ended September 30, 1998 (herein referred
to as "3rd Quarter 1998 Form 10-Q").)
Management Contracts and Compensatory Plans.
(iii) 1984 Stock Option Plan.
(a) Plan, as amended February 23, 1987, and August 28, 1989.
(Exhibit (10)(iii)(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 (herein
referred to as "1995 Form 10-K").)
(b) Forms of stock option agreements. (Exhibit (10)(vi)(b)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992 (herein referred to as "1992
Form 10-K").)
(iv) 1988 Stock Option Plan.
(a) Plan, as amended on December 14, 1992. (Exhibit (10)(vii)
(a) of the 1992 Form 10-K.)
(b) Form of Notice of Terms of Stock Option Grant. (Exhibit
(10)(vii)(b) of the 1992 Form 10-K.)
(v) 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.)
(vi) 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").)
(vii) 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.)
17
<PAGE> 18
(viii) 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.)
(ix) Deferred Compensation Plan for Directors of The Boeing
Company, as amended on October 28, 1996. (Exhibit 10.1 to the
Form S-4.)
(x) 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.)
(xi) 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.)
(xii) 1997 Incentive Stock Plan, as amended on June 29, 1998.
(Exhibit (10) of the Company's Form 10-Q for the quarter
ended June 30, 1998.)
(xiii) SAR Deferral Arrangements of the Company.
(a) Form of SAR Deferral Agreement. (Exhibit (10)(xii)(a) to
the 1995 Form 10-K.)
(b) Plan for Employees, as amended. (Exhibit (10)(xii)(b) to
the 1995 Form 10-K.)
(c) Form of SAR deferral election notice. (Exhibit
(10)(xiv)(c) to the 1992 Form 10-K.)
(xiv) 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.)
(xv) 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.)
(xvi) 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.)
(xvii) The McDonnell Douglas Incentive Award Plan as amended
and restated July 20, 1990. (Exhibit 99.2 of Registration
Statement No. 333-32567 on Form S-8 filed on July 31, 1997.)
(xviii) The Boeing Company ShareValue Program, as amended on December
20, 1996. (Exhibit (10)(xiii) to the 1996 Form 10-K.)
(xix) 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.)
(xx) Consultant Services Agreement between the Company and Boyd E.
Givan, dated August 26, 1998, with an amendment in the form
of a letter from the Company dated September 14, 1998.
(Exhibit (10)(ii) to the 3rd Quarter 1998 Form 10-Q.)
18
<PAGE> 19
(xxi) Settlement and Release Agreement with Ronald B. Woodard,
dated October 31, 1998. (Exhibit (10)(xxi) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 (herein referred to as "1998 Form 10-K").)
(xxii) Terms of Employment Agreement with Deborah C. Hopkins, dated
November 10, 1998. (Exhibit (10)(xxii) to the 1998 Form
10-K.)
(xxiii) Supplemental Pension Agreement with Michael M. Sears, dated
February 16, 2000. Filed herewith.
(12) Computation of Ratio of Earnings to Fixed Charges. Page 23.
(13) Portions of the 1999 Annual Report to Shareholders incorporated by
reference herein. Filed herewith.
(21) List of Company Subsidiaries. Pages 96-99.
(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 21.
(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, 1999:
A report on Form 8-K was filed on October 26, 1999, to report under
Item 5 the revision of the Company's procedure with respect to foreign
sales consultants.
19
<PAGE> 20
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/ Deborah C. Hopkins By: /s/ Laurette T. Koellner
-------------------------------- --------------------------------
Deborah C. Hopkins - Senior Vice Laurette T. Koellner - Vice President
President and Chief Financial Officer and Corporate Controller
Date: February 28, 2000
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 F. McDonnell
- -------------------------------- --------------------------------
John H. Biggs - Director John F. McDonnell - Director
/s/ John E. Bryson /s/ William J. Perry
- -------------------------------- --------------------------------
John E. Bryson - Director William J. Perry - Director
/s/ Kenneth M. Duberstein /s/ Charles M. Pigott
- -------------------------------- --------------------------------
Kenneth M. Duberstein - Director Charles M. Pigott - Director
/s/ John B. Fery /s/ Lewis E. Platt
- -------------------------------- --------------------------------
John B. Fery - Director Lewis E. Platt - Director
/s/ Paul E. Gray /s/ Rozanne L. Ridgway
- -------------------------------- --------------------------------
Paul E. Gray - Director Rozanne L. Ridgway - Director
Date: February 28, 2000
20
<PAGE> 21
INDEPENDENT AUDITORS' CONSENT
AND REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
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, 333-03191, 333-16363, 333-26867,
333-32461, 333-32491, 333-32499, and 333-32567 of The Boeing Company on Form S-8
of our report dated January 28, 2000, appearing in and incorporated by reference
in the Annual Report on Form 10-K of The Boeing Company for the year ended
December 31, 1999.
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,
1999. 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 3, 2000
21
<PAGE> 22
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)
1999 1998 1997
===============================================================================
Balance at January 1 $289 $233 $184
Charged to costs and expenses 102 61 64
Transfer from accrued liabilities 24
Deductions from reserves (accounts charged off) (93) (5) (15)
----- ----- -----
Balance at December 31 $322 $289 $233
===== ===== ====
22
<PAGE> 23
EXHIBIT (12) - Computation of Ratio of Earnings to Fixed Charges
The Boeing Company and Subsidiaries
(Dollars in millions)
Year ended December 31,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1995
==== ==== ==== ==== ====
Earnings before
federal taxes on income $3,324 $1,397 $(341) $2,480 $(412)
Fixed charges excluding
capitalized interest 483 507 552 463 427
Amortization of previously
capitalized interest 80 75 97 80 59
Net adjustment for
earnings of affiliates (8) (18) 4 (1) (5)
------- ------- ----- ------- ------
Earnings available for
fixed charges $3,879 $1,961 $ 312 $3,022 $ 69
====== ====== ===== ====== =====
Fixed charges:
Interest expense $431 $453 $513 $393 $376
Interest capitalized during
the period 81 65 61 58 65
Rentals deemed
representative of an
interest factor 52 54 39 70 51
---- ---- ---- ---- ----
Total fixed charges $564 $572 $613 $521 $492
==== ==== ==== ==== ====
Ratio of earnings to fixed
charges 6.9 3.4 .5 5.8 .1
==== === == === ==
23
<PAGE> 24
EXHIBITS FILED WITH THIS REPORT ON FORM 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) (xxiii) Supplemental Pension Agreement with
Michael M. Sears, dated February 16, 2000 94
(12) Computation of Ratio of Earnings to Fixed
Charges 23
(13) Portions of the 1999 Annual Report to
Shareholders incorporated by reference
in Part I and Part II 25
Market for registrant's Common Equity and
related Stockholder Matters * 92
Management's Discussion and Analysis of
Financial Position and Results of Operations 30 25
Consolidated Statements of Operations 51 54
Consolidated Statements of Financial Position 52 55
Consolidated Statements of Cash Flows 53 56
Consolidated Statements of Shareholders' Equity 54 57
Notes to Consolidated Financial Statements 56 63
Independent Auditor's Report 73 89
Supplementary Data Regarding Quarterly
Financial Data 72 88
Selected Financial Data
Five-Year Summary 74 90
(21) List of Subsidiaries 96
(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. 21
Appendix of graphic and image material
pursuant to Rule 304(a) of regulation S-T 100
* Listed on inside back cover of annual report
24
<PAGE> 25
Exhibit (13)
Portions of the 1999 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
MERGER WITH MCDONNELL DOUGLAS CORPORATION
On August 1, 1997, McDonnell Douglas Corporation merged with the Company through
a stock-for-stock exchange in which 1.3 shares of Company stock were issued for
each share of McDonnell Douglas stock outstanding. The merger has been accounted
for as a pooling of interests, and the discussion and analysis that follows
reflects the combined results of operations and financial condition of the
merged companies.
INFORMATION, SPACE AND DEFENSE SYSTEMS
Segment Reporting
In 1998, the Information, Space and Defense Systems (ISDS) Group of the Company
was reorganized into two groups: the Military Aircraft and Missile Systems Group
and the Space and Communications Group, which have been reported as separate
business segments beginning in 1998. Comparisons of revenues and operating
profit between 1997 and 1998 relate to the ISDS segment in total. Total ISDS
segment revenues were $19.9 billion in 1998, compared with $18.1 billion in
1997, and operating profit in 1998 was $1,531 million, compared with $1,317
million in 1997. The increase in revenue and operating profit in 1998 was
principally due to increased deliveries for the C-17, F-15 and CH-47 programs,
partially offset by fewer F/A-18 C/D deliveries.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Operating revenues for 1999 were $58.0 billion, compared with $56.2 billion in
1998 and $45.8 billion in 1997. The higher revenues for both 1999 and 1998
reflect the increased deliveries in the Commercial Airplanes segment. The higher
1998 revenues also reflect increased deliveries in the combined Military
Aircraft and Missiles segment and Space and Communications segment. Military
Aircraft and Missiles segment 1999 revenues of $12.2 billion decreased
$0.8 billion from 1998, and Space and Communications 1999 segment revenues of
$6.8 billion decreased $0.1 billion from 1998.
Revenues by industry segment:
[Graphic and image material item Number 1
See appendix on page 100 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, |
| customer financing, sales, revenues, margins, free cash flow, research and |
| development, inventory turn rates, employment, asset utilization, |
| productivity improvement, pension income, new business and new business |
| opportunities, value potential, and other trend projections. This forward- |
| looking information is based upon a number of assumptions including |
| assumptions regarding demand; current and future markets for the Company's |
25
<PAGE> 26
| products and services; internal performance; product performance; customer, |
| supplier and subcontractor performance; government policies and actions; 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, asset management plans, procurement plans, and other |
| cost-reduction efforts; 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; |
| actions by regulatory agencies in regard to the proposed acquisition of |
| Hughes space and communication businesses; 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 and economic conditions, |
| particularly in Asia; real estate market value fluctuations in areas where |
| company facilities are located; 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. |
|-----------------------------------------------------------------------------|
Commercial Airplanes
Commercial Airplanes products and services accounted for 66%, 66% and 59% of
total operating revenues for the years 1999, 1998 and 1997.
Total commercial jet aircraft deliveries by model, including deliveries under
operating lease, which are identified by the numbers in parentheses, were as
follows:
1999 1998 1997
- ----------------------------------------------
717 12(2) - -
737 Classic 42 116(6) 132
737 NG 278 165 3
747 47 53(3) 39
757 67 50 46
767 44(1) 47 41
777 83 74 59
MD-80 26(21) 8(4) 16(7)
MD-90 13 34 26(5)
MD-11 8 12(2) 12(1)
- ----------------------------------------------
Total 620 559 374
==============================================
26
<PAGE> 27
The 737 Classic, MD-80 and MD-90 aircraft will not be produced after early 2000.
The MD-11 program is scheduled to terminate production in 2000, with final
deliveries in 2001. First delivery of the 717 aircraft occurred in the third
quarter of 1999.
Total commercial aircraft deliveries for 2000 are currently projected to be in
the range of 490 aircraft. Based on current plans, Commercial Airplanes revenues
for 2000 are expected to be in the $30 billion range. Total commercial aircraft
deliveries for 2001 are currently projected to approximate total deliveries for
2000. Commercial aircraft transportation trends are discussed in the Commercial
Airplanes Business Environment and Trends section on pages 40-43.
Commercial Airplanes sales by geographic region:
[Graphic and image material item Number 2
See Appendix on page 100 for description.]
Military Aircraft and Missiles
Military Aircraft and Missiles segment revenues were $12.2 billion in 1999,
compared with $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 accounted for more than 15% of
total 1998-1999 segment revenues.
The principal contributors to 1999 Military Aircraft and Missiles segment
revenues included the C-17 Globemaster, F-15 Eagle, F/A-18 C/D Hornet, F/A-18
E/F Super Hornet, AH-64 Apache, F-22 Raptor, CH-47 Chinook, and V-22 Osprey
programs, along with aerospace support programs.
Deliveries of selected production units were as follows:
1999 1998 1997
- ----------------------------------------------
C-17 11 10 7
F-15 35 39 19
F/A-18 C/D 25 29 46
F/A-18 E/F 13 1 -
T-45TS 12 16 11
CH-47 Chinook 14 18 1
757 - C-32A - 4 -
AH-64 Apache 11 5 2
Military Aircraft and Missiles segment revenues for 2000 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 43-44.
Space and Communications
Space and Communications segment revenues were $6.8 billion in 1999, compared
with $6.9 billion in 1998. The segment is well diversified. Only the
International Space Station program, which accounted for approximately 19% of
revenues for the previous two years, contributed more than 15% of revenues.
Other principal contributors to 1999 Space and Communications segment revenues
included National Missile Defense Lead System Integrator (NMD LSI), E-3 AWACS
(Airborne Warning and Control System) updates and 767 AWACS, Space Shuttle
Flight Operations and Main Engine, Delta space launch services, and classified
projects for the U.S. Government.
27
<PAGE> 28
Deliveries of selected production units were as follows:
1999 1998 1997
- ----------------------------------------------
767 AWACS 2 2 -
Delta II 11 13 12
Delta III 1 1 -
Space and Communications segment revenues for 2000 are projected to be in the
range of $7.5 billion to $8.0 billion, excluding the potential impact of the
proposed acquisition of Hughes space and communications business described on
page 45. Growth is anticipated primarily from recent capture of classified
government programs supporting the National Reconnaissance Office and the NMD
LSI program.
Segment business trends are discussed in the Space and Communications Business
Environment and Trends section on pages 44-45.
Customer and Commercial Financing/Other
Operating revenues in the Customer and Commercial Financing/Other segment were
$837 million in 1999, compared with $730 million in 1998 and $746 million in
1997. 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 49-53.
. . . . . . . .
Based on current schedules and plans, the Company projects total 2000 revenues
to be approximately $50 billion.
EARNINGS
Net earnings for the three years include a significant provision to cost of
products and services in 1997 in addition to earnings fluctuations associated
with the Company's share-based plans.
In the fourth quarter of 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 provisions of $1,400
million, or $876 million after tax, relative to these decisions. These
provisions principally represented an inventory valuation adjustment based on
post-merger assessments of the market conditions and related program decisions.
Under the original product strategy decision, the passenger version of the MD-11
was to be terminated in late 2000, the final MD-80 would be delivered in late
1999, and the final MD-90 would be delivered in early 2000. Under the plans
ultimately implemented, final delivery of the MD-80 occurred in 1999, and
scheduled final deliveries are in first quarter 2000 for the MD-90 and in first
quarter 2001 for the MD-11. These provisions are discussed in Note 7 to the
consolidated financial statements.
The share-based plans are discussed on page 48 and in Note 18 to the
Consolidated Financial Statements on page 79. Share-based plans resulted in an
after-tax charge of $130 million in 1999, $96 million in 1998 and $(66) in 1997.
Net earnings:
[Graphic and image material item Number 3
See appendix on page 100 for description.]
28
<PAGE> 29
Net earnings of $1,120 million for 1998 were $1,298 million higher than the
net loss of $178 million for 1997. This was primarily due to the provision in
1997 of $876 million after tax related to the McDonnell Douglas Corporation
commercial product lines discussed above. Other factors include higher
commercial aircraft deliveries in 1998, a higher after-tax forward loss
recognized in 1997 for the Next-Generation 737 ($436 million in 1997 compared
with $218 million in 1998), merger-related expenses of $120 million in 1997,
and prior years' defense-related partnership research and development tax
credits amounting to $57 million recognized in 1998. Additionally, interest
income was lower in 1998, and share-based plans expense was $162 million
higher in 1998 on an after-tax basis.
Net earnings of $2,309 million for 1999 were $1,189 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,
and lower research and development company-wide, which decreased by $554
million to $1,341 million pretax in 1999. Offsetting these increases were
charges of $270 million ($169 million after tax) associated with the F-15
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 $7.2 billion of unrecognized net actuarial
gains. The Company projects that in the near term, significant net periodic
benefit income will be recognized due to pensions. Also, the increase in
assumed cost growth used to calculate retiree health care costs (10% annual
growth rate for 1999, decreasing to a 5.5% annual growth rate by 2010) is
projected to result in increased retiree health care costs.
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 1999 Commercial Airplanes segment earnings of $2,016 million (based on the
cost of specific airplane units delivered - see discussion under Segment
Information on page 49) resulted in an earnings from operations margin of 5.2%,
or 6.8% exclusive of research and development expense. Comparable results for
1998 were a loss of $266 million, and earnings from operations margin of (0.7)%,
or 2.0% exclusive of research and development expense.
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.
29
<PAGE> 30
The 1998 Commercial Airplanes segment loss of $266 million compares with a
loss of $1,589 for 1997. The significant segment loss in 1997 resulted from
the provision related to the McDonnell Douglas Corporation commercial aircraft
product line discussed in Note 7 to the consolidated financial statements, and
production problems.
Production problems experienced on the commercial aircraft programs reached
unexpected levels late in the third quarter of 1997. During this period, the
Company was in the midst of an unprecedented production rate build-up for the
7-series commercial aircraft programs, and experienced a number of
challenges, including raw material shortages, internal and supplier parts
shortages, and productivity inefficiencies associated with adding thousands of
new employees. These factors resulted in significant out-of-sequence work.
The breadth and complexity of the entire commercial aircraft production
process, especially during this time of substantial production rate increases,
presented a situation where disrupted process flows caused major
inefficiencies throughout the entire process chain. The 747 and 737 production
lines were halted for approximately one month in 1997. The recovery plan
continued throughout 1998.
In 1999, the Company delivered the initial units of the 717 program. 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 such time as program reviews indicate
positive gross profit within the program accounting quantity. Such program
reviews could include revised assumptions of revenues and costs, or an
increase in the program quantity if warranted by additional program orders.
The Company has significant exposures related to the 717 program, principally
attributable to pricing pressures and the slow build-up of firm orders.
Current firm contracts for the 717 program include a contract for 50 airplanes
with Trans World Airlines (TWA). TWA continues to operate under a
reorganization plan, confirmed by the U.S. Bankruptcy Court in 1995, which
restructured its indebtedness and leasehold obligations to creditors.
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 air fares, similar to the competitive environment in the
United States. Although current trends have begun to show some improvements in
Asia, slowing economies, reduced business travel, and currency devaluations have
recently contributed to sharply lower yields. 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 1999 and 1998
were $1,193 million and $1,283 million. The segment operating margins were 9.8%
and 9.9% for 1999 and 1998. The 1999 operating results included a favorable
contract settlement amounting to $55 million and pretax charges of $270 million
associated with the F-15 program. The Company had procured and committed to
long-lead items in anticipation of additional F-15 orders. In the third quarter
of 1999, the Company assessed that there was a limited near-term market for
F-15s based on revised market analysis, recent international customer
decisions, and actions then pending in Congress. As a result of these revised
market assessments, the Company recorded a $225 million pretax charge
30
<PAGE> 31
associated with F-15 program inventory. Additionally, in the second quarter
of 1999, the Company recognized a pretax charge of $45 million attributable to
the impairment of certain F-15 inventory costs incurred in support of a
potential sale to the government of Greece which did not materialize.
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 F-22 Raptor, Joint Strike Fighter, V-22
Osprey tiltrotor aircraft, and the RAH-66 Comanche helicopter. The V-22 program
is currently transitioning to low-rate initial production, while the F/A-18 E/F
program transitioned to low-rate initial production during 1999.
In 1998 the Company announced that it would exit the market for commercial
helicopters. As part of that strategic decision, in early 1998, the Company
transferred its interest in the Civil Tiltrotor program to Bell Helicopter
Textron. Also, in the first quarter of 1999, the Company sold the MD 500, MD
600 and MD Explorer light-commercial helicopter product lines to RDM Holding,
Inc., a European-based industrial group.
Space and Communications
Space and Communications segment operating earnings for 1999 and 1998 were $415
million and $248 million. Segment operating margins were 6.1% and 3.6% for 1999
and 1998. The 1999 operating results included a pretax gain of $95 million
related to the sale of Boeing Information Systems (BIS), which provides the
federal government with information and systems integration services, to Science
Applications International Corporation in July 1999. Operating results for 1998
and 1999 also included favorable contract settlements. Excluding the impact of
these contract settlements and the BIS sale, operating margins were 4.0% and
2.9% for 1999 and 1998.
The segment operating margins are reduced by significant company investment in
the development of new products, particularly the Delta IV launch vehicle and
the new 737-based airborne early warning and control aircraft. In addition, a
significant percentage of Space and Communications segment business has been
performed under cost-reimbursement-type contracts, which generally have lower
profit margins than higher-risk fixed-price-type contracts. Current major cost-
reimbursement programs include the International Space Station, NMD LSI, Space
Shuttle Flight Operations and Space Shuttle Main Engine. Excluding research and
development expense, contract settlements and the BIS sale, Space and
Communications margins were 11.2% for 1999 and 1998. The segment's 2000
operating margins are expected to be impacted by continued significant new
product development expenses. Margins should begin to improve in 2001 when the
Delta IV program enters the operational phase.
The primary factor that is evaluated in building projections for the need for
commercial launch services is the commercial satellite market. Recent
commercial satellite program start-up delays and system changes have caused a
softening of the market. Depending on the outcome of these programs, and a
successful Delta III launch, forward-looking financial projections for the
Company's launch business, principally for the Delta III vehicle, may be
adversely impacted. A Delta III demonstration launch at company expense may be
required to prove system reliability. In addition, the Company has exposures
related to work in process inventory and supplier commitments for the Delta
III program beyond firm customer commitments. The Company continues to closely
monitor these issues. A significant portion of the Company's equity in income
from joint ventures relates to Space and Communications segment activity. The
principal joint ventures are Sea Launch and United Space Alliance.
31
<PAGE> 32
Sea Launch is a commercial satellite launch venture with Norwegian, Russian
and Ukrainian partners. Boeing is a 40% partner in Sea Launch with RSC Energia
(25%) from Russia, Kvaerner Maritime (20%) from Norway, and KB Yuzhnoye/PO
Yuzhmach (15%) from Ukraine. In March 1999 Sea Launch conducted a successful
first launch from a sea-based platform, placing a demonstration payload in a
perfect orbit. Sea Launch initiated commercial operations in October 1999
with a second flawless launch delivering a DirecTV satellite payload for
Hughes Space & Communications International, Incorporated. Hughes and Space
Systems/Loral are the initial Sea Launch customers, with announced orders, as
of the end of 1999, for 18 launches in backlog plus options for additional
launches. The venture incurred losses in 1999 related to development costs,
expensed as incurred, and losses related to the demonstration launch and
initial operations. Space and Communications segment operating earnings
include losses of $57 million and $87 million for 1999 and 1998 attributable
to the Sea Launch venture.
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 the modifications, 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. Space
and Communications segment operating earnings include earnings of $48 million
and $46 million for 1999 and 1998 attributable to United Space Alliance.
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 101 for description.]
In 1999, total research and development was approximately $1.3 billion,
compared with approximately $1.9 billion in both 1998 and 1997.
In 1999, research and development declined in each operating group relative to
1998. The most significant decline was attributable to the Commercial Airplanes
segment and related to the timing of major commercial aircraft developmental
programs. In 1998, the decline in the Commercial Airplanes segment research and
development expense was largely offset by an increase in the Space and
Communications segment.
Commercial Airplanes
The principal commercial aircraft developmental programs during the 1997-1999
period were the Next-Generation 737 family, the 767-400ER, the 717 program, the
757-300 derivative, and the 777-300 wide-body twinjet derivative.
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. The 767-400ER, a stretched version of the
32
<PAGE> 33
767-300ER, is scheduled for first delivery in the year 2000. 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 101 for description.
Military Aircraft and Missiles
The Military Aircraft and Missiles segment continues to pursue business
opportunities where it can use its technical 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.
Space and Communications
The Space and Communications segment continues to invest significantly to
develop new products. Research and development expenditures support the
development of the Delta family of launch vehicles, the new 737-based airborne
early warning and control aircraft, and commercial space-based broadband
mobile information and communications systems. Delta IV development expenses
are reduced by the U.S. Government's participation in developing the Evolved
Expendable Launch Vehicle (EELV).
. . . . . . .
Total Company research and development expenditures for 2000 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 2000 is expected to be approximately $1.5 billion, which
reflects slight increases in all segments relative to 1999 levels. Research and
development activities are further discussed in the Strategic Investments for
Long-Term Value section on page 45.
INCOME TAXES
The 1999 effective income tax rate of 30.5% varies from the federal statutory
tax rate of 35% principally due to Foreign Sales Corporation (FSC) tax
benefits of $230 million. Offsetting this benefit are state income taxes and
the non-deductibility of goodwill.
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. The income tax provision
for 1997 is a tax credit resulting from application of the tax rate to a
pretax loss.
The income tax provision in 1997 is lower than the statutory amount,
principally due to FSC tax benefits of $79 million. These benefits were
partially offset by the nondeductibility of goodwill and merger costs.
33
<PAGE> 34
The European Union filed a challenge to U.S. Foreign Sales Corporation tax
provisions with the World Trade Organization (WTO). On February 25, 2000, the
WTO issued a final decision upholding this challenge. Officials representing
the United States on trade issues continue to seek resolution through a
negotiated settlement. It is not possible to predict what impact, if any, this
issue will have on future earnings pending final determination of the manner
and scope of the U.S. Government response.
Additional information relating to income taxes is found in Note 13 to the
Consolidated Financial Statements on pages 72-73.
LABOR NEGOTIATIONS AND WORKFORCE LEVELS
As of December 31, 1999, the Company's principal collective bargaining
agreements were with the International Association of Machinists and Aerospace
Workers (IAM), representing 23% of employees (current agreements expiring May
2001, September 2002, October 2002); the Society of Professional Engineering
Employees in Aerospace (SPEEA), representing 11% of employees (currently not
under contract); the United Automobile, Aerospace and Agricultural Implement
Workers of America (UAW), representing 5% of employees (current agreements
expiring April 2000, September 2002, and May 2003); and Southern California
Professional Engineering Association (SCPEA), representing 2% of employees
(current agreement expiring March 2001).
The Company has been in negotiations with SPEEA, representing approximately
22,000 engineers and technicians. On February 9, 2000, members of SPEEA,
having rejected the Company's second contract proposal, elected to strike. On
February 26, 2000, SPEEA rejected the Company's third and final contract
offer. On March 2, 2000, the Company informed SPEEA that given the
substantial differences between the parties that had developed during the
past several months, the Company believed the parties were at impasse. As of
March 6, 2000, the strike continued. The strike has impacted the Company's
operations and production, particularly in the Commercial Airplanes segment,
where first quarter 2000 deliveries will be affected, and second quarter 2000
deliveries may be affected. The total effect of the strike on deliveries, the
results of operations and financial position is uncertain, but could be
material depending on the strike duration, the nature of post-strike recovery
plans and the performance of other segments.
The Company's workforce level was 197,000 at December 31, 1999. Year-end 2000
workforce levels are projected to be in the range of 180,000 to 190,000.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has not completed the process of evaluating the impact that will
result from adopting Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
therefore has not yet identified the impact that adopting SFAS No. 133 will have
on its financial position and results of operations. SFAS No. 133 is required to
be adopted in 2001.
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
34
<PAGE> 35
expansion requirements; customer financing assistance; the timing of federal
income tax payments; the Company's stock repurchase plan; and proposed
acquisitions, such as the Hughes space and communications business transaction
discussed on page 45.
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 56 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 in
the table below is defined as cash flow from operations less change in short-
term investments, reduced by facilities and equipment expenditures.
(Dollars in billions) 1999 1998 1997
- ---------------------------------------------------------------
Net earnings (loss) $ 2.3 $ 1.1 $(0.2)
Non-cash charges to earnings (a) 1.8 1.8 1.4
Change in gross inventory (b) 5.6 1.5 (3.9)
Change in customer advances (c) (3.6) (0.8) 3.9
Net changes in receivables, liabilities
deferred income taxes and other (d) 0.2 (1.3) 1.1
Facilities and
equipment expenditures (1.2) (1.7) (1.4)
Pension income (expense)
variance to funding (0.3) (0.2) (0.3)
- ---------------------------------------------------------------
Free cash flow 4.8 0.4 0.6
Proceeds from dispositions (e) 0.4
Change in customer and
commercial financing (f) (0.6) (1.2) (0.9)
Change in debt (g) (0.2) 0.1 (0.6)
Net shares issued (acquired) (h) (2.9) (1.3) 0.3
Cash dividends (0.5) (0.6) (0.6)
- ---------------------------------------------------------------
Increase (decrease) in cash and
short-term investments $ 1.0 $(2.6) $(1.2)
===============================================================
Cash and short-term
investments at end of year $ 3.5 $ 2.5 $ 5.1
===============================================================
(a) Non-cash charges to earnings as presented here consist of depreciation,
amortization, retiree health care accruals, customer and commercial
financing valuation provision and share-based plans. 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.
(b) Production and tooling inventory associated with the Next-Generation 737
program increased substantially, especially during 1997 and 1998.
Inventory balances on the 747, 757 and 767 commercial jet programs
increased in 1997 and 1998 due to increased production rates. The
decrease in inventory in 1999 resulted principally from decreased
production rates on the 777 and 747 programs and improved inventory
cycle time.
35
<PAGE> 36
(c) The changes in commercial customer advances during 1997, 1998 and 1999
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 net change in receivables, liabilities, deferred income taxes and
other resulted in no impact to cash for the three-year period
presented. The net increase in cash attributable to changes in
income taxes payable and deferred was $0.2 billion. Excluding
potential tax settlements discussed in Note 13 to the consolidated
financial statements, federal income tax payments over the next two
years are projected to substantially exceed income tax expense due to
anticipated completion of contracts executed under prior tax
regulations.
(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 and the ability of the Company
to sell customer financing assets. Over the three-year period
1997-1999, the Company generated $4.4 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 $6.9 billion. As of December 31, 1999, the Company had
outstanding commitments of approximately $4.8 billion to arrange or
provide financing related to aircraft on order or under option for
deliveries scheduled through the year 2004. 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 amounting to $650 million matured in 1999. Debt amounting to $300
million matured in 1998, and $300 million was added with maturity in
2038. In 1997, debt amounting to $637 million matured, and the
Company also retired $230 million of debt through a tender offer for
the 9.25% notes due April 1, 2002. Additionally, Boeing Capital
Corporation, a corporation wholly owned by the Company, issued $400
million of debt in 1999, $511 million in 1998, and $225 million in
1997.
(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. In 1998, the Company repurchased 35.2 million shares of stock
for $1.3 billion, and in 1999, the Company repurchased 68.9 million
shares for $2.9 billion.
CAPITAL RESOURCES
The Company has long-term debt obligations of $6.0 billion, which are unsecured.
Approximately $480 million mature in 2000, and the balance has an average
maturity of 15 years. Total long-term debt as of year-end 1999 amounted to 34%
36
<PAGE> 37
of total capital (shareholders' equity plus borrowings). The Company has
substantial additional long-term borrowing capability. Revolving credit line
agreements with a group of major banks, totaling $2.64 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.
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, 1999, inventories included approximately $581
million of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350 million. The amount of the provision,
which was established in 1990, was based on the Company's belief, supported by
an opinion of outside counsel, that the termination for default would be
converted to a termination for convenience, that the Team would establish a
claim for contract adjustments for a minimum of $250 million, that there was a
range of reasonably possible results on termination for convenience, and that
it was prudent to provide for what the Company then believed was the upper
range of possible loss on termination for convenience, which was $350 million.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the Government
had not exercised the required discretion before issuing a termination for
default. It converted the termination to a termination for convenience, and
determined the Team was entitled to be paid $1,200 million, plus statutory
interest from June 26, 1991, until paid. The Court of Appeals remanded the case
to the Court of Federal Claims for a determination as to whether the Government
is able to sustain the burden of showing a default was justified and other
proceedings. Final resolution of the A-12 litigation will depend on such
litigation and possible further appeals, or negotiations with the Government.
In the Company's opinion, the loss provision continues to provide adequately
for the reasonably possible reduction in value of A-12 net contracts in process
as of December 31, 1999, as a result of a termination of the contract for the
convenience of the Government. The Company has been provided with an opinion of
outside counsel that (i) the Government's termination of the contract for
default was contrary to law and fact, (ii) the rights and obligations of the
Company are the same as if the termination had been issued for the convenience
of the Government, and (iii) subject to prevailing on the issue that the
termination is properly one for the convenience of the Government, the
probable recovery by the Company is not less than $250 million.
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-
37
<PAGE> 38
executive officers. Additional lawsuits of a similar nature have been filed in
the same court. These lawsuits were consolidated on February 24, 1998.
Initially, the plaintiffs sought to represent a class of purchasers of Boeing
stock between July 21, 1997, and October 22, 1997, (the "Class Period"),
including recipients of Boeing stock in the McDonnell Douglas merger. (July
21, 1997, was the date on which the Company announced its second quarter
results, and October 22, 1997, was the date on which the Company announced
charges to earnings associated with production problems being experienced on
commercial aircraft programs.) The lawsuits generally allege that the
defendants desired to keep the Company's share price as high as possible in
order to ensure that the McDonnell Douglas shareholders would approve the
merger and, in the case of two of the individual defendants, to benefit
directly from the sale of Boeing stock during the Class Period. By orders
dated September 15, 1999, and February 3, 2000, plaintiffs were granted leave
to amend their complaint to broaden their action (1) to encompass claims of
the original proposed class members for Boeing securities purchases made
between April 7, 1997 and July 20, 1997; (2) to include certain alleged
misstatements purportedly made by the Company going back to April 7, 1997; and
(3) to add allegations that the Company's 10-Q reports for the first and
second quarters of 1997 were false and misleading. The plaintiffs seek
compensatory damages and treble damages. The court has not yet ruled on class
certification. The action is currently set for trial on October 2, 2000. 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 charges one employee with participation in the
alleged conspiracy. The indictment relates to the sale and export to China in
1993-1995 of surplus, used machine tools sold by Douglas Aircraft Company to
China National Aero-Technology Import and Export Corporation for use in
connection with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC.
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 may be 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.
38
<PAGE> 39
YEAR 2000 (Y2K) DATE CONVERSION
Summary of readiness: The Company recognized this challenge early, and each
group began working on the problem in 1993. The Company's Y2K strategy, to
make systems "Y2K-ready," included a common companywide focus on methods and
correction tools, and coordination with customers. This focus was on all
systems potentially impacted by the Y2K, including information technology (IT)
systems and non-IT systems, such as product-embedded, facilities and factory
floor systems. Each operating group was responsible for its own conversion, in
line with overall guidance and oversight provided by a corporate-level
steering committee. Costs to address Y2K issues: The Company's Y2K conversion
efforts have not been budgeted and tracked as independent projects, but have
occurred in conjunction with normal sustaining activities. The Company
estimates that IT Y2K conversion efforts represent the majority of conversion
efforts, and have averaged annually $35 million during 1996-1998, representing
on average 10% of the total application-sustaining IT costs during that
period. Y2K conversion costs represented a lower percentage of total
application sustaining IT costs in 1999. In addition to these sustaining
costs, the discretely identifiable IT costs associated with Y2K conversion
activities totaled approximately $16 million. The Company does not expect a
reduction in sustaining costs now that Y2K conversion activities are completed
because normal sustaining activities will be ongoing. Reprioritizing
sustaining activities to support Y2K had no adverse impact on operations.
Risks associated with Y2K issues: Due to the Company's early recognition and
start on resolving the Y2K issue, the Company believed there was a low risk of
any internal critical system, product-embedded system, or other critical Company
asset not functioning properly during the date conversion. The Company assessed
its risk exposure due to external factors and suppliers, including suppliers
outside the United States. Additionally, the Company worked with its customers
and suppliers, conducting test scenarios to assess Y2K readiness.
Although the Company believed that the most reasonably likely worst-case Y2K
scenario entailed production disruption due to inability of suppliers to deliver
critical parts, the Company found no reason to conclude that any specific
supplier represented a significant risk.
Enterprise-wide tests were successfully conducted during the third and fourth
quarters of 1999 to validate the Company's ability to communicate under multiple
emergency scenarios. While the Company did not anticipate significant challenges
during the Y2K rollover period, its communication centers were fully staffed
during the transition. The Company also worked closely with local, state and
federal emergency management organizations to ensure coordinated plans were in
place should infrastructure problems occur during the year 2000 transition.
Year 2000 transition outcome: Boeing experienced a successful year 2000
rollover with minimal problems reported and minimal impact to business
operations. Several application problems were identified and standard resolution
processes were deployed, resulting in timely correction.
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
39
<PAGE> 40
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,
1999, the notional value of such derivatives was $521 million, with a net
unrealized loss of $5 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 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.
GLOBAL ECONOMIC AND PASSENGER TRAFFIC TRENDS
As the world economy improved in this decade, airline passenger traffic
increased. For the five-year period 1995-1999, the average annual growth rate
for worldwide passenger traffic was approximately 5.5%. The Company's 20-year
forecast of the average long-term growth rate in passenger traffic is
approximately 4.7% annually, based on projected average worldwide annual
economic real growth of 2.9% over the 20-year period.
Based on global economic growth projections over the long term, and taking
into consideration increasing utilization levels of the worldwide aircraft fleet
and requirements to replace older aircraft, the Company projects the total
commercial jet aircraft market over the next 20 years at more than $1,000
billion in 1999 dollars.
AIRLINE DEREGULATION
Worldwide, the airline industry has experienced progressive deregulation of
domestic markets and increasing liberalization of international markets. Twenty
years ago virtually all air travel took place within a framework of domestic and
international regulatory oversight. Since then, several countries, most notably
the United States, Australia, Japan and the countries in Western Europe, have
eliminated restrictive regulations for domestic airline markets and promoted a
more open-market climate for international services. Currently, more than 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.
Liberalization of government regulations, together with increased aircraft
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 aircraft
size and capabilities for their route systems. In intercontinental markets,
more liberal bilateral air service agreements provide an important stimulus to
40
<PAGE> 41
opening new city-pair markets, which favor increased flight frequency over
capacity growth. In parallel with regulatory liberalization, developments in
improving aircraft 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 aircraft.
ASIA-PACIFIC ECONOMIES
In 1999 the economies of Japan, Malaysia, the Philippines, Hong Kong, Singapore,
Indonesia, Thailand and South Korea indicated positive growth, signifying a
reduction or curtailment of the recession previously affecting these economies.
After 11 months of decline, air travel is also showing positive growth, and this
is resulting in airlines beginning to show increased passenger yields. Some
airlines in this region, however, continued to report losses. The Company
believes that increased airplane orders will occur from airlines in the Asia-
Pacific region when their financial position improves.
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 past
few years. The industry realized a substantial positive level of earnings over
the five-year period 1995-1999. The outlook for passenger traffic growth in 2000
is generally positive, especially in the United States, Europe, 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. Compliance with this policy was a significant factor for the record
single-aisle airplane deliveries during 1998 and 1999. Beginning in 2000, near-
term demand for new airplanes will reflect principally a requirement for growth.
INDUSTRY COMPETITIVENESS AND WORLD TRADE POLICIES
Over the past ten years, the Company (including McDonnell Douglas) has
maintained, on average, approximately a two-thirds share of the available
commercial jet aircraft market. Airbus Industrie is an aggressive competitor
seeking to increase market share. 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. The Company's extensive customer
support services network for airlines throughout the world plays a key role in
maintaining high customer satisfaction. On-line access is available to all
airline customers for engineering drawings, parts lists, service bulletins and
maintenance manuals. Over the past five years, sales outside the United States
have accounted for approximately 53% of the Company's total Commercial Airplanes
sales; approximately 50% of the Commercial Airplanes contractual backlog at
year-end 1999 was with customers based outside the United States. Continued
access to global markets is extremely important to the Company's future ability
to fully realize its sales potential and projected long-term investment returns.
41
<PAGE> 42
For more than three decades, the European governments have provided the
partner companies of Airbus Industrie subsidized loans to develop commercial
aircraft. The prior grants of subsidized loans to these European aerospace
companies have been of significant magnitude and have represented a serious
concern to the United States and the Company for several years.
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 aircraft 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 34 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 aircraft 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.
In spite of the recent Asian economic difficulties, Company forecasts indicate
that the airlines in China represent a significant potential market for
commercial jet aircraft over the next 20 years. However, if the U.S.
Government does not grant China unconditional and permanent "most favored
nations" (Normal Trade Relations) treatment, the Company's ability to sell
commercial aircraft to airlines in China could be severely constrained. 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 aircraft. Because of slow economic
growth, high customs duties, a shortage of foreign exchange, and legal and
financing constraints, new aircraft orders have not been significant. The
Company expects that the airlines and the aircraft manufacturing industry in
this region will eventually be integrated into the international economy.
42
<PAGE> 43
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 aircraft 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 major trends that shape the Military Aircraft and Missiles segment include
the moderately increasing DoD budget, 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.
The DoD remains the principal customer of this business segment, and DoD
procurement funding levels are expected to increase moderately on an inflation-
adjusted basis. The Company's DoD programs are benefiting from improved
certainty regarding program funding levels, which has reduced the possibility
that some programs would face termination or stretch-out.
Domestically, continuing demands for peacekeeping operations are driving high
usage of equipment, and the aging of equipment is creating operating cost
affordability pressures. However, there is insufficient DoD budget to
adequately modernize equipment and maintain a high level of readiness. These
factors contribute to awareness in Congress that the DoD budget may need to be
increased further. This trend has also led to privatization of government
facilities and has opened areas of growth for the Company in aerospace
support. The Boeing Aerospace Support Center at Kelly Air Force Base, located
near San Antonio, Texas, is an example of this activity.
Overall the Company faces strong competition in all market segments. The
acquisition and merger consolidations among U.S. aerospace companies have
resulted in three principal prime contractors for the DoD, including the
Company. While there may be some further niche acquisitions at the prime
contractor level, the major area for further consolidation is likely to be
among subcontractors to the primes. Lockheed Martin and Raytheon are the
Company's primary U.S. competitors for this business segment. As a result of
the extensive consolidation in the defense and space industry, the Company and
its major competitors are also partners with or major suppliers to each other
on various programs. The consolidation and rationalization of the European
defense and space companies has been proceeding for several years, mainly
within individual nations. The first step toward consolidation took place
early in 1999 with the merger of British Aerospace (BAe) and GEC Marconi,
resulting in the largest United Kingdom aerospace company, BAE Systems. The
43
<PAGE> 44
second step was the merger, pending regulatory approval, of Germany's
DaimlerChrysler Aerospace AG (DASA), France's Aerospatiale Matra, and Spain's
CASA (Construcciones Aeronauticas, SA), creating the European Aeronautics
Defense & Space Corporation (EADS). This establishes EADS as the world's third
largest aircraft and defense company behind Boeing and Lockheed Martin.
Internationally, the largest European aerospace companies compete in many of
the same market segments with the Company's products and services. These
companies are also potential teaming partners.
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. The basic strategy is to provide a
competitive product in every selected market. This business segment has several
programs that are now in production for the DoD, such as the C-17 Transport,
F/A-18 E/F, T-45 Trainer and V-22 Tiltrotor. Other programs include those that
are still in development, such as the F-22 Raptor and RAH-66 rotorcraft, or in
competitive development, such as the Joint Strike Fighter. Aerospace Support
products and services include maintenance and modification, training systems,
support systems, support services, and spares, repairs and supply chain
management. Despite expected modest growth in global defense budgets, there
continues to be strong international demand for military aircraft and missiles.
Foreign sales approved by the U.S. Government are extending some product lines,
such as the Harpoon missile and the AH-64 and CH-47 helicopters.
SPACE AND COMMUNICATIONS BUSINESS ENVIRONMENT AND TRENDS
- --------------------------------------------------------
Space and Communications addresses four major market areas: launch services
(including on-orbit systems), human space flight and exploration, missile
defense and space control, and information and communications.
Many environmental factors are affecting the outlook for the launch services
business. In the near-term the softening of the non-geostationary satellite
launch market and the resulting prediction of excess capacity in launch vehicle
supply will create a more competitive atmosphere where price, availability of
service and reliability will be critical success factors. Space and
Communications is well positioned to offer full service capabilities to this
market with the Delta family and Sea Launch commercial launch vehicles. As the
future of this market evolves, Space and Communications is prepared to undertake
a strong role with its participation in NASA-driven and industry-driven advanced
space transportation technology developments.
NASA is the primary customer and major driver for the human space flight and
exploration market. This market, based on NASA budget projections, is forecasted
to be relatively flat at about $5 billion per year over the next ten years. The
largest near-term focus of this market is the successful completion and assembly
of the International Space Station (ISS), for which Boeing is the prime
contractor. To support ISS operations NASA will award contracts for the Crew
Return Vehicle and the operations and utilization of ISS. Boeing is well
positioned to pursue these contracts. The Space Shuttle continues to be the only
U.S. vehicle to support the need for human access to space, and Boeing plays a
key role in Shuttle operations and maintenance through the United Space Alliance
Joint Venture. Once the International Space Station is assembled on-orbit, NASA
is projected to address future attention and funding to continue to pursue the
long-term goal of space exploration.
44
<PAGE> 45
U.S. Government development and procurement funding are the principle drivers
of the missile defense and space control market. This market includes components
for theater, cruise and national missile defense. The Company's win of the
National Missile Defense Lead Systems Integrator contract recognizes our
capabilities to perform complex large-scale systems engineering and integration
projects. This, along with the role as a subsystem supplier to the Patriot
Missile defense system and propulsion supplier for the Theater High Altitude
Area Defense program, has established Boeing as a major player in the missile
defense market. The Space and Communications segment also has a strong
technical position in the emerging laser system applications market. As the
governments of the United States and other allied nations pursue integrated
solutions to ballistic and theater and cruise missile defense, Boeing is
positioned to become a leading contractor for these integrated solutions.
The information and communications market is a large and diverse market that
serves both government and commercial customers. The government segment includes
airborne mission systems, satellite systems, space systems, and integrated
systems of systems opportunities. The commercial services segment includes
telecommunications, remote sensing, and next-generation aircraft navigation and
route control. The commercial and government segments of this market require
customer-focused solutions that provide seamless interfaces to multiple systems
and applications. The Company's experience in large-scale systems integration
projects, coupled with expertise from directly relevant programs such as
Airborne Warning and Control System (AWACS) and Global Positioning System
(GPS), will provide leverage for expansion in the information and
communications marketplace.
PROPOSED ACQUISITION OF HUGHES SPACE AND COMMUNICATIONS BUSINESS
- ----------------------------------------------------------------
On January 13, 2000, the Company announced an agreement to acquire the Hughes
space and communications business and related operations for $3.75 billion. The
transaction is subject to regulatory and government reviews and is expected to
be finalized by the end of the second quarter of 2000. Hughes is a
technological leader in space-based communications, reconnaissance,
surveillance and imaging systems. It is also a leading manufacturer of
commercial satellites. Under the definitive agreement, Boeing also will
acquire Hughes Electron Dynamics, a supplier of electronic components for
satellites, and Spectrolab, a provider of solar cells and panels for
satellites.
STRATEGIC INVESTMENTS FOR LONG-TERM VALUE
- -----------------------------------------
Over the past several years, the Company has made significant internal
investments to meet future airline product requirements, to achieve production
efficiencies, and to aggressively pursue new Space and Communications business
opportunities. Although constraining earnings and requiring substantial
resources in the near term, these investments are building long-term value by
streamlining operations and positioning the Company to maintain its aerospace
industry leadership.
45
<PAGE> 46
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.
In the commercial space arena, the Company is investing in the development of
the Delta IV family of expendable launch vehicles and is leading the Sea Launch
team to offer highly automated commercial satellite launching from a seagoing
launch platform. These product offerings provide access to significant portions
of the space launch market not previously available with the Delta II rocket.
Sea Launch initiated commercial operations in October 1999. The Delta IV
investment, coupled with the U.S. Air Force Evolved Expendable Launch Vehicle
program, positions the Company for potential market share gains. The Company
continues to invest in the development of Airborne Early Warning & Control
(AEW&C) systems. An AEW&C system based on a 737 platform is currently under
development to capture near-term opportunities in foreign markets. These
investments can also be leveraged in the development of other information,
communication and battle management applications.
In commercial information and communications-related activities, the Company
has decided to proceed with a satellite-based imaging system for agricultural
applications. Additionally, the Company is evaluating other commercial systems
and anticipates a decision to proceed with a system allowing air travelers real-
time access to video and data services.
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
substantial resources invested in education and training, restructuring of
processes, new technology, and organizational realignment.
Recent commercial and government developmental programs, such as the 777-300,
757-300, 767-400ER 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.
46
<PAGE> 47
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 in the
Company's factories. Efforts are underway on part number reduction, reducing
cycle time and maximizing the value of airplane change. The initiatives will
enhance our 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 Company has received support from Baan, a software manufacturer
from the Netherlands, associated with enterprise resource planning (ERP)
improvement activities. Recent financial results of Baan have indicated
significant losses; however, the Company's plans assume that Baan will
continue to meet its commitments to support ERP efforts. In the event that
Baan is unable to assist the Company with these efforts, the timing and costs
to implement ERP and other process improvements could be negatively impacted.
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 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 our 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 company-wide. 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 Define,
Manufacturing, 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.
47
<PAGE> 48
In 1999, the Company initiated a Managing for Value program designed to
develop a company-wide 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. In January 2000, the Company announced
an incentive plan that will provide annual cash rewards to non-union 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. Any performance shares not converted to common stock after five years
will expire. This plan is intended to increase executive management's focus on
improving shareholder value. In 1998, the Company adopted the expense recogni-
tion provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, which principally affects the account-
ing for performance share awards, the ShareValue Trust plan, and stock options.
48
<PAGE> 49
Segment Information
Note 24 to the consolidated financial statements
The Company is organized based on the products and services that 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; 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.
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, and performance issues with key suppliers and subcontractors. 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
49
<PAGE> 50
U.S. Government contracts. The launch services market has some degree of
uncertainty since global demand is driven in part by launch customers' access
to the capital markets. Additionally, some of the Company's competitors for
launch services receive direct or indirect government funding.
As of December 31, 1999, the Company's principal collective bargaining
agreements were with the International Association of Machinists and Aerospace
Workers (IAM) representing 23% of employees (current agreements expiring May
2001, September 2002, and October 2002), the Society of Professional Engineering
Employees in Aerospace (SPEEA) representing 11% of employees (currently not
under contract), the United Automobile, Aerospace and Agricultural Implement
Workers of America (UAW) representing 5% of employees (current agreements
expiring April 2000, September 2002, and May 2003), and Southern California
Professional Engineering Association (SCPEA) representing 2% 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, 1999 1998 1997
===========================================================
Asia, other than China $10,776 $14,065 $11,437
China 1,231 1,572 1,265
Europe 9,678 8,646 7,237
Oceania 942 844 1,078
Africa 386 702 192
Western Hemisphere, other
than the United States 461 701 228
- -----------------------------------------------------------
23,474 26,530 21,437
United States 34,519 29,624 24,363
- -----------------------------------------------------------
Total sales $57,993 $56,154 $45,800
===========================================================
Military Aircraft and Missiles segment and Space and Communications segment
combined sales were approximately 17%, 16% and 19% of total sales in Europe for
1999, 1998 and 1997, respectively. Defense sales were approximately 17%, 19% 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 25%, 26% and 29% of consolidated sales for 1999,
1998 and 1997.
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 of 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.
50
<PAGE> 51
For internal reporting purposes, the Company records Commercial Airplanes
segment revenue for airplanes transferred to other segments, and such transfers
may include airplanes accounted for as operating leases that are considered
transferred to the Customer and Commercial Financing/Other segment. The revenue
for these transfers is eliminated in the 'Accounting differences/eliminations'
caption.
The Company records cost of sales for 7-series commercial airplane programs
under the program method of accounting described in Note 1. In 1999, the Company
changed the internal measurement and segment reporting method for the Commercial
Airplanes segment to record cost of sales based on the cost of specific units
delivered, and to the extent that inventoriable costs exceed estimated revenue,
a loss is not recognized until delivery is made, which is not in accordance
with generally accepted accounting principles. Prior to 1999, the Commercial
Airplanes segment cost of sales was determined based on the program method of
accounting. The 1998 and 1997 segment results have been changed to conform to
this method. The adjustment between the internal measurement method and the
program accounting method of recording cost of sales is included in the
'Accounting differences/eliminations' caption of net earnings. This adjustment
totaled $(304), $514 and $(248) for 1999, 1998 and 1997, respectively.
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. Unallocated assets primarily consist
of cash and short-term investments, prepaid pension expense, goodwill, 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 1998, the Information, Space and Defense Systems Group of the
Company was reorganized into two groups: the Military Aircraft and Missile
Systems Group and the Space and Communications Group, which have been
reporting as separate business segments since 1998.
It is not practicable to determine the Military Aircraft and Missiles and the
Space and Communications breakout of the Information, Space and Defense Systems
segment information for 1997 presented on pages 52-53.
51
<PAGE> 52
Sales and other
Net earnings (loss) operating revenues
(Dollars in millions) ---------------------- -----------------------
Year ended December 31, 1999 1998 1997 1999 1998 1997
===============================================================================
Commercial Airplanes $2,016 $ (266) $(1,589) $38,409 $36,880 $27,479
Military Aircraft
and Missiles 1,193 1,283 12,220 12,990
Space and Communications 415 248 6,831 6,889
----- ----- ------ ------
Information, Space
and Defense Systems 1,608 1,531 1,317 19,051 19,879 18,125
Customer and Commercial
Financing/Other 492 367 381 837 730 746
Accounting
differences/eliminations (432) 372 (177) (304) (1,335) (550)
Share-based plans (209) (153) 99
Other unallocated costs (305) (284) (287)
- -------------------------------------------------------------------------------
Earnings (loss)
from operations 3,170 1,567 (256)
Other income,
principally interest 585 283 428
Interest and debt expense (431) (453) (513)
- -------------------------------------------------------------------------------
Earnings (loss)
before taxes 3,324 1,397 (341)
Income taxes (benefit) 1,015 277 (163)
- -------------------------------------------------------------------------------
$2,309 $1,120 $ (178) $57,993 $56,154 $45,800
===============================================================================
52
<PAGE> 53
Segment information (continued)
(Dollars in millions) Depreciation and
Research and Development Amortization
------------------------ ----------------------
Year ended December 31, 1999 1998 1997 1999 1998 1997
==============================================================================
Commercial Airplanes $ 585 $1,021 $1,208 $ 595 $ 628 $ 570
Military Aircraft
and Missiles 264 304 201 208
Space and Communications 492 570 168 142
--- --- --- ---
Information, Space
and Defense Systems 756 874 716 369 350 365
Customer and Commercial
Financing/Other 163 135 91
Unallocated 518 509 432
- ------------------------------------------------------------------------------
$1,341 $1,895 $1,924 $1,645 $1,622 $1,458
==============================================================================
Assets Liabilities
at December 31 at December 31
---------------------- ----------------------
1999 1998 1997 1999 1998 1997
==============================================================================
Commercial Airplanes $ 8,075 $11,003 $11,000 $ 6,135 $ 6,907 $ 7,617
Military Aircraft
and Missiles 3,206 3,560 1,080 743
Space and Communications 4,245 3,149 1,350 1,452
----- ----- ----- -----
Information, Space
and Defense Systems 7,451 6,709 6,597 2,430 2,195 2,379
Customer and Commercial
Financing/Other 6,004 5,751 4,716 228 301 396
Unallocated 14,617 13,561 15,980 15,892 15,305 14,948
- ------------------------------------------------------------------------------
$36,147 $37,024 $38,293 $24,685 $24,708 $25,340
==============================================================================
Contractual backlog at
Capital expenditures, net December 31 (unaudited)
------------------------- -----------------------
Year ended December 31, 1999 1998 1997 1999 1998 1997
==============================================================================
Commercial Airplanes $ 307 $ 754 $ 531 $72,972 $ 86,057 $ 93,788
Military Aircraft
and Missiles 215 213 15,691 17,007
Space and Communications 585 339 10,585 9,832
--- --- ------ ------
Information, Space
and Defense Systems 800 552 463 26,276 26,839 27,852
Customer and Commercial
Financing/Other 1 1 1
Unallocated 128 358 396
- ------------------------------------------------------------------------------
$1,236 $1,665 $1,391 $99,248 $112,896 $121,640
==============================================================================
53
<PAGE> 54
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data)
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
Sales and other operating revenues $57,993 $56,154 $45,800
Cost of products and services 51,320 50,492 42,001
- ------------------------------------------------------------------------------
6,673 5,662 3,799
Equity in income (loss) from joint ventures 4 (67) (43)
General and administrative expense 2,044 1,993 2,187
Research and development expense 1,341 1,895 1,924
Gain on dispositions, net 87 13
Share-based plans expense 209 153 (99)
- ------------------------------------------------------------------------------
Operating earnings (loss) 3,170 1,567 (256)
Other income, principally interest 585 283 428
Interest and debt expense (431) (453) (513)
- ------------------------------------------------------------------------------
Earnings (loss) before income taxes 3,324 1,397 (341)
Income taxes (benefit) 1,015 277 (163)
- ------------------------------------------------------------------------------
Net earnings (loss) $ 2,309 $ 1,120 $ (178)
==============================================================================
Basic earnings (loss) per share $ 2.52 $ 1.16 $ (.18)
==============================================================================
Diluted earnings (loss) per share $ 2.49 $ 1.15 $ (.18)
==============================================================================
Cash dividends per share $ .56 $ .56 $ .56
==============================================================================
See notes to consolidated financial statements.
54
<PAGE> 55
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
December 31, 1999 1998
- ------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 3,354 $ 2,183
Short-term investments 100 279
Accounts receivable 3,453 3,288
Current portion of customer and commercial financing 799 781
Deferred income taxes 1,467 1,495
Inventories, net of advances and progress billings 6,539 8,584
- ------------------------------------------------------------------------------
Total current assets 15,712 16,610
Customer and commercial financing 5,205 4,930
Property, plant and equipment, net 8,245 8,589
Deferred income taxes 411
Goodwill 2,233 2,312
Prepaid pension expense 3,845 3,513
Other assets 907 659
- ------------------------------------------------------------------------------
$36,147 $37,024
==============================================================================
Liabilities and Shareholders' Equity
Accounts payable and other liabilities $11,269 $11,085
Advances in excess of related costs 1,215 1,251
Income taxes payable 420 569
Short-term debt and current portion of long-term debt 752 869
- ------------------------------------------------------------------------------
Total current liabilities 13,656 13,774
Deferred income taxes 172
Accrued retiree health care 4,877 4,831
Long-term debt 5,980 6,103
Shareholders' equity:
Common shares, par value $5.00 -
1,200,000,000 shares authorized;
Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059
Additional paid-in capital 1,684 1,147
Treasury shares, at cost - 102,356,897 and 35,845,731 (4,161) (1,321)
Retained earnings 10,487 8,706
Accumulated other comprehensive income 6 (23)
Unearned compensation (12) (17)
ShareValue Trust shares - 38,696,289 and 38,166,601 (1,601) (1,235)
- ------------------------------------------------------------------------------
Total shareholders' equity 11,462 12,316
- ------------------------------------------------------------------------------
$36,147 $37,024
==============================================================================
See notes to consolidated financial statements.
55
<PAGE> 56
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings (loss) $ 2,309 $ 1,120 $ (178)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Share-based plans 209 153 (99)
Depreciation 1,538 1,517 1,354
Amortization of goodwill and intangibles 107 105 104
Customer and commercial financing
valuation provision 72 61 64
Gain on dispositions, net (87) (13)
Changes in assets and liabilities -
Short-term investments 179 450 154
Accounts receivable (225) (167) (240)
Inventories, net of advances and
progress billings 2,030 652 (96)
Accounts payable and other liabilities 217 (840) 1,908
Advances in excess of related costs (36) (324) (139)
Income taxes payable and deferred 462 145 (451)
Other (597) (479) (272)
Accrued retiree health care 46 35 (4)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 6,224 2,415 2,105
- ------------------------------------------------------------------------------
Cash flows - investing activities:
Customer and commercial financing - additions (2,398) (2,603) (1,889)
Customer and commercial financing - reductions 1,842 1,357 1,025
Property, plant and equipment, net additions (1,236) (1,665) (1,391)
Proceeds from dispositions 359 37
- ------------------------------------------------------------------------------
Net cash used by investing activities (1,433) (2,874) (2,255)
- ------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 437 811 232
Debt repayments (676) (693) (867)
Common shares purchased (2,937) (1,397) (141)
Common shares issued 268
Stock options exercised, other 93 65 166
Dividends paid (537) (564) (557)
- ------------------------------------------------------------------------------
Net cash used by financing activities (3,620) (1,778) (899)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 1,171 (2,237) (1,049)
Cash and cash equivalents at beginning of year 2,183 4,420 5,469
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,354 $ 2,183 $ 4,420
==============================================================================
See notes to consolidated financial statements.
56
<PAGE> 57
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 December 31, 1996 993,348 $4,967 $ 920 30 $ (1)
Shares issued 4,550 23 245
Shares issued for
incentive stock plans 2,132 10
Treasury shares acquired 2,710 (141)
Treasury shares issued for
incentive stock plans, net (20) (2,580) 133
Tax benefit related to
incentive stock plans 41
Stock appreciation rights
expired or surrendered 6
ShareValue Trust
market value adjustment (102)
Shares transferred
from ShareValue Trust 5
Shares acquired from
dividend reinvestment
Accrued distributable appreciation
New issuances - unearned compensation
Amortization and forfeitures -
unearned compensation
Net loss
Cash dividends declared
- ------------------------------------------------------------------------------
Balance December 31, 1997 1,000,030 $5,000 $ 1,090 165 $ (9)
- ------------------------------------------------------------------------------
57
<PAGE> 58
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
==============================================================================
Shares issued for
ShareValue Trust 11,253 56 494
Shares issued for
incentive stock plans 587 3
Share-based compensation 153
Treasury shares acquired 37,473 (1,397)
Treasury shares issued for
incentive stock plans, net (43) (1,792) 85
Tax benefit related to
incentive stock 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)
- ------------------------------------------------------------------------------
Share-based compensation 209
Tax benefit related to
incentive stock plans 9
ShareValue Trust market
value adjustment 366
Treasury shares acquired 68,923 (2,937)
Treasury shares issued for
incentive stock 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)
==============================================================================
See notes to consolidated financial statements.
58
<PAGE> 59
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED)
ShareValue Trust
(Dollars in millions / ---------------- Unearned
Shares in thousands) Shares Amount Compensation
==================================================================
Balance December 31, 1996 26,120 $(1,258) $(22)
Shares issued
Shares issued for
incentive stock plans
Treasury shares acquired
Treasury shares issued for
incentive stock plans, net
Tax benefit related to
incentive stock plans
Stock appreciation rights
expired or surrendered
ShareValue Trust
market value adjustment 102
Shares transferred
from ShareValue Trust (5)
Shares acquired from
dividend reinvestment 270
Accrued distributable appreciation (99)
New issuances - unearned compensation (29)
Amortization and forfeitures -
unearned compensation 31
Net loss
Cash dividends declared
- ------------------------------------------------------------------
Balance December 31, 1997 26,385 $(1,255) $(20)
- ------------------------------------------------------------------
59
<PAGE> 60
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED)
ShareValue Trust
(Dollars in millions / ---------------- Unearned
Shares in thousands) Shares Amount Compensation
==================================================================
Shares issued for
ShareValue Trust 11,253 (550)
Shares issued for
incentive stock plans
Share-based compensation
Treasury shares acquired
Treasury shares issued for
incentive stock plans, net
Tax benefit related to
incentive stock 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)
- ------------------------------------------------------------------
Share-based compensation
Tax benefit related to
incentive stock plans
ShareValue Trust market
value adjustment (366)
Treasury shares acquired
Treasury shares issued for
incentive stock 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)
==================================================================
See notes to consolidated financial statements.
60
<PAGE> 61
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 December 31, 1996 $ - $8,896
Shares issued
Shares issued for
incentive stock plans
Treasury shares acquired
Treasury shares issued for
incentive stock plans, net
Tax benefit related to
incentive stock plans
Stock appreciation rights
expired or surrendered
ShareValue Trust
market value adjustment
Shares transferred
from ShareValue Trust
Shares acquired from
dividend reinvestment
Accrued distributable appreciation
New issuances - unearned compensation
Amortization and forfeitures -
unearned compensation
Net loss (178) $(178)
Cash dividends declared (571)
- -------------------------------------------------------------------
Balance December 31, 1997 $ - $8,147 $(178)
- ------------------------------------------------------=============
61
<PAGE> 62
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
===================================================================
Shares issued for
ShareValue Trust
Shares issued for
incentive stock plans
Share-based compensation
Treasury shares acquired
Treasury shares issued for
incentive stock plans, net
Tax benefit related to
incentive stock 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
- ------------------------------------------------------============
Share-based compensation
Tax benefit related to
incentive stock plans
ShareValue Trust market
value adjustment
Treasury shares acquired
Treasury shares issued for
incentive stock 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
==================================================================
See notes to consolidated financial statements.
62
<PAGE> 63
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(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, including the reclassification of the McDonnell Douglas products
valuation adjustment, discussed in Note 7, from special charges to cost of
products and services.
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 contractual billing 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-type contracts
are recorded as costs are incurred. Certain U.S. Government contracts contain
profit incentives based upon performance relative to predetermined targets.
Incentives based on cost performance are recorded currently, and other
incentives and fee awards are recorded when the amounts can be reasonably
estimated. 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
fixed-price-type contracts is determined based on the estimated average total
contract cost and revenue. Cost of sales under cost-reimbursement-type contracts
are recorded as costs are incurred.
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
initial program quantity for the 717 program has been established at 200 units.
63
<PAGE> 64
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 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 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 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 realizable value.
Share-based plans
In 1998, the Company 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 distributions from the ShareValue Trust 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 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 the life of the award. Performance Shares were first
issued in 1998. Prior to 1998, the Company recognized no expense for stock
options, and ShareValue Trust expense was determined based on the change in the
distributable market value of the trust. Share-based plans expenses for stock
options, ShareValue Trust, Performance Shares and other share-based awards are
offset by a credit to additional paid-in capital.
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.
64
<PAGE> 65
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
pension 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 management's plan for use and
disposition.
Long-lived assets deemed available for sale are stated at the lower of cost
or fair value less the cost to sell. Long-lived assets held for use are subject
to an impairment adjustment down to fair value less the cost to sell if the
carrying value is no longer recoverable based upon the sum of undiscounted
future cash flows.
Goodwill
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 30 years. Recoverability of the unamortized goodwill balance is
based upon assessment of related operational cash flows.
Note 2
Revenues and Costs Attributable to Customer and Commercial Financing
- --------------------------------------------------------------------
The years ended 1999, 1998 and 1997 include sales and other operating revenues
of $752, $646, and $670 and cost of products and services of $218, $241, and
$295 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.
65
<PAGE> 66
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. For 1999, net gains of $118 were recorded for sales of
businesses, and net losses of $31 were recorded for the disposition of real
property. For 1998, net gains of $13 were recorded on the disposition of real
property.
Note 4
Mergers and Acquisitions
- ------------------------
Merger with McDonnell Douglas Corporation
On August 1, 1997, McDonnell Douglas Corporation merged with the Company through
a stock-for-stock exchange in which 1.3 shares of Company stock were issued for
each share of McDonnell Douglas stock outstanding. The Company issued 277.3
million shares in connection with the merger. The merger is accounted for as a
pooling of interests. Accordingly, except for adjustments to reflect conformed
accounting policies, the historical results of operations of the two companies
have been combined, and no acquisition revaluation or goodwill was recorded.
The merger was subject to approval by the United States Federal Trade
Commission and the European Commission. Future requirements or obligations
associated with having obtained these approvals are not expected to have a
material impact on future operations or liquidity of the Company.
Proposed acquisition of Hughes space and communications business
On January 13, 2000, the Company announced an agreement to acquire the Hughes
space and communications business and related operations for $3.75 billion. The
transaction is subject to regulatory and government reviews and is expected to
be finalized by the end of the second quarter of 2000. Hughes is a technological
leader in space-based communications, reconnaissance, surveillance and imaging
systems. It is also a leading manufacturer of commercial satellites. Under the
definitive agreement, Boeing also will acquire Hughes Electron Dynamics, a
supplier of electronic components for satellites, and Spectrolab, a provider of
solar cells and panels for satellites.
Note 5
Equity in Income (Loss) from Joint Ventures
- -------------------------------------------
Equity in income (loss) from joint ventures in the Consolidated Statements of
Operations included recognized losses of $65, $127 and $102 for the years ended
December 31, 1999, 1998 and 1997, respectively, representing the Company's share
of losses from joint venture arrangements in the developmental stages accounted
for under the equity method. The Company's principal joint venture arrangement
in the developmental stages is a 40% partnership in Sea Launch, a commercial
satellite launch venture with Norwegian, Russian and Ukrainian partners. The Sea
Launch program entered the production phase with its first revenue-producing
launch in the fourth quarter of 1999.
Additionally, the Company recognized income of $69, $60, and $59 for the
years ended December 31, 1999, 1998 and 1997, respectively, attributable to non-
developmental joint venture arrangements. The Company's 50% partnership with
Lockheed Martin in United Space Alliance is the principal non-developmental
66
<PAGE> 67
joint venture arrangement. United Space Alliance is responsible for all ground
processing of the Space Shuttle fleet and for space-related operations with the
U.S. Air Force.
As of December 31, 1999 and 1998, other assets included $164 and $117
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, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Basic shares 917.1 966.9 970.1
Diluted shares 925.9 976.7 970.1
================================================================================
Basic earnings per share are calculated based on the weighted average number of
shares outstanding, excluding 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
share-based plans computed using the treasury stock method. Because 1997 results
reflected a net loss from continuing operations, both basic and diluted earnings
per share were calculated based on the same weighted average number of shares
for that year.
Note 7
McDonnell Douglas Products Valuation Adjustment
- -----------------------------------------------
In the fourth quarter of 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 provisions aggregating
$1,400 relative to these decisions. These provisions were recorded against cost
of products and services, of which $906 constituted an inventory writedown. The
principal airplane programs impacted by this valuation adjustment are the MD-11
trijet, the MD-80, MD-90 and 717 twinjets, and the McDonnell Douglas light
commercial helicopter programs. Under the original product strategy decision,
the passenger version of the MD-11 was to be terminated in late 2000, the final
MD-80 would be delivered in late 1999, and the final MD-90 would be delivered in
early 2000. Under the plans ultimately implemented, final delivery of the MD-80
occurred in 1999, and scheduled final deliveries are in first quarter 2000 for
the MD-90 and in first quarter 2001 for the MD-11.
The provisions attributable to the commercial airplane programs discussed
above totaled $1,075, of which $806 related to inventory writedowns, $209
related to contractual supplier termination liabilities, and $60 related to
employee severance liabilities. The provisions included an inventory writedown
of $100 attributable to light commercial helicopter programs, which were sold in
1998. The sale resulted in no additional gain or loss.
The provisions also included a $55 increase in the valuation reserve of
finance receivables and a $170 increase in liabilities attributable to off-
balance-sheet financing commitments. This portion of the provisions resulted
from changes in collateral value underlying the receivables and commitments,
which deteriorated for the MD-80, MD-90 and MD-11 primarily because of the
product terminations discussed above.
67
<PAGE> 68
Contractual termination liabilities as of December 31, 1999 and 1998, were as
follows:
1999 1998
- -------------------------------------------------------------------------------
Beginning balance $178 $209
Payments (24) (6)
Changes in estimate (7) (25)
- -------------------------------------------------------------------------------
Ending balance $147 $178
===============================================================================
Employee severance liabilities as of December 31, 1999 and 1998, were as
follows:
1999 1998
- -------------------------------------------------------------------------------
Beginning balance $ 39 $ 60
Payments (12)
Changes in estimate (7) (21)
- -------------------------------------------------------------------------------
Ending balance $ 20 $ 39
===============================================================================
Changes in supplier termination liability estimates result from continued
negotiations with suppliers, which are expected to be completed in 2002. Changes
in employee severance liabilities have resulted principally from increased
employment requirements located in other segments of the Company in similar
geographic areas.
Note 8
Accounts Receivable
- -------------------
Accounts receivable at December 31 consisted of the following:
1999 1998
- -------------------------------------------------------------------------------
U.S. Government contracts $1,970 $2,058
Other 1,483 1,230
- -------------------------------------------------------------------------------
$3,453 $3,288
===============================================================================
Accounts receivable included the following as of December 31, 1999 and 1998,
respectively: amounts not currently billable of $401 and $381 relating primarily
to sales values recorded upon attainment of performance milestones that differ
from contractual billing milestones and withholds on U.S. Government contracts
($214 and $109 not expected to be collected within one year); $51 and $93
relating to claims and other amounts on U.S. Government contracts subject to
future settlement ($32 and $66 not expected to be collected within one year);
and $46 and $48 of other receivables not expected to be collected within one
year.
68
<PAGE> 69
Note 9
Inventory
- ---------
Inventories at December 31 consisted of the following:
1999 1998
- -------------------------------------------------------------------------------
Commercial aircraft programs
and long-term contracts
in progress $ 19,537 $ 24,812
Commercial spare parts, general
stock materials and other 2,042 2,162
- -------------------------------------------------------------------------------
21,579 26,974
Less advances and
progress billings (15,040) (18,625)
- -------------------------------------------------------------------------------
$ 6,539 $ 8,349
===============================================================================
As of December 31, 1999, 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 other than the 777 and the 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, respectively, and
excess deferred production costs of $1,507 and $646 relating to the 777 and
Next-Generation 737 programs. Inventory costs at December 31, 1998, included
unamortized tooling of $2,022 and $760 relating to the 777 and Next-Generation
737 programs and excess deferred production costs of $1,654 and $329 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, 1999; 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 $17,
$20 and $33 in 1999, 1998 and 1997, respectively.
As of December 31, 1999 and 1998, 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.
69
<PAGE> 70
Note 10
Customer and Commercial Financing
- ---------------------------------
Customer and commercial financing at December 31 consisted of the following:
1999 1998
- -------------------------------------------------------------------------------
Aircraft financing
Notes receivable $ 781 $ 859
Investment in sales-type/
financing leases 1,497 1,325
Operating lease equipment,
at cost, less accumulated
depreciation of $304 and $195 2,357 2,201
Commercial equipment financing
Notes receivable 730 534
Investment in sales-type/
financing leases 506 548
Operating lease equipment,
at cost, less accumulated
depreciation of $92 and $129 408 510
- -------------------------------------------------------------------------------
Less valuation allowance (275) (266)
- -------------------------------------------------------------------------------
$6,004 $5,711
===============================================================================
Customer and commercial financing assets that are leased by the Company under
capital leases and have been subleased to others totaled $502 and $333 as of
December 31, 1999 and 1998. 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
- -------------------------------------------------------------------------------
2000 $230 $587 $ 294
2001 175 416 267
2002 108 212 249
2003 102 195 236
2004 152 175 216
Beyond 2004 744 797 2,045
The components of investment in sales-type/financing leases at December 31 were
as follows:
1999 1998
- -------------------------------------------------------------------------------
Minimum lease payments
receivable $2,382 $2,362
Estimated residual value
of leased assets 479 438
Unearned income (858) (927)
- -------------------------------------------------------------------------------
$2,003 $1,873
===============================================================================
70
<PAGE> 71
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 $58 of customer financing
receivables as of December 31, 1999. These swaps have a receive rate that is
floating and a pay rate that is fixed. Interest rate swaps on financing
receivables are settled on the same dates interest is due on the underlying
receivables.
Interest rates on fixed-rate notes ranged from 6.41% to 15.00%, and effective
interest rates on variable-rate notes ranged from 0.15% to 5.50% 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:
1999 1998
- -------------------------------------------------------------------------------
Land $ 430 $ 499
Buildings 8,148 8,244
Machinery and equipment 10,411 10,521
Construction in progress 1,130 977
- -------------------------------------------------------------------------------
$ 20,119 $ 20,241
Less accumulated depreciation (11,874) (11,652)
- -------------------------------------------------------------------------------
$ 8,245 $ 8,589
===============================================================================
Balances are net of impairment asset valuation reserve adjustments for real
property available for sale of $76 and $64 for December 31, 1999 and 1998.
Depreciation expense was $1,330, $1,386 and $1,266 for 1999, 1998 and 1997,
respectively. Interest capitalized as construction-period property, plant and
equipment costs amounted to $64, $45 and $28 in 1999, 1998 and 1997,
respectively.
Rental expense for leased properties was $320, $349 and $308 for 1999, 1998
and 1997, 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 $704 at December 31,
1999. Payments, net of sublease amounts, due during the next five years are as
follows:
2000 2001 2002 2003 2004
------------------------------------
$167 $120 $92 $77 $67
====================================
71
<PAGE> 72
Note 12
Goodwill
- --------
Goodwill at December 31 consisted of the following:
1999 1998
- -------------------------------------------------------------------------------
Goodwill $2,490 $2,486
Less cumulative amortization (257) (174)
- -------------------------------------------------------------------------------
$2,233 $2,312
===============================================================================
Note 13
Income Taxes
- ------------
The provision for taxes on income consisted of the following:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
U.S. Federal
Taxes paid or
currently payable $ 368 $ 370 $ 103
Change in deferred taxes 561 (124) (253)
- -------------------------------------------------------------------------------
929 246 (150)
State
Taxes paid or
currently payable 36 33 9
Change in deferred taxes 50 (2) (22)
- -------------------------------------------------------------------------------
86 31 (13)
- -------------------------------------------------------------------------------
Income tax
provision (benefit) $1,015 $ 277 $(163)
===============================================================================
The following is a reconciliation of the income tax provision (benefit) computed
by applying the U.S. federal statutory rate of 35 percent to the recorded income
tax provision:
1999 1998 1997
- -------------------------------------------------------------------------------
U.S. federal statutory tax $1,163 $ 489 $(119)
Foreign Sales Corporation tax benefit (230) (130) (79)
Research benefit (24) (70) (8)
Prior years' research benefit settlement (57)
Prior years' tax adjustment (8) (23)
Nondeductibility of goodwill and merger costs 31 31 71
State income tax provision,
net of effect on U.S. federal tax 86 31 (9)
Other provision adjustments (11) (9) 4
- -------------------------------------------------------------------------------
Income tax provision (benefit) $1,015 $ 277 $(163)
===============================================================================
72
<PAGE> 73
The deferred tax assets, net of deferred tax liabilities, resulted from
temporary tax differences associated with the following:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Inventory and long-term
contract methods
of income recognition $ 634 $ 800 $ 1,186
Pension benefit accruals (1,215) (1,179) (1,152)
Retiree health care accruals 1,821 1,771 1,806
Other employee
benefits accruals 565 415 318
Customer and
commercial financing (510) 99 (378)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 1,295 $ 1,906 $ 1,780
===============================================================================
The temporary tax 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 1987.
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 the second quarter of 1999, the IRS and the Company reached a partial
agreement on an IRS examination of the years 1988 through 1991. As a result of
the partial agreement between the Company and the IRS for these years, refunds
and payments of tax and interest were due to or payable by the Company. Second
quarter 1999 net earnings included net interest income of $289 associated with
this partial agreement.
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 $575, $85 and $219 in 1999,
1998 and 1997, respectively.
73
<PAGE> 74
Note 14
Accounts Payable and Other Liabilities
- --------------------------------------
Accounts payable and other liabilities at December 31 consisted of the
following:
1999 1998
- -------------------------------------------------------------------------------
Accounts payable $ 4,909 $ 5,263
Accrued compensation and
employee benefit costs 2,421 2,326
Lease and other deposits 647 539
Other 3,292 2,840
- -------------------------------------------------------------------------------
$11,269 $10,968
===============================================================================
Note 15
Debt
- ----
Debt at December 31 consisted of the following:
1999 1998
- -------------------------------------------------------------------------------
Unsecured debentures and notes:
8 7/8% due Sep. 15, 1999 $ - $ 304
8.25% due Jul. 1, 2000 200 200
8 3/8% due Feb. 15, 2001 177 180
7.565% due Mar. 30, 2002 52 54
9.25% due Apr. 1, 2002 120 120
6 3/4% due Sep. 15, 2002 298 298
6.35% due Jun. 15, 2003 300 299
7 7/8% due Feb. 15, 2005 207 208
6 5/8% due Jun. 1, 2005 293 292
6.875% due Nov. 1, 2006 248 248
8 1/10% due Nov. 15, 2006 175 175
9.75% due Apr. 1, 2012 348 348
8 3/4% due Aug. 15, 2021 398 398
7.95% due Aug. 15, 2024 300 300
7 1/4% due Jun. 15, 2025 247 247
8 3/4% due Sep. 15, 2031 248 248
8 5/8% due Nov. 15, 2031 173 173
6 5/8% due Feb. 15, 2038 300 300
7.50% due Aug. 15, 2042 100 100
7 7/8% due Apr. 15, 2043 173 173
6 7/8% due Oct. 15, 2043 125 125
Senior debt securities
6.0% - 9.4%, due through 2011 30 55
Senior medium-term notes,
5.6% - 10.0%, due through 2017 1,426 1,320
Subordinated medium-term notes,
5.5% - 8.3%, due through 2004 45 55
Capital lease obligations,
due through 2008 386 433
Other notes 363 319
- -------------------------------------------------------------------------------
$6,732 $6,972
===============================================================================
74
<PAGE> 75
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:
2000 2001 2002 2003 2004
------------------------------------
$480 $490 $690 $535 $197
====================================
The Company has $2,640 currently available under credit line agreements,
which includes $240 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 has filed
shelf registrations with the Securities and Exchange Commission totaling $1,200,
on which $1,008 has been drawn. BCC has additionally filed a Form S-3 Registra-
tion Statement for a public shelf registration of $2,500 in debt securities.
At December 31, 1999, and 1998, borrowings under commercial paper and
uncommitted short-term bank facilities totaling $228 and $172 were supported by
available unused commitments under the revolving credit agreement. Total
consolidated debt attributable to BCC amounted to $2,058 and $1,971 as of
December 31, 1999 and 1998.
The $100 notes due August 15, 2042, with a stated rate of 7.50% were issued
to a private investor in connection with an interest rate swap arrangement that
resulted in an effective synthetic rate of 7.865%. The swap arrangement results
in semi-annual interest rate payments at LIBOR, and is scheduled to settle when
the underlying note matures. Additionally, BCC has interest rate swaps totaling
$323 relating to capital lease obligations and $80 relating to medium-term
notes. The swaps attributable to capital lease obligations have a receive rate
that is floating based on LIBOR, and a pay rate that is fixed. Of the swaps
attributable to medium-term notes, $50 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 notes are settled on the same
dates interest is due on the underlying obligations.
BCC has available approximately $70 in uncommitted, short-term bank credit
facilities whereby the Company may borrow, at interest rates which are
negotiated at the time of the borrowings, upon such terms as the Company and the
banks may mutually agree. At December 31, 1999 and 1998, borrowings on these
credit facilities totaled $90 and $50. The weighted average interest rate on
short-term borrowings at December 31, 1999, was 5.3%.
Total debt interest, including amounts capitalized, was $517, $520 and $573
for the years ended December 31, 1999, 1998 and 1997, and interest payments were
$517, $514 and $588, respectively.
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.
75
<PAGE> 76
Other
Pensions Postretirement Benefits
-------------- -----------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Benefit obligation
Beginning balance $28,887 $25,845 $ 4,418 $ 4,008
Service cost 651 573 111 81
Interest cost 1,879 1,793 302 271
Plan participants'
contributions 2 1
Amendments 52 489
Actuarial loss (gain) (2,115) 1,862 1,036 330
Benefits paid (1,735) (1,676) (298) (272)
- -------------------------------------------------------------------------------
Ending balance $27,621 $28,887 $ 5,569 $ 4,418
===============================================================================
Plan assets - fair value
Beginning balance $32,609 $33,119
Actual return on plan assets 6,099 1,146
Company contribution 22 18
Plan participants'
contributions 2 1
Benefits paid (1,716) (1,659)
Exchange rate adjustment 10 (16)
- -------------------------------------------------------------------------------
Ending balance $37,026 $32,609
===============================================================================
Reconciliation of funded status
to net amounts recognized
Funded status - plan assets
in excess of (less than)
projected benefit obligation $ 9,405 $ 3,722 $(5,569) $(4,418)
Unrecognized net
actuarial loss (gain) (7,230) (1,699) 1,063 (21)
Unrecognized prior service costs 1,418 1,491 (371) (392)
Unrecognized net transition asset (135) (241)
- -------------------------------------------------------------------------------
Net amount recognized $ 3,458 $ 3,273 $(4,877) $(4,831)
===============================================================================
Amount recognized in statement
of financial position
Prepaid benefit cost $ 3,845 $ 3,513
Intangible asset 64 105
Accumulated other
comprehensive income 1 37
Accrued benefit liability (452) (382) $(4,877) $(4,831)
- -------------------------------------------------------------------------------
Net amount recognized $ 3,458 $ 3,273 $(4,877) $(4,831)
===============================================================================
76
<PAGE> 77
Components of net periodic benefit costs and other
supplemental information were as follows:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Components of net periodic
benefit cost - Pensions
Service cost $ 651 $ 573 $ 506
Interest cost 1,879 1,793 1,727
Expected return on plan assets (2,689) (2,507) (2,163)
Amortization of transition asset (106) (86) (86)
Amortization of prior service cost 139 101 101
Recognized net actuarial loss (gain) 1 5 (20)
- -------------------------------------------------------------------------------
Net periodic benefit cost (income) $ (125) $ (121) $ 65
===============================================================================
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Components of net periodic
benefit cost - OPB
Service cost $ 111 $ 81 $ 86
Interest cost 302 271 274
Expected return on plan assets (2)
Amortization of prior service cost (47) (45) (45)
Recognized net actuarial loss (gain) 10 (16) (22)
- -------------------------------------------------------------------------------
Net periodic benefit cost $ 374 $ 291 $ 293
===============================================================================
Weighted average assumptions
as of December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Discount rate:
pensions and OPB 7.50% 6.50% 7.00%
Expected return on plan assets 9.00% 8.75% 8.33%
Rate of compensation increase 5.50% 4.50% 5.00%
Effect of 1% change in
assumed health care costs 1999 1998 1997
- -------------------------------------------------------------------------------
Effect on total of service
and interest cost
1% increase $ 51 $ 44 $ 43
1% decrease (44) (39) (38)
Effect on postretirement
benefit obligation
1% increase 530 452 410
1% decrease (474) (406) (368)
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.
77
<PAGE> 78
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-union employees of pre-merger Boeing and McDonnell Douglas. Assets
and liabilities associated with benefits earned through 1998 were transferred to
the new plans, which 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-union employees covered under the
Boeing North American Retirement Plan were transferred to the new pension plan
created for the pre-merger Boeing employees.
The Company has certain unfunded and partially funded plans with a projected
benefit obligation of $432 and $688; plan assets of $43 and $243; and
unrecognized prior services costs and actuarial losses of $124 and $240 as of
December 31, 1999 and 1998. The net provision for these plans was $63 and $52
for 1999 and 1998.
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 1999, 1998, and 1997 was $409, $417, and $361,
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 10% annual rate for 1999, decreasing to a 5.5% annual growth
rate by 2010. In 1998, benefit costs for retiree health care were calculated
based on an annual cost growth rate of 6.9%, decreasing to a 4.5% annual growth
rate by 2010.
78
<PAGE> 79
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 would
amount to 145,899,000 shares. As of December 31, 1999, 104,118,000 shares had
been repurchased pursuant to this resolution.
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.
In 1998, the Company adopted the expense recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Had the Company adopted the expense recognition provision of SFAS
No. 123 in 1997, net loss would have been $332 and loss per share, both basic
and diluted, would have been $.18.
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 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, in 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.
The following table summarizes information about Performance Shares outstanding
at December 31, 1999 and 1998 (shares in thousands).
Performance
Shares Outstanding
Grant Date Issue Price 1999 1998
- -------------------------------------------------------------------------------
2/23/98 $50 11/16 3,459 3,586
12/14/98 33 9/16 46 46
2/22/99 36 1/4 4,569 -
The Company recognized share-based expense of $77 and $38 for 1999 and 1998
attributable to Performance Shares.
Other stock awards
The total number of stock unit awards that are convertible only to common stock
and not contingent upon stock price were 1,629,945, 1,161,652 and 301,631 as of
December 31, 1999, 1998 and 1997, respectively.
79
<PAGE> 80
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, in the form of stock, appreciation in value above a 3%
per annum threshold rate of return. As of December 31, 1999, the Trust held
38,696,289 shares of the Company's common stock, split equally between two
funds, "fund 1" and "fund 2." If on June 30, 2000, the market value of fund 1
exceeds $943 (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,
2000, market value of fund 1 after distribution (if any) will be the basis for
determining any potential distribution on June 30, 2004. Similarly, if on June
30, 2002, the market value of fund 2 exceeds $949, 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 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 of $72, $72 and $(99) for the
years 1999, 1998 and 1997, respectively, attributable to the ShareValue Program.
The 1998 and 1999 ShareValue Trust expense was 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, 30,000,000 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, 1999, no SARs have been granted under the
1997 Plan.
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, 1999, a total of 594,000 shares had been granted, and of those, 244,205
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.
80
<PAGE> 81
Information concerning stock options issued to directors, officers and other
employees is presented in the following table.
1999 1998 1997
-------------------------------------------------------
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 28,653 $36.03 27,705 $32.36 26,525 $25.47
Granted 3,462 43.40 3,772 52.72 6,320 53.16
Exercised (2,345) 22.03 (2,493) 20.77 (4,502) 21.77
Canceled or expired (515) 39.33 (255) 46.35 (223) 47.84
Exercised as SARs (27) 19.70 (76) 19.27 (415) 15.21
------ ------ ------
Outstanding at
end of year 29,228 38.02 28,653 36.03 27,705 32.36
===============================================================================
Exercisable at
end of year 19,749 $34.58 15,577 $29.57 12,277 $24.09
===============================================================================
As of December 31, 1999, 13,174,962 shares were available for grant under the
1997 Incentive Stock Plan, and 3,603,564 shares were available for grant under
the Incentive Compensation Plan.
The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in thousands).
Options Outstanding
-------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Shares Life (years) Price
- ------------------------------------------------------------------------------
$10 to $19 3,510 3.7 $16.27
$20 to $29 6,843 4.1 $23.32
$30 to $39 1,704 6.2 $38.45
$40 to $49 7,913 7.8 $42.33
$50 to $59 9,258 7.7 $53.36
- ------------------------------------------------------------------------------
29,228
==============================================================================
81
<PAGE> 82
Options Exercisable
----------------------
Weighted
Average
Range of Exercise
Exercise Prices Shares Price
- ------------------------------------------------------------------------------
$10 to $19 3,275 $16.42
$20 to $29 6,050 $23.33
$30 to $39 1,661 $38.52
$40 to $49 3,532 $41.13
$50 to $59 5,231 $53.30
- ------------------------------------------------------------------------------
19,749
==============================================================================
The Company has determined the weighted average fair values of stock-based
arrangements granted, including ShareValue Trust, during 1999, 1998 and 1997 to
be $17.67, $19.99 and $20.67, 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
Grant ---------------------------
Date Option Term Volatility
- -------------------------------------------------------------------------------
1999 6/28/99 9 years 22%
- -------------------------------------------------------------------------------
1998 4/13/98 9 years 20%
- -------------------------------------------------------------------------------
1997 1/13/97 9 years 19%
2/24/97 9 years 19%
===============================================================================
Grant Expected Risk-Free
Date Dividend Yield Interest Rate
- -------------------------------------------------------------------------------
1999 6/28/99 1.1% 6.3%
- -------------------------------------------------------------------------------
1998 4/13/98 1.1% 5.9%
- -------------------------------------------------------------------------------
1997 1/13/97 1.1% 6.6%
2/24/97 1.1% 6.6%
===============================================================================
The Company recognized share-based expense of $35 and $31 in 1999 and 1998
attributable to stock options, with an offset to additional paid-in capital, and
recognized no expense in 1997.
82
<PAGE> 83
Note 19
Derivative Financial Instruments
- --------------------------------
The derivative financial instruments held by the Company at December 31, 1999,
consisted of simple and specifically tailored interest rate swaps and foreign
currency forward contracts. The Company does not trade in derivatives for
speculative purposes.
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, Note
15 and Note 22.)
Foreign currency forward contracts are entered into to hedge specific receipt
and expenditure commitments made in foreign currencies. As of December 31, 1999,
the notional amount of foreign currency forward contracts through 2003
denominated in foreign currencies was $521, with unrealized losses, net of
unrealized gains, of $5.
The Company has not completed the process of evaluating the impact that will
result from adopting Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
therefore has not yet identified the impact that adopting SFAS No. 133 will have
on its financial position and results of operations. SFAS No. 133 is required to
be adopted in 2001.
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 2004 totaled $5,015 and $6,239 as of
December 31, 1999 and 1998. 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 $212 and $163 as of December 31, 1999 and 1998.
Participations in customer financing receivables with third-party investors
that involve interest rate terms different from the underlying receivables
totaled $58 and $62 as of December 31, 1999 and 1998.
83
<PAGE> 84
The Company's maximum exposure to credit-related losses associated with
credit guarantees, without regard to collateral and net of provisions
established, totaled $1,053 ($603 associated with commercial aircraft and
collateralized) and $1,309 ($730 associated with commercial aircraft and
collateralized) as of December 31, 1999 and 1998.
The Company's maximum exposure to losses associated with asset value
guarantees, without regard to collateral and net of provisions established,
totaled $353 and $444 as of December 31, 1999 and 1998. These asset value
guarantees relate to commercial aircraft and are collateralized.
As of December 31, 1999 and 1998, accounts payable and other liabilities
included $561 and $463 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, 1999,
off-balance-sheet financial instruments described in Note 20 predominantly
related to commercial aircraft customers. Of the $9,457 in accounts receivable
and customer financing included in the Consolidated Statements of Financial
Position, $6,581 related to commercial aircraft customers and $1,970 related to
the U.S. Government. Other than Trans World Airlines (TWA), discussed below, 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 $6,581 of commercial accounts receivable and aircraft customer
financing, $3,952 is related to customers that the Company believes have less
than investment-grade credit. Similarly, of the $4,831 of irrevocable financing
commitments related to aircraft on order including options, $3,063 is related to
customers that the Company believes have less than investment-grade credit.
As of December 31, 1999, the Company had customer financing in place totaling
$1,125 and commitments to arrange for future financing totaling $1,327 with TWA.
TWA continues to operate under a reorganization plan, confirmed by the U.S.
Bankruptcy Court in 1995, which restructured its indebtedness and leasehold
obligations to its creditors. In addition, TWA continues to face financial and
operational challenges. Further deterioration of TWA's financial condition could
adversely affect the performance of customer financing extended to TWA; however,
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 liquidity or
results of operations.
Note 22
Disclosures about Fair Value of Financial Instruments
- -----------------------------------------------------
As of December 31, 1999 and 1998, the carrying amount of accounts receivable
was $3,453 and $3,288, and the fair value of accounts receivable was estimated
to be $3,385 and $3,239. 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.
84
<PAGE> 85
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, 1999 and 1998, the carrying amount of debt, net of capital
leases, was $6,346 and $6,539, and the fair value of debt, based on current
market rates for debt of the same risk and maturities, was estimated at $6,393
and $7,198. 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, 1999.
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, 1999, 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.
85
<PAGE> 86
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, 1999, inventories included approximately $581
of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350. The amount of the provision, which was
established in 1990, was based on the Company's belief, supported by an opinion
of outside counsel, that the termination for default would be converted to a
termination for convenience, that the Team would establish a claim for contract
adjustments for a minimum of $250, that there was a range of reasonably possible
results on termination for convenience, and that it was prudent to provide for
what the Company then believed was the upper range of possible loss on
termination for convenience, which was $350.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal
Claims for the Team. The 1998 judgment was based on a determination that the
Government had not exercised the required discretion before issuing a
termination for default. It converted the termination to a termination for
convenience, and determined the Team was entitled to be paid $1,200, plus
statutory interest from June 26, 1991, until paid. The Court of Appeals
remanded the case to the Court of Federal Claims for a determination as to
whether the Government is able to sustain the burden of showing a default was
justified and other proceedings. Final resolution of the A-12 litigation will
depend on such litigation and possible further appeals, or negotiations with
the Government. In the Company's opinion, the loss provision continues to
provide adequately for the reasonably possible reduction in value of A-12 net
contracts in process as of December 31, 1999, as a result of a termination of
the contract for the convenience of the Government. The Company has been
provided with an opinion of outside counsel that (i) the Government's
termination of the contract for default was contrary to law and fact, (ii) the
rights and obligations of the Company are the same as if the termination had
been issued for the convenience of the Government, and (iii) subject to
prevailing on the issue that the termination is properly one for the
convenience of the Government, the probable recovery by the Company is not
less than $250.
On October 31, 1997, a federal securities lawsuit was filed against the
Company in the U.S. District Court for the Western District of Washington, in
Seattle. The lawsuit names as defendants the Company and three of its then-
executive officers. Additional lawsuits of a similar nature have been filed in
the same court. These lawsuits were consolidated on February 24, 1998.
Initially, the plaintiffs sought to represent a class of purchasers of
86
<PAGE> 87
Boeing stock between July 21, 1997, and October 22, 1997, (the "Class Period"),
including recipients of Boeing stock in the McDonnell Douglas merger. (July 21,
1997, was the date on which the Company announced its second quarter results,
and October 22, 1997, was the date on which the Company announced charges to
earnings associated with production problems being experienced on commercial
aircraft programs.) The lawsuits generally allege that the defendants desired
to keep the Company's share price as high as possible in order to ensure that
the McDonnell Douglas shareholders would approve the merger and, in the case
of two of the individual defendants, to benefit directly from the sale of
Boeing stock during the Class Period. By orders dated September 15, 1999, and
February 3, 2000, plaintiffs were granted leave to amend their complaint to
broaden their action (1) to encompass claims of the original proposed class
members for Boeing securities purchases made between April 7, 1997 and July
20, 1997; (2) to include certain alleged misstatements purportedly made by the
Company going back to April 7, 1997; and (3) to add allegations that the
Company's 10-Q reports for the first and second quarters of 1997 were false
and misleading. The plaintiffs seek compensatory damages and treble damages.
The court has not yet ruled on class certification. The action is currently
set for trial on October 2, 2000. 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 charges one employee with participation in the alleged
conspiracy. The indictment relates to the sale and export to China in 1993-1995
of surplus, used machine tools sold by Douglas Aircraft Company to China
National Aero-Technology Import and Export Corporation for use in connection
with the MD-80/90 commercial aircraft Trunkliner Program in China.
As a result of the indictment, the Department of State has discretion to deny
defense-related export privileges to MDC or a division or subsidiary of MDC. 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 may be 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.
Note 24
Segment Information
- -------------------
Segment information may be found on pages 49-53.
87
<PAGE> 88
THE BOEING COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in millions except per share data)
1999 1998
-----------------------------------------------------------
Quarter 4th 3rd 2nd 1st 4th 3rd 2nd 1st
===============================================================================
Sales and other
operating
revenues $15,200 $13,279 $15,122 $14,392 $17,099 $12,721 $13,389 $12,945
Earnings from
operations 970 668 793 739 602 430 416 119
Net earnings 662 477 701 469 465 347 258 50
Basic earnings
per share .75 .52 .75 .50 .49 .36 .26 .05
Diluted earnings
per share .74 .52 .75 .50 .48 .36 .26 .05
- -------------------------------------------------------------------------------
Cash dividends
per share .14 .14 .14 .14 .14 .14 .14 .14
- -------------------------------------------------------------------------------
Market price:
High 46.44 48.50 45.88 37.69 44.00 50.13 56.25 54.75
Low 37.06 41.06 33.50 32.56 29.50 30.38 42.13 42.81
Quarter end 41.44 42.63 44.00 34.00 32.63 34.31 44.56 52.13
===============================================================================
88
<PAGE> 89
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, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 18 to the financial statements, The Boeing
Company changed its method of expense recognition for share-based incentive
plans in 1998.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Seattle, Washington
January 28, 2000
89
<PAGE> 90
THE BOEING COMPANY AND SUBSIDIARIES
FIVE-YEAR SUMMARY
(Dollars in millions except per share data)
1999 1998 1997 1996 1995
===============================================================================
Operations
Sales and other operating revenues
Commercial Airplanes (a) $38,409 $36,880 $27,479 $19,916 $17,511
Military Aircraft and Missiles 12,220 12,990
Space and Communications 6,831 6,889
------- -------
Information, Space and Defense
Systems 19,051 19,879 18,125 14,934 14,849
Customer and commercial
financing/other 837 730 746 603 600
Accounting differences/
eliminations (a) (304) (1,335) (550)
- -------------------------------------------------------------------------------
Total $57,993 $56,154 $45,800 $35,453 $32,960
- -------------------------------------------------------------------------------
Net earnings (loss) $ 2,309 $ 1,120 $ (178) $ 1,818 $ (36)
Basic earnings
(loss) per share 2.52 1.16 (.18) 1.88 (.04)
Diluted earnings
(loss) per share 2.49 1.15 (.18) 1.85 (.04)
- --------------------------------------------------------------------------------
Cash dividends paid $ 537 $ 564 $ 557 $ 480 $ 434
Per share .56 .56 .56 .55 .50
- --------------------------------------------------------------------------------
Other income, principally interest 585 283 428 388 280
- --------------------------------------------------------------------------------
Research and development expense 1,341 1,895 1,924 1,633 1,674
General and administrative expense 2,044 1,993 2,187 1,819 1,794
- --------------------------------------------------------------------------------
Additions to plant and
equipment, net 1,236 1,665 1,391 971 747
Depreciation of plant and equipment 1,330 1,386 1,266 1,132 1,172
- --------------------------------------------------------------------------------
Employee salaries and wages 11,019 12,074 11,287 9,225 8,688
Year-end workforce 197,000 231,000 238,000 211,000 169,000
================================================================================
Financial position at December 31
Total assets $ 36,147 $ 37,024 $ 38,293 $ 37,880 $ 31,877
Working capital 2,056 2,836 5,111 7,783 7,490
Net plant and equipment 8,245 8,589 8,391 8,266 7,927
- --------------------------------------------------------------------------------
Cash and short-term investments 3,454 2,462 5,149 6,352 4,527
Total debt 6,732 6,972 6,854 7,489 5,401
Customer and commercial
financing assets 6,004 5,711 4,600 3,888 4,212
- --------------------------------------------------------------------------------
90
<PAGE> 91
THE BOEING COMPANY AND SUBSIDIARIES
FIVE-YEAR SUMMARY (Continued)
(Dollars in millions except per share data)
1999 1998 1997 1996 1995
===============================================================================
Shareholders' equity 11,462 12,316 12,953 13,502 12,527
Per share 13.16 13.13 13.31 13.96 12.80
Common shares outstanding
(in millions) (b) 870.8 937.9 973.5 967.2 978.6
================================================================================
Contractual backlog
Commercial Airplanes $ 72,972 $ 86,057 $ 93,788 $ 86,151 $ 73,715
Military Aircraft and Missiles 15,691 17,007
Space and Communications 10,585 9,832
-------- --------
Information, Space and Defense
Systems 26,276 26,839 27,852 28,022 21,773
- --------------------------------------------------------------------------------
Total $ 99,248 $112,896 $121,640 $114,173 $ 95,488
================================================================================
Cash dividends have been paid on common stock every year since 1942.
(a) For Commercial Airplanes segment sales and other operating revenues, years
1996 and 1995 are reported in accordance with GAAP; years 1999, 1998 and
1997 are reported in accordance with segment reporting, as discussed in
Note 24.
(b) Computation excludes outstanding shares held by the ShareValue Trust.
91
<PAGE> 92
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, L.P.
P.O. Box 8040
Boston, MA 02266-8040
(888) 777-0923 (toll-free for domestic U.S. callers)
(781) 575-3400 (non-U.S. callers may call collect)
Boeing shareholders can also obtain answers to frequently asked questions
(FAQ), 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.
ANNUAL MEETING
The annual meeting of Boeing shareholders is scheduled to be held on Monday,
May 1, 2000. Details of the meeting are provided in the proxy statement.
Formal notice of the meeting, proxy statement, form of proxy and annual
report were mailed to shareholders beginning March 17, 2000.
ELECTRONIC PROXY RECEIPT AND VOTING
Shareholders now 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
92
<PAGE> 93
COMPANY SHAREHOLDER SERVICES
Pre-recorded shareholder information and quarterly earnings data are 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 L.P.
P.O. Box 8040
Boston, MA 02266-8040
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.
93
<PAGE> 94
SUPPLEMENTAL PENSION AGREEMENT
In consideration of his continued employment after the date of this
Agreement, The Boeing Company ("Company") and Michael M. Sears ("Executive")
agree as follows:
1. Upon Executive's retirement from the Company, the Company will
supplement Executive's retirement benefits under the Supplemental Executive
Retirement Plan for Employees of The Boeing Company (the "SERP") (or any
successors to the SERP), with payments in the amount of the excess, if any, of
(a) the benefit (payable in the form of a single life annuity). Executive
would have earned at the time of retirement under the terms of the
Supplemental Employee Retirement Income Plan of McDonnell Douglas Corporation
and the Employee Retirement Income Plan of McDonnell Douglas Corporation,
Salaried Plan, both as in effect on August 1, 1997, had these plans continued
in effect until the Executive's retirement, over (b) the benefits (payable in
the form of a single life annuity) actually earned by Executive under the
SERP, The Boeing Company Pension Value Plan, The Boeing Company Pension Value
Plan for Heritage MDC Employees and any other qualified or non-qualified
defined benefit pension plan sponsored by the Company.
2. Any supplemental payment provided by this Agreement shall be paid to
the Executive or, if applicable, to his surviving spouse, at the same time, for
the same period, and in the same form as Executive elects under the SERP or in
lieu of an election, as is otherwise provided by the SERP.
3. The supplemental benefit provided by this Agreement shall be
unfunded and shall be paid only from the general assets of the Company. It
shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, charge, execution, attachment, garnishment, or
any other legal process, and any attempt to take any such action shall be
void.
4. Executive shall forfeit all rights to receive further supplemental
payments under this Agreement if at any time after retirement Executive shall
engage in any activity, whether as an individual or as an employee, consultant,
or otherwise, which the Employee Benefit Plans Committee of the Company, in
its sole and absolute discretion, shall determine to be in competition with
any significant aspect of the Company's business.
5. Nothing in this Agreement shall be deemed to give Executive any
right to remain in the employ of the Company or affect any right of the
Company to terminate Executive's employment with or without cause.
94
<PAGE> 95
6. This Agreement constitutes the entire agreement of the parties, and
supersedes any and all previous oral or written agreements or understandings
between the parties, with respect to Executive's retirement benefits.
Dated: February 16, 2000
EXECUTIVE THE BOEING COMPANY
/s/ Michael M. Sears /s/ James B. Dagnon
_______________________ __________________________
Michael M. Sears James B. Dagnon
Senior Vice President, People
95
<PAGE> 96
EXHIBIT (21) - List of Company Subsidiaries
The Boeing Company and Subsidiaries
(Wholly owned unless identified by asterisk)
Place of Date
Name Incorporation Incorporated
================================================================================
2433265 Manitoba Ltd. Manitoba 1989
692567 Ontario Limited Ontario 1986
757UA, Inc. Delaware 1989
767ER, Inc. Delaware 1987
ACN 004 471 078 PTY LIMITED Australia 1960
AeroSpace Technologies of Australia Limited Australia 1986
Aileron Inc. Delaware 1989
Akash, Inc. Delaware 1998
Aldford-1 Corporation Delaware 1993
Astro Limited Bermuda 1975
Astro-II, Inc. Vermont 1984
Autonetics, Inc. Delaware 1958
Aviatek Pty Limited Australia 1989
Bahasa Aircraft Corporation Delaware 1993
BCC (Aircraft Acquisition) Limited England 1999
BCS Richland, Inc. Washington 1975
Beaufoy-1 Corporation Delaware 1993
BNA International Systems, Inc. Delaware 1974
BNA Operations International, Inc. Delaware 1996
BNJ Foreign Sales Corporation Barbados 1999
BNJ, Inc. Delaware 1998
Boeing - Corinth Co. Delaware 1987
Boeing - Irving Co. Delaware 1979
Boeing - Oak Ridge Co. Delaware 1980
Boeing Aerospace - TAMS, Inc. Delaware 1981
Boeing Aerospace - U.K., Ltd. Delaware 1993
Boeing Aerospace (Malaysia) Sdn. Bhd. Malaysia 1993
Boeing Aerospace Australia Pty. Ltd. Delaware 1980
Boeing Aerospace Hungary Ltd. Hungary 1997
Boeing Aerospace Ltd. Delaware 1980
Boeing Aerospace Middle East Limited Delaware 1993
Boeing Aerospace Operations, Inc. Delaware 1978
Boeing Aerospace Poland Poland 1996
Boeing Aerospace Switzerland, Inc. Delaware 1972
Boeing Agri-Industrial Company Oregon 1973
Boeing Aircraft Holding Company Delaware 1984
Boeing Australia Limited Australia 1986
Boeing Business Services Company Delaware 1999
Boeing Canada Inc. Ontario 1929
Boeing Capital Corporation Delaware 1968
Boeing Capital Loan Corporation Delaware 2000
Boeing Capital Services Corporation Delaware 1988
Boeing Capital Services Loan Corporation Delaware 2000
Boeing Capital Washington Corporation Delaware 1999
Boeing China Technical Services, Inc. Delaware 1985
Boeing China, Inc. Delaware 1986
Boeing Commercial Space Company Delaware 1987
96
<PAGE> 97
EXHIBIT (21) - List of Company Subsidiaries
The Boeing Company and Subsidiaries
(Wholly owned unless identified by asterisk)
Place of Date
Name Incorporation Incorporated
================================================================================
Boeing Constructors Nominees Pty. Ltd. Australia 1994
Boeing Constructors, Inc. Texas 1970
Boeing Defence UK Limited England 1976
Boeing Domestic Sales Corporation Washington 1974
Boeing Enterprises, Inc. Delaware 1997
Boeing Financial Corporation Washington 1965
Boeing Finland Oy Finland 1991
Boeing Global Services, Inc. Delaware 1998
Boeing International Corporation Delaware 1953
Boeing International Holdings, Ltd. Bermuda 1998
Boeing International Logistics Spares, Inc. Delaware 1996
Boeing International Overhaul & Repair Inc. Delaware 1999
Boeing International Sales Corporation Washington 1971
Boeing Investment Company, Inc. Delaware 1985
Boeing Leasing Company Delaware 1988
Boeing Logistics Spares, Inc. Delaware 1980
Boeing Management Company Delaware 1999
Boeing Middle East Limited Delaware 1982
Boeing Netherlands Leasing, B.V. Netherlands 1999
Boeing Nevada, Inc. Delaware 1989
Boeing North American Space Alliance Company Delaware 1995
Boeing North American Space Enterprises Canada, Inc. Canada 1996
Boeing North American Space Operations Company Delaware 1983
Boeing of Canada Ltd. Delaware 1986
Boeing Offset Company, Inc. Delaware 1985
Boeing Operations International, Incorporated Delaware 1981
Boeing Overseas, Inc. Delaware 1984
Boeing Precision Gear, Inc. Delaware 1994
Boeing Realty Corporation California 1972
Boeing Sales Corporation Guam 1984
Boeing Service Company Texas 1973
Boeing Space Operations Company Delaware 1998
Boeing Spain, Ltd. Delaware 1983
Boeing Support Services, Inc. Delaware 1980
Boeing Technology International, Inc. Washington 1973
Boeing Toronto, Ltd. Canada 1964
Boeing Travel Management Company Delaware 1980
Boeing Worldwide Operations Limited Bermuda 1998
Canard Holdings, Inc. Delaware 1996
CBSA Leasing II, Inc. Delaware 1998
CBSA Leasing, Inc. Delaware 1998
Cougar, Ltd. Bermuda 1998
Delta Launch Services, Inc. Delaware 1988
Dillon, Inc. Delaware 1998
Douglas Express Limited Virgin Islands 1996
Douglas Federal Leasing Limited Virgin Islands 1996
Douglas Leasing Inc. Delaware 1996
Douglas Realty Company, Inc. California 1965
97
<PAGE> 98
EXHIBIT (21) - List of Company Subsidiaries
The Boeing Company and Subsidiaries
(Wholly owned unless identified by asterisk)
Place of Date
Name Incorporation Incorporated
=============================================================================
Falcon II Leasing Limited Virgin Islands 1998
Falcon Leasing Limited Virgin Islands 1998
Fine Chemicals Offset Limited British Virgin 1996
Islands
Gaucho-1 Inc. Delaware 1994
Gaucho-2 Inc. Delaware 1994
Hanway Corporation Delaware 1993
Hawk Leasing, Inc. Delaware 1998
Kerbridge Air Control Pty. Limited Australia 1995
Kuta-3 Aircraft Corporation, Limited Delaware 1994
Kuta-One Aircraft Corporation, Limited Delaware 1994
Kuta-Three Aircraft Corporation Delaware 1993
Kuta-Two Aircraft Corporation Delaware 1993
Longacres Park, Inc. Washington 1948
Longbow Golf Club Corporation Delaware 1997
McDonnell Douglas Aircraft Finance Corporation Delaware 1989
McDonnell Douglas Corporation Maryland 1939
McDonnell Douglas Dakota Leasing, Inc. Delaware 1996
McDonnell Douglas Express, Inc. Delaware 1996
McDonnell Douglas F-15 Technical Services
Company, Inc. Delaware 1978
McDonnell Douglas Finance Corporation -
Federal Leasing, Limited Virgin Islands 1994
McDonnell Douglas Foreign Sales Corporation Virgin Islands 1984
McDonnell Douglas Helicopter Company Delaware 1980
McDonnell Douglas Helicopter Support Services, Inc. Delaware 1984
McDonnell Douglas Indonesia Leasing, Inc. Delaware 1997
McDonnell Douglas Insurance Holdings Corporation Delaware 1989
McDonnell Douglas International Sales Corporation Delaware 1972
McDonnell Douglas Japan, Ltd. Japan 1958
McDonnell Douglas Korea, Ltd. Delaware 1986
McDonnell Douglas Macedonia Leasing, Inc. Delaware 1997
McDonnell Douglas Middle East, Ltd. Delaware 1989
McDonnell Douglas Overseas Finance Corporation Delaware 1975
McDonnell Douglas Radio Services Corporation Delaware 1973
McDonnell Douglas Services, Inc. Missouri 1980
McDonnell Douglas Support Services - Military, Inc. Delaware 1991
McDonnell Douglas Truck Services, Inc. Delaware 1982
MD Dakota Leasing, Ltd. Virgin Islands 1996
MD Indonesia Limited Virgin Islands 1997
MDAFC - Nashville Company Delaware 1996
MD-Air Leasing Limited Virgin Islands 1996
MDC Properties, Inc. Michigan 1979
MDFC - Aircraft Leasing Company Delaware 1995
MDFC - Aircraft Leasing Limited Virgin Islands 1995
98
<PAGE> 99
EXHIBIT (21) - List of Company Subsidiaries
The Boeing Company and Subsidiaries
(Wholly owned unless identified by asterisk)
Place of Date
Name Incorporation Incorporated
=============================================================================
MDFC - Aircraft Ltd. Ireland 1995
MDFC - Bali, Limited Virgin Islands 1993
MDFC - Carson Company Delaware 1997
MDFC - Carson Limited Virgin Islands 1996
MDFC - Express Leasing Company Delaware 1995
MDFC - Express Leasing Limited Virgin Islands 1995
MDFC - Jakarta, Limited Virgin Islands 1993
MDFC - Knoxville Company Delaware 1996
MDFC - Knoxville Limited Virgin Islands 1995
MDFC - Lakewood Company Delaware 1996
MDFC - Lakewood Limited Virgin Islands 1996
MDFC - Memphis Company Delaware 1996
MDFC - Memphis Ltd. Virgin Islands 1995
MDFC - Nashville Ltd. Virgin Islands 1995
MDFC - Reno Company Delaware 1996
MDFC - Sierra Company Delaware 1985
MDFC - Spring Limited Virgin Islands 1996
MDFC - Tahoe Company Delaware 1996
MDFC Equipment Leasing Corporation Delaware 1972
MDFC Loan Corporation Delaware 1983
MD-Federal Holding Company Delaware 1996
MDRC of Missouri, Inc. Missouri 1989
Montana Aviation Research Company Delaware 1991
Network Information Service Co., Ltd. Japan 1984
North American Aviation, Inc. Delaware 1967
Plaza Realty Holdings Corporation Delaware 1986
Processing Properties, Inc. Delaware 1993
Radical Pty Limited Australia 1995
Rainier Aircraft Leasing, Inc. Delaware 1992
Raven Leasing, Inc. Delaware 1998
RGL-1 Corporation Delaware 1993
RGL-2 Corporation Delaware 1993
RGL-3 Corporation Delaware 1993
RGL-4 Corporation Delaware 1993
RGL-5 Corporation Delaware 1993
RGL-6 Corporation Delaware 1993
Rocketdyne Technical Services Company Delaware 1986
Rocketdyne, Inc. Delaware 1958
Sunshine Leasing Company-1 Delaware 1997
Taiko Leasing, Inc. Delaware 1998
Thayer Leasing Company-1 Delaware 1997
The Preston Group Pty Limited Australia 1989
TPG America, Inc. Virginia 1996
TPG Europe Limited England 1989
VC-X 757, Inc. Delaware 1996
Wingspan, Inc. Delaware 1994
99
<PAGE> 100
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 1995-1999 indicating revenues by industry
segment (Dollars in billions):
1995 1996 1997 1998 1999
Commercial Airplanes 17.511 19.916 26.929 35.545 38.105
ISDS - Military Aircraft and Missiles 12.990 12.220
ISDS - Space and Communications 6.889 6.831
------ ------
Information, Space and Defense Systems 14.849 14.934 18.125 19.879 19.051
Customer and Commercial Financing/Other 0.600 0.603 0.746 0.730 0.837
Total 32.960 35.453 45.800 56.154 57.993
Graphic and image material item Number 2
Commercial sales by geographic region:
A bar chart for the five years 1995-1999 indicating sales by region of
customer (Dollars in billions):
1995 1996 1997 1998 1999
United States 7.530 8.634 9.625 14.726 18.678
Asia, Other than China 5.256 6.576 9.254 11.337 8.989
China 0.754 0.950 1.265 1.572 1.231
Europe 2.533 2.757 5.886 7.274 8.011
Oceania 0.599 0.536 0.560 0.732 0.770
Other 0.839 0.463 0.339 1.239 0.730
Total 17.511 19.916 26.929 36.880 38.409
Graphic and image material item Number 3
Net earnings
A bar chart of net earnings for the five years 1995-1999 (Dollars in billions):
1995 - (0.036); 1996 - 1.818; 1997 - (0.178); 1998 - 1.120; 1999 - 2.309
100
<PAGE> 101
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 1995-1999 (Dollars in billions):
1995 1996 1997 1998 1999
Commercial Airplanes 1.232 1.156 1.208 1.021 0.585
ISDS - Military Aircraft and Missiles 0.304 0.264
ISDS - Space and Communications 0.570 0.492
----- -----
Information, Space and Defense Systems 0.442 0.477 0.716 0.874 0.756
Total 1.674 1.633 1.924 1.895 1.341
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)
777-200 < 1/1995 4/1995
777-200ER < 1/1995 2/1997
777-300 6/1995 6/1998
737-700 < 1/1995 12/1997
737-800 < 1/1995 3/1998
737-600 3/1995 10/1998
737-900 11/1997 1/2001
757-300 9/1996 2/1999
767-400ER 4/1997 4/2000
717-200 10/1995 6/1999
101
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,354
<SECURITIES> 100
<RECEIVABLES> 4,964
<ALLOWANCES> 322
<INVENTORY> 6,539
<CURRENT-ASSETS> 15,712
<PP&E> 20,119
<DEPRECIATION> 11,874
<TOTAL-ASSETS> 36,147
<CURRENT-LIABILITIES> 13,656
<BONDS> 6,732
0
0
<COMMON> 5,059
<OTHER-SE> 6,403
<TOTAL-LIABILITY-AND-EQUITY> 36,147
<SALES> 57,993
<TOTAL-REVENUES> 57,993
<CGS> 0
<TOTAL-COSTS> 54,614
<OTHER-EXPENSES> 209
<LOSS-PROVISION> 102
<INTEREST-EXPENSE> 431
<INCOME-PRETAX> 3,324
<INCOME-TAX> 1,015
<INCOME-CONTINUING> 2,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,309
<EPS-BASIC> 2.52
<EPS-DILUTED> 2.49
</TABLE>
