Management’s Discussion and Analysis

Management’s Discussion and Analysis

Net earnings of $2,128 million for 2000 were $181 million lower than 1999 earnings. Net earnings for 2000 were significantly impacted by $557 million expensed as in-process research and development. Net earnings also reflected significant improvement in Commercial Airplanes segment margins resulting from continued production efficiencies. Other income decreased $199 million in 2000 to $386 million. This decrease principally reflects lower interest income resulting from lower cash levels, but was partially offset by the $73 million of interest income attributable to federal income tax audit settlements and the $42 million gain from the sale of a long-held equity investment. Interest and debt expense for 2000 and 1999 was relatively stable.

As indicated in Note 20, the Company has generated significant net periodic benefit income related to pensions: $920 million in 2001, $428 million in 2000 and $125 million in 1999. Not all net periodic pension benefit income or expense is recognized in net earnings in the year incurred since they are principally allocated to production as product costs, and a portion remains in inventory at the end of a reporting period. Accordingly, the operating earnings for 2001 and 2000 included $785 million and $403 million of income due to pensions. The significantly unfavorable returns experienced by pension assets during 2001 are the principal cause of the shift in unrecognized net actuarial gains and losses, from unrecognized actuarial gains of $10.7 billion at the end of 2000 to unrecognized actuarial losses of $2.9 billion at the end of 2001. The Company projects that net periodic benefit income related to pensions will decrease significantly during 2002 and beyond and projects 2002 net periodic benefit income will be approximately $400 million less than in 2001.

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 2001 Commercial Airplanes segment earnings of $2,632 million (based on the cost of specific airplane units delivered — see discussion under Segment Information on page 81) included $908 million of non-recurring charges associated with the September 11, 2001, terrorist attacks. The segment operating margin for 2001 including the impact of non-recurring charges was 7.5%. Earnings from operations in 2001 excluding non-recurring charges totaled $3,540 million resulting in an earnings from operations margin of 10.1%. The 2000 Commercial Airplanes segment earnings of $2,736 million resulted in an earnings from operations margin of 8.8%. The 1999 Commercial Airplanes segment earnings of $2,082 million resulted in an earnings from operations margin of 5.4%. The increased earnings and margins excluding non-recurring charges for 2001 were principally due to continued improvement in the production process.

Segment operating earnings included $68 million for 2001 and $22 million for 2000 of amortization expense associated with goodwill and acquired intangibles.

Commercial Airplanes segment earnings, as determined under generally accepted accounting principles (GAAP), reflect the program method of accounting and incorporate a portion of the ‘Accounting differences/eliminations’ caption as discussed in Note 28. Excluding the non-recurring charge associated with the events of September 11, 2001, Commercial Airplanes segment earnings under GAAP, and including intercompany transactions, were $2,819 million for 2001, $2,099 million for 2000 and $1,778 million for 1999, and comparable margins were 8.0%, 6.7% and 4.6%, respectively.

The improving GAAP margins over this period reflect improved unit costs over the accounting quantity, along with the impact of additional units within the accounting quantity for the Next-Generation 737 and the 777. Because of the higher unit production costs experienced at the beginning of a new program and the substantial investment required for initial tooling and special equipment, new commercial jet aircraft programs normally have lower operating profit margins than established programs. The increase of the accounting quantity for a new program generally results in improved margins. The Next-Generation 737 program accounting quantity was 800 units at the beginning of 1999, 1,200 units at the end of 1999, 1,650 units at the end of 2000 and 1,800 units at the end of 2001. The 777 accounting quantity was 500 at the end of 1999 and 600 at the end of 2000 and 2001. Improved margins from 1999 through 2001 also reflect an increase in estimated revenue for airplanes within the program accounting quantities.

In 1999, the Company delivered the initial units of the 717 program, and 93 units have cumulatively been delivered as of year-end 2001. The 717 program is accounted for under the program method of accounting described in the Critical Accounting Policies discussed on pages 39–40. The Company established the initial program accounting quantity at 200 units. Because of a lack of firm demand for the 717 aircraft subsequent to September 11, 2001, the program accounting quantity was reduced to 135 aircraft. This change in estimate created a $250 million pretax loss and was treated as a special charge due to events of September 11, 2001. The Company will record 717 deliveries on a break-even basis until program reviews indicate positive gross profit within the program accounting quantity. Such program reviews could include revised assumptions of revenues and costs. The Company has potentially material exposures related to the 717 program, principally attributable to vendor termination costs that could result from a lack of longer-term market acceptance. Additionally, the Company has potential exposure relating to the valuation of 717 customer financing assets. As discussed in Note 12 to the consolidated financial statements, as of December 31, 2001, the Company has $1,499 million of customer financing assets relating to the 717 program, of which $692 million are accounted for as operating lease assets.

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