Management’s Discussion and Analysis

Management’s Discussion and Analysis

The Commercial Airplanes segment is projecting lower deliveries in the near term, and the resulting downsizing that began in 2001 and is projected to continue during 2002 will add to the complexity of achieving estimated cost targets. The Company believes that these complexities have been adequately considered in projecting cost estimates that are inherent in margins determined under the program method of accounting; however, such cost estimates remain subject to potential adverse future adjustments.

The Company offers aircraft fleet support for all its aircraft models. These costs include flight and maintenance training, field service support costs, engineering services and technical data and documents. These costs are expensed as incurred and do not vary significantly with current production rates. The costs incurred to sustain this support averaged less than 1.5% of total costs of products and services for the periods disclosed.

The Company projects significant market opportunities for the commercial aviation support market over the next two decades. Factors contributing to the need for aviation support include deregulation, privatization and globalization, which have increased competition and forced airlines to operate more efficiently. The Company will focus on total life-cycle opportunities, which include airplane servicing and maintenance, and airport and route infrastructure services.

Military Aircraft and Missile Systems Military Aircraft and Missile Systems segment operating earnings for 2001, 2000 and 1999 were $1,346 million, $1,245 million and $1,161 million, respectively. The segment operating margins for 2001, 2000 and 1999 were 10.8%, 10.4% and 9.8%, respectively. The 2001 operating results reflect strong profits on major production programs. These programs include the C-17 Globemaster, F/A-18E/F Super Hornet, T-45 Goshawk, AV-8B Harrier, and the Harpoon missile. The segment operating earnings for 2001 include the recognition of $48 million of charges relating to asset reductions attributable to reduced work volume at the Philadelphia site, and $46 million of charges associated with the Joint Strike Fighter program and idle manufacturing assets. The 2001 operating earnings also included a favorable adjustment of $57 million attributable to F-15 program charges recognized in 1999. Exclusive of these items, the segment operating margins for 2001 were 11.1%. Included in the 1999 operating results were a favorable contract settlement amounting to $55 million and pretax charges of $270 million associated with the F-15 program. Exclusive of these items, segment operating margins for 1999 were 11.6%.

A significant percentage of Military Aircraft and Missile Systems segment business has been in developmental programs under cost-reimbursement-type contracts, which generally have lower profit margins than fixed-pricetype contracts. Current major developmental programs include the F-22 Raptor, V-22 Osprey tiltrotor aircraft, C-130 AMP and the RAH-66 Comanche helicopter. Both the V-22 and F-22 programs have transitioned to low-rate initial production, but also continue developmental activities.

Space and Communications Space and Communications segment operating earnings, prior to non-recurring items, for 2001 were $619 million, $340 million in 2000 and $320 million in 1999, and the related operating margins were 6.0%, 4.2% and 4.7% for 2001, 2000 and 1999, respectively. The 2000 operating results included a non-recurring pretax charge of $505 million associated with the in-process research and development from the acquisition of the Hughes space and communications businesses (renamed Boeing Satellite Systems) and Autometric businesses, along with $78 million in costs associated with a Delta III demonstration launch in August 2000. The 1999 operating results included a pretax gain of $95 million related to the sale of Boeing Information Systems to Science Applications International Corporation.

The 2001 segment operating margins improved over 2000 due to excellent International Space Station on-orbit performance, and improved Integrated Defense Systems and Ground-Based Midcourse Defense program performance. These margins were reduced by company investments in the development of new products, in particular, the Delta IV launch vehicle and the 737 Airborne Early Warning & Control System (AEW&C) program. Additionally, earnings were impacted by $131 million for the amortization of goodwill and acquired intangibles principally associated with the acquisition of Boeing Satellite Systems. The Company projects that 2002 operating earnings will continue to be impacted by new product development expenses but to a lesser degree than in prior years, primarily due to the transition of the Delta IV launch vehicle into production. Program margins for the Space and Communications segment, excluding non-recurring items and research and development, were 11.0% in 2001 and 10.8% in 2000.

Significant risk remains related to work in process inventory and supplier commitments for the Delta III program. In order to mitigate some of this risk, four Delta IIIs were converted to Delta IIs in 2001. These risk assessments remain closely monitored, and additional opportunities for conversions are under review.

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