We operate in six principal segments: Commercial Airplanes; Aircraft and Weapon Systems (A&WS), Network Systems, Support Systems, and Launch and Orbital Systems (L&OS), collectively IDS; and BCC. All other activities fall within the Other segment, principally made up of Boeing Technology, Connexion by BoeingSM and Air Traffic Management.
Our Commercial Airplanes operation principally involves development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide.
IDS operations principally involve research, development, production, modification and support of the following products and related systems: military aircraft, both land-based and aircraftcarrier- based, including fighter, transport and attack aircraft with wide mission capability, and vertical/short takeoff and landing capability; helicopters and missiles, space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines and information and battle management systems. Although some IDS products are contracted in the commercial environment, the primary customer is the U.S. Government.
See Note 24 for a discussion of the BCC segment operations.
Boeing Technology is an advanced research and development organization focused on innovative technologies, improved processes and the creation of new products. Connexion by BoeingSM provides two-way broadband data communications service for global travelers. Air Traffic Management is a business unit developing new approaches to a global solution to address air traffic management issues. Financing activities other than BCC, consisting principally of four C-17 transport aircraft under lease to the UKRAF, are included within the Other segment classification.
In the first quarter of 2002, we began separately reporting BCC which was originally included in the Customer and Commercial Financing segment classification. The 2001 results have been restated to conform to the revised segment classification with the remaining balance reclassified to the Other segment.
While our principal operations are in the United States, Canada and Australia, some key suppliers and subcontractors are located in Europe and Japan. Sales and other operating revenue by geographic area consisted of the following:
Commercial Airplanes segment sales were approximately 80%, 78% and 70% of total sales in Europe and approximately 90%, 87% and 89% of total sales in Asia, excluding China, for 2003, 2002 and 2001, respectively. IDS sales were approximately 16%, 20% and 29% of total sales in Europe and approximately 8%, 12% and 10% of total sales in Asia, excluding China, for 2003, 2002 and 2001, respectively. Exclusive of these amounts, IDS sales were principally to the U.S. Government and represented 50%, 42% and 33% of consolidated sales for 2003, 2002 and 2001, respectively. Approximately 4% of operating assets are located outside the United States.
The information in the following tables is derived directly from the segments’ internal financial reporting used for corporate management purposes.
For segment reporting purposes, we record Commercial Airplanes segment revenues and cost of sales for airplanes transferred to other segments. Such transfers may include airplanes accounted for as operating leases and considered transferred to the BCC segment and airplanes transferred to the IDS segment for further modification prior to delivery to the customer. The revenues and cost of sales for these transfers are eliminated in the ‘Accounting differences/eliminations’ caption. In the event an airplane accounted for as an operating lease is subsequently sold, the ‘Accounting differences/eliminations’ caption would reflect the recognition of revenue and cost of sales on the consolidated financial statements.
For segment reporting purposes, we record IDS revenues and cost of sales for only the modification performed on airplanes received from Commercial Airplanes when the airplane is delivered to the customer or at the attainment of performance milestones. The ‘Accounting differences/eliminations’ caption would reflect the recognition of revenues and cost of sales for the premodified airplane upon delivery to the customer or at the attainment of performance milestones.
Beginning in 2003, the Commercial Airplanes segment is being reported under the program method of accounting. Prior to 2003, the Commercial Airplanes segment reported cost of sales based on the cost of specific units delivered. The Commercial Airplanes segment numbers for the periods ending December 31, 2003, 2002 and 2001, have been revised to reflect the program method of accounting.
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, the differences between workers’ compensation costs recognized under SFAS No. 5, Accounting for Contingencies, and under federal cost accounting standards, under which adjustments to prior years’ estimates of claims incurred and not reported are recognized in future periods; 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.
Unallocated expense includes corporate costs not allocated to the operating segments, including, for the period ended December 31, 2001, goodwill amortization resulting from acquisitions prior to 1998. For the period ended December 31, 2002, unallocated expense does not include goodwill amortization as a result of our adopting SFAS No. 142, as described in Note 4.
Unallocated expense also includes the recognition of an expense or a reduction to expense for deferred stock compensation plans resulting from stock price changes as described in Note 16. The cost attributable to share-based plans expense is not allocated to other business segments except for the portion related to BCC. Depreciation and amortization relate primarily to shared services assets.
Unallocated assets primarily consist of cash and short-term investments, prepaid pension expense, goodwill acquired prior to 1997, deferred tax assets and capitalized interest. Unallocated liabilities include various accrued employee compensation and benefit liabilities, including accrued retiree health care and income taxes payable. Debentures and notes payable are not allocated to other business segments except for the portion related to BCC. Unallocated capital expenditures relate primarily to shared services assets. The segment assets, liabilities, capital expenditures and backlog are summarized in the tables below.
Note 24 – Boeing Capital Corporation (BCC)
BCC, a wholly-owned subsidiary, is primarily engaged in the financing of commercial and private aircraft and commercial equipment. However, in November 2003, we announced a significant change in BCC’s strategic direction, moving to a focus of supporting our major operating units and managing overall corporate exposures. Additionally, in January 2004, we announced that we are exploring strategic options for the future of BCC’s Commercial Financial Services business.
The portfolio consists of financing leases, notes and other receivables, equipment under operating leases (net of accumulated depreciation), investments and equipment held for sale or re-lease (net of accumulated depreciation). BCC segment revenues consist principally of interest from financing receivables and notes, lease income from operating lease equipment, investment income, gains on disposals of investments and gains/losses on revaluation of derivatives. Cost of products and services for the segment consists of depreciation on leased equipment, asset impairment expenses and other charges and provisions recorded against the valuation allowance presented in Note 9. Beginning in 2003, interest expense is being reported as a component of operating earnings. Intracompany profits, transactions and balances (including those related to intracompany guarantees) have been eliminated in consolidation and are reflected in the “Boeing” columns below.
Operating cash flow in the Consolidated Statements of Cash Flows includes intracompany cash received from the sale of aircraft by the Commercial Airplanes segment for customers who receive financing from BCC. The contribution to operating cash flow related to customer deliveries of Boeing airplanes financed by BCC amounted to $1,672, $2,691 and $2,960 for the years ended December 31, 2003, 2002 and 2001, respectively. Investing cash flow includes a reduction in cash for the intracompany cash paid by BCC to Commercial Airplanes as well as an increase in cash for amounts received from third parties, primarily customers paying amounts due on aircraft financing transactions.
As part of BCC’s quarterly review of its portfolio of financing assets and operating leases, additions to the valuation allowance and specific impairment losses were identified. During the year ended December 31, 2003 and 2002, BCC increased the valuation allowance by $130 and $100, resulting from deterioration in the credit worthiness of its airline customers, airline bankruptcy filings and continued decline in aircraft and general equipment asset values. Also during 2003, BCC recognized impairment charges of $103 and charges related to the writeoff of forward-starting interest rate swaps related to Hawaiian of $21. During 2002, BCC recognized charges of $13 due to impairments of investments in ETCs, charges of $48 due to impairments of joint venture aircraft and charges of $39 related to valuations of other assets in the portfolio.
Intracompany Guarantees
We provide BCC with certain intracompany guarantees and other subsidies.
Intracompany guarantees primarily relate to residual value guarantees
and credit guarantees (first loss deficiency guarantees and rental guarantees).
Residual value guarantees provide BCC a specified asset value at the
end of a lease agreement with a third-party in the event of a decline
in market value of the financed aircraft. First loss deficiency guarantees
cover a specified portion of BCC’s losses on financed aircraft
in the event of a loss upon disposition of the aircraft following a default
by the third-party lessee. Rental guarantees are whole or partial guarantees
covering BCC against the third-party lessee’s failure to pay rent
under the lease agreement. In addition to guarantees, other subsidies
are also provided to BCC mainly in the form of rental payments on restructured
third-party leases and interest rate subsidies.
As a result of guaranteed residual values of assets or guaranteed income streams under credit guarantees, BCC is abated from asset impairments on the guaranteed aircraft to the extent of guarantee coverage. If an asset impairment is calculated on a guaranteed aircraft, the impairment charge is generally recorded in the Other segment. If the guarantee amount is insufficient to cover the full impairment loss, the shortage is recorded by BCC.
Due to intracompany guarantees, the BCC accounting classification of certain third-party leases may differ from the accounting classification in the consolidated financial statements (i.e. direct financing lease at BCC, operating lease in the consolidated financial statements; or leveraged lease at BCC, sales-type lease in the consolidated financial statements). In these cases, the accounting treatment at BCC is eliminated and the impact of the consolidated accounting treatment is recorded in the Other segment.
The following table provides the financial statement impact of intracompany guarantees and asset impairments, lease accounting differences and other subsidies. These amounts have been recorded in the operating earnings of the Other segment.
Included in ‘Guarantees and asset impairments’ for the year ended December 31, 2003, were asset impairments and other charges of $5 related to the deterioration of aircraft values, reduced estimated cash flows for operating leases and the renegotiation of leases. Also included is an increase in the customer financing valuation allowance of $61 resulting from guarantees provided to BCC.
In January and February 2004, we received federal tax refunds and a notice of an approved refund totaling $145 (of which $40 represents interest). The refunds related to a settlement of the 1996 tax year and the 1997 partial tax year for McDonnell Douglas Corporation, which we merged with on August 1, 1997. The notice of an approved refund related to the 1985 tax year. These events resulted in a $20 increase in net earnings for the year ended December 31, 2003.