Finacial Report part 2

Financial Report 1995

Management’s Discussion and Analysis (part - II)

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 commercial jet transport programs requiring both high developmental expenditures and initial inventory buildup; cyclical growth and expansion requirements; customer financing assistance; and the timing of federal income tax payments.

Cash Flow Summary

Following is a summary of cash flow based on changes in cash and short-term investments. This cash flow summary is not intended to replace the Consolidated Statements of Cash Flows section that is prepared in accordance with generally accepted accounting principles, but is intended to highlight and facilitate discussion of the principal cash flow elements.

(a) Non-cash charges to earnings as presented here consisted of depreciation and retiree health care accruals for all years and the special retirement program charge for 1995. The Company has not funded Statement of Financial Accounting Standards No. 106 retiree health care accruals and, at this time, has no plan to fund these accruals in the future. The special retirement program charge will be funded over a minimum of ten years. Retirement plan funding in excess of retirement plan expense is separately indicated.

(b) Facilities and equipment expenditures have declined each year since 1992 following record-high levels of expenditures in the 1991–1992 time period, reflecting the substantial completion by 1994 of the facilities and equipment expansion for the 777 program. No major plant expansions are currently planned.

(c) Inventory balances on the 737, 747, 757 and 767 commercial jet transport programs declined substantially in 1993 and 1994 due to production rate reductions and improvements in production inventory flow times. These declines were partially offset during 1993 and more than offset in 1994 by substantial production inventory and tooling buildup on the new 777 program. The substantial inventory buildup for the 777 program continued through 1995. Additionally, curtailed deliveries at the end of 1995 due to the ten-week IAM strike resulted in higher inventory levels for all other commercial programs. Defense and space segment inventories declined in 1993, and remained relatively level during the 1994–1995 time period.

d) Commercial customer advances declined during 1993 and 1994 as backlog and deliveries for commercial aircraft programs in total declined. The increase in commercial customer advances during 1995 was principally associated with the 777 program. Approximately 30 777s are scheduled for delivery in 1996, compared with 13 deliveries in 1995. With regard to defense and space contract activity, the ratio of progress billings to gross inventory did not significantly change during this period.

(e) Over the three-year period 1993–1995, changes in accounts receivable, accounts payable, other liabilities and deferred taxes resulted in a net increase in cash of $0.3 billion, largely attributable to an increase in accounts payable and other liabilities of $1.0 billion during this time. Offsetting this principal positive cash flow factor were the effects of increases in deferred tax assets of $0.6 billion during this same time period. Federal income tax payments over the past several years have substantially exceeded the tax provisions on book income, due principally to certain tax law changes previously enacted, resulting in the acceleration of the recognition of taxable income related to long-term contracts and inventory costing. The completion in the next two years of contracts executed under prior tax regulations is projected to result in additional tax payments exceeding income tax expense.

(f ) The changes in customer financing balances have been largely driven both by commercial aircraft market conditions and the ability of the Company to sell customer financing assets. The Company generated $2.6 billion, $0.8 billion and $0.6 billion of cash in 1995, 1994 and 1993 from principal repayments and by selling customer financing receivables. As of December 31, 1995, the Company had outstanding commitments of approximately $3.6 billion to arrange or provide financing related to aircraft on order or under option for deliveries scheduled through 2002. However, not all these commitments are likely to be utilized. The Company will continue to sell customer financing assets from time to time when capital markets are favorable in order to maintain maximum capital resource flexibility. Outstanding loans and commitments are secured by the underlying aircraft.