Financial Report

Financial Report 1995

Management’s Discussion and Analysis (part - III)

Liquidity and Capital Resources Summary

The $2.3 billion of long-term debt, primarily issued in the 1990–1993 time period, is unsecured, and has an average maturity of approximately 30 years. Total long-term debt as of year-end 1995, excluding $250 million with a March 1996 maturity, amounted to 19% of total book capital (shareholders’ equity plus borrowings).

The Company believes it has substantial additional long-term borrowing capability, although no additional debt issuances are anticipated at this time. Revolving credit line agreements with a group of major banks, totaling $2.0 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 to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise.

Contingent Items

As discussed in Note 17 to the Consolidated Financial Statements, the U.S. Government terminated for alleged default most of the work required under contracts for a Saudi Arabia air defense system known as the Peace Shield program and selected another contractor to perform the terminated work. In conjunction with the notice of partial termination, the Government demanded that the Company repay $605 million of Peace Shield unliquidated progress payments. In April 1995, an agreement was executed deferring the Company’s potential obligation to repay the $605 million from January 25, 1991, until a decision of the court or earlier settlement. The deferment agreement is subject to annual review by the Government. Management believes that the Government’s grounds for default are not legally supportable and on appeal the Government’s position will be overturned. The Company filed its complaint in the United States Court of Federal Claims to overturn the default termination and submitted a Contract Claim for equitable adjustment to the contract prices and schedules. The Company’s financial statements assume that the termination for default will be overturned and that the Contract Claim will be settled in the Company’s favor. The parties have been engaged in the discovery phase of the litigation, with the trial scheduled for March 1997, and have concurrently engaged in discussions which could lead to final settlement. On October 20, 1995, the court determined all activities in the lawsuit would be "suspended in light of the prospect of settlement."

There can be no assurance that the Government will agree to final settlement on terms acceptable to the Company. If a final settlement is not reached, the Company expects that its position will ultimately be upheld with respect to the termination action and that it will recover on the Contract Claim. If the Company’s appeal of the termination for default is not successful, the Company could realize a pretax loss on the program approximating the value of the unliquidated progress payments plus related interest and potential damages.

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. Based on in-depth studies, expert analyses and legal reviews, the Company routinely assesses its contingencies, obligations and commitments to clean up sites, including assessments of the probability of recoveries from other responsible parties who have and have not agreed to a settlement and recoveries from insurance carriers. The Company’s policy is to immediately recognize identified exposures related to environmental cleanup sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred in connection with such activities have not had a material impact to the Company’s financial position. Based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in a materially adverse impact on the Company’s future financial position or operating results and cash flow trends.

Commercial Aircraft Business Environment and Trends

The worldwide market for commercial jet transports is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth in developed and emerging countries and political stability. Demand for the Company’s commercial aircraft is further influenced by world trade policies, government-to-government relations, environmental constraints imposed upon airplane operations, airline industry profitability, technological changes, and price and other competitive factors.

Global Economic and Passenger Traffic Trends

Since the 1970s, world air travel has grown in parallel with prevailing economic conditions. Major slumps occurred in tandem with the two petroleum price-driven world recessions and the most recent worldwide recession in developed countries, which followed the high economic growth of the late 1980s. The current world economic recovery has been moderate in the United States and slow in Europe. Japan is projected to experience a modest recovery beginning in 1996. Current economic indications suggest that most Asian economies will continue to experience rapid expansion.

As the world economy has improved, airline passenger traffic has been increasing. Following the decline in passenger traffic in 1991, the first annual decline since the start of the jet era, worldwide passenger traffic has grown steadily. For the four-year period 1992–1995, the average annual growth rate for worldwide passenger traffic (excluding traffic in the nations of the Commonwealth of Independent States and the three Baltic republics) was approximately 6 1/2 %. The Company’s forecast of the average long-term growth rate in passenger traffic is approximately 5.6% annually for the balance of the decade and slightly less than 5%for the balance of the 20-year forecast period, based on average worldwide economic real growth of 3.2% over the period.

Significant excess capacity in the worldwide aircraft fleet developed during the recent global recession following several years of record-setting delivery levels of new jet transports. At the end of 1993, approximately 1,100 commercial jet transports out of the total world fleet of over 11,000 aircraft were in out-of-service status. By the end of 1995, that number had declined to approximately 730. Due to noise constraints, inferior economics of older aircraft and the market requirement for readily available used aircraft, the Company currently estimates that less than one-fourth of the stored aircraft are potentially practical alternatives to new aircraft for airlines seeking added capacity.

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 transport market opportunity over the next 20 years at more than $1,000 billion in 1995 dollars.

Airline Profitability

The airline industry’s ability to achieve substantial levels of profitability will be an important factor in determining whether the Company’s long-term market forecast will be realized. In addition to aggressive cost reduction measures being taken by many airlines, continued growth in passenger traffic, together with stable fare structures, are important conditions if the airline industry is to sustain acceptable earnings levels.

Through a combination of passenger traffic growth, improved revenue, lower fuel costs and aggressive cost reduction measures, the airline industry showed significant improvement in operating profitability over the past few years. Airlines’ net earnings (after interest costs on debt) also showed a marked improvement in both 1994 and 1995. In the aggregate, the industry achieved approximately a break-even level of net earnings in 1994 and a substantial positive level of earnings in 1995, following four years of net losses. Most airline industry analysts project additional gains in 1996.

Worldwide airline industry core operating profits:

Aircraft Replacement Due to Noise Regulations

There are approximately 3,600 Stage 2 aircraft worldwide that cannot operate in conformity with legislated noise requirements to be phased in by the year 2002. Approximately 2,100 of these aircraft are in the United States and most of the remainder operate in Europe. Airlines have the option of hushkitting Stage 2 aircraft, replacing them, or selling or removing them from service without replacement. The Company projects that about one-half of the U.S. Stage 2 aircraft will eventually be hushkitted, and the remainder, primarily older aircraft, will be replaced.

Industry Competitiveness and World Trade Policies

Since the 1970s, the Company has maintained approximately a 60% share of the available commercial jet transport market. This market share has been maintained throughout the economic cycles of the commercial jet transport market, including the difficult market environment in recent years that has resulted in lower production rates and excess production capacity for all jet transport manufacturers. With regard to new orders, this market environment results in intense pressures on pricing and other competitive factors. The Company’s focus on improving processes and other cost reduction efforts are intended to enhance the ability to pursue pricing strategies that enable the Company to maintain market share 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. Online access to engineering drawings and parts lists needed for aircraft maintenance is already available to airline customers, and in 1996, service bulletins and maintenance manuals will also be delivered online. To help airline customers more effectively manage their operating costs, new facilities and systems now provide for next-day shipment for routine spare parts orders, and the highest priority orders are processed and ready for shipment within two hours. A new regional customer service center was opened in Beijing in 1994 to serve growing airline requirements in China and other Asian countries, and the center is currently being expanded to stock 30,000 spare parts. The Company now has 17 field service bases located throughout China. In 1995 the Company opened an avionics center in Singapore that is able to service a significant number of Asian customers.

Over the past five years, sales outside the United States have accounted for more than 70% of the Company’s total commercial aircraft sales, and approximately 60% of the contractual backlog at year-end 1995 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.

In 1992 the U.S. Government and the European Community announced agreement on interpreting the commercial aircraft code of the General Agreement on Tariffs and Trade (GATT). The 1992 agreement bans government production subsidies and limits development in the form of loans to 33% of development costs. The Company would have preferred a ban on all government subsidies for commercial airplane programs, but the controls embodied in the 1992 agreement were considered important in limiting future government subsidies to Airbus Industrie, the Company’s European competitor.

The World Trade Organization (WTO), based in Geneva, was inaugurated in 1995. Consisting of approximately 110 nations, the WTO was established to promote open and nondiscriminatory trade among its members. The WTO contains an improved subsidies code, applicable to all members, that provides important protections against injurious subsidies by governments, as well as improved dispute settlement procedures to resolve disagreements between nations. Company forecasts indicate that the airlines of China represent a significant potential for commercial jet transport orders over the next 20 years; however, China is not currently a member of the WTO. The Company believes the accession of China to the WTO and the granting of permanent Most-Favored-Nation trading status by the U.S. Government would help ensure an open market and effective trade policies. However, if government and trade relations between the United States and China deteriorate significantly, the Company’s ability to sell commercial aircraft to airlines in China could become severely constrained.

Airlines of Russia and other States of the former Soviet Union operate a limited number of western-built aircraft, principally under operating leases with leasing firms. Because of high customs taxes and financing constraints, the potential for new aircraft orders has been severely limited. In January 1996, the U.S. Government reached a trade agreement with the Russian Federation that provides for future aircraft tariff reductions. The Company expects that the airlines and aircraft manufacturing industry of this region will eventually be integrated into the international economy.

Summary

Although market uncertainties remain, particularly with respect to the airline industry’s profitability and open market access, the long-term market outlook remains favorable. The Company is well positioned in all segments of the commercial jet transport 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.

Defense and Space Business Environment and Trends

Procurement budget – Department of Defense and NASA:

Uncertain defense priorities and severe U.S. Government budget pressures continue to characterize the business environment for the defense and space segment. Since 1992, total procurement and research funding for U.S. Government defense and space programs has declined nearly 20%. As a consequence, over the last few years, some of the Company’s programs have been subject to stretch-out, curtailment or termination. Although a number of programs remain subject to future stretch-out and curtailment, the Company’s defense and space business is broadly diversified among priority government programs involving military aircraft, helicopters, information and electronic systems, and space systems. Additionally, the Company’s programs are balanced between potential future production programs and ongoing modernization activities for existing defense systems. At this time, total U.S. Government defense and space funding for procurement and research programs is expected to be relatively constant over the next five years.

During 1994 and 1995, an increasing percentage of the Company’s defense and space business was contracted under cost-reimbursement-type contracts. The current major developmental programs, principally the International Space Station, F-22 fighter, V-22 Osprey tiltrotor aircraft and RAH-66 Comanche helicopter, primarily involve cost-reimbursement-type contracts.

In addition to the developmental programs mentioned above, the major revenue-producing programs for 1995 included production and remanufacturing of CH-47 helicopters, updating and modifying various military aircraft and systems, production of 767 Airborne Warning and Control System (AWACS) for the Government of Japan, continuing B-2 bomber subcontract work, other program support and classified project activities.

Significant restructuring in the form of mergers, acquisitions and strategic alliances are continuing throughout the industry as a result of the reduced opportunities for new programs. Internal consolidations and restructuring of the Company’s defense and space operations have helped position the Defense & Space Group to effectively compete in the current market environment. The Company continues to examine whether its long-term strategy is best pursued through internal means or through acquisitions, dispositions or alliances. Joint venture arrangements with other companies are expected to continue to be common for major developmental programs and follow-on production activities. Currently, the Company’s activities in the F-22, V-22 and RAH-66 developmental programs are under joint venture arrangements.

Sales to foreign governments represented 19% of total 1995 defense and space sales, compared with an average of 10% for the prior three years, principally due to foreign government sales associated with the 767 AWACS and CH-47 programs in 1995.

In 1993 NASA selected Boeing to become the prime contractor for the restructured International Space Station program, which now includes Russian participation. The selection as prime contractor for the International Space Station was an acknowledgment of Boeing Defense & Space Group’s ability to effectively manage large, complex integration projects, and represents an assignment of great importance to both theCompany and the country’s manned space program. Boeing is responsible for the design, development and integration of the Space Station, as well as completion of its original work package to build the habitat and laboratory modules. In early 1995, the International Space Station contract was definitized with NASA at a target price of $5.6 billion. First launch of a Space Station component is currently scheduled for 1997.

The F-22 fighter, being developed in partnership with Lockheed Martin, remains a high priority defense program. The Air Force completed its Air Vehicle Critical Design Review in the first quarter of 1995, and first flight is currently scheduled to occur in early 1997. Low-rate initial production is scheduled to begin approximately two years later.

The 767 AWACS program is expected to provide important business opportunities over the long term in international markets and ultimately with the U.S. Government. Currently, four 767 AWACS have been ordered by the Government of Japan. The first two 767 airframes have been delivered and are undergoing modification for installation of the AWACS system. Completion of the first 767 AWACS system aircraft is scheduled for 1998. In October 1995, the U.S. Air Force placed into service the first 707 AWACS to incorporate a major block of enhancements, the first significant AWACS enhancements in 10 years. U.S. Government and NATO 707 AWACS upgrades continue to be a significant defense and space activity. Revenues for these upgrades increased in 1995.

The V-22 Osprey tiltrotor aircraft, being developed in partnership with Bell Helicopter Textron, has maintained strong congressional support. The V-22 will satisfy U.S. Marine Corps and Special Operations Forces medium-lift requirements with exceptional mobility and rapid deployment. Critical Design Review for the V-22 was successfully completed in late 1994, and the current engineering and manufacturing development contract will provide four production-representative aircraft for operational tests scheduled to begin in late 1996.

The RAH-66 Comanche, a reconnaissance light-attack helicopter for the U.S. Army, is being jointly developed with Sikorsky. First flight of the Comanche prototype occurred in January 1996.

The CH-47 Chinook helicopter program currently consists of modernizing and remanufacturing earlier model Chinooks and production of new CH-47s. In July 1995, the Company received a contract award from Britain’s Ministry of Defence for 14 new Chinook helicopters. These deliveries will begin in 1997. Near-term sales prospects are principally with foreign governments.

Other business activities include developing largescale information systems and providing management services, principally for government agencies.

Strategic Investments for Long-Term Value

Over the past several years, the Company has made significant investments to meet future airline product requirements and to aggressively pursue business and process improvement opportunities. Although constraining earnings and requiring substantial cash resources in the near term, these investments are building long-term value by streamlining operations and positioning the Company to maintain its leadership position.

New Product Development

The Company continually evaluates opportunities to improve current models, and conducts ongoing marketplace assessments to ensure that its family of jet transports 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 airplanes. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products that exhibit the highest standards of quality, safety, technical excellence, economic performance, and in-service support.

The major focus of development activities over the past three years has been the 777 wide-body twinjet which entered service in May 1995. The new 777 model is designed to meet airline requirements for an efficient, comfortable, high-capacity airplane to be used in domestic and regional markets internationally. Deliveries of the extended-range version 777-200 will begin in late 1996, followed in 1998 by the 777-300 version with 20% greater passenger-carrying capability. As of January 25, 1996, orders for 250 and options for 138 777s have been announced by 20 customers.

Development of the 737-600/700/800 next-generation 737 family of short-to-medium-range jetliners began in 1993. These new 737s will provide greater range, increased speed, and reduced noise and emissions while maintaining 737 family commonality. The 737-700, the middle-sized member of the family, will be the first version to be placed into service, with initial deliveries scheduled for late 1997 to Southwest Airlines. The 737-800, a larger version, is currently scheduled to be delivered in early 1998 to Hapag-Lloyd. Initial delivery of the smallest version, the 737-600, is currently scheduled for late 1998 to SAS. As of January 25, 1996, orders for 302 and options for 206 next-generation 737-600/700/800s have been announced by 13 customers.

Other derivatives recently developed include freighter versions of the 747-400 and 767. The initial 747-400 freighter was delivered in 1993, and first delivery of the 767 freighter occurred in the fourth quarter of 1995.

The Company continues to assess the market potential for new or derivative aircraft that are larger and have more range than the 747-400. Because of the relatively limited market for this size and range aircraft and the very substantial investment levels that would be required to develop and produce an all-new aircraft, this market segment may best be met with derivatives of the 747 model. The timing of a decision to proceed with a 747 derivative aircraft and the development schedule will be dependent on customer demand and the Company’s ability to achieve favorable long-term financial returns on the substantial development costs that would be required.

While product development activities are principally oriented toward maintaining and enhancing the competitiveness of the Boeing subsonic fleet, the Company is also involved in studying the technological and economic issues associated with development of commercial supersonic aircraft.

The major developmental programs in the defense and space segment, funded principally under cost-reimbursement-type contracts, include International Space Station, F-22 fighter aircraft, V-22 Osprey tiltrotor transport and RAH-66 Comanche helicopter.

Opportunities for major new U.S. Government defense and space programs in the near term are relatively limited; however, the Company is aggressively seeking ways to capitalize on its existing broad program base and its competitive strength with regard to military and space technology. In recent years, significant resources have been applied in technologies for affordable military aircraft, which has led to award of key conceptual design contracts, including Joint Attack Strike Technology (JAST), a tri-service Defense Department initiative to provide design concepts for an affordable lightweight fighter. During 1995 Boeing completed a series of critical tests with a large-scale JAST model in preparation for the Government’s selection of two competing contractors in 1996 for the Concept Demonstration phase of the program.

Other new business opportunities being pursued or studied include both military and commercial applications. On the military side, potential applications using the Company’s commercial aircraft, particularly the 767, continue to be assessed. In the commercial space arena, Boeing is leading an industrial team to offer highly automated commercial satellite launching from a seagoing launch platform. Team members include Kvaerner a.s. of Norway, RSC-Energia of Russia, and Yuzhnoye of Ukraine. First launch is currently scheduled for 1998. The market requirements and developmental risks associated with a commercial tiltrotor aircraft based on V-22 technology are also being studied. In 1997 the Company will begin producing a phased-array antenna that can provide live television to airline passengers, as well as providing other in-flight communications applications.

Major Process Improvements

The Company remains strongly committed to continuous quality improvement 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 committed to investments in training, restructuring of processes, new technology, and organizational realignment.

The 777, the 737-700 and other recent developmental programs have 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.

A major initiative has been launched to greatly simplify and streamline commercial aircraft configuration control, production management, and related systems. Organizations have been realigned and substantial resources have been dedicated to ensure the new processes and systems are successfully implemented over the next few years.

The Defense & Space Group continues to aggressively pursue important process improvements through integrated product teams to provide cost-effective solutions that maintain technological superiority. One example is a rapid prototyping process that facilitates quick and effective cross-disciplinary integration in creating new product prototypes.

Shareholder Value as Corporate Performance Measure

The Company’s long-range mission is to be the number one aerospace company in the world and among the premier industrial concerns in terms of quality, profitability and growth. The Company has recently revised its fundamental goal with respect to growth and profitability, now defined as increasing shareholder value over the long term. Corporate level and internal operating performance measurements and strategic planning processes are aligned with or directly based on enhancing long-term shareholder value.

Report of Management

To the Shareholders of The Boeing Company:

The accompanying consolidated financial statements of The Boeing Company and subsidiaries have been prepared by management who are responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include amounts based on management’s best estimates and judgments. Financial information elsewhere in this Annual Report is consistent with that in the financial statements.

Management has established and maintains a system of internal control designed to provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. The system of internal control includes widely communicated statements of policies and business practices which are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. The internal controls are augmented by organizational arrangements that provide for appropriate delegation of authority and division of responsibility and by a program of internal audit with management follow-up.

The financial statements have been audited by Deloitte & Touche LLP, independent certified public accountants. Their audit was conducted in accordance with generally accepted auditing standards and included a review of internal controls and selective tests of transactions. The Independent Auditors’ Report appears below.

The Audit Committee of the Board of Directors, composed entirely of outside directors, meets periodically with the independent certified public accountants, management and internal auditors to review accounting, auditing, internal accounting controls, litigation and financial reporting matters. The independent certified public accountants and the internal auditors have free access to this committee without management present.


Frank Shrontz Chairman of the Board and Chief Executive Officer	B.E. Givan Senior Vice President and Chief Financial Officer	Gary W. Beil Vice President and Controller

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, 1995 and 1994, and the related statements of net earnings and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all material respects, the financial position of The Boeing Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
January 25, 1996
Seattle, Washington