Financial Report 1995

Financial Report 1995

Management’s Discussion and Analysis
Results of Operations, Financial Condition and Business Environment

Forward-Looking Information Is Subject To Risk And Uncertainty
Certain statements in the financial discussion and analysis by management contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty, including projections for 1996 deliveries and sales and 1996 research and development expenditures, and various business environment and trends projections. Actual future results and trends may differ materially depending on a variety of factors, including the Company’s successful execution of internal performance plans; product performance risks associated with regulatory certifications of the Company’s commercial aircraft by the U.S. Government and foreign governments; other regulatory uncertainties; collective bargaining labor disputes, performance issues with key suppliers and subcontractors; governmental export and import policies; factors that result in significant and prolonged disruption to air travel worldwide; global trade policies; worldwide political stability and economic growth; changing priorities or reductions in the U.S. Government defense and space budget; termination of government contracts due to unilateral government action or failure to perform; and legal proceedings.

Results of Operations

Revenues

Operating revenues for 1995 were $19.5 billion compared with $21.9 billion in 1994 and $25.4 billion in 1993. The declines in revenue for the past two years were due to fewer commercial jet transport deliveries as a result of economic conditions and airline industry overcapacity in most major market areas of the world. Additionally, a ten-week strike during the fourth quarter of 1995 by the International Association of Machinists and Aerospace orkers (IAM) resulted in the delay of about 30 jet transport deliveries representing approximately $2 billion inreduced sales in 1995. Adjusting for the impact of the labor strike, the Company’s commercial jet transport market share has averaged approximately 60% in terms of sales value of deliveries over the three-year period. Commercial jet transport deliveries by model:

Commercial aircraft products and services accounted for 71%, 77% and 81% of total operating revenues for the years 1995, 1994 and 1993.

Total commercial aircraft production declined from a rate of 32 1/2 aircraft per month at the beginning of 1993 to 18 1/2 in the fourth quarter of 1995, prior to the IAM labor strike. Production rates for all models are expected to recover to prestrike levels during the first quarter of 1996.

Based on current schedules, total aircraft production will increase to 22 1/2 per month by early 1997. The following production rate increases are planned for the second half of 1996: the 747 from 2 to 3 1/2 per month, the 767 from 3 1/2 to 4 per month, and the 737 from 7 to 8 1/2 per month. The 757 production rate will be decreased from 4 to 3 per month, also in the second half of 1996. The 777 production rate is scheduled to reach 3 1/2 per month by the third quarter of 1996 and 5 per month by early 1997.

Total commercial jet transport deliveries for 1996 are currently projected to be approximately 215 aircraft. Commercial transportation sales trends are discussed further in the Commercial Aircraft Business Environment and Trends section.

Sales by industry segment:

Commercial aircraft sales by geographic region:

Defense and space segment revenues, including activities previously identified as "Other industries" in prior years, were $5.6 billion for 1995, compared with $5.1 billion and $4.9 billion for 1994 and 1993, respectively. The International Space Station program was the major contributor to the increase in defense and space revenues in 1994 and 1995, following NASA’s selection of Boeing Defense & Space Group as the prime contractor for the restructured Space Station program in 1993. The 707 and 767 Airborne Warning and Control System (AWACS) programs and the V-22 program also had increased sales in 1995. Sales associated with B-2 bomber subcontract work declined in both 1994 and 1995. The Company’s defense and space business is broadly diversified, and no program accounted for more than 20% of total 1993–1995 defense and space revenues. The International Space Station program represented approximately 25% of total 1995 sales.

The principal contributors to defense and space sales in 1995, in addition to the Space Station program, included F-22 fighter aircraft engineering and manufacturing development activities, production and remanufacturing of CH-47 helicopters, V-22 Osprey tiltrotor transport development and test activities, E-3 AWACS updates, 767 AWACS development and manufacturing, B-2 bomber subcontractor work, RAH-66 Comanche helicopter development activities, and various facilities management and information services contracts (previously reported as "Other industries"). U.S. Government classified projects also continued to contribute to defense and space segment revenues. The Company’s activities on the F-22, RAH-66 and V-22 programs are under joint venture teaming arrangements with other companies.

Defense and space activities are discussed further in the Defense and Space Business Environment and Trends section.

Based on current programs and schedules, the Company projects total 1996 revenues to be approximately $22 billion.

Earnings

Net earnings of $393 million for 1995 include the recognition of a $600 million one-time pretax charge, or $390 million after-tax, for the special retirement program offered in the first half of 1995. Excluding the one-time special retirement program charge, net earnings for 1995 were $783 million, $73 million lower than the 1994 net earnings of $856 million. The lower comparable earnings were primarily due to the decline in commercial jet transport sales discussed above. Also contributing to lower earnings was an increase in interest expense of $21 million in 1995 due to less interest being capitalized on plant and equipment investments.

These factors were partially offset by lower research and development expense, an increase in other income of $87 million principally attributable to increased interest income on investments, and a negative income tax provision. Research and development expense of $1,267 million for 1995 was down $437 million from 1994, primarily due to reduced 777 developmental expenditures. The negative effective income tax rate for 1995 was due to the recognition of higher tax benefits, together with the lower relative pretax earnings after the second quarter earnings charge for the special retirement program and the effect of the labor strike in the fourth quarter. The tax benefit recognized for 1995 included a research and experimentation tax credit of $90 million, primarily associated with the initial 777 development program that was substantially completed in 1995, and Foreign Sales Corporation tax benefits of $75 million. Without the special retirement program charge, the effective tax rate for 1995 would have been 18.4%, compared with 25.1% in 1994. Research and experimentation tax credit and Foreign Sales Corporation tax benefits were $60 million and $65 million, respectively, for 1994.

The special retirement program was offered during the first half of 1995 to achieve desired workforce reductions corresponding with the lower production rates and major process improvement initiatives. Approximately 9,500 employees – 9% of total employees – accepted the early retirement offer. Funding of the program will occur over a minimum of ten years through the Company’s retirement plan and will not have a significant impact on annual cash flow.

The overall operating profit margin, exclusive of research and development expense and the special retirement program expense, was 11.1% for 1995 compared with 13.0% for 1994. The lower overall operating profit margin was primarily attributable to defense and space segment sales being a higher percentage of total sales (28% in 1995, 23% in 1994) and the commencement of 777 jet transport deliveries together with fewer deliveries of all other commercial aircraft models. The overall profit margin before research and development expense for the defense and space segment is normally lower than for the commercial aircraft segment. With regard to the 777 program, new jet transport programs normally have lower operating profit margins than established programs due to initial tooling amortization and higher unit production costs in the early years of a program.

Significant efficiencies have been gained through process improvements, but the commercial jet transport market remains extremely competitive, resulting in continued price pressure. The Company will continue to pursue major productivity gains to help ensure that its favorable market position is maintained at acceptable profit margins.

The diversified programs of the defense and space segment continue to demonstrate solid technical and cost performance. The defense and space segment operating profit margin was 6.6% in 1995 exclusive of the special retirement program expense, compared with 6.0% in 1994. Although the operating profit margin associated with the Company’s managing role for the Space Station program is relatively low (due to fee structure for subcontracts), favorable performance was recognized on other programs in 1995.

Net earnings:

Net earnings of $856 million for 1994 were $388 million lower than in 1993, primarily due to the fewer commercial aircraft deliveries, a higher level of research and development expenditures, increased debt expense, and lower corporate investment income. These factors were partially offset by improved defense and space earnings and a lower effective federal income tax rate. Although commercial aircraft sales levels were down substantially in 1994 relative to 1993, the combined operating profit margin on commercial aircraft programs, before research and development expenditures for new and derivative models, was maintained through efficiencies gained by process improvements throughout the segment’s operations. The lower effective federal income tax rate in 1994 was principally due to the recognition of a research and experimentation tax credit of $60 million in 1994, whereas no research and experimentation credit was recognized in 1993.

Research and development expenditures charged directly to earnings include design, developmental and related test activities for new and derivative commercial jet transports, other company-sponsored product development, and basic defense and space research and development not recoverable under U.S. Government flexibly priced contracts. Research and development associated with new commercial models and derivatives was maintained at relatively high levels over the past three years even though sales were declining during this period. These substantial investment levels are helping to ensure the Company is well positioned to meet future commercial airline market requirements.

The principal commercial developmental program during the 1993–1995 time period has been the new 777 wide-body twinjet. During 1993, the 777 development program transitioned from primarily structural and systems design activities to primarily systems integration and test activities. Flight testing of the Pratt & Whitney-powered 777 began in mid-1994, and continued through the first half of 1995. Flight testing of General Electric-powered and Rolls-Royce-powered 777s continued through 1995. Other commercial development programs in 1994 and 1995 included the 777-200ER extended-range version of the 777, the 737-600/700/800 next-generation 737 family, and a freighter version of the 767. Additionally, in 1995 development efforts commenced for the larger capacity 777-300.

The defense and space segment plans to selectively pursue commercial-type business opportunities where it can utilize its technical and large-scale integration capabilities. Such business pursuits, which are outside the traditional U.S. Government contracting environment, may require increased levels of research and development expenditures for the defense and space segment over the next few years.

Total research and development expenditures for 1996 are currently projected to be in the $1.2 billion range. Research and development activities are discussed further in the Strategic Investments for Long-Term Value section.

Essentially all of the Company’s business is performed under contract, and therefore operating results trends are not significantly influenced by the effects of inflation. Additional information relating to sales and earnings contributions by business segment can be found in Note 18 to the Consolidated Financial Statements.

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, becomes effective in1996. The Company does not plan to adopt the expense-recognition alternative for stock options as permitted by the standard.

Contractual Backlog

Contractual backlog:

Total contractual backlog of unfilled orders at December 31, 1995, was $72.3 billion, compared with $66.3 billion at the end of 1994. Of the total 1995 backlog, $66.5 billion or 92% related to the commercial aircraft segment, compared with $60.6 billion or 91% in 1994. Not included in contractual backlog are purchase options and announced orders for which definitive contracts have not been executed. Commercial backlog includes orders for deliveries that extend several years into the future. Approximately 30% of the commercial aircraft backlog units are scheduled for delivery beyond 1998.

U.S. Government and foreign military backlog is limited to amounts obligated to contracts. Unobligated contract values not included in backlog at December 31, 1995 and 1994, totaled $7.6 billion and $5.9 billion.