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Notes
to Consolidated Financial Statements (continued) Years
ended December 31, 1998, 1997 and 1996 Note
17 The derivative financial instruments held by the Company at December 31, 1998, consisted of simple and specifically tailored interest rate swaps and foreign currency forward contracts. The Company does not trade in derivatives for speculative purposes. The interest rate swaps, which are associated with certain customer financing receivables and long-term debt, are designed to achieve a desired balance of fixed and variable rate positions. These swaps are accounted for as integral components of the associated receivable and debt, with interest accrued and recognized based upon the effective rates. Due to the component nature of these interest rate swaps, there are no associated gains or losses. (See Note 8, Note 13 and Note 20.) Foreign currency forward contracts are entered into to hedge specific receipt and expenditure commitments made in foreign currencies. As of December 31, 1998, the notional amount of foreign currency forward contracts through 2002 denominated in foreign currencies was $395, with unrealized gains, net of unrealized losses, of $2. The Company believes that there is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of derivative financial instruments. Note
18 The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk include financing commitments, credit guarantees, and participation in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables. Irrevocable financing commitments related to aircraft on order, including options, scheduled for delivery through 2004 totaled $6,239 and $6,029 as of December 31, 1998 and 1997. The Company anticipates that not all of these commitments will be used and that it will be able to arrange for third-party investors to assume a portion of the remaining commitments, if necessary. The Company has additional commitments to arrange for commercial equipment financing totaling $163 and $132 as of December 31, 1998 and 1997. Participations in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables totaled $62 and $64 as of December 31, 1998 and 1997. The Company’s maximum exposure to credit-related losses associated with credit guarantees, without regard to collateral, totaled $1,426 ($730 associated with commercial aircraft and collateralized) and $955 ($660 associated with commercial aircraft and collateralized) as of December 31, 1998 and 1997. The Company’s maximum exposure to losses associated with asset value guarantees, without regard to collateral, totaled $444 and $470 as of December 31, 1998 and 1997. These asset value guarantees relate to commercial aircraft and are collateralized. Note
19 Financial instruments involving potential credit risk are predominantly with commercial airline customers and the U.S. Government. As of December 31, 1998, off-balance-sheet financial instruments described in Note 18 predominantly related to commercial aircraft customers. Of the $8,999 in accounts receivable and customer financing included in the Consolidated Statements of Financial Position, $4,871 related to commercial aircraft customers and $2,058 related to the U.S. Government. No single commercial airline customer is associated with more than 17% of all financial instruments relating to customer financing. Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral. Of the $4,871 of commercial accounts receivable and aircraft customer financing, $3,511 related to customers the Company believes have less than investment-grade credit. Similarly, of the $6,239 of irrevocable financing commitments related to aircraft on order including options, $4,067 related to customers the Company believes have less than investment-grade credit. The Company has customer financing and commitments to arrange for future financing with Trans World Airlines (TWA) totaling $2,363. TWA continues to operate under a reorganization plan, confirmed by the U.S. Bankruptcy Court in 1995, which restructured its indebtedness and leasehold obligations to its creditors. In addition, TWA continues to face financial and operational challenges. Further deterioration of TWA’s financial condition could adversely affect the performance of customer financing extended to TWA; however, based on the Company’s assessment of the underlying collateral position held by the Company, possible future non-performance of financing currently extended to TWA would not have a material adverse impact on the Company’s liquidity or results of operations. Note
20 As of December 31, 1998 and 1997, the carrying amount of accounts receivable was $3,288 and $3,121, and the fair value of accounts receivable was estimated to be $3,239 and $3,033. The lower fair value reflects a discount due to deferred collection for certain receivables that will be collected over an extended period. The carrying value of accounts payable is estimated to approximate fair value. The carrying amount of notes receivable, net of valuation allowance, is estimated to approximate fair value. Although there are generally no quoted market prices available for customer financing notes receivable, the valuation assessments were based on the respective interest rates, risk-related rate spreads and collateral considerations. As of December 31, 1998 and 1997, the carrying amount of debt, net of capital leases, was $6,539 and $6,354, and the fair value of debt, based on current market rates for debt of the same risk and maturities, was estimated at $7,198 and $6,996. The Company’s debt, however, is generally not callable until maturity. With regard to financial instruments with off-balance-sheet risk, it is not practicable to estimate the fair value of future financing commitments, and all other off-balance-sheet financial instruments are estimated to have only a nominal fair value. The terms and conditions reflected in the outstanding guarantees and commitments for financing assistance are not materially different from those that would have been negotiated as of December 31, 1998. Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below. 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. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company’s policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company’s financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings exclusive of special charges. Such accruals as of December 31, 1998, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company’s financial position or operating results and cash flow trends. The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. In 1991 the U.S. Navy notified the Company and General Dynamics Corporation (the Team) that it was terminating for default the Team’s contract for development and initial production of the A-12 aircraft. The Team filed a legal action to contest the Navy’s default termination, to assert its rights to convert the termination to one for “the convenience of the Government,” and to obtain payment for work done and costs incurred on the A-12 contract but not paid to date. At December 31, 1998, inventories included approximately $581 of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350. The amount of the provision, which was established in 1990, was based on the Company’s belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, that the Team would establish a claim for contract adjustments for a minimum of $250, that there was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company then believed was the upper range of possible loss on termination for convenience, which was $350. On December 19, 1995, the U.S. Court of Federal Claims ordered that the Government’s termination of the A-12 contract for default be converted to a termination for convenience of the Government. On December 13, 1996, the court issued an opinion confirming its prior no-loss adjustment and no-profit recovery order. On December 5, 1997, the Court issued an opinion confirming its preliminary holding that plaintiffs were entitled to certain adjustments to the contract funding, increasing the plaintiffs’ possible recovery to $1,200. On March 31, 1998, the Court entered a judgment, pursuant to a March 30, 1998, opinion and order, determining that plaintiffs were entitled to be paid that amount, plus statutory interest from June 26, 1991, until paid. Although the Government has appealed the resulting judgment, the Company believes the judgment will be sustained. Final resolution of the A-12 litigation will depend on such appeals and possible further litigation, or negotiations, with the Government. If sustained, however, the expected damages judgment, including interest, could result in pretax income that would more than off-set the $350 loss provision established in 1990. On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington in Seattle. The lawsuit named as defendants the Company and three of its executive officers. Additional lawsuits of a similar nature have been filed. The plaintiffs in each lawsuit seek to represent a class of purchasers of Boeing stock between July 21, 1997, and October 22, 1997, (the “Class Period”), including recipients of Boeing stock in the McDonnell Douglas merger. July 21, 1997, was the date on which the Company announced its second quarter results, and October 22, 1997, was the date on which the Company announced charges to earnings associated with production problems being experienced on commercial aircraft programs. The lawsuits generally allege that the defendants desired to keep the Company’s share price as high as possible in order to ensure that the McDonnell Douglas shareholders would approve the merger and, in the case of two of the individual defendants, to benefit directly from the sale of Boeing stock during the Class Period. The plaintiffs seek compensatory damages and treble damages. The Company believes that the allegations are without merit and that the outcome of these lawsuits will not have a material adverse effect on its earnings, cash flow or financial position. On June 6, 1998, sixteen African American employees of The Boeing Company, previously employed at several distinct units of The Boeing Company, McDonnell Douglas Corporation and Rockwell International Corporation, filed a complaint in the U.S. District Court for the Western District of Washington (Washington Class Action) alleging, on the basis of race, discrimination in promotions and training. The plaintiffs also allege retaliation and harassment and seek, among other things, an order certifying a class of all African American employees who are currently working or have worked for the three companies during the past few years. Also, on July 31, 1998, seven African American employees of the helicopter division of the Military Aircraft and Missile Systems Group in Philadelphia filed an action in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia Class Action) alleging, on the basis of race, discrimination in compensation, promotions and terminations. The complaint also alleges retaliation at that division. Plaintiffs are seeking an order certifying a class of all African American employees of The Boeing Company. In September 1998, the Court denied plaintiffs’ motion seeking class certification, but allowed plaintiffs to renew their motion upon completion of class discovery. On January 25, 1999, the U.S. District Court in the Western District of Washington entered an order preliminarily approving a proposed Consent Decree, which settles both the Washington Class Action and the Philadelphia Class Action, along with a multi-plaintiff racial discrimination lawsuit. The order, inter alia, conditionally certified a nationwide class of 20,000 current and former African American Boeing (including all U.S. subsidiaries and former McDonnell Douglas Corporation and Rockwell International) employees. If approved by the Court, the Company will pay $15 allocated in a manner described in the proposed Consent Decree. The Company will devise systems changes that will inform hourly employee class members about the promotion selection process, and which employee was awarded a certain promotion; provide training and other programs to assist employees with career development; employ a consultant to assess these system changes; implement across the system a revised first-level management selection process and revised internal complaint process; and implement enforcement procedures to maintain a harassment-free workplace. A hearing is set for May 26, 1999, to determine the fairness of the proposed Consent Decree, and if so determined, for the Court to approve the Consent Decree. The Company believes that the proposed Consent Decree, if approved, will not have a materially adverse effect on its earnings, cash flow or financial position. Segment information may be found by clicking HERE.
The Boeing Company and Subsidiaries |
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