Philip M. Condit
Chairman and CEO
The Boeing Company
"Address to Shareholders"
April 28, 2003
Thank you, Jim (Johnson), and let me add my welcome to each of you.
As your chairman, I officially call the annual meeting of The Boeing Company to order. First, I want to introduce our Board of Directors and ask each to stand as called.
- John Biggs, former chairman, president, and CEO of TIAA-CREF, the national teachers' pension fund.
- John Bryson, chairman, president, and CEO, Edison International.
- Ken Duberstein, chairman and CEO, The Duberstein Group.
- Dr. Paul Gray, president emeritus and professor of Electrical Engineering, MIT, who is nominated for re-election.
- John McDonnell, retired chairman, McDonnell Douglas Corporation, who is up for re-election.
- Jim McNerney, chairman and CEO of 3M.
- Lew Platt, retired chairman, president and CEO of Hewlett-Packard Company.
- Roz Ridgway, former assistant secretary of state for Europe and Canada.
- John Shalikashvili, retired chairman of the Joint Chiefs of Staff, U.S. Department of Defense, who is nominated for re-election.
- Harry Stonecipher, retired vice chairman of The Boeing Company, who is also nominated for re-election.
It is my pleasure to introduce, as a group, the members of our senior leadership team as shown in the annual report. This is a great team. Would you please stand - thank you.
Our next item of business is the Chairman's Report.
Next December, we celebrate the centennial of the first powered flight by the Wright brothers. Their vision and courage to keep trying led to success. They had almost given up hope that human flight would happen within their lifetime - until four flights one cold Thursday morning.
Now, I am glad that they didn't give up, that they met the challenges with patience, that they kept trying to unlock the unknown because their efforts led to global jet travel, to space vehicles, and to going to the Moon. I can imagine the pain of disappointment and then the joy of discovery the Wright brothers felt when they took flight, and especially the first time they got it right.
At Boeing, we are well on our way toward our long-term vision and strategy to get it right too. Today we have the right vision, the right strategy, the right people, and the right balance.
Our vision for what we want Boeing to be on our centennial - just 13 years from now - remains the same: "People working together as a global enterprise for aerospace leadership."
Our strategy for execution and growth remains consistent:
- Run healthy core businesses.
- Leverage strengths into new products and new services.
- Open new frontiers.
Our people who make it happen are talented and capable. They are working together in a period of dramatic change and doing what they promised to do with integrity and dedication. I appreciate that very deeply and thank them for all that they do.
The balance in our businesses is right, too. Over the last 10 years, we have created an aerospace company of unrivaled breadth and balance. Just a decade ago, our profile looked very different, and we were a company that was dependent on a very cyclical commercial airplane market. We were 80 percent commercial airplanes and only 20 percent defense and other business.
So I have to ask, "What would this meeting be like today if we had that profile and had failed to broaden the company? Could we survive, let alone prosper, in today's very dynamic environment?"
Fortunately, we look very different, and today your company is a billion-dollar-a-week company with a better-balanced portfolio mix. In 2002, we were 53 percent commercial airplane business and 47 percent integrated defense systems. A series of strategic mergers, acquisitions, and restructuring has minimized our exposure to any one market. Today this better balance has helped us prosper during the most severe commercial airline downturn since the Wright brothers launched those first few flights.
Now let me turn to overall performance for 2002.
Last year, our financial results reflected both retrenchment and growth. We had a depression in the commercial airplane, commercial satellite, and launch segments, and significant growth in our defense, intelligence, and noncommercial space markets.
We had net earnings - before a cumulative effect of accounting change - of $2.3 billion on revenues of $54.1 billion and operating margins of 7.2 percent. Last year's results reflect, as we expected, a decrease in commercial airplanes revenue. They also reflect growth in our defense systems, increased stock-base compensation expense and decreased pension income. Free cash flow was a very robust $3.4 billion. We won key contracts, our backlog increased $5 billion to $139 billion, and we invested in the future with R&D of $1.6 billion.
Let me talk briefly about each of our businesses.
I believe that strong execution is the key to running healthy core business: doing what you say you will do. Last year, our Commercial Airplanes unit said they would manage profitably during this downturn, and they did. They turned in excellent margin performance in the most severe downturn in commercial aviation history.
They did what they said they would do and executed with quick, decisive action. They reduced deliveries by almost 30 percent a year and still managed to shorten flow times, reduce unit costs, streamline assets, implement lean processes, and successfully negotiate key labor contracts. They won 251 gross orders with key wins at leading low-cost airlines. And now All Nippon Airways announced earlier this month its decision to go with an all-Boeing 737 fleet to streamline costs and improve efficiency for its narrow-body fleet for the long term.
Commercial also maintained its focus on the future. They continued to invest for the long term and are actively pursuing an all-new airplane, the 7E7, which has real market impact. In addition, they are creating further derivatives of existing airplanes. Commercial is doing what they said they would do to run a healthy core business no matter what the environment. They continue to execute and are measurably leaner and well prepared for a market recovery.
Last year we merged our Military Aircraft and Missile Systems and Space and Communications units to form a new Integrated Defense Systems unit. That business is now the second largest defense contractor in the United States.
We are reporting our new Integrated Defense Systems as a single core business unit, with four segments. For today's meeting, however, I will report out separately - the way we managed last year - on the merged businesses as they performed in 2002.
The first of those, the Military Aircraft and Missile Systems sector, has been a model of reliable financial and technical execution. They had strong top-line growth, double-digit operating margins, and a 20 percent increase in contractual backlog, and they secured important new military aircraft business. And while the U.S. Air Force's 767 tanker program is not yet in that category, their efforts continue on this program, which is critical to U. S. military capability. Military Aircraft and Missile Systems also made great strides in the development of unmanned vehicles, and in the future we expect this segment of Integrated Defense Systems to continue to execute and deliver strong performance.
Our other Integrated Defense Systems business was Space and Communications. They perform systems integration at the highest level of knowledge and complexity.
The majority of this unit executed extremely well last year; particularly in expanding markets, which included integrated battlespace, missile defense, and proprietary programs. They emerged as a leading industry partner in the U.S. military's transformation with three key programs: Future Combat Systems, Joint Tactical Radio Systems, and FAB-T.
This sector met a very aggressive deadline and executed the first major Homeland Security contract for airport baggage screening. They also demonstrated capabilities in missile defense; integrated a complex array of ground and space assets as prime contractor for the International Space Station; and launched the first Delta IV rocket, which was powered by the first new rocket engine since the early 1980s. However, Space and Communications had challenges last year. As with commercial airplanes, commercial space markets remained very difficult, which impacted last year's financial results. This sector has reorganized and streamlined, and is using proven lean manufacturing and quality processes to drive improvement.
Integrated Defense Systems is a powerful organization with the tools to be the leader in this marketplace.
Last year, we also continued to position our other businesses: Boeing Capital Corporation, Connexion by Boeing and Air Traffic Management.
Boeing Capital Corporation's revenues grew almost 22 percent, reflecting portfolio growth. Their operating results were impacted by the challenging aircraft-financing environment in 2002. We will continue to structure transactions that acknowledge present and future risk, provide appropriate returns, and support our customers. Looking forward, Boeing Capital will remain focused on preserving value and managing risk.
Last year, Connexion by Boeing started revenue service on government aircraft and signed up new airline customers. Early this year, they conducted successful consumer trials on transatlantic flights by Lufthansa and British Airways. Airline interest continues to build, and next year will mark the start of full-scale service on the airlines around the world.
Air Traffic Management refined their concepts and built significant support in the United States and around the world for a revolutionary new global air traffic system.
Our enterprise-wide organizations are Phantom Works and Shared Services, and they continue to unlock value for us.
Phantom Works, our technical arm, continues to leverage innovation and transfer technology across the company. They are harnessing the synergy of 65 senior technical fellows, 381 technical fellows, and 1,661 associate technical fellows, and they are also sponsoring biannual Boeing technical exchange conferences within the company. We are seeing the benefits of creating this environment where powerful minds can exchange information, share diverse thinking, and compare experiences.
The Shared Services Group, our internal infrastructure and non-production activities group, continues to standardize and leverage new ideas. They successfully implemented a worldwide employee badge program using state-of-the-art technology, and they are now pioneering ways to manage daily business to achieve instant collaboration anywhere, anytime. They started a pilot project to transition 1,000 people into a virtual environment where employees work and stay connected through network technology at customer sites, from transitory offices, or from home.
This is a great and capable company. Our financial results in 2002 were good considering the dramatic downturn in the commercial airplanes market.
As we go forward, we will continue to execute and operate in a dynamic environment. Based on what we know today, 2003 commercial deliveries should be about 280 airplanes, down almost 50 percent from 2001. Deliveries in 2004 should be at about the same level. Commercial Airplanes will continue to perform very well and aggressively manage their business, and will emerge from the downturn stronger than ever.
The defense side of our business has grown steadily over the last several years. Our military customer is transforming, and Integrated Defense Systems will be the leading provider of existing capabilities and emerging DoD network-centric systems. As a result of the very different market environments, we expect Integrated Defense Systems' revenues to be greater than half of Boeing's revenue for the next several years.
In the end, the bright future for Boeing relates to several key and powerful reasons. We have the right vision, the right strategy, the right people, and the right balance. We have our 2016 vision. We have our strategy to run healthy core businesses and leverage them into new products and new services, and we will continue to open new frontiers. We have people who do what they say they will do and are committed to excellence and integrity. We have balance, with the greatest set of capabilities in the world. We have strong existing programs and powerful future programs.
And together we are:
- Executing in good times and in bad times.
- Shaping markets of tomorrow.
- Helping customers - and our customers' customers - accomplish their goals.
I am enormously proud of our people because of the courage and fortitude they have shown this past year, which brings me back to where I started. Next December, we celebrate the centennial of the first powered flight by the Wright brothers - two people who modeled great vision, courage, and resilience, which ultimately led them to human flight. As we approach that anniversary and look forward, we can see that our company, our industry, and our customers are changing, learning, and becoming stronger in the most challenging of times. At Boeing, we are on our way, because we have the right vision, the right strategy, the right people, and the right balance.
Now let me close with words that I've said before. We will continue to run this company, and we will run it for the long term, by:
- Delivering strong operating performance and running healthy core businesses.
- Managing the company with the highest standards of corporate governance and ethics.
- Executing our strategy to deliver long-term shareholder value.