Enjoyed Some Success; Faced Many Challenges

Boeing, the big kahuna of aerospace, reported its 2003 year-end results on Thursday. Its report revealed the very best and worst the aerospace giant could hope for over the previous 12 month period.

Boeing reported net income of $1.1 billion for the fourth quarter, or $1.37 per share, on revenues of $13.2 billion. Reported net income for 2003 totaled $0.7 billion, or $0.86 per share, on revenues of $50.5 billion. The results include a $1.01 per share non-cash charge to revalue goodwill balances in the first quarter and a $0.87 per share gain related to a federal tax refund in the fourth quarter.

"This past year was notable both for the solid performance turned in by most of our businesses, as well as the challenges we faced," Boeing President and CEO Harry Stonecipher said. "Integrated Defense Systems delivered strong fourth-quarter operating performance and over $50 billion of new orders for the year, which strengthen our revenue outlook going forward."

"Despite the most severe market challenges our industry has faced, Boeing Commercial Airplanes continues to perform well in terms of productivity and profitability. With the Board's approval to begin selling the 7E7, we are well positioned as the industry recovers with an airplane we believe will provide significant benefits to airlines and passengers," he added.

"While there is no doubt that the emergence of ethical issues during the year was deeply disappointing to all of us, I feel strongly that we acted quickly and aggressively to address the issues," Stonecipher said. "As we move into 2004, our focus is on execution, demonstrating our commitment to integrity, and raising our performance to a new level."

The Company’s 2003 earnings from operations of $0.4 billion reflect lower commercial airplane deliveries, commercial space charges, lower pension income, and the revaluation of commercial financing and goodwill assets . These factors were partially offset by continued growth and strong operating performance in the Company’s portfolio of defense businesses and by continued improvements in operating efficiencies at Commercial Airplanes. Excluding the goodwill impairment charges reported earlier in the year, adjusted earnings from operations* were $1.3 billion for 2003.

Boeing Commercial Airplanes

During 2003, Commercial Airplanes aggressively managed for profitability through the downturn in its markets while positioning itself for long-term strength. In December, Commercial Airplanes received authority from the Board of Directors to offer the 7E7 mid-sized airplane, which is designed to provide airlines with substantial gains over current-generation aircraft in efficiency, environmental friendliness, and passenger comfort. Customer interest in the 7E7 is high and the Company projects the addressable market to be approximately $400 billion over the next 20 years.

Commercial Airplanes’ results for the fourth quarter and full year are summarized in Table 5 and reflect solid operating performance on planned lower delivery volumes and the third-quarter decision to complete 757 production after delivering more than 1,000 airplanes over two decades.

For 2003, Commercial Airplanes delivered 281 airplanes generating $22.4 billion of revenue. Operating earnings for the year totaled approximately $0.7 billion, reflecting lower revenues, a goodwill impairment charge in the first quarter, and the decision to conclude the 757 program. These impacts were partially offset by continued improvements in operating efficiencies. Excluding the goodwill impairment charge, adjusted operating earnings* for the year totaled approximately $1.0 billion.

During the fourth quarter, deliveries of commercial airplanes decreased 17 percent to 71 airplanes, and revenues fell 8 percent to $5.8 billion, when compared with the fourth quarter of 2002. Operating earnings totaled $471 million and operating margins increased to 8.1 percent.

Commercial Airplanes captured 81 gross orders during the quarter and 240 for the year from a broad cross-section of customers including many leading low-cost airlines. Contractual backlog totaled $63.9 billion on December 31 compared with $68.2 billion at the end of 2002.

Integrated Defense Systems

Integrated Defense Systems (IDS) delivered solid revenue growth and operating profitability as its defense and intelligence businesses continued to perform in strong markets. During 2003, IDS won unprecedented orders of more than $50 billion. IDS faced challenges in 2003 that impacted its results, primarily in its Launch and Orbital Systems segment, including continued weakness in its commercial space markets and ethics issues related to the U.S. Air Force EELV contract. However, with a broad portfolio of traditional platforms and transformational programs along with success in winning new business, IDS is well positioned to deliver continued growth and profitability.

Revenues for 2003 were $27.4 billion, up 10 percent over 2002 driven by growth in all four of IDS’s reporting segments. Operating earnings and margins were down from 2002 as a result of charges related to its commercial space businesses that were partially offset by improved performance in its Aircraft and Weapon Systems, Network Systems, and Support Systems businesses.

For the fourth quarter, IDS revenues increased to $7.2 billion primarily as a result of significant growth in its Network Systems and Support Systems segments. IDS delivered strong fourth-quarter operating margins of 8.3 percent, up from 8.0 percent in the fourth quarter of 2002.

Aircraft and Weapon Systems delivered another year of excellent profitability. Revenues rose 2 percent to $10.8 billion on increased JDAM and F/A-22 volume, which offset lower rotorcraft deliveries. Performance remained outstanding with operating margins of 13.2 percent net of investment in the 767 Tanker program, up from 12.0 percent in 2002.

Network Systems continued its rapid growth and solid performance in 2003. Revenues rose 16 percent to almost $9.4 billion on increased activity in its Proprietary, Homeland Security, and Future Combat Systems programs. Operating margins remained solid at 6.7 percent on higher revenues and favorable program mix offset by cost growth on DoD satellite programs as well as a non-cash charge taken for the Resource 21 venture in the third quarter. Results for 2002 included a $100 million charge related to the development of the 737 Airborne Early Warning & Control aircraft.

Support Systems also delivered strong growth and excellent profitability in 2003. Revenues increased 21 percent to $4.2 billion on significant increases in spares for tactical aircraft, maintenance and modifications on transport aircraft, and integrated logistic support and services. Operating margins continued to improve, totaling 11.2 percent on higher revenue and strong program performance. During the fourth quarter, Support Systems was awarded the Malcolm Baldrige quality award in recognition of their operational excellence.

Launch and Orbital Systems’ 2003 results were impacted by the continued weakness in commercial space markets and cost growth in its satellite business. Revenues rose 7 percent on higher deliveries of Delta launch vehicles. Operating losses totaled approximately $1.8 billion, primarily reflecting the write-down of goodwill balances in the first quarter and the charge associated with its launch and satellite businesses in the second quarter.

During 2003, IDS captured new business that boosted its year-end contractual backlog to $40.9 billion compared with $36.0 billion at the end of 2002. Unobligated backlog also rose significantly to $50.6 billion. Total IDS backlog, comprised of contractual and unobligated, ended 2003 at $91.5 billion compared with $70.7 billion at the end of 2002.

Boeing Capital Corporation

During 2003, Boeing Capital Corporation (BCC) shifted its strategy to create value by supporting the operations of the Company’s business units while reducing risk. BCC’s performance reflected this new strategy as customer financing portfolio growth slowed over the course of the year.

In 2003, BCC annual revenues and pre-tax income increased to $1.2 billion and $143 million, respectively, primarily reflecting the portfolio growth that occurred during the second half of 2002. For the fourth quarter, revenues rose by 11 percent to $307 million as portfolio growth slowed during 2003. Pre-tax income rose to $76 million, driven by a sharp reduction in non-cash charges compared with the fourth quarter of 2002.

BCC’s customer financing portfolio grew slightly in 2003 to $12.2 billion, up from $11.8 billion at the end of 2002. New business volume of approximately $2.0 billion was offset by $1.6 billion of asset run-off and depreciation. In the fourth quarter, BCC’s portfolio balance was unchanged from the $12.2 billion reported at the end of the third quarter as asset run-off and depreciation offset new business volume. The allowance for losses on finance leases and notes receivable at year-end was 4.8 percent compared to 4.6 percent at the end of the third quarter and 3.5 percent at the end of 2002. Leverage, as measured by the ratio of debt-to-equity, dropped sharply to 4.7-to-1, down from 5.2-to-1 at the end of the third quarter and 5.7-to-1 at the end of 2002.

At year end, approximately 80 percent of BCC's portfolio was related to Boeing products and services (primarily commercial aircraft), up slightly from the end of the third quarter. On January 15, 2004, BCC announced it is assessing strategic options with regard to the future of its Commercial Financing unit.

"Other" Segments

The “Other” segment consists chiefly of the Connexion by BoeingSM, Air Traffic Management, and Boeing Technology units, as well as certain results related to the consolidation of all business units. For 2003, losses from operations were $449 million up slightly from 2002.

Connexion by BoeingSM continues to prepare for launch of commercial service on Lufthansa in March 2004, while Air Traffic Management builds support for a modernized global air traffic management system. During the fourth quarter, Connexion by Boeing signed initial service agreements with Japan Airlines and All Nippon Airways for 10 aircraft each bringing the total number of aircraft under contract for its service to 119.

FMI:  www.boeing.com