| BOEING CO Item 1A Risk Factors An investment in our common stock or debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past performance due to a variety of factors, including, without limitation, the following: We depend heavily upon commercial customers, our suppliers and the worldwide market, which are subject to unique risks |
| We derive a significant portion of our revenues from a limited number of major commercial airlines, some of which have encountered financial difficulties |
| We depend on a limited number of customers, 5 ______________________________________________________________________ [43]Table of Contents including the major commercial airlines |
| We can make no assurance that any customer will purchase additional products or services from us after our contract with the customer has ended |
| The loss of any of the major commercial airlines as customers could significantly reduce our revenues and our opportunity to generate a profit |
| Several commercial airlines, including United Airlines (United), US Airways, Hawaiian Airlines, Inc |
| (Northwest), Delta Air Lines, Inc |
| (Delta), ATA Holdings Corp (ATA), and Viacao Aerea Rio-Grandense (VARIG) have filed for bankruptcy protection |
| United recently exited from bankruptcy, Hawaiian emerged from bankruptcy and US Airways emerged from its second bankruptcy in 2005 |
| We depend on a variety of factors to deliver aircraft on time, which are subject to unique risks |
| Our ability to deliver jet aircraft on schedule is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, internal and supplier produced parts, conversion of raw materials into parts and assemblies, performance of suppliers and subcontractors, and regulatory certification |
| The failure of any or all of these factors could result in significant out-of-sequence work and disrupted process flows thus resulting in significant inefficiencies |
| In addition, the introduction of new commercial aircraft programs and major derivatives involves increased risks associated with meeting development, production and certification schedules |
| We rely on market conditions to sell aircraft into the future |
| The worldwide market for commercial jet aircraft is predominately driven by long-term trends in airline passenger traffic |
| The principal factors underlying long-term traffic growth are sustained economic growth and political stability, both in developed and emerging countries |
| Demand for our commercial aircraft is further influenced by airline industry profitability, world trade policies, government-to-government relations, terrorism, disease outbreaks, environmental constraints imposed upon aircraft operations, technological changes, and price and other competitive factors |
| Our commercial aircraft customers may cancel, modify or reschedule orders |
| We generally make sales under purchase orders that are subject to cancellation, modification or rescheduling |
| Changes in the economic environment and the financial condition of the airline industry could result in customer requests for rescheduling or cancellation of contractual orders |
| Since a significant portion of our backlog is related to orders from commercial airlines, further adverse developments in the commercial airline industry could cause customers to reschedule or terminate their contracts with us |
| We depend heavily on US Government contracts, which are subject to unique risks |
| In 2005, 51prca of our revenues were derived from US Government contracts |
| In addition to normal business risks, our contracts with the US Government are subject to unique risks some of which are beyond our control |
| The funding of US Government programs is subject to Congressional appropriations |
| Many of the US Government programs in which we participate may extend for several years; however, these programs are normally funded on an annual basis |
| Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable |
| The termination of the funding for a US Government program would result in a loss of anticipated future revenues attributable to that program, which could have a materially negative impact on our operations |
| The US Government may modify, curtail or terminate our contracts |
| The US Government may modify, curtail or terminate its contracts and subcontracts without prior notice at its convenience upon payment for work done and commitments made at the time of termination |
| Modification, curtailment or termination of our major programs or contracts could have a material adverse effect on our results of operations and financial condition |
| Our contract costs are subject to audits by US Government agencies |
| The costs we incur on our US Government contracts, including allocated indirect costs, may be audited by US Government representatives |
| These audits may result in adjustments to our contract costs |
| Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed must be refunded |
| We normally negotiate with the US Government representatives before settling 6 ______________________________________________________________________ [44]Table of Contents on final adjustments to our contract costs |
| We have recorded contract revenues based upon costs we expect to realize upon final audit |
| However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenues or profits upon completion and final negotiation of these audits |
| If any audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the US Government |
| Our business is subject to potential US Government inquiries and investigations |
| We are from time to time subject to certain US Government inquiries and investigations of our business practices due to our participation in government contracts |
| We cannot assure you that any such inquiry or investigation will not result in a material adverse effect on our results of operations and financial condition |
| Our US Government business is also subject to specific procurement regulations and other requirements |
| These requirements, although customary in US Government contracts, increase our performance and compliance costs |
| These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition |
| Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from US Government contracting or subcontracting for a period of time and could have a negative effect on our reputation and ability to procure other US Government contracts in the future |
| In addition, sales to the US Government may be affected by: · changes in procurement policies · budget considerations · unexpected developments, such as the terrorist attacks of September 11, 2001, which change concepts of national defense · political developments abroad, such as those occurring in the wake of the September 11 attacks The influence of any of these factors, which are largely beyond our control, could also negatively impact our financial condition |
| We also may experience problems associated with advanced designs required by the US Government which may result in unforeseen technological difficulties and cost overruns |
| Failure to overcome these technological difficulties and the occurrence of cost overruns would have a negative impact on our results |
| We enter into fixed-price contracts, which could subject us to losses if we have cost overruns |
| Certain of our contracts with the US Government are fixed-price contracts (just over 50prca of IDS revenues in a fiscal year are generated from fixed-price type contracts) |
| Commercial jet aircraft are normally sold on a firm fixed-price basis with an indexed price escalation clause |
| Firm, fixed-price contracts expose us to the risk of cost overruns |
| In addition, some of our US Government contracts have specific provisions relating to cost controls, schedule, and product performance |
| If we fail to meet the terms specified in those contracts, then we may not realize their full benefits |
| Our ability to manage costs on these contracts may affect our financial condition |
| We use estimates in accounting for many contracts and programs |
| Changes in our estimates could adversely affect our future financial results |
| Contract and program accounting require judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues |
| Due to the size and nature of many of our contracts and programs, the estimation of total revenues and cost at completion 7 ______________________________________________________________________ [45]Table of Contents is complicated and subject to many variables |
| Assumptions have to be made regarding the length of time to complete the contract or program because costs also include expected increases in wages and prices for materials |
| Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance |
| Estimates of award fees are also used in estimating sales and profit rates based on actual and anticipated awards |
| Under program accounting, inventoriable production costs (including overhead), program tooling costs and routine warranty costs are accumulated and charged as cost of sales by program instead of by individual units or contracts |
| A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts |
| To establish the relationship of sales to cost of sales, program accounting requires estimates of (a) the number of units to be produced and sold in a program, (b) the period over which the units can reasonably be expected to be produced, and (c) the units’ expected sales prices, production costs, program tooling, and routine warranty costs for the total program |
| We determine accounting quantity based on several factors, including firm orders, letters of intent from prospective customers, and market studies |
| Changes in underlying assumptions, circumstances or estimates concerning the selection of the initial accounting quantity or changes in market conditions, along with a failure to realize predicted unit costs from cost reduction initiatives and repetition of task and production techniques as well as supplier cost reductions, may adversely affect future financial performance |
| Because of the significance of the judgments and estimation processes described above, it is likely that materially different sales and profit amounts could be recorded if we used different assumptions or if the underlying circumstances were to change |
| Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance |
| For additional information on our accounting policies for recognizing sales and profits, see our discussion under “Management’s Discussion and Analysis—Application of Critical Accounting Policies—Contract Accounting/Program Accounting” on pages 48-50 and Note 1 to the consolidated financial statements on pages 61-62 of this Form 10-K Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our earnings, equity, and pension contributions in future periods |
| Our earnings may be positively or negatively impacted by the amount of income or expense we record for our pension and other postretirement benefit plans |
| Generally accepted accounting principles (GAAP) in the United States of America require that we calculate income or expense for the plans using actuarial valuations |
| These valuations reflect assumptions that we make relating to financial market and other economic conditions |
| Changes in key economic indicators can result in changes in the assumptions we use |
| The most significant year-end assumptions used to estimate pension or other postretirement income or expense for the following year are the discount rate, the expected long-term rate of return on plan assets, and expected future medical inflation |
| In addition, we are required to make an annual measurement of plan assets and liabilities |
| Under certain circumstances, at the time of the measurement, we may be required to make a significant change to equity through a reduction or increase to Other comprehensive income |
| For a discussion regarding how our financial statements can be affected by pension and other postretirement plan accounting policies, see “Management’s Discussion and Analysis—Application of Critical Accounting Policies—Postretirement Plans” on pages 52-53 of this Form 10-K Although GAAP expense and pension or other postretirement contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash that the company would contribute to the pension or other postretirement plans |
| Potential pension contributions include both mandatory amounts required under federal law Employee Retirement Income Security Act (ERISA) and discretionary contributions made to improve the plans’ funded status |
| Approximately 54cmam000 of our employees are unionized, which represented approximately 36prca of our employees at December 31, 2005 |
| We experienced work stoppages in 2005 when labor strikes halted commercial aircraft and IDS production and we may experience additional work stoppages in the future, which could adversely affect our business |
| We are vulnerable to the demands imposed by our employees’ labor unions |
| We cannot predict how stable our relationships, currently with 17 different US labor organizations and 7 different non-US labor organizations, will be or whether we will be able to meet the requirements of these unions without impacting our financial condition |
| In addition, the presence of unions may limit our flexibility in dealing with our workforce |
| Work stoppages and instability in our union relationships could negatively impact our ability to manufacture our products on a timely basis, resulting in strain on our relationships with our customers, as well as a loss of revenues |
| That would adversely affect our results of operations |
| Competition within our markets may reduce our procurement of future contracts and sales |
| The military and commercial industries in which we operate are highly competitive |
| Our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas |
| In addition, some of our largest customers could develop the capability to manufacture products similar to products that we manufacture |
| This would result in these customers supplying their own products and competing directly with us for sales of these products, all of which could significantly reduce our revenues |
| Furthermore, we are facing increased international competition and cross-border consolidation of competition |
| There can be no assurance that we will be able to compete successfully against our current or future competitors or that the competitive pressures we face will not result in reduced revenues and market share |
| We derive a significant portion of our revenues from international sales and are subject to the risks of doing business in foreign countries |
| In 2005, sales to international customers accounted for approximately 30prca of our revenues |
| We expect that international sales will continue to account for a significant portion of our revenues for the foreseeable future |
| As a result, we are subject to risks of doing business internationally, including: · changes in regulatory requirements · domestic and foreign government policies, including requirements to expend a portion of program funds locally and governmental industrial cooperation requirements · fluctuations in foreign currency exchange rates · delays in placing orders · the complexity and necessity of using foreign representatives and consultants · the uncertainty of adequate and available transportation · the uncertainty of the ability of foreign customers to finance purchases · uncertainties and restrictions concerning the availability of funding credit or guarantees · imposition of tariffs or embargoes, export controls and other trade restrictions · the difficulty of management and operation of an enterprise spread over various countries · compliance with a variety of foreign laws, as well as US laws affecting the activities of US companies abroad · economic and geopolitical developments and conditions, including international hostilities, acts of terrorism and governmental reactions, inflation, trade relationships and military and political alliances 9 ______________________________________________________________________ [47]Table of Contents While these factors or the impact of these factors are difficult to predict, any one or more of these factors could adversely affect our operations in the future |
| The outcome of litigation in which we have been named as a defendant is unpredictable and an adverse decision in any such matter could have a material adverse affect on our financial position and results of operations |
| We are defendants in a number of litigation matters |
| These claims may divert financial and management resources that would otherwise be used to benefit our operations |
| Although we believe that we have meritorious defenses to the claims made in each and all of the litigation matters to which we have been named a party, and intend to contest each lawsuit vigorously, no assurances can be given that the results of these matters will be favorable to us |
| An adverse resolution of any of these lawsuits could have a material adverse affect on our financial position and results of operations |
| A portion of Boeing Capital Corporation’s (“BCC”) portfolio has encountered financial difficulties, which may have an adverse effect on our earnings, cash flows and/or financial position |
| BCC, our wholly-owned subsidiary, has a substantial portion of its portfolio concentrated among commercial airline customers |
| Several of the major commercial airlines, including ATA, VARIG, Delta and Northwest have filed for bankruptcy protection |
| These bankruptcies have caused a decrease in the value of certain aircraft collateral and other assets in BCC’s portfolio and required BCC to take an asset impairment charge in some instances |
| We cannot assure that any additional declines in the value of BCC’s portfolio will not occur in the future due to these or other airline restructurings |
| In addition, the adverse developments in the commercial airline industry have decreased the creditworthiness of airline customers in BCC’s portfolio and may lead to defaults by such customers |
| If such defaults were to occur, it could have a negative effect on our earnings, cash flows and/or financial position |
| Our insurance coverage may be inadequate to cover all significant risk exposures |
| We are exposed to liabilities that are unique to the products and services we provide |
| A significant portion of our business relates to designing, developing and manufacturing commercial jet aircraft and advanced defense and technology systems and products |
| In some, but not all, circumstances, we may receive indemnification from the U S Government |
| While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs |
| It also is not possible to obtain insurance to protect against all risks and liabilities |
| As a US Government contractor, we are subject to a number of procurement rules and regulations |
| We must comply with and are affected by laws and regulations relating to the award, administration and performance of US Government contracts |
| Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business |
| In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions |
| For example, the US Government may terminate any of our government contracts and, in general, subcontracts, at their convenience, as well as for default based on performance |
| A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts |
| 10 ______________________________________________________________________ [48]Table of Contents Our forward looking statements, projections and business assumptions may prove to be inaccurate, resulting in lower than expected earnings, which could impair our ability to access the capital markets and obtain adequate sources of capital to meet our future needs |
| Our management’s statements regarding financial performance, sales, segment operating margin, pension expense, employer contributions under pension plans and medical and life benefits plans, and cash flow are subject to numerous assumptions and uncertainties, many of which are outside our control |
| These include our assumptions with respect to future revenues, expected program performance and cash flows, returns on pension plan assets and variability of pension actuarial and related assumptions, the outcome of litigation and appeals, hurricane recoveries, environmental remediation, divestitures of businesses, successful reduction of debt, successful negotiation of contracts with labor unions, effective tax rates and timing and amounts of tax payments, the results of any audit or appeal process with the Internal Revenue Service, and anticipated costs of capital investments, among other things |
| Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” and variations thereof and similar terms are intended to be forward-looking statements as defined by federal securities law |
| While these forward-looking statements reflect our best estimates when made, the preceding risk factors could cause actual results to differ materially from estimates or projections |
| We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 |
| You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements |
| We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements |
| Moreover, in the future, we may make forward-looking statements that involve the risk factors and other matters described in this document as well as other risk factors subsequently identified |