Press Release

Boeing Updates Assessment of Launch and Satellite Businesses in Weak Commercial Space Markets; To Record $1.1 Billion Second Quarter Charge

By SpaceRef Editor
July 15, 2003
Filed under , ,

Revised Assessment Not Expected to Have a Material Impact on the Company’s Cash Flow Outlook

The Boeing Company
announced today that as a result of continued weakness in the commercial space
launch market, higher mission and launch costs on its Delta IV program, and
cost growth in its satellite businesses, the company will recognize pre-tax
charges of approximately $1.1 billion, or $0.87 per share, when it announces
second quarter results on July 23.

Approximately $835 million, or $0.66 per share, of the charges are
attributable to the company’s Delta IV program and primarily reflect the
company’s updated — and significantly lower — assessment of global demand
for launch services. The lower program base reduces the profitability of
currently contracted launches. The charges also reflect higher mission costs,
primarily related to government launch requirements. Approximately
$265 million, or $0.21 per share, reflects the loss to be reported by Boeing
Satellite Systems for the quarter due to higher cost estimates to complete
several satellite programs and write-downs of commercial inventory that
recognizes current market conditions.

Approximately $135 million of the total charges are non-cash depreciation
and inventory adjustments, as noted in the detailed discussion below. The
cash outlays associated with the remaining $965 million of charges will be
incurred over the next seven years as the affected launch vehicles and
satellite programs are completed and delivered.

The company will hold an analyst conference call today, July 15, at
10:00 a.m. Eastern Daylight Time which will be accessible at the company’s
website, www.boeing.com .

A further discussion of the charges follows:

1) Delta IV Program ($835 million)

When the company began the Delta IV program in the 1990s, demand for
commercial satellites and related launch services, particularly for
telecommunications, was robust. The company anticipated that strong
commercial demand would help reduce the cost of launch vehicles for both
commercial and government customers, and the company priced its vehicles
accordingly.

During this period, Boeing also made substantial incremental investments
in a second launch site on the U.S. west coast, a heavy-lift version of the
Delta IV vehicle, and an all-new U.S. rocket engine. These unique
capabilities were developed to address U.S. government requirements and
positioned the company to capture additional business.

However, over the last several years demand for commercial launches eroded
while global launch capacity increased. In light of the continuing severe
downturn in the commercial launch market, the company has determined that a
meaningful recovery of demand and pricing is unlikely for the foreseeable
future. As a result, in the second quarter of 2003 Boeing made a strategic
decision to focus the Delta IV program on the government launch services
market. In conjunction with that decision, the company updated — and reduced
by nearly one-half — its estimate of long-term demand for Delta IV launch
vehicles. This reduction eliminated nearer-term commercial launches
previously forecast to occur over the next five years.

As a result, the company estimates it will incur higher per-unit labor,
materials and business infrastructure costs due to lower annual launch rates
over the next five years. In addition, the company has experienced higher
mission and launch costs, primarily to support government requirements, and
has increased its estimates accordingly. Because currently contracted and
awarded launches are in a loss position, Boeing will recognize charges
totaling approximately $835 million in the second quarter across its 24
currently contracted and awarded Delta IV (including Evolved Expendable Launch
Vehicle program) launches. This estimate is based upon existing pricing in
the company’s contracted and awarded launches.

Of the charges totaling $835 million, approximately $90 million are
non-cash charges related to the higher per-unit depreciation and amortization
costs associated with the lower number of launches in the company’s revised
market outlook. The remaining costs will be incurred as the contracted and
awarded vehicles are built and delivered over the next seven years.

2) Boeing Satellite Systems ($265 Million)

Boeing Satellite Systems continues to experience cost growth on certain
satellites in its current backlog. Over the past two years, the company has
continued to make management changes and implemented significant process
improvements to reduce technical and cost risk on future satellite production.
The company also recognized significant cost increases to complete currently
contracted work based upon known requirements and previous experience.
However, many satellites in the current backlog incorporate advanced
technology and are the first of their kind to be built. These factors are
driving cost growth at higher than previously estimated trend levels.

As a result, the company is raising its estimates to complete and deliver
in-process satellite backlog and will record charges totaling approximately
$265 million in the second quarter. Approximately $45 million of this amount
reflects a higher provision for obsolete inventory related to weak demand for
commercial satellites, and is non-cash. The cash expenditures associated with
the remaining charges will be incurred as satellites on the affected programs
are completed over the next two years.

Charges totaling approximately $195 million will be recorded in the Launch
and Orbital Systems segment; the remaining $70 million is related to
satellites for fixed-price military programs and will be recorded in the
Network Systems segment, as summarized in the table below.

Outlook & Summary

Boeing does not expect these charges to have a material impact on the
company’s consolidated cash flow guidance, as the related costs are spread
over the next seven years. The company will discuss its financial outlook in
more detail when it releases second quarter results.

Boeing will continue to manage its launch services and satellite
businesses to market realities. As previously announced, the company
continues to reduce employment, consolidate facilities and implement best
engineering and manufacturing practices to reduce costs and position the
business for future returns.

    A summary of the charges is provided in the table below:

     Boeing Integrated Defense Systems
     Pre-Tax Earnings Impact
     (Millions)                 Launch & Orbital      Network        Total
                                     Systems          Systems
     Delta IV Program (a)             ~$835                         ~$835

     Boeing Satellite Systems (b)     ~$195            ~$70         ~$265

     Total                          ~$1,030            ~$70       ~$1,100

     (a) Approximately $90 million of the Delta IV-related charges are
         non-cash.
     (b) Approximately $45 million of the BSS charges recorded through Launch
         and Orbital Systems charges are non-cash.
         All estimates subject to final audit.

Forward-Looking Information Is Subject to Risk and Uncertainty

Certain statements in this release may constitute “forward-looking”
statements within the meaning of the Private Litigation Reform Act of 1995.
Words such as “expects,” “intends,” “plans,” “projects,” “believes,”
“estimates,” and similar expressions are used to identify these forward-
looking statements. Forward-looking statements in this release include, but
are not limited to, our assessment of the markets for our products, statements
discussing the growth of our business segments, and the statements contained
in the “Outlook” section of this release. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that
are difficult to predict. Forward-looking statements are based upon
assumptions as to future events that may not prove to be accurate. Actual
outcomes and results may differ materially from what is expressed or
forecasted in these forward-looking statements. As a result, these statements
speak only as of the date they were made and we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Our actual results and future
trends may differ materially depending on a variety of factors, including the
continued impact of the commercial aviation downturn on overall production, as
well as the impact on production or production rates for specific commercial
airplane models, the continued operation, viability and growth of major
airline customers and non-airline customers (such as the U.S. Government);
adverse developments in the value of collateral securing customer and other
financings; the occurrence of any significant collective bargaining labor
dispute; tax settlements with the U.S. Government; the Company’s successful
execution of internal performance plans, production rate increases and
decreases (including any reduction in or termination of an aircraft product),
acquisition and divestiture plans, and other cost-reduction and productivity
efforts; charges from any future SFAS 142 review; an adverse development in
rating agency credit ratings or assessments; the actual outcomes of certain
pending sales campaigns and U.S. and foreign government procurement
activities, including the timing of procurement of tankers by the U.S.
Department of Defense; the cyclical nature of some of the Company’s
businesses; unanticipated financial market changes which may impact pension
plan assumptions; domestic and international competition in the defense, space
and commercial areas; continued integration of acquired businesses;
performance issues with key suppliers, subcontractors and customers; factors
that could result in significant and prolonged disruption to air travel
worldwide (including the status of and impacts flowing from the war in Iraq
and future terrorist attacks); any additional impacts from the attacks of
September 11, 2001; global trade policies; worldwide political stability;
domestic and international economic conditions; price escalation; the outcome
of political and legal processes, including uncertainty regarding government
funding of certain programs; changing priorities or reductions in the U.S.
Government or foreign government defense and space budgets; termination of
government or commercial contracts due to unilateral government or customer
action or failure to perform; legal, financial and governmental risks related
to international transactions; legal proceedings, including U.S. Government
proceedings and investigations and commercial litigation related to the
Evolved Expendable Launch Vehicle Program; and other economic, political and
technological risks and uncertainties. Additional information regarding these
factors is contained in the Company’s SEC filings, including, without
limitation, the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002 and Form 10-Q for the period ending March 31, 2003.

SpaceRef staff editor.