Boeing 2005 Annual Report Download - page 36

Management’s Discussion and Analysis
requirements, that our 767 aircraft was the most cost-effective
solution that met those requirements and, therefore, that it was
probable we would be awarded the USAF 767 Tanker contract.
Based on prior DoD contracting practices, we also believed it
was probable that we would be awarded the initial support
contracts.
On January 14, 2005, as a result of our 2004 year-end review,
we updated our assessment of the probability of securing the
USAF 767 Tanker contract and announced our plan to recog-
nize pre-tax charges totaling $275 million in our year-end 2004
financial statements based on the continued delay of the con-
tract award and the likely re-competition of the contract.
Commercial Airplanes share was $195 million and IDS’ share
was $80 million. Within IDS, A&WS and Support Systems were
impacted by the charge. The charge included $47 million of
incurred design and development cost and $33 million for
anticipated supplier penalties.
Through 2005, the 767 Tanker program has orders for eight
767 Tankers, four from the Italian Air Force and four from the
Japan Self Defense Agency. The first aircraft for Italy will be
tendered for acceptance in late 2006 and our first delivery to
Japan will occur in early 2007. Work continues on the
Company Sponsored Research and Development (CSR&D)
effort as we entered the flight test phase of the program in
2005 and expect to complete it in 2006.
The USAF is continuing to pursue a replacement for the KC-
135 tanker. Funding has been included in the DoD
Appropriation Act for both of its fiscal years 2005 and 2006,
and has also been included in the fiscal year 2007 DoD budget
request. The USAF has announced that the replacement for
the KC-135 will be awarded through a competition which will
be held in 2006. We remain firmly committed to the USAF
Tanker program and are ready to support our customer in
whatever decision is made regarding the recapitalization of the
nation’s current aerial refueling fleet.
Comanche On February 23, 2004 the U.S. Government
announced plans to terminate for convenience (TFC) the RAH-
66 Comanche Engineering and Manufacturing Development
contract. The joint venture between us and Sikorsky Aircraft, a
division of United Technologies Corporation, had a 50/50 share
in program work and earnings. On March 19, 2004 the U.S.
Government issued a partial TFC notification. A termination
proposal was submitted to the U.S. Government on February
25, 2005. An updated proposal was submitted in January
2006 to reflect actual costs through 2005. We expect that a
settlement will be reached by the end of the first quarter of
2006. The program represented less than 1% of our 2005 rev-
enues. No material impact on our financial statements is
expected.
Integrated Defense Systems
(Dollars in millions) 2005 2004 2003
Revenues $30,791 $30,465 $27,361
% of Total Company Revenues 56% 58% 54%
Operating Earnings $««3,890 $««2,925 $«««««766
Operating Margins 12.6% 9.6% 2.8%%
Research and Development $«««««855 $«««««834 $«««««846
Contractual Backlog $36,341 $39,151 $40,883
Unobligated Backlog $43,759 $47,270 $50,564
Since our operating cycle is long-term and involves many differ-
ent types of development and production contracts with vary-
ing delivery and milestone schedules, the operating results of a
particular year, or year-to-year comparisons of revenues and
earnings, may not be indicative of future operating results. In
addition, depending on the customer and their funding
sources, our orders might be structured as annual follow-on
contracts, or as one large multi-year order or long-term
awards. As a result, period-to-period comparisons of orders
and backlog are not necessarily indicative of future workloads.
The following discussions of comparative results among peri-
ods should be viewed in this context.
IDS revenues remained stable in 2005 due to moderating
defense budgets, up 1% from 2004, after strong growth of
11% in 2004 over 2003. The operating earnings increase of
$965 million from 2004 to 2005 was primarily due to higher
L&OS earnings largely driven by the net gain of $578 million ($9
million of which was recognized at the Other segment) from the
Rocketdyne divestiture in 2005.
Total backlog is comprised of contractual backlog, which repre-
sents funded work to perform, and unobligated backlog, which
represents unfunded work to perform. IDS total backlog
decreased 7% in 2005, from $86.4 billion to $80.1 billion, yet
still remains industry-leading. Given our annual revenue of
almost $31 billion, we have 2.6 years worth of sales in backlog,
an important indicator of future workload.
For further details on the changes between periods, refer to the
discussions of the individual segments below.
Aircraft and Weapons Systems
(Dollars in millions) 2005 2004 2003
Revenues $11,444 $11,394 $10,763
% of Total Company Revenues 21% 22% 21%
Operating Earnings $««1,707 $««1,636 $««1,420
Operating Margins 14.9% 14.4% 13.2%%%
Research and Development $«««««374 $«««««382 $«««««360
Contractual Backlog $19,161 $18,256 $19,352
Unobligated Backlog $12,006 $17,197 $24,176
Revenues A&WS revenues remained stable between 2004 and
2005 primarily due to increased deliveries on F-15 and Apache
and higher volume on C-40 and F-22. This was offset by
decreased deliveries on F/A-18 and lower volume on Chinook,
V-22, and the Comanche termination.
Revenues grew 6% from 2003 to 2004 due to increased deliv-
eries on F/A-18 and Apache and higher volume on F-22 and
Chinook. This was partially offset by fewer deliveries on T-45
34 The Boeing Company and Subsidiaries