Boeing 2006 Annual Report Download - page 34

offset by increased earnings in the FCS program in 2006.
The increase from 2004 to 2005 was driven by the favorable
Rocketdyne and Delta IV impacts in 2005 mentioned above,
while losses were recorded in our commercial satellite business
in 2004 caused by performance issues due to cost growth from
technical and quality issues and write-offs of slow-moving
inventory. N&SS operating earnings include equity earnings of
$71 million, $72 million, and $70 million from the United Space
Alliance joint venture in 2006, 2005, and 2004, respectively.
Divestitures On February 28, 2005, we completed the stock
sale of EDD to L-3 Communications. On August 2, 2005 we
completed the sale of our Rocketdyne business to United
Technologies Corporation. (See Note 9).
Research and Development The N&SS research and develop-
ment funding remains focused on the development of communi-
cations and command and control capabilities that support a
network-centric architecture approach for our various govern-
ment customers. We are investing in the communications
market to enable connectivity between existing air/ground plat-
forms, increase communications availability and bandwidth
through more robust space systems, and leverage innovative
communications concepts. Key programs in this area include
JTRS, FCS, GPS, and Transformational Communications
System. Investments were also made to support concepts that
will lead to the development of next-generation space intelligence
systems. Along with increased funding to support these areas of
architecture and network-centric capabilities development, we
also maintained our investment levels in global missile defense
and advanced missile defense concepts and technologies.
Backlog N&SS total backlog decreased 7% from 2005 to 2006
driven by sales from a multi-year order received in prior years
on FCS. Total backlog decreased 6% from 2004 to 2005 driven
by sales from multi-year orders received in prior years on GMD
and FCS, partially offset by new orders on Proprietary programs.
Additional Considerations Items which could have a future
impact on N&SS operations include the following:
United Launch Alliance On December 1, 2006, we completed
the transaction with Lockheed Martin Corporation (Lockheed)
to create a 50/50 joint venture named United Launch Alliance
L.L.C. (ULA). ULA combines the production, engineering, test
and launch operations associated with U.S. Government
launches of Boeing Delta and Lockheed Atlas rockets. In con-
nection with the transaction, we contributed assets and liabili-
ties of $1,609 million and $695 million, respectively, to ULA.
These amounts are subject to adjustment pending final review
of the respective parties’ contributions. Any difference between
the book value of our investment and our proportionate share
of ULA’s net assets would be recognized ratably in future years.
We also entered into an inventory supply agreement with ULA
that provides for the purchase by ULA from us of Boeing Delta
inventories totaling $1,860 million by March 31, 2021. We and
Lockheed each will provide ULA with initial cash contributions
of up to $25 million, and we each have agreed to extend a line
of credit to ULA of up to $200 million to support its working
capital requirements. In connection with the transaction, we
and Lockheed transferred performance responsibility for certain
U.S. Government contracts to ULA as of the closing date. We
and Lockheed agreed to jointly guarantee the performance of
those contracts to the extent required by the U.S. Government.
We agreed to indemnify ULA through December 31, 2020
against potential non-recoverability of $1,375 million of Boeing
Delta inventories included in contributed assets plus $1,860 mil-
lion of inventory subject to the inventory supply agreement. In
addition, in the event ULA is unable to obtain re-pricing of cer-
tain contracts which we contributed to ULA and to which we
believe ULA is entitled, we will be responsible for any shortfall
and may record up to $322 million in pre-tax losses. ULA is
accounted for under the equity method of accounting. N&SS
2006 revenues include $727 million related to Delta rockets and
formation of ULA will reduce N&SS revenues in 2007. We do
not expect ULA to have a material impact to our earnings, cash
flows, or financial position for 2007.
Sea Launch The Sea Launch venture, in which we are a 40%
partner, provides ocean-based launch services to commercial
satellite customers. For the year ended December 31, 2006,
the venture conducted five successful launches.
We have issued credit guarantees to creditors of the Sea Launch
venture to assist it in obtaining financing. In the event we are
required to perform on these guarantees, we believe we can
recover a portion of the cost (estimated at $486 million) through
guarantees from the other venture partners. The components
of this exposure are as follows:
Estimated
Estimated Proceeds Estimated
Maximum Established from Net
(Dollars in millions) Exposure Reserves Recourse Exposure
Credit Guarantees $÷«471 $188 $283
Partner Loans
(Principal and Interest) 451 271 180
Advances to Provide
for Future Launches 76 $÷76
Trade Receivable
from Sea Launch 311 289 22
Performance Guarantees 33 20 13
Other Receivables
from Sea Launch 45 38 3 4
$1,387 $786 $486 $115
We made no additional capital contributions to the Sea Launch
venture during the year ended December 31, 2006.
We suspended recording equity losses after writing our invest-
ment in and direct loans to Sea Launch down to zero in 2001
and accruing our obligation for third-party guarantees on
Sea Launch indebtedness. We are not obligated to provide any
further financial support to the Sea Launch venture. However,
in the event that we do extend additional financial support to
Sea Launch in the future, we will recognize suspended losses
as appropriate.
A Sea Launch Zenit-3SL vehicle, carrying a Boeing-built satel-
lite, experienced an anomaly during launch on January 30, 2007.
The impact to Sea Launch operations, including the remaining
launches scheduled for 2007 is not yet known. Based on our
preliminary assessment, we do not believe that this anomaly
will have a material adverse impact on our results of operations,
financial position, or cash flows.
32 The Boeing Company and Subsidiaries
Management’s Discussion and Analysis