Boeing 2006 Annual Report Download - page 35

The Boeing Company and Subsidiaries 33
Management’s Discussion and Analysis
Satellites The Boeing-built NSS-8 satellite was declared a total
loss due to an anomaly during launch on January 30, 2007.
The NSS-8 satellite was insured for $200 million. We believe
the NSS-8 loss was the result of an insured event and have so
notified our insurance carriers.
See the discussions of Boeing Satellite Systems International,
Inc. (BSSI) litigation/arbitration with ICO Global Communications
(Operations), Ltd., Thuraya Satellite Telecommunications,
Telesat Canada, and Space Communications Corporation in
Note 22.
Support Systems Operating Results
(Dollars in millions) 2006 2005 2004
Revenues $6,109 $5,342 $4,881
% of Total Company Revenues 10%10%10%
Operating Earnings $÷«836 $÷«765 $÷«662
Operating Margins 13.7%14.3%13.6%
Research and Development $÷÷«86 $÷÷«81 $÷÷«57
Contractual Backlog $9,302 $8,366 $6,834
Unobligated Backlog $÷«507 $1,185 $1,568
Revenues Support Systems revenues increased 14% in 2006
and 9% in 2005 driven by growth throughout the segment. The
increase of $767 million in 2006 was due to higher Integrated
Logistics (IL) volume on programs such as C-17 and increased
program volume resulting from Aviall, which we acquired in the
third quarter; higher International program volume resulting from
our increased ownership in Alsalam Aircraft Co. (Alsalam); and
volume on Maintenance, Modification, & Upgrade (MM&U) pro-
grams such as AC-130. The increase of $461 million in 2005
was due to higher volume on MM&U programs such as F-15
and AC-130 and IL programs such as Chinook and C-17.
In the second quarter of 2006, we increased our ownership
interest in Alsalam, which operates as a Maintenance, Repair
and Overhaul facility for various military and commercial aircraft.
As a result, we began consolidating Alsalam’s financial state-
ments, which generated revenues of $137 million during the
last three quarters of 2006.
Operating Earnings Support Systems operating earnings in-
creased 9% in 2006 and 16% in 2005 driven by the revenue
increases mentioned above in addition to a different contract mix.
Research and Development Support Systems continues to
focus investment strategies on its core businesses including
Engineering and Logistic Services, MM&U, Supply Chain Services,
Training and Support Systems, and Advanced Logistics Services,
as well as on moving into the innovative Network Centric
Logistics areas. Investments have been made to continue the
development and implementation of innovative and disciplined
tools, processes and systems as market discriminators in the
delivery of integrated customer solutions. Examples of success-
ful programs stemming from these investment strategies include
the C-17 Globemaster Sustainment Partnership, the F/A-18
Integrated Readiness Support Teaming program, and the F-15
Singapore Performance Based Logistics contract.
Backlog Support Systems total backlog increased 3% from
2005 to 2006 driven by a large IL order for Chinook support.
Total backlog increased 14% from 2004 to 2005 driven by
orders for new business offsetting sales on various IL programs.
Boeing Capital Corporation Segment
Business Environment and Trends
BCC’s customer financing and investment portfolio at
December 31, 2006 totaled $8,034 million, which was substan-
tially collateralized by our commercial aircraft. While worldwide
traffic levels are well above those in the past, the effects of
higher fuel prices continue to impact the airline industry. At the
same time, the credit ratings of some airlines, particularly in the
United States, have remained at low levels. Despite positive
factors including passenger load at record high levels, a limited
supply of economically viable used aircraft and, increasing lease
rates, values as measured by reference to published reports
from multiple external appraisers for the various aircraft types that
are collateral in BCC’s portfolio generally have not increased.
Aircraft values and lease rates are impacted by the number and
type of aircraft that are currently out of service. Approximately
1,850 commercial jet aircraft (9.9% of current world fleet) con-
tinue to be parked, including both in production and out-of-
production aircraft types of which over 50% are not expected
to return to service. Aircraft valuations could decline if significant
numbers of aircraft, particularly types with relatively few operators,
are placed out of service.
At December 31, 2006, $2,590 million and $1,171 million of
BCC’s portfolio was collateralized by 717 and 757 aircraft.
During 2006, BCC recognized an expense of $15 million to
increase the valuation allowance resulting from a decrease in
the collateral value of the 717 aircraft. (See Note 10).
Summary Financial Information
(Dollars in millions) 2006 2005 2004
Revenues $1,025 $966 $959
Operating Earnings $«««291 $232 $183
Operating Margins 28%24%19%
Revenues BCC segment revenues consist principally of interest
from financing receivables and notes, and lease income from
equipment under operating lease. BCC’s revenues increased
$59 million in 2006, primarily due to an increase in investment
income of $40 million from the sale or repayment at maturity of
certain investments and a higher gain on the sale of aircraft and
certain investments in notes receivable of $23 million. These
increases were partially offset by a decline in interest and lease
income due to decreases in the weighted average balance of
the related portfolio. BCC’s revenues were essentially
unchanged in 2005 compared with 2004.
Operating Earnings BCC’s operating earnings are presented
net of interest expense, provision for losses, asset impair-
ment expense, depreciation on leased equipment and other
operating expenses. Operating earnings increased by $59 mil-
lion in 2006 primarily due to increased revenues. The increase
in operating earnings in 2005 compared with 2004 was
primarily due to a lower asset impairment expense and the
absence of debt redemption costs partially offset by increased
depreciation expense.