Boeing 2007 Annual Report Download - page 27

24
Management’s Discussion and Analysis
expense. Commercial Airplanes’ research and development
expense increased by $572 million to $2,962 million compared
with the same period 2006, primarily due to spending on the
787 and 747-8 programs. IDS earnings increased by $408 mil-
lion compared with 2006. The increase is primarily due to 2006
charges of $770 million in the PE&MS segment related to
Airborne Early Warning & Control (AEW&C), partially offset by
lower 2007 earnings on several programs in the PE&MS and
N&SS segments. BCC operating earnings decreased $57 mil-
lion reflecting lower revenues partially offset by a recovery of
losses and lower expenses. Other segment earnings improved
by $495 million primarily due to the absence of losses related to
Connexion by Boeing, which included a charge of $320 million
to exit this business in 2006. Lower unallocated expense in 2007
contributed $548 million to the 2007 earnings improvement.
Operating earnings increased in 2006 compared with 2005 pri-
marily driven by improved earnings at Commercial Airplanes
resulting from higher revenue from new aircraft deliveries,
increased earnings from commercial aviation support business
and improved cost performance. Lower unallocated expense in
2006 also contributed to the 2006 earnings increase. This was
partially offset by a $571 million charge for global settlement
with U.S. DoJ, lower IDS earnings reflecting a $569 million net
gain on the sale of our Rocketdyne business in 2005 and $770
million of charges on the AEW&C development program in
2006 partially offset by improved margins on other programs
and a $320 million charge related to the exit of the Connexion
by Boeing business recorded in Other segment.
The most significant items included in Unallocated expense are
shown in the following table:
(Dollars in millions)
Years ended December 31, 2007 2006 2005
Pension and other postretirement $÷«(686) $÷«(472) $÷«(851)
Share-based plans (233) (680) (999)
Deferred compensation (51) (211) (186)
Other (215) (370) (371)
Unallocated expense $(1,185) $(1,733) $(2,407)
We recorded net periodic benefit cost related to pensions and
other postretirement benefits of $1,773 million, $1,663 million
and $1,852 million in 2007, 2006 and 2005, respectively. Not
all net periodic benefit cost is recognized in earnings in the
period incurred because it is allocated to production as prod-
uct costs and a portion remains in inventory at the end of the
reporting period. Accordingly, earnings from operations includ-
ed $1,730 million, $1,227 million and $1,893 million in 2007,
2006, and 2005, respectively. A portion of pension and other
postretirement expense is recorded in the business segments
and the remainder is included in unallocated pension and
other postretirement expense.
Unallocated pension and other postretirement expense repre-
sents the difference between costs recognized under GAAP
in the consolidated financial statements and federal cost
accounting standards required to be utilized by our business
segments for U.S. government contracting purposes.
Pension and other postretirement expense increased during
2007 when compared with 2006 primarily due to increased
overall pension costs recognized in inventory as of December
31, 2006, which are subsequently expensed in cost of sales in
2007. Pension and other postretirement expense decreased in
2006 compared with 2005 mainly due to an absence of net
settlement and curtailment charges partially offset by an
increase in the amount of actuarial loss that was amortized.
The reduction in Share-based plans expense is primarily due to
lower Performance Shares outstanding during 2007 and higher
expense acceleration during 2006, resulting from 12 payouts
compared with six payouts in 2007. The decrease in 2006
Share-based plans expense is primarily due to the increase in
our stock price during 2005 which resulted in additional com-
pensation expense due to an increase in the number of per-
formance shares meeting the price growth targets and being
converted to common stock. The year over year changes in
deferred compensation expense are primarily driven by
changes in our stock price. Other expense decreased in 2007
partly due to reduced intercompany profit elimination as a
result of fewer intercompany deliveries during 2007 compared
with 2006.
Other Earnings Items
(Dollars in millions)
Years ended December 31, 2007 2006 2005
Earnings from operations $«5,830 $3,014 $2,812
Other income, net 484 420 301
Interest and debt expense (196) (240) (294)
Earnings before income taxes 6,118 3,194 2,819
Income tax expense (2,060) (988) (257)
Net earnings from
continuing operations $«4,058 $2,206 $2,562
Other income, which primarily consists of interest income, was
higher in 2007 compared with 2006 as a result of increases
in average principal balances and higher average rates of
return on cash and investments. Other income was higher in
2006 compared with 2005 as a result of increases in average
principal balances and higher average rates of return, partially
offset by lower interest income compared with 2005 related to
federal income tax settlements for prior years.
Interest and debt expense decreased in 2007 and in 2006,
primarily due to debt repayments.
The effective income tax rate of 33.7% for 2007 differed from
the 2006 effective income tax rate of 30.9% primarily due to
Foreign Sales Corporation and Extraterritorial Income exclusion
tax benefits that existed in 2006, but did not recur in 2007.
This was partially offset by the non-deduction in 2006 of the
global settlement with the U.S. DoJ and other income tax pro-
vision adjustments. The 2007 tax rate of 33.7% included
enhanced Research and Development credits that exceeded
the credits in 2006. The effective income tax rate of 30.9% for
2006 differed from the 2005 effective income tax rate of 9.1%
primarily due to the favorable 2005 settlement with the Internal
Revenue Service and the non-deduction in 2006 of the global
settlement with the U.S. DoJ. For additional discussion related
to Income Taxes see Note 4.
The Boeing Company and Subsidiaries