Boeing 2007 Annual Report Download - page 33

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Management’s Discussion and Analysis
Revenues PE&MS revenues decreased 3% in 2007 compared
with an increase of 6% in 2006. The decrease of $422 million
in 2007 was due to reduced deliveries of the Apache and T-45
aircraft and Joint Direct Attack Munitions, partially offset by
higher deliveries of Chinook and F-18 aircraft and higher vol-
ume on the P-8A program. The revenue growth of $799 million
in 2006 was driven by higher deliveries of F-15 and Apache
aircraft and higher volume on P-8A, F-22, and Chinook, partially
offset by reduced revenues on AEW&C.
Deliveries of new-build production aircraft, excluding remanu-
factures and modifications, were as follows:
2007 2006 2005
F/A-18 Models 44 42 42
T-45TS Goshawk 9 13 10
F-15E Eagle 12 12 6
C-17 Globemaster 16 16 16
CH-47 Chinook 10 2
AH-64 Apache 17 31 12
C-40A Clipper 3 1 2
Total New-Build Production Aircraft 111 117 88
Operating Earnings PE&MS operating earnings increased by
$421 million in 2007 primarily due to the 2006 charges of
$770 million on the AEW&C development program, which were
partially offset by lower 2007 earnings due to revised cost
estimates on the international KC-767 Tanker program, lower
prices on the C-17 program and revised cost and revenue esti-
mates on the AEW&C program. Operating earnings decreased
by $512 million in 2006 due to the above mentioned AEW&C
charge, which was partially offset by earnings from revenue
growth, favorable contract mix, and reduced Company-
Sponsored Research & Development expenditures on the
767 Tanker program.
Research and Development The PE&MS segment continues to
focus its research and development resources where it can
use its customer knowledge, technical strength and large-scale
integration capabilities to provide innovative solutions to meet
the war fighter’s enduring needs. Research and development
has remained consistent over the past several years. Research
and development activities leverage our capabilities in architec-
tures, system-of-systems integration and weapon systems
technologies to develop solutions which are designed to
enhance our customers’ capabilities in the areas of mobility,
precision effects, situational awareness and survivability. These
efforts focus on increasing mission effectiveness and interoper-
ability, and improving affordability, reliability and economic own-
ership. Continued research and development investments in
unmanned technology and systems have enabled the demon-
stration of multi-vehicle coordinated flight and distributed con-
trol of high-performance unmanned combat air vehicles.
Research and development in advanced weapons technolo-
gies emphasizes, among other things, precision guidance and
multi-mode targeting. Research and development investments
in the Global Tanker Aircraft program represent a significant
opportunity to provide state-of-the-art refueling capabilities to
domestic and non-U.S. customers. Investments were also
made to support various intelligence, surveillance, and recon-
naissance business opportunities including P-8A and AEW&C
aircraft. Other research and development efforts include
upgrade and technology insertions to network-enable and
enhance the capability and competitiveness of current product
lines such as the F/A-18E/F Super Hornet, F-15E Eagle, AH-
64 Apache, CH-47 Chinook and C-17 Globemaster.
Backlog PE&MS total backlog decreased by 6% in 2007 com-
pared with 2006 primarily due to deliveries and sales on C-17,
F/A-18, P-8A and F-15. These decreases were partially offset
by a multi-year contract for F-22 aircraft and international
orders for AEW&C and F/A-18 aircraft. Total backlog
decreased by 8% in 2006 compared with 2005 primarily due
to deliveries and sales on F/A-18 and F-15 from multi-year
contracts awarded in prior years.
Additional Considerations Items which could have a future
impact on PE&MS operations include the following:
AEW&C During 2006 we recorded charges of $770 million on
our international Airborne Early Warning & Control program.
This development program, also known as Wedgetail in
Australia and Peace Eagle in Turkey, consists of a 737-700 air-
craft outfitted with a variety of command and control and
advanced radar systems, some of which have never been
installed on an airplane before. Wedgetail includes six aircraft
and Peace Eagle includes four aircraft. This is an advanced
and complex fixed-price development program involving tech-
nical challenges at the individual subsystem level and in the
overall integration of these subsystems into a reliable and
effective operational capability. We believe that the cost esti-
mates incorporated in the financial statements are appropriate;
however, the technical complexity of the programs creates
financial risk as additional completion costs may be necessary
or scheduled delivery dates could be missed.
International KC-767 Tanker Program During 2007, the PE&MS
segment recorded charges of $152 million which were partially
offset at the consolidated level. Currently the international KC-
767 Tanker program includes four aircraft for the Italian Air
Force and four aircraft for the Japanese Air Self Defense Force.
These charges are associated with additional estimated costs
for mitigating both the risks on the flight test program and the
delivery risk associated with the Italy and Japan contracts.
These programs are ongoing, and while we believe the cost
estimates incorporated in the financial statements are appropri-
ate, the technical complexity of the programs creates financial
risk as additional completion and development costs may be
necessary or scheduled delivery dates could be missed.
C-17 As of December 31, 2007 we delivered 171 of the 190
C-17 aircraft ordered by the U.S. Air Force, with final deliveries
scheduled for 2009. In June 2007, based upon continued
bipartisan congressional support, including the House Armed
Services Committee addition of $2.4 billion for 10 C-17s in
their mark of the 2008 budget, and U.S. Air Force testimony to
Congress reflecting interest in additional C-17 aircraft, we
directed key suppliers to begin work on 10 aircraft beyond the
190 currently on order. As of December 31, 2007, inventory
expenditures and potential termination liabilities to suppliers for
work performed related to anticipated orders for 10 C-17 air-
craft to the U.S. Air Force and anticipated international orders
The Boeing Company and Subsidiaries