Boeing 2007 Annual Report Download - page 34

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Management’s Discussion and Analysis
for three additional aircraft totaled approximately $215 million.
It is reasonably possible that we will decide in 2008 to com-
plete production of the C-17 if further orders are not received.
We are still evaluating the full financial impact of a potential
production shut-down, including any recovery that would be
available from the government. Such recovery from the gov-
ernment would not include the costs incurred by us resulting
from the second-quarter direction to key suppliers to begin
working on the additional 10 aircraft.
Network and Space Systems Operating Results
(Dollars in millions)
Years ended December 31, 2007 2006 2005
Revenues $11,696 $11,941 $12,221
% of Total company revenues 18% 19% 23%
Earnings from operations $÷÷«891 $÷÷«952 $÷1,395
Operating margins 7.6% 8.0% 11.4%
Research and development $«««««300 $÷÷«301 $÷÷«334
Contractual backlog $÷9,167 $÷7,838 $÷6,324
Unobligated backlog $20,210 $23,723 $27,634
Revenues N&SS revenues decreased 2% in both 2007 and
2006. The decrease of $245 million in 2007 was primarily due
to the exclusion of government Delta volume, now a compo-
nent of our equity investment in ULA and lower FCS volume,
partially offset by increased volume on SBInet and several
satellite programs. The decrease of $280 million in 2006 was
primarily due to lower volume in Proprietary and GMD as well
as the divestiture of our Rocketdyne business, which were
partly offset by significant growth in FCS and higher Delta IV
volume. Additional impacts resulted from fewer milestone com-
pletions in our commercial satellite business in 2006 and the
completion of a Homeland Security contract in 2005.
Delta launch and new-build satellite deliveries were as follows:
2007 2006 2005
Delta II Commercial 3
Delta II Government 2 2
Delta IV Government 3
Satellites 4 4 3
Delta government launches are excluded from our deliveries
after December 1, 2006 due to the formation of ULA.
Operating Earnings N&SS operating earnings decreased by
$61 million in 2007 and decreased by $443 million in 2006.
The decrease in 2007 was due to lower earnings on FCS and
several satellite programs. These decreases were partially off-
set by higher award fees on GMD and a $44 million gain on
sale of Anaheim property. The decrease in 2006 was primarily
due to the $569 million net gain on the Rocketdyne sale and
higher contract values for Delta IV launch contracts in 2005,
partially offset by increased earnings in the FCS program in
2006. N&SS operating earnings include equity earnings of
$85 million, $71 million and $72 million from the United Space
Alliance joint venture in 2007, 2006, and 2005, respectively
and equity loss of $11 million and equity earnings of $5 million
from the ULA joint venture in 2007 and 2006. The ULA
equity earnings and loss amounts are net of the basis differ-
ence amortization.
Divestitures On February 28, 2005, we completed the stock
sale of Electronic Dynamic Devices Inc. to L-3 Communications.
On August 2, 2005 we completed the sale of our Rocketdyne
business to United Technologies Corporation. See Note 7 Exit
Activity and Divestitures.
Research and Development The N&SS research and develop-
ment funding remains focused on the development of intelli-
gence and surveillance systems; communications and
command and control capabilities that support a network-
enabled architecture approach for our various government
customers. We are investing in the communications market to
enable connectivity between existing air/ground platforms,
increase communications availability and bandwidth through
more robust space systems, and leverage innovative commu-
nications concepts. Key programs in this area include Joint
Tactical Radio System, FCS, Global Positioning System, and
Transformational Satellite Communications System. Invest-
ments were also made to support concepts that will lead to
the development of next-generation space intelligence sys-
tems. Along with increased funding to support these areas of
architecture and network-enabled 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 by 7% in 2007 com-
pared with 2006 due to revenues recognized on multi-year
orders received in prior years on FCS and Proprietary pro-
grams, partially offset by an increase in our Space Exploration
programs. Total backlog decreased by 7% in 2006 compared
with 2005 primarily due to revenues recognized on multi-year
orders received in prior years on the FCS program.
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 initially contributed net assets
of $914 million at December 1, 2006. On July 24, 2007 we
and Lockheed reached agreement with respect to resolution of
the final working capital and the value of the launch vehicle
support contracts that each party contributed to form ULA.
Effective August 15, 2007 the parties received all necessary
approvals pursuant to the terms of the Consent Order and the
terms of the agreement which resulted in additional contribu-
tions from both parties with Boeing agreeing to contribute an
additional $97 million which did not result in a cash outflow as
it will be offset against future payments due to us from ULA
associated with an inventory supply agreement. Additionally,
conformed accounting adjustments made by ULA resulted in
adjustments to ULA’s balance sheet. The book value of our
investment exceeds our proportionate share of ULA’s net
assets. This difference will be expensed ratably in future years.
Based on the adjusted contributions and the conformed
accounting policies established by ULA, this amortization is
expected to be approximately $14 million annually for the
next 17 years.
The Boeing Company and Subsidiaries