Boeing 2007 Annual Report Download - page 35

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Management’s Discussion and Analysis
In connection with the formation of ULA, we and Lockheed
each committed to provide up to $25 million in additional capi-
tal contributions, and we each have agreed to extend a line of
credit to ULA of up to $200 million to support its working capi-
tal requirements. 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 guaran-
tee the performance of those contracts to the extent required
by the U.S. government.
In December 2006, we agreed to indemnify ULA through
December 31, 2020 against potential non-recoverability of
$1,375 million of Boeing Delta inventories included in con-
tributed assets plus $1,860 million of inventory subject to the
inventory supply agreement which ends on March 31, 2021.
Since inception, ULA sold $443 million of inventories that were
contributed by us. During 2007, ULA determined that certain
Delta II inventory is not fully recoverable. As a result we record-
ed charges of $31 million for non-recoverable Delta II inventory
and $39 million for our share of the loss recorded by ULA relat-
ed to Delta II. Future decisions regarding the Delta II program
could reduce our earnings by up to $100 million.
We also agreed to indemnify ULA in the event ULA is unable to
obtain re-pricing of certain 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 $332 million
in pre-tax losses related to these contracts.
Sea Launch The Sea Launch venture, in which we are a 40%
partner, provides ocean-based launch services to commercial
satellite customers.
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 mil-
lion) 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 $«÷457 $183 $274
Partner Loans
(principal and interest) 479 287 192
Trade receivable from
Sea Launch 337 334 3
Performance guarantees 33 20 13
Subcontract termination 8 8
Other receivables and
Inventory 47 39 8
$1,361 $843 $486 $32
We made no additional capital contributions to the Sea Launch
venture during the year ended December 31, 2007.
The venture conducted zero, five and four successful launches
for the years ended December 31, 2007, 2006, and 2005,
respectively. A Sea Launch Zenit-3SL vehicle, carrying a
Boeing-built NSS-8 satellite, experienced an anomaly during
launch on January 30, 2007. The launch platform has been
repaired and resumed flight operations on January 15, 2008,
successfully launching a Boeing-built satellite. The venture
incurred losses in 2007 due to a delay in its 2007 launch mani-
fest that was caused by the launch anomaly and unusually
strong ocean currents at the launch site during November and
December. The venture incurred losses in 2006 and 2005 due
to the relatively low price and volume of launches, driven by a
depressed commercial satellite market and oversupply of
launch vehicles as well as a high level of debt and debt servic-
ing requirements.
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 fur-
ther 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. In addition, we continue to look at alternative
capital structures for the venture.
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 which was
collected during the second and third quarter of 2007. New
Skies Satellites B.V. (New Skies) declined to exercise its option
to purchase a replacement spacecraft due to its assertion that
we anticipatorily breached the contract. We believe that had
New Skies exercised its option, we would have fulfilled our
contractual responsibilities. We do not expect New Skies’
assertion to materially impact our consolidated results of oper-
ations, financial position, or cash flows.
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 21.
Support Systems Operating Results
(Dollars in millions)
Years ended December 31, 2007 2006 2005
Revenues $6,699 $6,391 $5,577
% of Total company revenues 10% 10% 10%
Earnings from operations $÷«920 $÷«872 $÷«804
Operating margins 13.7% 13.6% 14.4%
Research and development $÷«104 $÷÷«98 $÷÷«89
Contractual backlog $9,664 $9,714 $8,551
Unobligated backlog $1,148 $÷«739 $1,320
Revenues Support Systems revenues increased $308 million in
2007 and $814 million in 2006, an increase of 5% and 15%.
The increases were due to higher Integrated Logistics (IL) pro-
gram volume resulting from the 2006 acquisition of Aviall, Inc.
(Aviall) and increased revenue on the C-17 support program.
Higher international program volume in 2007 was the result of
our increased ownership in Alsalam Aircraft Company (Alsalam)
which occurred during the second quarter of 2006. Lower
volume on several Maintenance, Modification and Upgrades
(MM&U) and Training Systems and Services (TS&S) programs
partially offset the 2007 increases. Higher volume on several
MM&U programs also contributed to the significant growth in
2006 revenues.
The Boeing Company and Subsidiaries