Boeing 2007 Annual Report Download - page 36

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Management’s Discussion and Analysis
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 air-
craft. As a result, we began consolidating Alsalam’s financial
statements, which generated revenues of $207 million during
2007 and $137 million during the last three quarters of 2006.
Operating Earnings Support Systems operating earnings
increased by 5% in 2007 and increased by 9% in 2006 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 IL,
MM&U, TS&S and Advanced Logistics Support Systems, as
well as on moving into the innovative Network Centric Logistics
areas. Investments have been made to continue the develop-
ment and implementation of innovative and disciplined tools,
processes and systems as market discriminators in the delivery
of integrated customer solutions. Examples of successful pro-
grams 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 by 3% in
2007 compared with 2006 due to increases in TS&S programs
and International Support programs which were partially offset
by decreases in MM&U and IL programs. Total backlog
increased by 6% in 2006 compared with 2005 driven by a
large IL order for Chinook support.
Boeing Capital Corporation Segment
Business Environment and Trends
BCC’s customer financing and investment portfolio at
December 31, 2007 totaled $6,532 million, which was sub-
stantially collateralized by Boeing produced commercial air-
craft. 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. A substantial portion of BCC’s portfolio is concentrated
among U.S. commercial airline customers.
Certain aircraft models in BCC’s portfolio have recently experi-
enced a lower rate of decline in market value and some mod-
els have experienced increases in market value. This market
value condition had been due to certain positive factors includ-
ing passenger load at record high levels, a limited supply of
economically viable used aircraft, increasing lease rates and
increased demand from used aircraft buyers.
Aircraft values and lease rates are impacted by the number
and type of aircraft that are currently out of service. Approxi-
mately 1,600 commercial jet aircraft (8.2% of current world
fleet) continue to be parked, including both in-production and
out-of-production aircraft types, of which over 60% 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.
Summary Financial Information
(Dollars in millions)
Years ended December 31, 2007 2006 2005
Revenues
Earnings from operations
Operating margins
$815
$234
29%
$1,025
$÷«291
28%
$966
$232
24%
Revenues BCC segment revenues consist principally of lease
income from equipment under operating lease and interest
from financing receivables and notes. BCC’s revenues
decreased $210 million in 2007, resulting from lower interest
income on notes receivable of $75 million, lower investment
income of $50 million primarily due to the sale or repayment at
maturity of certain investments in 2006 and lower net gain on
disposal of assets of $47 million. BCC’s revenues increased
$59 million in 2006, primarily due to an increase of investment
income and higher gain on the sale of aircraft and certain
investments in notes receivable.
Operating Earnings BCC’s operating earnings are presented
net of interest expense, provision for (recovery of) losses, asset
impairment expense, depreciation on leased equipment and
other operating expenses. Operating earnings decreased by
$57 million in 2007 primarily due to lower revenues partially off-
set by lower interest expense, lower asset impairment expense
and lower depreciation expense and a recovery of losses. The
increase in operating earnings in 2006 compared with 2005
was primarily due to higher revenues.
Financial Position The following table presents selected
financial data for BCC:
(Dollars in millions) 2007 2006
BCC Customer Financing and
Investment Portfolio $6,532 $8,034
Valuation Allowance as a % of
Total Receivables 2.5% 2.4%
Debt $4,327 $5,590
Debt-to-Equity Ratio 5.0-to-1 5.0-to-1
BCC’s customer financing and investment portfolio at
December 31, 2007 decreased from December 31, 2006 due
to prepayment of certain notes receivable, normal portfolio run-
off and sale of certain portfolio assets. At December 31, 2007
and 2006, BCC had $86 million and $259 million of assets that
were held for sale or re-lease of which $86 million and $253
million had firm contracts to be sold or placed on lease.
Additionally, aircraft subject to leases with a carrying value of
approximately $292 million are scheduled to be returned off
lease in the next 12 months. These aircraft are being remarket-
ed or the leases are being extended and $132 million were
committed at December 31, 2007.
BCC enters into certain transactions with the Other segment in
the form of intercompany guarantees and other subsidies.
Finance Restructurings From time to time, certain BCC cus-
tomers have requested a restructuring of their transactions
with BCC. As of December 31, 2007, BCC has not reached
agreement on any restructuring requests that would have a
material adverse effect on its earnings, cash flows and/or
financial position.
The Boeing Company and Subsidiaries