Boeing 2009 Annual Report Download - page 40

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agreement contains an escalation clause to account for the effects of economic fluctuations over the
period of time from airplane sale to airplane delivery. A price escalation formula based on pre-defined
factors is used to determine the final price of the airplane at the time of customer delivery. While firm
fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost
overruns. Many new airplanes and derivatives have highly complex designs, utilize exotic materials
and require extensive coordination and integration with supplier partners. As technical or quality issues
arise, such as issues experienced on the 787 and 747-8 programs, we may experience schedule
delays and higher costs to complete new programs and derivative aircraft. Additionally, price escalation
factors may also impact margins by reducing the estimated price of airplanes delivered in the future.
There are other factors that could also result in lower margins or a material charge if a program has or
is determined to have reach-forward losses. These include: changes to the program accounting
quantity, production costs and rates, capital expenditures and other costs associated with increasing or
adding new production capacity, learning curve, anticipated cost reductions, flight test and certification
schedules, costs and schedule for derivative airplanes and status of customer claims, supplier
assertions and other contractual negotiations. While we believe the cost and revenue estimates
incorporated in the financial statements are appropriate, the technical complexity of these programs
creates financial risk as additional completion costs may become necessary or scheduled delivery
dates could be extended, which could trigger termination provisions, order cancellations or other
financially significant exposure.
Boeing Defense, Space & Security
Business Environment and Trends
On January 7, 2010, we announced that Integrated Defense Systems will begin operating under the
name Boeing Defense, Space & Security (BDS).
BDS consists of three capabilities-driven businesses: Boeing Military Aircraft (BMA), Network & Space
Systems (N&SS) and Global Services & Support (GS&S). Additionally, BDS Phantom Works supports
all three businesses via product development, rapid prototyping and customer engagement through
experimentation and enterprise technology investment strategies.
Defense Environment Overview The U.S. continues to balance funding priorities to plan for the
broadest possible range of operations that include homeland defense, natural disasters, stabilization
efforts, counterinsurgency and counterterrorism operations, or nation state aggressors with growing
sophistication and military means. The U.S. Department of Defense (U.S. DoD) faces the simultaneous
requirements to recapitalize important capabilities and transform the force to meet the changing
national security as articulated in the 2010 Quadrennial Defense Review. All of this must be carried out
against a backdrop of significant competing national priorities including the economic crisis and
healthcare reform. We anticipate that the national security environment will remain dynamic and
challenging well into this decade trending with the threat environment.
Government policies are impacting the defense environment including defense acquisition reform,
more insourcing, concerns over industrial base, a shift in emphasis towards more affordable solutions
and emphasis on increasing diplomatic efforts to expand and strengthen our alliances.
Although the U.S. DoD budget has grown substantially over the past decade, we expect the total
budget growth rate to level off over the next several years due to shifting priorities and budget
pressures. The fiscal year 2010 discretionary budget request of $660 billion includes an Overseas
Contingency Operations (OCO) budget of $130 billion, with an additional $33 billion requested.
The fiscal year 2011 discretionary budget of $708 billion includes OCO budget of $159 billion.
Procurement is expected to increase, while Research and Development accounts decrease, facing
increasing budgetary pressures due to growing requirements from Operations and Maintenance (O&M)
and personnel costs tied to U.S. commitments overseas. However, this trend is partially offset by
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