Boeing 2010 Annual Report Download - page 41

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, customer and model mix, 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,
schedule and demand 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
U.S. 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 execute the national security policy, recapitalize important capabilities, and transform
the force to meet the changing national security threat environment as articulated in the 2010 National
Security Strategy and Quadrennial Defense Review. These actions must be carried out against a
backdrop of significant competing national priorities including the economic crisis, the national debt and
healthcare reform. As a result, the traditional roles of defense and security are converging into a single
set of customer needs. We anticipate that the national security environment will remain dynamic and
challenging well into this decade trending with the threat environment.
U.S. government policies impacting the defense environment include: efficiency initiatives to save at
least $100 billion through 2016, defense acquisition reform, increased insourcing, concerns over the
decline of the U.S. industrial base, a shift in emphasis towards more affordable solutions, and
emphasis on increasing diplomatic efforts to expand and strengthen our alliances. In January 2011, the
U.S. DoD announced its intention to further reduce its top-line base budget by $78 billion over the next
five years.
Although the U.S. DoD budget has grown substantially over the past decade, we expect the total
budget growth rate to level off or even decline slightly over the next several years due to these shifting
priorities and budget pressures. The fiscal year 2011 discretionary budget of $708 billion includes an
Overseas Contingency Operations (OCO) budget of $159 billion. Procurement is expected to increase,
while research and development accounts are expected to decrease 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 equipment recapitalization efforts and continued demand for
systems development. The near-term forecast of the defense budget environment shows limited
growth in the 2012 to 2016 period for investment efforts. Although opportunities may exist following
complete U.S. troop draw-downs in Iraq in late 2011, they may be offset by sustained O&M
requirements in Afghanistan. Early indications suggest that coalition forces will sustain operations in
the Afghanistan Theater longer than initially anticipated. We continue to see pressure to reduce OCO
requests that have been used to cover the ongoing costs of the wars.
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