Boeing 2012 Annual Report Download - page 22

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10
We enter into cost-type contracts which also carry risks.
Our BDS business generated approximately 30% of its 2012 revenues from cost-type contracting
arrangements. Some of these are development programs that have complex design and technical
challenges. These cost-type programs typically have award or incentive fees that are subject to uncertainty
and may be earned over extended periods. In these cases the associated financial risks are primarily in
reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues
arise. Programs whose contracts are primarily cost-type include GMD, Proprietary and SLS programs.
We enter into contracts that include in-orbit incentive payments that subject us to risks.
Contracts in the commercial satellite industry and certain government satellite contracts include in-orbit
incentive payments. These in-orbit payments may be paid over time after final satellite acceptance or paid
in full prior to final satellite acceptance. In both cases, the in-orbit incentive payment is at risk if the satellite
does not perform to specifications for up to 15 years after acceptance. The net present value of in-orbit
incentive fees we ultimately expect to realize is recognized as revenue in the construction period. If the
satellite fails to meet contractual performance criteria, customers will not be obligated to continue making
in-orbit payments and/or we may be required to provide refunds to the customer and incur significant
charges.
Our ability to deliver products and services that satisfy customer requirements is heavily dependent
on the performance of our subcontractors and suppliers, as well as on the availability of raw
materials and other components.
We rely on other companies including subcontractors and suppliers to provide and produce raw materials,
integrated components and sub-assemblies, and production commodities and to perform some of the
services that we provide to our customers. If one or more of our suppliers or subcontractors experiences
delivery delays or other performance problems, we may be unable to meet commitments to our customers
or incur additional costs. In addition, if one or more of the raw materials on which we depend (such as
aluminum, titanium or composites) becomes unavailable or is available only at very high prices, we may
be unable to deliver one or more of our products in a timely fashion or at budgeted costs. In some instances,
we depend upon a single source of supply. Any service disruption from one of these suppliers, either due
to circumstances beyond the supplier’s control or as a result of performance problems or financial
difficulties, could have a material adverse effect on our ability to meet commitments to our customers or
increase our operating costs.
We use estimates in accounting for many contracts and programs. Changes in our estimates could
adversely affect our future financial results.
Contract and program accounting require judgment relative to assessing risks, estimating revenues and
costs and making assumptions for schedule and technical issues. Due to the size and nature of many of
our contracts and programs, the estimation of total revenues and cost at completion is complicated and
subject to many variables. Assumptions have to be made regarding the length of time to complete the
contract or program because costs also include expected increases in wages and employee benefits,
material prices and allocated fixed costs. Incentives or penalties related to performance on contracts are
considered in estimating sales and profit rates, and are recorded when there is sufficient information for
us to assess anticipated performance. Suppliers’ assertions are also assessed and considered in estimating
costs and profit rates. Estimates of award fees are also used in sales and profit rates based on actual and
anticipated awards.
With respect to each of our commercial aircraft programs, inventoriable production costs (including
overhead), program tooling and other non-recurring costs and routine warranty costs are accumulated