UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-442
THE BOEING COMPANY | ||
(Exact name of registrant as specified in its charter)
Delaware | 91-0425694 | |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | |
100 N. Riverside Plaza, Chicago, IL | 60606-1596 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (312) 544-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value | New York Stock Exchange | |
(Title of each class) | (Name of each exchange on which registered) | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2012, there were 751,347,709 common shares outstanding held by nonaffiliates of the registrant, and the aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock Exchange) was approximately $55.8 billion.
The number of shares of the registrant’s common stock outstanding as of February 1, 2013 was 756,165,531.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2012.
THE BOEING COMPANY
Index to the Form 10-K
For the Fiscal Year Ended December 31, 2012
Page | |||
PART I
Item 1. Business
The Boeing Company, together with its subsidiaries (herein referred to as “Boeing,” the “Company,” “we,” “us,” “our”), is one of the world’s major aerospace firms.
We are organized based on the products and services we offer. We operate in five principal segments:
• | Commercial Airplanes; |
• | Our Defense, Space & Security (BDS) business comprises three segments: |
• | Boeing Military Aircraft (BMA), |
• | Network & Space Systems (N&SS) and |
• | Global Services & Support (GS&S); and |
• | Boeing Capital (BCC). |
Our Other segment includes the unallocated activities of Engineering, Operations & Technology (EO&T) and Shared Services Group (SSG), as well as intercompany guarantees provided to BCC. EO&T provides Boeing with technical and functional capabilities, including information technology, research and development, test and evaluation, technology strategy development, environmental remediation management and intellectual property management.
Commercial Airplanes Segment
The Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, principally to the commercial airline industry worldwide. We are a leading producer of commercial aircraft and offer a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and non-U.S. airlines. This family of commercial jet aircraft in production includes the 737 narrow-body model and the 747, 767, 777 and 787 wide-body models. Development continues on the 787-9 and 737 MAX derivatives. The Commercial Airplanes segment also offers aviation services support, aircraft modifications, spares, training, maintenance documents and technical advice to commercial and government customers worldwide.
Defense, Space & Security
Our BDS operations principally involve research, development, production, modification and support of the products and related systems as described below. BDS' primary customer is the United States Department of Defense (U.S. DoD) with approximately 70% of BDS 2012 revenues being derived from this customer (excluding foreign military sales through the U.S. government). Other significant revenues were derived from the National Aeronautics and Space Administration (NASA), international defense markets, civil markets and commercial satellite markets. BDS consists of three capabilities-driven businesses: BMA, N&SS and GS&S. Additionally, the Phantom Works group is an integrated team that works with the three businesses via product development, rapid prototyping and customer engagement through experimentation and enterprise technology investment strategies.
Boeing Military Aircraft Segment
This segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for global strike, including fighter and combat rotorcraft aircraft and missile systems; global mobility, including transport, tanker, rotorcraft and tilt-rotor aircraft; and airborne surveillance and reconnaissance, including command and control, battle
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management and airborne anti-submarine aircraft. The major programs in this segment include for global strike: EA-18G Growler Airborne Electronic Attack, F/A-18E/F Super Hornet, F-15 Strike Eagle, AH-64 Apache and Joint Direct Attack Munition; for global mobility: C-17 Globemaster III, USAF KC-46A Tanker, CH-47 Chinook and V-22 Osprey; and for airborne surveillance and reconnaissance: Airborne Early Warning and Control (AEW&C), P-8A Poseidon and India P-8I. During 2011, production deliveries concluded on the F-22 Raptor and KC-767 International Tanker programs.
Network & Space Systems Segment
This segment is engaged in the research, development, production and modification of the following products and related services: electronics and information systems, including command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), cyber and information solutions, and intelligence systems; strategic missile and defense systems; space and intelligence systems, including satellites and commercial satellite launch vehicles; and space exploration. The major programs in this segment include for electronics and information systems: Family of Advanced Beyond Line-of-Sight Terminals (FAB-T); for strategic missile and defense systems: Ground-based Midcourse Defense (GMD); for space and intelligence systems: commercial, civil and military satellites; and for space exploration: International Space Station, Space Launch System (SLS) and Crew Space Transportation-100. This segment also includes our joint venture operations related to United Launch Alliance and United Space Alliance. During 2011, the Brigade Combat Team Modernization (BCTM) and Space Shuttle programs concluded.
Global Services & Support Segment
This segment provides customers with mission readiness through total support solutions. Our global services business sustains aircraft and systems with a full spectrum of products and services through integrated logistics, including supply chain management and engineering support; maintenance, modification and upgrades for aircraft; and training systems and government services, including pilot and maintenance training. GS&S international operations include Boeing Defence U.K. Ltd., Boeing Defence Australia, and Alsalam Aircraft Company, a joint venture.
Integrated logistics comprises an integrated array of services that address the complete life cycle of aircraft and systems. Major programs include: C-17 Globemaster III Integrated Sustainment Program; F-15 support programs for the United States Air Force (USAF) and several other international customers; the F/A-18E/F support program; and domestic and international performance based logistic programs for the AH-64 Apache and CH-47 Chinook helicopters and other BDS platforms.
Maintenance, modification and upgrades for aircraft are performed at centers throughout the United States and around the world, providing rapid cycle time and aircraft services for military customers on a wide variety of BDS and non-BDS platforms.
Training systems and government services comprise a full range of training capabilities for domestic and international customers, including the design and development of trainers for multiple aircraft platforms, and logistics and asset management solutions.
Boeing Capital Segment
BCC facilitates, arranges, structures and provides selective financing solutions for our Commercial Airplanes customers. In the space and defense markets, BCC primarily arranges and structures financing solutions for our BDS government customers. BCC’s portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments.
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Financial and Other Business Information
See the Summary of Business Segment Data and Note 22 to our Consolidated Financial Statements for financial information, including revenues and earnings from operations, for each of our business segments.
Intellectual Property
We own numerous patents and have licenses for the use of patents owned by others, which relate to our products and their manufacture. In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties. For example, the U.S. government has licenses in our patents that are developed in performance of government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes. Unpatented research, development and engineering skills, as well as certain trademarks, trade secrets, and other intellectual property rights, also make an important contribution to our business. While our intellectual property rights in the aggregate are important to the operation of each of our businesses, we do not believe that our business would be materially affected by the expiration of any particular intellectual property right or termination of any particular intellectual property patent license agreement.
Non-U.S. Revenues
See Note 22 to our Consolidated Financial Statements for information regarding non-U.S. revenues.
Research and Development
Research and development expenditures involve experimentation, design, development and related test activities for defense systems, new and derivative jet aircraft including both commercial and military, advanced space and other company-sponsored product development. These are expensed as incurred including amounts allocable as reimbursable overhead costs on U.S. government contracts.
Our total research and development expense amounted to $3.3 billion, $3.9 billion and $4.1 billion in 2012, 2011 and 2010, respectively.
Research and development costs also include bid and proposal efforts related to government products and services, as well as costs incurred in excess of amounts estimated to be recoverable under cost-sharing research and development agreements. Bid and proposal costs were $326 million, $332 million and $355 million in 2012, 2011 and 2010, respectively.
Employees
Total workforce level at December 31, 2012 was approximately 174,400.
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As of December 31, 2012, our principal collective bargaining agreements were with the following unions:
Union | Percent of our Employees Represented | Status of the Agreements with the Union |
The International Association of Machinists and Aerospace Workers (IAM) | 21% | We have two major agreements; one expiring in January of 2015 and one in September of 2016. |
The Society of Professional Engineering Employees in Aerospace (SPEEA) | 13% | We have one major agreement which expired in October of 2012 that is currently being renegotiated. |
The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) | 2% | We have two major agreements; one expiring in October of 2014 and one in February of 2015. |
Competition
The commercial jet aircraft market and the airline industry remain extremely competitive. We face aggressive international competitors who are intent on increasing their market share, such as Airbus, Embraer and Bombardier, and other entrants from Russia, China and Japan. We are focused on improving our processes and continuing cost reduction efforts. We intend to continue to compete with other airplane manufacturers by providing customers with greater value products, services, and support. We continue to leverage our extensive customer support services network which span the life cycle of the airplane: aircraft acquisition, readying for service, maintenance and engineering, enhancing and upgrading, and transitioning to the next model - as well as the daily cycle of gate-to-gate operations. This enables us to provide a high level of customer satisfaction and productivity.
BDS faces strong competition in all market segments, primarily from Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company and General Dynamics Corporation. Non-U.S. companies such as BAE Systems and European Aeronautic Defence and Space Company (EADS), the parent of Airbus, continue to build a strategic presence in the U.S. market by strengthening their North American operations and partnering with U.S. defense companies. In addition, certain of our competitors have occasionally formed teams with other competitors to address specific customer requirements. BDS expects the trend of strong competition to continue into 2013 with many international firms attempting to increase their U.S. presence.
Regulatory Matters
Our businesses are heavily regulated in most of our markets. We deal with numerous U.S. government agencies and entities, including but not limited to all of the branches of the U.S. military, NASA, the Federal Aviation Administration (FAA) and the Department of Homeland Security. Similar government authorities exist in our international markets.
Government Contracts. The U.S. government, and other governments, may terminate any of our government contracts at their convenience, as well as for default, based on our failure to meet specified performance requirements. If any of our U.S. government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default.
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Commercial Aircraft. In the United States, our commercial aircraft products are required to comply with FAA regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Internationally, similar requirements exist for airworthiness, installation and operational approvals. These requirements are generally administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities.
Environmental. We are subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We continually assess our compliance status and management of environmental matters to ensure our operations are in substantial compliance with all applicable environmental laws and regulations. Investigation, remediation, operation and maintenance costs associated with environmental compliance and management of sites are a normal, recurring part of our operations. These costs often are allowable costs under our contracts with the U.S. government. It is reasonably possible that continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows if additional work requirements or more stringent clean-up standards are imposed by regulators, new areas of soil and groundwater contamination are discovered and/or expansions of work scope are prompted by the results of investigations.
A Potentially Responsible Party (PRP) has joint and several liability under existing U.S. environmental laws. Where we have been designated a PRP by the Environmental Protection Agency or a state environmental agency, we are potentially liable to the government or third parties for the full cost of remediating contamination at our facilities or former facilities or at third-party sites. If we were required to fully fund the remediation of a site for which we were originally assigned a partial share, the statutory framework would allow us to pursue rights to contribution from other PRPs. For additional information relating to environmental contingencies, see Note 12 to our Consolidated Financial Statements.
International. Our international sales are subject to U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations relating to import-export control, investment, exchange controls and repatriation of earnings. International sales are also subject to varying currency, political and economic risks.
Raw Materials, Parts, and Subassemblies
We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and subcontractors. The most important raw materials required for our aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). Although alternative sources generally exist for these raw materials, qualification of the sources could take one year or more. Many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of companies.
Suppliers
We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production schedules and program/contract profitability, thereby jeopardizing our ability to fulfill commitments to our customers. We are also dependent on the availability of energy sources, such as electricity, at affordable prices.
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Seasonality
No material portion of our business is considered to be seasonal.
Executive Officers of the Registrant
See “Item 10. Directors, Executive Officers and Corporate Governance” in Part III.
Other Information
Boeing was originally incorporated in the State of Washington in 1916 and reincorporated in Delaware in 1934. Our principal executive offices are located at 100 N. Riverside Plaza, Chicago, Illinois 60606 and our telephone number is (312) 544-2000.
General information about us can be found at www.boeing.com. The information contained on or connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the Securities and Exchange Commission (SEC). Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our web site as soon as reasonably practicable after we file them with, or furnish them to, the SEC. These reports may also be obtained at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Boeing.
Forward-Looking Statements
This report, as well as our Annual Report to Shareholders, quarterly reports, and other filings we make with the SEC, press releases and other written and oral communications, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “expects,” “intends,” “projects,” “plans,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, as well as any other statement that does not directly relate to any historical or current fact.
Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties and changes in circumstances that are difficult to predict. Many factors, including those set forth in the “Risk Factors” section below could cause actual results to differ materially and adversely from these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.
Item 1A. Risk Factors
An investment in our common stock or debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past or projected future performance. We urge investors to consider carefully the risk factors described below in evaluating the information contained in this report.
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Our Commercial Airplanes business depends heavily on commercial airlines, and is subject to unique risks.
Market conditions have a significant impact on demand for our commercial aircraft. The commercial aircraft market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors underlying long-term traffic growth are sustained economic growth and political stability both in developed and emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of aircraft financing, world trade policies, government-to-government relations, technological changes, price and other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the airline industry has been cyclical and very competitive and has experienced significant profit swings and constant challenges to be more cost competitive. Significant deterioration in the global economic environment, the airline industry generally, or in the financial stability of one or more of our major customers could result in fewer new orders for aircraft or could cause customers to seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues, profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.
We enter into firm fixed-price aircraft sales contracts with indexed price escalation clauses which could subject us to losses if we have cost overruns or if increases in our costs exceed the applicable escalation rate. Commercial aircraft sales contracts are often entered into years before the aircraft are delivered. In order to account for economic fluctuations between the contract date and delivery date, aircraft pricing generally consists of a fixed amount as modified by an indexed price escalation formula. Our revenue estimates are based on current expectations with respect to these escalation formulas, but the actual escalation amounts are outside of our control. Escalation factors can fluctuate significantly from period to period. Changes in escalation amounts can significantly impact revenues and operating margins in our Commercial Airplanes business.
We derive a significant portion of our revenues from a limited number of commercial airlines. We can make no assurance that any customer will exercise purchase options, fulfill existing purchase commitments or purchase additional products or services from us. In addition, fleet decisions, airline consolidations or financial challenges involving any of our major commercial airline customers could significantly reduce our revenues and limit our opportunity to generate profits from those customers.
Our Commercial Airplanes business depends on our ability to maintain a healthy production system, achieve planned production rate targets, successfully develop new aircraft or new derivative aircraft, and meet or exceed stringent performance and reliability standards.
The commercial aircraft business is extremely complex, involving extensive coordination and integration with suppliers, highly-skilled labor from thousands of employees and other partners, and stringent regulatory requirements and performance and reliability standards. In addition, the introduction of new aircraft derivatives, such as the 787-9 and 737 MAX, involves increased risks associated with meeting development, testing, production and certification schedules. As a result, our ability to deliver aircraft on time, satisfy regulatory and customer requirements, and achieve or maintain, as applicable, program profitability is subject to significant risks.
We must meet planned production rate targets in order to satisfy customer demand and maintain our profitability. We continue to increase production rates for the 737, 777 and 787 programs, while at the same time engaging in significant ongoing development of the 787-9 and 737 MAX derivative aircraft. If production rate ramp-up efforts at any of our commercial aircraft assembly facilities are delayed or if our suppliers cannot timely deliver components to us at the rates necessary to achieve our planned rate
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increases, we may be unable to meet delivery schedules and the financial performance of one or more of our programs may suffer.
Operational challenges impacting the production system for one or more of our commercial aircraft programs could result in production delays and/or failure to meet customer demand for new aircraft, either of which would negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely complex. Operational issues, including delays or defects in supplier components, failure to meet internal performance plans, or delays or failures to achieve required regulatory certifications, could result in significant out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to aircraft performance and/or increased warranty or fleet support costs. Further, if we cannot efficiently and cost-effectively incorporate design changes into already-completed 787 and 747-8 production aircraft, we may face further profitability pressures on these programs.
If our commercial airplanes fail to satisfy performance and reliability requirements, we could face additional costs and/or lower revenues. Developing and manufacturing commercial aircraft that meet or exceed our performance and reliability standards, as well as those of customers and regulatory agencies, can be costly and technologically challenging. These challenges are particularly significant with newer aircraft programs. Any failure of any Boeing aircraft to satisfy performance or reliability requirements could result in disruption to our operations, higher costs and/or lower revenues.
Changes in levels of U.S. government defense spending or overall acquisition priorities could negatively impact our financial position and results of operations.
We derive a substantial portion of our revenue from the U.S. government, primarily from defense related programs with the U.S. DoD. Levels of U.S. defense spending in future periods are very difficult to predict and subject to significant risks. In addition, significant budgetary constraints may result in further reductions to projected spending levels. In particular, U.S. government expenditures are subject to the potential for automatic reductions, generally referred to as “sequestration.” Sequestration may occur during 2013, resulting in significant additional reductions to spending by the U.S. DoD on both existing and new contracts as well as disruption of ongoing programs. We expect that sequestration would have similar impacts on other U.S government customers, such as NASA and various intelligence agencies. Even if sequestration does not occur, we expect that budgetary constraints and ongoing concerns regarding the U.S. national debt will continue to place downward pressure on U.S. DoD spending levels. Due to these and other factors, overall U.S. government defense spending could decline, which could result in significant reductions to revenue, cash flow, profit and backlog primarily in our BDS business.
In addition, as a result of the significant ongoing uncertainty with respect to both U.S. defense spending levels and the nature of the threat environment, we expect the U.S. DoD to continue to emphasize cost-cutting and other efficiency initiatives in its procurement processes. If we can no longer adjust successfully to these changing acquisition priorities and/or fail to meet affordability targets set by the U.S. DoD customer, our revenues and market share would be further impacted.
We conduct a significant portion of our business pursuant to U.S. government contracts, which are subject to unique risks.
In 2012, 33% of our revenues were earned pursuant to U.S. government contracts, which include foreign military sales through the U.S. government. Business conducted pursuant to such contracts is subject to extensive procurement regulations and other unique risks.
Our sales to the U.S. government are subject to extensive procurement regulations, and changes to those regulations could increase our costs. New procurement regulations, or changes to existing requirements, could increase our compliance costs or otherwise have a material impact on the operating margins of our BDS business. For example, in 2012 the U.S. DoD issued a final rule implementing regulations that
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increased levels of U.S. government oversight with respect to several key business systems of U.S. government prime contractors. These requirements may result in increased compliance costs, and we could be subject to additional costs in the form of withheld payments and/or reduced future business if we fail to comply with these requirements in the future. Compliance costs attributable to current and potential future procurement regulations such as these could negatively impact our financial condition and operating results.
The U.S. government may modify, curtail or terminate one or more of our contracts. The U.S. government contracting party may modify, curtail or terminate its contracts and subcontracts with us, without prior notice and either at its convenience or for default based on performance. For example, in 2011, the U.S. Army terminated for convenience the entire BCTM program. In addition, funding pursuant to our U.S. government contracts may be reduced or withheld as part of the U.S. Congressional appropriations process due to fiscal constraints, changes in U.S. national security strategy and/or priorities or other reasons. Further uncertainty with respect to ongoing programs could also result in the event that the U.S. government finances its operations through temporary funding measures such as “continuing resolutions” rather than full-year appropriations. Any loss or anticipated loss of expected funding and/or modification, curtailment, or termination of one or more large programs could have a material adverse effect on our earnings, cash flow and/or financial position.
We are subject to U.S. government inquiries and investigations, including periodic audits of costs that we determine are reimbursable under U.S. government contracts. U.S. government agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit government contractors. These agencies review our performance under contracts, cost structure and compliance with applicable laws, regulations, and standards, as well as the adequacy of and our compliance with our internal control systems and policies. Any costs found to be misclassified or inaccurately allocated to a specific contract will be deemed non-reimbursable, and to the extent already reimbursed, must be refunded. Any inadequacies in our systems and policies could result in withholds on billed receivables, penalties and reduced future business. Furthermore, if any audit, inquiry or investigation uncovers improper or illegal activities, we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with the U.S. government. We also could suffer reputational harm if allegations of impropriety were made against us, even if such allegations are later determined to be false.
We enter into fixed-price contracts which could subject us to losses if we have cost overruns.
Our BDS business generated approximately 70% of its 2012 revenues from fixed-price contracts. While firm fixed price contracts enable us to benefit from performance improvements, cost reductions and efficiencies, they also subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and revenues. If our estimated costs exceed our estimated price, we recognize reach-forward losses which can significantly affect our reported results. The long term nature of many of our contracts makes the process of estimating costs and revenues on fixed-price contracts inherently risky. Fixed-price contracts often contain price incentives and penalties tied to performance which can be difficult to estimate and have significant impacts on margins. In addition, some of our contracts have specific provisions relating to cost, schedule and performance.
Fixed-price development contracts are generally subject to more uncertainty than fixed-price production contracts. Many of these development programs have highly complex designs. In addition, technical or quality issues that arise during development could lead to schedule delays and higher costs to complete, which could result in a material charge or otherwise adversely affect our financial condition. Examples of significant BDS fixed-price development contracts include AEW&C, FAB-T, India P-8I, Saudi F-15, USAF KC-46A Tanker, and commercial and military satellites.
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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
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and charged as cost of sales by program instead of by individual units or contracts. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts limited by the ability to make reasonably dependable estimates. To establish the relationship of sales to cost of sales, program accounting requires estimates of (a) the number of units to be produced and sold in a program, (b) the period over which the units can reasonably be expected to be produced and (c) the units’ expected sales prices, production costs, program tooling and other non-recurring costs, and routine warranty costs for the total program. Several factors determine accounting quantity, including firm orders, letters of intent from prospective customers and market studies. Changes to customer or model mix, production costs and rates, learning curve, escalation, costs of derivative aircraft, supplier performance, customer negotiations/settlements, supplier claims and/or certification issues can impact these estimates. Any such change in estimates relating to program accounting may adversely affect future financial performance.
Because of the significance of the judgments and estimation processes described above, it is likely that materially different sales and profit amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. For additional information on our accounting policies for recognizing sales and profits, see our discussion under “Management’s Discussion and Analysis – Critical Accounting Policies – Contract Accounting/Program Accounting” on pages 42 – 44 and Note 1 to our Consolidated Financial Statements on pages 55 – 65 of this Form 10-K.
Competition within our markets may reduce our future contracts and sales.
The markets in which we operate are highly competitive and one or more of our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. In our Commercial Airplanes business, we anticipate increasing competition among non-U.S. aircraft manufacturers and service providers in one or more of our market segments. In our BDS business, we anticipate that the effects of defense industry consolidation and new priorities, including long-term cost competitiveness, of our U.S. DoD customer will intensify competition for many of our products and services. Furthermore, we are facing increased international competition and cross-border consolidation of competition. There can be no assurance that we will be able to compete successfully against our current or future competitors or that the competitive pressures we face will not result in reduced revenues and market share.
We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks of doing business in other countries.
In 2012, non-U.S. customers accounted for approximately 54% of our revenues. We expect that non-U.S. sales will continue to account for a significant portion of our revenues for the foreseeable future. As a result, we are subject to risks of doing business internationally, including:
• | changes in regulatory requirements; |
• | domestic and international government policies, including requirements to expend a portion of program funds locally and governmental industrial cooperation or participation requirements; |
• | fluctuations in international currency exchange rates; |
• | volatility in international political and economic environments and changes in non-U.S. national priorities and budgets, which can lead to delays or fluctuations in orders; |
• | the complexity and necessity of using non-U.S. representatives and consultants; |
• | the uncertainty of the ability of non-U.S. customers to finance purchases, including the availability of financing from the U.S. Export-Import Bank; |
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• | uncertainties and restrictions concerning the availability of funding credit or guarantees; |
• | imposition of taxes, export controls, tariffs, embargoes and other trade restrictions; |
• | the difficulty of management and operation of an enterprise spread over many countries; |
• | compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S. companies abroad; and |
• | economic and geopolitical developments and conditions. |
While the impact of these factors is difficult to predict, any one or more of these factors could adversely affect our operations in the future.
The outcome of litigation and of government inquiries and investigations involving our business is unpredictable and an adverse decision in any such matter could have a material effect on our financial position and results of operations.
We are involved in a number of litigation matters. These claims may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits could have a material impact on our financial position and results of operations. In addition, we are sometimes subject to government inquiries and investigations of our business due, among other things, to our business relationships with the U.S government, the heavily regulated nature of our industry, and in the case of environmental proceedings, our ownership of certain property. Any such inquiry or investigation could potentially result in an adverse ruling against us, which could have a material impact on our financial position and operating results.
A significant portion of our and Boeing Capital’s customer financing portfolio is concentrated among certain customers based in the United States, and in certain types of Boeing aircraft, which exposes us to concentration risks.
A significant portion of our customer financing portfolio is concentrated among certain customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 aircraft. If one or more customers holding a significant portion of our portfolio assets experiences financial difficulties or otherwise defaults on or does not renew its leases with us at their expiration, and we are unable to redeploy the aircraft on reasonable terms, or if the types of aircraft that are concentrated in our portfolio suffer greater than expected declines in value, our earnings, cash flows and/or financial position could be materially adversely affected.
We may be unable to obtain debt to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms or in sufficient amounts.
We depend, in part, upon the issuance of debt to fund our operations and contractual commitments. As of December 31, 2012 and 2011, our airplane financing commitments totaled $18,083 million and $15,866 million. If we require additional funding in order to fund outstanding financing commitments or meet other business requirements, our market liquidity may not be sufficient. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook or credit ratings. The occurrence of any or all of these events may adversely affect our ability to fund our operations and contractual or financing commitments.
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We may not realize the anticipated benefits of mergers, acquisitions, joint ventures/strategic alliances or divestitures.
As part of our business strategy, we may merge with or acquire businesses and/or form joint ventures and strategic alliances. Whether we realize the anticipated benefits from these acquisitions and related activities depends, in part, upon our ability to integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the performance of the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected from unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. Consolidations of joint ventures could also impact our reported results of operations or financial position. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to liabilities that are unique to the products and services we provide. While we maintain insurance for certain risks and, in some circumstances, we may receive indemnification from the U.S. government, insurance cannot be obtained to protect against all risks and liabilities. It is therefore possible that the amount of our insurance coverage may not cover all claims or liabilities, and we may be forced to bear substantial costs. For example, liabilities arising from the use of certain of our products, such as aircraft technologies, missile systems, border security systems, anti-terrorism technologies, and/or air traffic management systems may not be insurable on commercially reasonable terms. While some of these products are shielded from liability within the U.S. under the SAFETY Act provisions of the 2002 Homeland Security Act, no such protection is available outside the U.S., potentially resulting in significant liabilities. The amount of insurance coverage we are able to maintain may be inadequate to cover these or other claims or liabilities.
Business disruptions could seriously affect our future sales and financial condition or increase our costs and expenses.
Our business may be impacted by disruptions including threats to physical security, information technology or cyber-attacks or failures, damaging weather or other acts of nature and pandemics or other public health crises. Any of these disruptions could affect our internal operations or our ability to deliver products and services to our customers. Any significant production delays, or any destruction, manipulation or improper use of our data, information systems or networks could impact our sales, increase our expenses and/or have an adverse affect the reputation of Boeing and of our products and services.
Some of our and our suppliers’ workforces are represented by labor unions, which may lead to work stoppages.
Approximately 68,000 employees, which constitute 39% of our total workforce, are union represented as of December 31, 2012. We experienced a work stoppage in 2008 when a labor strike halted commercial aircraft and certain BMA program production and we may experience additional work stoppages in the future, which could adversely affect our business. We cannot predict how stable our relationships, currently with 12 U.S. labor organizations and 6 non-U.S. labor organizations, will be or whether we will be able to meet the unions’ requirements without impacting our financial condition. The unions may also limit our flexibility in dealing with our workforce. Union actions at suppliers can also affect us. Work stoppages and
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instability in our union relationships could delay the production and/or development of our products, which could strain relationships with customers and cause a loss of revenues which would adversely affect our operations.
We have substantial pension and other postretirement benefit obligations, which have a material impact on our earnings, shareholders' equity and cash flows from operations and could have significant adverse impacts in future periods.
We have qualified defined benefit pension plans that cover the majority of our employees. Potential pension contributions include both mandatory amounts required under the Employee Retirement Income Security Act (ERISA) and discretionary contributions to improve the plans' funded status. The extent of future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions as well as on our annual pension costs and/or result in a significant change to Shareholders' equity. For U.S. government contracts, we allocate pension costs to individual contracts based on U.S. Cost Accounting Standards which can also affect contract profitability. We also provide other postretirement benefits to certain of our employees, consisting principally of health care coverage for eligible retirees and qualifying dependents. Our estimates of future costs associated with these benefits are also subject to assumptions, including estimates of the level of medical cost increases. For a discussion regarding how our financial statements can be affected by pension and other postretirement plan accounting policies, see “Management's Discussion and Analysis-Critical Accounting Policies-Postretirement Plans” on page 46 of this Form 10-K. Although GAAP expense and pension or other postretirement contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash or stock we would contribute to our plans.
Our operations expose us to the risk of material environmental liabilities.
We are subject to various federal, state, local and non-U.S. laws and regulations related to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if we were to violate or become liable under environmental laws or regulations. In some cases, we may be subject to such costs due to environmental impacts attributable to our current or past manufacturing operations or the operations of companies we have acquired. In other cases, we may become subject to such costs due to an indemnification agreement between us and a third party relating to such environmental liabilities. In addition, new laws and regulations, more stringent enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new remediation requirements could result in additional costs. For additional information relating to environmental contingencies, see Note 12 to our Consolidated Financial Statements.
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Unauthorized access to our or our customers’ information and systems could negatively impact our business.
We face certain security threats, including threats to the confidentiality, availability and integrity of our data and systems. We maintain an extensive network of technical security controls, policy enforcement mechanisms and monitoring systems in order to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks could result in significant financial or information losses and/or reputational harm. In addition, we manage information technology systems for certain customers. Many of these customers face similar security threats. If we cannot prevent the unauthorized access, release and/or corruption of our customers’ confidential, classified or personally identifiable information, our reputation could be damaged, and/or we could face financial losses.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2. Properties
We occupied approximately 83 million square feet of floor space on December 31, 2012 for manufacturing, warehousing, engineering, administration and other productive uses, of which approximately 96% was located in the United States. The following table provides a summary of the floor space by business as of December 31, 2012:
(Square feet in thousands) | Owned | Leased | Government Owned(1) | Total | |||||||
Commercial Airplanes | 36,165 | 5,404 | 41,569 | ||||||||
Defense, Space & Security | 30,101 | 7,801 | 37,902 | ||||||||
Other(2) | 2,155 | 748 | 318 | 3,221 | |||||||
Total | 68,421 | 13,953 | 318 | 82,692 | |||||||
(1) Excludes rent-free space furnished by U.S. government landlord of 546 square feet.
(2) Other includes BCC; EO&T; SSG; and our Corporate Headquarters.
At December 31, 2012, our segments occupied in excess of 74 million square feet of floor space at the following major locations:
• | Commercial Airplanes – Greater Seattle, WA; North Charleston, SC; Greater Los Angeles, CA; Portland, OR; Australia; and Canada |
• | Defense, Space & Security – Greater Los Angeles, CA; Greater Seattle, WA; Greater St. Louis, MO; Philadelphia, PA; San Antonio, TX; Huntsville, AL; Mesa, AZ; Wichita, KS; Houston, TX; Oklahoma City, OK; and Greater Washington, DC |
• | Other – Chicago, IL and Greater Seattle, WA |
Most runways and taxiways that we use are located on airport properties owned by others and are used jointly with others. Our rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. government furnishes us certain office space, installations and equipment at U.S. government bases for use in connection with various contract activities.
We believe that our major properties are adequate for our present needs and, as supplemented by planned improvements and construction, expect them to remain adequate for the foreseeable future.
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Item 3. Legal Proceedings
Currently, we are involved in a number of legal proceedings. For a discussion of contingencies related to legal proceedings, see Note 21 to our Consolidated Financial Statements, which is hereby incorporated by reference.
BSSI/Telesat Canada
On November 9, 2006, Telesat Canada (Telesat) and a group of its insurers served Boeing Satellite Systems International Inc. (BSSI) with an arbitration demand in connection with the constructive total loss of Anik F1, a model 702 satellite manufactured by BSSI. During the fourth quarter of 2012, both the arbitration and the associated claims by reinsurers were dismissed after the parties agreed to settle on terms requiring no payment or admission of liability.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market for our common stock is the New York Stock Exchange where it trades under the symbol BA. As of February 1, 2013, there were 167,801 shareholders of record. Additional information required by this item is incorporated by reference from Note 23 to our Consolidated Financial Statements.
Issuer Purchases of Equity Securities
The following table provides information about purchases we made during the quarter ended December 31, 2012 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
(Dollars in millions, except per share data)
(a) | (b) | (c) | (d) | ||||||||
Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs(2) | ||||||||
10/1/2012 thru 10/31/2012 | 47,535 | $70.05 | $3,610 | ||||||||
11/1/2012 thru 11/30/2012 | 4,728 | 71.69 | 3,610 | ||||||||
12/1/2012 thru 12/31/2012 | 4,643 | 74.10 | 3,610 | ||||||||
Total | 56,906 | $70.52 | |||||||||
(1) | We purchased an aggregate of 56,906 shares transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units during the period. We did not purchase shares in swap transactions. |
(2) | On October 29, 2007, the Board approved the repurchase of up to $7 billion of common stock (the Program). Unless terminated earlier by a Board resolution, the Program will expire when we have used all authorized funds for repurchase. In February 2009, repurchases were suspended and in December 2012 we announced the resumption of this program with repurchases expected to total between $1.5 and $2.0 billion in 2013. |
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Item 6. Selected Financial Data
Five-Year Summary (Unaudited) | |||||||||||||||||||
(Dollars in millions, except per share data) | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Operations | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Commercial Airplanes | $49,127 | $36,171 | $31,834 | $34,051 | $28,263 | ||||||||||||||
Defense, Space & Security:(1) | |||||||||||||||||||
Boeing Military Aircraft | 16,384 | 14,947 | 14,238 | 14,304 | 13,445 | ||||||||||||||
Network & Space Systems | 7,584 | 8,654 | 9,449 | 10,871 | 11,346 | ||||||||||||||
Global Services & Support | 8,639 | 8,375 | 8,256 | 8,486 | 7,256 | ||||||||||||||
Total Defense, Space & Security | 32,607 | 31,976 | 31,943 | 33,661 | 32,047 | ||||||||||||||
Boeing Capital | 441 | 520 | 639 | 660 | 703 | ||||||||||||||
Other segment | 133 | 150 | 138 | 165 | 567 | ||||||||||||||
Unallocated items and eliminations | (610 | ) | (82 | ) | (248 | ) | (256 | ) | (671 | ) | |||||||||
Total revenues | $81,698 | $68,735 | $64,306 | $68,281 | $60,909 | ||||||||||||||
General and administrative expense | 3,717 | 3,408 | 3,644 | 3,364 | 3,084 | ||||||||||||||
Research and development expense | 3,298 | 3,918 | 4,121 | 6,506 | 3,768 | ||||||||||||||
Other income/(loss), net | 62 | 47 | 52 | (26 | ) | 247 | |||||||||||||
Net earnings from continuing operations | $3,903 | $4,011 | $3,311 | $1,335 | $2,654 | ||||||||||||||
Net gain/(loss) on disposal of discontinued operations, net of tax | (3 | ) | 7 | (4 | ) | (23 | ) | 18 | |||||||||||
Net earnings | $3,900 | $4,018 | $3,307 | $1,312 | $2,672 | ||||||||||||||
Basic earnings per share from continuing operations | 5.15 | 5.38 | 4.50 | 1.89 | 3.68 | ||||||||||||||
Diluted earnings per share from continuing operations | 5.11 | 5.33 | 4.46 | 1.87 | 3.65 | ||||||||||||||
Cash dividends declared | $1,360 | $1,263 | $1,245 | $1,233 | $1,187 | ||||||||||||||
Per share | 1.81 | 1.70 | 1.68 | 1.68 | 1.62 | ||||||||||||||
Additions to Property, plant and equipment | 1,703 | 1,713 | 1,125 | 1,186 | 1,674 | ||||||||||||||
Depreciation of Property, plant and equipment | 1,248 | 1,119 | 1,096 | 1,066 | 1,013 | ||||||||||||||
Year-end workforce | 174,400 | 171,700 | 160,500 | 157,100 | 162,200 | ||||||||||||||
Financial position at December 31 | |||||||||||||||||||
Total assets | $88,896 | $79,986 | $68,565 | $62,053 | $53,779 | ||||||||||||||
Working capital | 12,327 | 8,536 | 5,177 | 2,392 | (4,809 | ) | |||||||||||||
Property, plant and equipment, net | 9,660 | 9,313 | 8,931 | 8,784 | 8,762 | ||||||||||||||
Cash and cash equivalents | 10,341 | 10,049 | 5,359 | 9,215 | 3,268 | ||||||||||||||
Short-term and other investments | 3,217 | 1,223 | 5,158 | 2,008 | 11 | ||||||||||||||
Total debt | 10,409 | 12,371 | 12,421 | 12,924 | 7,512 | ||||||||||||||
Customer financing assets | 4,420 | 4,772 | 4,680 | 5,834 | 6,282 | ||||||||||||||
Shareholders’ equity(2) | 5,867 | 3,515 | 2,766 | 2,128 | (1,294 | ) | |||||||||||||
Per share | 7.76 | 4.72 | 3.76 | 2.93 | (1.85 | ) | |||||||||||||
Common shares outstanding (in millions)(3) | 755.6 | 744.7 | 735.3 | 726.3 | 698.1 | ||||||||||||||
Contractual Backlog: | |||||||||||||||||||
Commercial Airplanes | $317,287 | $293,303 | $255,591 | $250,476 | $278,575 | ||||||||||||||
Defense, Space & Security:(1) | |||||||||||||||||||
Boeing Military Aircraft | 29,674 | 24,085 | 25,094 | 26,354 | 25,802 | ||||||||||||||
Network & Space Systems | 9,692 | 9,024 | 9,567 | 7,731 | 8,868 | ||||||||||||||
Global Services & Support | 15,702 | 13,245 | 13,703 | 11,939 | 10,615 | ||||||||||||||
Total Defense, Space & Security | 55,068 | 46,354 | 48,364 | 46,024 | 45,285 | ||||||||||||||
Total contractual backlog | $372,355 | $339,657 | $303,955 | $296,500 | $323,860 | ||||||||||||||
Cash dividends have been paid on common stock every year since 1942.
(1) | Effective January 1, 2012, certain programs were realigned between BDS segments. Prior years have been recast for segment realignments. |
(2) | Shareholders’ equity excludes non-controlling interest. |
(3) | Represents actual number of shares outstanding as of December 31 and excludes treasury shares and the outstanding shares held by the ShareValue Trust, which was terminated in July 2010. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations and Financial Condition
Overview
We are a global market leader in design, development, manufacture, sale, service and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. We are one of the two major manufacturers of 100+ seat airplanes for the worldwide commercial airline industry and one of the largest defense contractors in the U.S. While our principal operations are in the U.S., we conduct operations in many countries and rely on an extensive network of international partners, key suppliers and subcontractors.
Our strategy is centered on successful execution in healthy core businesses – Commercial Airplanes and Defense, Space & Security (BDS) – supplemented and supported by Boeing Capital (BCC). Taken together, these core businesses have historically generated substantial earnings and cash flow that permit us to invest in new products and services. We focus on producing the products and providing the services that the market demands and we price our products and services to provide a fair return for our shareholders while continuing to find new ways to improve efficiency and quality. Commercial Airplanes is committed to being the leader in commercial aviation by offering airplanes and services that deliver superior design, efficiency and value to customers around the world. BDS integrates its resources in defense, intelligence, communications, security and space to deliver capability-driven solutions to its customers at reduced costs. Our strategy is to leverage our core businesses to capture key next-generation programs while expanding our presence in adjacent and international markets, underscored by an intense focus on growth and productivity. Our strategy also benefits as the cyclicality of commercial and defense markets often offset. BCC delivers value by supporting our business units and managing overall financing exposure.
Consolidated Results of Operations
Revenues
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Commercial Airplanes | $49,127 | $36,171 | $31,834 | ||||||||
Defense, Space & Security | 32,607 | 31,976 | 31,943 | ||||||||
Boeing Capital | 441 | 520 | 639 | ||||||||
Other segment | 133 | 150 | 138 | ||||||||
Unallocated items and eliminations | (610 | ) | (82 | ) | (248 | ) | |||||
Total | $81,698 | $68,735 | $64,306 | ||||||||
Revenues in 2012 increased by $12,963 million or 19% compared with 2011. Commercial Airplanes revenues increased by $12,956 million primarily due to higher new airplane deliveries across all programs. BDS revenues increased by $631 million due to higher revenues in the Boeing Military Aircraft (BMA) and Global Service & Support (GS&S) segments partially offset by lower revenues in the Network & Space Systems (N&SS) segment. Unallocated items and eliminations reduced revenues by $610 million in 2012 compared with $82 million in 2011 reflecting higher intercompany deliveries of P-8 and commercial aircraft in 2012.
Revenues in 2011 increased by $4,429 million or 7% compared with 2010. Commercial Airplanes revenues increased by $4,337 million due to higher new airplane deliveries, including the impact of entry into service of the 787-8 and 747-8 Freighter, favorable new airplane delivery mix and higher commercial aviation
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services revenues. BDS revenues increased by $33 million primarily due to higher revenues in the BMA and GS&S segments, partially offset by lower revenues in the N&SS segment.
Earnings From Operations
The following table summarizes our earnings/(loss) from operations:
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Commercial Airplanes | $4,711 | $3,495 | $3,006 | ||||||||
Defense, Space & Security | 3,068 | 3,158 | 2,875 | ||||||||
Boeing Capital | 82 | 113 | 152 | ||||||||
Other segment | (159 | ) | 66 | (327 | ) | ||||||
Unallocated items and eliminations | (1,391 | ) | (988 | ) | (735 | ) | |||||
Total | $6,311 | $5,844 | $4,971 | ||||||||
Operating earnings in 2012 increased by $467 million compared with 2011. Commercial Airplanes earnings increased by $1,216 million reflecting higher new airplane deliveries and lower research and development expense partially offset by higher fleet support costs, increased operating costs associated with business growth, other period costs and decreased earnings from commercial aviation services. BDS earnings decreased by $90 million due to lower earnings in the N&SS segment, partially offset by higher earnings in the GS&S and BMA segments. Other segment losses increased by $225 million primarily due to a reduction in the allowance for losses on receivables in 2011. Unallocated items and eliminations in 2012 reduced earnings by $403 million compared with 2011 primarily due to higher pension costs.
Operating earnings in 2011 increased by $873 million compared with 2010. Commercial Airplanes earnings increased by $489 million, primarily due to higher revenues and a reduction in research and development costs, partially offset by increases in period costs associated with business growth. BDS earnings increased by $283 million compared with 2010 due to higher earnings in the BMA and GS&S segments, partially offset by lower earnings in the N&SS segment. Other segment earnings increased by $393 million primarily due to a $241 million reduction in the allowance for losses on receivables during 2011. Unallocated items and eliminations in 2011 reduced earnings by $253 million compared with 2010 primarily due to higher pension and postretirement costs.
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The following table summarizes our research and development expense:
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Commercial Airplanes | $2,049 | $2,715 | $2,975 | ||||||||
Defense, Space & Security | 1,189 | 1,138 | 1,136 | ||||||||
Other | 60 | 65 | 10 | ||||||||
Total | $3,298 | $3,918 | $4,121 | ||||||||
Our Research and development expense decreased by $620 million and $203 million in 2012 and 2011. These decreases were primarily due to lower spending at BCA on the 747-8 and 787-8 programs.
The most significant items included in Unallocated items and eliminations are shown in the following table:
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Share-based plans | ($81 | ) | ($83 | ) | ($136 | ) | |||||
Deferred compensation | (75 | ) | (61 | ) | (112 | ) | |||||
Pension | (787 | ) | (269 | ) | 54 | ||||||
Postretirement | (112 | ) | (248 | ) | (59 | ) | |||||
Eliminations and other | (336 | ) | (327 | ) | (482 | ) | |||||
Total | ($1,391 | ) | ($988 | ) | ($735 | ) | |||||
Share-based plans expense decreased by $53 million in 2011 primarily due to the expiration of the ShareValue trust at June 30, 2010.
Deferred compensation expense increased by $14 million in 2012 and decreased by $51 million in 2011. The year over year changes in deferred compensation expense are primarily driven by changes in our stock price and broad stock market conditions.
Eliminations and other unallocated items expense increased by $9 million in 2012 and decreased by $155 million in 2011. The fluctuations in 2012 and 2011 were due to the timing of intercompany expense allocations and elimination of profit on intercompany items. The 2012 expense includes a $121 million benefit related to a favorable court judgment on satellite litigation and the 2010 expense includes a $55 million charitable contribution.
Unallocated pension and other postretirement expense represents the difference between costs recognized under Generally Accepted Accounting Principles in the United States of America (GAAP) in the consolidated financial statements and federal cost accounting standards required to be utilized by our business segments for U.S. government contracting purposes. We recorded net periodic benefit cost related to pensions and other postretirement benefits of $3,383 million, $3,127 million and $1,864 million in 2012, 2011 and 2010, respectively. The increase in net periodic benefit costs related to pensions and other postretirement benefits is primarily due to higher amortization of actuarial losses and higher service costs driven by lower discount rates. Not all net periodic benefit cost is recognized in earnings in the period incurred because it is allocated to production as product costs and a portion remains in inventory at the end of the reporting period. A portion of pension and other postretirement expense is recorded in the business segments and the remainder is included in unallocated pension and other postretirement expense. The unallocated expense in 2011 includes $161 million of additional expense recorded during the third quarter due to an adjustment primarily related to prior years’ accumulated postretirement benefit obligations. See the discussion of the postretirement liabilities in Note 15 to our Consolidated Financial Statements. Earnings from operations included the following amounts allocated to business segments and Other unallocated items and eliminations.
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(Dollars in millions) | Pension | Other Postretirement Benefits | |||||||||||||||||||||
Years ended December 31, | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||
Allocated to business segments | ($1,620 | ) | ($1,379 | ) | ($1,155 | ) | ($431 | ) | ($444 | ) | ($421 | ) | |||||||||||
Other unallocated items and eliminations | (787 | ) | (269 | ) | 54 | (112 | ) | (248 | ) | (59 | ) | ||||||||||||
Total | ($2,407 | ) | ($1,648 | ) | ($1,101 | ) | ($543 | ) | ($692 | ) | ($480 | ) | |||||||||||
Other Earnings Items
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Earnings from operations | $6,311 | $5,844 | $4,971 | ||||||||
Other income, net | 62 | 47 | 52 | ||||||||
Interest and debt expense | (463 | ) | (498 | ) | (516 | ) | |||||
Earnings before income taxes | 5,910 | 5,393 | 4,507 | ||||||||
Income tax expense | (2,007 | ) | (1,382 | ) | (1,196 | ) | |||||
Net earnings from continuing operations | $3,903 | $4,011 | $3,311 | ||||||||
Interest and debt expense decreased by $35 million in 2012 and $18 million in 2011 as a result of lower weighted average interest rates and debt balances.
Our effective income tax rates were 34.0%, 25.6% and 26.5% for the years ended December 31, 2012, 2011 and 2010, respectively. Our 2012 effective tax rate was higher than prior years, primarily due to tax benefits of $397 million and $371 million recorded in 2011 and 2010 as a result of federal income tax audit settlements. Federal income tax audits have been settled for all years prior to 2007. The absence of research and development tax credits also contributed to the higher tax rate in 2012. Our 2011 effective tax rate was lower than 2010, primarily due to an income tax charge of $150 million recorded during the first quarter of 2010 as a result of the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act of 2010.
The research and development credit expired on December 31, 2011. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 that retroactively renews the research and development credit for 2012 and extends the credit through December 31, 2013. As tax law changes are recognized in the period in which new legislation is enacted, the 2012 R&D credit of approximately $150 million will be reflected as a discrete item in our income tax rate for the first quarter of 2013. For additional discussion related to Income Taxes, see Note 5 to our Consolidated Financial Statements.
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Backlog
Our backlog at December 31 was as follows:
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||||
Contractual Backlog: | |||||||||||
Commercial Airplanes | $317,287 | $293,303 | $255,591 | ||||||||
Defense, Space & Security: | |||||||||||
Boeing Military Aircraft | 29,674 | 24,085 | 25,094 | ||||||||
Network and Space Systems | 9,692 | 9,024 | 9,567 | ||||||||
Global Services and Support | 15,702 | 13,245 | 13,703 | ||||||||
Total Defense, Space & Security | 55,068 | 46,354 | 48,364 | ||||||||
Total contractual backlog | $372,355 | $339,657 | $303,955 | ||||||||
Unobligated backlog | $17,873 | $15,775 | $16,871 | ||||||||
Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligated U.S. and non-U.S. government contract funding. The increase in contractual backlog during 2012 was due to commercial aircraft orders in excess of deliveries, partially reduced by cancellations of commercial airplane orders and changes in projected revenue escalation. The increase in contractual backlog during 2011 was due to commercial airplane orders in excess of deliveries and changes in projected revenue escalation for undelivered commercial airplanes.
Unobligated backlog includes U.S. and non-U.S. government definitive contracts for which funding has not been authorized. The increase in unobligated backlog during 2012 is due to increases at BDS of $2,720 million compared with 2011 primarily due to F-15 orders and the contract award for the Space Launch System program received in 2012. The decrease in unobligated backlog during 2011 is due to decreases at BDS of $3,135 million compared with 2010 primarily due to funding of existing multi-year contracts and termination for convenience by the U.S. Army of the Brigade Combat Team Modernization (BCTM) program, partially offset by the U.S. Air Force (USAF) contract for the KC-46A Tanker and the Missile Defense Agency Development and Sustainment Contract.
Additional Considerations
KC-46A Tanker In 2011, we were awarded a contract from the USAF to design, develop, manufacture and deliver 4 next generation aerial refueling tankers. The KC-46A Tanker will be a derivative of our 767 commercial aircraft. This contract is a fixed-price incentive firm contract valued at $4.9 billion and involves highly complex designs. Changes to our estimated cost to perform the work could result in a material charge. This contract contains production options. If all options under the contract are exercised, we expect to deliver 179 aircraft for a total expected contract value of approximately $30 billion. For segment reporting purposes, backlog, revenues and costs are recorded in the Commercial Airplanes and BMA segments.
Collective Bargaining Agreement Our collective bargaining agreement with The Society of Professional Engineering Employees in Aerospace (SPEEA), which covers 23,600 employees, expired in October, 2012. SPEEA-represented employees continue to work under the terms of that contract. The parties continue contract negotiations and on January 17, 2013, Boeing presented a contract offer to SPEEA.
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Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment Global economic growth and global trade, which are the primary drivers of air travel and air cargo growth, remained weak in 2012. Despite this, passenger traffic grew by approximately 6% in 2011 and 2012 and is forecast to continue at or near the long-term trend of 5% in 2013. There continues to be significant variation between regions and airline business models, with airlines operating in emerging economies and low-cost-carriers leading growth. Estimates indicate a modest decline in air cargo traffic in 2012 with continued softness in 2013. The relative weakness of the air cargo market has impacted near-term demand for new freighter aircraft and freighter conversions, and we continue to monitor the impact of this trend on our business.
Airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on increasing revenue through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services and related revenues. Airlines are also relentlessly focusing on reducing costs by renewing fleets to leverage more fuel efficient airplanes and by employing efficiency generating service offerings in a high-fuel-price environment. Net profits for the global airline industry are estimated to total $7 billion in 2012 and the forecast shows some improvement in 2013. These profit levels reflect low profit margins for the industry, and risk remains due to ongoing economic and political uncertainty.
The long-term outlook for the industry remains positive due to the fundamental drivers of air travel growth: economic growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. Our 20-year forecast is for a long-term average growth rate of 5% per year for passenger and cargo traffic, based on a projected average annual worldwide real economic growth rate of 3%. Based on long-term global economic growth projections, and factoring in increased utilization of the worldwide airplane fleet and requirements to replace older airplanes, we project a $4.5 trillion market for 34,000 new airplanes over the next 20 years.
The industry remains vulnerable to near-term exogenous developments including fuel price spikes, credit market shocks, terrorism, natural disasters, conflicts, and increased global environmental regulations.
Industry Competitiveness The commercial jet airplane market and the airline industry remain extremely competitive. Market liberalization in Europe and Asia has enabled low-cost airlines to continue gaining market share. These airlines have increased the pressure on airfares. This results in continued cost pressures for all airlines and price pressure on our products. Major productivity gains are essential to ensure a favorable market position at acceptable profit margins.
Continued access to global markets remains vital to our ability to fully realize our sales potential and long-term investment returns. Approximately 15% of Commercial Airplanes’ contractual backlog, in dollar terms, is with U.S. airlines, including cargo carriers.
We face aggressive international competitors who are intent on increasing their market share. They offer competitive products and have access to most of the same customers and suppliers. With government support, Airbus has historically invested heavily to create a family of products to compete with ours. Regional jet makers Embraer and Bombardier, coming from the less than 100-seat commercial jet market, continue to develop larger and more capable airplanes. Additionally, other competitors from Russia, China and Japan are developing commercial jet aircraft in the market above 90 seats. Many of these competitors have historically enjoyed access to government-provided financial support, including “launch aid,” which greatly reduces the commercial risks associated with airplane development activities and enables airplanes to be brought to market more quickly than otherwise possible. This market environment
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has resulted in intense pressures on pricing and other competitive factors, and we expect these pressures to continue or intensify in the coming years.
Worldwide, airplane sales are generally conducted in U.S. dollars. Fluctuating exchange rates affect the profit potential of our major competitors, all of whom have significant costs in other currencies. Changes in value of the U.S. dollar relative to their local currencies impact competitors’ revenues and profits. Competitors routinely respond to a relatively weaker U.S. dollar by aggressively reducing costs and increasing productivity, thereby improving their longer-term competitive posture. If the U.S. dollar strengthens, competitors can use the improved efficiency to fund product development, gain market share through pricing and/or improve earnings.
We are focused on improving our processes and continuing cost-reduction efforts. We continue to leverage our extensive customer support services network which includes aviation support, spares, training, maintenance documents and technical advice for airlines throughout the world. This enables us to provide a high level of customer satisfaction and productivity. These efforts enhance our ability to pursue pricing strategies that enable us to price competitively.
Operating Results
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $49,127 | $36,171 | $31,834 | ||||||||
% of total company revenues | 60 | % | 53 | % | 50 | % | |||||
Earnings/(loss) from operations | $4,711 | $3,495 | $3,006 | ||||||||
Operating margins | 9.6 | % | 9.7 | % | 9.4 | % | |||||
Research and development | $2,049 | $2,715 | $2,975 | ||||||||
Contractual backlog | $317,287 | $293,303 | $255,591 | ||||||||
Unobligated backlog | $1,466 | $2,088 | $49 | ||||||||
Revenues
Year-over-year changes in Revenue are shown in the following table:
(Dollars in millions) | 2012 vs. 2011 | 2011 vs. 2010 | |||||
New airplane sales | $13,185 | $3,766 | |||||
Commercial aviation services | (161 | ) | 594 | ||||
Other | (68 | ) | (23 | ) | |||
Total | $12,956 | $4,337 | |||||
Revenues for 2012 increased by $12,956 million or 36% compared with 2011 primarily due to higher new airplane deliveries across all programs.
Revenues for 2011 increased by $4,337 million or 13.6% compared with 2010 due to higher new airplane deliveries, including the impact of entry into service of the 787-8 and 747-8 Freighter, favorable commercial airplane delivery model mix and higher commercial aviation services revenues. The increase in revenues from commercial aviation services was primarily due to increased sales of spares.
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Commercial airplanes deliveries as of December 31 were as follows:
737 | 747 | 767 | 777 | 787 | Total | |||||||||||
2012 | ||||||||||||||||
Cumulative deliveries | 4,293 | 1,458 | 1,040 | 1,066 | 49 | |||||||||||
Deliveries | 415 | (1) | 31 | 26 | 83 | 46 | (2) | 601 | ||||||||
2011 | ||||||||||||||||
Cumulative deliveries | 3,878 | 1,427 | 1,014 | 983 | 3 | |||||||||||
Deliveries | 372 | (1) | 9 | 20 | 73 | 3 | 477 | |||||||||
2010 | ||||||||||||||||
Cumulative deliveries | 3,506 | 1,418 | 994 | 910 | ||||||||||||
Deliveries | 376 | (1) | 12 | 74 | 462 | |||||||||||
(1) | Includes intercompany deliveries of nine aircraft in 2012, seven in 2011 and five in 2010. |
(2) | Includes three aircraft accounted for as revenues by BCA and as operating leases in consolidation. |
Earnings From Operations
Earnings from operations for 2012 increased by $1,216 million compared with 2011. This was primarily due to higher new airplane deliveries, which drove an increase in earnings of $1,292 million, and lower research and development expense of $666 million primarily due to lower spending on the 747-8 and 787-8 programs. These increases were partially offset by lower earnings of $742 million driven by higher fleet support costs, increased operating costs associated with business growth, other period costs and decreased earnings from commercial aviation services. The decrease in operating margins from 9.7% in 2011 to 9.6% in 2012 was primarily due to the dilutive effect of the 787 and 747-8 deliveries.
Earnings from operations for 2011 increased by $489 million compared with 2010. This increase reflects earnings of $376 million from higher revenues on new airplane deliveries, $180 million of higher earnings due to commercial aviation services volume and margins and $261 million of lower research and development expense, partially offset by increases of $328 million reflecting higher fleet support costs and other costs associated with business growth.
Backlog Firm backlog represents orders for products and services where no contingencies remain before we and the customer are required to perform. Backlog does not include prospective orders where customer controlled contingencies remain, such as the customers receiving approval from their Board of Directors, shareholders or government and completing financing arrangements. All such contingencies must be satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly certain. Firm orders exclude options. A number of our customers may have contractual remedies that may be implicated by program delays. We continue to address customer claims and requests for other contractual relief as they arise. However, once orders are included in firm backlog, orders remain in backlog until canceled or fulfilled, although the value of orders is adjusted as changes to price and schedule are agreed to with customers.
The increase in contractual backlog during 2012 was due to orders in excess of deliveries, partially reduced by cancellations of orders and changes in projected revenue escalation. The decrease in unobligated backlog in 2012 was due to incremental funding of the existing multi-year contract for Commercial Airplanes’ share of the USAF contract for the KC-46A Tanker.
The increase in contractual backlog during 2011 was due to orders in excess of deliveries and changes in projected revenue escalation, partially reduced by cancellations of orders. The increase in unobligated backlog in 2011 represents Commercial Airplanes’ share of the USAF contract for the KC-46A Tanker.
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Accounting Quantity The accounting quantity is our estimate of the quantity of airplanes that will be produced for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. It is a key determinant of the gross margins we recognize on sales of individual airplanes throughout a program’s life. Estimation of each program’s accounting quantity takes into account several factors that are indicative of the demand for that program, including firm orders, letters of intent from prospective customers and market studies. We review our program accounting quantities quarterly.
The accounting quantity for each program may include units that have been delivered, undelivered units under contract, and units anticipated to be under contract in the reasonable future (anticipated orders). In developing total program estimates, all of these items within the accounting quantity must be considered.
The following table provides details of the accounting quantities and firm orders by program as of December 31. Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders.
Program | ||||||||||||||
737 | 747 | 767 | 777 | 787 | ||||||||||
2012 | ||||||||||||||
Program accounting quantities | 6,600 | 1,574 | 1,103 | 1,450 | 1,100 | |||||||||
Undelivered units under firm orders | 3,074 | 67 | 68 | 365 | 799 | |||||||||
Cumulative firm orders | 7,367 | 1,525 | 1,108 | 1,431 | 848 | |||||||||
2011 | ||||||||||||||
Program accounting quantities | 6,200 | 1,549 | 1,084 | 1,350 | 1,100 | |||||||||
Undelivered units under firm orders | 2,365 | 97 | 72 | 380 | 857 | |||||||||
Cumulative firm orders | 6,243 | 1,524 | 1,086 | 1,363 | 860 | |||||||||
2010 | ||||||||||||||
Program accounting quantities | 5,000 | 1,524 | 1,048 | 1,150 | * | |||||||||
Undelivered units under firm orders | 2,186 | 107 | 50 | 253 | 847 | |||||||||
Cumulative firm orders | 5,692 | 1,525 | 1,044 | 1,163 | 847 | |||||||||
* | The initial accounting quantity for the 787 program was established in the third quarter of 2011. |
737 Program The accounting quantity for the 737 program increased by 400 units during 2012 due to the program’s normal progress of obtaining additional orders and delivering airplanes. As planned, production increased from 31.5 to 35 airplanes per month during 2012. We continue to expect to increase production from 35 to 38 airplanes per month beginning in 2013 and a further increase to 42 airplanes per month beginning in 2014. The majority of the 737 orders during 2012 related to the 737 MAX, the new engine variant of the 737. The accounting quantity for the 737 program includes NG and MAX units. First delivery of the 737 MAX is expected in 2017.
747 Program The accounting quantity for the 747 program increased by 25 units in 2012, reflecting the normal process of estimating planned production under existing and anticipated contracts. We continue to incorporate changes identified during flight testing into previously completed airplanes. First delivery of the 747-8 Intercontinental occurred in February 2012.
The production rate increased from 1.5 to 2 airplanes per month in May 2012. Ongoing weakness in the air cargo market and lower-than-expected demand for large commercial passenger aircraft have resulted in pricing pressures and fewer orders than anticipated in 2012. We have a number of unsold Freighter and Intercontinental production positions beyond 2013. If we are unable to obtain orders for multiple Freighter aircraft in 2013 consistent with our near-term production plans, we may be required to take actions including
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reducing the number of airplanes produced and/or building airplanes for which we have not received firm orders. We also remain focused on reducing out-of-sequence work, improving supply chain efficiency and implementing cost-reduction efforts. If market and production risks cannot be mitigated, the program could face an additional reach-forward loss that may be material.
767 Program The accounting quantity for the 767 program increased by 19 units during 2012 reflecting the normal process of estimating planned production under existing and anticipated contracts. As we reconfigure the 767 assembly line to include the USAF KC-46A Tanker, we plan to decrease our production rate from 2 to 1 airplanes per month in late 2013. We then expect to increase the rate to 1.5 per month in 2014 and back to 2 per month in 2016.
777 Program The accounting quantity for the 777 program increased by 100 units during 2012 due to the program’s normal progress of obtaining additional orders and delivering airplanes. As previously announced, we plan to increase our production rate from 7 per month to 8.3 per month in 2013.
787 Program We delivered 46 787 aircraft in 2012 bringing cumulative deliveries to 49. We continued to incorporate engineering and other design changes identified during flight testing into already completed aircraft. Beginning in June 2012, airplanes coming out of final assembly have not required change incorporation at our Everett modification center. During the second quarter of 2012 we achieved a production rate of 3.5 per month in final assembly and in the fourth quarter of 2012, we achieved a program production rate of 5 airplanes per month in final assembly. We also activated the temporary surge line in Everett in the third quarter. We remain focused on achieving further planned increases in 787 production rates while continuing to satisfy customer mission and performance requirements. We also continue to monitor and address challenges associated with aircraft production and assembly, including management of our manufacturing operations and extended global supply chain, completion and integration of traveled work, as well as introduction of the 787-9 derivative into the manufacturing process. We continue to expect to increase the production rate of 787 aircraft to 10 per month in final assembly by the end of 2013 with first deliveries occurring at that rate in early 2014. Our efforts to achieve planned production rate targets include improving the production system, coordinating rate increases with suppliers and increasing production rates in both Everett and North Charleston final assembly. We continue to expect first delivery of the 787-9 to occur in early 2014. In addition, we continue to work with our customers and suppliers to assess the specific impacts of prior schedule changes, including requests for contractual relief related to delivery delays and supplier assertions.
During 2009, we concluded that the first three flight-test 787 aircraft could not be sold as previously anticipated due to the inordinate amount of rework and unique and extensive modifications made to those aircraft. As a result, costs associated with these airplanes were included in research and development expense. During the fourth quarter of 2012 we finalized an order for one of the three remaining flight test aircraft. We continue to believe that the other two 787 flight-test aircraft are commercially saleable and we continue to include costs related to those airplanes in program inventory at December 31, 2012. If we determine that either of the remaining aircraft cannot be sold, we may incur additional charges.
The accounting quantity of 1,100 units remains unchanged and represents approximately 10 years of production at planned production rates. The cumulative impacts of production challenges, change incorporation, schedule delays from prior periods and customer and supplier impacts have created significant pressure on program profitability. If risks related to this program, including risks associated with change incorporation, planned production rate increases, or introducing the 787-9 derivative as scheduled cannot be mitigated, the program could face additional customer claims and/or supplier assertions, as well as further pressures on program profitability and/or a reach-forward loss. We continue to implement mitigation plans and cost-reduction efforts to improve program profitability and address program risks.
A battery-related failure occurred on a 787 aircraft on January 7, 2013. On January 15, 2013 a second 787 aircraft had a battery incident. On January 16, 2013, the Federal Aviation Administration issued an
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airworthiness directive to address potential battery risk on the 787 and required U.S. aircraft operators to suspend operations of all 787 aircraft. International government regulators also issued directives to the same effect. We are working with the government regulators and 787 aircraft operators to investigate both incidents. While production continues on the 787, we have suspended deliveries until appropriate clearance is granted by the regulatory agencies. We are unable to reasonably estimate a loss or a range of loss at this time because such estimates are dependent on the ultimate finding as to cause and the timing and conditions surrounding a resolution and return to flight. Any such resolution could have a material effect on our financial position, results of operations or cash flows.
Fleet Support We provide the operators of our commercial airplanes with assistance and services to facilitate efficient and safe airplane operation. Collectively known as fleet support services, these activities and services begin prior to airplane delivery and continue throughout the operational life of the airplane. They include flight and maintenance training, field service support costs, engineering services, information services and systems and technical data and documents. The costs for fleet support are expensed as incurred and have been historically less than 1.5% of total consolidated costs of products and services.
Research and Development The following chart summarizes the time horizon between go-ahead and initial delivery for major Commercial Airplanes derivatives and programs.
Our Research and development expense decreased by $666 million and $260 million in 2012 and 2011. These decreases were primarily due to lower spending on the 747-8 and 787-8 programs.
Additional Considerations
The development and ongoing production of commercial aircraft is extremely complex, involving extensive coordination and integration with suppliers and highly-skilled labor from thousands of employees and other partners. Meeting or exceeding our performance and reliability standards, as well as those of customers and regulators, can be costly and technologically challenging. In addition, the introduction of new aircraft derivatives, such as the 787-9 and 737 MAX, involves increased risks associated with meeting development, production and certification schedules. As a result, our ability to deliver aircraft on time, satisfy performance and reliability standards and achieve or maintain, as applicable, program profitability is subject to significant risks. Factors that could result in lower margins (or a material charge if an airplane program has or is determined to have reach-forward losses) include the following: changes to the program accounting quantity, customer and model mix, production costs and rates, changes to price escalation factors in aircraft purchase contracts, performance or reliability issues involving completed aircraft, capital expenditures and other costs associated with increasing or adding new production capacity, learning curve, additional change incorporation, 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 consolidated financial statements are appropriate, the technical complexity of our airplane 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.
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Defense, Space & Security
Business Environment and Trends
U.S. Defense Environment Overview In August 2011, the Budget Control Act reduced the United States Department of Defense (U.S. DoD) top line budget by approximately $490 billion through 2021. In addition, U.S. government expenditures are subject to the potential for further reductions, generally referred to as “sequestration”. Sequestration would result in additional reductions of approximately $500 billion from the defense top line budget through 2021. The Office of Management and Budget (OMB) has estimated that sequestration would reduce non-exempt defense discretionary accounts during U.S. government fiscal year 2013 by approximately 9.4% (excluding military personnel accounts). The OMB has further stated that the budget for Overseas Contingency Operations and any unobligated balances in prior year funds would be included in aggregate reductions but has otherwise indicated that it cannot yet assess the impact of sequestration at the program, project and activity level. The U.S. DoD has indicated that such reductions might require the termination of certain, as yet undetermined, procurement programs, and other U.S. government customers, such as NASA and various intelligence agencies, may be required to take comparable actions. Any such impacts could have a material effect on our results of operations, financial position and/or cash flows. With the aforementioned fiscal challenges as a backdrop, the U.S. DoD announced a significant revision to the defense strategy in January 2012. This new strategy prioritized the Asia Pacific and Middle East regions, reduced the number of ground forces, maintained nuclear deterrence and reduced Cold War assets. Additionally, it emphasized the increasing importance of Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR); Cyber Security; Space; Special Operations; and Unmanned Systems in implementing the nation's security posture. We anticipated this shift in U.S. DoD priorities and aligned our strategy accordingly. As such, we have been developing organic and inorganic capabilities to better serve our customers and their emerging needs in these markets, including the acquisition over the last five years of targeted capabilities with expertise in these priority markets.
International Environment Overview The international market continues to be driven by rapidly evolving security challenges and the need for countries to modernize aging inventories. Western governments are pressured by new threats to security while at the same time dealing with constrained budgets. In Europe, the continuing financial challenges are forcing governments to institute austerity measures negatively impacting defense spending in the near term.
The strongest opportunities for BDS growth in 2013 will be the Middle East and Asia Pacific regions where the relative financial strength of these economies, coupled with a broad spectrum of evolving threats, will result in procurement of defense and security systems.
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BDS Realignment
Effective January 1, 2012, 2011 and 2010, certain programs were realigned among BDS segments. Business segment data for all periods presented have been adjusted to reflect the realignment.
Operating Results
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $32,607 | $31,976 | $31,943 | ||||||||
% of total company revenues | 40 | % | 47 | % | 50 | % | |||||
Earnings from operations | $3,068 | $3,158 | $2,875 | ||||||||
Operating margins | 9.4 | % | 9.9 | % | 9.0 | % | |||||
Contractual backlog | $55,068 | $46,354 | $48,364 | ||||||||
Unobligated backlog | $16,407 | $13,687 | $16,822 | ||||||||
Since our operating cycle is long-term and involves many different types of development and production contracts with varying delivery and milestone schedules, the operating results of a particular year, or year-to-year comparisons of revenues and earnings, may not be indicative of future operating results. In addition, depending on the customer and their funding sources, our orders might be structured as annual follow-on contracts, or as one large multi-year order or long-term award. As a result, period-to-period comparisons of backlog are not necessarily indicative of future workloads. The following discussions of comparative results among periods should be viewed in this context.
Revenues
BDS revenues increased by $631 million in 2012 compared with 2011, due to higher revenues of $1,437 million in the BMA segment and $264 million in the GS&S segment, partially offset by lower revenues of $1,070 million in the N&SS segment. BDS revenues increased by $33 million in 2011 compared with 2010, due to higher revenues in the BMA and the GS&S segments, partially offset by lower revenues in the N&SS segment.
Operating Earnings
BDS operating earnings in 2012 decreased by $90 million compared with 2011 due to lower earnings of $201 million in the N&SS segment, partially offset by higher earnings of $56 million and $55 million in the GS&S and BMA segments. Included above are net favorable cumulative contract catch-up adjustments, which were $150 million higher in 2012 compared with 2011, primarily reflecting higher favorable adjustments in the BMA segment.
BDS operating earnings in 2011 increased by $283 million compared with 2010 primarily due to higher earnings of $276 million and $33 million in the BMA and GS&S segments, partially offset by lower earnings of $26 million in the N&SS segment. Included above are net favorable cumulative contract catch-up adjustments which were $104 million higher in 2011 compared with 2010.
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Backlog
Total backlog is comprised of contractual backlog, which represents work we are on contract to perform for which we have received funding, and unobligated backlog, which represents work we are on contract to perform for which funding has not yet been authorized and appropriated. BDS total backlog increased by 19% in 2012, from $60,041 million to $71,475 million, primarily due to F-15 and C-17 orders and the contract award for the Space Launch System program received in 2012. For further details on the changes between periods, refer to the discussions of the individual segments below.
Additional Considerations
Our BDS business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. 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. Examples of these programs include Ground-based Midcourse Defense (GMD), Proprietary and Space Launch Systems programs.
Some of our development programs are contracted on a fixed-price basis. Many of these programs have highly complex designs. As technical or quality issues arise during development, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the work or reduce our estimated price, either of which could result in a material charge or otherwise adversely affect our financial condition. These programs are ongoing, and while we believe the cost and fee 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, the loss of satellite in-orbit incentive payments, or other financially significant exposure. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues. Examples of significant fixed-price development programs include Airborne Early Warning and Control (AEW&C), Family of Advanced Beyond Line-of-Sight Terminals (FAB-T), India P-8I, Saudi F-15, USAF KC-46A Tanker, and commercial and military satellites.
Boeing Military Aircraft
Operating Results
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $16,384 | $14,947 | $14,238 | ||||||||
% of total company revenues | 20 | % | 22 | % | 22 | % | |||||
Earnings from operations | $1,581 | $1,526 | $1,250 | ||||||||
Operating margins | 9.6 | % | 10.2 | % | 8.8 | % | |||||
Contractual backlog | $29,674 | $24,085 | $25,094 | ||||||||
Unobligated backlog | $9,286 | $7,155 | $8,297 | ||||||||
Revenues
BMA revenues increased by 10% in 2012 compared with 2011. The increase of $1,437 million in 2012 was primarily due to higher deliveries on the P-8A and Apache programs of $1,050 million and higher milestone revenue of $426 million on the KC-46A Tanker program. In addition, F-15 program revenues were $450 million higher reflecting initial revenues on the contract for the Kingdom of Saudi Arabia partially offset by lower F-15 deliveries. These increases were partially offset by decreases of $723 million related to fewer deliveries of C-17 aircraft in 2012 and the conclusion of the KC-767 International Tanker program in 2011.
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BMA revenues increased by 5% in 2011 compared with 2010. The increase of $709 million in 2011 was primarily due to higher AEW&C, C-17 and KC-767 International Tanker revenues. AEW&C revenues increased by $780 million in 2011 due to delivery of the first two Peace Eye aircraft and higher Wedgetail milestone revenues. C-17 revenues increased by $273 million reflecting favorable mix, partially offset by fewer deliveries. International Tanker revenues increased by $235 million due to higher deliveries. In addition, initial revenues on the USAF KC-46A Tanker were recognized in 2011. Lower volumes on the F-22, F/A-18 and Apache programs combined to reduce revenues by $613 million. Boeing production deliveries on the F-22 program ended in 2011. There were no new-build Apache deliveries in 2011, however, new-build deliveries resumed in 2012.
Deliveries of new-build production aircraft, excluding remanufactures and modifications, were as follows:
Years ended December 31, | 2012 | 2011 | 2010 | |||||
F/A-18 Models | 48 | 49 | 50 | |||||
F-15E Eagle | 8 | 15 | 13 | |||||
C-17 Globemaster III | 10 | 13 | 14 | |||||
CH-47 Chinook | 51 | 32 | 20 | |||||
AH-64 Apache | 19 | 13 | ||||||
AEW&C | 3 | 3 | 4 | |||||
P-8A Poseidon | 5 | |||||||
KC-767 International Tanker | 3 | 1 | ||||||
Total new-build production aircraft | 144 | 115 | 115 | |||||
Operating Earnings
BMA operating earnings increased by $55 million in 2012 primarily due to higher aircraft deliveries on the P-8A and Apache programs and reach-forward loss provisions in 2011 on the KC-767 International Tanker program. These increases were partially offset by fewer aircraft deliveries on the C-17 program and higher research and development costs. The increase in earnings includes net favorable cumulative catch-up contract adjustments which were $139 million higher in 2012 compared with 2011 primarily reflecting favorable adjustments on the F-15 and Chinook programs.
Operating earnings increased by $276 million in 2011 primarily due to $236 million of higher earnings on the AEW&C program reflecting the initial Peace Eye deliveries and lower reach-forward loss provisions in 2011 on the AEW&C Wedgetail and Peace Eagle contracts. Lower reach-forward losses of $49 million on the KC-767 International Tanker program and lower research and development costs also contributed to the earnings improvements.
Backlog
BMA total backlog in 2012 increased by 25% from 2011, primarily due to F-15 and C-17 orders. Total backlog in 2011 decreased by 6% from 2010, primarily due to 2011 deliveries and sales on multi-year contracts awarded in prior years partially offset by BMA’s share of the USAF contract awards for the KC-46A and low-rate initial production of the P-8A.
Additional Considerations
C-17
See the discussion of the C-17 program in Note 12 to our Consolidated Financial Statements.
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Network & Space Systems
Operating Results
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $7,584 | $8,654 | $9,449 | ||||||||
% of total company revenues | 9 | % | 13 | % | 15 | % | |||||
Earnings from operations | $478 | $679 | $705 | ||||||||
Operating margins | 6.3 | % | 7.8 | % | 7.5 | % | |||||
Contractual backlog | $9,692 | $9,024 | $9,567 | ||||||||
Unobligated backlog | $6,917 | $6,424 | $8,436 | ||||||||
Revenues
N&SS revenues decreased by 12% in 2012 and 8% in 2011. The decrease of $1,070 million in 2012 was primarily due to $835 million of lower revenues on the Brigade Combat Team Modernization (BCTM) program, which was terminated for convenience during 2011. In addition, customer funding constraints on the GMD program and conclusion of the Space Shuttle program in 2011 reduced revenues by a total of $251 million. These decreases were partially offset by higher Space & Intelligence Systems revenues of $178 million due to larger volume of deliveries in 2012.
The decrease of $795 million in 2011 was primarily due to $577 million of lower revenues on the BCTM program, which was terminated for convenience during 2011. Lower revenues on the GMD, SBInet and Joint Tactical Radio System programs of $150 million, $146 million and $93 million, respectively, were more than offset by $150 million of higher sales of Delta inventory to United Launch Alliance (ULA) and $250 million of higher commercial and civil satellite revenues.
Delta launch and new-build satellite deliveries were as follows:
Years ended December 31, | 2012 | 2011 | 2010 | ||
Delta II | 1 | ||||
Delta IV | 1 | ||||
Commercial and civil satellites | 3 | 1 | 3 | ||
Military satellites | 7 | 3 | 1 | ||
Operating Earnings
N&SS earnings decreased by $201 million in 2012 primarily due to lower revenues on the BCTM program and a $42 million charge related to a contract restructure of an electronic and mission system program. Net favorable cumulative contract catch-up adjustments were $56 million lower in 2012 than in 2011 primarily reflecting the $42 million charge described above. Operating earnings decreased by $26 million in 2011 primarily due to lower revenues and higher research and development costs.
N&SS operating earnings include equity earnings of $180 million, $194 million and $189 million from the United Space Alliance (USA) joint venture and the ULA joint venture in 2012, 2011 and 2010, respectively. Operating earnings in 2012 include a $39 million gain related to the termination and settlement of USA’s defined benefit pension plans.
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Backlog
N&SS total backlog increased by 8% in 2012 compared with 2011 primarily due to the contract award for the Space Launch System program, partially offset by current year deliveries and sales on contracts awarded in prior years. Total backlog decreased 14% in 2011 compared with 2010 primarily due to termination for convenience by the U.S. Army of the BCTM program and revenues recognized on multi-year contracts awarded in prior years, partially offset by the contract award for the Missile Defense Agency Development and Sustainment Contract.
Additional Considerations
United Launch Alliance
See the discussion of ULA in Notes 7, 12, and 13 to our Consolidated Financial Statements.
Sea Launch
See the discussion of the Sea Launch receivables in Note 11 to our Consolidated Financial Statements.
LightSquared
See the discussion of the LightSquared receivables in Note 6 to our Consolidated Financial Statements.
Global Services & Support
Operating Results
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $8,639 | $8,375 | $8,256 | ||||||||
% of total company revenues | 11 | % | 12 | % | 13 | % | |||||
Earnings from operations | $1,009 | $953 | $920 | ||||||||
Operating margins | 11.7 | % | 11.4 | % | 11.1 | % | |||||
Contractual backlog | $15,702 | $13,245 | $13,703 | ||||||||
Unobligated backlog | $204 | $108 | $89 | ||||||||
Revenues
GS&S revenues increased by 3% in 2012 and by 1% in 2011. The 2012 increase of $264 million is primarily due to higher volume in several Integrated Logistics (IL) programs, including contracts to support Chinook and C-17 aircraft, and higher Training Systems & Government Services (TSGS) revenues primarily related to the P-8A program. The 2011 increase of $119 million is primarily due to higher revenues on several IL programs, partially offset by lower revenues from Maintenance, Modifications and Upgrades (MM&U) due to the conclusion in 2010 of our KC-10 support program.
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Operating Earnings
GS&S operating earnings increased by 6% in 2012 primarily due to improved performance on several MM&U programs and higher revenues on several IL programs. Net favorable cumulative contract catch-up adjustments were $67 million higher in 2012 than in 2011.
Operating earnings increased by 4% in 2011 primarily due to higher earnings on several IL programs, partially offset by lower earnings on MM&U programs.
Backlog
GS&S total backlog increased by 19% in 2012 compared with 2011 primarily due to the award of F-15 support contracts. Total backlog decreased by 3% in 2011 compared with 2010 primarily due to revenues recognized on multi-year contracts awarded in prior years on several IL programs, partially offset by a TSGS contract award on the P-8A program.
Boeing Capital
Business Environment and Trends
BCC’s customer financing and investment portfolio at December 31, 2012 totaled $4,066 million. A substantial portion of BCC’s portfolio is concentrated among certain U.S. commercial airline customers. BCC’s portfolio is also concentrated by varying degrees across Boeing aircraft product types most notably out-of-production Boeing aircraft such as 717 aircraft.
BCC provided customer financing of $364 million and $239 million during 2012 and 2011. While we may be required to fund a number of new aircraft deliveries in 2013, we expect financing will be available at reasonable prices from broad and globally diverse sources.
Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 2,200 western-built commercial jet aircraft (10% of current world fleet) were parked at the end of 2012, including both in-production and out-of-production aircraft types. Of these parked aircraft, approximately 25% are not expected to return to service. At the end of 2011 and 2010, 9.4% and 10.5% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of additional aircraft, particularly types with relatively few operators, are placed out of service.
Summary Financial Information
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $441 | $520 | $639 | ||||||||
Earnings from operations | $82 | $113 | $152 | ||||||||
Operating margins | 19 | % | 22 | % | 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 $79 million in 2012 compared with 2011 primarily due to lower operating and finance lease income. Operating lease income decreased as a result of the return of aircraft and lower lease rates on re-leased aircraft. In addition, lower finance lease income reflects the revised contractual terms of BCC’s leases with AirTran Airways Inc.(Airtran), a
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wholly owned subsidiary of Southwest Airlines Co. (Southwest), negotiated in conjunction with receiving a full guarantee from Southwest of those lease payment obligations in the fourth quarter of 2011.
The decrease in revenues in 2011 compared with 2010 of $119 million was primarily due to lower operating lease income from a smaller portfolio of equipment under operating leases as a result of aircraft returns and lower lease rates on re-leased aircraft and lower interest income on notes receivable resulting from a lower weighted average notes receivable balance and a decrease in the weighted average annual effective interest rate during 2011.
Earnings From Operations
BCC’s operating earnings are presented net of interest expense, recovery of losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Operating earnings decreased by $31 million in 2012 compared with 2011 primarily due to lower revenues partially offset by lower interest and asset impairment expense.
Operating earnings decreased by $39 million in 2011 compared with 2010 primarily due to lower revenues and higher asset impairment expense partially offset by lower interest expense, lower depreciation expense and a reduction in the allowance for losses.
Financial Position
The following table presents selected financial data for BCC as of December 31:
(Dollars in millions) | 2012 | 2011 | |||||
BCC customer financing and investment portfolio | $4,066 | $4,315 | |||||
Valuation allowance as a % of total receivables | 2.0 | % | 2.3 | % | |||
Debt | $2,511 | $3,400 | |||||
Debt-to-equity ratio | 5.0-to-1 | 6.3-to-1 | |||||
BCC’s customer financing and investment portfolio at December 31, 2012 decreased from December 31, 2011 primarily due to normal portfolio run-off and asset sales, partially offset by the origination of notes receivable. At December 31, 2012 and 2011, BCC had $354 million and $521 million of assets that were held for sale or re-lease, of which $266 million and $476 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. Additionally, aircraft subject to leases with a carrying value of approximately $78 million are scheduled to be returned off lease during 2013. These aircraft are being remarketed or the leases are being extended and approximately $33 million of such aircraft had either executed term sheets with deposits or firm contracts as of December 31, 2012.
For the years ended December 31, 2012 and 2011, AirTran accounted for 18% and 21% of BCC revenue. On July 8, 2012, BCC, Boeing, Southwest and Delta Air Lines, Inc. (Delta) reached agreement whereby 78 BCC 717 aircraft on lease to AirTran will be subleased from AirTran to Delta on a phased-in basis beginning in 2013, with the sublease scheduled for the duration of the lease term between BCC and AirTran. Delta has committed to lease these 717 aircraft from BCC for an additional seven-year period following the expiration of the sublease.
BCC enters into certain transactions with Boeing, reflected in the Other segment, in the form of intercompany guarantees and other subsidies that mitigate the effects of certain credit quality or asset impairment issues on the BCC segment.
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Bankruptcies
In 2011, American Airlines, Inc. (American Airlines) filed for Chapter 11 bankruptcy protection. American Airlines retains certain rights by operating under Chapter 11 bankruptcy protection, including the right to reject executory contracts, such as aircraft leases. American Airlines has not rejected any of the leases related to our aircraft. At December 31, 2012, American Airlines accounted for $524 million of our customer financing portfolio, of which $399 million represents collateral for $231 million of non-recourse debt. We believe that our customer financing receivables from American Airlines are sufficiently collateralized such that we do not expect to incur losses related to those receivables as a result of the bankruptcy. We continue to monitor the American Airlines bankruptcy for potential impacts on our business.
Restructurings and Restructuring Requests
From time to time, certain customers have requested a restructuring of their transactions with BCC. During 2012, BCC did not reach agreement on any restructuring requests that would have a material effect on our earnings, cash flows and/or financial position.
Other Segment
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Revenues | $133 | $150 | $138 | ||||||||
Earnings/(Loss) from operations | (159 | ) | 66 | (327 | ) | ||||||
Other segment operating losses for the year ended December 31, 2012 increased by $225 million compared with 2011 primarily due to a $241 million reduction in the allowance for losses on AirTran receivables in 2011. Lower environmental expense of $82 million in 2012 compared with 2011 was largely offset by higher costs related to BCC guarantees and increases in other costs.
Other segment operating earnings for the year ended December 31, 2011 increased by $393 million compared with 2010 primarily due to a $241 million reduction in the allowance for losses on AirTran receivables and $124 million of lower impairment charges related to our customer financing portfolio in 2011.
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Liquidity and Capital Resources
Cash Flow Summary
(Dollars in millions)
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Net earnings | $3,900 | $4,018 | $3,307 | ||||||||
Non-cash items | 2,728 | 2,140 | 2,679 | ||||||||
Changes in working capital | 880 | (2,135 | ) | (3,034 | ) | ||||||
Net cash provided by operating activities | 7,508 | 4,023 | 2,952 | ||||||||
Net cash (used)/provided by investing activities | (3,757 | ) | 2,369 | (4,831 | ) | ||||||
Net cash used by financing activities | (3,477 | ) | (1,700 | ) | (1,962 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 18 | (2 | ) | (15 | ) | ||||||
Net increase/(decrease) in cash and cash equivalents | 292 | 4,690 | (3,856 | ) | |||||||
Cash and cash equivalents at beginning of year | 10,049 | 5,359 | 9,215 | ||||||||
Cash and cash equivalents at end of period | $10,341 | $10,049 | $5,359 | ||||||||
Operating Activities Net cash provided by operating activities was $7.5 billion during 2012, an increase of $3.5 billion compared with 2011 primarily due to lower inventory growth in 2012, which was partially offset by $1.6 billion of contributions to our pension plans in 2012 compared with $0.5 billion in 2011 and $35 million in 2010. Our investment in gross inventories increased by $6.2 billion in 2012, and by $9.8 billion in 2011, driven by higher investments in commercial airplane program inventory, primarily 787 inventory. Advances and progress billings increased to $41.6 billion at December 31, 2012 compared with $39.8 billion at December 31, 2011 and $34.7 billion at December 31, 2010.
Investing Activities Cash used by investing activities totaled $3.8 billion during 2012 compared with $2.4 billion provided during 2011, largely due to higher contributions to investments in time deposits. Net contributions to investments were $2 billion in 2012 compared with net proceeds from investments of $4 billion in 2011. In 2012, capital expenditures totaled $1.7 billion, consistent with the prior year. We expect capital expenditures to be higher in 2013 due to continued investment to support growth.
Financing Activities Cash used by financing activities was $3.5 billion during 2012, an increase of $1.8 billion compared with 2011 as a result of higher debt repayments of $1.1 billion and lower new borrowings of $0.7 billion.
In 2012, we repaid $2.1 billion of debt, including repayments of $0.9 billion of debt held at BCC. At December 31, 2012 and 2011, the recorded balance of debt was $10.4 billion and $12.4 billion, of which $1.4 billion and $2.4 billion were classified as short-term. This includes $2.5 billion and $3.4 billion of debt recorded at BCC, of which $0.6 billion and $0.9 billion were classified as short-term.
In 2012 and 2011, we had 1,007,706 and 350,778 shares transferred to us from employees for tax withholding and did not repurchase any shares through our open market share repurchase program. In December 2012, we announced the resumption of this program with repurchases expected to total between $1.5 and $2 billion in 2013.
Capital Resources We have substantial borrowing capacity. Any future borrowings may affect our credit ratings and are subject to various debt covenants as described below. We have a commercial paper program that continues to serve as a significant potential source of short-term liquidity. Throughout 2012 and at December 31, 2012, we had no commercial paper borrowings outstanding. Currently, we have $4.6
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billion of unused borrowing on revolving credit line agreements. We anticipate that these credit lines will primarily serve as backup liquidity to support our general corporate borrowing needs.
Financing commitments totaled $18.1 billion and $15.9 billion as of December 31, 2012 and 2011. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. Historically, we have not been required to fund significant amounts of outstanding commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required.
In the event we require additional funding to support strategic business opportunities, our commercial aircraft financing commitments, unfavorable resolution of litigation or other loss contingencies, or other business requirements, we expect to meet increased funding requirements by issuing commercial paper or term debt. We believe our ability to access external capital resources should be sufficient to satisfy existing short-term and long-term commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year. However, there can be no assurance of the cost or availability of future borrowings, if any, under our commercial paper program, in the debt markets or our credit facilities.
At December 31, 2012 and 2011, our pension plans were $19.7 billion and $16.6 billion underfunded as measured under GAAP. On an ERISA basis our plans are more than 100% funded at December 31, 2012 with minimal required contributions in 2013. We expect to make discretionary contributions to our plans of approximately $1.5 billion in 2013. We may be required to make higher contributions to our pension plans in future years.
As of December 31, 2012, we were in compliance with the covenants for our debt and credit facilities. The most restrictive covenants include a limitation on mortgage debt and sale and leaseback transactions as a percentage of consolidated net tangible assets (as defined in the credit agreements), and a limitation on consolidated debt as a percentage of total capital (as defined). When considering debt covenants, we continue to have substantial borrowing capacity.
Contractual Obligations
The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2012, and the estimated timing thereof.
(Dollars in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||
Long-term debt (including current portion) | $10,251 | $1,340 | $2,147 | $1,095 | $5,669 | ||||||||||||||
Interest on debt(1) | 6,177 | 510 | 864 | 749 | 4,054 | ||||||||||||||
Pension and other postretirement cash requirements | 25,558 | 579 | 1,244 | 7,025 | 16,710 | ||||||||||||||
Capital lease obligations | 184 | 102 | 78 | 4 | |||||||||||||||
Operating lease obligations | 1,405 | 218 | 334 | 209 | 644 | ||||||||||||||
Purchase obligations not recorded on the Consolidated Statements of Financial Position | 118,002 | 44,472 | 41,838 | 18,956 | 12,736 | ||||||||||||||
Purchase obligations recorded on the Consolidated Statements of Financial Position | 15,981 | 14,664 | 1,307 | 1 | 9 | ||||||||||||||
Total contractual obligations | $177,558 | $61,885 | $47,812 | $28,039 | $39,822 | ||||||||||||||
(1) | Includes interest on variable rate debt calculated based on interest rates at December 31, 2012. Variable rate debt was less than 1% of our total debt at December 31, 2012. |
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Pension and Other Postretirement Benefits Pension cash requirements are based on an estimate of our minimum funding requirements, pursuant to ERISA regulations, although we may make additional discretionary contributions. Estimates of other postretirement benefits are based on both our estimated future benefit payments and the estimated contributions to plans that are funded through trusts.
Purchase Obligations Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. Purchase obligations include amounts recorded as well as amounts that are not recorded on the Consolidated Statements of Financial Position. Approximately 5% of the purchase obligations disclosed above are reimbursable to us pursuant to cost-type government contracts.
Purchase Obligations Not Recorded on the Consolidated Statements of Financial Position Production related purchase obligations not recorded on the Consolidated Statements of Financial Position include agreements for inventory procurement, tooling costs, electricity and natural gas contracts, property, plant and equipment, and other miscellaneous production related obligations. The most significant obligation relates to inventory procurement contracts. We have entered into certain significant inventory procurement contracts that specify determinable prices and quantities, and long-term delivery timeframes. In addition, we purchase raw materials on behalf of our suppliers. These agreements require suppliers and vendors to be prepared to build and deliver items in sufficient time to meet our production schedules. The need for such arrangements with suppliers and vendors arises from the extended production planning horizon for many of our products. A significant portion of these inventory commitments is supported by firm contracts and/or has historically resulted in settlement through reimbursement from customers for penalty payments to the supplier should the customer not take delivery. These amounts are also included in our forecasts of costs for program and contract accounting. Some inventory procurement contracts may include escalation adjustments. In these limited cases, we have included our best estimate of the effect of the escalation adjustment in the amounts disclosed in the table above.
Purchase Obligations Recorded on the Consolidated Statements of Financial Position Purchase obligations recorded on the Consolidated Statements of Financial Position primarily include accounts payable and certain other liabilities including accrued compensation.
Industrial Participation Agreements We have entered into various industrial participation agreements with certain customers outside of the U.S. to facilitate economic flow back and/or technology transfer to their businesses or government agencies as the result of their procurement of goods and/or services from us. These commitments may be satisfied by our placement of direct work or vendor orders for supplies, opportunities to bid on supply contracts, transfer of technology or other forms of assistance. However, in certain cases, our commitments may be satisfied through other parties (such as our vendors) who purchase supplies from our non-U.S. customers. We do not commit to industrial participation agreements unless a contract for sale of our products or services is signed. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. During 2012, we incurred no such penalties. As of December 31, 2012, we have outstanding industrial participation agreements totaling $16.2 billion that extend through 2026. Purchase order commitments associated with industrial participation agreements are included in purchase obligations in the table above. To be eligible for such a purchase order commitment from us, a foreign supplier must have sufficient capability to meet our requirements and must be competitive in cost, quality and schedule.
Income Tax Obligations As of December 31, 2012, our net liability for income taxes payable, including uncertain tax positions, was $111 million. We are not able to reasonably estimate the timing of future cash flows related to uncertain tax positions. Our income tax matters are excluded from the table above. See Note 5 to our Consolidated Financial Statements.
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Commercial Commitments
The following table summarizes our commercial commitments outstanding as of December 31, 2012.
(Dollars in millions) | Total Amounts Committed/Maximum Amount of Loss | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||
Standby letters of credit and surety bonds | $4,545 | $2,791 | $1,332 | $292 | $130 | |||||||||||||
Commercial aircraft financing commitments | 18,083 | 1,341 | 6,588 | 6,253 | 3,901 | |||||||||||||
Total commercial commitments | $22,628 | $4,132 | $7,920 | $6,545 | $4,031 | |||||||||||||
Commercial aircraft financing commitments include commitments to provide financing related to aircraft on order, under option for deliveries or proposed as part of sales campaigns based on estimated earliest potential funding dates. Based on historical experience, we anticipate that we will not be required to fund a significant portion of our financing commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required. See Note 12 to our Consolidated Financial Statements.
Contingent Obligations
We have significant contingent obligations that arise in the ordinary course of business, which include the following:
Legal Various legal proceedings, claims and investigations are pending against us. Legal contingencies are discussed in Note 21 to our Consolidated Financial Statements, including our contesting the default termination of the contract for A-12 aircraft, certain employment, labor and benefits litigation and civil securities litigation relating to disclosures concerning the 787 program.
Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $710 million at December 31, 2012. For additional information, see Note 12 to our Consolidated Financial Statements.
Income Taxes We have recorded a liability of $1,055 million at December 31, 2012 for uncertain tax positions.
For further discussion of income taxes, see Note 5 to our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion of these arrangements, see Note 13 to our Consolidated Financial Statements.
Critical Accounting Policies
Contract Accounting
We use contract accounting to determine revenue, cost of sales, and profit for almost all of our BDS business. Contract accounting involves a judgmental process of estimating the total sales and costs for each contract, which results in the development of estimated cost of sales percentages. For each contract, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage to the amount of revenue recognized.
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Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Total contract sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance, and price adjustment clauses (such as inflation or index-based clauses). The majority of these contracts are with the U.S. government where the price is generally based on estimated cost to produce the product or service plus profit. Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed in establishing contract price. Total contract cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.
Revenue and cost estimates for all significant contracts are reviewed and reassessed quarterly. Changes in these estimates could result in recognition of cumulative catch-up adjustments to the contract’s inception to date revenues, cost of sales and profit, in the period in which such changes are made. Changes in revenue and cost estimates could also result in a reach-forward loss or an adjustment to a reach-forward loss, which would be recorded immediately in earnings. For the years ending December 31, 2012, 2011 and 2010 cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts increased operating earnings by $379 million, $229 million and $125 million, respectively.
Due to the significance of judgment in the estimation process described above, it is likely that materially different cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods. If the combined gross margin for all contracts in BDS for all of 2012 had been estimated to be higher or lower by 1%, it would have increased or decreased pre-tax income for the year by approximately $326 million. In addition, a number of our fixed price development contracts are in a reach-forward loss position. Changes to estimated losses are recorded immediately in earnings.
Program Accounting
Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to costs for the defined program accounting quantity. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. For each program, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of sales recognized for airplanes delivered and accepted by the customer.
Factors that must be estimated include program accounting quantity, sales price, labor and employee benefit costs, material costs, procured part costs, major component costs, overhead costs, program tooling and other non-recurring costs, and warranty costs. Estimation of the accounting quantity for each program takes into account several factors that are indicative of the demand for the particular program, such as firm orders, letters of intent from prospective customers, and market studies. Total estimated program sales are determined by estimating the model mix and sales price for all unsold units within the accounting quantity, added together with the sales prices for all undelivered units under contract. The sales prices for all undelivered units within the accounting quantity include an escalation adjustment for inflation that is updated quarterly. Cost estimates are based largely on negotiated and anticipated contracts with suppliers, historical performance trends, and business base and other economic projections. Factors that influence these estimates include production rates, internal and subcontractor performance trends, customer and/or supplier claims or assertions, asset utilization, anticipated labor agreements, and inflationary trends.
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To ensure reliability in our estimates, we employ a rigorous estimating process that is reviewed and updated on a quarterly basis. Changes in estimates are normally recognized on a prospective basis; when estimated costs to complete a program exceed estimated revenues from undelivered units in the accounting quantity, a loss provision is recorded in the current period for the estimated loss on all undelivered units in the accounting quantity.
The program method of accounting allocates tooling and other non-recurring and production costs over the accounting quantity for each program. Because of the higher unit production costs experienced at the beginning of a new program and substantial investment required for initial tooling and other non-recurring costs, new commercial aircraft programs, such as the 787 program, typically have lower margins than established programs.
Due to the significance of judgment in the estimation process described above, it is likely that materially different cost of sales amounts could be recorded if we used different assumptions, or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or other circumstances may adversely or positively affect financial performance in future periods. If combined cost of sales percentages for commercial airplane programs for all of 2012 had been estimated to be lower by 1%, it would have increased pre-tax income for the year by approximately $420 million. If the combined cost of sales percentages for commercial airplane programs for all of 2012 (excluding the 747 and 787 programs which have gross margins that are breakeven or near breakeven at December 31, 2012) had been estimated to be higher by 1%, it would have decreased pre-tax income for the year by approximately $324 million. If we are unable to mitigate risks associated with the 747 and 787 programs, or if we are required to change one or more of our pricing, cost or other assumptions related to these programs, we could be required to record reach forward losses which could have a material effect on our reported results.
Aircraft Valuation
Allowance for Losses on Customer Financing Receivables The allowance for losses on customer financing receivables (valuation provision) is used to provide for potential impairment of customer financing receivables in the Consolidated Statements of Financial Position. The balance represents an estimate of probable but unconfirmed losses in the customer financing receivables portfolio. The estimate is based on various qualitative and quantitative factors, including historical loss experience, collateral values, and results of individual credit and collectibility reviews. The adequacy of the allowance is assessed quarterly.
Three primary factors influencing the level of our allowance are customer credit ratings, collateral values and default rates. If each customer’s credit rating were upgraded or downgraded by one major rating category at December 31, 2012, the allowance would have decreased by $35 million or increased by $90 million. If the collateral values were 20% higher or lower at December 31, 2012, the allowance would have decreased by $21 million or increased by $20 million. If the cumulative default rates used for each rating category increased or decreased 1%, the allowance would have increased or decreased by $6 million.
Impairment Review for Assets Under Operating Leases and Held for Re-Lease We evaluate for impairment assets under operating lease or assets held for re-lease when events or changes in circumstances indicate that the expected undiscounted cash flow from the asset may be less than its carrying value. We use various assumptions when determining the expected undiscounted cash flow including the expected future lease rates, lease terms, residual value of the asset, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the remaining economic life of the asset.
When we determine that impairment is indicated for an asset, the amount of impairment expense recorded is the excess of the carrying value over the fair value of the asset.
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Had future lease rates on assets evaluated for impairment been 10% lower, we estimate that we would have incurred additional impairment expense of $26 million for the year ended December 31, 2012.
Residual Values Equipment under operating leases and assets held for re-lease are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the period that we project we will hold the asset for lease. Estimates used in determining residual values significantly impact the amount and timing of depreciation expense for equipment under operating leases and assets held for re-lease. If the estimated residual values declined 20% at December 31, 2012, we estimate that we would have incurred additional impairment expense of $11 million for the year ended December 31, 2012, and a future cumulative pre-tax earnings reduction of approximately $82 million recognized over the remaining depreciable periods, of which approximately $16 million would be recognized in 2013.
Our investment in sales-type/finance leases includes future minimum lease payments receivable plus the estimated residual value of leased assets less unearned income. Declines in estimated residual value that are deemed other than temporary are recognized in the period in which the decline occurs. If the estimated residual values declined 20% at December 31, 2012, we estimate that we would have reduced pre-tax income by $49 million for the year ended December 31, 2012.
Goodwill and Indefinite-Lived Intangible Impairments
Goodwill and other acquired intangible assets with indefinite lives are not amortized but are annually tested for impairment, and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. April 1 is our annual testing date. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the related operations. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.
We estimate the fair values of the related operations using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements, and general market conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any.
The cash flow forecasts are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. Therefore, changes in the stock price may also affect the amount of impairment recorded, if any.
We completed our assessment of goodwill as of April 1, 2012 and determined that the estimated fair value of each reporting unit significantly exceeded its corresponding carrying value. Changes in our forecasts, or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future periods. A 10% decrease in the estimated fair value of any of our operations would have no impact on the carrying value of goodwill.
As of December 31, 2012 and 2011, we had $497 million of indefinite-lived intangible assets related to the Jeppesen and Aviall brand and trade names acquired in business combinations. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment. A 10% decrease in the discounted cash flows would reduce the carrying value of these indefinite-lived intangible assets by less than $1 million.
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Postretirement Plans
The majority of our employees are covered by defined benefit pension plans. All nonunion and some union employees hired after December 31, 2008 are not covered by defined benefit plans. We also have other postretirement benefits consisting principally of healthcare coverage for eligible retirees and qualifying dependents. Accounting rules require an annual measurement of our projected obligations and plan assets. These measurements are based upon several assumptions, including the discount rate, the expected long-term rate of asset return, and medical trend rate (rate of growth for medical costs). Future changes in assumptions or differences between actual and expected outcomes can significantly affect our future annual expense, projected benefit obligations and Shareholders’ equity.
The following table shows the sensitivity of our pension and other postretirement benefit plan liabilities and net periodic cost to a 25 basis point change in the discount rate as of December 31, 2012.
(Dollars in millions) | Change in discount rate Increase 25 bps | Change in discount rate Decrease 25 bps | |||||
Pension plans | |||||||
Projected benefit obligation | ($2,444 | ) | $3,112 | ||||
Net periodic pension cost | (250 | ) | 312 | ||||
Other postretirement benefit plans | |||||||
Accumulated postretirement benefit obligation | (175 | ) | 205 | ||||
Net periodic postretirement benefit cost | (12 | ) | 13 | ||||
Pension expense is also sensitive to changes in the expected long-term rate of asset return. A decrease or increase of 25 basis points in the expected long-term rate of asset return would have increased or decreased 2012 net periodic pension expense by $126 million. We expect 2013 net periodic pension cost to increase by approximately $400 million and the portion recognized in earnings for 2013 to increase by approximately $800 million primarily due to a reduction in the discount rate from 4.4% at December 31, 2011 to 3.8% at December 31, 2012 and amortization of actuarial losses.
The assumed medical trend rates have a significant effect on the following year’s expense, recorded liabilities and Shareholders’ equity. The following table shows the sensitivity of our other postretirement benefit plan liabilities and net periodic cost to a 100 basis point change as of December 31, 2012.
(Dollars in millions) | Change in medical trend rate Increase 100 bps | Change in medical trend rate Decrease 100 bps | |||||
Other postretirement benefit plans | |||||||
Accumulated postretirement benefit obligation | $827 | ($700 | ) | ||||
Net periodic postretirement benefit cost | 128 | (110 | ) | ||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have financial instruments that are subject to interest rate risk, principally fixed-rate debt obligations, and customer financing assets and liabilities. Additionally, BCC uses interest rate swaps with certain debt obligations to manage exposure to interest rate changes. Historically, we have not experienced material gains or losses on our customer financing assets and liabilities due to interest rate changes. As of December 31, 2012, the impact over the next 12 months of a 100 basis point rise in interest rates to our
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pre-tax earnings would not be significant. The investors in our fixed-rate debt obligations do not generally have the right to demand we pay off these obligations prior to maturity. Therefore, exposure to interest rate risk is not believed to be material for our fixed-rate debt.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. We use foreign currency forward and option contracts to hedge the price risk associated with firmly committed and forecasted foreign denominated payments and receipts related to our ongoing business. Foreign currency forward and option contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2012, a 10% increase in the exchange rate in our portfolio of foreign currency contracts would have decreased our unrealized gains by $194 million and a 10% decrease in the exchange rate would have increased our unrealized gains by $221 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these forward currency contracts and the offsetting underlying commitments do not create material market risk.
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Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
Page | |
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The Boeing Company and Subsidiaries
Consolidated Statements of Operations
(Dollars in millions, except per share data) | |||||||||||
Years ended December 31, | 2012 | 2011 | 2010 | ||||||||
Sales of products | $71,234 | $57,401 | $52,586 | ||||||||
Sales of services | 10,464 | 11,334 | 11,720 | ||||||||
Total revenues | 81,698 | 68,735 | 64,306 | ||||||||
Cost of products | (60,309 | ) | (46,642 | ) | (42,194 | ) | |||||
Cost of services | (8,247 | ) | (9,097 | ) | (9,489 | ) | |||||
Boeing Capital interest expense | (88 | ) | (128 | ) | (160 | ) | |||||
Total costs and expenses | (68,644 | ) | |||||||||