2013 09 Sep 30 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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)
 
(312) 544-2000
 
(Registrant’s telephone number, including area code)
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 ý 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an 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. (Check one):
Large accelerated filer  
ý
 
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 ý
As of October 16, 2013, there were 751,453,447 shares of common stock, $5.00 par value, issued and outstanding.

Table of Contents

THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended September 30, 2013
INDEX
Part I. Financial Information (Unaudited)
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

Table of Contents

Part I. Financial Information
Item 1. Financial Statements
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except per share data)
Nine months ended September 30
 
Three months ended September 30
  
2013

 
2012

 
2013


2012

Sales of products

$55,310

 

$51,441

 

$19,754



$17,415

Sales of services
7,528

 
7,955

 
2,376


2,593

Total revenues
62,838

 
59,396

 
22,130


20,008

 


 


 
 
 
 
Cost of products
(47,030
)
 
(43,103
)
 
(16,865
)

(14,683
)
Cost of services
(5,795
)
 
(6,431
)
 
(1,791
)

(2,089
)
Boeing Capital interest expense
(55
)
 
(85
)
 
(18
)

(27
)
Total costs and expenses
(52,880
)
 
(49,619
)
 
(18,674
)

(16,799
)
 
9,958

 
9,777

 
3,456


3,209

Income from operating investments, net
147

 
211

 
59


120

General and administrative expense
(2,856
)
 
(2,774
)
 
(956
)

(916
)
Research and development expense, net
(2,223
)
 
(2,545
)
 
(755
)

(853
)
Gain/(loss) on dispositions, net
21

 
(3
)
 
(1
)
 
(1
)
Earnings from operations
5,047

 
4,666

 
1,803


1,559

Other income, net
41

 
39

 
19


17

Interest and debt expense
(290
)
 
(330
)
 
(95
)

(110
)
Earnings before income taxes
4,798

 
4,375

 
1,727


1,466

Income tax expense
(1,445
)
 
(1,450
)
 
(567
)

(432
)
Net earnings from continuing operations
3,353

 
2,925

 
1,160


1,034

Net loss on disposal of discontinued operations, net of taxes of $0, $2, $0 and $1
(1
)
 
(3
)
 
(2
)

(2
)
Net earnings

$3,352



$2,922

 

$1,158



$1,032

Basic earnings per share from continuing operations

$4.40

 

$3.86

 

$1.53

 

$1.36

Net loss on disposal of discontinued operations, net of taxes

 

 

 

Basic earnings per share

$4.40

 

$3.86

 

$1.53



$1.36

Diluted earnings per share from continuing operations

$4.36

 

$3.84

 

$1.51

 

$1.35

Net loss on disposal of discontinued operations, net of taxes 

 

 

 

Diluted earnings per share

$4.36

 

$3.84

 

$1.51



$1.35

Cash dividends paid per share

$1.455

 

$1.32

 

$0.485



$0.44

Weighted average diluted shares (millions)
769.8

 
762.3

 
769.1


765.2

See Notes to the Condensed Consolidated Financial Statements.

1
Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
Nine months ended September 30
 
Three months ended September 30
 
2013

 
2012

 
2013

 
2012

Net earnings

$3,352

 

$2,922

 

$1,158

 

$1,032

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
(46
)
 
26

 
42

 
36

Unrealized (loss)/gain on derivative instruments:
 
 
 
 
 
 
 
Unrealized (loss)/gain arising during period, net of tax of $31, ($14), ($20) and ($21)
(54
)
 
25

 
35

 
37

Reclassification adjustment for (gain)/loss included in net earnings, net of tax of $8, ($5), $5 and $0
(13
)
 
8

 
(10
)
 

Total unrealized (loss)/gain on derivative instruments, net of tax
(67
)
 
33

 
25

 
37

Defined benefit pension plans & other postretirement benefits:
 
 
 
 
 
 
 
Amortization of prior service cost included in net periodic pension cost, net of tax of ($6), ($9), ($3) and ($3)
9

 
12

 
4

 
4

Net actuarial gain arising during the period, net of tax of ($72), ($29), ($56) and ($5)
131

 
52

 
101

 
9

Amortization of actuarial losses included in net periodic pension cost, net of tax of ($644), ($563), ($213) and ($188)
1,135

 
979

 
380

 
326

Settlements and curtailments included in net income, net of tax of ($35), ($3), ($30) and $0
63

 
5

 
54

 

Pension and post retirement benefits related to our equity method investments, net of tax ($2), ($75), ($1) and ($81)
4

 
132

 
1

 
143

Total defined benefit pension plans & other postretirement benefits, net of tax
1,342

 
1,180

 
540

 
482

Other comprehensive income, net of tax
1,229

 
1,239

 
607

 
555

Comprehensive income/(loss) related to noncontrolling interest
3

 
4

 
(18
)
 
3

Comprehensive income, net of tax

$4,584

 

$4,165

 

$1,747

 

$1,590

See Notes to the Condensed Consolidated Financial Statements.

2
Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Financial Position
(Unaudited)
(Dollars in millions, except per share data)
September 30
2013

 
December 31
2012

Assets
 
 
 
Cash and cash equivalents

$10,041

 

$10,341

Short-term and other investments
5,870

 
3,217

Accounts receivable, net
6,652

 
5,608

Current portion of customer financing, net
316

 
364

Deferred income taxes
43

 
28

Inventories, net of advances and progress billings
41,240

 
37,751

Total current assets
64,162

 
57,309

Customer financing, net
3,903

 
4,056

Property, plant and equipment, net of accumulated depreciation of $14,938 and $14,645
9,987

 
9,660

Goodwill
5,047

 
5,035

Acquired intangible assets, net
2,962

 
3,111

Deferred income taxes
5,957

 
6,753

Investments
1,168

 
1,180

Other assets, net of accumulated amortization of $493 and $504
1,447

 
1,792

Total assets

$94,633

 

$88,896

Liabilities and equity
 
 
 
Accounts payable

$10,657

 

$9,394

Accrued liabilities
12,384

 
12,995

Advances and billings in excess of related costs
20,216

 
16,672

Deferred income taxes and income taxes payable
5,504

 
4,485

Short-term debt and current portion of long-term debt
919

 
1,436

Total current liabilities
49,680

 
44,982

Accrued retiree health care
7,415

 
7,528

Accrued pension plan liability, net
18,559

 
19,651

Non-current income taxes payable
299

 
366

Other long-term liabilities
936

 
1,429

Long-term debt
8,677

 
8,973

Shareholders’ equity:
 
 
 
Common stock, par value $5.00 – 1,200,000,000 shares authorized; 1,012,261,159 shares issued
5,061

 
5,061

Additional paid-in capital
4,295

 
4,122

Treasury stock, at cost - 260,351,104 and 256,630,628 shares
(16,865
)
 
(15,937
)
Retained earnings
32,647

 
30,037

Accumulated other comprehensive loss
(16,187
)
 
(17,416
)
Total shareholders’ equity
8,951

 
5,867

Noncontrolling interest
116

 
100

Total equity
9,067

 
5,967

Total liabilities and equity

$94,633

 

$88,896

See Notes to the Condensed Consolidated Financial Statements.

3
Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Nine months ended September 30
  
2013


2012

Cash flows – operating activities:
 

 
Net earnings

$3,352



$2,922

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
Non-cash items – 
 

 
Share-based plans expense
156


148

Depreciation and amortization
1,323


1,313

Investment/asset impairment charges, net
38


59

Customer financing valuation benefit
(7
)

(4
)
Loss on disposal of discontinued operations
1

 
5

(Gain)/loss on dispositions, net
(21
)
 
3

Other charges and credits, net
48


559

Excess tax benefits from share-based payment arrangements
(86
)

(43
)
Changes in assets and liabilities – 
 

 
Accounts receivable
(1,006
)

150

Inventories, net of advances and progress billings
(3,631
)

(4,588
)
Accounts payable
943


857

Accrued liabilities
(338
)

(123
)
Advances and billings in excess of related costs
3,543


123

Income taxes receivable, payable and deferred
1,336


1,085

Other long-term liabilities
(52
)

22

Pension and other postretirement plans
954


571

Customer financing, net
223


254

Other
23


28

Net cash provided by operating activities
6,799


3,341

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(1,460
)
 
(1,208
)
Property, plant and equipment reductions
47

 
29

Acquisitions, net of cash acquired
(26
)
 
(18
)
Contributions to investments
(9,640
)
 
(10,331
)
Proceeds from investments
6,997

 
6,941

Purchase of distribution rights


 
(6
)
Net cash used by investing activities
(4,082
)
 
(4,593
)
Cash flows – financing activities:
 
 
 
New borrowings
547

 
34

Debt repayments
(1,397
)
 
(1,273
)
Repayments of distribution rights financing
(139
)
 
(72
)
Stock options exercised, other
871

 
96

Excess tax benefits from share-based payment arrangements
86

 
43

Employee taxes on certain share-based payment arrangements
(60
)
 
(72
)
Common shares repurchased
(1,799
)
 
 
Dividends paid
(1,102
)
 
(990
)
Net cash used by financing activities
(2,993
)
 
(2,234
)
Effect of exchange rate changes on cash and cash equivalents
(24
)
 
19

Net decrease in cash and cash equivalents
(300
)
 
(3,467
)
Cash and cash equivalents at beginning of year
10,341

 
10,049

Cash and cash equivalents at end of period

$10,041

 

$6,582

See Notes to the Condensed Consolidated Financial Statements.

4
Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited)
 
Boeing shareholders
 
 
(Dollars in millions, except per share data)
Common
Stock

Additional
Paid-In
Capital

Treasury Stock

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-
controlling
Interest

Total

Balance January 1, 2012

$5,061


$4,033


($16,603
)

$27,524


($16,500
)

$93


$3,608

Net earnings
 
 
 
2,922

 
4

2,926

Other comprehensive income, net of tax of ($698)
 
 
 
 
1,239

 
1,239

Share-based compensation and related dividend equivalents
 
155

 
(10
)
 
 
145

Excess tax pools
 
43

 
 
 
 
43

Treasury shares issued for stock options exercised, net
 
(43
)
138

 
 
 
95

Treasury shares issued for other share-based plans, net
 
(174
)
110

 
 
 
(64
)
Treasury shares issued for 401(k) contribution
 
54

300

 
 
 
354

Cash dividends declared ($0.88 per share)
 
 
 
(661
)
 
 
(661
)
Changes in non-controlling interest
 
 
 
 
 
(3
)
(3
)
Balance September 30, 2012

$5,061


$4,068


($16,055
)

$29,775


($15,261
)

$94


$7,682

 
 
 
 
 
 
 
 
Balance January 1, 2013

$5,061


$4,122


($15,937
)

$30,037


($17,416
)

$100


$5,967

Net earnings
 
 
 
3,352

 
3

3,355

Other comprehensive income, net of tax of ($720)
 
 
 
 
1,229

 
1,229

Share-based compensation and related dividend equivalents
 
161

 
(7
)
 
 
154

Excess tax pools
 
60

 
 
 
 
60

Treasury shares issued for stock options exercised, net
 
80

793

 
 
 
873

Treasury shares issued for other share-based plans, net
 
(128
)
78

 
 
 
(50
)
Common shares repurchased
 
 
(1,799
)
 
 
 
(1,799
)
Cash dividends declared ($0.97 per share)
 
 
 
(735
)
 
 
(735
)
Changes in non-controlling interest
 
 
 
 
 
13

13

Balance September 30, 2013

$5,061


$4,295


($16,865
)

$32,647


($16,187
)

$116


$9,067

See Notes to the Condensed Consolidated Financial Statements.

5
Table of Contents

The Boeing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Summary of Business Segment Data
(Unaudited)
(Dollars in millions)
Nine months ended September 30
 
Three months ended September 30

2013

 
2012

 
2013

 
2012

Revenues:

 

 



Commercial Airplanes

$38,301

 

$34,966

 

$13,987



$12,186

Defense, Space & Security:

 

 



Boeing Military Aircraft
11,541

 
11,982

 
3,543


3,710

Network & Space Systems
6,240

 
5,887

 
2,231


2,055

Global Services & Support
6,561

 
6,395

 
2,272


2,074

Total Defense, Space & Security
24,342

 
24,264

 
8,046


7,839

Boeing Capital
303

 
339

 
94


101

Other segment
80

 
79

 
26


27

Unallocated items and eliminations
(188
)
 
(252
)
 
(23
)

(145
)
Total revenues

$62,838

 

$59,396

 

$22,130



$20,008

Earnings from operations:

 

 



Commercial Airplanes

$4,289

 

$3,445

 

$1,617



$1,153

Defense, Space & Security:

 

 



Boeing Military Aircraft
1,024

 
1,176

 
221


424

Network & Space Systems
486

 
424

 
193


179

Global Services & Support
771

 
717

 
259


224

Total Defense, Space & Security
2,281

 
2,317

 
673


827

Boeing Capital
98

 
100

 
35


28

Other segment
(57
)

(217
)
 
44


(74
)
Unallocated items and eliminations
(1,564
)

(979
)
 
(566
)

(375
)
Earnings from operations
5,047

 
4,666

 
1,803


1,559

Other income, net
41

 
39

 
19


17

Interest and debt expense
(290
)
 
(330
)
 
(95
)

(110
)
Earnings before income taxes
4,798

 
4,375

 
1,727


1,466

Income tax expense
(1,445
)
 
(1,450
)
 
(567
)

(432
)
Net earnings from continuing operations
3,353

 
2,925

 
1,160


1,034

Net loss on disposal of discontinued operations, net of taxes of $0, $2, $0 and $1
(1
)
 
(3
)
 
(2
)

(2
)
Net earnings

$3,352

 

$2,922

 

$1,158



$1,032

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 18 for further segment results.

6
Table of Contents

The Boeing Company and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)
Note 1 – Basis of Presentation
The condensed consolidated interim financial statements included in this report have been prepared by management of The Boeing Company (herein referred to as “Boeing”, the “Company”, “we”, “us”, or “our”). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The results of operations for the period ended September 30, 2013 are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited Consolidated Financial Statements, including the notes thereto, included in our 2012 Annual Report on Form 10-K. Amounts reported in prior periods as Interest and debt expense have been reclassified to Boeing Capital interest expense to conform to the current period's presentation.
Use of Estimates
Management makes assumptions and estimates to prepare financial statements in conformity with accounting principles generally accepted in the United States of America. Those assumptions and estimates directly affect the amounts reported in the Condensed Consolidated Financial Statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these Notes to the Condensed Consolidated Financial Statements.
Contract accounting is used for development and production activities predominantly by Defense, Space & Security (BDS). Contract accounting involves a judgmental process of estimating total sales and costs for each contract resulting in the development of estimated cost of sales percentages. Changes in estimated revenues, cost of sales and the related effect on operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contract’s percent complete. For the nine months ended September 30, 2013 and 2012, net favorable cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts increased Earnings from operations by $184 and $308 and diluted earnings per share by $0.17 and $0.27. For the three months ended September 30, 2013 and 2012, net favorable cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts increased Earnings from operations by $20 and $74 and diluted earnings per share by $0.02 and $0.07.
Note 2 – Earnings Per Share
Basic and diluted earnings per share are computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares and participating securities. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Participating securities and common shares have equal rights to undistributed earnings.
Basic earnings per share is calculated by taking net earnings, less earnings available to participating securities, divided by the basic weighted average common shares outstanding.
Diluted earnings per share is calculated by taking net earnings, less earnings available to participating securities, divided by the diluted weighted average common shares outstanding.

7
Table of Contents

The elements used in the computation of basic and diluted earnings per share were as follows:
(In millions - except per share amounts)
Nine months ended September 30
 
Three months ended September 30
 
2013

 
2012

 
2013

 
2012

Net earnings

$3,352

 

$2,922

 

$1,158

 

$1,032

Less: earnings available to participating securities
6

 
7

 
2

 
3

Net earnings available to common shareholders

$3,346

 

$2,915

 

$1,156

 

$1,029

Basic
 
 
 
 
 
 
 
Basic weighted average shares outstanding
762.0

 
756.6

 
759.4

 
759.5

Less: participating securities
1.9

 
2.3

 
1.8

 
2.4

Basic weighted average common shares outstanding
760.1

 
754.3

 
757.6

 
757.1

Diluted
 
 
 
 
 
 
 
Basic weighted average shares outstanding
762.0

 
756.6

 
759.4

 
759.5

Dilutive potential common shares(1)
7.8

 
5.7

 
9.7

 
5.7

Diluted weighted average shares outstanding
769.8

 
762.3

 
769.1

 
765.2

Less: participating securities
1.9

 
2.3

 
1.8

 
2.4

Diluted weighted average common shares outstanding
767.9

 
760.0

 
767.3

 
762.8

Net earnings per share:
 
 
 
 
 
 
 
Basic

$4.40

 

$3.86

 

$1.53

 

$1.36

Diluted
4.36

 
3.84

 
1.51

 
1.35

(1) 
Diluted EPS includes any dilutive impact of stock options, restricted stock units and Performance Awards.
The shares included in the following table were not included in the computation of diluted earnings per share because the effect was antidilutive. However, these shares may be dilutive potential common shares in the future.
(Shares in millions)
Nine months ended September 30
 
Three months ended September 30
 
2013

 
2012

 
2013

 
2012

Stock options
6.4

 
23.2

 


 
25.4

Performance Awards
4.6

 
4.7

 
3.6

 
5.0

Note 3 – Income Taxes
Our effective income tax rate was 30.1% and 33.1% for the nine months ended September 30, 2013 and 2012 and 32.8% and 29.5% for the three months ended September 30, 2013 and 2012. The effective tax rate for the nine months ended September 30, 2013 is lower than the comparable prior year period primarily due to the inclusion of U.S. research and development (R&D) tax credits in 2013 which were not available in 2012. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 that retroactively renewed the research and development tax credit for 2012 and extended 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 $145 was recorded in the first quarter of 2013. The effective tax rate for the three months ended September 30, 2013 is higher than the comparable prior year period primarily due to discrete tax adjustments, including settlement of non-US audits, during the three months ended September 30, 2012 partially offset by research and development tax credits in 2013, which were not available in 2012.
Federal income tax audits have been settled for all years prior to 2007. The years 2009-2010 are currently being examined by the IRS, and we have filed appeals with the IRS for tax years 2007-2008. We are also

8
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subject to examination in major state and international jurisdictions for the 2001-2012 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next 12 months we will resolve the matters presently under consideration for the 2007-2010 tax years with the IRS. Depending on the timing and outcome of the audit settlements, unrecognized tax benefits that affect the effective tax rate could increase earnings by up to $420 based on current estimates.
On September 5, 2013, the IRS issued proposed regulations that amend the definition of research and experimental (R&E) expenditures. The regulations are generally taxpayer favorable and provide clarity for the categories of expense that can be considered when computing the research credit. Upon issuance of the regulations we commenced an analysis to determine the impact to the Company’s financial statements. Such analysis is expected to be completed in the fourth quarter of 2013, as effort to apply the regulations to the Company’s R&E expenditures will be extensive. Upon completion of the analysis, we expect to record certain previously unrecognized tax benefits related to research tax credits including portions of the $420 of unrecognized tax benefits related to the 2007-2010 audit settlements described above.
Note 4 – Accounts Receivable
Accounts receivable as of September 30, 2013, includes $112 of unbillable receivables on a long-term contract with LightSquared, LLC (LightSquared) related to the construction of two commercial satellites. One of the satellites has been delivered, and the other is substantially complete but remains in Boeing’s possession. On May 14, 2012, LightSquared filed for Chapter 11 bankruptcy protection. We believe that our rights in the second satellite and related ground-segment assets are sufficient to protect the value of our receivables in the event LightSquared fails to make payments as contractually required or rejects its contract with us. Given the uncertainties inherent in bankruptcy proceedings it is reasonably possible that we could incur losses related to these receivables in connection with the LightSquared bankruptcy.
Note 5 – Inventories
Inventories consisted of the following:
 
September 30
2013

 
December 31
2012

Long-term contracts in progress

$13,872

 

$15,130

Commercial aircraft programs
47,063

 
40,389

Commercial spare parts, used aircraft, general stock materials and other
7,115

 
7,206

Inventory before advances and progress billings
68,050

 
62,725

Less advances and progress billings
(26,810
)
 
(24,974
)
Total

$41,240

 

$37,751

Long-Term Contracts in Progress
Long-term contracts in progress includes Delta launch program inventory that is being sold at cost to United Launch Alliance (ULA) under an inventory supply agreement that terminates on March 31, 2021. At September 30, 2013 and December 31, 2012, the inventory balance, net of advances, was $425 and $725. At September 30, 2013, $390 of this inventory related to unsold launches. See Note 10.
Inventory balances included $237 subject to claims or other uncertainties relating to the A-12 program at September 30, 2013 and December 31, 2012. See Note 17.
Capitalized precontract costs of $374 and $238 at September 30, 2013 and December 31, 2012, are included in inventories.

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Commercial Aircraft Programs
At September 30, 2013 and December 31, 2012, commercial aircraft programs inventory included the following amounts related to the 787 program: $26,453 and $21,289 of work in process (including deferred production costs of $20,189 and $15,929), $2,143 and $1,908 of supplier advances, and $2,862 and $2,339 of unamortized tooling and other non-recurring costs. At September 30, 2013, $14,657 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $8,394 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
At September 30, 2013 and December 31, 2012, commercial aircraft programs inventory included the following amounts related to the 747 program: $1,237 and $1,292 of deferred production costs, net of previously recorded reach-forward losses, and $611 and $683 of unamortized tooling costs. At September 30, 2013, $859 of 747 deferred production costs and unamortized tooling are expected to be recovered from units included in the program accounting quantity that have firm orders and $989 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling $3,502 and $2,989 at September 30, 2013 and December 31, 2012.
Note 6 – Customer Financing
Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:
 
September 30
2013

 
December 31
2012

Financing receivables:
 
 
 
Investment in sales-type/finance leases

$1,736

 

$1,850

Notes
600

 
592

Operating lease equipment, at cost, less accumulated depreciation of $550 and $628
1,936

 
2,038

Gross customer financing
4,272

 
4,480

Less allowance for losses on receivables
(53
)
 
(60
)
Total

$4,219

 

$4,420

We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms. At September 30, 2013 and December 31, 2012, we individually evaluated for impairment customer financing receivables of $555 and $616 and determined that $418 and $446 were impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceed the carrying values of the receivables.
The adequacy of the allowance for losses is assessed quarterly. Three primary factors influencing the level of our allowance for losses on customer financing receivables are customer credit ratings, default rates and collateral values. We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. Our rating categories are comparable to those used by the major credit rating agencies.

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Our financing receivable balances by internal credit rating category are shown below. 
Rating categories
September 30
2013

 
December 31
2012

BBB

$1,118

 

$1,201

BB
57

 
63

B
146

 
51

CCC
460

 
511

D
454

 
524

Other
101

 
92

Total carrying value of financing receivables

$2,336

 

$2,442

At September 30, 2013, our allowance primarily related to receivables with ratings of CCC and we applied default rates that averaged 46% to the exposure associated with those receivables.
In the fourth quarter of 2011, American Airlines Inc. (American Airlines) filed for Chapter 11 bankruptcy protection. We believe that our customer financing receivables from American Airlines of $454 are sufficiently collateralized such that we do not expect to incur losses related to those receivables and have not recorded an allowance for losses as of September 30, 2013 as a result of the bankruptcy.
Customer Financing Exposure Customer financing is collateralized by security in the related asset. The value of the collateral is closely tied to commercial airline performance and overall market conditions and may be subject to reduced valuation with market decline. Declines in collateral values are also a significant driver of our allowance for losses. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft. Our customer financing portfolio is primarily collateralized by out-of-production aircraft. The majority of customer financing carrying values are concentrated in the following aircraft models:
 
September 30
2013

 
December 31
2012

717 Aircraft ($449 and $465 accounted for as operating leases) (1)

$1,701

 

$1,781

757 Aircraft ($408 and $454 accounted for as operating leases) (1)
473

 
561

MD-80 Aircraft (Accounted for as sales-type finance leases) (1)
418

 
446

787 Aircraft (Accounted for as operating leases)
370

 
286

747 Aircraft ($230 and $221 accounted for as operating leases)
336

 
221

MD-11 Aircraft (Accounted for as operating leases) (1)
257

 
269

737 Aircraft ($144 and $193 accounted for as operating leases)
218

 
316

767 Aircraft ($62 and $63 accounted for as operating leases)
204

 
223

(1) 
Out-of-production aircraft.

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Note 7 – Investments
Our investments, which are recorded in Short-term and other investments or Investments, consisted of the following:
 
September 30
2013

 
December 31
2012

Time deposits

$5,790

 

$3,135

Pledged money market funds (1)
46

 
56

Available-for-sale investments
8

 
9

Equity method investments (2)
1,127

 
1,137

Restricted cash (3)
33

 
25

Other investments
34

 
35

Total

$7,038

 

$4,397

(1) 
Reflects amounts pledged in lieu of letters of credit as collateral in support of our workers’ compensation programs. These funds can become available within 30 days notice upon issuance of replacement letters of credit.
(2) 
Dividends received were $163 and $60 during the nine and three months ended September 30, 2013, and $276 and $155 during the same periods in the prior year.
(3) 
Restricted to pay life insurance premiums for certain employees and certain claims related to workers' compensation.
Note 8 – Other Assets
Sea Launch
At September 30, 2013 and December 31, 2012, Other assets included $356 of receivables related to our former investment in the Sea Launch venture which became payable by certain Sea Launch partners following Sea Launch’s bankruptcy filing in June 2009. The $356 includes $147 related to a payment made by us under a bank guarantee on behalf of Sea Launch and $209 related to loans (partner loans) we made to Sea Launch. The net amounts owed to Boeing by each of the partners are as follows: S.P. Koroley Rocket and Space Corporation Energia of Russia – $223, PO Yuzhnoye Mashinostroitelny Zavod of Ukraine – $89 and KB Yuzhnoye of Ukraine – $44.
Although each partner is contractually obligated to reimburse us for its share of the bank guarantee, the Russian and Ukrainian partners have raised defenses to enforcement and contested our claims. On October 19, 2009, we filed a Notice of Arbitration with the Stockholm Chamber of Commerce seeking reimbursement from the other Sea Launch partners of the $147 bank guarantee payment. On October 7, 2010, the arbitrator ruled that the Stockholm Chamber of Commerce lacked jurisdiction to hear the matter but did not resolve the merits of our claim. We filed a notice appealing the arbitrator’s ruling on January 11, 2011. The Ukrainian partners responded to our appeal on June 30, 2012 and the Russian partner responded on July 3, 2012. We filed replies on September 20, 2012. On February 1, 2013, we filed an action in the United States District Court for the Central District of California seeking reimbursement from the other Sea Launch partners of the $147 bank guarantee payment and the $209 partner loan obligations. We believe the partners have the financial wherewithal to pay and intend to pursue vigorously all of our rights and remedies. In the event we are unable to secure reimbursement of $147 related to our payment under the bank guarantee and $209 related to partner loans made to Sea Launch, we could incur additional pre-tax charges of up to $356.

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Note 9 – Commitments and Contingencies
Environmental
The following table summarizes environmental remediation activity during the nine months ended September 30, 2013 and 2012.
 
2013

 
2012

Beginning balance – January 1

$710

 

$758

Reductions for payments made
(69
)
 
(61
)
Changes in estimates
48

 
65

Ending balance – September 30

$689

 

$762

The liabilities recorded represent our best estimate or the low end of a range of reasonably possible costs expected to be incurred to remediate sites, including operation and maintenance over periods of up to 30 years. It is reasonably possible that we may incur charges that exceed these recorded amounts because of regulatory agency orders and directives, changes in laws and/or regulations, higher than expected costs and/or the discovery of new or additional contamination. As part of our estimating process, we develop a range of reasonably possible alternate scenarios which include the high end of a range of reasonably possible cost estimates for all remediation sites for which we have sufficient information based on our experience and existing laws and regulations. There are some potential remediation obligations where the costs of remediation cannot be reasonably estimated. At September 30, 2013 and December 31, 2012, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $905 and $865.
Product Warranties
The following table summarizes product warranty activity recorded during the nine months ended September 30, 2013 and 2012.
 
2013

 
2012

Beginning balance – January 1

$1,572

 

$1,046

Additions for current year deliveries
427

 
367

Reductions for payments made
(326
)
 
(244
)
Changes in estimates
(110
)
 
212

Ending balance – September 30

$1,563

 

$1,381

Commercial Aircraft Commitments
In conjunction with signing definitive agreements for the sale of new aircraft (Sale Aircraft), we have entered into trade-in commitments with certain customers that give them the right to trade in used aircraft at a specified price upon the purchase of Sale Aircraft. The probability that trade-in commitments will be exercised is determined by using both quantitative information from valuation sources and qualitative information from other sources. The probability of exercise is assessed quarterly, or as events trigger a change, and takes into consideration the current economic and airline industry environments. Trade-in commitments, which can be terminated by mutual consent with the customer, may be exercised only during the period specified in the agreement, and require advance notice by the customer.
Trade-in commitment agreements at September 30, 2013 have expiration dates from 2013 through 2023. At September 30, 2013, and December 31, 2012 total contractual trade-in commitments were $1,500 and $1,535. As of September 30, 2013 and December 31, 2012, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $227 and $108 and the fair value of the related trade-in aircraft was $227 and $108.

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Financing Commitments
Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, totaled $19,095 and $18,083 as of September 30, 2013 and December 31, 2012. The estimated earliest potential funding dates for these commitments as of September 30, 2013 are as follows:
  
Total

October through December 2013

$264

2014
2,774

2015
3,608

2016
3,791

2017
3,062

Thereafter
5,596

 

$19,095

As of September 30, 2013, all of these financing commitments related to customers we believe have less than investment-grade credit. We have concluded that no reserve for future potential losses is required for these financing commitments based upon the terms, such as collateralization and interest rates, under which funding would be provided.
Standby Letters of Credit and Surety Bonds
We have entered into standby letters of credit and surety bonds with financial institutions primarily relating to the guarantee of our future performance on certain contracts. Contingent liabilities on outstanding letters of credit agreements and surety bonds aggregated approximately $4,318 and $4,545 as of September 30, 2013 and December 31, 2012.
Commitments to ULA
We and Lockheed Martin Corporation have each committed to provide ULA with up to $527 of additional capital contributions in the event ULA does not have sufficient funds to make a required payment to us under an inventory supply agreement. See Note 5.
C-17
In September 2013, we decided to end production of C-17 aircraft in 2015 and recorded charges of $92, primarily for pension curtailment costs. We are currently producing C-17 aircraft at a rate of 10 per year and plan to continue producing at that rate through 2015. At September 30, 2013, our backlog included 8 international orders for C-17 aircraft that are scheduled for delivery through mid-2014. In addition, we believe it is probable that we will receive orders from international customers for 14 unsold aircraft that we are planning to produce in 2014 and 2015. We are currently incurring costs and have made commitments to suppliers related to the unsold aircraft. Should orders for the 14 unsold aircraft not materialize or no longer be considered probable we could incur charges to write-down inventory and/or record termination liabilities. At September 30, 2013, we had approximately $256 of capitalized precontract costs and $436 of potential termination liabilities to suppliers associated with the unsold aircraft.

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U.S. Government Defense Budget/Sequestration
In August 2011, the Budget Control Act (The Act) reduced the United States defense top line budget by approximately $490 billion through 2021. The Act further reduced the defense top line budget by an additional $500 billion through 2021 if Congress did not enact $1.2 trillion in further budget reductions by January 15, 2012. Should Congress in future years provide funding above the yearly spending limits of The Act, sequestration will automatically take effect and cancel any excess amount above the limits. The annual spending limits of The Act will remain in place unless and until the current law is changed.
On March 1, 2013, sequestration was implemented for the U.S. government fiscal year 2013 (FY2013) and the Office of Management and Budget (OMB) issued a report to Congress listing illustrative cuts which equal a 7.8% reduction in FY2013 non-exempt defense discretionary funding and a 5.0% reduction in non-exempt nondefense discretionary funding. However, as noted in the OMB report, the effective reduction in funds would be approximately 13% for non-exempt defense programs and 9% for non-exempt nondefense programs if implemented over the seven-month period from March 1, 2013 to September 30, 2013.
On June 10, 2013, the United States Department of Defense (U.S. DoD) released its Report on the Joint Committee Sequestration for FY2013, which summarized the budgetary resources sequestered at the U.S. DoD's program, project and activity levels.
On August 20, 2013, OMB issued a Sequestration Update Report for FY2014 identifying enforcement of The Act's discretionary spending caps. Under these caps the U.S. DoD will be subject to approximately $52 billion in reductions from the totals contained in the President's FY2014 budget proposal.
The lack of agreement between Congress and the Administration to end sequestration, the OMB reports, and communications with the U.S. DoD indicate that there are likely to be reductions to our defense business. However, at this time we cannot determine how sequestration will impact specific programs and contracts at Boeing. Reductions, cancellations or delays impacting existing contracts or programs could have a material effect on our results of operations, financial position and/or cash flows. While U.S. DoD would sustain the bulk of sequestration cuts affecting the Company, civil programs and agencies could be significantly impacted as well.
BDS Fixed-Price Development Contracts
Fixed-price development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work. BDS fixed-price contracts with significant development work include Airborne Early Warning and Control, Family of Advanced Beyond Line-of-Sight Terminals, India P-8I, Saudi Arabia F-15, USAF KC-46A Tanker and commercial and military satellites. The operational and technical complexities of these contracts create financial risk, which could trigger termination provisions, order cancellations or other financially significant exposure. Changes to cost and revenue estimates could also result in lower margins or a material charge for reach-forward losses during the next 12 months.
Recoverable Costs on Government Contracts  
Our final incurred costs for each year are subject to audit and review for allowability by the U.S. government, which can result in payment demands related to costs they believe should be disallowed. We work with the U.S government to assess the merits of claims and where appropriate reserve for amounts disputed. If we are unable to satisfactorily resolve disputed costs, we could be required to record an earnings charge and/or provide refunds to the U.S. government.
747 and 787 Commercial Airplane Programs
The development and initial production of new commercial airplanes and new commercial airplane derivatives, which include the 747 and 787, entail significant commitments to customers and suppliers as well as substantial investments in working capital, infrastructure and research and development. The 747 and 787 programs have gross margins that are breakeven or near breakeven at September 30, 2013.

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Continued weakness in the air cargo market and lower-than-expected demand for large commercial passenger aircraft have resulted in pricing pressures and fewer 747 orders than anticipated. We continue to have a number of unsold 747 production positions. If market and production risks cannot be mitigated, the program could face a reach-forward loss that may be material.
The cumulative impacts of production challenges, change incorporation, schedule delays and customer and supplier impacts have created significant pressure on 787 program profitability. If risks related to this program, including risks associated with planned production rate increases, or introducing the 787-9 and 787-10 derivatives as scheduled cannot be mitigated, the program could face additional customer claims and/or supplier assertions, as well as a reach-forward loss that may be material.
Note 10 – Arrangements with Off-Balance Sheet Risk
We enter into arrangements with off-balance sheet risk in the normal course of business, primarily in the form of guarantees.
The following table provides quantitative data regarding our third party guarantees. The maximum potential payments represent a “worst-case scenario,” and do not necessarily reflect amounts that we expect to pay. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees. The carrying amount of liabilities represents the amount included in Accrued liabilities.
  
Maximum
Potential Payments
 
Estimated Proceeds from
Collateral/Recourse
 
Carrying Amount of
 Liabilities
 
September 30
2013

December 31
2012

 
September 30
2013

December 31
2012

 
September 30
2013

December 31
2012

Contingent repurchase commitments

$1,909


$2,065

 

$1,906


$2,065

 

$5


$5

Indemnifications to ULA:
 
 
 
 
 
 
 
 
Contributed Delta program launch inventory
127

137

 
 
 
 
 
 
Contract pricing
261

261

 
 
 
 
7

7

Other Delta contracts
227

232

 
 
 
 
8

8

Other indemnifications
111

137

 
 
 
 
28

32

Contingent Repurchase Commitments The repurchase price specified in contingent repurchase commitments is generally lower than the expected fair value at the specified repurchase date. Estimated proceeds from collateral/recourse in the table above represent the lower of the contracted repurchase price or the expected fair value of each aircraft at the specified repurchase date.
Indemnifications to ULA In 2006, we agreed to indemnify ULA through December 31, 2020 against potential non-recoverability and non-allowability of $1,360 of Boeing Delta launch program inventory included in contributed assets plus $1,860 of inventory subject to an inventory supply agreement which ends on March 31, 2021. Since inception, ULA has consumed $1,233 of the $1,360 of inventory that was contributed by us and has yet to consume $127. ULA has made advance payments of $1,380 to us and we have recorded revenues and cost of sales of $1,037 under the inventory supply agreement through September 30, 2013.
We agreed to indemnify ULA against potential losses that ULA may incur in the event ULA is unable to obtain certain additional contract pricing from the U.S.Air Force (USAF) for four satellite missions. We believe ULA is entitled to additional contract pricing. In December 2008, ULA submitted a claim to the USAF to re-price the contract value for two satellite missions. In March 2009, the USAF issued a denial of that claim. In June 2009, ULA filed a notice of appeal, and in October 2009, ULA filed a complaint before the Armed Services Board of Contract Appeals (ASBCA) for a contract adjustment for the price of the two satellite missions. In September 2009, the USAF exercised its option for a third satellite mission. During the third quarter of 2010, ULA submitted a claim to the USAF to re-price the contract value of the third mission. The USAF did not exercise an option for a fourth mission prior to the expiration. In March 2011, ULA filed a notice of appeal before the ASBCA, seeking to re-price the third mission. A hearing before the ASBCA has been scheduled

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for November 18, 2013. On March 1, 2013, the USAF filed two motions for summary judgment before the ASBCA. ULA's oppositions to these motions were filed on April 19, 2013 and USAF filed its replies to ULA's oppositions on May 10, 2013. There is no deadline for the ASBCA to rule on these motions. If ULA is unsuccessful in obtaining additional pricing, we may be responsible for a portion of the shortfall and may record up to $278 in pre-tax losses associated with the three missions, representing up to $261 for the indemnification payment and up to $17 for our portion of additional contract losses incurred by ULA.
Potential payments for Other Delta contracts include $85 related to deferred support costs. In June 2011, the Defense Contract Management Agency (DCMA) notified ULA that it had determined that $271 of deferred support costs are not recoverable under government contracts. In December 2011, the DCMA notified ULA of the potential non-recoverability of an additional $114 of deferred production costs. The DCMA has not yet issued a final decision related to the recoverability of the $114. ULA and Boeing believe that all costs are recoverable and in November 2011, ULA filed a certified claim with the USAF for collection of deferred support and production costs. The USAF issued a final decision denying ULA’s certified claim in May 2012. On June 14, 2012, Boeing and ULA filed a suit in the Court of Federal Claims seeking recovery of the deferred support and production costs from the U.S. government. On November 9, 2012, the U.S. government filed an answer to our claim and asserted a counterclaim for credits that it alleges were offset by deferred support cost invoices. We believe that the U.S. government’s counterclaim is without merit, and have filed an answer challenging it on multiple grounds. The litigation proceeds, with no trial date having yet been set. If, contrary to our belief, it is determined that some or all of the deferred support or production costs are not recoverable, we could be required to record pre-tax losses and make indemnification payments to ULA for up to $317 of the costs questioned by the DCMA.
Other Indemnifications As part of the 2004 sale agreement with General Electric Capital Corporation related to the sale of Boeing Capital’s (BCC) Commercial Financial Services business, BCC is involved in a loss sharing arrangement for losses on transferred portfolio assets, such as asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. At September 30, 2013 and December 31, 2012, our maximum future cash exposure to losses associated with the loss sharing arrangement was $111 and $137 and our accrued liability under the loss sharing arrangement was $28 and $32.
In conjunction with our sales of Electron Dynamic Devices, Inc. and Rocketdyne Propulsion and Power businesses and our Commercial Airplanes facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma, we agreed to indemnify, for an indefinite period, the buyers for costs relating to pre-closing environmental conditions and certain other items. It is impossible to assess the potential number of future claims that may be asserted under these indemnifications, nor the amounts thereof (if any). As a result, we cannot estimate the maximum potential amount of future payments under these indemnities and therefore, no liability has been recorded. To the extent that claims have been made under these indemnities and/or are probable and reasonably estimable, liabilities associated with these indemnities are included in the environmental liability disclosure in Note 9.
Note 11 – Debt
On May 3, 2013, we issued $350 of fixed rate senior notes due May 15, 2018 (Fixed Rate Senior Notes) and $150 of floating rate senior notes due November 3, 2014 (Floating Rate Senior Notes). The Fixed Rate Senior Notes bear an annual interest rate of 0.95%, and may be redeemed at our option at any time for a redemption price equal to the full principal amount plus any accrued and unpaid interest and a make-whole premium. The Floating Rate Senior Notes bear an annual interest rate of three-month LIBOR plus one basis point, and are not redeemable prior to maturity. The notes are unsecured senior obligations and rank equally in right of payment with our existing and future unsecured and unsubordinated indebtedness. The net proceeds of the issuance totaling $494, after deducting underwriting discounts, commissions and offering expenses, were used to fund Boeing Capital Corporation.

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Note 12 – Postretirement Plans
The components of net periodic benefit cost were as follows:
 
Nine months ended September 30
 
Three months ended September 30
Pension Plans
2013

 
2012

 
2013

 
2012

Service cost

$1,414

 

$1,233

 

$468

 

$411

Interest cost
2,175

 
2,253

 
713

 
751

Expected return on plan assets
(2,907
)
 
(2,874
)
 
(969
)
 
(958
)
Amortization of prior service costs
150

 
168

 
52

 
56

Recognized net actuarial loss
1,668

 
1,452

 
530

 
484

Settlement and curtailment loss
104

 
10

 
84

 


Net periodic benefit cost

$2,604

 

$2,242

 

$878

 

$744

Net periodic benefit cost included in Earnings from operations

$2,319

 

$1,831

 

$775

 

$583

 
Nine months ended September 30
 
Three months ended September 30
Other Postretirement Benefit Plans
2013

 
2012

 
2013

 
2012

Service cost

$111

 

$108

 

$37

 

$36

Interest cost
198

 
237

 
65

 
79

Expected return on plan assets
(5
)
 
(6
)
 
(1
)
 
(2
)
Amortization of prior service costs
(135
)
 
(147
)
 
(45
)
 
(49
)
Recognized net actuarial loss
72

 
90

 
24

 
30

Settlement and curtailment gain


 
(2
)
 

 

Net periodic benefit cost

$241

 

$280

 

$80

 

$94

Net periodic benefit cost included in Earnings from operations

$269

 

$414

 

$90

 

$132

During each of the nine-month periods ended September 30, 2013 and 2012, we made discretionary pension contributions of $1,513.
Note 13 – Share-Based Compensation and Other Compensation Arrangements
Stock Options
On February 25, 2013, we granted to our executives 6,591,968 options with an exercise price equal to the fair market value of our stock on the date of grant and which expire 10 years after the date of grant. The stock options vest over a period of three years, with 34% vesting after the first year, 33% vesting after the second year and the remaining 33% vesting after the third year. The grant-date fair value of each stock option was $15.85.
Restricted Stock Units
On February 25, 2013, we granted to our executives 1,375,414 restricted stock units (RSUs) as part of our long-term incentive program with a grant date fair value of $75.97 per share. The RSUs granted under this program will vest and settle in common stock (on a one-for-one basis) on the third anniversary of the grant date.

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Performance Awards
On February 25, 2013, we granted to our executives Performance Awards with the payout based on the achievement of financial goals for the three-year period ending December 31, 2015. The minimum payout amount is $0 and the maximum payout is $276.
Note 14 – Shareholders' Equity
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss (AOCI) by component for the nine and three months ended September 30, 2013 were as follows:
 
Currency Translation Adjustments

 
Unrealized Gains and Losses on Certain Investments

 
Unrealized Gains and Losses on Derivative Instruments

 
Defined Benefit Pension Plans & Other Postretirement Benefits

 
Total (1)

Balance January 1, 2013

$214

 

($8
)
 

$86

 

($17,708
)
 

($17,416
)
OCI before reclassifications
(46
)
 

 
(54
)
 
135

 
35

Amounts reclassified from AOCI

 

 
(13
)
 
1,207

(2) 
1,194

Net current period OCI
(46
)
 

 
(67
)
 
1,342

 
1,229

Balance September 30, 2013

$168

 

($8
)
 

$19

 

($16,366
)
 

($16,187
)
Balance June 30, 2013

$126

 

($8
)
 

($6
)
 

($16,906
)
 

($16,794
)
OCI before reclassifications
42

 

 
35

 
102

 
179

Amounts reclassified from AOCI

 

 
(10
)
 
438

(2) 
428

Net current period OCI
42

 

 
25

 
540

 
607

Balance September 30, 2013

$168

 

($8
)
 

$19

 

($16,366
)
 

($16,187
)
(1) 
Net of tax.
(2) 
Primarily relates to amortization of actuarial gains/losses for the nine and three months ended September 30, 2013 totaling $1,135 and $380 (net of tax of $644 and $213) which is included in the net periodic pension cost of which a portion is allocated to production as inventoried costs.
Note 15 – Derivative Financial Instruments
Cash Flow Hedges
Our cash flow hedges include foreign currency forward contracts, foreign currency option contracts, commodity swaps, and commodity purchase contracts. We use foreign currency forward and option contracts to manage currency risk associated with certain transactions, specifically forecasted sales and purchases made in foreign currencies. Our foreign currency contracts hedge forecasted transactions principally occurring within five years in the future, with certain contracts hedging transactions through 2023. We use commodity derivatives, such as swaps and fixed-price purchase commitments to hedge against potentially unfavorable price changes for items used in production. Our commodity contracts hedge forecasted transactions through 2016.

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Table of Contents

Fair Value Hedges
Interest rate swaps under which we agree to pay variable rates of interest are designated as fair value hedges of fixed-rate debt. The net change in fair value of the derivatives and the hedged items is reported in Boeing Capital interest expense.
Derivative Instruments Not Receiving Hedge Accounting Treatment
We also hold certain derivative instruments, primarily foreign currency forward contracts, for risk management purposes that are not receiving hedge accounting treatment.
Notional Amounts and Fair Values
The notional amounts and fair values of derivative instruments in the Condensed Consolidated Statements of Financial Position were as follows:
  
Notional amounts (1)
Other assets
Accrued liabilities
  
September 30
2013

December 31
2012

September 30
2013

December 31
2012

September 30
2013

December 31
2012

Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts

$2,309


$2,310


$134


$202


($41
)

($16
)
Interest rate contracts
313

388

16

26



 
Commodity contracts
59

99



(52
)
(71
)
Derivatives not receiving hedge accounting treatment:
 
 
 
 
 
 
Foreign exchange contracts
342

412

21

3

(35
)
(42
)
Commodity contracts
10

15





(6
)
(8
)
Total derivatives
3,033

3,224

171

231

(134
)
(137
)
Netting arrangements
 
 
(51
)
(53
)
51

53

Net recorded balance
 
 

$120


$178


($83
)

($84
)
(1) 
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.
Gains/(losses) associated with our cash flow and undesignated hedging transactions and their effect on Other comprehensive income/(loss) and Net earnings were as follows: 
  
Nine months ended September 30
 
Three months ended September 30
  
2013

 
2012

 
2013

 
2012

Effective portion recognized in Other comprehensive income/(loss), net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts

($51
)
 

$35

 

$36

 

$36

Commodity contracts
(3
)
 
(10
)
 
(1
)
 
1

Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts
28

 
18

 
14

 
8

Commodity contracts
(15
)
 
(26
)
 
(4
)
 
(8
)
Forward points recognized in Other income/(expense), net:
 
 
 
 
 
 
 
Foreign exchange contracts
24

 
16

 
2

 
4

Undesignated derivatives recognized in Other income/(expense), net:
 
 
 
 
 
 
 
Foreign exchange contracts
13

 
(11
)
 
(1
)
 
(1
)

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Table of Contents

Based on our portfolio of cash flow hedges, we expect to reclassify gains of $4 (pre-tax) out of Accumulated other comprehensive loss into earnings during the next 12 months. Ineffectiveness related to our hedges recognized in Other income/(expense) was insignificant for the nine and three months ended September 30, 2013 and 2012.
We have derivative instruments with credit-risk-related contingent features. For foreign exchange contracts with original maturities of at least five years, our derivative counterparties could require settlement if we default on our five-year credit facility. For commodity contracts, our counterparties could require collateral posted in an amount determined by our credit ratings. The fair value of foreign exchange and commodity contracts that have credit-risk-related contingent features that are in a net liability position at September 30, 2013 was $10. At September 30, 2013, there was no collateral posted related to our derivatives.
Note 16 – Fair Value Measurements
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. 
 
September 30, 2013
 
December 31, 2012
 
Total

 
Level 1

 
Level 2

 
Level 3

 
Total

 
Level 1

 
Level 2

 
Level 3

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds

$4,744

 

$4,744

 
 
 
 
 

$4,534

 

$4,534

 
 
 
 
Available-for-sale investments
8

 
6

 
 
 

$2

 
9

 
6

 
 
 

$3

Derivatives
120

 
 
 

$120

 
 
 
178

 
 
 

$178

 
 
Total assets

$4,872

 

$4,750

 

$120

 

$2

 

$4,721

 

$4,540

 

$178

 

$3

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives

($83
)
 
 
 

($83
)
 
 
 

($84
)
 
 
 

($84
)
 
 
Total liabilities

($83
)
 

 

($83
)
 

 

($84
)
 

 

($84
)
 

Money market funds and available-for-sale equity securities are valued using a market approach based on the quoted market prices of identical instruments. Available-for-sale debt investments are primarily valued using an income approach based on benchmark yields, reported trades and broker/dealer quotes.
Derivatives include foreign currency, commodity and interest rate contracts. Our foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the present value of the commodity index prices less the contract rate multiplied by the notional amount. The fair value of our interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve.
Certain assets have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents the nonrecurring losses recognized for the nine months ended September 30 and the fair value and asset classification of the related assets as of the impairment date:
  
2013
 
2012
 
Fair
Value

 
Total
Losses

 
Fair
Value

 
Total
Losses

Operating lease equipment

$28

 

($21
)
 

$25

 

($31
)
Property, plant and equipment
39

 
(12
)
 
19

 
(21
)
Total

$67

 

($33
)
 

$44

 

($52
)

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Table of Contents

The fair value of the impaired equipment under operating lease is derived by calculating a median collateral value from a consistent group of third party aircraft value publications. The values provided by the third party aircraft publications are derived from their knowledge of market trades and other market factors. Management reviews the publications quarterly to assess the continued appropriateness and consistency with market trends. Under certain circumstances, we adjust values based on the attributes and condition of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by third party publications, or on the expected net sales price for the aircraft. Property, plant and equipment was primarily valued using an income approach based on the discounted cash flows associated with the underlying assets.
For Level 3 assets that were measured at fair value on a nonrecurring basis during the nine months ended September 30, 2013, the following table presents the fair value of those assets as of the measurement date, valuation techniques and related unobservable inputs of those assets.
 
Fair
Value
 
Valuation
Technique(s)
 
Unobservable Input