2014 06 Jun 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 June 30, 2014
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 July 16, 2014, there were 720,613,065 shares of common stock, $5.00 par value, issued and outstanding.

Table of Contents

THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended June 30, 2014
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)
Six months ended June 30
 
Three months ended June 30
  
2014

 
2013

 
2014


2013

Sales of products

$37,542

 

$35,556

 

$19,527



$19,238

Sales of services
4,968

 
5,152

 
2,518


2,577

Total revenues
42,510

 
40,708

 
22,045


21,815

 


 


 
 
 
 
Cost of products
(31,932
)
 
(30,165
)
 
(16,674
)

(16,437
)
Cost of services
(3,999
)
 
(4,004
)
 
(1,979
)

(1,995
)
Boeing Capital interest expense
(35
)
 
(37
)
 
(17
)

(18
)
Total costs and expenses
(35,966
)
 
(34,206
)
 
(18,670
)

(18,450
)
 
6,544

 
6,502

 
3,375


3,365

Income from operating investments, net
120

 
88

 
61


43

General and administrative expense
(1,795
)
 
(1,900
)
 
(918
)

(929
)
Research and development expense, net
(1,542
)
 
(1,468
)
 
(733
)

(763
)
Gain on dispositions, net
2

 
22

 
2

 


Earnings from operations
3,329

 
3,244

 
1,787


1,716

Other income, net
20

 
22

 
11


13

Interest and debt expense
(173
)
 
(195
)
 
(81
)

(96
)
Earnings before income taxes
3,176

 
3,071

 
1,717


1,633

Income tax expense
(558
)
 
(878
)
 
(64
)

(546
)
Net earnings from continuing operations
2,618

 
2,193

 
1,653


1,087

Net gain on disposal of discontinued operations, net of taxes of $0, $0, $0 and $0


 
1

 



1

Net earnings

$2,618



$2,194

 

$1,653



$1,088

Basic earnings per share from continuing operations

$3.55

 

$2.88

 

$2.26

 

$1.43

Net gain on disposal of discontinued operations, net of taxes

 

 

 

Basic earnings per share

$3.55

 

$2.88

 

$2.26



$1.43

Diluted earnings per share from continuing operations

$3.50

 

$2.85

 

$2.24

 

$1.41

Net gain on disposal of discontinued operations, net of taxes

 

 

 

Diluted earnings per share

$3.50

 

$2.85

 

$2.24



$1.41

Cash dividends paid per share

$1.46

 

$0.97

 

$0.73



$0.485

Weighted average diluted shares (millions)
747.4

 
770.1

 
740.1


771.8

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)
Six months ended June 30
 
Three months ended June 30
 
2014

 
2013

 
2014

 
2013

Net earnings

$2,618

 

$2,194

 

$1,653

 

$1,088

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
38

 
(88
)
 
21

 
(65
)
Unrealized gain on certain investments, net of tax of ($2), $0, ($1) and $0
3

 


 
1

 

Unrealized gain/(loss) on derivative instruments:
 
 
 
 
 
 
 
Unrealized gain/(loss) arising during period, net of tax of ($14), $51, ($20) and $36
25

 
(89
)
 
36

 
(63
)
Reclassification adjustment for losses/(gains) included in net earnings, net of tax of $0, $3, $3 and $4
1

 
(3
)
 
(4
)
 
(5
)
Total unrealized gain/(loss) on derivative instruments, net of tax
26

 
(92
)
 
32

 
(68
)
Defined benefit pension plans and other postretirement benefits:
 
 
 
 
 
 
 
Amortization of prior service cost included in net periodic pension cost, net of tax of ($6), ($3), ($3) and ($2)
11

 
5

 
5

 
2

Net actuarial gain arising during the period, net of tax of ($347), ($16), ($1) and $0
622

 
30

 
2

 

Amortization of actuarial losses included in net periodic pension cost, net of tax of ($185), ($431), ($91) and ($216)
333

 
755

 
164

 
377

Settlements and curtailments included in net income, net of tax of ($113), ($5), $0 and $0
202

 
9

 
(1
)
 

Pension and postretirement benefit related to our equity method investments, net of tax $0 ($1), $0 and $0


 
3

 

 
1

Total defined benefit pension plans and other postretirement benefits, net of tax
1,168

 
802

 
170

 
380

Other comprehensive income, net of tax
1,235

 
622

 
224

 
247

Comprehensive income related to noncontrolling interests
6

 
21

 
3

 
19

Comprehensive income, net of tax

$3,859

 

$2,837

 

$1,880

 

$1,354

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)
June 30
2014

 
December 31
2013

Assets
 
 
 
Cash and cash equivalents

$7,533

 

$9,088

Short-term and other investments
3,797

 
6,170

Accounts receivable, net
7,694

 
6,546

Current portion of customer financing, net
237

 
344

Deferred income taxes
15

 
14

Inventories, net of advances and progress billings
46,251

 
42,912

Total current assets
65,527

 
65,074

Customer financing, net
3,180

 
3,627

Property, plant and equipment, net of accumulated depreciation of $15,424 and $15,070
10,449

 
10,224

Goodwill
5,139

 
5,043

Acquired intangible assets, net
3,004

 
3,052

Deferred income taxes
2,664

 
2,939

Investments
1,196

 
1,204

Other assets, net of accumulated amortization of $420 and $448
1,578

 
1,500

Total assets

$92,737

 

$92,663

Liabilities and equity
 
 
 
Accounts payable

$11,060

 

$9,498

Accrued liabilities
13,222

 
14,131

Advances and billings in excess of related costs
21,244

 
20,027

Deferred income taxes and income taxes payable
6,222

 
6,267

Short-term debt and current portion of long-term debt
1,591

 
1,563

Total current liabilities
53,339

 
51,486

Accrued retiree health care
6,506

 
6,528

Accrued pension plan liability, net
9,812

 
10,474

Non-current income taxes payable
740

 
156

Other long-term liabilities
864

 
950

Long-term debt
7,292

 
8,072

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
4,524

 
4,415

Treasury stock, at cost – 290,904,517 and 264,882,461 shares
(21,381
)
 
(17,671
)
Retained earnings
34,516

 
32,964

Accumulated other comprehensive loss
(8,659
)
 
(9,894
)
Total shareholders’ equity
14,061

 
14,875

Noncontrolling interests
123

 
122

Total equity
14,184

 
14,997

Total liabilities and equity

$92,737

 

$92,663

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)
Six months ended June 30
  
2014


2013

Cash flows – operating activities:
 

 
Net earnings

$2,618



$2,194

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

 
Non-cash items – 
 

 
Share-based plans expense
101


107

Depreciation and amortization
900


865

Investment/asset impairment charges, net
36


26

Customer financing valuation benefit
(26
)

(5
)
Gain on disposal of discontinued operations


 
(1
)
Gain on dispositions, net
(2
)
 
(22
)
Other charges and credits, net
87


31

Excess tax benefits from share-based payment arrangements
(97
)

(47
)
Changes in assets and liabilities – 
 

 
Accounts receivable
(1,286
)

(550
)
Inventories, net of advances and progress billings
(3,402
)

(2,614
)
Accounts payable
1,783


848

Accrued liabilities
(913
)

(682
)
Advances and billings in excess of related costs
1,217


1,472

Income taxes receivable, payable and deferred
394


608

Other long-term liabilities
(88
)

(60
)
Pension and other postretirement plans
1,118


1,638

Customer financing, net
466


188

Other
15


(5
)
Net cash provided by operating activities
2,921


3,991

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(946
)
 
(976
)
Property, plant and equipment reductions
17

 
44

Acquisitions, net of cash acquired
(163
)
 
(26
)
Contributions to investments
(5,657
)
 
(7,045
)
Proceeds from investments
8,030

 
4,632

Net cash provided/(used) by investing activities
1,281

 
(3,371
)
Cash flows – financing activities:
 
 
 
New borrowings
85

 
531

Debt repayments
(854
)
 
(1,361
)
Payments to noncontrolling interests
(12
)
 


Repayments of distribution rights and other asset financing
(184
)
 
(139
)
Stock options exercised, other
261

 
484

Excess tax benefits from share-based payment arrangements
97

 
47

Employee taxes on certain share-based payment arrangements
(88
)
 
(57
)
Common shares repurchased
(3,998
)
 
(1,000
)
Dividends paid
(1,071
)
 
(735
)
Net cash used by financing activities
(5,764
)
 
(2,230
)
Effect of exchange rate changes on cash and cash equivalents
7

 
(37
)
Net decrease in cash and cash equivalents
(1,555
)
 
(1,647
)
Cash and cash equivalents at beginning of year
9,088

 
10,341

Cash and cash equivalents at end of period

$7,533

 

$8,694

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
Interests

Total

Balance at January 1, 2013

$5,061


$4,122


($15,937
)

$30,037


($17,416
)

$100


$5,967

Net earnings
 
 
 
2,194

 
21

2,215

Other comprehensive income, net of tax of ($403)
 
 
 
 
622

 
622

Share-based compensation and related dividend equivalents
 
111

 
(7
)
 
 
104

Excess tax pools
 
27

 
 
 
 
27

Treasury shares issued for stock options exercised, net
 
45

448

 
 
 
493

Treasury shares issued for other share-based plans, net
 
(124
)
77

 
 
 
(47
)
Common shares repurchased
 
 
(1,000
)
 
 
 
(1,000
)
Cash dividends declared ($0.97 per share)
 
 
 
(734
)
 
 
(734
)
Changes in noncontrolling interests
 
 
 
 
 
(15
)
(15
)
Balance at June 30, 2013

$5,061


$4,181


($16,412
)

$31,490


($16,794
)

$106


$7,632

 
 
 
 
 
 
 
 
Balance at January 1, 2014

$5,061


$4,415


($17,671
)

$32,964


($9,894
)

$122


$14,997

Net earnings
 
 
 
2,618

 
6

2,624

Other comprehensive income, net of tax of ($667)
 
 
 
 
1,235

 
1,235

Share-based compensation and related dividend equivalents
 
108

 
(10
)
 
 
98

Excess tax pools
 
97

 
 
 
 
97

Treasury shares issued for stock options exercised, net
 
18

245

 
 
 
263

Treasury shares issued for other share-based plans, net
 
(114
)
43

 
 
 
(71
)
Common shares repurchased
 
 
(3,998
)
 
 
 
(3,998
)
Cash dividends declared ($1.46 per share)
 
 
 
(1,056
)
 
 
(1,056
)
Changes in noncontrolling interests
 
 
 
 
 
(5
)
(5
)
Balance at June 30, 2014

$5,061


$4,524


($21,381
)

$34,516


($8,659
)

$123


$14,184

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)
Six months ended June 30
 
Three months ended June 30

2014

 
2013

 
2014

 
2013

Revenues:
 
 
 
 



Commercial Airplanes

$27,041

 

$24,314

 

$14,304



$13,624

Defense, Space & Security:
 
 
 
 



Boeing Military Aircraft
6,981

 
7,621

 
3,523


3,641

Network & Space Systems
3,796

 
4,009

 
1,920


2,049

Global Services & Support
4,603

 
4,666

 
2,304


2,496

Total Defense, Space & Security
15,380

 
16,296

 
7,747


8,186

Boeing Capital
172

 
209

 
90


104

Other segment
42

 
54

 
22


27

Unallocated items and eliminations
(125
)
 
(165
)
 
(118
)

(126
)
Total revenues

$42,510

 

$40,708

 

$22,045



$21,815

Earnings from operations:
 
 
 
 



Commercial Airplanes

$3,052

 

$2,672

 

$1,550



$1,453

Defense, Space & Security:
 
 
 
 



Boeing Military Aircraft
497

 
813

 
165


386

Network & Space Systems
318

 
293

 
150


137

Global Services & Support
545

 
502

 
267


253

Total Defense, Space & Security
1,360

 
1,608

 
582


776

Boeing Capital
77

 
63

 
33


19

Other segment
(110
)

(101
)
 
(48
)

(43
)
Unallocated items and eliminations
(1,050
)

(998
)
 
(330
)

(489
)
Earnings from operations
3,329

 
3,244

 
1,787


1,716

Other income, net
20

 
22

 
11


13

Interest and debt expense
(173
)
 
(195
)
 
(81
)

(96
)
Earnings before income taxes
3,176

 
3,071

 
1,717


1,633

Income tax expense
(558
)
 
(878
)
 
(64
)

(546
)
Net earnings from continuing operations
2,618

 
2,193

 
1,653


1,087

Net gain on disposal of discontinued operations, net of taxes of $0, $0, $0 and $0


 
1

 



1

Net earnings

$2,618

 

$2,194

 

$1,653



$1,088

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 17 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 June 30, 2014 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 2013 Annual Report on Form 10-K. Effective during the first quarter of 2014, certain programs previously reported in the Boeing Military Aircraft (BMA) segment were realigned to the Global Services & Support (GS&S) segment. See Note 17. Business segment data for 2013 have been adjusted to reflect the realignment.
Standards Issued and Not Yet Implemented
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. For Boeing the new standard will be effective January 1, 2017 and the Company is currently evaluating the impacts of adoption and the implementation approach to be used.
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 three months ended June 30, 2014, higher estimated costs to complete the KC-46A Tanker contract for the U.S. Air Force resulted in a reach-forward loss of $425 of which the Commercial Airplanes segment recorded $238 and the BMA segment recorded $187. For the six and three months ended June 30, 2014, net unfavorable cumulative catch-up adjustments, including reach-forward losses, across all contracts decreased Earnings from operations by $145 and $312 and diluted earnings per share by $0.16 and $0.41. For the six and three months ended June 30, 2013 net favorable cumulative catch-up adjustments, including reach-forward losses, across all contracts increased Earnings by $164 and $59 and diluted earnings per share by $0.15 and $0.04.

7
Table of Contents

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.
The elements used in the computation of basic and diluted earnings per share were as follows:
(In millions - except per share amounts)
Six months ended June 30
 
Three months ended June 30
 
2014

 
2013

 
2014

 
2013

Net earnings

$2,618

 

$2,194

 

$1,653

 

$1,088

Less: earnings available to participating securities
3

 
4

 
1

 
1

Net earnings available to common shareholders

$2,615

 

$2,190

 

$1,652

 

$1,087

Basic
 
 
 
 
 
 
 
Basic weighted average shares outstanding
738.3

 
763.2

 
731.1

 
763.3

Less: participating securities
1.3

 
2.0

 
1.3

 
1.9

Basic weighted average common shares outstanding
737.0

 
761.2

 
729.8

 
761.4

Diluted
 
 
 
 
 
 
 
Basic weighted average shares outstanding
738.3

 
763.2

 
731.1

 
763.3

Dilutive potential common shares(1)
9.1

 
6.9

 
9.0

 
8.5

Diluted weighted average shares outstanding
747.4

 
770.1

 
740.1

 
771.8

Less: participating securities
1.3

 
2.0

 
1.3

 
1.9

Diluted weighted average common shares outstanding
746.1

 
768.1

 
738.8

 
769.9

Net earnings per share:
 
 
 
 
 
 
 
Basic

$3.55

 

$2.88

 

$2.26

 

$1.43

Diluted
3.50

 
2.85

 
2.24

 
1.41

(1) 
Diluted EPS includes any dilutive impact of stock options, restricted stock units, performance-based restricted stock units and performance awards.
The following table includes the number of shares that may be dilutive potential common shares in the future. These shares were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance condition was not met.
(Shares in millions)
Six months ended June 30
 
Three months ended June 30
 
2014

 
2013

 
2014

 
2013

Stock options


 
9.6

 


 


Performance awards
5.6

 
5.2

 
5.1

 
4.5

Performance-based restricted stock units
1.3

 


 
1.3

 



8
Table of Contents

Note 3 – Income Taxes
Our effective income tax rates were 17.6% and 3.7% for the six and three months ended June 30, 2014 and 28.6% and 33.4% for the same periods in the prior year. The effective tax rates for the six and three months ended June 30, 2014 are lower than the comparable prior year periods primarily due to an incremental tax benefit of $265 recorded in the second quarter of 2014 that related to the application of a 2012 Federal Court of Claims decision which held that the tax basis in certain assets could be increased and realized upon the assets' disposition. In addition, during the second quarter of 2014, tax benefits of $116 and $143 were recorded as a result of the 2007-2008 and 2009-2010 federal tax audit settlements. These benefits are partially offset by the absence of the U.S. research and development tax credit (research tax credit). The research tax credit was effective for 2013, but due to the expiration at the end of 2013, no tax benefit is recorded in 2014. Furthermore, in the first quarter of 2013, Congress retroactively reinstated the research tax credit for 2012, which reduced income tax expense by $145. If Congress extends the research tax credit for 2014, there will be a favorable impact on our effective income tax rate.
The total amount of unrecognized tax benefits increased from $1,141 as of December 31, 2013 to $1,420 as of June 30, 2014 primarily due to the tax basis adjustment, partially offset by the settlement of the 2007-2008 and 2009-2010 federal tax audits.
Federal income tax audits have been settled for all years prior to 2011. The Internal Revenue Service (IRS) will begin the 2011-2012 federal tax audit in the third quarter of 2014. We are also subject to examination in major state and international jurisdictions for the 2001-2013 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Note 4 – Accounts Receivable, net
Accounts receivable, net as of June 30, 2014, 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:
 
June 30
2014

 
December 31
2013

Long-term contracts in progress

$13,250

 

$12,608

Commercial aircraft programs
54,256

 
48,065

Commercial spare parts, used aircraft, general stock materials and other
7,295

 
7,793

Inventory before advances and progress billings
74,801

 
68,466

Less advances and progress billings
(28,550
)
 
(25,554
)
Total

$46,251

 

$42,912


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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 June 30, 2014, the inventory balance was $322 (net of advances of $307) and $425 (net of advances of $331) at December 31, 2013. At June 30, 2014, $333 of this inventory related to unsold launches. See Note 10.
Capitalized precontract costs of $1,074 and $520 at June 30, 2014 and December 31, 2013, are included in inventories.
Commercial Aircraft Programs
At June 30, 2014 and December 31, 2013, commercial aircraft programs inventory included the following amounts related to the 787 program: $31,880 and $27,576 of work in process (including deferred production costs of $24,242 and $21,620), $2,320 and $2,189 of supplier advances, and $3,442 and $3,377 of unamortized tooling and other non-recurring costs. At June 30, 2014, $18,367 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 $9,317 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
At June 30, 2014 and December 31, 2013, commercial aircraft programs inventory included the following amounts related to the 747 program: $1,756 and $1,554 of deferred production costs, net of previously recorded reach-forward losses, and $550 and $563 of unamortized tooling costs. At June 30, 2014, $1,221 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 $1,085 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 $3,269 and $3,465 at June 30, 2014 and December 31, 2013.
Note 6 – Customer Financing
Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:
 
June 30
2014

 
December 31
2013

Financing receivables:
 
 
 
Investment in sales-type/finance leases

$1,593

 

$1,699

Notes
449

 
587

Operating lease equipment, at cost, less accumulated depreciation of $584 and $564
1,398

 
1,734

Gross customer financing
3,440

 
4,020

Less allowance for losses on receivables
(23
)
 
(49
)
Total

$3,417

 

$3,971

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 June 30, 2014 and December 31, 2013, we individually evaluated for impairment customer financing receivables of $91 and $95 and determined that none of these were impaired.

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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.
Our financing receivable balances by internal credit rating category are shown below. 
Rating categories
June 30
2014

 
December 31
2013

BBB

$1,046

 

$1,091

BB
50

 
58

B
680

 
585

CCC
175

 
457

Other
91

 
95

Total carrying value of financing receivables

$2,042

 

$2,286

At June 30, 2014, our allowance related to receivables with ratings of B and BBB to which we applied default rates that averaged 17% and 2% to the exposure associated with those receivables.
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:
 
June 30
2014

 
December 31
2013

717 Aircraft ($433 and $444 accounted for as operating leases) (1)

$1,619

 

$1,674

757 Aircraft ($389 and $402 accounted for as operating leases) (1)
424

 
453

MD-80 Aircraft (Accounted for as sales-type finance leases) (1)
367

 
411

MD-11 Aircraft (Accounted for as operating leases) (1)
206

 
220

737 Aircraft ($131 and $138 accounted for as operating leases)
198

 
210

767 Aircraft ($53 and $60 accounted for as operating leases)
183

 
207

747 Aircraft ($172 and $183 accounted for as operating leases)(1)
172

 
286

787 Aircraft (Accounted for as operating leases)
 
 
273

(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:
 
June 30
2014

 
December 31
2013

Time deposits
3,721

 

$6,090

Pledged money market funds (1)
46

 
46

Available-for-sale investments
12

 
8

Equity method investments (2)
1,151

 
1,164

Restricted cash (3)
30

 
33

Other investments
33

 
33

Total

$4,993

 

$7,374

(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 letters of credit.
(2) 
Dividends received were $134 and $75 for the six and three months ended June 30, 2014 and $103 and $53 during the same periods in the prior year.
(3) 
Restricted to pay certain claims related to workers' compensation and life insurance premiums for certain employees.
Note 8 – Other Assets
Sea Launch
At June 30, 2014 and December 31, 2013, 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. On April 11, 2014, the appellate court entered a ruling that the decision of the arbitrator is not appealable. On May 9, 2014, we filed a brief with the Supreme Court of Sweden appealing the appellate court's April 11, 2014 ruling. 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. A trial in the United States District Court for the Central District of California is scheduled to commence January 26, 2015. 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. Our current assessment as to the collectability of these receivables takes into account the recent political unrest involving Russia and Ukraine, although we will continue to monitor the situation.

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Note 9 – Commitments and Contingencies
Environmental
The following table summarizes environmental remediation activity during the six months ended June 30, 2014 and 2013.
 
2014

 
2013

Beginning balance – January 1

$649

 

$710

Reductions for payments made
(16
)
 
(37
)
Changes in estimates
16

 
25

Ending balance – June 30

$649

 

$698

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 June 30, 2014 and December 31, 2013, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $895 and $928.
Product Warranties
The following table summarizes product warranty activity recorded during the six months ended June 30, 2014 and 2013.
 
2014

 
2013

Beginning balance – January 1

$1,570

 

$1,572

Additions for current year deliveries
314

 
231

Reductions for payments made
(209
)
 
(243
)
Changes in estimates
45

 
(50
)
Ending balance - June 30

$1,720

 

$1,510

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 June 30, 2014 have expiration dates from 2014 through 2023. At June 30, 2014, and December 31, 2013 total contractual trade-in commitments were $1,953 and $1,605. As of June 30, 2014 and December 31, 2013, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $503 and $325 and the fair value of the related trade-in aircraft was $503 and $325.

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Financing Commitments
Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, totaled $17,924 and $17,987 as of June 30, 2014 and December 31, 2013. The estimated earliest potential funding dates for these commitments as of June 30, 2014 are as follows:
  
Total

July through December 2014

$1,520

2015
3,266

2016
3,695

2017
3,354

2018
1,798

Thereafter
4,291

 

$17,924

As of June 30, 2014, 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 $4,095 and $4,376 as of June 30, 2014 and December 31, 2013.
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 late 2015. In April 2014, we announced that we anticipate ending production approximately three months earlier based on our decision to produce three fewer aircraft in 2015 than previously planned. As a result, during the first quarter of 2014, BDS recorded $48 to write off inventory and accrue termination liabilities to suppliers. At June 30, 2014, our backlog included 2 international orders for C-17 aircraft that are scheduled for delivery through mid-2014 and we have active sales campaigns for the remaining 10 unsold aircraft that we plan to produce. We are currently incurring costs and have made commitments to suppliers related to the unsold aircraft. We believe it is probable that we will recover costs related to the unsold aircraft from international customer orders. Should orders for the 10 unsold aircraft not materialize or should we decide to discontinue production of unsold aircraft, we could incur further charges to write-down inventory and/or record termination liabilities. At June 30, 2014, we had approximately $938 of capitalized precontract costs and $602 of potential termination liabilities to suppliers associated with the unsold aircraft.

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F/A-18
At June 30, 2014, our backlog included 89 F/A-18 aircraft currently under contract with the U.S. Navy. The President’s Fiscal Year 2015 budget request submitted in March 2014 did not include funding for additional F/A-18 aircraft. We are continuing to work with our U.S. customer as well as international customers to secure additional orders. The orders in backlog would complete production in 2016. Should additional orders not materialize, it is reasonably possible that we will decide in the next twelve months to end production of the F/A-18 at a future date. We are still evaluating the full financial impact of a potential production shutdown, including any recovery that may be available from the U.S. government.
United States Government Defense Environment Overview
U.S. government appropriation levels remain subject to significant uncertainty. In August 2011, the Budget Control Act (The Act) established limits on U.S. government discretionary spending, including a reduction of defense spending by approximately $490 billion between the 2012 and 2021 U.S. government fiscal years. The Act also provided that the defense budget would face “sequestration” cuts of up to an additional $500 billion during that same period to the extent that discretionary spending limits are exceeded. The impact of sequestration cuts was reduced with respect to FY2014 and FY2015 following the enactment of The Bipartisan Budget Act in December 2013. However, significant uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. government discretionary spending levels for FY2016 and beyond will continue to be subject to significant pressure, including risk of future sequestration cuts.
Significant uncertainty also continues with respect to program-level appropriations for the U.S. Department of Defense (U.S. DoD) and other government agencies, including the National Aeronautics and Space Administration, within the overall budgetary framework described above. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the authorization and appropriations process could result in reductions, cancellations and/or delays of existing contracts or programs. Any of these impacts could have a material effect on the results of the Company's operations, financial position and/or cash flows.
In addition to the risks described above, if Congress is unable to pass appropriations bills in a timely manner, a government shutdown could result which could have impacts above and beyond those resulting from budget cuts or sequestration impacts. For example, requirements to furlough employees in the U.S. DoD or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders.
KC-46A Tanker and 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, 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 result in lower margins or material charges for reach-forward losses. For example, during the three months ended June 30, 2014, higher estimated costs to complete the KC-46A Tanker contract for the U.S. Air Force resulted in a reach-forward loss of $425 of which the Commercial Airplanes segment recorded $238 and the BMA segment recorded $187.
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.

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Table of Contents

Russia/Ukraine
We continue to monitor recent political unrest involving Russia and Ukraine, where we and some of our suppliers source titanium products and/or have operations. A number of our commercial customers also have operations in Russia and Ukraine. To date, we have not experienced any disruptions to production or deliveries. Should suppliers or customers experience disruption, our production and/or deliveries could be materially impacted.
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 had gross margins that were breakeven or near breakeven during the six months ended June 30, 2014.
Continued weakness in the air cargo market and lower-than-expected demand for large commercial passenger aircraft have resulted in ongoing 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 combination of production challenges, change incorporation, schedule delays and customer and supplier impacts has created significant pressure on 787 program profitability. If risks related to this program, including risks associated with planned production rate increases or introducing and manufacturing 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
 
June 30
2014

December 31
2013

 
June 30
2014

December 31
2013

 
June 30
2014

December 31
2013

Contingent repurchase commitments

$1,652


$1,872

 

$1,643


$1,871

 

$5


$5

Indemnifications to ULA:
 
 
 
 
 
 
 
 
Contributed Delta program launch inventory
123

127

 
 
 
 
 
 
Contract pricing
261

261

 
 
 
 
7

7

Other Delta contracts
221

227

 
 
 
 
8

8

Other indemnifications
92

106

 
 
 
 
28

28

Credit guarantees
30

35

 
27

27

 
2

2

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.

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Table of Contents

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 $1,237 of the $1,360 of inventory that was contributed by us and has yet to consume $123. ULA has made advance payments of $1,500 to us and we have recorded revenues and cost of sales of $1,170 under the inventory supply agreement through June 30, 2014.
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 of the contract. In March 2011, ULA filed a notice of appeal before the ASBCA, seeking to re-price the third mission. On November 20, 2013, the ASBCA denied USAF motions for summary judgment against ULA in large part, leaving ULA's claims against the USAF substantially intact. The hearing before the ASBCA concluded on December 20, 2013. The parties filed their final post-hearing briefs in May 2014. The Board may now issue a ruling at any time, but there is no scheduled date or official deadline for its decision. If ULA is ultimately 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 is in the discovery phase, and the Court has not yet set a trial date. 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 BCC's 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 June 30, 2014 and December 31, 2013, our maximum future cash exposure to losses associated with the loss sharing arrangement was $92 and $106 and our accrued liability under the loss sharing arrangement was $28.

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Table of Contents

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.
Credit Guarantees We have issued credit guarantees, principally to facilitate the sale and/or financing of commercial aircraft. Under these arrangements, we are obligated to make payments to a guaranteed party in the event that lease or loan payments are not made by the original lessee or debtor or certain specified services are not performed. A substantial portion of these guarantees has been extended on behalf of original lessees or debtors with less than investment-grade credit. Our commercial aircraft credit guarantees are collateralized by the underlying commercial aircraft and certain other assets. Current outstanding credit guarantees expire within the next seven years.
Note 11 – Postretirement Plans
The components of net periodic benefit cost were as follows:
 
Six months ended June 30
 
Three months ended June 30
Pension Plans
2014

 
2013

 
2014

 
2013

Service cost

$829

 

$946

 

$415

 

$473

Interest cost
1,542

 
1,462

 
758

 
731

Expected return on plan assets
(2,083
)
 
(1,938
)
 
(1,042
)
 
(969
)
Amortization of prior service costs
89

 
98

 
44

 
49

Recognized net actuarial loss
514

 
1,138

 
253

 
569

Settlement/curtailment/other losses
337

 
20

 
(1
)
 


Net periodic benefit cost

$1,228

 

$1,726

 

$427

 

$853

Net periodic benefit cost included in Earnings from operations

$1,728

 

$1,544

 

$693

 

$753

 
Six months ended June 30
 
Three months ended June 30
Other Postretirement Benefit Plans
2014

 
2013

 
2014

 
2013

Service cost

$64

 

$74

 

$32

 

$37

Interest cost
144

 
133

 
72

 
66

Expected return on plan assets
(4
)
 
(4
)
 
(2
)
 
(2
)
Amortization of prior service costs
(72
)
 
(90
)
 
(36
)
 
(45
)
Recognized net actuarial loss
4

 
48

 
2

 
24

Net periodic benefit cost

$136

 

$161

 

$68

 

$80

Net periodic benefit cost included in Earnings from operations

$143

 

$179

 

$72

 

$88


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Table of Contents

In the first quarter of 2014, we announced changes to our nonunion and certain union retirement plans whereby approximately 100,000 employees will transition in 2016 to a company-funded defined contribution retirement savings plan in lieu of participation in defined benefit pension plans. The defined benefit pension plan changes resulted in charges of $334 in the first quarter of 2014, primarily for pension curtailment costs. In addition, we remeasured pension assets and benefit obligations for the affected pension plans. These remeasurements resulted in a net actuarial gain of $966 which is included in Other Comprehensive Income. The $966 reflects a gain of $1,988 resulting from benefit plan changes that was partially offset by net actuarial losses of $1,022 primarily driven by a reduction in the discount rate from approximately 4.8% at December 31, 2013 to approximately 4.5% as of the remeasurement dates.
Note 12 – Share-Based Compensation and Other Compensation Arrangements
Restricted Stock Units
On February 24, 2014, we granted to our executives 695,651 restricted stock units (RSUs) as part of our long-term incentive program with a grant date fair value of $129.58 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.
Performance-Based Restricted Stock Units
On February 24, 2014, we granted to our executives 662,215 performance-based restricted stock units (PBRSUs) as part of our long-term incentive program with a grant date fair value of $136.12 per share. The PBRSUs 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 based on the Company’s total shareholder return as compared to a group of peer companies. The award payout can range from 0% to 200% of the original PBRSU award amount. Compensation expense for the award is recognized over the three-year performance period based upon the fair value determined at grant date using a Monte-Carlo simulation model.
Performance Awards
On February 24, 2014, we granted performance awards to our executives with the payout based on the achievement of financial goals for the three-year period ending December 31, 2016. At June 30, 2014, the minimum payout amount is $0 and the maximum amount we could be required to pay out is $349.

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Table of Contents

Note 13 – Shareholders' Equity
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive income/(loss) (AOCI) by component for the six and three months ended June 30, 2014 and 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 at January 1, 2013

$214

 

($8
)
 

$86

 

($17,708
)
 

($17,416
)
Other comprehensive income/(loss) before reclassifications
(88
)
 

 
(89
)
 
33

 
(144
)
Amounts reclassified from AOCI

 

 
(3
)
 
769

(2) 
766

Net current period Other comprehensive income/(loss)
(88
)
 

 
(92
)
 
802

 
622

Balance at June 30, 2013

$126

 

($8
)
 

($6
)
 

($16,906
)
 

($16,794
)
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014

$150

 

($8
)
 

($6
)
 

($10,030
)
 

($9,894
)
Other comprehensive income/(loss) before reclassifications
38

 
3

 
25

 
622

 
688

Amounts reclassified from AOCI

 

 
1

 
546

(2) 
547

Net current period Other comprehensive income/(loss)
38

 
3

 
26

 
1,168

 
1,235

Balance at June 30, 2014

$188

 

($5
)
 

$20

 

($8,862
)
 

($8,659
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013

$191

 

($8
)
 

$62

 

($17,286
)
 

($17,041
)
Other comprehensive income/(loss) before reclassifications
(65
)
 

 
(63
)
 
1

 
(127
)
Amounts reclassified from AOCI

 

 
(5
)
 
379

(2) 
374

Net current period Other comprehensive income/(loss)
(65
)
 

 
(68
)
 
380

 
247

Balance at June 30, 2013

$126

 

($8
)
 

($6
)
 

($16,906
)
 

($16,794
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2014

$167

 

($6
)
 

($12
)
 

($9,032
)
 

($8,883
)
Other comprehensive income/(loss) before reclassifications
21

 
1

 
36

 
2

 
60

Amounts reclassified from AOCI

 

 
(4
)
 
168

(2) 
164

Net current period Other comprehensive income/(loss)
21

 
1

 
32

 
170

 
224

Balance at June 30, 2014

$188

 

($5
)
 

$20

 

($8,862
)
 

($8,659
)
(1)     Net of tax.
(2) 
Primarily relates to amortization of actuarial gains/losses for the six and three months ended June 30, 2013 totaling $755 and $377 (net of tax of $(431) and $(216)) and to settlements, curtailments and amortization of actuarial gains/losses for the six and three months ended June 30, 2014 totaling $535 and $163 (net of tax of ($298) and $(91)). These are included in the net periodic pension cost of which a portion is allocated to production as inventoried costs.

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Table of Contents

Note 14 – 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 2017.
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
  
June 30
2014

December 31
2013

June 30
2014

December 31
2013

June 30
2014

December 31
2013

Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts

$2,620


$2,524


$113


$122


($45
)

($64
)
Interest rate contracts
313

313

12

13




Commodity contracts
63

72

5

2

(24
)
(39
)
Derivatives not receiving hedge accounting treatment:
 
 
 
 
 
 
Foreign exchange contracts
400

259

28

12

(26
)
(35
)
Commodity contracts
6

9





(2
)
(4
)
Total derivatives

$3,402


$3,177

158

149

(97
)
(142
)
Netting arrangements
 
 
(44
)
(63
)
44

63

Net recorded balance
 
 

$114


$86


($53
)

($79
)
(1) 
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

21
Table of Contents

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: 
  
Six months ended June 30
 
Three months ended June 30
  
2014

 
2013

 
2014

 
2013

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

$20

 

($87
)
 

$32

 

($61
)
Commodity contracts
5

 
(2
)
 
4

 
(2
)
Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts
7

 
14

 
9

 
11

Commodity contracts
(8
)
 
(11
)
 
(5
)
 
(6
)
Forward points recognized in Other income, net:
 
 
 
 
 
 
 
Foreign exchange contracts
16

 
22

 
9

 
14

Undesignated derivatives recognized in Other income, net:
 
 
 
 
 
 
 
Foreign exchange contracts
(6
)
 
14

 
(2
)
 
15

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 was insignificant for the six and three months ended June 30, 2014 and 2013.
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 June 30, 2014 was $6. At June 30, 2014, there was no collateral posted related to our derivatives.
Note 15 – 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. 
 
June 30, 2014
 
December 31, 2013
 
Total

 
Level 1

 
Level 2

 
Level 3
 
Total

 
Level 1

 
Level 2

 
Level 3

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds

$2,676

 

$2,676

 
 
 
 
 

$3,783

 

$3,783

 
 
 
 
Available-for-sale investments
12

 
12

 
 
 

 
8

 
6

 
 
 

$2

Derivatives
114

 
 
 

$114