Document
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 March 31, 2017
or
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¨ | | 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
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 91-0425694 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
100 N. Riverside Plaza, Chicago, IL | | 60606-1596 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | |
Large accelerated filer | ý | | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Emerging growth company | ¨ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 April 19, 2017, there were 603,580,992 shares of common stock, $5.00 par value, issued and outstanding.
THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended March 31, 2017
INDEX
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Part I. Financial Information (Unaudited) | Page |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II. Other Information | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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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) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Sales of products |
| $18,512 |
| |
| $19,885 |
|
Sales of services | 2,464 |
| | 2,747 |
|
Total revenues | 20,976 |
| | 22,632 |
|
|
|
| |
|
|
Cost of products | (15,363 | ) | | (16,945 | ) |
Cost of services | (1,888 | ) | | (2,136 | ) |
Boeing Capital interest expense | (13 | ) | | (16 | ) |
Total costs and expenses | (17,264 | ) | | (19,097 | ) |
| 3,712 |
| | 3,535 |
|
Income from operating investments, net | 81 |
| | 54 |
|
General and administrative expense | (933 | ) | | (888 | ) |
Research and development expense, net | (838 | ) | | (917 | ) |
Gain on dispositions, net | 2 |
| | 4 |
|
Earnings from operations | 2,024 |
| | 1,788 |
|
Other income, net | 22 |
| | 26 |
|
Interest and debt expense | (87 | ) | | (73 | ) |
Earnings before income taxes | 1,959 |
| | 1,741 |
|
Income tax expense | (508 | ) | | (522 | ) |
Net earnings |
| $1,451 |
|
|
| $1,219 |
|
| | | |
Basic earnings per share |
| $2.36 |
| |
| $1.85 |
|
| | | |
Diluted earnings per share |
| $2.34 |
| |
| $1.83 |
|
| | | |
Cash dividends paid per share |
| $1.42 |
| |
| $1.09 |
|
| | | |
Weighted average diluted shares (millions) | 621.2 |
| | 665.8 |
|
See Notes to the Condensed Consolidated Financial Statements.
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Net earnings |
| $1,451 |
| |
| $1,219 |
|
Other comprehensive income, net of tax: | | | |
Currency translation adjustments | 34 |
| | 23 |
|
Unrealized gain/(loss) on certain investments, net of tax of ($1) and $1 | 1 |
| | (2 | ) |
Unrealized gain on derivative instruments: | | | |
Unrealized gain arising during period, net of tax of ($28) and ($32) | 52 |
| | 58 |
|
Reclassification adjustment for losses included in net earnings, net of tax of ($9) and ($12) | 16 |
| | 23 |
|
Total unrealized gain on derivative instruments, net of tax | 68 |
| | 81 |
|
Defined benefit pension plans and other postretirement benefits: | | | |
Amortization of prior service credits included in net periodic pension cost, net of tax of $16 and $7 | (28 | ) | | (14 | ) |
Net actuarial gain/(loss) arising during the period, net of tax of ($1) and $181 | 3 |
| | (328 | ) |
Amortization of actuarial losses included in net periodic pension cost, net of tax of ($72) and ($72) | 132 |
| | 131 |
|
Settlements and curtailments included in net income, net of tax of $0 and ($6) |
| | 11 |
|
Pension and postretirement (cost)/benefit related to our equity method investments, net of tax of $1 and ($4) | (2 | ) | | 8 |
|
Total defined benefit pension plans and other postretirement benefits, net of tax | 105 |
| | (192 | ) |
Other comprehensive income/(loss), net of tax | 208 |
| | (90 | ) |
Comprehensive income related to noncontrolling interests |
|
| | 1 |
|
Comprehensive income, net of tax |
| $1,659 |
| |
| $1,130 |
|
See Notes to the Condensed Consolidated Financial Statements.
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Financial Position
(Unaudited)
|
| | | | | | | |
(Dollars in millions, except per share data) | March 31 2017 |
| | December 31 2016 |
|
Assets | | | |
Cash and cash equivalents |
| $8,190 |
| |
| $8,801 |
|
Short-term and other investments | 1,015 |
| | 1,228 |
|
Accounts receivable, net | 9,335 |
| | 8,832 |
|
Current portion of customer financing, net | 580 |
| | 428 |
|
Inventories, net of advances and progress billings | 43,247 |
| | 43,199 |
|
Total current assets | 62,367 |
| | 62,488 |
|
Customer financing, net | 3,527 |
| | 3,773 |
|
Property, plant and equipment, net of accumulated depreciation of $17,156 and $16,883 | 12,842 |
| | 12,807 |
|
Goodwill | 5,342 |
| | 5,324 |
|
Acquired intangible assets, net | 2,496 |
| | 2,540 |
|
Deferred income taxes | 336 |
| | 332 |
|
Investments | 1,319 |
| | 1,317 |
|
Other assets, net of accumulated amortization of $527 and $497 | 1,444 |
| | 1,416 |
|
Total assets |
| $89,673 |
| |
| $89,997 |
|
Liabilities and equity | | | |
Accounts payable |
| $11,964 |
| |
| $11,190 |
|
Accrued liabilities | 13,332 |
| | 14,691 |
|
Advances and billings in excess of related costs | 24,118 |
| | 23,869 |
|
Short-term debt and current portion of long-term debt | 367 |
| | 384 |
|
Total current liabilities | 49,781 |
| | 50,134 |
|
Deferred income taxes | 1,339 |
| | 1,338 |
|
Accrued retiree health care | 5,885 |
| | 5,916 |
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Accrued pension plan liability, net | 19,796 |
| | 19,943 |
|
Other long-term liabilities | 2,285 |
| | 2,221 |
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Long-term debt | 10,432 |
| | 9,568 |
|
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 | 4,604 |
| | 4,762 |
|
Treasury stock, at cost - 406,468,802 and 395,109,568 shares | (38,320 | ) | | (36,097 | ) |
Retained earnings | 42,165 |
| | 40,714 |
|
Accumulated other comprehensive loss | (13,415 | ) | | (13,623 | ) |
Total shareholders’ equity | 95 |
| | 817 |
|
Noncontrolling interests | 60 |
| | 60 |
|
Total equity | 155 |
| | 877 |
|
Total liabilities and equity |
| $89,673 |
| |
| $89,997 |
|
See Notes to the Condensed Consolidated Financial Statements.
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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(Dollars in millions) | Three months ended March 31 |
| 2017 |
|
| 2016 |
|
Cash flows – operating activities: | |
| |
Net earnings |
| $1,451 |
|
|
| $1,219 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| |
Non-cash items – | |
| |
Share-based plans expense | 50 |
|
| 51 |
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Depreciation and amortization | 471 |
|
| 443 |
|
Investment/asset impairment charges, net | 23 |
|
| 33 |
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Customer financing valuation benefit | 7 |
|
| (2 | ) |
Gain on dispositions, net | (2 | ) | | (4 | ) |
Other charges and credits, net | 52 |
|
| 84 |
|
Changes in assets and liabilities – | |
| |
Accounts receivable | (769 | ) |
| (1,002 | ) |
Inventories, net of advances and progress billings | (31 | ) |
| (56 | ) |
Accounts payable | 616 |
|
| 960 |
|
Accrued liabilities | (613 | ) |
| (467 | ) |
Advances and billings in excess of related costs | 249 |
|
| (435 | ) |
Income taxes receivable, payable and deferred | 495 |
|
| 273 |
|
Other long-term liabilities | (72 | ) |
| (116 | ) |
Pension and other postretirement plans | 10 |
|
| 79 |
|
Customer financing, net | 232 |
|
| 276 |
|
Other | (75 | ) |
| (61 | ) |
Net cash provided by operating activities | 2,094 |
|
| 1,275 |
|
Cash flows – investing activities: | | | |
Property, plant and equipment additions | (466 | ) | | (748 | ) |
Property, plant and equipment reductions | 9 |
| | 11 |
|
Contributions to investments | (605 | ) | | (204 | ) |
Proceeds from investments | 803 |
| | 493 |
|
Other | (3 | ) | | 10 |
|
Net cash used by investing activities | (262 | ) | | (438 | ) |
Cash flows – financing activities: | | | |
New borrowings | 872 |
| | 115 |
|
Debt repayments | (34 | ) | | (128 | ) |
Stock options exercised | 174 |
| | 42 |
|
Employee taxes on certain share-based payment arrangements | (107 | ) | | (76 | ) |
Common shares repurchased | (2,500 | ) | | (3,501 | ) |
Dividends paid | (868 | ) | | (717 | ) |
Net cash used by financing activities | (2,463 | ) | | (4,265 | ) |
Effect of exchange rate changes on cash and cash equivalents | 20 |
| | 12 |
|
Net decrease in cash and cash equivalents | (611 | ) | | (3,416 | ) |
Cash and cash equivalents at beginning of year | 8,801 |
| | 11,302 |
|
Cash and cash equivalents at end of period |
| $8,190 |
| |
| $7,886 |
|
See Notes to the Condensed Consolidated Financial Statements.
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, 2016 |
| $5,061 |
|
| $4,834 |
|
| ($29,568 | ) |
| $38,756 |
|
| ($12,748 | ) |
| $62 |
|
| $6,397 |
|
Net earnings | | | | 1,219 |
| | 1 |
| 1,220 |
|
Other comprehensive income, net of tax of $63 | | | | | (90 | ) | | (90 | ) |
Share-based compensation and related dividend equivalents | | 54 |
| |
|
| | | 54 |
|
Excess tax pools | | 44 |
| | | | | 44 |
|
Treasury shares issued for stock options exercised, net | | (8 | ) | 50 |
| | | | 42 |
|
Treasury shares issued for other share-based plans, net | | (140 | ) | 80 |
| | | | (60 | ) |
Common shares repurchased | | | (3,501 | ) | | | | (3,501 | ) |
Balance at March 31, 2016 |
| $5,061 |
|
| $4,784 |
|
| ($32,939 | ) |
| $39,975 |
|
| ($12,838 | ) |
| $63 |
|
| $4,106 |
|
| | | | | | | |
Balance at January 1, 2017 |
| $5,061 |
|
| $4,762 |
|
| ($36,097 | ) |
| $40,714 |
|
| ($13,623 | ) |
| $60 |
|
| $877 |
|
Net earnings | | | | 1,451 |
| |
|
| 1,451 |
|
Other comprehensive loss, net of tax of ($94)
| | | | | 208 |
| | 208 |
|
Share-based compensation and related dividend equivalents | | 48 |
| |
|
| | | 48 |
|
Treasury shares issued for stock options exercised, net | | (42 | ) | 215 |
| | | | 173 |
|
Treasury shares issued for other share-based plans, net | | (164 | ) | 62 |
| | | | (102 | ) |
Common shares repurchased | | | (2,500 | ) | | | | (2,500 | ) |
Balance at March 31, 2017 |
| $5,061 |
|
| $4,604 |
|
| ($38,320 | ) |
| $42,165 |
|
| ($13,415 | ) |
| $60 |
|
| $155 |
|
See Notes to the Condensed Consolidated Financial Statements.
The Boeing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Summary of Business Segment Data
(Unaudited)
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Revenues: | | | |
Commercial Airplanes |
| $14,305 |
| |
| $14,399 |
|
Defense, Space & Security: | | | |
Boeing Military Aircraft | 2,636 |
| | 3,659 |
|
Network & Space Systems | 1,564 |
| | 1,735 |
|
Global Services & Support | 2,332 |
| | 2,562 |
|
Total Defense, Space & Security | 6,532 |
| | 7,956 |
|
Boeing Capital | 92 |
| | 64 |
|
Unallocated items, eliminations and other | 47 |
| | 213 |
|
Total revenues |
| $20,976 |
| |
| $22,632 |
|
Earnings from operations: | | | |
Commercial Airplanes |
| $1,215 |
| |
| $1,033 |
|
Defense, Space & Security: | | | |
Boeing Military Aircraft | 321 |
| | 334 |
|
Network & Space Systems | 98 |
| | 148 |
|
Global Services & Support | 318 |
| | 340 |
|
Total Defense, Space & Security | 737 |
| | 822 |
|
Boeing Capital | 39 |
| | 5 |
|
Segment operating profit | 1,991 |
| | 1,860 |
|
Unallocated items, eliminations and other | 33 |
| | (72 | ) |
Earnings from operations | 2,024 |
| | 1,788 |
|
Other income, net | 22 |
| | 26 |
|
Interest and debt expense | (87 | ) | | (73 | ) |
Earnings before income taxes | 1,959 |
| | 1,741 |
|
Income tax expense | (508 | ) | | (522 | ) |
Net earnings |
| $1,451 |
| |
| $1,219 |
|
This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 17 for further segment results.
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 March 31, 2017 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 2016 Annual Report on Form 10-K.
Standards Issued and Not Yet Implemented
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016 - 02, Leases (Topic 842). The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We do not expect the new lease standard to have a material effect on our financial position, results of operations or cash flows.
We plan to implement ASU No. 2014-09, Revenue from Contracts with Customers in the first quarter of 2018. This 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. The standard also requires expanded disclosures regarding revenue and contracts with customers. 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. The Company plans to adopt the new standard effective January 1, 2018 and apply it retrospectively to all periods presented.
We are analyzing the impact of the new standard on the Company’s revenue contracts, comparing our current accounting policies and practices to the requirements of the new standard, and identifying potential differences that would result from applying the new standard to our contracts. We are also identifying and implementing changes to the Company’s business processes, systems and controls to support adoption of the new standard in 2018 and recasting prior periods’ financial information.
We expect adoption of the new standard will have a material impact on our income statement and balance sheet but are unable to quantify those impacts at this time. We currently expect that most of our Defense, Space & Security (BDS) contracts that currently recognize revenue as deliveries are made or based on the attainment of performance milestones will recognize revenue under the new standard as costs are incurred. Certain military derivative aircraft contracts in our Commercial Airplane business will also recognize revenue as costs are incurred. The new standard will not change the total amount of revenue recognized on these contracts, only accelerate the timing of when the revenue is recognized. We expect a corresponding acceleration in timing of cost of sales recognition for these contracts resulting in a decrease in Inventories from long-term contracts in progress upon adoption of the new standard.
We do not expect the new standard to affect revenue recognition or the use of program accounting for commercial airplane contracts in our Commercial Airplane business. We will continue to recognize revenue for these contracts at the point in time when the customer accepts delivery of the airplane.
From a balance sheet perspective we expect adoption of the new standard will increase Total Assets and Total Liabilities because netting of advances from customers against inventory will no longer be permitted.
This will result in an increase in the Advances liability and Inventories from commercial aircraft programs upon adoption of the new standard.
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 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. Net cumulative catch-up adjustments to prior years' earnings, including reach-forward losses, across all contracts were as follows:
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| | | | | | | |
| Three months ended March 31 |
| 2017 |
| | 2016 |
|
Increase/(Decrease) to Earnings from Operations |
| $32 |
| |
| ($84 | ) |
Increase/(Decrease) to Diluted EPS |
| $0.04 |
| |
| ($0.09 | ) |
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) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Net earnings |
| $1,451 |
| |
| $1,219 |
|
Less: earnings available to participating securities | 2 |
| | 2 |
|
Net earnings available to common shareholders |
| $1,449 |
| |
| $1,217 |
|
Basic | | | |
Basic weighted average shares outstanding | 614.4 |
| | 659.6 |
|
Less: participating securities | 0.8 |
| | 1.0 |
|
Basic weighted average common shares outstanding | 613.6 |
| | 658.6 |
|
Diluted | | | |
Basic weighted average shares outstanding | 614.4 |
| | 659.6 |
|
Dilutive potential common shares(1) | 6.8 |
| | 6.2 |
|
Diluted weighted average shares outstanding | 621.2 |
| | 665.8 |
|
Less: participating securities | 0.8 |
| | 1.0 |
|
Diluted weighted average common shares outstanding | 620.4 |
| | 664.8 |
|
Net earnings per share: | | | |
Basic |
| $2.36 |
| |
| $1.85 |
|
Diluted | 2.34 |
| | 1.83 |
|
| |
(1) | Diluted earnings per share 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) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Performance awards | 5.6 |
| | 7.6 |
|
Performance-based restricted stock units | 1.3 |
| | 1.9 |
|
Note 3 – Income Taxes
Our effective income tax rates were 25.9% and 30.0% for the three months ended March 31, 2017 and 2016. The effective tax rate for the three months ended March 31, 2017 is lower than the comparable prior year period primarily due to higher discrete tax benefits in the first quarter of 2017. The increase in discrete tax benefits was primarily driven by excess tax benefits from share-based payments attributable to increases in the company’s stock price, in combination with the annual vesting of restricted stock units and performance-based restricted stock units and higher stock option exercises.
Federal income tax audits have been settled for all years prior to 2013. The Internal Revenue Service (IRS) began the 2013-2014 federal tax audit in the fourth quarter of 2016. We are also subject to examination in major state and international jurisdictions for the 2001-2016 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Note 4 – Inventories
Inventories consisted of the following:
|
| | | | | | | |
| March 31 2017 |
| | December 31 2016 |
|
Long-term contracts in progress |
| $13,684 |
| |
| $12,801 |
|
Commercial aircraft programs | 53,493 |
| | 52,048 |
|
Commercial spare parts, used aircraft, general stock materials and other | 5,410 |
| | 5,446 |
|
Inventory before advances and progress billings | 72,587 |
| | 70,295 |
|
Less advances and progress billings | (29,340 | ) | | (27,096 | ) |
Total |
| $43,247 |
| |
| $43,199 |
|
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. The inventory balance was $120 (net of advances of $192 and $220) at March 31, 2017 and December 31, 2016. See indemnifications to ULA in Note 9.
Included in inventories are capitalized precontract costs of $728 and $729 primarily related to KC-46A Tanker and C-17 at March 31, 2017 and December 31, 2016.
Commercial Aircraft Programs
At March 31, 2017 and December 31, 2016, commercial aircraft programs inventory included the following amounts related to the 787 program: $32,374 and $32,501 of work in process (including deferred production costs of $26,992 and $27,308), $2,525 and $2,398 of supplier advances, and $3,581 and $3,625 of unamortized tooling and other non-recurring costs. At March 31, 2017, $23,606 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 $6,967 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
At March 31, 2017 and December 31, 2016, commercial aircraft programs inventory included $275 and $284 of unamortized tooling costs related to the 747 program. At March 31, 2017, $209 of unamortized tooling costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $66 is expected to be recovered from units included in the program accounting quantity that represent expected future orders. At March 31, 2017 and December 31, 2016, work in process inventory included a number of completed 747 aircraft that we expect to recover from future orders.
Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling $3,139 and $3,117 at March 31, 2017 and December 31, 2016.
Note 5 – Customer Financing
Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:
|
| | | | | | | |
| March 31 2017 |
| | December 31 2016 |
|
Financing receivables: | | | |
Investment in sales-type/finance leases |
| $1,501 |
| |
| $1,482 |
|
Notes | 899 |
| | 807 |
|
Total financing receivables | 2,400 |
| | 2,289 |
|
Operating lease equipment, at cost, less accumulated depreciation of $334 and $359 | 1,723 |
| | 1,922 |
|
Gross customer financing | 4,123 |
| | 4,211 |
|
Less allowance for losses on receivables | (16 | ) | | (10 | ) |
Total |
| $4,107 |
| |
| $4,201 |
|
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 March 31, 2017 and December 31, 2016, we individually evaluated for impairment customer financing receivables of $57 and $55, of which $46 and $44 were determined to be impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceeded 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.
Our financing receivable balances by internal credit rating category are shown below:
|
| | | | | | | |
Rating categories | March 31 2017 |
| | December 31 2016 |
|
BBB |
| $1,284 |
| |
| $1,324 |
|
BB | 540 |
| | 538 |
|
B | 530 |
| | 383 |
|
CCC | 46 |
| | 44 |
|
Total carrying value of financing receivables |
| $2,400 |
| |
| $2,289 |
|
At March 31, 2017, our allowance related to receivables with ratings of B, BB and BBB. We applied default rates that averaged 17.6%, 8.5% and 1.1%, respectively, 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 could result in asset impairments, reduced finance lease income, and an increase in the allowance for losses. Our customer financing collateral is concentrated in 747-8 and out-of-production aircraft. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft.
The majority of customer financing carrying values are concentrated in the following aircraft models:
|
| | | | | | | |
| March 31 2017 |
| | December 31 2016 |
|
717 Aircraft ($296 and $301 accounted for as operating leases) |
| $1,233 |
| |
| $1,282 |
|
747-8 Aircraft ($948 and $1,086 accounted for as operating leases) | 1,071 |
| | 1,111 |
|
MD-80 Aircraft (Accounted for as sales-type finance leases) | 263 |
| | 259 |
|
757 Aircraft ($42 and $43 accounted for as operating leases) | 241 |
| | 246 |
|
777 Aircraft ($16 and $0 accounted for as operating leases) | 177 |
| | 165 |
|
767 Aircraft ($80 and $85 accounted for as operating leases) | 161 |
| | 170 |
|
747-400 Aircraft ($82 and $149 accounted for as operating leases) | 144 |
| | 149 |
|
737 Aircraft ($100 and $103 Accounted for as operating leases) | 105 |
| | 103 |
|
Note 6 – Investments
Our investments, which are recorded in Short-term and other investments or Investments, consisted of the following:
|
| | | | | | | |
| March 31 2017 |
| | December 31 2016 |
|
Equity method investments (1) | 1,242 |
| | 1,242 |
|
Time deposits | 446 |
| | 665 |
|
Available-for-sale investments | 542 |
| | 537 |
|
Restricted cash & cash equivalents(2) | 74 |
| | 68 |
|
Other investments | 30 |
| | 33 |
|
Total |
| $2,334 |
| |
| $2,545 |
|
| |
(1) | Dividends received were $96 and $49 for the three months ended March 31, 2017 and 2016. |
| |
(2) | Reflects amounts restricted in support of our workers’ compensation programs and insurance premiums. |
Note 7 – Other Assets
Sea Launch
At March 31, 2017 and December 31, 2016, 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 (RSC Energia) – $223, PO Yuzhnoye Mashinostroitelny Zavod of Ukraine – $89 and KB Yuzhnoye of Ukraine – $44.
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. On May 12, 2016, the court issued a judgment in favor of Boeing relating to the bank guarantee payment and the partner loan obligations.
In December 2016, we reached an agreement which we believe will enable us to recover the outstanding receivable balance from RSC Energia over the next several years. The agreement was subject to certain contingencies which were resolved during the first quarter of 2017. We continue to pursue collection efforts against the former Ukrainian partners in connection with the court judgment and continue to 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 from the Sea Launch partners, we could incur additional charges. Our current assessment as to the collectability of these receivables takes into account the current economic conditions in Russia and Ukraine, although we will continue to monitor the situation.
Spirit AeroSystems
As of March 31, 2017 and December 31, 2016, Other assets included $143 of receivables related to indemnifications from Spirit AeroSystems, Inc. (Spirit), for costs incurred related to pension and retiree medical obligations of former Boeing employees that were subsequently employed by Spirit. During the fourth quarter of 2014, Boeing filed a complaint against Spirit in Delaware Superior Court seeking to enforce our rights to indemnification and to recover from Spirit amounts incurred by Boeing for pension and retiree medical obligations. On March 22, 2017 the court held oral argument on the cross motions for summary judgment and is expected to issue a ruling during the second quarter. We expect to fully recover from Spirit.
Note 8 – Commitments and Contingencies
Environmental
The following table summarizes environmental remediation activity during the three months ended March 31, 2017 and 2016.
|
| | | | | | | |
| 2017 |
| | 2016 |
|
Beginning balance – January 1 |
| $562 |
| |
| $566 |
|
Reductions for payments made | (11 | ) | | (7 | ) |
Changes in estimates | (26 | ) | | 19 |
|
Ending balance – March 31 |
| $525 |
| |
| $578 |
|
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 that includes 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 March 31, 2017 and December 31, 2016, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $867 and $857.
Product Warranties
The following table summarizes product warranty activity recorded during the three months ended March 31, 2017 and 2016.
|
| | | | | | | |
| 2017 |
| | 2016 |
|
Beginning balance – January 1 |
| $1,414 |
| |
| $1,485 |
|
Additions for current year deliveries | 70 |
| | 92 |
|
Reductions for payments made | (74 | ) | | (79 | ) |
Changes in estimates | (65 | ) | | (25 | ) |
Ending balance – March 31 |
| $1,345 |
| |
| $1,473 |
|
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 March 31, 2017 have expiration dates from 2017 through 2026. At March 31, 2017, and December 31, 2016 total contractual trade-in commitments were $1,448 and $1,485. As of March 31, 2017 and December 31, 2016, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $160 and $126 and the fair value of the related trade-in aircraft was $160 and $126.
Financing Commitments
Financing commitments, related to aircraft on order, including options and those proposed in sales campaigns, and refinancing of delivered aircraft, totaled $14,067 and $14,847 as of March 31, 2017 and December 31, 2016. The estimated earliest potential funding dates for these commitments as of March 31, 2017 are as follows:
|
| | | |
| Total |
|
April through December 2017 |
| $1,438 |
|
2018 | 3,528 |
|
2019 | 3,166 |
|
2020 | 1,901 |
|
2021 | 1,634 |
|
Thereafter | 2,400 |
|
|
| $14,067 |
|
As of March 31, 2017, 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 $3,960 and $4,701 as of March 31, 2017 and December 31, 2016.
Commitments to ULA
We and Lockheed Martin Corporation have each committed to provide ULA with additional capital contributions in the event ULA does not have sufficient funds to make a required payment to us under an inventory supply agreement. As of March 31, 2017, ULA’s total remaining obligation to Boeing under the inventory supply agreement was $120. See Note 4.
F/A-18
At March 31, 2017, our backlog included 29 F/A-18 aircraft under contract with the U.S. Navy. We have begun work or authorized suppliers to begin working on aircraft beyond those already in backlog in anticipation of future orders. At March 31, 2017, we had $43 of capitalized precontract costs and $844 of potential termination liabilities to suppliers associated with F/A-18 aircraft not yet on order.
United States Government Defense Environment Overview
In March 2017, the U.S. administration submitted a budget amendment that would add $30 billion to the Defense Department budget for government fiscal year 2017. In addition, an outline of its fiscal year 2018 budget request was released that is $52 billion or 10% higher than the caps in the Budget Control Act of 2011 (The Act). However, The Act, which mandates limits on U.S. government discretionary spending, remains in effect through fiscal year 2021. As a result, continued budget uncertainty and the risk of future sequestration cuts will remain unless The Act is repealed or significantly modified.
In addition, there continues to be uncertainty 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 (NASA), within the overall budgetary framework described above. Future budget cuts or investment priority changes 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.
Funding timeliness also remains a risk as the federal government is currently operating under a continuing resolution that expires on April 28, 2017. If Congress is unable to pass appropriations bills before the continuing resolution expires, a government shutdown could result which may have impacts above and beyond those resulting from budget cuts, sequestration impacts or program-level appropriations. 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.
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 Commercial Crew, U.S. Air Force (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, in the first quarter of 2017, we recorded an additional reach-forward loss of $142 on the KC-46A Tanker program. Moreover, this and our other fixed-price development programs remain subject to additional reach-forward losses if we experience further technical or quality issues, schedule delays, or increased costs.
KC-46A Tanker
In 2011, we were awarded a contract from the USAF to design, develop, manufacture and deliver four next generation aerial refueling tankers. This Engineering, Manufacturing and Development (EMD) contract is a fixed-price incentive fee contract valued at $4.9 billion and involves highly complex designs and systems integration. In 2016, the USAF authorized LRIP lots for 7 and 12 aircraft valued at $2.8 billion. In January 2017, the USAF authorized an additional LRIP lot for 15 aircraft valued at $2.1 billion. At March 31, 2017, we had approximately $288 of capitalized precontract costs and $345 of potential termination liabilities to suppliers.
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.
Russia/Ukraine
We continue to monitor 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 significant disruptions to production or deliveries. Should suppliers or customers experience disruption, our production and/or deliveries could be materially impacted.
747 Program
Lower-than-expected demand for large commercial passenger and freighter aircraft and slower-than-expected growth of global freight traffic have continued to drive market uncertainties, pricing pressures and fewer orders than anticipated. We are currently producing at a rate of 0.5 aircraft per month. The program accounting quantity includes aircraft currently scheduled to be produced through 2019. We continue to have a number of completed aircraft in inventory as well as unsold production positions and we remain focused on obtaining additional orders and implementing cost-reduction efforts. If we are unable to obtain sufficient orders and/or market, production and other risks cannot be mitigated, we could record additional losses that may be material, and it is reasonably possible that we could decide to end production of the 747.
787 Program
The 787 program continued to have near breakeven gross margins. The combination of production challenges, change incorporation on early build aircraft, schedule delays, customer and supplier impacts and changes to price escalation factors has created significant pressure on program profitability. We are continuing to monitor wide-body demand and if sufficient orders do not materialize, we may consider appropriate adjustments to planned production rates. If risks related to these challenges, together with risks associated with planned production rates and productivity improvements, supply chain management, or introducing or manufacturing the 787-10 derivative as scheduled cannot be mitigated, the program could record a reach-forward loss that may be material.
Note 9 – 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 |
| March 31 2017 |
| December 31 2016 |
| | March 31 2017 |
| December 31 2016 |
| | March 31 2017 |
| December 31 2016 |
|
Contingent repurchase commitments |
| $1,306 |
|
| $1,306 |
| |
| $1,306 |
|
| $1,306 |
| |
| $9 |
|
| $9 |
|
Indemnifications to ULA: | | | | | | | | |
Contributed Delta program launch inventory | 72 |
| 77 |
| | | | | | |
Contract pricing | 261 |
| 261 |
| | | | | 7 |
| 7 |
|
Other Delta contracts | 196 |
| 216 |
| | | | | 5 |
| 5 |
|
Credit guarantees | 29 |
| 29 |
| | 26 |
| 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.
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 $1,288 of the $1,360 of inventory that was contributed by us and has yet to consume $72. Under the inventory supply agreement, we have recorded revenues and cost of sales of $1,500 through March 31, 2017. ULA has made payments of $1,740 to us under the inventory supply agreement and we have made $48 of net indemnification payments to ULA.
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 USAF for four satellite missions. In 2009, ULA filed a complaint before the Armed Services Board of Contract Appeals (ASBCA) for a contract adjustment for the price of two of these missions, followed in 2011 by a subsequent notice of appeal with respect to a third mission. The USAF did not exercise an option for a fourth mission prior to the expiration of the contract. During the second quarter of 2016, the ASBCA ruled that ULA is entitled to additional contract pricing for each of the three missions and remanded to the parties to negotiate appropriate pricing. During the fourth quarter of 2016, the USAF appealed the ASBCA's ruling. In April 2017, the USAF withdrew its appeal. If ULA is ultimately unsuccessful in obtaining additional pricing, we may be responsible for an indemnification payment up to $261 and may record up to $277 in pre-tax losses associated with the three missions.
Potential payments for Other Delta contracts include $85 related to deferred support costs and $91 related to deferred production 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. 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 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. We are unable 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 8.
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 four years.
Note 10 – Debt
On February 16, 2017, we issued $900 of fixed rate senior notes consisting of $300 due March 1, 2022 that bear an annual interest rate of 2.125%, $300 due March 1, 2027 that bear an annual interest rate of 2.8%, and $300 due March 1, 2047 that bear an annual interest rate of 3.65%. 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 totaled $872, after deducting underwriting discounts, commissions and offering expenses.
Note 11 – Postretirement Plans
The components of net periodic benefit cost were as follows:
|
| | | | | | | | | | | | | | | |
| Pension | | Other Postretirement Benefits |
| 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
Service cost |
| $101 |
| |
| $163 |
| |
| $26 |
| |
| $32 |
|
Interest cost | 748 |
| | 764 |
| | 57 |
| | 65 |
|
Expected return on plan assets | (961 | ) | | (999 | ) | | (2 | ) | | (2 | ) |
Amortization of prior service (credits)/costs | (10 | ) | | 10 |
| | (34 | ) | | (31 | ) |
Recognized net actuarial loss | 201 |
| | 197 |
| | 3 |
| | 6 |
|
Settlement/curtailment/other losses | 1 |
| | 15 |
| |
|
| |
|
|
Net periodic benefit cost |
| $80 |
| |
| $150 |
| |
| $50 |
| |
| $70 |
|
Net periodic benefit cost included in Earnings from operations |
| $334 |
| |
| $629 |
| |
| $85 |
| |
| $88 |
|
Note 12 – Share-Based Compensation and Other Compensation Arrangements
Restricted Stock Units
On February 27, 2017, we granted to our executives 523,835 restricted stock units (RSUs) as part of our long-term incentive program with a grant date fair value of $178.72 per unit. 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 27, 2017, we granted to our executives 492,273 performance-based restricted stock units (PBRSUs) as part of our long-term incentive program with a grant date fair value of $190.17 per unit. Compensation expense for the award is recognized over the three-year performance period based upon the grant date fair value estimated using a Monte-Carlo simulation model. The model used the following assumptions: expected volatility of 21.37% based upon historical stock volatility, a risk-free interest rate of 1.46%, and no expected dividend yield because the units earn dividend equivalents.
Performance Awards
On February 27, 2017, we granted to our executives performance awards as part of our long-term incentive program with a payout based on the achievement of financial goals for the three-year period ending December 31, 2019. At March 31, 2017, the minimum payout amount is $0 and the maximum amount we could be required to pay out is $371.
Note 13 – Shareholders' Equity
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss (AOCI) by component for the three months ended March 31, 2017 and 2016 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, 2016 |
| ($39 | ) | |
| |
| ($197 | ) | |
| ($12,512 | ) | |
| ($12,748 | ) |
Other comprehensive income/(loss) before reclassifications | 23 |
| | (2 | ) | | 58 |
| | (320 | ) | | (241 | ) |
Amounts reclassified from AOCI |
| |
| | 23 |
| | 128 |
| (2) | 151 |
|
Net current period Other comprehensive income/(loss) | 23 |
| | (2 | ) | | 81 |
| | (192 | ) | | (90 | ) |
Balance at March 31, 2016 |
| ($16 | ) | |
| ($2 | ) | |
| ($116 | ) | |
| ($12,704 | ) | |
| ($12,838 | ) |
| | | | | | | | | |
Balance at January 1, 2017 |
| ($143 | ) | |
| ($2 | ) | |
| ($127 | ) | |
| ($13,351 | ) | |
| ($13,623 | ) |
Other comprehensive income before reclassifications | 34 |
| | 1 |
| | 52 |
| | 1 |
| | 88 |
|
Amounts reclassified from AOCI |
| |
| | 16 |
| | 104 |
| (2) | 120 |
|
Net current period Other comprehensive income | 34 |
| | 1 |
| | 68 |
| | 105 |
| | 208 |
|
Balance at March 31, 2017 |
| ($109 | ) | |
| ($1 | ) | |
| ($59 | ) | |
| ($13,246 | ) | |
| ($13,415 | ) |
(1) Net of tax.
| |
(2) | Primarily relates to amortization of actuarial losses for the three months ended March 31, 2017 and 2016 totaling $132 and $131 (net of tax of $(72) and ($72)). These are included in the net periodic pension cost of which a portion is allocated to production as inventoried costs. See Note 17. |
Note 14 – Derivative Financial Instruments
Cash Flow Hedges
Our cash flow hedges include foreign currency forward contracts and commodity purchase contracts. We use foreign currency forward 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 through 2022. We use commodity derivatives, such as fixed-price purchase commitments to hedge against potentially unfavorable price changes for items used in production. Our commodity contracts hedge forecasted transactions through 2020.
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 have entered into agreements to purchase and sell aluminum to address long-term strategic sourcing objectives and international business requirements. These agreements are derivative instruments for accounting purposes. The quantities of aluminum in these agreements offset and are priced at prevailing market prices. We also hold certain foreign currency forward contracts which do not qualify for 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 |
| March 31 2017 |
| December 31 2016 |
| March 31 2017 |
| December 31 2016 |
| March 31 2017 |
| December 31 2016 |
|
Derivatives designated as hedging instruments: | | | | | | |
Foreign exchange contracts |
| $2,497 |
|
| $2,584 |
|
| $72 |
|
| $34 |
|
| ($154 | ) |
| ($225 | ) |
Interest rate contracts | 125 |
| 125 |
| 6 |
| 6 |
|
|
|
|
Commodity contracts | 22 |
| 53 |
| 3 |
| 7 |
| (8 | ) | (5 | ) |
Derivatives not receiving hedge accounting treatment: | | | | | | |
Foreign exchange contracts | 470 |
| 465 |
| 18 |
| 21 |
| (11 | ) | (17 | ) |
Commodity contracts | 729 |
| 648 |
|
|
|
|
| | |
Total derivatives |
| $3,843 |
|
| $3,875 |
| 99 |
| 68 |
| (173 | ) | (247 | ) |
Netting arrangements | | | (56 | ) | (45 | ) | 56 |
| 45 |
|
Net recorded balance | | |
| $43 |
|
| $23 |
|
| ($117 | ) |
| ($202 | ) |
| |
(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:
|
| | | | | | | |
| Three months ended March 31 |
| 2017 |
| | 2016 |
|
Effective portion recognized in Other comprehensive income/(loss), net of taxes: | | | |
Foreign exchange contracts |
| $56 |
| |
| $62 |
|
Commodity contracts | (4 | ) | | (4 | ) |
Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes: | | | |
Foreign exchange contracts | (15 | ) | | (21 | ) |
Commodity contracts | (1 | ) | | (2 | ) |
Forward points recognized in Other income, net: | | | |
Foreign exchange contracts | 1 |
| | 2 |
|
Undesignated derivatives recognized in Other income, net: | | | |
Foreign exchange contracts | 5 |
| | 2 |
|
Based on our portfolio of cash flow hedges, we expect to reclassify losses of $72 (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 three months ended March 31, 2017 and 2016.
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 certain 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 March 31, 2017 was $38. At March 31, 2017, there was no collateral posted related to our derivatives.
Note 15 – Fair Value Measurements
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. 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2017 | | December 31, 2016 |
| Total |
| | Level 1 |
| | Level 2 |
| | Total |
| | Level 1 |
| | Level 2 |
|
Assets | | | | | | | | | | | |
Money market funds |
| $2,074 |
| |
| $2,074 |
| | | |
| $2,858 |
| |
| $2,858 |
| | |
Available-for-sale investments: | | | | | | | | | | | |
Commercial paper | 118 |
| | | |
| $118 |
| | 162 |
| | | |
| $162 |
|
Corporate notes | 319 |
| | | | 319 |
| | 271 |
| | | | 271 |
|
U.S. government agencies | 57 |
| | | | 57 |
| | 63 |
| | | | 63 |
|
Other | 48 |
| | 48 |
| | | | 46 |
| | 46 |
| | |
Derivatives | 43 |
| | | | 43 |
| | 23 |
| | | | 23 |
|
Total assets |
| $2,659 |
| |
| $2,122 |
| |
| $537 |
| |
| $3,423 |
| |
| $2,904 |
| |
| $519 |
|
Liabilities | | | | | | | | | | | |
Derivatives |
| ($117 | ) | | | |
| ($117 | ) | |
| ($202 | ) | | | |
| ($202 | ) |
Total liabilities |
| ($117 | ) | |
| |
| ($117 | ) | |
| ($202 | ) | |
| |
| ($202 | ) |
Money market funds, available-for-sale debt investments and equity securities are valued using a market approach based on the quoted market prices or broker/dealer quotes of identical or comparable instruments.
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 three months ended March 31 due to long-lived asset impairment and the fair value and asset classification of the related assets as of the impairment date:
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Fair Value |
| | Total Losses |
| | Fair Value |
| | Total Losses |
|
Operating lease equipment |
| $31 |
| |
| ($11 | ) | |
| $40 |
| |
| ($8 | ) |
Property, plant and equipment | 9 |
| | (1 | ) | |
|
| | (4 | ) |
Acquired intangible assets |
| |
| | 12 |
| | (10 | ) |
Investments | 1 |
| | (11 | ) | |
| |
|
Total |
| $41 |
| |
| ($23 | ) | |
| $52 |
| |
| ($22 | ) |
The fair value of the impaired operating lease equipment 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, Acquired intangible assets and Investments were 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 three months ended March 31, 2017, 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 | | Range Median or Average |
Operating lease equipment | $31 | | Market approach | | Aircraft value publications | | $58 - $73(1) Median $69 |
| | Aircraft condition adjustments | | ($38) - $0(2) Net ($38) |
| |
(1) | The range represents the sum of the highest and lowest values for all aircraft subject to fair value measurement, according to the third party aircraft valuation publications that we use in our valuation process. |
| |
(2) | The negative amount represents the sum for all aircraft subject to fair value measurement, of all downward adjustments based on consideration of individual aircraft attributes and condition. The positive amount represents the sum of all such upward adjustments. |
Fair Value Disclosures
The fair values and related carrying values of financial instruments that are not required to be remeasured at fair value on the Condensed Consolidated Statements of Financial Position were as follows:
|
| | | | | | | | | | | | |
| March 31, 2017 |
| Carrying Amount |
| Total Fair Value |
| Level 1 | Level 2 |
| Level 3 |
|
Assets | | | | | |
Notes receivable, net | $ | 899 |
| $ | 906 |
| | $ | 906 |
| |
Liabilities | | | | | |
Debt, excluding capital lease obligations | (10,670 | ) | (12,066 | ) | | (11,935 | ) | (131 | ) |
|
| | | | | | | | | | | | |
| December 31, 2016 |
| Carrying Amount |
| Total Fair Value |
| Level 1 | Level 2 | Level 3 |
Assets | | | | | |
Notes receivable, net | $ | 807 |
| $ | 803 |
| | $ | 803 |
| |
Liabilities | | | | | |
Debt, excluding capital lease obligations | (9,815 | ) | (11,209 | ) | | (11,078 | ) | (131 | ) |
The fair values of notes receivable are estimated with discounted cash flow analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality. The fair value of our debt that is traded in the secondary market is classified as Level 2 and is based on current market yields. For our debt that is not traded in the secondary market, the fair value is classified as Level 2 and is based on our indicative borrowing cost derived from dealer quotes or discounted cash flows. The fair values of our debt classified as Level 3 are based on discounted cash flow models using the implied yield from similar securities. With regard to other financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of our indemnifications and financing commitments because the amount and timing of those arrangements are uncertain. Items not included in the above disclosures include cash, restricted cash, time deposits and other deposits, commercial paper, money market funds, Accounts receivable, Accounts payable
and long-term payables. The carrying values of those items, as reflected in the Condensed Consolidated Statements of Financial Position, approximate their fair value at March 31, 2017 and December 31, 2016. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash (Level 1).
Note 16 – Legal Proceedings
Various legal proceedings, claims and investigations related to products, contracts, employment and other matters are pending against us.
In addition, we are subject to various U.S. government inquiries and investigations from which civil, criminal or administrative proceedings could result or have resulted in the past. Such proceedings involve or could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. We believe, based upon current information, that the outcome of any such legal proceeding, claim, or government dispute and investigation will not have a material effect on our financial position, results of operations, or cash flows.
Note 17 – Segment Information
Our primary profitability measurements to review a segment’s operating results are Earnings from operations and operating margins. See page 6 for a Summary of Business Segment Data, which is an integral part of this note.
In November 2016, we announced plans for the formation of Boeing Global Services (BGS), which will bring together certain Commercial Aviation Services businesses, currently included in the Commercial Airplanes segment, and certain BDS businesses (primarily those currently included in the Global Services & Support (GS&S) segment). We expect Boeing Global Services to be operational during the second half of 2017. We will continue to report using the existing segment structure until BGS is operational and has discrete financial information that is being provided to the Chief Operating Decision Maker.
Intersegment revenues, eliminated in Unallocated items, eliminations and other, are shown in the following table.
|
| | | | | | | |
| Three months ended March 31 |
| 2017 |
| | 2016 |
|
Commercial Airplanes |
| $597 |
| |
| $428 |
|
Boeing Capital | 5 |
| | 5 |
|
Total |
| $602 |
| |
| $433 |
|
Unallocated Items, Eliminations and other
Unallocated items, eliminations and other includes costs not attributable to business segments as well as intercompany profit eliminations. We generally allocate costs to business segments based on the U.S. federal cost accounting standards. Components of Unallocated items, eliminations and other are shown in the following table.
|
| | | | | | | |
| Three months ended March 31 |
| 2017 |
| | 2016 |
|
Share-based plans |
| ($21 | ) | |
| ($23 | ) |
Deferred compensation | (50 | ) | | 16 |
|
Amortization of previously capitalized interest | (31 | ) | | (30 | ) |
Eliminations and other unallocated items | (180 | ) | | (129 | ) |
Sub-total | (282 | ) | | (166 | ) |
Pension | 255 |
| | 45 |
|
Postretirement | 60 |
| | 49 |
|
Pension and Postretirement | 315 |
| | 94 |
|
Total |
| $33 |
| |
| ($72 | ) |
Unallocated Pension and Other Postretirement Benefit Expense
Unallocated pension and other postretirement benefit expense represent the portion of pension and other postretirement benefit costs that are not recognized by business segments for segment reporting purposes. Pension costs, comprising Generally Accepted Accounting Principles in the United States of America (GAAP) service and prior service costs, are allocated to Commercial Airplanes. Pension costs are allocated to BDS using U.S. Government Cost Accounting Standards (CAS), which employ different actuarial assumptions and accounting conventions than GAAP. These costs are allocable to government contracts. Other postretirement benefit costs are allocated to business segments based on CAS, which is generally based on benefits paid.
Assets
Segment assets are summarized in the table below:
|
| | | | | | | |
| March 31 2017 |
| | December 31 2016 |
|
Commercial Airplanes |
| $55,916 |
| |
| $55,527 |
|
Defense, Space & Security: | | | |
Boeing Military Aircraft | 6,774 |
| | 6,698 |
|
Network & Space Systems | 6,360 |
| | 6,113 |
|
Global Services & Support | 4,506 |
| | 4,020 |
|
Total Defense, Space & Security | 17,640 |
| | 16,831 |
|
Boeing Capital | 4,025 |
| | 4,139 |
|
Unallocated items, eliminations and other | 12,092 |
| | 13,500 |
|
Total |
| $89,673 |
| |
| $89,997 |
|
Assets included in Unallocated items, eliminations and other primarily consist of Cash and cash equivalents, Short-term and other investments, Deferred tax assets, capitalized interest and assets held centrally as well as intercompany eliminations.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Boeing Company
Chicago, Illinois
We have reviewed the accompanying condensed consolidated statement of financial position of The Boeing Company and subsidiaries (the “Company”) as of March 31, 2017, and the related condensed consolidated statements of operations, comprehensive income, cash flows and equity for the three-month periods ended March 31, 2017 and 2016. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of the Company as of December 31, 2016, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 8, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Chicago, Illinois
April 26, 2017
|
| |
FORWARD-LOOKING STATEMENTS |
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “expects,” “intends,” “projects,” “plans,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, as well as any other statement that does not directly relate to any historical or current fact. |
| |
Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties and changes in circumstances that are difficult to predict. Many factors could cause actual results to differ materially and adversely from these forward-looking statements. Among these factors are risks related to: |
| |
(1) | general conditions in the economy and our industry, including those due to regulatory changes; |
| |
(2) | our reliance on our commercial airline customers; |
| |
(3) | the overall health of our aircraft production system, planned production rate increases across multiple commercial airline programs, our commercial development and derivative aircraft programs, and our aircraft being subject to stringent performance and reliability standards; |
| |
(4) | changing budget and appropriation levels and acquisition priorities of the U.S. government; |
| |
(5) | our dependence on U.S. government contracts; |
| |
(6) | our reliance on fixed-price contracts; |
| |
(7) | our reliance on cost-type contracts; |
| |
(8) | uncertainties concerning contracts that include in-orbit incentive payments; |
| |
(9) | our dependence on our subcontractors and suppliers as well as the availability of raw materials; |
| |
(10) | changes in accounting estimates; |
| |
(11) | changes in the competitive landscape in our markets; |
| |
(12) | our non-U.S. operations, including sales to non-U.S. customers; |
| |
(13) | potential adverse developments in new or pending litigation and/or government investigations; |
| |
(14) | customer and aircraft concentration in Boeing Capital’s customer financing portfolio; |
| |
(15) | changes in our ability to obtain debt on commercially reasonable terms and at competitive rates in order to fund our operations and contractual commitments; |
| |
(16) | realizing the anticipated benefits of mergers, acquisitions, joint ventures, strategic alliances or divestitures; |
| |
(17) | the adequacy of our insurance coverage to cover significant risk exposures; |
|
| |
(18) | potential business disruptions, including those related to physical security threats, information technology or cyber attacks, epidemics, sanctions or natural disasters; |
| |
(19) | work stoppages or other labor disruptions; |
| |
(20) | significant changes in discount rates and actual investment return on pension assets; |
| |
(21) | potential environmental liabilities; and |
| |
(22) | threats to the security of our or our customers’ information. |
| |
Additional information concerning these and other factors can be found in our filings with the Securities and Exchange Commission, including the “Risk Factors” on pages 6 through 14 of our most recent Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 9, 10, and 16 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Current Reports on Form 8-K. Any forward-looking information speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law. |
| |
| |
| |
| |
| |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations and Financial Condition
Earnings From Operations and Core Operating Earnings (Non-GAAP) The following table summarizes key indicators of consolidated results of operations:
|
| | | | | | | |
(Dollars in millions, except per share data) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Revenues |
| $20,976 |
| |
| $22,632 |
|
| | | |
GAAP | | | |
Earnings from operations |
| $2,024 |
| |
| $1,788 |
|
Operating margins | 9.6 | % | | 7.9 | % |
Effective income tax rate | 25.9 | % | | 30.0 | % |
Net earnings |
| $1,451 |
| |
| $1,219 |
|
Diluted earnings per share |
| $2.34 |
| |
| $1.83 |
|
| | | |
Non-GAAP (1) | | | |
Core operating earnings |
| $1,709 |
| |
| $1,694 |
|
Core operating margins | 8.1 | % | | 7.5 | % |
Core earnings per share |
| $2.01 |
| |
| $1.74 |
|
| |
(1) | These measures exclude certain components of pension and other postretirement benefit expense. See page 43 for important information about these non-GAAP measures and reconciliations to the most comparable GAAP measures. |
Revenues
The following table summarizes Revenues:
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Commercial Airplanes |
| $14,305 |
| |
| $14,399 |
|
Defense, Space & Security | 6,532 |
| | 7,956 |
|
Boeing Capital | 92 |
| | 64 |
|
Unallocated items, eliminations and other | 47 |
| | 213 |
|
Total |
| $20,976 |
| |
| $22,632 |
|
Revenues for the three months ended March 31, 2017 decreased by $1,656 million compared with the same period in 2016. Commercial Airplanes revenues decreased by $94 million primarily due to lower volume and delivery mix. Defense, Space & Security (BDS) revenues decreased by $1,424 million, due to lower revenues in all three segments.
The change in unallocated items and eliminations primarily reflects the timing of eliminations for intercompany aircraft deliveries.
Earnings From Operations
The following table summarizes Earnings from operations:
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Commercial Airplanes |
| $1,215 |
| |
| $1,033 |
|
Defense, Space & Security | 737 |
| | 822 |
|
Boeing Capital | 39 |
| | 5 |
|
Unallocated pension and other postretirement benefit income | 315 |
| | 94 |
|
Other unallocated items and eliminations | (282 | ) | | (166 | ) |
Earnings from operations (GAAP) |
| $2,024 |
| |
| $1,788 |
|
Unallocated pension and other postretirement benefit income | (315 | ) | | (94 | ) |
Core operating earnings (Non-GAAP) |
| $1,709 |
| |
| $1,694 |
|
Earnings from operations for the three months ended March 31, 2017 increased by $236 million compared with the same period in 2016, primarily due to Commercial Airplanes' earnings and higher unallocated pension income, which more than offset the impact of other unallocated items and eliminations and lower earnings at BDS.
During the first quarter of 2017, earnings from operations included reach-forward losses of $142 million related to the KC-46A Tanker program. During the first quarter of 2016, we recorded KC-46A Tanker program reach-forward losses of $243 million, and a charge of $70 million related to the 747 program at Commercial Airplanes.
Core operating earnings for the three months ended March 31, 2017 increased by $15 million compared with the same period in 2016 primarily due to higher Commercial Airplanes' and Boeing Capital (BCC) earnings, which more than offset lower earnings at BDS and other unallocated items and eliminations.
Unallocated Items, Eliminations and Other The most significant items included in Unallocated items, eliminations and other are shown in the following table:
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Share-based plans |
| ($21 | ) | |
| ($23 | ) |
Deferred compensation | (50 | ) | | 16 |
|
Eliminations and other unallocated items | (211 | ) | | (159 | ) |
Sub-total (included in core operating earnings*) | (282 | ) | | (166 | ) |
Pension | 255 |
| | 45 |
|
Postretirement | 60 |
| | 49 |
|
Pension and other postretirement benefit income(excluded from core operating earnings*) | 315 |
| | 94 |
|
Total |
| $33 |
| |
| ($72 | ) |
* Core operating earnings is a Non-GAAP measure that excludes certain components of pension and postretirement benefit expense. See page 43.
The deferred compensation expense increased by $66 million for the three months ended March 31, 2017 compared with the same period in 2016 primarily driven by changes in broad stock market conditions and our stock price.
Eliminations and other unallocated loss increased by $52 million for the three months ended March 31, 2017 compared with the same period in 2016 primarily due to the timing of expense allocations and the elimination of profit on intercompany aircraft deliveries.
The components of net periodic benefit cost are shown in the following table:
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
Pension Plans | 2017 |
| | 2016 |
|
Service cost |
| $101 |
| |
| $163 |
|
Interest cost | 748 |
| | 764 |
|
Expected return on plan assets | (961 | ) | | (999 | ) |
Amortization of prior service costs | (10 | ) | | 10 |
|
Recognized net actuarial loss | 201 |
| | 197 |
|
Settlement/curtailment/other losses | 1 |
| | 15 |
|
Net periodic benefit cost |
| $80 |
| |
| $150 |
|
The decrease in net periodic pension benefit cost for the three months ended March 31, 2017 of $70 million compared with the same period in 2016 is primarily due to lower service costs due to the transition of additional employees to defined contribution retirement savings plans.
A portion of net periodic benefit cost is recognized in Earnings from operations in the period incurred and the remainder is included in inventory at the end of the reporting period and recorded in Earnings from operations in subsequent periods. Costs are allocated to the business segments as described in Note 11. Net periodic pension benefit costs included in Earnings from operations were as follows:
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
Pension Plans | 2017 |
| | 2016 |
|
Allocated to business segments |
| ($589 | ) | |
| ($674 | ) |
Unallocated items, Eliminations and other | 255 |
| | 45 |
|
Total |
| ($334 | ) | |
| ($629 | ) |
The unallocated pension costs recognized in earnings was a benefit of $255 million for the three months ended March 31, 2017 compared with $45 million for the same period in 2016. The higher benefit reflects the amortization of pension benefits capitalized as inventory in prior years.
Other Earnings Items
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31 |
| 2017 |
| | 2016 |
|
Earnings from operations |
| $2,024 |
| |
| $1,788 |
|
Other income, net | 22 |
| | 26 |
|
Interest and debt expense | (87 | |