UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-442
THE BOEING COMPANY | ||
(Exact name of registrant as specified in its charter)
Delaware | 91-0425694 | |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | |
100 N. Riverside Plaza, Chicago, IL | 60606-1596 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (312) 544-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value | New York Stock Exchange | |
(Title of each class) | (Name of each exchange on which registered) | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer x | 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 x
As of June 30, 2017, there were 593,198,552 common shares outstanding held by nonaffiliates of the registrant, and the aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock Exchange) was approximately $117.3 billion.
The number of shares of the registrant’s common stock outstanding as of February 5, 2018 was 588,490,313.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2017.
THE BOEING COMPANY
Index to the Form 10-K
For the Fiscal Year Ended December 31, 2017
Page | |||
PART I
Item 1. Business
The Boeing Company, together with its subsidiaries (herein referred to as “Boeing,” the “Company,” “we,” “us,” “our”), is one of the world’s major aerospace firms.
We are organized based on the products and services we offer. We operate in four reportable segments:
• | Commercial Airplanes (BCA); |
• | Defense, Space & Security (BDS); |
• | Global Services (BGS); |
• | Boeing Capital (BCC). |
Commercial Airplanes Segment
This segment develops, produces and markets commercial jet aircraft and provides fleet support services, principally to the commercial airline industry worldwide. We are a leading producer of commercial aircraft and offer a family of commercial jetliners designed to meet a broad spectrum of global passenger and cargo requirements of airlines. This family of commercial jet aircraft in production includes the 737 narrow-body model and the 747, 767, 777 and 787 wide-body models. Development continues on the 787-10 and certain 737 MAX derivatives and the 777X program.
Defense, Space & Security Segment
This segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for global strike, including fighter aircraft and missile systems; vertical lift, including rotorcraft and tilt-rotor aircraft; mobility, surveillance and engagement, including battle management, airborne, anti-submarine, transport and tanker aircraft. In addition, this segment is engaged in the research, development, production and modification of the following products and related services: strategic defense and intelligence systems, including strategic missile and defense systems, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), cyber and information solutions, and intelligence systems; satellite systems, including government and commercial satellites and space exploration.
BDS' primary customer is the United States Department of Defense (U.S. DoD). Revenues from the U.S. DoD, including foreign military sales through the U.S. government, accounted for approximately 79% of its 2017 revenues. Other significant BDS customers include the National Aeronautics and Space Administration (NASA) and customers in international defense, civil and commercial satellite markets.
This segment's primary products include the following fixed-wing military aircraft: EA-18G Growler Airborne Electronic Attack, F/A-18E/F Super Hornet, F-15 Strike Eagle, P-8 programs, and KC-46A Tanker. This segment produces rotorcraft and rotary-wing programs, such as CH-47 Chinook, AH-64 Apache, and V-22 Osprey. In addition, this segment's products include space and missile systems including: government and commercial satellites, the International Space Station, missile defense and weapons programs, and Joint Direct Attack Munition, as well as the United Launch Alliance joint venture.
Global Services Segment
This segment provides services to our commercial and defense customers. This segment offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, data analytics and information-based services, and technical advice to commercial and government customers worldwide.
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In addition, BGS sustains aircraft and systems with a full spectrum of products and services through integrated logistics, including supply chain management and engineering support; maintenance, modification and upgrades for aircraft; and training systems and government services, including pilot and maintenance training. Major defense programs supported include the C-17 Globemaster III, F-15 Strike Eagle, F/A-18E/F Super Hornet, and AH-64 Apache for domestic and international customers.
Boeing Capital Segment
BCC seeks to ensure that Boeing customers have the financing they need to buy and take delivery of their Boeing product and manages overall financing exposure. BCC’s portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments.
Financial and Other Business Information
See the Summary of Business Segment Data and Note 21 to our Consolidated Financial Statements for financial information, including revenues and earnings from operations, for each of our business segments.
Intellectual Property
We own numerous patents and have licenses for the use of patents owned by others, which relate to our products and their manufacture. In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties. For example, the U.S. government has licenses in our patents that are developed in performance of government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes. Unpatented research, development and engineering skills, as well as certain trademarks, trade secrets, and other intellectual property rights, also make an important contribution to our business. While our intellectual property rights in the aggregate are important to the operation of each of our businesses, we do not believe that our business would be materially affected by the expiration of any particular intellectual property right or termination of any particular intellectual property patent license agreement.
Non-U.S. Revenues
See Note 21 to our Consolidated Financial Statements for information regarding non-U.S. revenues.
Research and Development
Research and development (R&D) expenditures involve experimentation, design, development and related test activities for defense systems, new and derivative jet aircraft including both commercial and military, advanced space and other company-sponsored product development. R&D expenditures are expensed as incurred including amounts allocable as reimbursable overhead costs on U.S. government contracts.
Our total research and development expense, net amounted to $3.2 billion, $4.6 billion and $3.3 billion in 2017, 2016 and 2015, respectively.
Research and development costs also include bid and proposal efforts related to government products and services, as well as costs incurred in excess of amounts estimated to be recoverable under cost-sharing research and development agreements. Bid and proposal costs were $288 million, $311 million and $286 million in 2017, 2016 and 2015, respectively.
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Employees
Total workforce level at December 31, 2017 was approximately 140,800. As of December 31, 2017, our principal collective bargaining agreements were with the following unions:
Union | Percent of our Employees Represented | Status of the Agreements with Major Union |
The International Association of Machinists and Aerospace Workers (IAM) | 21% | We have two major agreements; one expiring in June 2022 and one in September 2024. |
The Society of Professional Engineering Employees in Aerospace (SPEEA) | 12% | We have two major agreements expiring in October 2022. |
The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) | 1% | We have one major agreement expiring in October 2022. |
Competition
The commercial jet aircraft market and the airline industry remain extremely competitive. We face aggressive international competitors who are intent on increasing their market share, such as Airbus, Embraer and Bombardier, and other entrants from Russia, China and Japan. We are focused on improving our processes and continuing cost reduction efforts. We intend to continue to compete with other airplane manufacturers by providing customers with greater value products.
BDS faces strong competition in all market segments, primarily from Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company, General Dynamics Corporation and SpaceX. Non-U.S. companies such as BAE Systems and Airbus Group continue to build a strategic presence in the U.S. market by strengthening their North American operations and partnering with U.S. defense companies. In addition, certain competitors have occasionally formed teams with other competitors to address specific customer requirements. BDS expects the trend of strong competition to continue into 2018.
The commercial and defense services market is an extremely challenging landscape made up of many of the same strong U.S. and non-U.S. competitors facing BCA and BDS along with other competitors in those markets. BGS leverages our extensive services network offering products and services which span the life cycle of our defense and commercial airplane programs: training, fleet services and logistics, maintenance and engineering, modifications and upgrades - as well as the daily cycle of gate-to-gate operations. BGS expects the market to remain highly competitive in 2018, and intends to grow market share by leveraging a high level of customer satisfaction and productivity.
Regulatory Matters
Our businesses are heavily regulated in most of our markets. We deal with numerous U.S. government agencies and entities, including but not limited to all of the branches of the U.S. military, NASA, the Federal Aviation Administration (FAA) and the Department of Homeland Security. Similar government authorities exist in our non-U.S. markets.
Government Contracts. The U.S. government, and other governments, may terminate any of our government contracts at their convenience, as well as for default based on our failure to meet specified performance requirements. If any of our U.S. government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S.
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government would pay only for the work that has been accepted and could require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default.
Commercial Aircraft. In the U.S., our commercial aircraft products are required to comply with FAA regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Outside the U.S., similar requirements exist for airworthiness, installation and operational approvals. These requirements are generally administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities.
Environmental. We are subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We continually assess our compliance status and management of environmental matters to ensure our operations are in compliance with all applicable environmental laws and regulations. Investigation, remediation, and operation and maintenance costs associated with environmental compliance and management of sites are a normal, recurring part of our operations. These costs often are allowable costs under our contracts with the U.S. government. It is reasonably possible that costs incurred to ensure continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows if additional work requirements or more stringent clean-up standards are imposed by regulators, new areas of soil, air and groundwater contamination are discovered and/or expansions of work scope are prompted by the results of investigations.
A Potentially Responsible Party (PRP) has joint and several liability under existing U.S. environmental laws. Where we have been designated a PRP by the Environmental Protection Agency or a state environmental agency, we are potentially liable to the government or third parties for the full cost of remediating contamination at our facilities or former facilities or at third-party sites. If we were required to fully fund the remediation of a site for which we were originally assigned a partial share, the statutory framework would allow us to pursue rights to contribution from other PRPs. For additional information relating to environmental contingencies, see Note 11 to our Consolidated Financial Statements.
Non-U.S. Sales. Our non-U.S. sales are subject to both U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations relating to import-export control, investment, exchange controls, anti-corruption, and repatriation of earnings. Non-U.S. sales are also subject to varying currency, political and economic risks.
Raw Materials, Parts, and Subassemblies
We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and subcontractors. The most important raw materials required for our aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). Although alternative sources generally exist for these raw materials, qualification of the sources could take a year or more. Many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of companies.
Suppliers
We are dependent upon the ability of a large number of U.S. and non-U.S. suppliers and subcontractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production schedules and program/contract profitability, thereby jeopardizing our ability
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to fulfill commitments to our customers. We are also dependent on the availability of energy sources, such as electricity, at affordable prices.
Seasonality
No material portion of our business is considered to be seasonal.
Executive Officers of the Registrant
See “Item 10. Directors, Executive Officers and Corporate Governance” in Part III.
Other Information
Boeing was originally incorporated in the State of Washington in 1916 and reincorporated in Delaware in 1934. Our principal executive offices are located at 100 N. Riverside Plaza, Chicago, Illinois 60606 and our telephone number is (312) 544-2000.
General information about us can be found at www.boeing.com. The information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the Securities and Exchange Commission (SEC). Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC. These reports may also be obtained at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Boeing.
Forward-Looking Statements
This report, as well as our annual report to shareholders, quarterly reports, and other filings we make with the SEC, press and earnings releases and other written and oral communications, contain “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 generally 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 expectations and assumptions that we believe to be reasonable when made, but that may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties and changes in circumstances that are difficult to predict. Many factors, including those set forth in the “Risk Factors” section below and other important factors disclosed in this report and from time to time in our other filings with the SEC, could cause actual results to differ materially and adversely from these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.
Item 1A. Risk Factors
An investment in our common stock or debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past or projected future performance. We urge investors to consider carefully the risk factors described below in evaluating the information contained in this report.
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Our Commercial Airplanes and Global Services businesses depend heavily on commercial airlines, and are subject to unique risks.
Market conditions have a significant impact on demand for our commercial aircraft and related services. The commercial aircraft market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors underlying long-term traffic growth are sustained economic growth and political stability both in developed and emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of aircraft financing, world trade policies, government-to-government relations, technological advances, price and other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the airline industry has been cyclical and very competitive and has experienced significant profit swings and constant challenges to be more cost competitive. In addition, availability of financing to non-U.S. customers depends in part on the Export-Import Bank of the United States being fully operational. Significant deterioration in the global economic environment, the airline industry generally, or the financial stability of one or more of our major customers could result in fewer new orders for aircraft or services, or could cause customers to seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues, profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.
We enter into firm fixed-price aircraft sales contracts with indexed price escalation clauses which could subject us to losses if we have cost overruns or if increases in our costs exceed the applicable escalation rate. Commercial aircraft sales contracts are often entered into years before the aircraft are delivered. In order to help account for economic fluctuations between the contract date and delivery date, aircraft pricing generally consists of a fixed amount as modified by price escalation formulas derived from labor, commodity and other price indices. Our revenue estimates are based on current expectations with respect to these escalation formulas, but the actual escalation amounts are outside of our control. Escalation factors can fluctuate significantly from period to period. Changes in escalation amounts can significantly impact revenues and operating margins in our Commercial Airplanes business.
We derive a significant portion of our revenues from a limited number of commercial airlines. We can make no assurance that any customer will exercise purchase options, fulfill existing purchase commitments or purchase additional products or services from us. In addition, fleet decisions, airline consolidations or financial challenges involving any of our major commercial airline customers could significantly reduce our revenues and limit our opportunity to generate profits from those customers.
Our Commercial Airplanes business depends on our ability to maintain a healthy production system, achieve planned production rate targets, successfully develop new aircraft or new derivative aircraft, and meet or exceed stringent performance and reliability standards.
The commercial aircraft business is extremely complex, involving extensive coordination and integration with U.S and non-U.S. suppliers, highly-skilled labor from thousands of employees and other partners, and stringent regulatory requirements and performance and reliability standards. In addition, the introduction of new aircraft programs and/or derivatives, such as the 787-10, and 777X, involves increased risks associated with meeting development, testing, production and certification schedules. As a result, our ability to deliver aircraft on time, satisfy regulatory and customer requirements, and achieve or maintain, as applicable, program profitability is subject to significant risks.
We must minimize disruption caused by production changes and achieve productivity improvements in order to meet customer demand and maintain our profitability. We have plans to adjust production rates on several of our commercial aircraft programs, while at the same time engaging in significant ongoing development and production of the 787-10 and 777X aircraft. In addition, we continue to seek opportunities to reduce the costs of building our aircraft, including working with our suppliers to reduce supplier costs,
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identifying and implementing productivity improvements, and optimizing how we manage inventory. If production rate changes at any of our commercial aircraft assembly facilities are delayed or create significant disruption to our production system, or if our suppliers cannot timely deliver components to us at the cost and rates necessary to achieve our targets, we may be unable to meet delivery schedules and/or the financial performance of one or more of our programs may suffer.
Operational challenges impacting the production system for one or more of our commercial aircraft programs could result in production delays and/or failure to meet customer demand for new aircraft, either of which would negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely complex. Operational issues, including delays or defects in supplier components, failure to meet internal performance plans, or delays or failures to achieve required regulatory certifications, could result in significant out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to aircraft performance and/or increased warranty or fleet support costs.
If our commercial airplanes fail to satisfy performance and reliability requirements, we could face additional costs and/or lower revenues. Developing and manufacturing commercial aircraft that meet or exceed our performance and reliability standards, as well as those of customers and regulatory agencies, can be costly and technologically challenging. These challenges are particularly significant with newer aircraft programs. Any failure of any Boeing aircraft to satisfy performance or reliability requirements could result in disruption to our operations, higher costs and/or lower revenues.
Changes in levels of U.S. government defense spending or overall acquisition priorities could negatively impact our financial position and results of operations.
We derive a substantial portion of our revenue from the U.S. government, primarily from defense related programs with the United States Department of Defense (U.S. DoD). Levels of U.S. defense spending are very difficult to predict and may be impacted by numerous factors such as the political environment, U.S. foreign policy, macroeconomic conditions and the ability of the U.S. government to enact relevant legislation such as authorization and appropriations bills.
In addition, significant budgetary delays and constraints have already resulted in reduced spending levels, and additional reductions may be forthcoming. The Budget Control Act of 2011 (The Act) established limits on U.S. government discretionary spending, including a reduction of defense spending between the 2012 and 2021 U.S. government fiscal years. Accordingly, long-term uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. government discretionary spending levels will continue to be subject to pressure.
In addition, there continues to be significant uncertainty with respect to program-level appropriations for the U.S. DoD and other government agencies (including NASA) within the overall budgetary framework described above. While the House and Senate Appropriations committees included funding for Boeing’s major programs, such as F/A-18, CH-47 Chinook, AH-64 Apache, KC-46A Tanker and P-8 programs, in the final FY2017 appropriation and in their FY2018 bills, uncertainty remains about how defense budgets in FY2018 and beyond will affect Boeing’s programs. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the authorizations 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, as a result of the significant ongoing uncertainty with respect to both U.S. defense spending levels and the nature of the threat environment, we expect the U.S. DoD to continue to emphasize cost-cutting and other efficiency initiatives in its procurement processes. If we can no longer adjust successfully to these changing acquisition priorities and/or fail to meet affordability targets set by the U.S. DoD customer, our revenues and market share would be further impacted.
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We conduct a significant portion of our business pursuant to U.S. government contracts, which are subject to unique risks.
In 2017, 31% of our revenues were earned pursuant to U.S. government contracts, which include foreign military sales (FMS) through the U.S. government. Business conducted pursuant to such contracts is subject to extensive procurement regulations and other unique risks.
Our sales to the U.S. government are subject to extensive procurement regulations, and changes to those regulations could increase our costs. New procurement regulations, or changes to existing requirements, could increase our compliance costs or otherwise have a material impact on the operating margins of our BDS and BGS businesses. These requirements may result in increased compliance costs, and we could be subject to additional costs in the form of withheld payments and/or reduced future business if we fail to comply with these requirements in the future. Compliance costs attributable to current and potential future procurement regulations such as these could negatively impact our financial condition and operating results.
The U.S. government may modify, curtail or terminate one or more of our contracts. The U.S. government contracting party may modify, curtail or terminate its contracts and subcontracts with us, without prior notice and either at its convenience or for default based on performance. In addition, funding pursuant to our U.S. government contracts may be reduced or withheld as part of the U.S. Congressional appropriations process due to fiscal constraints, changes in U.S. national security strategy and/or priorities or other reasons. Further uncertainty with respect to ongoing programs could also result in the event that the U.S. government finances its operations through temporary funding measures such as “continuing resolutions” rather than full-year appropriations. Any loss or anticipated loss or reduction of expected funding and/or modification, curtailment, or termination of one or more large programs could have a material adverse effect on our earnings, cash flow and/or financial position.
We are subject to U.S. government inquiries and investigations, including periodic audits of costs that we determine are reimbursable under U.S. government contracts. U.S. government agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit government contractors. These agencies review our performance under contracts, cost structure and compliance with applicable laws, regulations, and standards, as well as the adequacy of and our compliance with our internal control systems and policies. Any costs found to be misclassified or inaccurately allocated to a specific contract will be deemed non-reimbursable, and to the extent already reimbursed, must be refunded. Any inadequacies in our systems and policies could result in withholds on billed receivables, penalties and reduced future business. Furthermore, if any audit, inquiry or investigation uncovers improper or illegal activities, we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with the U.S. government. We also could suffer reputational harm if allegations of impropriety were made against us, even if such allegations are later determined to be false.
We enter into fixed-price contracts which could subject us to losses if we have cost overruns.
Our BDS and BGS defense businesses generated approximately 65% and 77% of their 2017 revenues from fixed-price contracts. While fixed-price contracts enable us to benefit from performance improvements, cost reductions and efficiencies, they also subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and revenues. If our estimated costs exceed our estimated price, we recognize reach-forward losses which can significantly affect our reported results. For example, during 2017, we recorded reach-forward losses totaling $471 million on the USAF KC-46A Tanker contract, primarily driven by additional costs attributable to certification and incorporating changes into low rate initial production (LRIP) aircraft. The long term nature of many of our contracts makes the process of estimating costs and revenues on fixed-price contracts inherently risky. Fixed-price contracts often contain price incentives and penalties tied to performance which can be difficult to estimate and have significant
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impacts on margins. In addition, some of our contracts have specific provisions relating to cost, schedule and performance.
Fixed-price development contracts are generally subject to more uncertainty than fixed-price production contracts. Many of these development programs have highly complex designs. In addition, technical or quality issues that arise during development could lead to schedule delays and higher costs to complete, which could result in a material charge or otherwise adversely affect our financial condition. Examples of significant BDS fixed-price development contracts include Commercial Crew, Saudi F-15, USAF KC-46A Tanker, and commercial and military satellites.
We enter into cost-type contracts which also carry risks.
Our BDS and BGS defense businesses generated approximately 35% and 23% of their 2017 revenues from cost-type contracting arrangements. Some of these are development programs that have complex design and technical challenges. These cost-type programs typically have award or incentive fees that are subject to uncertainty and may be earned over extended periods. In these cases the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Programs whose contracts are primarily cost-type include GMD, Proprietary and SLS programs.
We enter into contracts that include in-orbit incentive payments that subject us to risks.
Contracts in the commercial satellite industry and certain government satellite contracts include in-orbit incentive payments. These in-orbit payments may be paid over time after final satellite acceptance or paid in full prior to final satellite acceptance. In both cases, the in-orbit incentive payment is at risk if the satellite does not perform to specifications for up to 15 years after acceptance. The net present value of in-orbit incentive fees we ultimately expect to realize is recognized as revenue in the construction period. If the satellite fails to meet contractual performance criteria, customers will not be obligated to continue making in-orbit payments and/or we may be required to provide refunds to the customer and incur significant charges.
Our ability to deliver products and services that satisfy customer requirements is heavily dependent on the performance and financial stability of our subcontractors and suppliers, as well as on the availability of raw materials and other components.
We rely on other companies including U.S. and non-U.S. subcontractors and suppliers to provide and produce raw materials, integrated components and sub-assemblies, and production commodities and to perform some of the services that we provide to our customers. If one or more of our suppliers or subcontractors experiences financial difficulties, delivery delays or other performance problems, we may be unable to meet commitments to our customers or incur additional costs. In addition, if one or more of the raw materials on which we depend (such as aluminum, titanium or composites) becomes unavailable or is available only at very high prices, we may be unable to deliver one or more of our products in a timely fashion or at budgeted costs. In some instances, we depend upon a single source of supply. Any service disruption from one of these suppliers, either due to circumstances beyond the supplier’s control, such as geo-political developments, or as a result of performance problems or financial difficulties, could have a material adverse effect on our ability to meet commitments to our customers or increase our operating costs.
We use estimates in accounting for many contracts and programs. Changes in our estimates could adversely affect our future financial results.
Contract and program accounting require judgment relative to assessing risks, estimating revenues and
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costs and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts and programs, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions have to be made regarding the length of time to complete the contract or program because costs also include expected increases in wages and employee benefits, material prices and allocated fixed costs. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance. Suppliers’ assertions are also assessed and considered in estimating costs and profit rates. Estimates of award fees are also used in sales and profit rates based on actual and anticipated awards.
With respect to each of our commercial aircraft programs, inventoriable production costs (including overhead), program tooling and other non-recurring costs and routine warranty costs are accumulated and charged as cost of sales by program instead of by individual units or contracts. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts limited by the ability to make reasonably dependable estimates. To establish the relationship of sales to cost of sales, program accounting requires estimates of (a) the number of units to be produced and sold in a program, (b) the period over which the units can reasonably be expected to be produced and (c) the units’ expected sales prices, production costs, program tooling and other non-recurring costs, and routine warranty costs for the total program. Several factors determine accounting quantity, including firm orders, letters of intent from prospective customers and market studies. Changes to customer or model mix, production costs and rates, learning curve, changes to price escalation indices, costs of derivative aircraft, supplier performance, customer and supplier negotiations/settlements, supplier claims and/or certification issues can impact these estimates. Any such change in estimates relating to program accounting may adversely affect future financial performance.
Because of the significance of the judgments and estimation processes described above, materially different sales and profit amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. For additional information on our accounting policies for recognizing sales and profits, see our discussion under “Management’s Discussion and Analysis – Critical Accounting Policies – Contract Accounting/Program Accounting” on pages 41 – 43 and Note 1 to our Consolidated Financial Statements on pages 52 – 64 of this Form 10-K.
Competition within our markets and with respect to the products we sell may reduce our future contracts and sales.
The markets in which we operate are highly competitive and one or more of our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. In our Commercial Airplanes business, we anticipate increasing competition among non-U.S. aircraft manufacturers of commercial jet aircraft. In our BDS business, we anticipate that the effects of defense industry consolidation, fewer large and new programs and new priorities, including near and long-term cost competitiveness, of our U.S. DoD and non-U.S. will intensify competition for many of our BDS products. Our BGS segment faces competition from many of the same strong U.S. and non-U.S. competitors facing BCA and BDS. Furthermore, we are facing increased international competition and cross-border consolidation of competition. There can be no assurance that we will be able to compete successfully against our current or future competitors or that the competitive pressures we face will not result in reduced revenues and market share.
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We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks of doing business in other countries.
In 2017, non-U.S. customers, which includes FMS, accounted for approximately 55% of our revenues. We expect that non-U.S. sales will continue to account for a significant portion of our revenues for the foreseeable future. As a result, we are subject to risks of doing business internationally, including:
• | changes in regulatory requirements; |
• | U.S. and non-U.S. government policies, including requirements to expend a portion of program funds locally and governmental industrial cooperation or participation requirements; |
• | fluctuations in international currency exchange rates; |
• | volatility in international political and economic environments and changes in non-U.S. national priorities and budgets, which can lead to delays or fluctuations in orders; |
• | the complexity and necessity of using non-U.S. representatives and consultants; |
• | the uncertainty of the ability of non-U.S. customers to finance purchases, including the availability of financing from the Export-Import Bank of the United States; |
• | uncertainties and restrictions concerning the availability of funding credit or guarantees; |
• | imposition of domestic and international taxes, export controls, tariffs, embargoes, sanctions and other trade restrictions; |
• | the difficulty of management and operation of an enterprise spread over many countries; |
• | compliance with a variety of non-U.S. laws, as well as U.S. laws affecting the activities of U.S. companies abroad; and |
• | unforeseen developments and conditions, including terrorism, war, epidemics and international tensions and conflicts. |
While the impact of these factors is difficult to predict, any one or more of these factors could adversely affect our operations in the future.
Unauthorized access to our or our customers’ information and systems could negatively impact our business.
We face certain security threats, including threats to the confidentiality, availability and integrity of our data and systems. We maintain an extensive network of technical security controls, policy enforcement mechanisms, monitoring systems and management oversight in order to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks, including cyber-attacks, could result in significant financial or information losses and/or reputational harm. In addition, we manage information and information technology systems for certain customers. Many of these customers face similar security threats. If we cannot prevent the unauthorized access, release and/or corruption of our customers’ confidential, classified or personally identifiable information, our reputation could be damaged, and/or we could face financial losses.
The outcome of litigation and of government inquiries and investigations involving our business is unpredictable and an adverse decision in any such matter could have a material effect on our financial position and results of operations.
We are involved in a number of litigation matters. These matters may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits, or future lawsuits, could have a material impact on our financial position and results of operations. In addition, we
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are subject to extensive regulation under the laws of the United States and its various states, as well as other jurisdictions in which we operate. As a result, we are sometimes subject to government inquiries and investigations of our business due, among other things, to our business relationships with the U.S. government, the heavily regulated nature of our industry, and in the case of environmental proceedings, our current or past ownership of certain property. Any such inquiry or investigation could potentially result in an adverse ruling against us, which could have a material impact on our financial position and results of operations.
A significant portion of our customer financing portfolio is concentrated among certain customers and in certain types of Boeing aircraft, which exposes us to concentration risks.
A significant portion of our customer financing portfolio is concentrated among certain customers and in distinct geographic regions. Our portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 and 747-8 aircraft, and among customers that we believe have less than investment-grade credit. If one or more customers holding a significant portion of our portfolio assets experiences financial difficulties or otherwise defaults on or does not renew its leases with us at their expiration, and we are unable to redeploy the aircraft on reasonable terms, or if the types of aircraft that are concentrated in our portfolio suffer greater than expected declines in value, our earnings, cash flows and/or financial position could be materially adversely affected.
We may be unable to obtain debt to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms or in sufficient amounts.
We depend, in part, upon the issuance of debt to fund our operations and contractual commitments. As of December 31, 2017 and 2016, our airplane financing commitments totaled $10,221 million and $14,847 million. If we require additional funding in order to fund outstanding financing commitments or meet other business requirements, our market liquidity may not be sufficient. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook or credit ratings. The occurrence of any or all of these events may adversely affect our ability to fund our operations and contractual or financing commitments.
We may not realize the anticipated benefits of mergers, acquisitions, joint ventures/strategic alliances or divestitures.
As part of our business strategy, we may merge with or acquire businesses and/or form joint ventures and strategic alliances. Whether we realize the anticipated benefits from these acquisitions and related activities depends, in part, upon our ability to integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the performance of the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected by unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. Consolidations of joint ventures could also impact our reported results of operations or financial position. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs.
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Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to liabilities that are unique to the products and services we provide. We maintain insurance for certain risks and, in some circumstances, we may receive indemnification from the U.S. government. The amount of our insurance coverage may not cover all claims or liabilities and we may be forced to bear substantial costs. For example, liabilities arising from the use of certain of our products, such as aircraft technologies, missile systems, border security systems, anti-terrorism technologies, and/or air traffic management systems may not be insurable on commercially reasonable terms. While some of these products are shielded from liability within the U.S. under the SAFETY Act provisions of the 2002 Homeland Security Act, no such protection is available outside the U.S., potentially resulting in significant liabilities. The amount of insurance coverage we maintain may be inadequate to cover these or other claims or liabilities.
Business disruptions could seriously affect our future sales and financial condition or increase our costs and expenses.
Our business may be impacted by disruptions including threats to physical security, information technology or cyber-attacks or failures, damaging weather or other acts of nature and pandemics or other public health crises. Any of these disruptions could affect our internal operations or our ability to deliver products and services to our customers. Any significant production delays, or any destruction, manipulation or improper use of our data, information systems or networks could impact our sales, increase our expenses and/or have an adverse effect on the reputation of Boeing and of our products and services.
Some of our and our suppliers’ workforces are represented by labor unions, which may lead to work stoppages.
Approximately 52,000 employees, which constitute 37% of our total workforce, were union represented as of December 31, 2017. We experienced a work stoppage in 2008 when a labor strike halted commercial aircraft and certain BDS program production. We may experience additional work stoppages in the future, which could adversely affect our business. We cannot predict how stable our relationships, currently with 10 U.S. labor organizations and 7 non-U.S. labor organizations, will be or whether we will be able to meet the unions’ requirements without impacting our financial condition. The unions may also limit our flexibility in dealing with our workforce. Union actions at suppliers can also affect us. Work stoppages and instability in our union relationships could delay the production and/or development of our products, which could strain relationships with customers and cause a loss of revenues which would adversely affect our operations.
Substantial pension and other postretirement benefit obligations have a material impact on our earnings, shareholders’ equity and cash flows from operations, and could have significant adverse impacts in future periods.
The majority of our employees have earned benefits under defined benefit pension plans. Potential pension contributions include both mandatory amounts required under the Employee Retirement Income Security Act and discretionary contributions to improve the plans' funded status. The extent of future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions as well as on our annual pension costs and/or result in a significant change to shareholders' equity. For U.S. government contracts, we allocate pension costs to individual contracts based on U.S. Cost Accounting Standards which can also affect contract profitability. We also provide other postretirement benefits to certain of our employees, consisting principally of health care coverage for eligible retirees and qualifying dependents. Our estimates of future costs associated with these benefits are also subject to assumptions, including
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estimates of the level of medical cost increases. For a discussion regarding how our financial statements can be affected by pension and other postretirement plan accounting policies, see “Management's Discussion and Analysis-Critical Accounting Policies-Pension Plans” on page 43 of this Form 10-K. Although GAAP expense and pension or other postretirement benefit contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash or stock we would contribute to our plans.
Our operations expose us to the risk of material environmental liabilities.
We are subject to various U.S. federal, state, local and non-U.S. laws and regulations related to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if we were to violate or become liable under environmental laws or regulations. In some cases, we may be subject to such costs due to environmental impacts attributable to our current or past manufacturing operations or the operations of companies we have acquired. In other cases, we may become subject to such costs due to an indemnification agreement between us and a third party relating to such environmental liabilities. In addition, new laws and regulations, more stringent enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new remediation requirements could result in additional costs. For additional information relating to environmental contingencies, see Note 11 to our Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments
Not applicable
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Item 2. Properties
We occupied approximately 85 million square feet of floor space on December 31, 2017 for manufacturing, warehousing, engineering, administration and other productive uses, of which approximately 96% was located in the United States. The following table provides a summary of the floor space by business as of December 31, 2017:
(Square feet in thousands) | Owned | Leased | Government Owned(1) | Total | |||||||
Commercial Airplanes | 41,115 | 2,455 | 43,570 | ||||||||
Defense, Space & Security | 26,449 | 5,390 | 31,839 | ||||||||
Global Services | 681 | 5,274 | 5,955 | ||||||||
Other(2) | 2,448 | 915 | 305 | 3,668 | |||||||
Total | 70,693 | 14,034 | 305 | 85,032 | |||||||
(1) Excludes rent-free space furnished by U.S. government landlord of 49 square feet.
(2) Other includes BCC, sites used for common internal services, and our Corporate Headquarters.
At December 31, 2017, we occupied in excess of 77.8 million square feet of floor space at the following major locations:
• | Commercial Airplanes – Greater Seattle, WA; Greater Charleston, SC; Portland, OR; Greater Los Angeles, CA; Greater Salt Lake City, UT; Australia; and Canada |
• | Defense, Space & Security – Greater St. Louis, MO; Greater Los Angeles, CA; Greater Seattle, WA; Philadelphia, PA; Mesa, AZ; Huntsville, AL; Oklahoma City, OK; Heath, OH; Greater Washington, DC; and Houston, TX |
• | Global Services – San Antonio, TX; Dallas, TX; and Mesa, AZ |
• | Other – Chicago, IL; Greater Seattle, WA; and Greater Washington, DC |
Most runways and taxiways that we use are located on airport properties owned by others and are used jointly with others. Our rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. government furnishes us certain office space, installations and equipment at U.S. government bases for use in connection with various contract activities.
We believe that our major properties are adequate for our present needs and, as supplemented by planned improvements and construction, expect them to remain adequate for the foreseeable future.
Item 3. Legal Proceedings
Currently, we are involved in a number of legal proceedings. For a discussion of contingencies related to legal proceedings, see Note 20 to our Consolidated Financial Statements, which is hereby incorporated by reference.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market for our common stock is the New York Stock Exchange where it trades under the symbol BA. As of February 5, 2018, there were 108,310 shareholders of record. Additional information required by this item is incorporated by reference from Note 22 to our Consolidated Financial Statements.
Issuer Purchases of Equity Securities
The following table provides information about purchases we made during the quarter ended December 31, 2017 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
(Dollars in millions, except per share data)
(a) | (b) | (c) | (d) | |||||||||
Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs(2) | |||||||||
10/1/2017 thru 10/31/2017 | 3,860,891 | $259.30 | 3,856,749 | $5,501 | ||||||||
11/1/2017 thru 11/30/2017 | 2,806,168 | 262.85 | 2,800,181 | 4,765 | ||||||||
12/1/2017 thru 12/31/2017 | 39,098 | 276.49 | 18,000 | |||||||||
Total | 6,706,157 | $260.89 | 6,656,930 | |||||||||
(1) | We purchased an aggregate of 6,656,930 shares of our common stock in the open market pursuant to our repurchase plan and 49,227 shares transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units during the period. We did not purchase shares in swap transactions. |
(2) | On December 11, 2017, we announced a new repurchase plan for up to $18 billion of common stock, replacing the plan previously authorized in 2016. |
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Item 6. Selected Financial Data
Five-Year Summary (Unaudited) | |||||||||||||||||||
(Dollars in millions, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||
Revenues | $93,392 | $94,571 | $96,114 | $90,762 | $86,623 | ||||||||||||||
Net earnings from continuing operations | $8,197 | $4,895 | $5,176 | $5,446 | $4,586 | ||||||||||||||
Basic earnings per share from continuing operations | $13.60 | $7.70 | $7.52 | $7.47 | $6.03 | ||||||||||||||
Diluted earnings per share from continuing operations | 13.43 | 7.61 | 7.44 | 7.38 | 5.96 | ||||||||||||||
Dividends declared per share(1) | 5.97 | 4.69 | 3.82 | 3.10 | 2.185 | ||||||||||||||
Cash and cash equivalents | $8,813 | $8,801 | $11,302 | $11,733 | $9,088 | ||||||||||||||
Short-term and other investments | 1,179 | 1,228 | 750 | 1,359 | 6,170 | ||||||||||||||
Total assets | 92,333 | 89,997 | 94,408 | 92,921 | 90,014 | ||||||||||||||
Total debt | 11,117 | 9,952 | 9,964 | 9,070 | 9,635 | ||||||||||||||
Operating cash flow | $13,344 | $10,499 | $9,363 | $8,858 | $8,179 | ||||||||||||||
Total backlog | $488,145 | $473,492 | $489,299 | $502,391 | $440,928 | ||||||||||||||
Year-end workforce | 140,800 | 150,500 | 161,400 | 165,500 | 168,400 | ||||||||||||||
(1) Cash dividends have been paid on common stock every year since 1942.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations and Financial Condition
Overview
We are a global market leader in the design, development, manufacture, sale, service and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. We are one of the two major manufacturers of 100+ seat airplanes for the worldwide commercial airline industry and one of the largest defense contractors in the U.S. While our principal operations are in the U.S., we conduct operations in an expanding number of countries and rely on an extensive network of non-U.S. partners, key suppliers and subcontractors.
Our strategy is centered on successful execution in healthy core businesses – Commercial Airplanes (BCA), Defense, Space & Security (BDS), and Global Services (BGS) – supplemented and supported by Boeing Capital (BCC). Taken together, these core businesses have historically generated substantial earnings and cash flow that permit us to invest in new products and services. We focus on producing the products and providing the services that the market demands, and continue to find new ways to improve efficiency and quality to provide a fair return for our shareholders. BCA is committed to being the leader in commercial aviation by offering airplanes and services that deliver superior design, efficiency and value to customers around the world. BDS integrates its resources in defense, intelligence, communications, security, space and services to deliver capability-driven solutions to its customers at reduced costs. Our BDS strategy is to leverage our core businesses to capture key next-generation programs while expanding our presence in adjacent and international markets, underscored by an intense focus on growth and productivity. BGS provides support for commercial, defense and space customers through innovative, comprehensive, and cost-competitive product and service solutions. Our strategy also benefits us as the cyclicality of commercial and defense markets sometimes offset. BCC facilitates, arranges, structures and provides selective financing solutions for our Boeing customers.
Consolidated Results of Operations
The following table summarizes key indicators of consolidated results of operations:
(Dollars in millions, except per share data) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Revenues | $93,392 | $94,571 | $96,114 | ||||||||
GAAP | |||||||||||
Earnings from operations | 10,278 | 5,834 | 7,443 | ||||||||
Operating margins | 11.0 | % | 6.2 | % | 7.7 | % | |||||
Effective income tax rate | 18.4 | % | 12.1 | % | 27.7 | % | |||||
Net earnings | $8,197 | $4,895 | $5,176 | ||||||||
Diluted earnings per share | $13.43 | $7.61 | $7.44 | ||||||||
Non-GAAP (1) | |||||||||||
Core operating earnings | $8,970 | $5,464 | $7,741 | ||||||||
Core operating margins | 9.6 | % | 5.8 | % | 8.1 | % | |||||
Core earnings per share | $12.04 | $7.24 | $7.72 | ||||||||
(1) | These measures exclude certain components of pension and other postretirement benefit expense. See page 39 - 40 for important information about these non-GAAP measures and reconciliations to the most comparable GAAP measures. |
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Revenues
The following table summarizes Revenues:
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Commercial Airplanes | $56,729 | $58,012 | $59,399 | ||||||||
Defense, Space & Security | 21,057 | 22,563 | 23,708 | ||||||||
Global Services | 14,639 | 13,925 | 13,293 | ||||||||
Boeing Capital | 307 | 298 | 413 | ||||||||
Unallocated items, eliminations and other | 660 | (227 | ) | (699 | ) | ||||||
Total | $93,392 | $94,571 | $96,114 | ||||||||
Revenues in 2017 decreased by $1,179 million or 1% compared with 2016. BCA revenues decreased by $1,283 million or 2% primarily due to delivery mix, with fewer twin aisle deliveries more than offsetting the impact of higher single aisle deliveries. BDS revenues decreased by $1,506 million primarily due to fewer C-17 deliveries, lower milestone revenue on satellite programs, and the mix of deliveries on the Apache and F-15 programs, partially offset by higher volume on various weapons programs. The decreases at BCA and BDS were partially offset by higher unallocated revenue and higher BGS revenue, primarily due to higher commercial parts revenue.
Revenues in 2016 decreased by $1,543 million or 2% compared with 2015. BCA revenues decreased by $1,387 million or 2% due fewer deliveries. BDS revenues decreased by $1,145 million or 5% primarily due to lower milestone revenue on government satellite programs, fewer C-17 deliveries, lower Commercial Crew revenue, as well as timing and mix of CH-47 Chinook deliveries, partially offset by higher revenue on several modifications and upgrades programs. The decreases at BCA and BDS were partially offset by higher BGS revenue, primarily due to higher commercial parts revenue and government services revenue.
The changes in unallocated items, eliminations and other in 2017, 2016 and 2015 primarily reflect the timing of eliminations for intercompany aircraft deliveries and the sale of aircraft previously leased to customers.
Earnings From Operations
The following table summarizes Earnings from operations:
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Commercial Airplanes | $5,432 | $1,995 | $4,284 | ||||||||
Defense, Space & Security | 2,223 | 1,966 | 2,312 | ||||||||
Global Services | 2,256 | 2,177 | 1,835 | ||||||||
Boeing Capital | 114 | 59 | 50 | ||||||||
Unallocated pension and other postretirement benefit income/(expense) | 1,308 | 370 | (298 | ) | |||||||
Other unallocated items and eliminations | (1,055 | ) | (733 | ) | (740 | ) | |||||
Earnings from operations (GAAP) | $10,278 | $5,834 | $7,443 | ||||||||
Unallocated pension and other postretirement benefit | (1,308 | ) | (370 | ) | 298 | ||||||
Core operating earnings (Non-GAAP) | $8,970 | $5,464 | $7,741 | ||||||||
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Earnings from operations in 2017 increased by $4,444 million compared with 2016, primarily due to higher earnings at BCA and BDS, and higher unallocated pension income, which more than offset other unallocated items and eliminations. BCA's 2017 earnings increased by $3,437 million primarily reflecting lower reach-forward losses, lower research and development costs, and improved margins reflecting favorable cost performance, which more than offset the impact of lower revenues. In 2016, BCA recorded reach-forward losses of $1,258 million on the 747 program and reclassified $1,235 million of 787 flight test aircraft inventory costs to research and development expense.
BDS earnings from operations in 2017 increased by $257 million compared with 2016 primarily due to lower charges on the KC-46A Tanker and Commercial Crew programs, which more than offset the impact of fewer C-17 deliveries and Apache delivery mix.
Earnings from operations in 2016 decreased by $1,609 million compared with 2015 due to lower earnings at BCA, partially offset by the change in unallocated pension and postretirement income/(expense). BCA earnings in 2016 decreased by $2,289 million primarily due to the reclassification of $1,235 million of 787 flight test aircraft costs to research and development and higher reach-forward losses on the 747 and KC-46A Tanker programs. The reclassification of flight test aircraft costs was recorded in the second quarter of 2016 as a result of our determination that two 787 flight test aircraft were no longer commercially saleable. The change in the unallocated pension and postretirement income/(expense) in 2016 was primarily driven by lower service costs and lower amortization of actuarial losses.
During 2017, 2016 and 2015, we recorded reach-forward losses on the KC-46A Tanker program. In 2017, we recorded charges of $471 million, of which $378 million was recorded at BCA and $93 million at BDS. During 2016, we recorded charges of $1,128 million: $772 million at BCA and $356 million at BDS. During 2015, we recorded charges of $835 million: $513 million at BCA and $322 million at BDS. During 2016 and 2015 we recorded reach-forward losses on the 747 program of $1,258 million and $885 million.
Core operating earnings for 2017 increased by $3,506 million compared with 2016 primarily due to lower reach forward losses and the reclassification of costs related to the 787 flight test aircraft in 2016.
Core operating earnings in 2016 decreased by $2,227 million compared with 2015 primarily due to the reclassification of costs related to the 787 flight test aircraft and higher charges on the 747 and KC-46A Tanker programs described above.
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) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Share-based plans | ($77 | ) | ($66 | ) | ($76 | ) | |||||
Deferred compensation | (240 | ) | (46 | ) | (63 | ) | |||||
Eliminations and other | (738 | ) | (621 | ) | (601 | ) | |||||
Sub-total (included in core operating earnings*) | (1,055 | ) | (733 | ) | (740 | ) | |||||
Pension | 1,120 | 217 | (421 | ) | |||||||
Postretirement | 188 | 153 | 123 | ||||||||
Pension and other postretirement benefit income/(expense) (excluded from core operating earnings*) | 1,308 | 370 | (298 | ) | |||||||
Total unallocated items, eliminations and other | $253 | ($363 | ) | ($1,038 | ) | ||||||
* Core operating earnings is a Non-GAAP measure that excludes certain components of pension and other postretirement benefit expense. See pages 39 - 40.
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Deferred compensation expense increased by $194 million in 2017 and decreased by $17 million in 2016, primarily driven by changes in broad stock market conditions and our stock price.
Eliminations and other unallocated expense increased by $117 million in 2017 and increased by $20 million in 2016 primarily due to the timing of the elimination of profit on intercompany aircraft deliveries and expense allocations.
Net periodic benefit cost related to pension totaled $312 million, $523 million and $2,786 million in 2017, 2016 and 2015, respectively. The components of net periodic benefit cost are shown in the following table:
Pension | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Service cost | $402 | $604 | $1,764 | ||||||||
Interest cost | 2,991 | 3,050 | 2,990 | ||||||||
Expected return on plan assets | (3,847 | ) | (3,999 | ) | (4,031 | ) | |||||
Amortization of prior service costs | (39 | ) | 38 | 196 | |||||||
Recognized net actuarial loss | 804 | 790 | 1,577 | ||||||||
Settlement/curtailment/other losses | 1 | 40 | 290 | ||||||||
Net periodic benefit cost | $312 | $523 | $2,786 | ||||||||
The decreases in net periodic pension benefit costs of $211 million in 2017 and of $2,263 million in 2016 are primarily due to lower service costs reflecting the transition of employees in 2016 to defined contribution retirement savings plans. The decrease in 2016 costs is also due to lower amortization of actuarial losses which reflects actuarial gains in 2015 resulting from the year-end discount rate increase from 3.9% to 4.2%.
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 21.
Net periodic benefit costs included in Earnings from operations were as follows:
(Dollars in millions) | Pension | ||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Allocated to business segments | ($1,759 | ) | ($2,196 | ) | ($1,945 | ) | |||||
Unallocated items, eliminations and other | 1,120 | 217 | (421 | ) | |||||||
Total | ($639 | ) | ($1,979 | ) | ($2,366 | ) | |||||
The unallocated pension costs recognized in earnings in 2017 was a benefit of $1,120 million compared with $217 million in 2016. The higher unallocated pension benefit recognized in earnings in 2017 primarily reflects the amortization of pension benefits capitalized as inventory in prior years. The unallocated pension costs recognized in earnings in 2016 was a benefit of $217 million compared with expense of $421 million in 2015. The 2016 benefit reflects the difference between the higher segment allocation compared to the U.S. GAAP net periodic pension costs recognized in earnings in the current period.
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Other Earnings Items
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Earnings from operations | $10,278 | $5,834 | $7,443 | ||||||||
Other income/(loss), net | 129 | 40 | (13 | ) | |||||||
Interest and debt expense | (360 | ) | (306 | ) | (275 | ) | |||||
Earnings before income taxes | 10,047 | 5,568 | 7,155 | ||||||||
Income tax expense | (1,850 | ) | (673 | ) | (1,979 | ) | |||||
Net earnings from continuing operations | $8,197 | $4,895 | $5,176 | ||||||||
Other income, net increased by $89 million and $53 million in 2017 and 2016, primarily due to higher gains from foreign exchange and interest income.
Interest and debt expense increased by $54 million in 2017 as a result of lower capitalized interest and increased by $31 million in 2016 as a result of higher average debt balances.
Our effective income tax rates were 18.4%, 12.1% and 27.7% for the years ended December 31, 2017, 2016 and 2015, respectively. The Tax Cuts and Jobs Act, enacted in December 2017, reduced the 2017 effective tax rate by 10.5% and resulted in incremental tax benefits of $1,051 million, primarily related to the remeasurement of our U.S. net deferred tax liabilities to reflect the reduction in the corporate tax rate from 35% to 21%. Our 2016 effective tax rate was lower than the 2015 rate primarily due to lower pre-tax income in 2016 and discrete tax benefits of $617 million recorded in the third quarter of 2016 related to tax basis adjustments and the settlement of the 2011-2012 federal tax audit.
For additional discussion related to Income Taxes, see Note 4 to our Consolidated Financial Statements.
Total Costs and Expenses (“Cost of Sales”)
Cost of sales, for both products and services, consists primarily of raw materials, parts, sub-assemblies, labor, overhead and subcontracting costs. Our Commercial Airplanes segment predominantly uses program accounting to account for cost of sales, BDS predominantly uses contract accounting and BGS uses contract accounting for defense contracts. Under program accounting, cost of sales for each commercial airplane program equals the product of (i) revenue recognized in connection with customer deliveries and (ii) the estimated cost of sales percentage applicable to the total remaining program. Under contract accounting, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage to the amount of revenue recognized.
The following table summarizes cost of sales:
(Dollars in millions) | |||||||||||||||||||||
Years ended December 31, | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Cost of sales | $76,066 | $80,790 | ($4,724 | ) | $80,790 | $82,088 | ($1,298 | ) | |||||||||||||
Cost of sales as a % of revenues | 81.4 | % | 85.4 | % | (4.0 | %) | 85.4 | % | 85.4 | % | 0.0 | % | |||||||||
Cost of sales in 2017 decreased by $4,724 million, or 6%, compared with 2016, primarily due to lower reach-forward losses, delivery model mix at BCA and improved performance at BCA and BDS.
Cost of sales in 2016 decreased by $1,298 million, or 2%, compared with 2015, primarily due to lower volume across all segments, partially offset by the 747 reach-forward losses at BCA.
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Research and Development The following table summarizes our Research and development expense:
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Commercial Airplanes | $2,247 | $3,706 | $2,311 | ||||||||
Defense, Space & Security | 834 | 815 | 902 | ||||||||
Global Services | 140 | 153 | 113 | ||||||||
Other | (42 | ) | (47 | ) | 5 | ||||||
Total | $3,179 | $4,627 | $3,331 | ||||||||
Research and development expense in 2017 decreased by $1,448 million compared with 2016 primarily due to the reclassification of $1,235 million of costs from inventory in the second quarter of 2016 related to the fourth and fifth 787 flight test aircraft as well as lower spending on the 737 MAX, 787-10, and 777X.
Research and development expense in 2016 increased by $1,296 million compared with 2015 primarily due to the reclassification of $1,235 million of costs from inventory in the second quarter of 2016 related to the fourth and fifth 787 flight test aircraft and higher spending on the 777X.
Backlog
Our backlog at December 31 was as follows:
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Commercial Airplanes | $421,345 | $413,036 | $429,346 | ||||||||
Defense, Space & Security | 49,577 | 44,825 | 46,933 | ||||||||
Global Services | 17,223 | 15,631 | 13,020 | ||||||||
Total Backlog | $488,145 | $473,492 | $489,299 | ||||||||
Contractual backlog | 470,241 | 458,277 | 476,595 | ||||||||
Unobligated backlog | 17,904 | $15,215 | $12,704 | ||||||||
Total Backlog | $488,145 | $473,492 | $489,299 | ||||||||
Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligated U.S. and non-U.S. government contract funding. The increase in contractual backlog during 2017 was primarily due to orders and funding in excess of deliveries. The decrease in contractual backlog during 2016 was primarily due to deliveries in excess of net orders.
Unobligated backlog includes U.S. and non-U.S. government definitive contracts for which funding has not been authorized. The increase in unobligated backlog in 2017 and 2016 was primarily due to contract awards, partially offset by reclassifications to contractual backlog related to BDS and BGS contracts.
Additional Considerations
KC-46A Tanker In 2011, we were awarded a contract from the U.S. Air Force (USAF) to design, develop, manufacture and deliver four next generation aerial refueling tankers. The KC-46A Tanker is a derivative of our 767 commercial aircraft. 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 2015, we began work on low rate initial production (LRIP) aircraft for the USAF. During the third quarter of 2016, following our achievement of key flight testing milestones, the USAF authorized two LRIP lots for 7 and 12 aircraft valued at $2.8 billion. On January 27, 2017, the USAF authorized an additional
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LRIP lot for 15 aircraft valued at $2.1 billion. The contract contains production options for both LRIP aircraft and full rate production aircraft. If all options under the contract are exercised, we expect to deliver 179 aircraft for a total expected contract value of approximately $30 billion. The EMD contract is currently in the certification and flight testing phases and we expect 18 fully operational aircraft to be delivered in 2018.
During 2016 and 2015, we recorded reach-forward losses of $1,128 million and $835 million related to the EMD contract and LRIP aircraft. During 2017, we recorded further reach-forward losses of $471 million primarily reflecting higher estimated costs associated with certification and incorporating changes into LRIP aircraft. As with any development program, this program remains subject to additional reach-forward losses or delivery delays if we experience further production, technical or quality issues, delays in certification and/or flight testing.
Export-Import Bank of the United States Many of our non-U.S. customers finance purchases through the Export-Import Bank of the United States. Following the expiration of the bank’s charter on June 30, 2015, the bank’s charter was reauthorized in December 2015. The bank is now authorized through September 30, 2019. However, until the U.S. Senate confirms members sufficient to reconstitute a quorum of the bank’s board of directors, the bank will not be able to approve any transaction totaling more than $10 million. As a result, we may fund additional commitments and/or enter into new financing arrangements with customers. Certain of our non-U.S. customers also may seek to delay purchases if they cannot obtain financing at reasonable costs, and there may be further impacts with respect to future sales campaigns involving non-U.S. customers. We continue to work with our customers to mitigate risks associated with the lack of a quorum of the bank’s board of directors and assist with alternative third party financing sources.
Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment Global economic growth, a primary driver for air travel, has returned to the long-term average of approximately 3%. Passenger traffic in 2017 is estimated to grow by more than 7%, exceeding the long-term trend of approximately 5%. While growth was strong across all major world regions, there continues to be variation between regions and airline business models. Airlines operating in the Asia Pacific regions and Europe, as well as low-cost-carriers globally, are currently leading the growth in passenger traffic. Air cargo traffic growth, building on the recovery that started in 2016, is expected to exceed 9% in 2017, driven by strong trade and industrial production in all regions.
Airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on increasing revenue through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services and related revenues. Airlines are also focusing on reducing costs and renewing fleets to leverage more efficient airplanes. Net profits in 2017 are expected to approximate $35 billion, consistent with 2016.
The long-term outlook for the industry continues to remain positive due to the fundamental drivers of air travel growth: economic growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. Our 20-year forecast projects a long-term average growth rate of 4.7% per year for passenger traffic and 4.2% for cargo traffic. Based on long-term global economic growth projections of 2.8% average annual GDP growth, we project a $6.1 trillion market for approximately 41,030 new airplanes over the next 20 years.
The industry remains vulnerable to exogenous developments including fuel price spikes, credit market shocks, acts of terrorism, natural disasters, conflicts, epidemics and increased global environmental regulations.
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Industry Competitiveness The commercial jet airplane market and the airline industry remain extremely competitive. Market liberalization in Europe, the Middle East and Asia is enabling low-cost airlines to continue gaining market share. These airlines are increasing the pressure on airfares. This results in continued cost pressures for all airlines and price pressure on our products. Major productivity gains are essential to ensure a favorable market position at acceptable profit margins.
Continued access to global markets remains vital to our ability to fully realize our sales potential and long-term investment returns. Approximately 91% of Commercial Airplanes’ total backlog, in dollar terms, is with non-U.S. airlines.
We face aggressive international competitors who are intent on increasing their market share. They offer competitive products and have access to most of the same customers and suppliers. With government support, Airbus has historically invested heavily to create a family of products to compete with ours. Regional jet makers Embraer and Bombardier continue to develop and market larger and increasingly more capable airplanes, including Embraer’s E-195 in the regional jet market and Bombardier’s C Series in the 100-150 seat transcontinental market. Additionally, other competitors from Russia, China and Japan are developing commercial jet aircraft. Some of these competitors have historically enjoyed access to government-provided financial support, including “launch aid,” which greatly reduces the cost and commercial risks associated with airplane development activities. This has enabled the development of airplanes without commercial viability; others to be brought to market more quickly than otherwise possible; and many offered for sale below market-based prices. Many competitors have continued to make improvements in efficiency, which may result in funding product development, gaining market share and improving earnings. This market environment has resulted in intense pressures on pricing and other competitive factors, and we expect these pressures to continue or intensify in the coming years.
We are focused on improving our products and services and continuing our cost-reduction efforts, which enhances our ability to compete. We are also focused on taking actions to ensure that Boeing is not harmed by unfair subsidization of competitors.
Results of Operations
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Revenues | $56,729 | $58,012 | $59,399 | ||||||||
% of total company revenues | 61 | % | 61 | % | 62 | % | |||||
Earnings from operations | $5,432 | $1,995 | $4,284 | ||||||||
Operating margins | 9.6 | % | 3.4 | % | 7.2 | % | |||||
Research and development | $2,247 | $3,706 | $2,311 | ||||||||
Revenues
Commercial Airplanes revenues decreased by $1,283 million or 2% in 2017 compared with 2016 due to delivery mix, with fewer twin aisle deliveries more than offsetting the impact of higher single aisle deliveries. Commercial Airplanes revenues decreased by $1,387 million or 2% in 2016 compared with 2015 primarily due to fewer deliveries.
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Commercial Airplanes deliveries as of December 31 were as follows:
737 | * | 747 | † | 767 | 777 | 787 | Total | ||||||||
2017 | |||||||||||||||
Cumulative deliveries | 6,732 | 1,542 | 1,106 | 1,534 | 636 | ||||||||||
Deliveries | 529 | (17) | 14 | (1) | 10 | 74 | 136 | 763 | |||||||
2016 | |||||||||||||||
Cumulative deliveries | 6,203 | 1,528 | 1,096 | 1,460 | 500 | ||||||||||
Deliveries | 490 | (19) | 9 | (3) | 13 | 99 | 137 | 748 | |||||||
2015 | |||||||||||||||
Cumulative deliveries | 5,713 | 1,519 | 1,083 | 1,361 | 363 | ||||||||||
Deliveries | 495 | (15) | 18 | (3) | 16 | 98 | 135 | 762 | |||||||
* Intercompany deliveries identified by parentheses
† Aircraft accounted for as revenues by BCA and as operating leases in consolidation identified by parentheses
Earnings From Operations
Earnings from operations in 2017 increased by $3,437 million compared with 2016. The increase in earnings and operating margins is primarily due to lower reach-forward losses, lower research and development costs and improved margins reflecting favorable cost performance, which more than offset the impact of lower revenues.
Earnings from operations in 2016 decreased by $2,289 million compared with 2015. The decrease in earnings and operating margins is primarily due to higher research and development costs of $1,395 million, delivery mix and higher reach-forward losses on the 747 program of $1,258 million compared with $885 million in 2015. Research and development expense in 2016 reflect the reclassification from inventory to research and development expense of $1,235 million related to the fourth and fifth 787 flight test aircraft and higher planned spending related to the 777X program.
Reach-forward losses of $378 million, $772 million and $513 million were recorded related to the KC-46A Tanker in 2017, 2016 and 2015, respectively. During 2016 and 2015, we recorded reach-forward losses on the 747 program of $1,258 million and $885 million.
Backlog
Firm backlog represents orders for products and services where no contingencies remain before we and the customer are required to perform. Backlog does not include prospective orders where customer controlled contingencies remain, such as the customer receiving approval from its board of directors, shareholders or government or completing financing arrangements. All such contingencies must be satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly certain. Firm backlog excludes options. A number of our customers may have contractual remedies that may be implicated by program delays. We address customer claims and requests for other contractual relief as they arise. However, once orders are included in firm backlog, orders remain in backlog until canceled or fulfilled, although the value of orders is adjusted as changes to price and schedule are agreed to with customers.
BCA total backlog was $421,345 million, $413,036 million and $429,346 million at December 31, 2017, 2016 and 2015, respectively. The increase in 2017 was primarily due to net orders in excess of deliveries. The decrease in 2016 was primarily due to deliveries in excess of net orders.
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Accounting Quantity The accounting quantity is our estimate of the quantity of airplanes that will be produced for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. It is a key determinant of the gross margins we recognize on sales of individual airplanes throughout a program’s life. Estimation of each program’s accounting quantity takes into account several factors that are indicative of the demand for that program, including firm orders, letters of intent from prospective customers and market studies. We review our program accounting quantities quarterly.
The accounting quantity for each program may include units that have been delivered, undelivered units under contract, and units anticipated to be under contract in the reasonable future (anticipated orders). In developing total program estimates, all of these items within the accounting quantity must be considered.
The following table provides details of the accounting quantities and firm orders by program as of December 31. Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders.
Program | |||||||||||||||
737 | 747* | 767 | 777 | 777X | 787 | ||||||||||
2017 | |||||||||||||||
Program accounting quantities | 9,800 | 1,570 | 1,171 | 1,625 | ** | 1,400 | |||||||||
Undelivered units under firm orders | 4,668 | 12 | 98 | 102 | 326 | 658 | |||||||||
Cumulative firm orders | 11,400 | 1,554 | 1,204 | 1,636 | 326 | 1,294 | |||||||||
2016 | |||||||||||||||
Program accounting quantities | 9,000 | 1,555 | 1,159 | 1,625 | ** | 1,300 | |||||||||
Undelivered units under firm orders | 4,452 | 28 | 93 | 136 | 306 | 700 | |||||||||
Cumulative firm orders | 10,655 | 1,556 | 1,189 | 1,596 | 306 | 1,200 | |||||||||
2015 | |||||||||||||||
Program accounting quantities | 8,400 | 1,574 | 1,147 | 1,650 | ** | 1,300 | |||||||||
Undelivered units under firm orders | 4,392 | 20 | 80 | 218 | 306 | 779 | |||||||||
Cumulative firm orders | 10,105 | 1,539 | 1,163 | 1,579 | 306 | 1,142 | |||||||||
* At December 31, 2017, the 747 accounting quantity includes one already completed aircraft which is being remarketed.
** The accounting quantity for the 777X will be determined in the year of first airplane delivery, targeted for 2020.
Program Highlights
737 Program The accounting quantity for the 737 program increased by 800 units during 2017 due to the program’s normal progress of obtaining additional orders and delivering airplanes. We are currently producing at a rate of 47 per month and plan to increase to 52 per month in 2018. We plan to further increase the rate to 57 per month in 2019. We delivered the first 737 MAX 8 in May 2017 and announced the launch of the 737 MAX 10 in June 2017.
747 Program During the fourth quarter of 2017, we received firm orders and commitments for 15 aircraft and we increased the program accounting quantity by 15 aircraft. The program accounting quantity now includes aircraft scheduled to be produced through 2021. We are currently producing at a rate of 0.5 aircraft per month, having reduced the rate from 1.0 per month in September 2016. In 2016 and 2015, we recorded reach-forward losses of $1,258 million and $885 million as lower than expected demand for large commercial passenger and freighter aircraft and slower-than-expected growth of global freight traffic
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resulted in lower anticipated revenues from future sales and higher costs to produce fewer airplanes. We continue to evaluate the viability of the 747 program and it is reasonably possible that we could decide to end production of the 747.
767 Program The accounting quantity for the 767 program increased by 12 units during the third quarter of 2017 due to the program's normal progress of obtaining additional orders and delivering airplanes. The 767 assembly line includes a 767 derivative to support the tanker program. The combined tanker and commercial production rate increased from 2 per month to 2.5 per month in the third quarter of 2017.
777 Program We implemented a planned production rate decrease from 8.3 per month to 7 per month during the first quarter of 2017. We further reduced the rate to 5 per month in the third quarter of 2017. In the fourth quarter of 2013, we launched the 777X, which features a new composite wing, new engines and folding wing-tips. The 777X will have a separate program accounting quantity, which will be determined in the year of first airplane delivery, targeted for 2020.
787 Program The accounting quantity for the 787 program increased by 100 units during the third quarter of 2017 due to the program’s normal progress of obtaining additional orders and delivering airplanes. We are currently producing at a rate of 12 per month and plan to increase to 14 per month in 2019. First delivery of the 787-10 derivative aircraft is targeted for 2018.
Fleet Support We provide the operators of our commercial airplanes with assistance and services to facilitate efficient and safe airplane operation. Collectively known as fleet support services, these activities and services begin prior to airplane delivery and continue throughout the operational life of the airplane. They include flight and maintenance training, field service support, engineering services, information services and systems and technical data and documents. The costs for fleet support are expensed as incurred and have historically been approximately 1.0% of total consolidated costs of products and services.
Program Development The following chart summarizes the time horizon between go-ahead and planned initial delivery for major Commercial Airplanes derivatives and programs.
Go-ahead and Initial Delivery | |||||||||||
737 MAX 7 | 2011 | 2019 | |||||||||
737 MAX 8 | 2011 | 2017 | |||||||||
737 MAX 9 | 2011 | 2018 | |||||||||
737 MAX 10 | 2017 | 2020 | |||||||||
787-10 | 2013 | 2018 | |||||||||
777X | 2013 | 2020 | |||||||||
Reflects models in development during 2017
We launched the 737 MAX 7, 8, 9 in August 2011 and the 737 MAX 10 in June 2017. We launched the 787-10 in June 2013 and the 777X in November 2013.
Additional Considerations
The development and ongoing production of commercial aircraft is extremely complex, involving extensive coordination and integration with suppliers and highly-skilled labor from employees and other partners. Meeting or exceeding our performance and reliability standards, as well as those of customers and regulators, can be costly and technologically challenging. In addition, the introduction of new aircraft and derivatives, such as the 787-10 and 777X, involves increased risks associated with meeting development, production and certification schedules. As a result, our ability to deliver aircraft on time, satisfy performance and reliability standards and achieve or maintain, as applicable, program profitability is subject to significant risks. Factors that could result in lower margins (or a material charge if an airplane program has or is determined to have reach-forward losses) include the following: changes to the program accounting
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quantity, customer and model mix, production costs and rates, changes to price escalation factors due to changes in the inflation rate or other economic indicators, performance or reliability issues involving completed aircraft, capital expenditures and other costs associated with increasing or adding new production capacity, learning curve, additional change incorporation, achieving anticipated cost reductions, flight test and certification schedules, costs, schedule and demand for new airplanes and derivatives and status of customer claims, supplier assertions and other contractual negotiations. While we believe the cost and revenue estimates incorporated in the consolidated financial statements are appropriate, the technical complexity of our airplane programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, order cancellations or other financially significant exposure.
Defense, Space & Security
Business Environment and Trends
United States Government Defense Environment Overview
In November 2017, Congress passed the National Defense Authorization Act for fiscal year 2018 (FY2018), which authorizes a U.S. DoD budget topline higher than the administration’s budget request from May. While the appropriations process for FY2018 remains incomplete, both the House and Senate appropriations committees have also produced bills that increase the U.S. DoD budget topline above the administration’s request. On February 9, 2018, Congress passed a fifth Continuing Resolution that maintains current funding levels through March 23, 2018 and includes increases to the Budget Control Act caps for defense and non-defense spending for FY2018 and FY2019. However, the Budget Control Act continues to mandate limits on U.S. government discretionary spending and remains in effect. As a result, continued budget uncertainty and the risk of future sequestration cuts will remain unless Congress acts to repeal or suspend this law.
Funding timeliness also remains a risk. If Congress is unable to pass appropriations bills or an omnibus spending bill before the expiration of the current Continuing Resolution, 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, the Department of Transportation, or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders.
In addition, there continues to be uncertainty with respect to program-level appropriations for the 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.
Non-U.S. Defense Environment Overview The non-U.S. market continues to be driven by complex and evolving security challenges and the need to modernize aging equipment and inventories. BDS expects that it will continue to have a wide range of opportunities across Asia, Europe and the Middle East given the diverse regional threats. At the end of 2017, 40% of BDS backlog was attributable to non-US customers.
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Results of Operations
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Revenues | $21,057 | $22,563 | $23,708 | ||||||||
% of total company revenues | 23 | % | 24 | % | 25 | % | |||||
Earnings from operations | $2,223 | $1,966 | $2,312 | ||||||||
Operating margins | 10.6 | % | 8.7 | % | 9.8 | % | |||||
Since our operating cycle is long-term and involves many different types of development and production contracts with varying delivery and milestone schedules, the operating results of a particular year, or year-to-year comparisons of revenues, earnings and backlog may not be indicative of future operating results. In addition, depending on the customer and their funding sources, our orders might be structured as annual follow-on contracts, or as one large multi-year order or long-term award. As a result, period-to-period comparisons of backlog are not necessarily indicative of future workloads. The following discussions of comparative results among periods should be viewed in this context.
Deliveries of units for new-build production aircraft, including remanufactures and modifications were as follows:
Years ended December 31, | 2017 | 2016 | 2015 | |||||
F/A-18 Models | 23 | 25 | 35 | |||||
F-15 Models | 16 | 15 | 12 | |||||
C-17 Globemaster III | 4 | 5 | ||||||
CH-47 Chinook (New) | 9 | 25 | 41 | |||||
CH-47 Chinook (Renewed) | 35 | 25 | 16 | |||||
AH-64 Apache (New) | 11 | 31 | 23 | |||||
AH-64 Apache (Remanufactured) | 57 | 34 | 38 | |||||
P-8 Models | 19 | 18 | 14 | |||||
AEW&C | 1 | |||||||
C-40A | 1 | 1 | ||||||
Total | 170 | 178 | 186 | |||||
New-build satellite deliveries were as follows:
Years ended December 31, | 2017 | 2016 | 2015 | ||
Commercial and civil satellites | 3 | 5 | 3 | ||
Military satellites | 1 | 2 | 1 | ||
Revenues
BDS revenues in 2017 decreased by $1,506 million compared with 2016 primarily due to fewer C-17 deliveries, lower milestone revenue on satellite programs, and the mix of deliveries on the Apache and F-15 programs, partially offset by higher volume on various weapons programs.
BDS revenues in 2016 decreased by $1,145 million compared with 2015 primarily due to lower milestone revenue on government satellite programs, fewer C-17 deliveries, lower Commercial Crew revenue, as well as timing and mix of CH-47 Chinook deliveries, partially offset by higher revenue on several modifications and upgrades programs.
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Earnings From Operations
BDS earnings from operations in 2017 increased by $257 million compared with 2016 primarily due to lower charges on the KC-46A Tanker and Commercial Crew programs, which more than offset the impact of fewer C-17 deliveries and Apache delivery mix. Higher earnings reflect the favorable impact of cumulative catch-up adjustments which were $541 million higher in 2017 than in 2016, primarily driven by lower charges.
BDS earnings from operations in 2016 decreased by $346 million compared with 2015, primarily due to lower earnings on the Commercial Crew program, driven by a charge of $162 million during the third quarter of 2016, as well as lower volume and mix on the CH-47 Chinook program. Lower earnings include the unfavorable impact of cumulative contract catch-up adjustments which were $441 million higher than 2015, primarily due to Commercial Crew charges in 2016 and the absence of favorable F-15 program adjustments recorded in 2015.
BDS earnings from operations include equity earnings of $183 million, $249 million and $202 million primarily from our ULA joint venture in 2017, 2016 and 2015.
During 2017, 2016 and 2015, BDS recorded charges related to the KC-46A Tanker contract of $93 million, $356 million and $322 million.
Backlog
Total backlog of $49,577 million at December 31, 2017 increased by 11% from December 31, 2016, primarily due to current year contract awards for the F-15 and Apache programs, partially offset by revenue recognized on contracts awarded in prior years.
Total backlog of $44,825 million at December 31, 2016 decreased by 4% reflecting revenue recognized on contracts awarded in prior years, partially offset by current year contract awards for satellite, P-8, weapons, Apache and CH-47 Chinook programs.
Additional Considerations
Our BDS business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases, the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Examples of these programs include Ground-based Midcourse Defense, Proprietary and Space Launch System programs.
Some of our development programs are contracted on a fixed-price basis. Many of these programs have highly complex designs. As technical or quality issues arise during development, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the work or reduce our estimated price, either of which could result in a material charge or otherwise adversely affect our financial condition. These programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, the loss of satellite in-orbit incentive payments, or other financially significant exposure. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues. Examples of significant fixed-price development programs include KC-46A Tanker, Commercial Crew, Saudi F-15, and commercial and military satellites.
KC-46A Tanker See the discussion of the USAF KC-46A Tanker program on page 23.
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United Launch Alliance See the discussion of Indemnifications to ULA and Financing Commitments in Notes 6, 11, and 12 to our Consolidated Financial Statements.
F/A-18 See the discussion of the F/A-18 program in Note 11 to our Consolidated Financial Statements.
Sea Launch See the discussion of the Sea Launch receivables in Note 7 to our Consolidated Financial Statements.
Commercial Crew See the discussion of Fixed-Price Development Contracts in Note 11 to our Consolidated Financial Statements.
Global Services
Business Environment and Trends
The aerospace markets we serve include parts distribution, logistics, and other inventory services; maintenance, engineering, and upgrades; training and professional services; and information services. We expect the market to grow by around 3.5% annually.
As the size of the worldwide commercial airline fleet continues to grow, so does demand for aftermarket services designed to increase efficiency and extend the economic lives of airplanes. Airlines are using data analytics to plan flight operations and predictive maintenance to improve their productivity and efficiency. Airlines continue to look for opportunities to reduce the size and cost of their spare parts inventory, frequently outsourcing spares management to third parties.
Government services market segments are growing on pace with related fleets, but vary based on the utilization and age of the aircraft. The U.S. government services market is the single largest individual market, comprising over 50 percent of the government services markets served. Over the next decade, we expect U.S. growth to remain flat and non-U.S. fleets, led by Middle East and Asia Pacific customers, to add rotorcraft and commercial derivative aircraft at the fastest rates. We expect less than 20 percent of the worldwide fleet of military aircraft to be retired and replaced over the next ten years, driving increased demand for services to maintain aging aircraft and enhance aircraft capability.
BGS’ major customer, the U.S. government, remains subject to the spending limits and uncertainty described on page 29, which could restrict the execution of certain program activities and delay new programs or competitions.
Industry Competitiveness Aviation services is a competitive market with many domestic and international competitors. This market environment has resulted in intense pressures on pricing and we expect these pressures to continue or intensify in the coming years. Continued access to global markets remains vital to our ability to fully realize our sales growth potential and long-term investment returns.
Results of Operations
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Revenues | $14,639 | $13,925 | $13,293 | ||||||||
% of total company revenues | 16 | % | 15 | % | 14 | % | |||||
Earnings from operations | $2,256 | $2,177 | $1,835 | ||||||||
Operating margins | 15.4 | % | 15.6 | % | 13.8 | % | |||||
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Revenues
BGS revenues in 2017 increased by $714 million compared with 2016 primarily due to higher commercial parts revenue.
BGS revenues in 2016 increased by $632 million compared with 2015 primarily due to higher commercial parts revenues and government services revenue.
Earnings From Operations
BGS earnings from operations in 2017 increased by $79 million compared with 2016 primarily due to higher revenues, partially offset by commercial services mix. Net favorable cumulative contract catch-up adjustments were $9 million lower in 2017 than in 2016.
BGS earnings from operations in 2016 increased by $342 million compared with 2015 primarily due to higher revenues and favorable mix of commercial parts and government services. Net favorable cumulative contract catch-up adjustments were $12 million higher in 2016 than in 2015.
Backlog
BGS total backlog of $17,223 million at December 31, 2017 increased by 10% from December 31, 2016, primarily due to current year contract awards including F-15, C-17, and Apache support programs.
BGS total backlog of $15,631 million at December 31, 2016 increased by 20% from December 31, 2015 primarily due to current year contract awards including the C-17 support program.
Boeing Capital
Business Environment and Trends
BCC’s gross customer financing and investment portfolio at December 31, 2017 totaled $3,006 million. A substantial portion of BCC’s portfolio is related to customers that we believe have less than investment-grade credit. BCC’s portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 and 747-8 aircraft.
BCC provided customer financing of $480 million and $1,376 million during 2017 and 2016. While we may be required to fund a number of new aircraft deliveries in 2018 and/or provide refinancing for existing bridge debt, we expect alternative financing will be available at reasonable prices from broad and globally diverse sources. However, a number of factors could cause BCC’s new business volume to increase further, including if the Export-Import Bank of the United States continues to be unable to, or does not, approve new financing transactions.
Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 2,000 western-built commercial jet aircraft (8.3% of current world fleet) were parked at the end of 2017, including both in-production and out-of-production aircraft types. Of these parked aircraft, approximately 2% are not expected to return to service. At the end of 2016 and 2015, 8.8% and 9.5% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of additional aircraft, particularly types with relatively few operators, are placed out of service.
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Results of Operations
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Revenues | $307 | $298 | $413 | ||||||||
Earnings from operations | $114 | $59 | $50 | ||||||||
Operating margins | 37 | % | 20 | % | 12 | % | |||||
Revenues
BCC segment revenues consist principally of lease income from equipment under operating lease, interest income from financing receivables and notes, and other income. BCC’s revenues in 2017 were consistent with 2016.
BCC’s revenues in 2016 decreased by $115 million compared with 2015 primarily due to lower lease income, and lower end of lease settlement payments.
Earnings From Operations
BCC’s earnings from operations are presented net of interest expense, provision for (recovery of) losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Earnings from operations in 2017 increased by $55 million primarily due to lower asset impairment and depreciation expenses. Earnings from operations in 2016 increased by $9 million primarily due to lower asset impairment expense which more than offset lower revenues.
Financial Position
The following table presents selected financial data for BCC as of December 31:
(Dollars in millions) | 2017 | 2016 | |||||
Customer financing and investment portfolio, net | $3,003 | $4,109 | |||||
Other assets, primarily cash and short-term investments | 677 | 346 | |||||
Total assets | $3,680 | $4,455 | |||||
Other liabilities, primarily deferred income taxes | $653 | $1,007 | |||||
Debt, including intercompany loans | 2,523 | 2,864 | |||||
Equity | 504 | 584 | |||||
Total liabilities and equity | $3,680 | $4,455 | |||||
Debt-to-equity ratio | 5.0-to-1 | 4.9-to-1 | |||||
BCC’s customer financing and investment portfolio at December 31, 2017 decreased from December 31, 2016, primarily due to $1,434 million of asset sales, note payoffs, and portfolio run-off, partially offset by new volume.
Aircraft subject to leases with a carrying value of approximately $25 million are scheduled to be returned off lease during 2018. We are seeking to remarket these aircraft or have the leases extended.
BCC enters into certain transactions with Boeing, reflected in Unallocated items, eliminations and other, in the form of intercompany guarantees and other subsidies that mitigate the effects of certain credit quality or asset impairment issues on the BCC segment.
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Liquidity and Capital Resources
Cash Flow Summary
(Dollars in millions) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Net earnings | $8,197 | $4,895 | $5,176 | ||||||||
Non-cash items | 2,652 | 2,559 | 2,392 | ||||||||
Changes in working capital | 2,495 | 3,045 | 1,795 | ||||||||
Net cash provided by operating activities | 13,344 | 10,499 | 9,363 | ||||||||
Net cash used by investing activities | (2,062 | ) | (3,380 | ) | (1,846 | ) | |||||
Net cash used by financing activities | (11,350 | ) | (9,587 | ) | (7,920 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 80 | (33 | ) | (28 | ) | ||||||
Net decrease in cash and cash equivalents | 12 | (2,501 | ) | (431 | ) | ||||||
Cash and cash equivalents at beginning of year | 8,801 | 11,302 | 11,733 | ||||||||
Cash and cash equivalents at end of period | $8,813 | $8,801 | $11,302 | ||||||||
Operating Activities Net cash provided by operating activities was $13.3 billion during 2017, compared with $10.5 billion during 2016 and $9.4 billion in 2015. The increase of $2.8 billion in 2017 was primarily driven by higher advances more than offsetting inventory increases. The increase of $1.1 billion in 2016 was primarily due to lower expenditures on commercial airplane program inventory, primarily 787. Advances and progress billings increased by $4.6 billion in 2017, decreased by $1.9 billion in 2016 and increased by $0.4 billion in 2015. During 2017, our discretionary contributions to our pension plans included 14.4 million shares of our common stock with an aggregate value of $3.5 billion and $0.5 billion in cash. Discretionary contributions to our pension plans were insignificant in 2016 and 2015.
Investing Activities Cash used by investing activities during 2017, 2016 and 2015 was $2.1 billion, $3.4 billion and $1.8 billion. Capital expenditures totaled $1.7 billion in 2017, down from $2.6 billion in 2016 and $2.5 billion in 2015. We expect capital expenditures in 2018 to be higher than 2017. Net proceeds from investments was insignificant in 2017. Net contributions to investments were $0.5 billion in 2016 compared with net proceeds from investments of $0.6 billion in 2015.
Financing Activities Cash used by financing activities was $11.4 billion during 2017, an increase of $1.8 billion compared with 2016, primarily due to higher share repurchases and dividend payments. During 2017, our net borrowings were $1.1 billion compared with minimal net repayments in 2016. Cash used by financing activities was $9.6 billion during 2016, an increase of $1.7 billion compared with 2015, primarily due to lower net borrowings and higher dividend payments and share repurchases.
At December 31, 2017 and 2016 the recorded balance of debt was $11.1 billion and $10.0 billion of which $1.3 billion and $0.4 billion was classified as short-term. At December 31, 2017 and 2016 this included $2.5 billion and $2.9 billion of debt attributable to BCC, of which $0.9 billion and $0.1 billion were classified as short-term.
During 2017 and 2016 we repurchased 46.1 million and 55.1 million shares totaling $9.2 billion and $7.0 billion through our open market share repurchase program. In 2017 and 2016, we had 0.7 million shares transferred to us from employees for tax withholdings. At December 31, 2017, the amount available under the share repurchase plan, announced on December 11, 2017, totaled $18 billion.
Capital Resources We have substantial borrowing capacity. Any future borrowings may affect our credit ratings and are subject to various debt covenants as described below. We have a commercial paper
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program that serves as a source of short-term liquidity. At December 31, 2017, commercial paper borrowings totaling $600 million were supported by unused commitments under the revolving credit agreement. We had no commercial paper borrowings in 2016. Currently, we have $5.0 billion of unused borrowing capacity on revolving credit line agreements. We anticipate that these credit lines will primarily serve as backup liquidity to support our general corporate borrowing needs.
Financing commitments totaled $10.2 billion and $14.8 billion at December 31, 2017 and 2016. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. Historically, we have not been required to fund significant amounts of outstanding commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required. In addition, many of our non-U.S. customers finance aircraft purchases through the Export-Import Bank of the United States. Following the expiration of the bank’s charter on June 30, 2015, the bank’s charter was reauthorized in December 2015. The bank is now authorized through September 30, 2019. However, until the U.S. Senate confirms members sufficient to reconstitute a quorum of the bank’s board of directors, the bank will not be able to approve any transaction totaling more than $10 million. As a result, we may fund additional commitments and/or enter into new financing arrangements with customers.
In the event we require additional funding to support strategic business opportunities, our commercial aircraft financing commitments, unfavorable resolution of litigation or other loss contingencies, or other business requirements, we expect to meet increased funding requirements by issuing commercial paper or term debt. We believe our ability to access external capital resources should be sufficient to satisfy existing short-term and long-term commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year. However, there can be no assurance of the cost or availability of future borrowings, if any, under our commercial paper program, in the debt markets or our credit facilities.
At December 31, 2017 and 2016, our pension plans were $16.4 billion and $20.1 billion underfunded as measured under GAAP. On an Employee Retirement Income Security Act (ERISA) basis our plans are more than 100% funded at December 31, 2017 with minimal required contributions in 2018. During 2017, we contributed shares of our common stock with an aggregate value of $3.5 billion and $0.5 billion in cash. We do not expect to make contributions to our pension plans in 2018. We may be required to make higher contributions to our pension plans in future years.
At December 31, 2017, we were in compliance with the covenants for our debt and credit facilities. The most restrictive covenants include a limitation on mortgage debt and sale and leaseback transactions as a percentage of consolidated net tangible assets (as defined in the credit agreements), and a limitation on consolidated debt as a percentage of total capital (as defined). When considering debt covenants, we continue to have substantial borrowing capacity.
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Contractual Obligations
The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2017, and the estimated timing thereof.
(Dollars in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||
Long-term debt (including current portion) | $11,130 | $1,285 | $2,362 | $1,266 | $6,217 | ||||||||||||||
Interest on debt | 5,635 | 478 | 831 | 672 | 3,654 | ||||||||||||||
Pension and other postretirement cash requirements | 6,190 | 609 | 1,245 | 1,246 | 3,090 | ||||||||||||||
Capital lease obligations | 147 | 55 | 61 | 16 | 15 | ||||||||||||||
Operating lease obligations | 1,367 | 220 | 365 | 212 | 570 | ||||||||||||||
Purchase obligations not recorded on the Consolidated Statements of Financial Position | 115,064 | 48,375 | 31,369 | 23,223 | 12,097 | ||||||||||||||
Purchase obligations recorded on the Consolidated Statements of Financial Position | 18,630 | 18,289 | 325 | 2 | 14 | ||||||||||||||
Total contractual obligations (1) | $158,163 | $69,311 | $36,558 | $26,637 | $25,657 | ||||||||||||||
(1) | Excludes income tax matters. As of December 31, 2017, our net liability for income taxes payable, including uncertain tax positions of $1,736 million, was $1,634 million. For further discussion of income taxes, see Note 4 to our Consolidated Financial Statements. We are not able to reasonably estimate the timing of future cash flows related to uncertain tax positions. |
Pension and Other Postretirement Benefits Pension cash requirements are based on an estimate of our minimum funding requirements, pursuant to ERISA regulations, although we may make additional discretionary contributions. Estimates of other postretirement benefits are based on both our estimated future benefit payments and the estimated contributions to plans that are funded through trusts.
Purchase Obligations Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. Purchase obligations include amounts recorded as well as amounts that are not recorded on the Consolidated Statements of Financial Position.
Purchase Obligations Not Recorded on the Consolidated Statements of Financial Position Purchase obligations not recorded on the Consolidated Statements of Financial Position include agreements for inventory procurement, tooling costs, electricity and natural gas contracts, property, plant and equipment, customer financing equipment, and other miscellaneous production related obligations. The most significant obligation relates to inventory procurement contracts. We have entered into certain significant inventory procurement contracts that specify determinable prices and quantities, and long-term delivery timeframes. In addition, we purchase raw materials on behalf of our suppliers. These agreements require suppliers and vendors to be prepared to build and deliver items in sufficient time to meet our production schedules. The need for such arrangements with suppliers and vendors arises from the extended production planning horizon for many of our products. A significant portion of these inventory commitments is supported by firm contracts and/or has historically resulted in settlement through reimbursement from customers for penalty payments to the supplier should the customer not take delivery. These amounts are also included in our forecasts of costs for program and contract accounting. Some inventory procurement contracts may include escalation adjustments. In these limited cases, we have included our best estimate of the effect of the escalation adjustment in the amounts disclosed in the table above.
Purchase Obligations Recorded on the Consolidated Statements of Financial Position Purchase obligations recorded on the Consolidated Statements of Financial Position primarily include accounts payable and certain other current and long-term liabilities including accrued compensation.
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Industrial Participation Agreements We have entered into various industrial participation agreements with certain customers outside of the U.S. to facilitate economic flow back and/or technology or skills transfer to their businesses or government agencies as the result of their procurement of goods and/or services from us. These commitments may be satisfied by our local operations there, placement of direct work or vendor orders for supplies, opportunities to bid on supply contracts, transfer of technology or other forms of assistance. However, in certain cases, our commitments may be satisfied through other parties (such as our vendors) who purchase supplies from our non-U.S. customers. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. During 2017, we incurred no such penalties. As of December 31, 2017, we have outstanding industrial participation agreements totaling $17.9 billion that extend through 2030. Purchase order commitments associated with industrial participation agreements are included in purchase obligations in the table above. To be eligible for such a purchase order commitment from us, a non-U.S. supplier must have sufficient capability to meet our requirements and must be competitive in cost, quality and schedule.
Commercial Commitments
The following table summarizes our commercial commitments outstanding as of December 31, 2017.
(Dollars in millions) | Total Amounts Committed/Maximum Amount of Loss | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||
Standby letters of credit and surety bonds | $3,708 | $1,659 | $782 | $559 | $708 | ||||||||||||||
Commercial aircraft financing commitments | 10,221 | 2,047 | 4,372 | 2,256 | 1,546 | ||||||||||||||
Total commercial commitments | $13,929 | $3,706 | $5,154 | $2,815 | $2,254 | ||||||||||||||
Commercial aircraft financing commitments include commitments to provide financing related to aircraft on order, under option for deliveries or proposed as part of sales campaigns or refinancing with respect to delivered aircraft, based on estimated earliest potential funding dates. Based on historical experience, we anticipate that we will not be required to fund a significant portion of our financing commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required, particularly if the Export-Import Bank of the United States continues to be unable to, or does not, provide new financing support. See Note 11 to our Consolidated Financial Statements.
Contingent Obligations
We have significant contingent obligations that arise in the ordinary course of business, which include the following:
Legal Various legal proceedings, claims and investigations are pending against us. Legal contingencies are discussed in Note 20 to our Consolidated Financial Statements.
Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $524 million at December 31, 2017. For additional information, see Note 11 to our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion of these arrangements, see Note 12 to our Consolidated Financial Statements.
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Non-GAAP Measures
Core Operating Earnings, Core Operating Margin and Core Earnings Per Share
Our Consolidated Financial Statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) which we supplement with certain non-GAAP financial information. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Core operating earnings, core operating margin and core earnings per share exclude the impact of certain pension and other postretirement benefit expenses that are not allocated to business segments. Pension costs, comprising service and prior service costs computed in accordance with GAAP are allocated to BCA and certain BGS businesses supporting commercial customers. Pension costs allocated to BDS and BGS businesses supporting government customers are computed in accordance with U.S. Government Cost Accounting Standards (CAS), which employ different actuarial assumptions and accounting conventions than GAAP. CAS costs are allocable to government contracts. Other postretirement benefit costs are allocated to all business segments based on CAS, which is generally based on benefits paid. The unallocated pension costs recognized in earnings during 2017 was a benefit of $1,120 million compared with a benefit of $217 million in 2016 and an expense of $421 million in 2015. The higher 2017 benefit reflects the amortization of pension benefits capitalized as inventory in prior years. The 2016 benefit reflects the difference between the higher segment allocation compared to the U.S. GAAP net periodic pension costs recognized in earnings in the current period, as well as lower settlements and curtailments. For further discussion of pension and other postretirement costs see the Management’s Discussion and Analysis on pages 20 and 21 of this Form 10-K and see Note 21 to our Consolidated Financial Statements. Management uses core operating earnings, core operating margin and core earnings per share for purposes of evaluating and forecasting underlying business performance. Management believes these core earnings measures provide investors additional insights into operational performance as unallocated pension and other postretirement benefit cost primarily represent costs driven by market factors and costs not allocable to U.S. government contracts.
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Reconciliation of GAAP Measures to Non-GAAP Measures
The table below reconciles the non-GAAP financial measures of core operating earnings, core operating margin and core earnings per share with the most directly comparable GAAP financial measures of earnings from operations, operating margins and diluted earnings per share.
(Dollars in millions, except per share data) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Revenues | $93,392 | $94,571 | $96,114 | ||||||||
Earnings from operations, as reported | $10,278 | $5,834 | $7,443 | ||||||||
Operating margins | 11.0 | % | 6.2 | % | 7.7 | % | |||||
Unallocated pension (income)/expense | ($1,120 | ) | ($217 | ) | $421 | ||||||
Unallocated other postretirement benefit income | ($188 | ) | ($153 | ) | ($123 | ) | |||||
Unallocated pension and other postretirement benefit (income)/expense | ($1,308 | ) | ($370 | ) | $298 | ||||||
Core operating earnings (non-GAAP) | $8,970 | $5,464 | $7,741 | ||||||||
Core operating margins (non-GAAP) | 9.6 | % | 5.8 | % | 8.1 | % | |||||
Diluted earnings per share, as reported | $13.43 | $7.61 | $7.44 | ||||||||
Unallocated pension (income)/expense | ($1.83 | ) | ($0.33 | ) | $0.61 | ||||||
Unallocated other postretirement benefit income | ($0.31 | ) | ($0.24 | ) | ($0.18 | ) | |||||
Provision for deferred income taxes on adjustments (1) | $0.75 | $0.20 | ($0.15 | ) | |||||||
Core earnings per share (non-GAAP) | $12.04 | $7.24 | $7.72 | ||||||||
Weighted average diluted shares (in millions) | 610.7 | 643.8 | 696.1 | ||||||||
(1) | The income tax impact is calculated using the tax rate in effect for the non-GAAP adjustments. |
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Critical Accounting Policies
Contract Accounting
Contract accounting is used to determine revenue, cost of sales, and profit predominantly by BDS and for defense contracts at BGS. Contract accounting involves a judgmental process of estimating the total sales and costs for each contract, which results in the development of estimated cost of sales percentages. For each contract, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage to the amount of revenue recognized.
Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Total contract sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance, and price adjustment clauses (such as inflation or index-based clauses). The majority of these contracts are with the U.S. government where the price is generally based on estimated cost to produce the product or service plus profit. Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed in establishing contract price. Total contract cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.
Revenue and cost estimates for all significant contracts are reviewed and reassessed quarterly. Changes in these estimates could result in recognition of cumulative catch-up adjustments to the contract’s inception to date revenues, cost of sales and profit, in the period in which such changes are made. Changes in revenue and cost estimates could also result in a reach-forward loss or an adjustment to a reach-forward loss, which would be recorded immediately in earnings. For the year ended December 31, 2017 net favorable cumulative catch-up adjustments, including reach-forward losses, across all contracts increased Earnings from operations by $14 million. For the years ended December 31, 2016 and 2015, net unfavorable cumulative catch-up adjustments, including reach-forward losses, across all contracts decreased Earnings from operations by $912 million and $224 million.
Due to the significance of judgment in the estimation process described above, it is likely that materially different cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods. If the combined gross margin for all contracts in BDS and defense contracts at BGS for all of 2017 had been estimated to be higher or lower by 1%, it would have increased or decreased pre-tax income for the year by approximately $280 million. In addition, a number of our fixed price development contracts are in a reach-forward loss position. Changes to estimated losses are recorded immediately in earnings.
Program Accounting
Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to costs for the defined program accounting quantity. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. For each program, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of sales recognized for airplanes delivered and accepted by the customer.
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Factors that must be estimated include program accounting quantity, sales price, labor and employee benefit costs, material costs, procured part costs, major component costs, overhead costs, program tooling and other non-recurring costs, and warranty costs. Estimation of the accounting quantity for each program takes into account several factors that are indicative of the demand for the particular program, such as firm orders, letters of intent from prospective customers, and market studies. Total estimated program sales are determined by estimating the model mix and sales price for all unsold units within the accounting quantity, added together with the sales prices for all undelivered units under contract. The sales prices for all undelivered units within the accounting quantity include an escalation adjustment for inflation that is updated quarterly. Cost estimates are based largely on negotiated and anticipated contracts with suppliers, historical performance trends, and business base and other economic projections. Factors that influence these estimates include production rates, internal and subcontractor performance trends, customer and/or supplier claims or assertions, asset utilization, anticipated labor agreements, and inflationary or deflationary trends.
To ensure reliability in our estimates, we employ a rigorous estimating process that is reviewed and updated on a quarterly basis. Changes in estimates are normally recognized on a prospective basis; when estimated costs to complete a program exceed estimated revenues from undelivered units in the accounting quantity, a loss provision is recorded in the current period for the estimated loss on all undelivered units in the accounting quantity. For example, in 2016 and 2015, we recorded reach-forward losses of $1,258 million and $885 million on the 747 program. We continue to evaluate the viability of the 747 program and it is reasonably possible that we could decide to end production of the 747.
The program method of accounting allocates tooling and other non-recurring and production costs over the accounting quantity for each program. Because of the higher unit production costs experienced at the beginning of a new program and substantial investment required for initial tooling and other non-recurring costs, new commercial aircraft programs, such as the 787 and 777X programs, typically have lower initial margins than established programs. In addition, actual costs incurred for earlier units in excess of the estimated average cost of all units in the program accounting quantity are included within program inventory as deferred production costs. Deferred production, unamortized tooling and other non-recurring costs are expected to be fully recovered when all units in the accounting quantity are delivered as the expected unit cost for later deliveries is below the estimated average cost as learning curve and other improvements are realized.
Due to the significance of judgment in the estimation process described above, it is reasonably possible that changes in underlying circumstances or assumptions could have a material effect on program gross margins. If the combined gross margin percentages for our commercial airplane programs had been estimated to be 1% higher or lower it would have a similar effect on the Commercial Airplane segment’s operating margins. For the year ended December 31, 2017, a 1% increase or decrease in operating margins for our Commercial Airplane segment would have a $567 million impact on operating earnings.
Goodwill and Indefinite-Lived Intangible Impairments
We test goodwill for impairment by performing a qualitative assessment or using a two-step impairment process. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors as an initial step in assessing the fair value of operations. If we determine it is more likely than not that the carrying value of the net assets is more than the fair value of the related operations, the two-step impairment process is then performed; otherwise, no further testing is required. For operations where the two-step impairment process is used, we first compare the book value of net assets to the fair value of the related operations. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.
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We estimate the fair values of the related operations using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements and general market conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any.
The cash flow forecasts are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. Therefore, changes in the stock price may also affect the amount of impairment recorded, if any.
We completed our assessment of goodwill as of April 1, 2017 and determined that there is no impairment of goodwill. As a result of the change in our reportable segments, as described in Note 21, we reallocated goodwill to our new reporting units using a relative fair value approach. We evaluated goodwill for impairment at July 1, 2017 and determined that no impairment existed. As of December 31, 2017, we estimated that the fair value of each reporting unit significantly exceeded its corresponding carrying value. Changes in our forecasts, or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future periods.
As of December 31, 2017 and 2016, we had $490 million of indefinite-lived intangible assets related to the Jeppesen and Aviall brand and trade names acquired in business combinations. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment. A 10% decrease in the discounted cash flows would not impact the carrying value of these indefinite-lived intangible assets.
Pension Plans
The majority of our employees have earned benefits under defined benefit pension plans. Nonunion and the majority of union employees that had participated in defined benefit pension plans transitioned to a company-funded defined contribution retirement savings plan in 2016. Accounting rules require an annual measurement of our projected obligation and plan assets. These measurements are based upon several assumptions, including the discount rate and the expected long-term rate of asset return. Future changes in assumptions or differences between actual and expected outcomes can significantly affect our future annual expense, projected benefit obligation and Shareholders’ equity.
The following table shows the sensitivity of our pension plan liability and net periodic cost to a 25 basis point change in the discount rate as of December 31, 2017.
(Dollars in millions) | Change in discount rate Increase 25 bps | Change in discount rate Decrease 25 bps | |||||
Pension plans | |||||||
Projected benefit obligation | ($2,364 | ) | $2,961 | ||||
Net periodic pension cost | (84 | ) | 99 | ||||
Pension expense is also sensitive to changes in the expected long-term rate of asset return. A decrease or increase of 25 basis points in the expected long-term rate of asset return would have increased or decreased 2017 net periodic pension expense by $148 million. We expect 2018 net periodic pension cost to decrease by approximately $44 million and the portion recognized in earnings before income taxes to decrease by approximately $512 million primarily due to lower amortization of actuarial losses.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have financial instruments that are subject to interest rate risk, principally fixed-rate debt obligations, and customer financing assets and liabilities. Additionally, BCC uses interest rate swaps with certain debt obligations to manage exposure to interest rate changes. Historically, we have not experienced material gains or losses on our customer financing assets and liabilities due to interest rate changes. As of December 31, 2017, the impact over the next 12 months of a 100 basis point rise in interest rates to our pre-tax earnings would not be significant. The investors in our fixed-rate debt obligations do not generally have the right to demand we pay off these obligations prior to maturity. Therefore, exposure to interest rate risk is not believed to be material for our fixed-rate debt.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. We use foreign currency forward contracts to hedge the price risk associated with firmly committed and forecasted foreign denominated payments and receipts related to our ongoing business. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2017, a 10% increase or decrease in the exchange rate in our portfolio of foreign currency contracts would have increased or decreased our unrealized losses by $289 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these forward currency contracts and the offsetting underlying commitments do not create material market risk.
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Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
Page | |
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The Boeing Company and Subsidiaries
Consolidated Statements of Operations
(Dollars in millions, except per share data) | |||||||||||
Years ended December 31, | 2017 | 2016 | 2015 | ||||||||
Sales of products | $83,204 | $84,399 | $85,255 | ||||||||
Sales of services | 10,188 | 10,172 | 10,859 | ||||||||
Total revenues | 93,392 | 94,571 | 96,114 | ||||||||
Cost of products | (68,365 | ) | (72,713 | ) | (73,446 | ) | |||||
Cost of services | (7,631 | ) | (8,018 | ) | (8,578 | ) | |||||
Boeing Capital interest expense | (70 | ) | (59 | ) | (64 | ) | |||||
Total costs and expenses | (76,066 | ) | (80,790 | ) | |||||||