10-K 1 a201312dec3110k.htm 10-K 2013 12 Dec 31 10K

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, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                         
Commission file number 1-442
 
THE BOEING COMPANY
 
(Exact name of registrant as specified in its charter)
Delaware
 
91-0425694
State or other jurisdiction of
incorporation or organization
 
(I.R.S. Employer Identification No.)
 
 
 
100 N. Riverside Plaza, Chicago, IL
 
60606-1596
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (312) 544-2000 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer  ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2013, there were 754,034,388 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 $77.2 billion.
The number of shares of the registrant’s common stock outstanding as of February 7, 2014 was 743,404,506.
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, 2013.



THE BOEING COMPANY
Index to the Form 10-K
For the Fiscal Year Ended December 31, 2013
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I
Item 1. Business
The Boeing Company, together with its subsidiaries (herein referred to as “Boeing,” the “Company,” “we,” “us,” “our”), is one of the world’s major aerospace firms.
We are organized based on the products and services we offer. We operate in five principal segments:
Commercial Airplanes;
Our Defense, Space & Security (BDS) business comprises three segments:
Boeing Military Aircraft (BMA),
Network & Space Systems (N&SS) and
Global Services & Support (GS&S); and
Boeing Capital (BCC).
Our Other segment includes the unallocated activities of Engineering, Operations & Technology (EO&T) and Shared Services Group (SSG), as well as intercompany guarantees provided to BCC. EO&T provides Boeing with technical and functional capabilities, including information technology, research and development, test and evaluation, technology strategy development, environmental remediation management and intellectual property management.
Commercial Airplanes Segment
The Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, principally to the commercial airline industry worldwide. We are a leading producer of commercial aircraft and offer a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and non-U.S. airlines. This family of commercial jet aircraft in production includes the 737 narrow-body model and the 747, 767, 777 and 787 wide-body models. Development continues on the 787-9, 787-10 and 737 MAX derivatives. In November 2013, we launched the 777X, which features a new composite wing, new engines and folding wing-tips all designed to deliver greater efficiency and significant fuel savings. The Commercial Airplanes segment also offers aviation services support, aircraft modifications, spares, training, maintenance documents and technical advice to commercial and government customers worldwide.
Defense, Space & Security
Our BDS operations principally involve research, development, production, modification and support of the products and related systems as described below. BDS' primary customer is the United States Department of Defense (U.S. DoD) with approximately 67% of BDS 2013 revenues being derived from this customer (excluding foreign military sales through the U.S. government). Other significant revenues were derived from the National Aeronautics and Space Administration (NASA), international defense markets, civil markets and commercial satellite markets. BDS consists of three capabilities-driven businesses: BMA, N&SS and GS&S. Additionally, the Phantom Works group is an integrated team that works with the three businesses via product development, rapid prototyping and customer engagement through experimentation and enterprise technology investment strategies.
Boeing Military Aircraft Segment
This segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for global strike, including fighter aircraft and missile


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systems; vertical lift, including rotorcraft and tilt-rotor aircraft; unmanned airborne systems programs; and mobility, surveillance and engagement, including command and control, battle management, airborne, anti-submarine, transport and tanker aircraft. The major programs in this segment include for global strike: EA-18G Growler Airborne Electronic Attack, F/A-18E/F Super Hornet, F-15 Strike Eagle and Joint Direct Attack Munition; for vertical lift: CH-47 Chinook, AH-64 Apache, and V-22 Osprey; for unmanned airborne systems programs: ScanEagle; and for mobility, surveillance and engagement: C-17 Globemaster III, P-8A Poseidon and India P-8I, Airborne Early Warning and Control (AEW&C), and KC-46A Tanker.
Network & Space Systems Segment
This segment is engaged in the research, development, production and modification of the following products and related services: electronics and information solutions, including command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), cyber and information solutions, and intelligence systems; strategic missile and defense systems; space and intelligence systems, including satellites and commercial satellite launch vehicles; and space exploration. The major programs in this segment include for electronics and information solutions: Family of Advanced Beyond Line-of-Sight Terminals (FAB-T); for strategic missile and defense systems: Ground-based Midcourse Defense (GMD); for space and intelligence systems: commercial, civil and military satellites; and for space exploration: Space Launch System (SLS) and International Space Station. This segment also includes our joint venture operations related to United Launch Alliance and United Space Alliance. During 2011, the Brigade Combat Team Modernization (BCTM) program concluded.
Global Services & Support Segment
This segment provides customers with mission readiness through total support solutions. Our global services business sustains aircraft and systems with a full spectrum of products and services through integrated logistics, including supply chain management and engineering support; maintenance, modification and upgrades for aircraft; and training systems and government services, including pilot and maintenance training. GS&S international operations include Boeing Defence U.K. Ltd., and Boeing Defence Australia, as well as Alsalam Aircraft Company and Boeing Sikorsky International Services LLC, joint ventures.
Integrated logistics comprises an integrated array of services that address the complete life cycle of aircraft and systems. Major programs include the F/A-18E/F support program and domestic and international performance based logistic programs for the AH-64 Apache, CH-47 Chinook and other BDS platforms.
Maintenance, modification and upgrades for aircraft are performed at centers throughout the United States and around the world, providing rapid cycle time and aircraft services for military customers on a wide variety of BDS and non-BDS platforms. Major programs include the C-17 Globemaster III Integrated Sustainment Program and F-15 support programs for the United States Air Force (USAF) and several other international customers.
Training systems and government services comprise a full range of training capabilities for domestic and international customers, including the design and development of trainers for multiple aircraft platforms and logistics and asset management solutions.
Boeing Capital Segment
BCC facilitates, arranges, structures and provides selective financing solutions for our Commercial Airplanes customers. In the space and defense markets, BCC primarily arranges and structures financing


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solutions for our BDS government and commercial satellite customers. BCC’s portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments.
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 expenditures involve experimentation, design, development and related test activities for defense systems, new and derivative jet aircraft including both commercial and military, advanced space and other company-sponsored product development. These are expensed as incurred including amounts allocable as reimbursable overhead costs on U.S. government contracts.
Our total research and development expense amounted to $3.1 billion, $3.3 billion and $3.9 billion in 2013, 2012 and 2011, 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 $285 million, $326 million and $332 million in 2013, 2012 and 2011, respectively.
Employees
Total workforce level at December 31, 2013 was approximately 168,400.


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As of December 31, 2013, our principal collective bargaining agreements were with the following unions:
Union
Percent of our Employees Represented
Status of the Agreements with the Union
The International Association of Machinists and Aerospace Workers (IAM)
21%
We have two major agreements; one expiring in January of 2015 and one in September of 2024.
The Society of Professional Engineering Employees in Aerospace (SPEEA)
14%
We have one major agreement expiring in October 2016.
The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW)
2%
We have one major agreement expiring in October of 2014 and one in February of 2015.
Competition
The commercial jet aircraft market and the airline industry remain extremely competitive. We face aggressive international competitors who are intent on increasing their market share, such as Airbus, Embraer and Bombardier, and other entrants from Russia, China and Japan. We are focused on improving our processes and continuing cost reduction efforts. We intend to continue to compete with other airplane manufacturers by providing customers with greater value products, services, and support. We continue to leverage our extensive customer support services network which span the life cycle of the airplane: aircraft acquisition, readying for service, maintenance and engineering, enhancing and upgrading, and transitioning to the next model - as well as the daily cycle of gate-to-gate operations. This enables us to provide a high level of customer satisfaction and productivity.
BDS faces strong competition in all market segments, primarily from Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company and General Dynamics Corporation. Non-U.S. companies such as BAE Systems and Airbus Group (formerly European Aeronautic Defence and Space Company (EADS)), 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 2014 with many international firms attempting to increase their U.S. presence.
Regulatory Matters
Our businesses are heavily regulated in most of our markets. We deal with numerous U.S. government agencies and entities, including but not limited to all of the branches of the U.S. military, NASA, the Federal Aviation Administration (FAA) and the Department of Homeland Security. Similar government authorities exist in our international markets.
Government Contracts. The U.S. government, and other governments, may terminate any of our government contracts at their convenience, as well as for default, based on our failure to meet specified performance requirements. If any of our U.S. government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default.


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Commercial Aircraft. In the United States, our commercial aircraft products are required to comply with FAA regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Internationally, similar requirements exist for airworthiness, installation and operational approvals. These requirements are generally administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities.
Environmental. We are subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We continually assess our compliance status and management of environmental matters to ensure our operations are in substantial compliance with all applicable environmental laws and regulations. Investigation, remediation, operation and maintenance costs associated with environmental compliance and management of sites are a normal, recurring part of our operations. These costs often are allowable costs under our contracts with the U.S. government. It is reasonably possible that continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows if additional work requirements or more stringent clean-up standards are imposed by regulators, new areas of soil and groundwater contamination are discovered and/or expansions of work scope are prompted by the results of investigations.
A Potentially Responsible Party (PRP) has joint and several liability under existing U.S. environmental laws. Where we have been designated a PRP by the Environmental Protection Agency or a state environmental agency, we are potentially liable to the government or third parties for the full cost of remediating contamination at our facilities or former facilities or at third-party sites. If we were required to fully fund the remediation of a site for which we were originally assigned a partial share, the statutory framework would allow us to pursue rights to contribution from other PRPs. For additional information relating to environmental contingencies, see Note 11 to our Consolidated Financial Statements.
International. Our international sales are subject to U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations relating to import-export control, investment, exchange controls and repatriation of earnings. International sales are also subject to varying currency, political and economic risks.
Raw Materials, Parts, and Subassemblies
We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and subcontractors. The most important raw materials required for our aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). Although alternative sources generally exist for these raw materials, qualification of the sources could take one year or more. Many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of companies.
Suppliers
We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production schedules and program/contract profitability, thereby jeopardizing our ability to fulfill commitments to our customers. We are also dependent on the availability of energy sources, such as electricity, at affordable prices.


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Seasonality
No material portion of our business is considered to be seasonal.
Executive Officers of the Registrant
See “Item 10. Directors, Executive Officers and Corporate Governance” in Part III.
Other Information
Boeing was originally incorporated in the State of Washington in 1916 and reincorporated in Delaware in 1934. Our principal executive offices are located at 100 N. Riverside Plaza, Chicago, Illinois 60606 and our telephone number is (312) 544-2000.
General information about us can be found at www.boeing.com. The information contained on or connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the Securities and Exchange Commission (SEC). Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our web site as soon as reasonably practicable after we file them with, or furnish them to, the SEC. These reports may also be obtained at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Boeing.
Forward-Looking Statements
This report, as well as our Annual Report to Shareholders, quarterly reports, and other filings we make with the SEC, press releases and other written and oral communications, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “expects,” “intends,” “projects,” “plans,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, as well as any other statement that does not directly relate to any historical or current fact.
Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties and changes in circumstances that are difficult to predict. Many factors, including those set forth in the “Risk Factors” section below could cause actual results to differ materially and adversely from these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.
Item 1A. Risk Factors
An investment in our common stock or debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past or projected future performance. We urge investors to consider carefully the risk factors described below in evaluating the information contained in this report.


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Our Commercial Airplanes business depends heavily on commercial airlines, and is subject to unique risks.
Market conditions have a significant impact on demand for our commercial aircraft. The commercial aircraft market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors underlying long-term traffic growth are sustained economic growth and political stability both in developed and emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of aircraft financing, world trade policies, government-to-government relations, technological changes, price and other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the airline industry has been cyclical and very competitive and has experienced significant profit swings and constant challenges to be more cost competitive. In addition, availability of financing to non-U.S. customers depends in part on the Export-Import Bank of the United States, whose current authorization expires at the end of September 2014. Significant deterioration in the global economic environment, the airline industry generally, or in the financial stability of one or more of our major customers could result in fewer new orders for aircraft or could cause customers to seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues, profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.
We enter into firm fixed-price aircraft sales contracts with indexed price escalation clauses which could subject us to losses if we have cost overruns or if increases in our costs exceed the applicable escalation rate. Commercial aircraft sales contracts are often entered into years before the aircraft are delivered. In order to account for economic fluctuations between the contract date and delivery date, aircraft pricing generally consists of a fixed amount as modified by an indexed price escalation formula. Our revenue estimates are based on current expectations with respect to these escalation formulas, but the actual escalation amounts are outside of our control. Escalation factors can fluctuate significantly from period to period. Changes in escalation amounts can significantly impact revenues and operating margins in our Commercial Airplanes business.
We derive a significant portion of our revenues from a limited number of commercial airlines. We can make no assurance that any customer will exercise purchase options, fulfill existing purchase commitments or purchase additional products or services from us. In addition, fleet decisions, airline consolidations or financial challenges involving any of our major commercial airline customers could significantly reduce our revenues and limit our opportunity to generate profits from those customers.
Our Commercial Airplanes business depends on our ability to maintain a healthy production system, achieve planned production rate targets, successfully develop new aircraft or new derivative aircraft, and meet or exceed stringent performance and reliability standards.
The commercial aircraft business is extremely complex, involving extensive coordination and integration with suppliers, highly-skilled labor from thousands of employees and other partners, and stringent regulatory requirements and performance and reliability standards. In addition, the introduction of new aircraft programs and/or derivatives, such as the 787-9, 787-10, 737 MAX 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 meet planned production rate targets in order to satisfy customer demand and maintain our profitability. We continue to increase production rates for the 737 and 787 programs, while at the same time engaging in significant ongoing development of the 787-9, 787-10, 737 MAX and 777X aircraft. If production rate ramp-up efforts at any of our commercial aircraft assembly facilities are delayed or if our suppliers cannot timely deliver components to us at the rates necessary to achieve our planned rate


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increases, we may be unable to meet delivery schedules and the financial performance of one or more of our programs may suffer.
Operational challenges impacting the production system for one or more of our commercial aircraft programs could result in production delays and/or failure to meet customer demand for new aircraft, either of which would negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely complex. Operational issues, including delays or defects in supplier components, failure to meet internal performance plans, or delays or failures to achieve required regulatory certifications, could result in significant out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to aircraft performance and/or increased warranty or fleet support costs. Further, if we cannot efficiently and cost-effectively incorporate design changes into already-completed 787 production aircraft, we may face further profitability pressures on this program.
If our commercial airplanes fail to satisfy performance and reliability requirements, we could face additional costs and/or lower revenues. Developing and manufacturing commercial aircraft that meet or exceed our performance and reliability standards, as well as those of customers and regulatory agencies, can be costly and technologically challenging. These challenges are particularly significant with newer aircraft programs. Any failure of any Boeing aircraft to satisfy performance or reliability requirements could result in disruption to our operations, higher costs and/or lower revenues.
Changes in levels of U.S. government defense spending or overall acquisition priorities could negatively impact our financial position and results of operations.
We derive a substantial portion of our revenue from the U.S. government, primarily from defense related programs with the U.S. DoD. Levels of U.S. defense spending in future periods are very difficult to predict and subject to significant risks. In addition, significant budgetary delays and constraints have already resulted in reduced spending levels, and additional reductions may be forthcoming. In August 2011, the Budget Control Act (The Act) established limits on U.S. government discretionary spending, including a reduction of defense spending by approximately $490 billion between the 2012 and 2021 U.S. government fiscal years. The Act also provided that the defense budget would face “sequestration” cuts of up to an additional $500 billion during that same period to the extent that discretionary spending limits are exceeded. The impact of sequestration cuts was reduced with respect to FY2014 and FY2015 following the enactment of The Bipartisan Budget Act in December 2013. However, significant uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. government discretionary spending levels will continue to be subject to significant pressure, including risk of future sequestration cuts.
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 FY2014 appropriations finalized in January 2014 included funding for Boeing’s major programs, uncertainty remains about how defense budgets in FY2015 and beyond will affect Boeing’s programs. We also expect that ongoing concerns regarding the U.S. national debt will continue to place downward pressure on U.S. DoD spending levels. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the 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 2013, 34% of our revenues were earned pursuant to U.S. government contracts, which include foreign military sales through the U.S. government. Business conducted pursuant to such contracts is subject to extensive procurement regulations and other unique risks.
Our sales to the U.S. government are subject to extensive procurement regulations, and changes to those regulations could increase our costs. New procurement regulations, or changes to existing requirements, could increase our compliance costs or otherwise have a material impact on the operating margins of our BDS business. These requirements may result in increased compliance costs, and we could be subject to additional costs in the form of withheld payments and/or reduced future business if we fail to comply with these requirements in the future. Compliance costs attributable to current and potential future procurement regulations such as these could negatively impact our financial condition and operating results.
The U.S. government may modify, curtail or terminate one or more of our contracts. The U.S. government contracting party may modify, curtail or terminate its contracts and subcontracts with us, without prior notice and either at its convenience or for default based on performance. For example, in 2011, the U.S. Army terminated for convenience the entire BCTM program. In addition, funding pursuant to our U.S. government contracts may be reduced or withheld as part of the U.S. Congressional appropriations process due to fiscal constraints, changes in U.S. national security strategy and/or priorities or other reasons. Further uncertainty with respect to ongoing programs could also result in the event that the U.S. government finances its operations through temporary funding measures such as “continuing resolutions” rather than full-year appropriations. Any loss or anticipated loss 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 business generated approximately 70% of its 2013 revenues from fixed-price contracts. While firm fixed price contracts enable us to benefit from performance improvements, cost reductions and efficiencies, they also subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and revenues. If our estimated costs exceed our estimated price, we recognize reach-forward losses which can significantly affect our reported results. The long term nature of many of our contracts makes the process of estimating costs and revenues on fixed-price contracts inherently risky. Fixed-price contracts often contain price incentives and penalties tied to performance which can be difficult to estimate and have significant impacts on margins. In addition, some of our contracts have specific provisions relating to cost, schedule and performance.


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Fixed-price development contracts are generally subject to more uncertainty than fixed-price production contracts. Many of these development programs have highly complex designs. In addition, technical or quality issues that arise during development could lead to schedule delays and higher costs to complete, which could result in a material charge or otherwise adversely affect our financial condition. Examples of significant BDS fixed-price development contracts include AEW&C, India P-8I, Saudi F-15, USAF KC-46A Tanker, and commercial and military satellites.
We enter into cost-type contracts which also carry risks.
Our BDS business generated approximately 30% of its 2013 revenues from cost-type contracting arrangements. Some of these are development programs that have complex design and technical challenges. These cost-type programs typically have award or incentive fees that are subject to uncertainty and may be earned over extended periods. In these cases the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Programs whose contracts are primarily cost-type include GMD, Proprietary and SLS programs.
We enter into contracts that include in-orbit incentive payments that subject us to risks.
Contracts in the commercial satellite industry and certain government satellite contracts include in-orbit incentive payments. These in-orbit payments may be paid over time after final satellite acceptance or paid in full prior to final satellite acceptance. In both cases, the in-orbit incentive payment is at risk if the satellite does not perform to specifications for up to 15 years after acceptance. The net present value of in-orbit incentive fees we ultimately expect to realize is recognized as revenue in the construction period. If the satellite fails to meet contractual performance criteria, customers will not be obligated to continue making in-orbit payments and/or we may be required to provide refunds to the customer and incur significant charges.
Our ability to deliver products and services that satisfy customer requirements is heavily dependent on the performance of our subcontractors and suppliers, as well as on the availability of raw materials and other components.
We rely on other companies including subcontractors and suppliers to provide and produce raw materials, integrated components and sub-assemblies, and production commodities and to perform some of the services that we provide to our customers. If one or more of our suppliers or subcontractors experiences delivery delays or other performance problems, we may be unable to meet commitments to our customers or incur additional costs. In addition, if one or more of the raw materials on which we depend (such as aluminum, titanium or composites) becomes unavailable or is available only at very high prices, we may be unable to deliver one or more of our products in a timely fashion or at budgeted costs. In some instances, we depend upon a single source of supply. Any service disruption from one of these suppliers, either due to circumstances beyond the supplier’s control or as a result of performance problems or financial difficulties, could have a material adverse effect on our ability to meet commitments to our customers or increase our operating costs.
We use estimates in accounting for many contracts and programs. Changes in our estimates could adversely affect our future financial results.
Contract and program accounting require judgment relative to assessing risks, estimating revenues and costs and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts and programs, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions have to be made regarding the length of time to complete the contract or program because costs also include expected increases in wages and employee benefits, material prices and allocated fixed costs. Incentives or penalties related to performance on contracts are


10


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, escalation, costs of derivative aircraft, supplier performance, customer negotiations/settlements, supplier claims and/or certification issues can impact these estimates. Any such change in estimates relating to program accounting may adversely affect future financial performance.
Because of the significance of the judgments and estimation processes described above, 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 4445 and Note 1 to our Consolidated Financial Statements on pages 5565 of this Form 10-K.
Competition within our markets may reduce our future contracts and sales.
The markets in which we operate are highly competitive and one or more of our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. In our Commercial Airplanes business, we anticipate increasing competition among non-U.S. aircraft manufacturers and service providers in one or more of our market segments. In our BDS business, we anticipate that the effects of defense industry consolidation and new priorities, including long-term cost competitiveness, of our U.S. DoD customer will intensify competition for many of our products and services. Furthermore, we are facing increased international competition and cross-border consolidation of competition. There can be no assurance that we will be able to compete successfully against our current or future competitors or that the competitive pressures we face will not result in reduced revenues and market share.
We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks of doing business in other countries.
In 2013, non-U.S. customers accounted for approximately 57% of our revenues. We expect that non-U.S. sales will continue to account for a significant portion of our revenues for the foreseeable future. As a result, we are subject to risks of doing business internationally, including:
changes in regulatory requirements;
domestic and international government policies, including requirements to expend a portion of program funds locally and governmental industrial cooperation or participation requirements;
fluctuations in international currency exchange rates;


11


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 and other trade restrictions;
the difficulty of management and operation of an enterprise spread over many countries;
compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S. companies abroad; and
unforeseen developments and conditions, including terrorism, war and international 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.
The outcome of litigation and of government inquiries and investigations involving our business is unpredictable and an adverse decision in any such matter could have a material effect on our financial position and results of operations.
We are involved in a number of litigation matters. These claims may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits could have a material impact on our financial position and results of operations. In addition, we are sometimes subject to government inquiries and investigations of our business due, among other things, to our business relationships with the U.S. government, the heavily regulated nature of our industry, and in the case of environmental proceedings, our ownership of certain property. Any such inquiry or investigation could potentially result in an adverse ruling against us, which could have a material impact on our financial position and operating results.
A significant portion of our customer financing portfolio is concentrated among certain customers based in the United States, and in certain types of Boeing aircraft, which exposes us to concentration risks.
A significant portion of our customer financing portfolio is concentrated among certain customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 aircraft. If one or more customers holding a significant portion of our portfolio assets experiences financial difficulties or otherwise defaults on or does not renew its leases with us at their expiration, and we are unable to redeploy the aircraft on reasonable terms, or if the types of aircraft that are concentrated in our portfolio suffer greater than expected declines in value, our earnings, cash flows and/or financial position could be materially adversely affected.
We may be unable to obtain debt to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms or in sufficient amounts.
We depend, in part, upon the issuance of debt to fund our operations and contractual commitments. As of December 31, 2013 and 2012, our airplane financing commitments totaled $17,987 million and $18,083 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


12


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 from unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. Consolidations of joint ventures could also impact our reported results of operations or financial position. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to liabilities that are unique to the products and services we provide. 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 65,000 employees, which constitute 38% of our total workforce, are union represented as of December 31, 2013. We experienced a work stoppage in 2008 when a labor strike halted commercial aircraft and certain BMA 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


13


11 U.S. labor organizations and 6 non-U.S. labor organizations, will be or whether we will be able to meet the unions’ requirements without impacting our financial condition. The unions may also limit our flexibility in dealing with our workforce. Union actions at suppliers can also affect us. Work stoppages and instability in our union relationships could delay the production and/or development of our products, which could strain relationships with customers and cause a loss of revenues which would adversely affect our operations.
We have substantial pension and other postretirement benefit obligations, which have a material impact on our earnings, shareholders' equity and cash flows from operations and could have significant adverse impacts in future periods.
We have qualified defined benefit pension plans that cover the majority of our employees. Potential pension contributions include both mandatory amounts required under the Employee Retirement Income Security Act and discretionary contributions to improve the plans' funded status. The extent of future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions as well as on our annual pension costs and/or result in a significant change to Shareholders' equity. For U.S. government contracts, we allocate pension costs to individual contracts based on U.S. Cost Accounting Standards which can also affect contract profitability. We also provide other postretirement benefits to certain of our employees, consisting principally of health care coverage for eligible retirees and qualifying dependents. Our estimates of future costs associated with these benefits are also subject to assumptions, including estimates of the level of medical cost increases. For a discussion regarding how our financial statements can be affected by pension and other postretirement plan accounting policies, see Management's Discussion and Analysis-Critical Accounting Policies-Pension Plans on page 46 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 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.
Unauthorized access to our or our customers’ information and systems could negatively impact our business.
We face certain security threats, including threats to the confidentiality, availability and integrity of our data and systems. We maintain an extensive network of technical security controls, policy enforcement mechanisms and monitoring systems in order to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks could result in significant financial or information losses and/or reputational harm. In addition, we manage information


14


technology systems for certain customers. Many of these customers face similar security threats. If we cannot prevent the unauthorized access, release and/or corruption of our customers’ confidential, classified or personally identifiable information, our reputation could be damaged, and/or we could face financial losses.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2. Properties
We occupied approximately 83 million square feet of floor space on December 31, 2013 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, 2013:
(Square feet in thousands)
Owned

 
Leased

 
Government Owned(1)

 
Total

Commercial Airplanes
38,108

 
5,042

 


43,150

Defense, Space & Security
28,769

 
7,995

 


 
36,764

Other(2)
2,082

 
920

 
318

 
3,320

Total
68,959

 
13,957

 
318

 
83,234

(1) Excludes rent-free space furnished by U.S. government landlord of 243 square feet.
(2) Other includes BCC; EO&T; SSG; and our Corporate Headquarters.
At December 31, 2013, our segments occupied in excess of 74.6 million square feet of floor space at the following major locations:
Commercial Airplanes – Greater Seattle, WA; Greater Charleston, SC; Portland, OR; Australia; Greater Salt Lake City, UT; Canada; and Greater Los Angeles, CA
Defense, Space & Security – Greater Los Angeles, CA; Greater St. Louis, MO; Greater Seattle, WA; Philadelphia, PA; Mesa, AZ; Wichita, KS; San Antonio, TX; Huntsville, AL; Greater Washington, DC; Oklahoma City, OK; and Houston, TX
Other – Chicago, IL and Greater Seattle, WA
Most runways and taxiways that we use are located on airport properties owned by others and are used jointly with others. Our rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. government furnishes us certain office space, installations and equipment at U.S. government bases for use in connection with various contract activities.
We believe that our major properties are adequate for our present needs and, as supplemented by planned improvements and construction, expect them to remain adequate for the foreseeable future.
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


15


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 7, 2014, there were 145,295 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, 2013 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)

10/1/2013 thru 10/31/2013
550,733
 

$114.75

 
536,500

 

$1,750

11/1/2013 thru 11/30/2013
2,620,456
 
134.06

 
2,615,281

 
1,399

12/1/2013 thru 12/31/2013
4,428,106
 
133.31

 
4,418,372

 
10,810

Total
7,599,295
 

$132.22

 
7,570,153

 
 
(1) 
We purchased an aggregate of 7,570,153 shares of our common stock in the open market pursuant to our repurchase program and 29,142 shares transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units during the period. We did not purchase shares in swap transactions.
(2) 
On October 29, 2007, the Board approved the repurchase of up to $7 billion of common stock (the 2007 Program). On December 16, 2013, the Board approved a new repurchase plan (the 2013 Program) for up to $10 billion of common stock that commences following the completion of the 2007 Program. Unless terminated earlier by a Board resolution, the 2013 Program will expire when we have used all authorized funds for repurchase.


16


Item 6. Selected Financial Data
Five-Year Summary (Unaudited)
(Dollars in millions, except per share data)
2013

 
2012

 
2011

 
2010

 
2009

Operations
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Commercial Airplanes

$52,981

 

$49,127

 

$36,171

 

$31,834

 

$34,051

Defense, Space & Security:(1)
 
 
 
 
 
 
 
 
 
Boeing Military Aircraft
15,936

 
16,019

 
14,585

 
13,876

 
13,988

Network & Space Systems
8,512

 
7,911

 
8,964

 
9,769

 
11,136

Global Services & Support
8,749

 
8,677

 
8,427

 
8,298

 
8,537

Total Defense, Space & Security
33,197

 
32,607

 
31,976

 
31,943

 
33,661

Boeing Capital(2)
408

 
468

 
547

 
672

 
695

Other segment(2)
102

 
106

 
123

 
105

 
130

Unallocated items and eliminations
(65
)
 
(610
)
 
(82
)
 
(248
)
 
(256
)
Total revenues

$86,623

 

$81,698

 

$68,735

 

$64,306

 

$68,281

General and administrative expense
3,956

 
3,717

 
3,408

 
3,644

 
3,364

Research and development expense
3,071

 
3,298

 
3,918

 
4,121

 
6,506

Other income/(loss), net
56

 
62

 
47

 
52

 
(26
)
Net earnings from continuing operations

$4,586

 

$3,903

 

$4,011

 

$3,311

 

$1,335

Net gain/(loss) on disposal of discontinued operations, net of tax
(1
)
 
(3
)
 
7

 
(4
)
 
(23
)
Net earnings

$4,585

 

$3,900

 

$4,018

 

$3,307

 

$1,312

Basic earnings per share from continuing operations
6.03

 
5.15

 
5.38

 
4.50

 
1.89

Diluted earnings per share from continuing operations
5.96

 
5.11

 
5.33

 
4.46

 
1.87

Cash dividends declared

$1,642

 

$1,360

 

$1,263

 

$1,245

 

$1,233

Per share
2.185

 
1.805

 
1.70

 
1.68

 
1.68

Additions to Property, plant and equipment
2,098

 
1,703

 
1,713

 
1,125

 
1,186

Depreciation of Property, plant and equipment
1,338

 
1,248

 
1,119

 
1,096

 
1,066

Year-end workforce
168,400

 
174,400

 
171,700

 
160,500

 
157,100

Financial position at December 31
 
 
 
 
 
 
 
 
 
Total assets

$92,663

 

$88,896

 

$79,986

 

$68,565

 

$62,053

Working capital
13,588

 
12,327

 
8,536

 
5,177

 
2,392

Property, plant and equipment, net
10,224

 
9,660

 
9,313

 
8,931

 
8,784

Cash and cash equivalents
9,088

 
10,341

 
10,049

 
5,359

 
9,215

Short-term and other investments
6,170

 
3,217

 
1,223

 
5,158

 
2,008

Total debt
9,635

 
10,409

 
12,371

 
12,421

 
12,924

Customer financing assets
3,971

 
4,420

 
4,772

 
4,680

 
5,834

Shareholders’ equity(3)
14,875

 
5,867

 
3,515

 
2,766

 
2,128

Per share
19.90

 
7.76

 
4.72

 
3.76

 
2.93

Common shares outstanding (in millions)(4)
747.4

 
755.6

 
744.7

 
735.3

 
726.3

Contractual Backlog:
 
 
 
 
 
 
 
 
 
Commercial Airplanes

$372,980

 

$317,287

 

$293,303

 

$255,591

 

$250,476

Defense, Space & Security:(1)
 
 
 
 
 
 
 
 
 
Boeing Military Aircraft
24,825

 
29,226

 
23,629

 
24,678

 
25,974

Network & Space Systems
9,832

 
10,078

 
9,429

 
9,935

 
8,069

Global Services & Support
15,024

 
15,764

 
13,296

 
13,751

 
11,981

Total Defense, Space & Security
49,681

 
55,068

 
46,354

 
48,364

 
46,024

Total contractual backlog

$422,661

 

$372,355

 

$339,657

 

$303,955

 

$296,500

Cash dividends have been paid on common stock every year since 1942.
(1) 
Effective January 1, 2013, certain programs were realigned between BDS segments. Prior years have been recast for segment realignments.
(2) 
Effective January 1, 2013, BCC's accounting policies for certain leasing transactions were aligned with Boeing's consolidated accounting policies. Amounts reported in prior periods as Interest and debt expense have been reclassified to Boeing Capital interest expense to conform to the current period's presentation.
(3) 
Shareholders’ equity excludes non-controlling interest.
(4) 
Represents actual number of shares outstanding as of December 31 and excludes treasury shares and the outstanding shares held by the ShareValue Trust, which was terminated in July 2010.


17


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations and Financial Condition
Overview
We are a global market leader in design, development, manufacture, sale, service and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. We are one of the two major manufacturers of 100+ seat airplanes for the worldwide commercial airline industry and one of the largest defense contractors in the U.S. While our principal operations are in the U.S., we conduct operations in many countries and rely on an extensive network of international partners, key suppliers and subcontractors.
Our strategy is centered on successful execution in healthy core businesses – Commercial Airplanes and Defense, Space & Security (BDS) – supplemented and supported by Boeing Capital (BCC). Taken together, these core businesses have historically generated substantial earnings and cash flow that permit us to invest in new products and services. We focus on producing the products and providing the services that the market demands and we price our products and services to provide a fair return for our shareholders while continuing to find new ways to improve efficiency and quality. Commercial Airplanes is committed to being the leader in commercial aviation by offering airplanes and services that deliver superior design, efficiency and value to customers around the world. BDS integrates its resources in defense, intelligence, communications, security and space to deliver capability-driven solutions to its customers at reduced costs. Our 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. Our strategy also benefits as the cyclicality of commercial and defense markets often offset. BCC delivers value by supporting our business units and managing overall financing exposure.
Consolidated Results of Operations
Earnings From Operations and Core Operating Earnings (Non-GAAP) The following table summarizes key indicators of consolidated results of operations:
(Dollars in millions, except per share data)
 
 
 
 
 
Years ended December 31,
2013

 
2012

 
2011

Revenues

$86,623

 

$81,698

 

$68,735

 
 
 
 
 
 
GAAP
 
 
 
 
 
Earnings from operations

$6,562

 

$6,290

 

$5,823

Operating margins
7.6
%
 
7.7
%
 
8.5
%
Effective income tax rate
26.4
%
 
34.0
%
 
25.6
%
Net earnings

$4,585

 

$3,900

 

$4,018

Diluted earnings per share

$5.96

 

$5.11

 

$5.34

 
 
 
 
 
 
Non-GAAP (1)
 
 
 
 
 
Core operating earnings

$7,876

 

$7,189

 

$6,340

Core operating margin
9.1
%
 
8.8
%
 
9.2
%
Core earnings per share

$7.07

 

$5.88

 

$5.79

(1)
These measures exclude certain components of pension and other postretirement benefit expense. See page 43 for important information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.


18


Revenues
The following table summarizes Revenues:
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Commercial Airplanes

$52,981

 

$49,127

 

$36,171

Defense, Space & Security
33,197

 
32,607

 
31,976

Boeing Capital
408

 
468

 
547

Other segment
102

 
106

 
123

Unallocated items and eliminations
(65
)
 
(610
)
 
(82
)
Total

$86,623

 

$81,698

 

$68,735

Revenues in 2013 increased by $4,925 million or 6% compared with 2012. Commercial Airplanes revenues increased by $3,854 million due to higher new airplane deliveries. BDS revenues increased by $590 million due to higher revenues in the Network & Space Systems (N&SS) and Global Services & Support (GS&S) segments offset by lower revenues in the Boeing Military Aircraft (BMA) segment. The change in unallocated items and eliminations primarily reflects the timing of eliminations for intercompany aircraft deliveries.
Revenues in 2012 increased by $12,963 million or 19% compared with 2011. Commercial Airplanes revenues increased by $12,956 million primarily due to higher new airplane deliveries across all programs. BDS revenues increased by $631 million due to higher revenues in the BMA and GS&S segments partially offset by lower revenues in the N&SS segment. Unallocated items and eliminations reduced revenues by $610 million in 2012 compared with $82 million in 2011 reflecting higher intercompany deliveries of P-8 and commercial aircraft in 2012.
Earnings From Operations
The following table summarizes Earnings from operations:
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Commercial Airplanes

$5,795

 

$4,711

 

$3,495

Defense, Space & Security
3,235

 
3,068

 
3,158

Boeing Capital
107

 
88

 
119

Other segment
(156
)
 
(186
)
 
39

Unallocated pension and other postretirement benefit expense
(1,314
)
 
(899
)
 
(517
)
Other unallocated items and eliminations
(1,105
)
 
(492
)
 
(471
)
Earnings from operations (GAAP)

$6,562

 

$6,290

 

$5,823

Unallocated pension and other postretirement benefit expense
1,314

 
899

 
517

Core operating earnings (Non-GAAP)

$7,876

 

$7,189

 

$6,340

Earnings from operations in 2013 increased by $272 million compared with 2012. Commercial Airplanes earnings increased by $1,084 million primarily reflecting higher new airplane deliveries and lower research and development expense. BDS earnings increased by $167 million due to higher earnings in the N&SS and GS&S segments offset by lower earnings in the BMA segment. Unallocated pension and other postretirement benefit expense in 2013 reduced earnings by $415 million compared with 2012 due to higher unallocated pension expense offset by lower unallocated other postretirement expense. Other unallocated items and eliminations in 2013 reduced earnings by $613 million primarily due to a charge


19


recorded in 2013 related to the settlement of A-12 litigation described in Note 20 and higher 2013 deferred compensation expense.
Earnings from operations in 2012 increased by $467 million compared with 2011. Commercial Airplanes earnings increased by $1,216 million reflecting higher new airplane deliveries and lower research and development expense partially offset by higher fleet support costs, increased operating costs associated with business growth, other period costs and decreased earnings from commercial aviation services. BDS earnings decreased by $90 million due to lower earnings in the N&SS segment, partially offset by higher earnings in the BMA and GS&S segments. Other segment losses increased by $225 million primarily due to a reduction in the allowance for losses on receivables in 2011. Unallocated pension and other postretirement benefit expense in 2012 reduced earnings by $382 million compared with 2011 primarily due to higher pension expense.
Core operating earnings in 2013 increased by $687 million compared with 2012 as higher earnings at Commercial Airplanes and BDS more than offset the A-12 charge and higher 2013 deferred compensation expense.
Core operating earnings in 2012 increased by $849 million compared with 2011 primarily reflecting higher earnings at Commercial Airplanes offset by the impact of the reduction in the allowance for losses on receivables recorded in 2011.
Research and Development The following table summarizes our Research and development expense:
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Commercial Airplanes

$1,807

 

$2,049

 

$2,715

Defense, Space & Security
1,215

 
1,189

 
1,138

Other
49

 
60

 
65

Total

$3,071

 

$3,298

 

$3,918

Research and development expense in 2013 decreased by $227 million compared to 2012 primarily due to lower spending at Commercial Airplanes on the 787 program partially offset by increased spending on the 737 MAX and 777X. Research and development expense in 2012 decreased by $620 million compared to 2011 primarily due to lower spending at Commercial Airplanes on the 747 and 787 programs.


20


Unallocated Items and Eliminations The most significant items included in Unallocated items and eliminations are shown in the following table:
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Share-based plans

($95
)
 

($81
)
 

($83
)
Deferred compensation
(238
)
 
(75
)
 
(61
)
Eliminations and other
(366
)
 
(457
)
 
(327
)
Litigation settlements
(406
)
 
121

 
 
Sub-total (included in core operating earnings*)
(1,105
)
 
(492
)
 
(471
)
Pension
(1,374
)
 
(787
)
 
(269
)
Postretirement
60

 
(112
)
 
(248
)
Pension and other postretirement benefit expense
(excluded from core operating earnings*)
(1,314
)
 
(899
)
 
(517
)
Total

($2,419
)
 

($1,391
)
 

($988
)
* Core operating earnings is a Non-GAAP measure that excludes certain components of pension and other postretirement benefit expense. See page 47.
Deferred compensation expense increased by $163 million in 2013, primarily driven by increases in our stock price, and by $14 million in 2012, primarily driven by increases in the overall stock market performance.
Eliminations and other unallocated expense decreased by $91 million in 2013, primarily due to the timing of elimination of profit on intercompany items, and increased by $130 million in 2012 due to the timing of intercompany expense allocations and elimination of profit on intercompany items.
Litigation settlements include the 2013 charge of $406 million related to the settlement of the A-12 litigation described in Note 20 and the $121 million benefit recorded in 2012 due to a favorable court judgment on satellite litigation.
We recorded net periodic benefit cost related to pension and other postretirement benefits of $3,769 million, $3,383 million and $3,127 million in 2013, 2012 and 2011, respectively. The increase in net periodic benefit cost related to pension is primarily due to higher amortization of actuarial losses and higher service costs driven by lower discount rates.
Unallocated pension expense in 2013 reflects the pension curtailment charge of $73 million related to the decision in September 2013 to end production of the C-17 aircraft in 2015. See Note 11. During the third quarter of 2013 we also determined that the pension expense in prior years was overstated and recorded a reduction in pension expense of $63 million. Unallocated other postretirement benefit expense in 2011 includes $161 million of additional expense due to an adjustment primarily related to prior years’ accumulated postretirement benefit obligations. See the discussion of the postretirement liabilities in Note 14 to our Consolidated Financial Statements.


21


A portion of net periodic benefit cost is recognized as product costs 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
 
Other Postretirement
Benefits
Years ended December 31,
2013

 
2012

 
2011

 
2013

 
2012

 
2011

Allocated to business segments

($1,662
)
 

($1,620
)
 

($1,379
)
 

($413
)
 

($431
)
 

($444
)
Other unallocated items and eliminations
(1,374
)
 
(787
)
 
(269
)
 
60

 
(112
)
 
(248
)
Total

($3,036
)
 

($2,407
)
 

($1,648
)
 

($353
)
 

($543
)
 

($692
)
Other Earnings Items
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Earnings from operations

$6,562

 

$6,290

 

$5,823

Other income, net
56

 
62

 
47

Interest and debt expense
(386
)
 
(442
)
 
(477
)
Earnings before income taxes
6,232

 
5,910

 
5,393

Income tax expense
(1,646
)
 
(2,007
)
 
(1,382
)
Net earnings from continuing operations

$4,586

 

$3,903

 

$4,011

Interest and debt expense decreased by $56 million in 2013 and $35 million in 2012 as a result of lower weighted average debt balances.
Our effective income tax rates were 26.4%, 34.0% and 25.6% for the years ended December 31, 2013, 2012 and 2011, respectively. Our 2013 effective tax rate was lower due to research tax credits for the 2013 and 2012 tax years that were both recorded in 2013 and research and experimental regulations issued by the Internal Revenue Service in 2013 which resulted in $212 million of previously unrecognized tax benefits being recorded in the fourth quarter of 2013. Our 2011 effective tax rate was lower primarily due to tax benefits of $397 million recorded as a result of federal income tax audit settlements in addition to research tax credits which were not available in 2012. Federal income tax audits have been settled for all years prior to 2007.
For additional discussion related to Income Taxes, see Note 4 to our Consolidated Financial Statements.


22


Backlog
Our backlog at December 31 was as follows:
(Dollars in millions)
2013

 
2012

 
2011

Contractual Backlog:
 
 
 
 
 
Commercial Airplanes

$372,980

 

$317,287

 

$293,303

Defense, Space & Security:
 
 
 
 
 
Boeing Military Aircraft
24,825

 
29,226

 
23,629

Network & Space Systems
9,832

 
10,078

 
9,429

Global Services & Support
15,024

 
15,764

 
13,296

Total Defense, Space & Security
49,681

 
55,068

 
46,354

Total contractual backlog

$422,661

 

$372,355

 

$339,657

Unobligated backlog

$18,267

 

$17,873

 

$15,775

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 2013 and 2012 was primarily due to commercial aircraft orders in excess of deliveries partially offset by cancellation of orders.
Unobligated backlog includes U.S. and non-U.S. government definitive contracts for which funding has not been authorized. Unobligated backlog increased during 2013 compared to 2012 primarily due to CH-47 Chinook and V-22 Osprey multi-year contract awards. The increase was partially offset by reclassifications to contractual backlog related to incremental funding for the USAF KC-46A Tanker and F-15 multi-year contracts. The increase in unobligated backlog during 2012 was due to increases at BDS of $2,720 million compared with 2011 primarily due to F-15 orders and the contract award for the Space Launch System program received in 2012.
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 4 next generation aerial refueling tankers. The KC-46A Tanker is a derivative of our 767 commercial aircraft. This contract is a fixed-price incentive firm contract valued at $4.9 billion and involves highly complex designs and systems integration. Changes to our estimated cost to perform the work could result in a material charge. This contract contains production options. If all options under the contract are exercised, we expect to deliver 179 aircraft for a total expected contract value of approximately $30 billion. For segment reporting purposes, backlog, revenues and costs are recorded in the Commercial Airplanes and BMA segments.


23


Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment Global economic activity and global trade, which are the primary drivers of air travel and air cargo growth, grew below the long-term average for the second year in a row in 2013. Despite this, passenger traffic grew by 5% annually in 2012 and 2013 and is forecast to continue at or near the long-term trend of 5% in 2014. There continues to be significant variation between regions and airline business models, with airlines operating in emerging economies and low-cost-carriers leading growth. In contrast, air cargo traffic declined in 2012 and grew by an estimated 1 to 2% in 2013 with continued improvement projected in 2014. The relative weakness of the air cargo market has impacted near-term demand for new freighter aircraft and freighter conversions, and we continue to monitor the impact of this trend on our business.
Airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on increasing revenue through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services and related revenues. Airlines are also relentlessly focusing on reducing costs by renewing fleets to leverage more fuel efficient airplanes and by employing efficiency generating service offerings in a high-fuel-price environment. Net profits for the global airline industry are estimated to total $13 billion in 2013 compared to $7 billion in 2012. Nonetheless, these profit levels reflect low profit margins for the industry, and risk remains due to ongoing economic and political uncertainty.
The long-term outlook for the industry remains positive due to the fundamental drivers of air travel growth: economic growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. Our 20-year forecast is for a long-term average growth rate of 5% per year for passenger and cargo traffic, based on a projected average annual worldwide real economic growth rate of 3%. Based on long-term global economic growth projections, and factoring in increased utilization of the worldwide airplane fleet and requirements to replace older airplanes, we project a $4.8 trillion market for 35,000 new airplanes over the next 20 years.
The industry remains vulnerable to near-term exogenous developments including fuel price spikes, credit market shocks, terrorism, natural disasters, conflicts, and increased global environmental regulations.
Industry Competitiveness The commercial jet airplane market and the airline industry remain extremely competitive. Market liberalization in Europe and Asia 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 14% of Commercial Airplanes’ contractual backlog, in dollar terms, is with U.S. airlines, including cargo carriers.
We face aggressive international competitors who are intent on increasing their market share. They offer competitive products and have access to most of the same customers and suppliers. With government support, Airbus has historically invested heavily to create a family of products to compete with ours. Regional jet makers Embraer and Bombardier, coming from the less than 100-seat commercial jet market, continue to develop larger and more capable airplanes. Additionally, other competitors from Russia, China and Japan are developing commercial jet aircraft in the market above 90 seats. Many of these competitors have historically enjoyed access to government-provided financial support, including “launch aid,” which greatly reduces the commercial risks associated with airplane development activities and enables airplanes to be brought to market more quickly than otherwise possible. This market environment


24


has resulted in intense pressures on pricing and other competitive factors, and we expect these pressures to continue or intensify in the coming years.
Worldwide, airplane sales are generally conducted in U.S. dollars. Fluctuating exchange rates affect the profit potential of our major competitors, all of whom have significant costs in other currencies. Changes in value of the U.S. dollar relative to their local currencies impact competitors’ revenues and profits. Competitors routinely respond to a relatively weaker U.S. dollar by aggressively reducing costs and increasing productivity, thereby improving their longer-term competitive posture. If the U.S. dollar strengthens, competitors can use the improved efficiency to fund product development, gain market share through pricing and/or improve earnings.
We are focused on improving our processes and continuing cost-reduction efforts. We continue to leverage our extensive customer support services network which includes aviation support, spares, training, maintenance documents and technical advice for airlines throughout the world. This enables us to provide a high level of customer satisfaction and productivity. These efforts enhance our ability to pursue pricing strategies that enable us to price competitively.
Operating Results(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$52,981

 

$49,127

 

$36,171

% of total company revenues
61
%
 
60
%
 
53
%
Earnings from operations

$5,795

 

$4,711

 

$3,495

Operating margins
10.9
%
 
9.6
%
 
9.7
%
Research and development

$1,807

 

$2,049

 

$2,715

Contractual backlog

$372,980

 

$317,287

 

$293,303

Unobligated backlog

$660

 

$1,466

 

$2,088

Revenues
Revenues in 2013 increased by $3,854 million or 8% compared with 2012 due to higher new airplane deliveries. Revenues in 2012 increased by $12,956 million or 36% compared with 2011 primarily due to higher new airplane deliveries across all programs.
Commercial airplanes deliveries as of December 31 were as follows:
 
737

 
747

 
767

 
777

 
787

 
Total
2013
 
 
 
 
 
 
 
 
 
 
 
Cumulative deliveries
4,733

 
1,482

 
1,061

 
1,164

 
114

 
 
Deliveries
440

(1) 
24

 
21

 
98

 
65

(2) 
648
2012
 
 
 
 
 
 
 
 
 
 
 
Cumulative deliveries
4,293
 
1,458
 
1,040
 
1,066
 
49
 
 
Deliveries
415
(1) 
31
 
26
 
83
 
46
(2) 
601
2011
 
 
 
 
 
 
 
 
 
 
 
Cumulative deliveries
3,878
 
1,427
 
1,014
 
983
 
3
 
 
Deliveries
372
(1) 
9
 
20
 
73
 
3
 
477
(1)
Includes intercompany deliveries of eight aircraft in 2013, nine in 2012 and seven in 2011.
(2)
Includes one aircraft in 2013 and three in 2012 accounted for as revenues by BCA and as operating leases in consolidation.


25


Earnings From Operations
Earnings from operations in 2013 increased by $1,084 million or 23% compared with 2012. Earnings increased by $842 million primarily driven by higher new airplane deliveries and lower research and development cost of $242 million due to lower spending on the 787 program partially offset by higher spending on the 737 MAX and 777X. Operating margins increased from 9.6% in 2012 to 10.9% in 2013 primarily due to higher deliveries and lower research and development cost partially offset by the dilutive impact of 787 deliveries.
Earnings from operations in 2012 increased by $1,216 million or 35% compared with 2011. This was primarily due to higher new airplane deliveries, which drove an increase in earnings of $1,292 million, and lower research and development expense of $666 million primarily due to lower spending on the 747-8 and 787-8 programs. These increases were partially offset by lower earnings of $742 million driven by higher fleet support costs, increased operating costs associated with business growth, other period costs and decreased earnings from commercial aviation services. The decrease in operating margins from 9.7% in 2011 to 9.6% in 2012 was primarily due to the dilutive effect of the 787 and 747-8 deliveries.
Backlog
Firm backlog represents orders for products and services where no contingencies remain before we and the customer are required to perform. Backlog does not include prospective orders where customer controlled contingencies remain, such as the customers receiving approval from their Board of Directors, shareholders or government and completing financing arrangements. All such contingencies must be satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly certain. Firm orders exclude options. A number of our customers may have contractual remedies that may be implicated by program delays. We continue to address customer claims and requests for other contractual relief as they arise. However, once orders are included in firm backlog, orders remain in backlog until canceled or fulfilled, although the value of orders is adjusted as changes to price and schedule are agreed to with customers.
The increase in contractual backlog during 2013 and 2012 was due to orders in excess of deliveries partially reduced by cancellation of orders and changes in projected revenue escalation. The decrease in unobligated backlog in 2013 was due to the reclassification from unobligated to contractual backlog related to incremental funding of the existing multi-year contract for Commercial Airplanes’ share of the USAF KC-46A Tanker contract.
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.


26


The following table provides details of the accounting quantities and firm orders by program as of December 31. Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders.
 
Program
 
737

 
747

 
767

 
777

 
787

2013
 
 
 
 
 
 
 
 
 
Program accounting quantities
7,000

 
1,574

 
1,113

 
1,550

 
1,300

Undelivered units under firm orders
3,680

 
55

 
49

 
380

 
916

Cumulative firm orders
8,413

 
1,537

 
1,110

 
1,544

 
1,030

2012
 
 
 
 
 
 
 
 
 
Program accounting quantities
6,600

 
1,574

 
1,103

 
1,450

 
1,100

Undelivered units under firm orders
3,074

 
67

 
68

 
365

 
799

Cumulative firm orders
7,367

 
1,525

 
1,108

 
1,431

 
848

2011
 
 
 
 
 
 
 
 
 
Program accounting quantities
6,200

 
1,549

 
1,084

 
1,350

 
1,100

Undelivered units under firm orders
2,365

 
97

 
72

 
380

 
857

Cumulative firm orders
6,243

 
1,524

 
1,086

 
1,363

 
860

Program Highlights
737 Program The accounting quantity for the 737 program increased by 400 units during 2013 due to the programs normal progress of obtaining additional orders and delivering airplanes. The accounting quantity includes NG and MAX units. We increased our production rate from 35 to 38 per month in the first quarter of 2013 and a further increase to 42 per month is planned for the second quarter of 2014. On October 31, 2013, we announced plans to increase production of the 737 to 47 airplanes per month beginning in 2017. First delivery of the 737 MAX is expected in 2017.
747 Program Continued weakness in the air cargo market and lower-than-expected demand for large commercial passenger aircraft have resulted in pricing pressures and fewer orders than anticipated. We continued to produce at a rate of 2 per month during 2013. In April 2013, we announced that the production rate would be decreased from 2 per month to 1.75 per month starting January 2014 and in October 2013 we announced that we would further reduce the production rate to 1.5 per month from February 2014 through the end of 2015. We continue to have a number of unsold 747 production positions and remain focused on obtaining additional orders, reducing out-of-sequence work, improving supply chain efficiency and implementing cost-reduction efforts. If market and production risks cannot be mitigated, the program could face a reach-forward loss that may be material.
767 Program The accounting quantity for the 767 program increased by 10 units during 2013 due to the programs normal progress of obtaining additional orders and delivering airplanes. During the third quarter of 2013 we reconfigured the 767 assembly line to include a 767 derivative to support the Tanker program and decreased our production rate from 2 to 1 per month. We expect to increase the commercial rate to 1.5 per month in 2014 and back to 2 per month in 2016.
777 Program The accounting quantity for the 777 program increased by 100 units during 2013 due to the programs normal progress of obtaining additional orders and delivering airplanes. We increased our production rate from 7 to 8.3 per month in the first quarter of 2013. In November 2013 we launched the 777X and first delivery is expected in 2020.


27


787 Program We delivered 65 aircraft in 2013 bringing cumulative deliveries to 114. In January 2013, following battery-related incidents on two 787 aircraft, the Federal Aviation Administration required U.S. aircraft operators to suspend operations of all 787 aircraft. International government regulators also issued directives to the same effect. We continued production but suspended deliveries until appropriate clearances were granted. During the second quarter, we installed a comprehensive set of battery system improvements on 50 previously-delivered 787 airplanes and resumed 787 deliveries to customers.
In May 2013, we achieved a production rate of 7 per month in final assembly. We began the production rate increase to 10 per month in final assembly in November 2013 with first deliveries expected to occur at that rate in early 2014. The first 787-9 derivative began final assembly in May 2013 and completed first flight on September 17, 2013. Production and flight testing of the 787-9 continues to be on schedule and we expect the first customer delivery to occur in mid-2014. In June 2013, we announced the launch of the 787-10 derivative aircraft with first delivery targeted for 2018.
We continue to incorporate engineering and other design changes identified during 787-8 flight testing into already completed aircraft at our Everett modification center. We also remain focused on stabilizing 787 production rates at 10 per month while continuing to improve aircraft reliability and satisfy customer mission and performance requirements. We continue to monitor and address challenges associated with aircraft production and assembly, including management of our manufacturing operations and extended global supply chain, completion and integration of traveled work, as well as the incorporation of the 787-9 derivative into the manufacturing process. In addition, we continue to work with our customers and suppliers to assess the specific impacts of schedule changes, including requests for contractual relief related to delivery delays and supplier assertions.
During 2009, we concluded that the first three flight-test 787 aircraft could not be sold as previously anticipated due to the inordinate amount of rework and unique and extensive modifications made to those aircraft. As a result, costs associated with these airplanes were included in research and development expense. We have finalized orders for two of the three remaining flight test aircraft. We continue to believe that the remaining 787 flight-test aircraft is commercially saleable and we continue to include costs related to that airplane in program inventory. If we determine that the remaining aircraft cannot be sold, we may incur additional charges related to the reclassification of costs associated with this aircraft to research and development expense.
During the third quarter of 2013 we increased the accounting quantity to 1,300 units from 1,100 units to reflect incorporation of revenue and cost estimates associated with the 787-10 and plans to increase production rates to 12 and 14 per month in future years. The accounting quantity of 1,300 units continues to represent approximately 10 years of production at planned production rates. The combination of production challenges, change incorporation, schedule delays and customer and supplier impacts has created significant pressure on program profitability. If risks related to this program, including risks associated with planned production rate increases, or introducing the 787-9 and 787-10 derivatives as scheduled cannot be mitigated, the program could face additional customer claims and/or supplier assertions, as well as further pressures on program profitability and/or a reach-forward loss. We continue to implement mitigation plans and cost-reduction efforts to improve program profitability and address program risks.
Fleet Support We provide the operators of our commercial airplanes with assistance and services to facilitate efficient and safe airplane operation. Collectively known as fleet support services, these activities and services begin prior to airplane delivery and continue throughout the operational life of the airplane. They include flight and maintenance training, field service support costs, engineering services, information services and systems and technical data and documents. The costs for fleet support are expensed as incurred and have been historically less than 1.5% of total consolidated costs of products and services.


28


Program Development The following chart summarizes the time horizon between go-ahead and planned initial delivery for major Commercial Airplanes derivatives and programs.
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 thousands of employees and other partners. Meeting or exceeding our performance and reliability standards, as well as those of customers and regulators, can be costly and technologically challenging. In addition, the introduction of new aircraft and derivatives, such as the 787-9, 787-10, 737 MAX 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 quantity, customer and model mix, production costs and rates, changes to price escalation factors in aircraft purchase contracts, performance or reliability issues involving completed aircraft, capital expenditures and other costs associated with increasing or adding new production capacity, learning curve, additional change incorporation, anticipated cost reductions, flight test and certification schedules, costs, schedule and demand for derivative airplanes and status of customer claims, supplier assertions and other contractual negotiations. While we believe the cost and revenue estimates incorporated in the consolidated financial statements are appropriate, the technical complexity of our airplane programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, order cancellations or other financially significant exposure.


29


Defense, Space & Security
Business Environment and Trends
United States Government Defense Environment Overview U.S. government appropriation levels remain subject to significant uncertainty. In August 2011, the Budget Control Act (The Act) established limits on U.S. government discretionary spending, including a reduction of defense spending by approximately $490 billion between the 2012 and 2021 U.S. government fiscal years. The Act also provided that the defense budget would face “sequestration” cuts of up to an additional $500 billion during that same period to the extent that discretionary spending limits are exceeded. The impact of sequestration cuts was reduced with respect to FY2014 and FY2015 following the enactment of The Bipartisan Budget Act in December 2013. However, significant uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. government discretionary spending levels will continue to be subject to significant pressure, including risk of future sequestration cuts.
In addition, there continues to be significant uncertainty with respect to program-level appropriations for the U.S. Department of Defense (U.S. DoD) and other government agencies (including the National Aeronautics and Space Administration) within the overall budgetary framework described above. While the FY2014 appropriations finalized in January 2014 included funding for Boeing’s major programs, uncertainty remains about how defense budgets in FY2015 and beyond will affect Boeing’s programs. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the appropriations process could result in reductions, cancellations, and/or delays of existing contracts or programs. Any of these impacts could have a material effect on the results of the Company’s operations, financial position and/or cash flows.
In addition to the risks described above, if Congress is unable to pass appropriations bills in a timely manner, a government shutdown could result which could have impacts above and beyond those resulting from budget cuts or sequestration impacts. For example, requirements to furlough employees in the U.S. DoD or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders.
International Environment Overview The international market continues to be driven by complex and evolving security challenges and the need to modernize aging equipment and inventories, while faced with constrained budgets. In Europe, the continuing financial challenges are forcing governments to institute austerity measures negatively impacting defense spending in the near term.
The strongest opportunities for BDS in 2014 will be the Middle East and Asia Pacific regions where the relative financial strength of these economies, coupled with a broad spectrum of evolving threats, will result in procurement of defense and security systems.


30


BDS Realignment
Effective January 1, 2013, 2012 and 2011, certain programs were realigned among BDS segments. Business segment data for all periods presented have been adjusted to reflect the realignment.
Operating Results
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$33,197

 

$32,607

 

$31,976

% of total company revenues
38
%
 
40
%
 
47
%
Earnings from operations

$3,235

 

$3,068

 

$3,158

Operating margins
9.7
%
 
9.4
%
 
9.9
%
Contractual backlog

$49,681

 

$55,068

 

$46,354

Unobligated backlog

$17,607

 

$16,407

 

$13,687

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.
Revenues
BDS revenues in 2013 increased by $590 million compared with 2012 due to higher revenues of $601 million and $72 million in the N&SS and GS&S segments, partially offset by lower revenues of $83 million in the BMA segment.
BDS revenues in 2012 increased by $631 million compared with 2011, due to higher revenues of $1,434 million and $250 million in the BMA and GS&S segments, partially offset by lower revenues of $1,053 million in the N&SS segment.
Earnings From Operations
BDS earnings from operations in 2013 increased by $167 million compared with 2012 due to higher earnings of $157 million and $34 million in the N&SS and GS&S segments, partially offset by lower earnings of $24 million in the BMA segment. Included above are net favorable cumulative contract catch-up adjustments, which were $137 million lower in 2013 compared with 2012, primarily reflecting lower favorable adjustments in the BMA segment.
BDS earnings from operations in 2012 decreased by $90 million compared with 2011 due to lower earnings of $197 million in the N&SS segment, partially offset by higher earnings of $58 million and $49 million in the BMA and GS&S segments. Included above are net favorable cumulative contract catch-up adjustments, which were $150 million higher in 2012 compared with 2011, primarily reflecting higher favorable adjustments in the BMA segment.


31


Backlog
Total backlog is comprised of contractual backlog, which represents work we are on contract to perform for which we have received funding, and unobligated backlog, which represents work we are on contract to perform for which funding has not yet been authorized and appropriated. BDS total backlog was $67,288 million at December 31, 2013, reflecting a decrease of 6% from December 31, 2012. BDS total backlog increased by 19% in 2012, from $60,041 million to $71,475 million. For further details on the changes between periods, refer to the discussions of the individual segments below.
Additional Considerations
Our BDS business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases, the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Examples of these programs include Ground-based Midcourse Defense (GMD), Proprietary and Space Launch Systems programs.
Some of our development programs are contracted on a fixed-price basis. Many of these programs have highly complex designs. As technical or quality issues arise during development, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the work or reduce our estimated price, either of which could result in a material charge or otherwise adversely affect our financial condition. These programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, the loss of satellite in-orbit incentive payments, or other financially significant exposure. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues. Examples of significant fixed-price development programs include Airborne Early Warning and Control (AEW&C), India P-8I, Saudi Arabia F-15, USAF KC-46A Tanker, and commercial and military satellites.
Boeing Military Aircraft
Operating Results
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$15,936

 

$16,019

 

$14,585

% of total company revenues
18
%
 
20
%
 
21
%
Earnings from operations

$1,465

 

$1,489

 

$1,431

Operating margins
9.2
%
 
9.3
%
 
9.8
%
Contractual backlog

$24,825

 

$29,226

 

$23,629

Unobligated backlog

$10,599

 

$9,270

 

$7,146

Revenues
BMA revenues in 2013 decreased by $83 million compared with 2012 primarily due to a reduction of $1,299 million related to fewer deliveries of AEW&C aircraft, and customer and delivery mix for the F-18 and C-17 programs. This reduction was partially offset by an increase of $1,168 million related to higher 2013 deliveries of P-8 aircraft and Apache rotorcraft, as well as non-recurring effort on several Chinook programs.
BMA revenues in 2012 increased by $1,434 million or 10% compared with 2011 primarily due to higher deliveries on the P-8A and Apache programs of $1,050 million and higher milestone revenue of $426


32


million on the KC-46A Tanker program. In addition, F-15 program revenues were $450 million higher reflecting initial revenues on the contract for the Kingdom of Saudi Arabia partially offset by lower F-15 deliveries. These increases were partially offset by decreases of $723 million related to fewer deliveries of C-17 aircraft in 2012 and the conclusion of the KC-767 International Tanker program in 2011.
Deliveries of units for new-build production aircraft, excluding remanufactures and modifications, were as follows:
Years ended December 31,
2013

 
2012

 
2011

F/A-18 Models
48

 
48

 
49

F-15E Eagle
14

 
8

 
15

C-17 Globemaster III
10

 
10

 
13

CH-47 Chinook
44

 
51

 
32

AH-64 Apache
37

 
19

 

AEW&C


 
3

 
3

P-8 Models
11

 
5

 


KC-767 International Tanker

 

 
3

Total new-build production aircraft
164

 
144

 
115

Earnings From Operations
BMA earnings from operations in 2013 decreased by $24 million compared with 2012 primarily due to lower earnings on the AEW&C and higher 2012 earnings related to the initial revenues on the Saudi F-15 program. The lower earnings were partially offset by higher earnings on the P-8 and Apache program due to increased deliveries and higher revenues. Net favorable cumulative contract catch-up adjustments were $146 million lower in 2013 than in 2012, primarily driven by less favorable adjustments to the F-15 program and unfavorable adjustments to the AEW&C program. In the third quarter of 2013, we decided to end production of C-17 aircraft in 2015. See Note 11. Also in the third quarter of 2013, we recorded a charge of $64 million to write off inventory and accrue termination liabilities as a result of The Republic of Korea's announcement that it will restart its F-X fighter aircraft competition.
BMA earnings from operations in 2012 increased by $58 million compared with 2011 primarily due to higher aircraft deliveries on the P-8A and Apache programs and reach-forward loss provisions in 2011 on the KC-767 International Tanker program. These increases were partially offset by fewer aircraft deliveries on the C-17 program and higher research and development costs. The increase in earnings includes net favorable cumulative catch-up contract adjustments which were $139 million higher in 2012 compared with 2011 primarily reflecting favorable adjustments on the F-15 and Chinook programs.
Backlog
BMA total backlog was $35,424 million at December 31, 2013, reflecting a decrease of 8% from December 31, 2012 primarily due to revenues recognized on F-15, F-18 and C-17 program contracts awarded in prior years, partially offset by CH-47 Chinook and V-22 Osprey multi-year contract awards. BMA total backlog in 2012 increased by 25% from 2011, primarily due to F-15 and C-17 orders.
Additional Considerations
C-17 See the discussion of the C-17 program in Note 11 to our Consolidated Financial Statements.
KC-46A Tanker See the discussion of the KC-46A Tanker program on page 23.


33


Network & Space Systems
Operating Results
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$8,512

 

$7,911

 

$8,964

% of total company revenues
10
%
 
10
%
 
13
%
Earnings from operations

$719

 

$562

 

$759

Operating margins
8.4
%
 
7.1
%
 
8.5
%
Contractual backlog

$9,832

 

$10,078

 

$9,429

Unobligated backlog

$6,076

 

$6,937

 

$6,437

Revenues
N&SS revenues in 2013 increased by $601 million compared with 2012 primarily due to higher revenue of $364 million on the Space Launch System program awarded in the fourth quarter of 2012 and higher revenues of $329 million in our commercial satellite programs. This increase was partially offset by lower revenues of $196 million on our electronic and information solutions programs.
N&SS revenues in 2012 decreased by $1,053 million or 12% compared with 2011 primarily due to $835 million of lower revenues on the Brigade Combat Team Modernization (BCTM) program, which was terminated for convenience during 2011. In addition, customer funding constraints on the GMD program and conclusion of the Space Shuttle program in 2011 reduced revenues by a total of $251 million. These decreases were partially offset by higher Space & Intelligence Systems revenues of $178 million due to larger volume of deliveries in 2012.
Delta launch and new-build satellite deliveries were as follows:
Years ended December 31,
2013
 
2012
 
2011
Commercial and civil satellites
3
 
3
 
1
Military satellites
4
 
7
 
3
Earnings From Operations
N&SS earnings from operations in 2013 increased by $157 million or 28% compared with 2012 primarily due to higher revenues and mix in our civil and commercial satellite programs and the Space Launch Systems program. These increases were partially offset by lower earnings from our United Space Alliance (USA) joint venture reflecting a gain of $39 million recorded in the third quarter of 2012 related to the termination and settlement of USA's defined benefit pension plans. The impact of net favorable cumulative contract catch-up adjustments was not significant in 2013.
N&SS earnings from operations in 2012 decreased by $197 million or 26% compared with 2011 primarily due to lower revenues on the BCTM program and a $42 million charge related to a contract restructure of an electronic and mission system program. Net favorable cumulative contract catch-up adjustments were $56 million lower in 2012 than in 2011 primarily reflecting the $42 million charge described above.
N&SS earnings from operations include equity earnings of $171 million, $180 million and $194 million from the USA joint venture and the United Launch Alliance (ULA) joint venture in 2013, 2012 and 2011, respectively.


34


Backlog
N&SS total backlog was $15,908 million at December 31, 2013, reflecting a decrease of 7% from December 31, 2012 primarily due to revenues recognized on contracts awarded in prior years, partially offset by government and commercial satellite contract awards. N&SS total backlog increased by 7% in 2012 compared with 2011 primarily due to the contract award for the Space Launch System program, partially offset by current year deliveries and sales on contracts awarded in prior years.
Additional Considerations
United Launch Alliance See the discussion of Indemnifications to ULA and Financing Commitments in Notes 6, 11, and 12 to our Consolidated Financial Statements.
Sea Launch See the discussion of the Sea Launch receivables in Note 10 to our Consolidated Financial Statements.
LightSquared See the discussion of the LightSquared, LLC receivables in Note 5 to our Consolidated Financial Statements.
Global Services & Support
Operating Results
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$8,749

 

$8,677

 

$8,427

% of total company revenues
10
%
 
11
%
 
12
%
Earnings from operations

$1,051

 

$1,017

 

$968

Operating margins
12.0
%
 
11.7
%
 
11.5
%
Contractual backlog

$15,024

 

$15,764

 

$13,296

Unobligated backlog

$932

 

$200

 

$104

Revenues
GS&S revenues in 2013 increased by $72 million compared with 2012 primarily due to higher revenues on several Maintenance, Modification and Upgrade (MM&U) and Training Systems & Government Services (TSGS) programs, partially offset by decreases in several Integrated Logistics (IL) programs. GS&S revenues in 2012 increased by $250 million compared with 2011 primarily due to higher volume in several IL programs, including contracts to support Chinook and C-17 aircraft, and higher TSGS revenues primarily related to the P-8A program.
Earnings From Operations
GS&S earnings from operations in 2013 increased by $34 million compared with 2012 primarily due to higher revenues and improved performance on several TSGS programs. Net favorable cumulative contract catch-up adjustments in 2013 were largely unchanged from 2012. GS&S earnings from operations in 2012 increased by $49 million compared to 2011 primarily due to improved performance on several MM&U programs and higher revenues on several IL programs. Net favorable cumulative contract catch-up adjustments were $67 million higher in 2012 than in 2011.


35


Backlog
GS&S total backlog was $15,956 million at December 31, 2013, which was largely unchanged from December 31, 2012. GS&S total backlog increased by 19% in 2012 compared with 2011 primarily due to the award of F-15 support contracts.
Boeing Capital
On January 23, 2013, BCC terminated its debt registration statement and on February 22, 2013 BCC suspended its separate U.S. Securities and Exchange Commission reporting obligations. This change does not affect operations or customer interactions. On January 23, 2013, Boeing issued full and unconditional guarantees of all of the outstanding publicly-issued debt securities of BCC. Funding requirements will be provided to BCC through intercompany loans from Boeing and we will continue to target a BCC debt-to-equity ratio of 5.0-to-1. As described in Note 13, on May 3, 2013, Boeing issued $500 million of notes and entered into a concurrent intercompany loan with BCC on the same terms. Interest expense associated with these notes is included in Boeing Capital interest expense. Effective January 1, 2013, BCC's accounting for certain leasing transactions was aligned with Boeing. Segment information previously reported has been adjusted to reflect this change.
Business Environment and Trends
BCC’s gross customer financing and investment portfolio at December 31, 2013 totaled $3,921 million. A substantial portion of BCC’s portfolio is concentrated among certain U.S. commercial airline customers. BCC’s portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably out-of-production Boeing aircraft such as 717 aircraft.
BCC provided customer financing of $220 million and $364 million during 2013 and 2012. While we may be required to fund a number of new aircraft deliveries in 2014, we expect alternative financing will be available at reasonable prices from broad and globally diverse sources.
Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 2,100 western-built commercial jet aircraft (9.2% of current world fleet) were parked at the end of 2013, including both in-production and out-of-production aircraft types. Of these parked aircraft, approximately 20% are not expected to return to service. At the end of 2012 and 2011, 10% and 9.4% 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.
Operating Results    
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$408

 

$468

 

$547

Earnings from operations

$107

 

$88

 

$119

Operating margins
26
%
 
19
%
 
22
%
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 2013 decreased by $60 million compared with 2012 primarily due to lower other income and operating lease income. Other income decreased due to lower aircraft return condition payments. BCC’s revenues in 2012 decreased


36


$79 million compared with 2011 primarily due to lower operating and finance lease income. Operating lease income decreased as a result of the return of aircraft and lower lease rates on re-leased aircraft. In addition, lower finance lease income reflects the revised contractual terms of BCCs leases with AirTran Airways Inc. (Airtran), a wholly owned subsidiary of Southwest Airlines Co. (Southwest), negotiated in conjunction with receiving a full guarantee from Southwest of those lease payment obligations in the fourth quarter of 2011.
Earnings From Operations
BCC’s earnings from operations are presented net of interest expense, recovery of losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Earnings from operations in 2013 increased by $19 million compared with 2012 primarily due to lower depreciation expense and interest expense offset by lower revenues. Earnings from operations in 2012 decreased by $31 million compared with 2011 primarily due to lower revenues partially offset by lower interest and asset impairment expense.
Financial Position
The following table presents selected financial data for BCC as of December 31:
(Dollars in millions)
2013

 
2012

Customer financing and investment portfolio, net

$3,883

 

$4,290

Other assets, primarily cash and short-term investments
505

 
402

Total assets

$4,388

 

$4,692

 
 
 
 
Other liabilities, primarily deferred income taxes

$1,296

 

$1,429

Debt, including intercompany loans
2,577

 
2,742

Equity
515

 
521

Total liabilities and equity

$4,388

 

$4,692

 
 
 
 
Debt-to-equity ratio
5.0-to-1

 
5.3-to-1

The customer financing portfolio and debt balances presented above as of December 31, 2012 have been revised from balances previously reported in the BCC 2012 10-K filing to reflect the alignment of BCC's accounting to the consolidated Boeing accounting for certain leasing transactions within the portfolio.
BCC’s customer financing and investment portfolio at December 31, 2013 decreased from December 31, 2012 primarily due to normal portfolio run-off and asset sales, partially offset by the origination of notes receivable. At December 31, 2013 and 2012, BCC had $83 million and $354 million of assets that were held for sale or re-lease, of which $57 million and $266 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. Additionally, aircraft subject to leases with a carrying value of approximately $36 million are scheduled to be returned off lease during 2014. These aircraft are being remarketed or the leases are being extended and $11 million of these aircraft were committed at December 31, 2013.
BCC enters into certain transactions with Boeing, reflected in the Other segment, in the form of intercompany guarantees and other subsidies that mitigate the effects of certain credit quality or asset impairment issues on the BCC segment.


37


Bankruptcies
In 2011, American Airlines, Inc. (American Airlines) filed for Chapter 11 bankruptcy protection. On December 9, 2013, American Airlines emerged from bankruptcy. Upon emergence from bankruptcy, the parent of American Airlines merged with US Airways Group, Inc., the parent of US Airways, to form American Airlines Group Inc., and American Airlines assumed all of the BCC financing agreements and underlying leases. At December 31, 2013, American Airlines accounted for $445 million of our customer financing portfolio, of which $371 million represents collateral for $233 million of non-recourse debt.
Restructurings and Restructuring Requests
From time to time, certain customers have requested a restructuring of their transactions with BCC. During 2013, BCC did not reach agreement on any restructuring requests that would have a material effect on our earnings, cash flows and/or financial position.
Other Segment
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Revenues

$102

 

$106

 

$123

Earnings/(Loss) from operations
(156
)
 
(186
)
 
39

Other segment losses in 2013 decreased by $30 million compared with 2012 primarily related to the insurance recoveries in the third quarter of 2013. Other segment losses in 2012 increased by $225 million compared with 2011 primarily due to a $241 million reduction in the allowance for losses on AirTran receivables in 2011. Lower environmental expense of $82 million in 2012 compared with 2011 was largely offset by higher costs related to BCC guarantees and increases in other costs.
Liquidity and Capital Resources
Cash Flow Summary
(Dollars in millions)
Years ended December 31,
2013

 
2012

 
2011

Net earnings

$4,585

 

$3,900

 

$4,018

Non-cash items
2,516

 
2,728

 
2,140

Changes in working capital
1,078

 
880

 
(2,135
)
Net cash provided by operating activities
8,179

 
7,508

 
4,023

Net cash (used)/provided by investing activities
(5,154
)
 
(3,757
)
 
2,369

Net cash used by financing activities
(4,249
)
 
(3,477
)
 
(1,700
)
Effect of exchange rate changes on cash and cash equivalents
(29
)
 
18

 
(2
)
Net (decrease)/increase in cash and cash equivalents
(1,253
)
 
292

 
4,690

Cash and cash equivalents at beginning of year
10,341

 
10,049

 
5,359

Cash and cash equivalents at end of period

$9,088

 

$10,341

 

$10,049

Operating Activities Net cash provided by operating activities was $8.2 billion during 2013, compared with $7.5 billion during 2012 and $4.0 billion in 2011. The increases of $0.7 billion in 2013 and $3.5 billion in 2012 were primarily due to increased customer receipts reflecting higher delivery and order volumes in


38


2013 and 2012. Our investment in gross inventories increased by $5.7 billion in 2013, $6.2 billion in 2012 and $9.8 billion in 2011, driven by continued investment in commercial airplane program inventory, primarily 787 inventory. Advances and progress billings increased by $3.9 billion in 2013, $1.9 billion in 2012 and $5 billion in 2011, primarily due to payments from commercial airplane customers. Discretionary contributions to our pension plans totaled $1.5 billion in 2013 compared with $1.6 billion in 2012 and $0.5 billion in 2011.
Investing Activities Cash used by investing activities totaled $5.2 billion during 2013 compared with $3.8 billion used during 2012 and $2.4 billion provided during 2011, largely due to higher net contributions to investments in time deposits. Net contributions to investments were $2.9 billion in 2013 compared with $2 billion in 2012 and net proceeds from investments of $4 billion in 2011. In 2013, capital expenditures totaled $2.1 billion, up from $1.7 billion in the prior two years. We expect capital expenditures to remain higher in 2014 due to continued investment to support growth.
Financing Activities Cash used by financing activities was $4.2 billion during 2013, an increase of $0.8 billion compared with 2012 primarily due to share repurchases of $2.8 billion in 2013 partially offset by higher new borrowings of $0.5 billion, lower debt repayments of $0.6 billion and an increase in stock options exercised of $1 billion in the current year. Cash used by financing activities was $3.5 billion during 2012, an increase of $1.8 billion compared with 2011 as a result of higher debt repayments of $1.1 billion and lower new borrowings of $0.7 billion.
In 2013, we issued notes totaling $0.5 billion to fund the BCC segment and repaid $1.4 billion of debt, including repayments of $0.6 billion of debt held at BCC. At December 31, 2013 and 2012, the recorded balance of debt was $9.6 billion and $10.4 billion, of which $1.6 billion and $1.4 billion were classified as short-term. This includes $2.6 billion and $2.7 billion of debt attributable to BCC, of which $0.7 billion was classified as short-term in both periods.
During 2013, we repurchased 25.4 million shares totaling $2.8 billion through our open market share repurchase program. There were no shares repurchased through the share repurchase program in 2012 and 2011. In 2013 and 2012, we had 0.8 million and 1 million shares transferred to us from employees for tax withholdings.
Capital Resources We have substantial borrowing capacity. Any future borrowings may affect our credit ratings and are subject to various debt covenants as described below. We have a commercial paper program that continues to serve as a significant potential source of short-term liquidity. Throughout 2013 and at December 31, 2013, we had no commercial paper borrowings outstanding. Currently, we have $4.8 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 $18 billion and $18.1 billion at December 31, 2013 and 2012. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. Historically, we have not been required to fund significant amounts of outstanding commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required.
In the event we require additional funding to support strategic business opportunities, our commercial aircraft financing commitments, unfavorable resolution of litigation or other loss contingencies, or other business requirements, we expect to meet increased funding requirements by issuing commercial paper or term debt. We believe our ability to access external capital resources should be sufficient to satisfy existing short-term and long-term commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year. However, there can be no assurance of the cost or availability of future borrowings, if any, under our commercial paper program, in the debt markets or our credit facilities.


39


At December 31, 2013 and 2012, our pension plans were $10.5 billion and $19.7 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, 2013 with minimal required contributions in 2014. We expect to make discretionary contributions to our plans of approximately $750 million in 2014. We may be required to make higher contributions to our pension plans in future years.
At December 31, 2013, we were in compliance with the covenants for our debt and credit facilities. The most restrictive covenants include a limitation on mortgage debt and sale and leaseback transactions as a percentage of consolidated net tangible assets (as defined in the credit agreements), and a limitation on consolidated debt as a percentage of total capital (as defined). When considering debt covenants, we continue to have substantial borrowing capacity.
Contractual Obligations
The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2013, 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)

$9,517

 

$1,490

 

$1,893

 

$682

 

$5,452

Interest on debt(1)
6,484

 
502

 
893

 
813

 
4,276

Pension and other postretirement cash requirements
15,329

 
577

 
3,005

 
6,803

 
4,944

Capital lease obligations
156

 
72

 
70

 
14

 


Operating lease obligations
1,414

 
228

 
319

 
217

 
650

Purchase obligations not recorded on the Consolidated Statements of Financial Position
123,904

 
46,938

 
41,985

 
19,344

 
15,637

Purchase obligations recorded on the Consolidated Statements of Financial Position
15,849

 
15,191

 
658

 


 


Total contractual obligations

$172,653

 

$64,998

 

$48,823

 

$27,873

 

$30,959

(1) 
Includes interest on variable rate debt calculated based on interest rates at December 31, 2013. Variable rate debt was less than 2% of our total debt at December 31, 2013.
Pension and Other Postretirement Benefits Pension cash requirements are based on an estimate of our minimum funding requirements, pursuant to ERISA regulations, although we may make additional discretionary contributions. Estimates of other postretirement benefits are based on both our estimated future benefit payments and the estimated contributions to plans that are funded through trusts.
Purchase Obligations Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. Purchase obligations include amounts recorded as well as amounts that are not recorded on the Consolidated Statements of Financial Position. Approximately 4% of the purchase obligations disclosed above are reimbursable to us pursuant to cost-type government contracts.


40


Purchase Obligations Not Recorded on the Consolidated Statements of Financial Position Production related purchase obligations not recorded on the Consolidated Statements of Financial Position include agreements for inventory procurement, tooling costs, electricity and natural gas contracts, property, plant and equipment, and other miscellaneous production related obligations. The most significant obligation relates to inventory procurement contracts. We have entered into certain significant inventory procurement contracts that specify determinable prices and quantities, and long-term delivery timeframes. In addition, we purchase raw materials on behalf of our suppliers. These agreements require suppliers and vendors to be prepared to build and deliver items in sufficient time to meet our production schedules. The need for such arrangements with suppliers and vendors arises from the extended production planning horizon for many of our products. A significant portion of these inventory commitments is supported by firm contracts and/or has historically resulted in settlement through reimbursement from customers for penalty payments to the supplier should the customer not take delivery. These amounts are also included in our forecasts of costs for program and contract accounting. Some inventory procurement contracts may include escalation adjustments. In these limited cases, we have included our best estimate of the effect of the escalation adjustment in the amounts disclosed in the table above.
Purchase Obligations Recorded on the Consolidated Statements of Financial Position Purchase obligations recorded on the Consolidated Statements of Financial Position primarily include accounts payable and certain other current and long-term liabilities including accrued compensation.
Industrial Participation Agreements We have entered into various industrial participation agreements with certain customers outside of the U.S. to facilitate economic flow back and/or technology transfer to their businesses or government agencies as the result of their procurement of goods and/or services from us. These commitments may be satisfied by our placement of direct work or vendor orders for supplies, opportunities to bid on supply contracts, transfer of technology or other forms of assistance. However, in certain cases, our commitments may be satisfied through other parties (such as our vendors) who purchase supplies from our non-U.S. customers. We do not commit to industrial participation agreements unless a contract for sale of our products or services is signed. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. During 2013, we incurred no such penalties. As of December 31, 2013, we have outstanding industrial participation agreements totaling $18.4 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 foreign supplier must have sufficient capability to meet our requirements and must be competitive in cost, quality and schedule.
Income Tax Obligations As of December 31, 2013, our net asset for income taxes receivable, including uncertain tax positions, was $24 million. We are not able to reasonably estimate the timing of future cash flows related to uncertain tax positions. Our income tax matters are excluded from the table above. See Note 4 to our Consolidated Financial Statements.


41


Commercial Commitments
The following table summarizes our commercial commitments outstanding as of December 31, 2013.
(Dollars in millions)
Total Amounts
Committed/Maximum
Amount of Loss

 
Less than
1 year

 
1-3
years

 
4-5
years

 
After 5
years

Standby letters of credit and surety bonds

$4,376

 

$2,525

 

$1,720

 

$83

 

$48

Commercial aircraft financing commitments
17,987

 
2,309

 
6,171

 
4,956

 
4,551

Total commercial commitments

$22,363

 

$4,834

 

$7,891

 

$5,039

 

$4,599

Commercial aircraft financing commitments include commitments to provide financing related to aircraft on order, under option for deliveries or proposed as part of sales campaigns based on estimated earliest potential funding dates. Based on historical experience, we anticipate that we will not be required to fund a significant portion of our financing commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required. See Note 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, including certain employment, labor and benefits litigation. Note 20 also addresses the settlement of the A-12 aircraft litigation.
Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $649 million at December 31, 2013. For additional information, see Note 11 to our Consolidated Financial Statements.
Income Taxes We have recorded a liability of $1,141 million at December 31, 2013 for uncertain tax positions. For further discussion of income taxes, see Note 4 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.


42


Non-GAAP Measures
Core Operating Earnings, Core Operating Margin and Core Earnings Per Share
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (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 unallocated pension and other postretirement benefit expenses which represent costs not attributable to business segments - 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.
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)
 
 
 

2013

 
2012

 
2011

Revenues

$86,623

 

$81,698

 

$68,735

Earnings from operations, as reported

$6,562

 

$6,290

 

$5,823

Operating margins
7.6
%
 
7.7
%
 
8.5
%
 
 
 
 
 
 
Unallocated pension and other postretirement benefit expense

$1,314

 

$899

 

$517

Core operating earnings (non-GAAP)

$7,876

 

$7,189

 

$6,340

Core operating margins (non-GAAP)
9.1
%
 
8.8
%
 
9.2
%
 
 
 
 
 
 
Diluted earnings per share, as reported

$5.96

 

$5.11

 

$5.34

Unallocated pension and other postretirement benefit expense(1)

$1.11