10-Q 1 a201606jun3010-q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      
Commission file number 1-442
 
THE BOEING COMPANY
 
(Exact name of registrant as specified in its charter)
Delaware
 
91-0425694
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 N. Riverside Plaza, Chicago, IL
 
60606-1596
(Address of principal executive offices)
 
(Zip Code)
 
(312) 544-2000
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company  
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of July 20, 2016, there were 623,825,935 shares of common stock, $5.00 par value, issued and outstanding.



THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended June 30, 2016
INDEX
Part I. Financial Information (Unaudited)
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 

Item 3.
 
 
 
Item 4.
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 



Part I. Financial Information
Item 1. Financial Statements
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except per share data)
Six months ended June 30
 
Three months ended June 30
  
2016

 
2015

 
2016


2015

Sales of products

$42,069

 

$41,408

 

$22,184



$21,923

Sales of services
5,318

 
5,284

 
2,571


2,620

Total revenues
47,387

 
46,692

 
24,755


24,543

 


 


 
 
 
 
Cost of products
(37,210
)
 
(35,627
)
 
(20,265
)

(19,247
)
Cost of services
(4,180
)
 
(4,186
)
 
(2,044
)

(2,086
)
Boeing Capital interest expense
(32
)
 
(33
)
 
(16
)

(17
)
Total costs and expenses
(41,422
)
 
(39,846
)
 
(22,325
)

(21,350
)
 
5,965

 
6,846

 
2,430


3,193

Income from operating investments, net
151

 
129

 
97


50

General and administrative expense
(1,694
)
 
(1,705
)
 
(806
)

(760
)
Research and development expense, net
(3,044
)
 
(1,569
)
 
(2,127
)

(800
)
(Loss)/gain on dispositions, net
(9
)
 
1

 
(13
)
 


Earnings/(loss) from operations
1,369

 
3,702

 
(419
)

1,683

Other income, net
39

 
3

 
13


15

Interest and debt expense
(146
)
 
(136
)
 
(73
)

(75
)
Earnings/(loss) before income taxes
1,262

 
3,569

 
(479
)

1,623

Income tax (expense)/benefit
(277
)
 
(1,123
)
 
245


(513
)
Net earnings/(loss)

$985



$2,446

 

($234
)


$1,110

 
 
 
 
 
 
 
 
Basic earnings/(loss) per share

$1.52

 

$3.50

 

($0.37
)


$1.61

 
 
 
 
 
 
 
 
Diluted earnings/(loss) per share

$1.51

 

$3.46

 

($0.37
)


$1.59

 
 
 
 
 
 
 
 
Cash dividends paid per share

$2.18

 

$1.82

 

$1.09



$0.91

 
 
 
 
 
 
 
 
Weighted average diluted shares (millions)
654.9

 
706.6

 
636.3


698.9

See Notes to the Condensed Consolidated Financial Statements.

1


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
Six months ended June 30
 
Three months ended June 30
 
2016

 
2015

 
2016

 
2015

Net earnings/(loss)

$985

 

$2,446

 

($234
)
 

$1,110

Other comprehensive (loss)/income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
7

 
(44
)
 
(16
)
 
44

Unrealized (loss)/gain on certain investments, net of tax of $1, ($3), $0, and ($2)
(1
)
 
4

 
1

 
3

Unrealized gain/(loss) on derivative instruments:
 
 
 
 
 
 
 
Unrealized gain/(loss) arising during period, net of tax of ($23), $37, $9, and ($14)
41

 
(66
)
 
(17
)
 
25

Reclassification adjustment for losses included in net earnings, net of tax of ($24), ($16), ($12), and ($10)
43

 
28

 
20

 
16

Total unrealized gain/(loss) on derivative instruments, net of tax
84

 
(38
)
 
3

 
41

Defined benefit pension plans and other postretirement benefits:
 
 
 
 
 
 
 
Amortization of prior service (benefit)/cost included in net periodic pension cost, net of tax of $15, ($11), $8, and ($6)
(27
)
 
19

 
(13
)
 
9

Net actuarial (loss)/gain arising during the period, net of tax of $215, ($17), $34, and ($17)
(387
)
 
31

 
(59
)
 
31

Amortization of actuarial losses included in net periodic pension cost, net of tax of ($145), ($282), ($73) and ($145)
261

 
508

 
130

 
264

Settlements and curtailments included in net income/(loss), net of tax of ($7), ($2), ($1), and ($2)
14

 
3

 
3

 
3

Pension and postretirement cost/(benefit) related to our equity method investments, net of tax of ($1),$0, $3 and $0
2

 

 
(6
)
 

Total defined benefit pension plans and other postretirement benefits, net of tax
(137
)
 
561

 
55

 
307

Other comprehensive (loss)/income, net of tax
(47
)
 
483

 
43

 
395

Comprehensive loss related to noncontrolling interests


 
(1
)
 
(1
)
 

Comprehensive income/(loss), net of tax

$938

 

$2,928

 

($192
)
 

$1,505

See Notes to the Condensed Consolidated Financial Statements.

2


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Financial Position
(Unaudited)
(Dollars in millions, except per share data)
June 30
2016

 
December 31
2015

Assets
 
 
 
Cash and cash equivalents

$8,605

 

$11,302

Short-term and other investments
660

 
750

Accounts receivable, net
9,809

 
8,713

Current portion of customer financing, net
251

 
212

Inventories, net of advances and progress billings
44,182

 
47,257

Total current assets
63,507

 
68,234

Customer financing, net
2,909

 
3,358

Property, plant and equipment, net of accumulated depreciation of $16,641 and $16,286
12,533

 
12,076

Goodwill
5,128

 
5,126

Acquired intangible assets, net
2,544

 
2,657

Deferred income taxes
267

 
265

Investments
1,312

 
1,284

Other assets, net of accumulated amortization of $451 and $451
1,409

 
1,408

Total assets

$89,609

 

$94,408

Liabilities and equity
 
 
 
Accounts payable

$11,748

 

$10,800

Accrued liabilities
13,534

 
14,014

Advances and billings in excess of related costs
23,409

 
24,364

Short-term debt and current portion of long-term debt
1,168

 
1,234

Total current liabilities
49,859

 
50,412

Deferred income taxes
2,422

 
2,392

Accrued retiree health care
6,586

 
6,616

Accrued pension plan liability, net
18,200

 
17,783

Other long-term liabilities
2,048

 
2,078

Long-term debt
9,847

 
8,730

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

 
5,061

Additional paid-in capital
4,778

 
4,834

Treasury stock, at cost - 386,402,793 and 345,637,354 shares
(34,821
)
 
(29,568
)
Retained earnings
38,362

 
38,756

Accumulated other comprehensive loss
(12,795
)
 
(12,748
)
Total shareholders’ equity
585

 
6,335

Noncontrolling interests
62

 
62

Total equity
647

 
6,397

Total liabilities and equity

$89,609

 

$94,408

See Notes to the Condensed Consolidated Financial Statements.


3


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Six months ended June 30
  
2016


2015

Cash flows – operating activities:
 

 
Net earnings

$985



$2,446

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

 
Non-cash items – 
 

 
Share-based plans expense
97


94

Depreciation and amortization
890


912

Investment/asset impairment charges, net
50


74

Customer financing valuation benefit
(4
)

(5
)
Gain/(loss) on dispositions, net
9

 
(1
)
Other charges and credits, net
141


140

Excess tax benefits from share-based payment arrangements



(124
)
Changes in assets and liabilities – 
 

 
Accounts receivable
(503
)

(313
)
Inventories, net of advances and progress billings
3,004


(2,395
)
Accounts payable
1,221


888

Accrued liabilities
(269
)

(177
)
Advances and billings in excess of related costs
(954
)

195

Income taxes receivable, payable and deferred
(494
)

482

Other long-term liabilities
(103
)

(17
)
Pension and other postretirement plans
181


1,244

Customer financing, net
275


19

Other
(61
)

(77
)
Net cash provided by operating activities
4,465


3,385

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(1,419
)
 
(1,266
)
Property, plant and equipment reductions
13

 
20

Acquisitions, net of cash acquired


 
(23
)
Contributions to investments
(657
)
 
(1,205
)
Proceeds from investments
705

 
2,040

Other
8

 
22

Net cash used by investing activities
(1,350
)
 
(412
)
Cash flows – financing activities:
 
 
 
New borrowings
1,323

 
761

Debt repayments
(267
)
 
(846
)
Stock options exercised
147

 
276

Excess tax benefits from share-based payment arrangements


 
124

Employee taxes on certain share-based payment arrangements
(79
)
 
(90
)
Common shares repurchased
(5,501
)
 
(4,501
)
Dividends paid
(1,408
)
 
(1,264
)
Other
(24
)
 


Net cash used by financing activities
(5,809
)
 
(5,540
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 
(9
)
Net decrease in cash and cash equivalents
(2,697
)
 
(2,576
)
Cash and cash equivalents at beginning of year
11,302

 
11,733

Cash and cash equivalents at end of period

$8,605

 

$9,157

See Notes to the Condensed Consolidated Financial Statements.

4


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

Additional
Paid-In
Capital

Treasury Stock

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-
controlling
Interests

Total

Balance at January 1, 2015

$5,061


$4,625


($23,298
)

$36,180


($13,903
)

$125


$8,790

Net earnings
 
 
 
2,446

 
(1
)
2,445

Other comprehensive income, net of tax of ($294)
 
 
 
 
483

 
483

Share-based compensation and related dividend equivalents
 
106

 
(13
)
 
 
93

Excess tax pools
 
126

 
 
 
 
126

Treasury shares issued for stock options exercised, net
 
(11
)
287

 
 
 
276

Treasury shares issued for other share-based plans, net
 
(125
)
49

 
 
 
(76
)
Common shares repurchased
 
 
(4,501
)
 
 
 
(4,501
)
Cash dividends declared ($1.82 per share)
 
 
 
(1,248
)
 
 
(1,248
)
Changes in noncontrolling interests
 
 
 
 
 
(81
)
(81
)
Balance at June 30, 2015

$5,061


$4,721


($27,463
)

$37,365


($13,420
)

$43


$6,307

 
 
 
 
 
 
 
 
Balance at January 1, 2016

$5,061


$4,834


($29,568
)

$38,756


($12,748
)

$62


$6,397

Net earnings
 
 
 
985

 


985

Other comprehensive loss, net of tax of $31
 
 
 
 
(47
)
 
(47
)
Share-based compensation and related dividend equivalents
 
110

 
(15
)
 
 
95

Treasury shares issued for stock options exercised, net
 
(20
)
167

 
 
 
147

Treasury shares issued for other share-based plans, net
 
(146
)
81

 
 
 
(65
)
Common shares repurchased
 
 
(5,501
)
 
 
 
(5,501
)
Cash dividends declared ($2.18 per share)
 
 
 
(1,364
)
 
 
(1,364
)
Balance at June 30, 2016

$5,061


$4,778


($34,821
)

$38,362


($12,795
)

$62


$647

See Notes to the Condensed Consolidated Financial Statements.



5


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

2016

 
2015

 
2016

 
2015

Revenues:
 
 
 
 



Commercial Airplanes

$31,855

 

$32,258

 

$17,456



$16,877

Defense, Space & Security:
 
 
 
 



Boeing Military Aircraft
6,638

 
6,200

 
2,979


3,474

Network & Space Systems
3,545

 
3,670

 
1,810


1,938

Global Services & Support
4,947

 
4,383

 
2,385


2,132

Total Defense, Space & Security
15,130

 
14,253

 
7,174


7,544

Boeing Capital
148

 
201

 
84


115

Unallocated items, eliminations and other
254

 
(20
)
 
41

 
7

Total revenues

$47,387

 

$46,692

 

$24,755



$24,543

Earnings/(loss) from operations:
 
 
 
 



Commercial Airplanes

$60

 

$2,823

 

($973
)


$1,206

Defense, Space & Security:
 
 
 
 



Boeing Military Aircraft
509

 
380

 
175


121

Network & Space Systems
301

 
318

 
153


151

Global Services & Support
605

 
591

 
265


274

Total Defense, Space & Security
1,415

 
1,289

 
593


546

Boeing Capital
23

 
31

 
18


11

Segment operating profit/(loss)
1,498

 
4,143

 
(362
)
 
1,763

Unallocated items, eliminations and other
(129
)
 
(441
)
 
(57
)
 
(80
)
Earnings/(loss) from operations
1,369

 
3,702

 
(419
)

1,683

Other income, net
39

 
3

 
13


15

Interest and debt expense
(146
)
 
(136
)
 
(73
)

(75
)
Earnings/(loss) before income taxes
1,262

 
3,569

 
(479
)

1,623

Income tax (expense)/benefit
(277
)
 
(1,123
)
 
245


(513
)
Net earnings/(loss)

$985

 

$2,446

 

($234
)


$1,110

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 17 for further segment results.

6


The Boeing Company and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)
Note 1 – Basis of Presentation
The condensed consolidated interim financial statements included in this report have been prepared by management of The Boeing Company (herein referred to as “Boeing”, the “Company”, “we”, “us”, or “our”). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The results of operations for the period ended June 30, 2016 are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited Consolidated Financial Statements, including the notes thereto, included in our 2015 Annual Report on Form 10-K. Certain amounts in prior periods have been reclassified to conform to the current period's presentation.
Standards Issued and Not Yet Implemented
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 - 02, Leases (Topic 842). The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We do not expect the new lease standard to have a material effect on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The new standard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was not permitted. On August 12, 2015, the FASB approved a one year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company plans to adopt the new standard effective January 1, 2018 and is continuing to evaluate the impacts of adoption and the implementation approach to be used.
Standards Issued and Implemented
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. The standard requires excess tax benefits or deficiencies for share-based payments to be recorded in the period shares vest or settle as income tax expense or benefit, rather than within Additional paid-in capital. Cash flows related to excess tax benefits will be included in Cash provided by operating activities and will no longer be separately classified as a financing activity. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes and provides an accounting policy election to account for forfeitures as they occur. We have elected to continue to estimate forfeitures and are not planning to change tax withholdings.
The Company prospectively adopted the standard during the three months ended June 30, 2016 effective January 1, 2016. For the six months ended June 30, 2016, this resulted in an increase of $54 to Net earnings and $0.08 to diluted earnings per share and for the three months ended June 30, 2016, a decrease of $54 to Net loss and $0.08 to diluted loss per share. Adoption also resulted in a $54 increase in Net cash provided

7


by operating activities and a corresponding $54 reduction in Net cash used by financing activities for the six months ended June 30, 2016.

Use of Estimates
Management makes assumptions and estimates to prepare financial statements in conformity with accounting principles generally accepted in the United States of America. Those assumptions and estimates directly affect the amounts reported in the Condensed Consolidated Financial Statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these Notes to the Condensed Consolidated Financial Statements.
Contract accounting is used for development and production activities predominantly by Defense, Space & Security (BDS). Contract accounting involves a judgmental process of estimating total sales and costs for each contract resulting in the development of estimated cost of sales percentages. Changes in estimated revenues, cost of sales and the related effect on operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contract’s percent complete. For the six months ended June 30, 2016 and 2015, net unfavorable cumulative catch-up adjustments, including reach-forward losses, across all contracts decreased Earnings from operations by $587 and $594 and diluted earnings per share by $0.70 and $0.58. For the three months ended June 30, 2016 and 2015, net unfavorable cumulative catch-up adjustments, including reach-forward losses, across all contracts decreased Earnings from operations by $503 and $724 and diluted earnings per share by $0.39 and $0.71.
Note 2 – Earnings Per Share
Basic and diluted earnings per share are computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares and participating securities. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Participating securities and common shares have equal rights to undistributed earnings.
Basic earnings per share is calculated by taking net earnings, less earnings available to participating securities, divided by the basic weighted average common shares outstanding.
Diluted earnings per share is calculated by taking net earnings, less earnings available to participating securities, divided by the diluted weighted average common shares outstanding.

8


The elements used in the computation of basic and diluted earnings/(loss) per share were as follows:
(In millions - except per share amounts)
Six months ended June 30
 
Three months ended June 30
 
2016

 
2015

 
2016

 
2015

Net earnings/(loss)

$985

 

$2,446

 

($234
)
 

$1,110

Less: earnings available to participating securities


 
2

 


 


Net earnings/(loss) available to common shareholders

$985

 

$2,444

 

($234
)
 

$1,110

Basic
 
 
 
 
 
 
 
Basic weighted average shares outstanding
648.5

 
698.5

 
636.3

 
691.2

Less: participating securities
1.0

 
1.1

 
1.0

 
1.1

Basic weighted average common shares outstanding
647.5

 
697.4

 
635.3

 
690.1

Diluted
 
 
 
 
 
 
 
Basic weighted average shares outstanding
648.5

 
698.5

 
636.3

 
691.2

Dilutive potential common shares(1)
6.4

 
8.1

 

 
7.7

Diluted weighted average shares outstanding
654.9

 
706.6

 
636.3

 
698.9

Less: participating securities
1.0

 
1.1

 
1.0

 
1.1

Diluted weighted average common shares outstanding
653.9

 
705.5

 
635.3

 
697.8

Net earnings/(loss) per share:
 
 
 
 
 
 
 
Basic

$1.52

 

$3.50

 

($0.37
)
 

$1.61

Diluted
1.51

 
3.46

 
(0.37
)
 
1.59

(1) 
Diluted earnings/(loss) per share includes any dilutive impact of stock options, restricted stock units, performance-based restricted stock units and performance awards.
As a result of incurring a net loss for the three months ended June 30, 2016, potential common shares of 6.7 million were excluded from diluted loss per share because the effect would have been antidilutive. In addition, the following table includes the number of shares that may be dilutive potential common shares in the future. These shares were not included in the computation of diluted earnings/(loss) per share because the effect was either antidilutive or the performance condition was not met.
(Shares in millions)
Six months ended June 30
 
Three months ended June 30
 
2016

 
2015

 
2016

 
2015

Performance awards
7.5

 
6.0

 
7.3

 
6.0

Performance-based restricted stock units
2.6

 
2.3

 
3.3

 
2.3

Note 3 – Income Taxes
Our effective income tax rates were 21.9% and 51.1% for the six and three months ended June 30, 2016 and 31.5% and 31.6% for the same periods in the prior year. The year over year tax rate variances are primarily due to lower pre-tax income in 2016. The 2016 year-to-date income tax expense reflects an estimated annual effective tax rate of 27.2% excluding discrete tax benefits of $66 that have been recorded through the second quarter of 2016. The effective tax rate for the six months ended June 30, 2016 is lower than the comparable prior year period due to lower projected pre-tax income in 2016 and the favorable impact of the permanent reinstatement of the U.S. research and development tax credit at the end of 2015. The discrete tax benefits of $66 include a $54 benefit from adopting ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting” in the three months ended June 30, 2016.

9


On July 5, 2016, the Joint Committee on Taxation completed its review of our federal income taxes for the 2011-2012 tax years and as a result, in the third quarter of 2016, we expect to record tax benefits of approximately $180 and reduce unrecognized tax benefits by approximately $220. We remain subject to federal income tax audits for the 2013 to 2015 tax years. We are also subject to examination in major state and international jurisdictions for the 2001-2015 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Note 4 – Inventories
Inventories consisted of the following:
 
June 30
2016

 
December 31
2015

Long-term contracts in progress

$12,516

 

$13,858

Commercial aircraft programs
53,769

 
55,230

Commercial spare parts, used aircraft, general stock materials and other
6,123

 
6,673

Inventory before advances and progress billings
72,408

 
75,761

Less advances and progress billings
(28,226
)
 
(28,504
)
Total

$44,182

 

$47,257

Long-Term Contracts in Progress
Long-term contracts in progress includes Delta launch program inventory that is being sold at cost to United Launch Alliance (ULA) under an inventory supply agreement that terminates on March 31, 2021. The inventory balance was $120 (net of advances of $276) and $120 (net of advances of $310) at June 30, 2016 and December 31, 2015. At June 30, 2016, $176 of this inventory related to unsold launches. See Note 9.
Included in inventories are capitalized precontract costs of $1,561 and $732 primarily related to KC-46A Tanker at June 30, 2016 and December 31, 2015.
Commercial Aircraft Programs
At June 30, 2016 and December 31, 2015, commercial aircraft programs inventory included the following amounts related to the 787 program: $34,123 and $34,656 of work in process (including deferred production costs of $27,673 and $28,510), $2,412 and $2,551 of supplier advances, and $3,707 and $3,890 of unamortized tooling and other non-recurring costs. At June 30, 2016, $22,966 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $8,414 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
We produced the fourth and fifth flight test aircraft for the 787 program in 2009 but have been unable to sell them at acceptable prices. The aircraft have been used extensively for flight and ground testing and we intended to begin to refurbish the aircraft in early 2017 for commercial sale based on sales activity and market interest. However, during the second quarter of 2016 we determined that firm orders for these aircraft prior to refurbishment were now unlikely, and that the Company would not invest company funds for their refurbishment. The Company also determined the costs to refurbish the aircraft at a future date would be prohibitively expensive. We have therefore determined that the aircraft are not commercially saleable, and accordingly, costs of $1,235 associated with these aircraft were reclassified from 787 program inventory to research and development expense. The reclassification also impacted 787 deferred production costs, reducing the balance by $1,011 at June 30, 2016.

10


At June 30, 2016 and December 31, 2015, commercial aircraft programs inventory included the following amounts related to the 747 program: $0 and $942 of deferred production costs, net of reach-forward losses, and $369 and $377 of unamortized tooling costs. At June 30, 2016, $173 of unamortized tooling costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $196 is expected to be recovered from units included in the program accounting quantity that represent expected future orders. At June 30, 2016 and December 31, 2015, work in process inventory included a number of completed 747 aircraft that we expect to recover from future orders.
Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling $3,217 and $3,166 at June 30, 2016 and December 31, 2015.
Used aircraft in inventories at Commercial Airplanes totaled $321 and $267 at June 30, 2016 and December 31, 2015.
Note 5 – Customer Financing
Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:
 
June 30
2016

 
December 31
2015

Financing receivables:
 
 
 
Investment in sales-type/finance leases

$1,510

 

$1,620

Notes
306

 
256

Total financing receivables
1,816

 
1,876

Operating lease equipment, at cost, less accumulated depreciation of $226 and $338
1,356

 
1,710

Gross customer financing
3,172

 
3,586

Less allowance for losses on receivables
(12
)
 
(16
)
Total

$3,160

 

$3,570

We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms. At June 30, 2016 and December 31, 2015, we individually evaluated for impairment customer financing receivables of $89 and $86. At June 30, 2016 and December 31, 2015, $48 and $0 was determined to be impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceeded the carrying values of the receivables.
The adequacy of the allowance for losses is assessed quarterly. Three primary factors influencing the level of our allowance for losses on customer financing receivables are customer credit ratings, default rates and collateral values. We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. Our rating categories are comparable to those used by the major credit rating agencies.

11


Our financing receivable balances by internal credit rating category are shown below: 
Rating categories
June 30
2016

 
December 31
2015

BBB

$919

 

$973

BB
490

 
536

B
249

 
258

CCC
69

 
23

Other
89

 
86

Total carrying value of financing receivables

$1,816

 

$1,876

At June 30, 2016, our allowance related to receivables with ratings of B, BB and BBB. We applied default rates that averaged 13%, 9% and 1%, respectively, to the exposure associated with those receivables.
Customer Financing Exposure
Customer financing is collateralized by security in the related asset. The value of the collateral is closely tied to commercial airline performance and overall market conditions and may be subject to reduced valuation with market decline. Declines in collateral values are also a significant driver of our allowance for losses. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft. Our customer financing portfolio is primarily collateralized by out-of-production aircraft. The majority of customer financing carrying values are concentrated in the following aircraft models:
 
June 30
2016

 
December 31
2015

717 Aircraft ($359 and $372 accounted for as operating leases)

$1,347

 

$1,415

747 Aircraft ($700 and $1,038 accounted for as operating leases)
727

 
1,038

MD-80 Aircraft (Accounted for as sales-type finance leases)
278

 
314

757 Aircraft ($45 and $48 accounted for as operating leases)
257

 
270

767 Aircraft ($96 and $84 accounted for as operating leases)
186

 
185

737 Aircraft (Accounted for as operating leases)
109

 
115

MD-11 Aircraft (Accounted for as operating leases)
26

 
35


12


Note 6 – Investments
Our investments, which are recorded in Short-term and other investments or Investments, consisted of the following:
 
June 30
2016

 
December 31
2015

Time deposits

$148

 

$456

Pledged money market funds (1)
38

 
38

Available-for-sale investments
494

 
244

Equity method investments (2)
1,230

 
1,230

Restricted cash (3)
27

 
31

Other investments
35

 
35

Total

$1,972

 

$2,034

(1) 
Reflects amounts pledged in lieu of letters of credit as collateral in support of our workers’ compensation programs. These funds can become available within 30 days notice upon issuance of letters of credit.
(2) 
Dividends received were $166 and $117 for the six and three months ended June 30, 2016 and $124 and $45 during the same periods in the prior year.
(3) 
Restricted to pay certain claims related to workers' compensation and life insurance premiums for certain employees.
Note 7 – Other Assets
Sea Launch
At June 30, 2016 and December 31, 2015, Other assets included $356 of receivables related to our former investment in the Sea Launch venture which became payable by certain Sea Launch partners following Sea Launch’s bankruptcy filing in June 2009. The $356 includes $147 related to a payment made by us under a bank guarantee on behalf of Sea Launch and $209 related to loans (partner loans) we made to Sea Launch. The net amounts owed to Boeing by each of the partners are as follows: S.P. Koroley Rocket and Space Corporation Energia of Russia – $223, PO Yuzhnoye Mashinostroitelny Zavod of Ukraine – $89 and KB Yuzhnoye of Ukraine – $44.
Although each partner is contractually obligated to reimburse us for its share of the bank guarantee, the Russian and Ukrainian partners have raised defenses to enforcement and contested our claims. On February 1, 2013, we filed an action in the United States District Court for the Central District of California seeking reimbursement from the other Sea Launch partners of the $147 bank guarantee payment and the $209 partner loan obligations. On May 12, 2016, the court issued a judgment in favor of Boeing relating to the bank guarantee payment and the partner loan obligations. Prior to these proceedings, we had filed a Notice of Arbitration with the Stockholm Chamber of Commerce seeking reimbursement from the other partners for a portion of these amounts. On May 16, 2016, the appellate court in Sweden dismissed the Swedish proceedings at our request.
We have initiated collection efforts and continue to believe the partners have the financial wherewithal to pay and intend to pursue vigorously all of our rights and remedies. In the event we are unable to secure reimbursement of $147 related to our payment under the bank guarantee and $209 related to partner loans made to Sea Launch, we could incur additional charges. Our current assessment as to the collectability of these receivables takes into account the current economic conditions in Russia and Ukraine, although we will continue to monitor the situation.

13


Spirit AeroSystems
As of June 30, 2016 and December 31, 2015, Other assets included $140 of receivables related to indemnifications from Spirit AeroSystems, Inc. (Spirit), for costs incurred related to pension and retiree medical obligations of former Boeing employees that were subsequently employed by Spirit. During the fourth quarter of 2014, Boeing filed a complaint against Spirit in Delaware Superior Court seeking to enforce our rights to indemnification and to recover from Spirit amounts incurred by Boeing for pension and retiree medical obligations. We expect to fully recover from Spirit.
Note 8 – Commitments and Contingencies
Environmental
The following table summarizes environmental remediation activity during the six months ended June 30, 2016 and 2015.
 
2016

 
2015

Beginning balance – January 1

$566

 

$601

Reductions for payments made
(20
)
 
(35
)
Changes in estimates
44

 
27

Ending balance – June 30

$590

 

$593

The liabilities recorded represent our best estimate or the low end of a range of reasonably possible costs expected to be incurred to remediate sites, including operation and maintenance over periods of up to 30 years. It is reasonably possible that we may incur charges that exceed these recorded amounts because of regulatory agency orders and directives, changes in laws and/or regulations, higher than expected costs and/or the discovery of new or additional contamination. As part of our estimating process, we develop a range of reasonably possible alternate scenarios that includes the high end of a range of reasonably possible cost estimates for all remediation sites for which we have sufficient information based on our experience and existing laws and regulations. There are some potential remediation obligations where the costs of remediation cannot be reasonably estimated. At June 30, 2016 and December 31, 2015, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $874 and $853.
Product Warranties
The following table summarizes product warranty activity recorded during the six months ended June 30, 2016 and 2015.
 
2016

 
2015

Beginning balance – January 1

$1,485

 

$1,504

Additions for current year deliveries
195

 
219

Reductions for payments made
(185
)
 
(155
)
Changes in estimates
(84
)
 
(90
)
Ending balance - June 30

$1,411

 

$1,478

Commercial Aircraft Commitments
In conjunction with signing definitive agreements for the sale of new aircraft (Sale Aircraft), we have entered into trade-in commitments with certain customers that give them the right to trade in used aircraft at a specified price upon the purchase of Sale Aircraft. The probability that trade-in commitments will be exercised is determined by using both quantitative information from valuation sources and qualitative information from other sources. The probability of exercise is assessed quarterly, or as events trigger a change, and takes into consideration the current economic and airline industry environments. Trade-in commitments, which

14


can be terminated by mutual consent with the customer, may be exercised only during the period specified in the agreement, and require advance notice by the customer.
Trade-in commitment agreements at June 30, 2016 have expiration dates from 2016 through 2026. At June 30, 2016, and December 31, 2015 total contractual trade-in commitments were $1,804 and $1,585. As of June 30, 2016 and December 31, 2015, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $257 and $240 and the fair value of the related trade-in aircraft was $257 and $240.
Financing Commitments
Financing commitments, which include commitments to provide financing related to aircraft on order, under option for deliveries or proposed as part of sales campaigns, totaled $17,132 and $16,283 as of June 30, 2016 and December 31, 2015. The estimated earliest potential funding dates for these commitments as of June 30, 2016 are as follows:
  
Total

July through December 2016

$1,470

2017
4,054

2018
3,709

2019
3,151

2020
1,515

Thereafter
3,233

 

$17,132

As of June 30, 2016, all of these financing commitments related to customers we believe have less than investment-grade credit. We have concluded that no reserve for future potential losses is required for these financing commitments based upon the terms, such as collateralization and interest rates, under which funding would be provided.
Standby Letters of Credit and Surety Bonds
We have entered into standby letters of credit and surety bonds with financial institutions primarily relating to the guarantee of our future performance on certain contracts. Contingent liabilities on outstanding letters of credit agreements and surety bonds aggregated approximately $4,501 and $4,968 as of June 30, 2016 and December 31, 2015.
Commitments to ULA
We and Lockheed Martin Corporation have each committed to provide ULA with additional capital contributions in the event ULA does not have sufficient funds to make a required payment to us under an inventory supply agreement. As of June 30, 2016, ULA’s total remaining obligation to Boeing under the inventory supply agreement was $120. See Note 4.
F/A-18
At June 30, 2016, our backlog included 34 F/A-18 aircraft under contract with the U.S. Navy. The Consolidated Appropriations Act, 2016, passed in December 2015, funds 12 additional F/A-18 aircraft that, combined with the orders in backlog, would complete production in mid-2018. The President’s Fiscal Year 2017 Budget request submitted in February 2016 includes funding for two additional F/A-18 aircraft. In May 2016, both congressional appropriations committees included additional F/A-18s in their proposed FY17 defense funding bills. The Senate bill includes funding for 14 F/A-18s and the House bill includes funding for a total of 16 F/A-18s. We are continuing to work with our U.S. customers as well as international customers to secure additional orders that would extend the program beyond 2018.

15


Should additional orders not materialize, it is reasonably possible that we will decide to end production of the F/A-18 in 2018. We are still evaluating the full financial impact of a potential production shutdown, including any recovery that may be available from the U.S. government.
United States Government Defense Environment Overview
The enactment of The Bipartisan Budget Act of 2015 in November 2015 established overall defense spending levels for FY2016 and FY2017. However, uncertainty remains with respect to levels of defense spending for FY2018 and beyond including risk of future sequestration cuts.
Significant uncertainty also continues with respect to program-level appropriations for the U.S. Department of Defense (U.S. DoD) and other government agencies, including the National Aeronautics and Space Administration, within the overall budgetary framework described above. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the authorization and appropriations process could result in reductions, cancellations and/or delays of existing contracts or programs. Any of these impacts could have a material effect on the results of the Company's operations, financial position and/or cash flows.
In addition to the risks described above, if Congress is unable to pass appropriations bills in a timely manner, a government shutdown could result which may have impacts above and beyond those resulting from budget cuts, sequestration impacts or program-level appropriations. For example, requirements to furlough employees in the U.S. DoD or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders.
KC-46A Tanker and BDS Fixed-Price Development Contracts
Fixed-price development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work. BDS fixed-price contracts with significant development work include Commercial Crew, Saudi F-15, USAF KC-46A Tanker and commercial and military satellites. The operational and technical complexities of these contracts create financial risk, which could trigger termination provisions, order cancellations or other financially significant exposure. Changes to cost and revenue estimates could result in lower margins or material charges for reach-forward losses. For example, during 2016, we have recorded additional reach-forward losses of $816 on the KC-46A Tanker program.
KC-46A Tanker
At June 30, 2016, we had approximately $1,211 of capitalized precontract costs and $1,997 of potential termination liabilities to suppliers associated with the Low Rate Initial Production (LRIP) KC-46A Tanker aircraft for the U.S. Air Force (USAF). On May 27, 2016 the USAF announced that the date it expected to authorize LRIP aircraft had moved from June 2016 to August 2016, subject to satisfactory progress being made on the Engineering, Manufacturing and Development (EMD) contract. We have achieved the relevant flight testing milestones, including successful refueling of six flight test aircraft (F-16, F/A-18, C-17, A-10, AV-8B and a receiver KC-46), and expect to meet all other program requirements necessary to support the USAF’s authorization of LRIP aircraft during August 2016. On May 27, 2016 it was also announced that the first tanker delivery date moved from March 2017 to August 2017 with 18 fully operational tankers to be delivered by January 2018 instead of August 2017 due to ongoing complexities associated with qualification and certification and the higher volume of change incorporation required to bring the first 18 aircraft up to certification configuration.
Recoverable Costs on Government Contracts  
Our final incurred costs for each year are subject to audit and review for allowability by the U.S. government, which can result in payment demands related to costs they believe should be disallowed. We work with the U.S. government to assess the merits of claims and where appropriate reserve for amounts disputed. If we are unable to satisfactorily resolve disputed costs, we could be required to record an earnings charge and/or provide refunds to the U.S. government.

16


Russia/Ukraine
We continue to monitor political unrest involving Russia and Ukraine, where we and some of our suppliers source titanium products and/or have operations. A number of our commercial customers also have operations in Russia and Ukraine. To date, we have not experienced any significant disruptions to production or deliveries. Should suppliers or customers experience disruption, our production and/or deliveries could be materially impacted.
747 Program
Lower-than-expected demand for large commercial passenger and freighter aircraft and slower-than-expected growth of global freight traffic have continued to drive market uncertainties, pricing pressures and fewer orders than anticipated. As a result, during the second quarter of 2016, we canceled previous plans to return to a production rate of 1.0 aircraft per month beginning in 2019, resulting in a reduction in the program accounting quantity from 1,574 to 1,555 aircraft. This reduction in the program accounting quantity, together with lower anticipated revenues from future sales and higher costs associated with producing fewer airplanes, resulted in a reach-forward loss of $1,188 in the quarter. The adjusted program accounting quantity includes 32 undelivered aircraft, currently scheduled to be produced through 2019. We previously recognized reach-forward losses of $885 and $70 during the second half of 2015 and the first quarter of 2016, respectively, related to the prior decision to reduce the production rate to 0.5 per month and lower estimated revenue from future sales due to ongoing pricing and market pressures. We are currently producing at a rate of 1.0 per month and expect to reduce the rate to 0.5 per month in September 2016. We continue to have a number of completed aircraft in inventory as well as unsold production positions and we remain focused on obtaining additional orders and implementing cost-reduction efforts. If we are unable to obtain sufficient orders and/or market, production and other risks cannot be mitigated, we could record additional losses that may be material, and it is reasonably possible that we could decide to end production of the 747.
787 Program
The 787 program continues to have near breakeven gross margins. The combination of production challenges, change incorporation on early build aircraft, schedule delays, customer and supplier impacts and changes to price escalation factors has created significant pressure on program profitability. If risks related to this program, including risks associated with productivity improvements, supply chain management, planned production rate increases or introducing and manufacturing the 787-10 derivative as scheduled cannot be mitigated, the program could record a reach-forward loss that may be material.

17


Note 9 – Arrangements with Off-Balance Sheet Risk
We enter into arrangements with off-balance sheet risk in the normal course of business, primarily in the form of guarantees.
The following table provides quantitative data regarding our third party guarantees. The maximum potential payments represent a “worst-case scenario,” and do not necessarily reflect amounts that we expect to pay. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees. The carrying amount of liabilities represents the amount included in Accrued liabilities.
  
Maximum
Potential Payments
 
Estimated Proceeds from
Collateral/Recourse
 
Carrying Amount of
 Liabilities
 
June 30
2016

December 31
2015

 
June 30
2016

December 31
2015

 
June 30
2016

December 31
2015

Contingent repurchase commitments

$1,612


$1,529

 

$1,591


$1,510

 

$9


$7

Indemnifications to ULA:
 
 
 
 
 
 
 
 
Contributed Delta program launch inventory
87

107

 
 
 
 
 
 
Contract pricing
261

261

 
 
 
 
7

7

Other Delta contracts
216

231

 
 
 
 
5

5

Credit guarantees
30

30

 
27

27

 
2

2

Contingent Repurchase Commitments The repurchase price specified in contingent repurchase commitments is generally lower than the expected fair value at the specified repurchase date. Estimated proceeds from collateral/recourse in the table above represent the lower of the contracted repurchase price or the expected fair value of each aircraft at the specified repurchase date.
Indemnifications to ULA In 2006, we agreed to indemnify ULA through December 31, 2020 against potential non-recoverability and non-allowability of $1,360 of Boeing Delta launch program inventory included in contributed assets plus $1,860 of inventory subject to an inventory supply agreement which ends on March 31, 2021. Since inception, ULA has consumed $1,273 of the $1,360 of inventory that was contributed by us and has yet to consume $87. Under the inventory supply agreement, we have recorded revenues and cost of sales of $1,410 through June 30, 2016. ULA has made payments of $1,740 to us under the inventory supply agreement and we have made $63 of net indemnification payments to ULA.
We agreed to indemnify ULA against potential losses that ULA may incur in the event ULA is unable to obtain certain additional contract pricing from the USAF for four satellite missions. In 2009, ULA filed a complaint before the Armed Services Board of Contract Appeals (ASBCA) for a contract adjustment for the price of two of these missions, followed in 2011 by a subsequent notice of appeal with respect to a third mission. The USAF did not exercise an option for a fourth mission prior to the expiration of the contract. During the second quarter of 2016, the ASBCA ruled that ULA is entitled to additional contract pricing for each of the three missions and remanded to the parties to negotiate appropriate pricing. However, if the USAF appeals the ASBCA's ruling, and ULA is ultimately unsuccessful in obtaining additional pricing, we may be responsible for an indemnification payment up to $261 and may record up to $277 in pre-tax losses associated with the three missions.

18


Potential payments for Other Delta contracts include $85 related to deferred support costs and $91 related to deferred production costs. In June 2011, the Defense Contract Management Agency (DCMA) notified ULA that it had determined that $271 of deferred support costs are not recoverable under government contracts. In December 2011, the DCMA notified ULA of the potential non-recoverability of an additional $114 of deferred production costs. ULA and Boeing believe that all costs are recoverable and in November 2011, ULA filed a certified claim with the USAF for collection of deferred support and production costs. The USAF issued a final decision denying ULA’s certified claim in May 2012. On June 14, 2012, Boeing and ULA filed a suit in the Court of Federal Claims seeking recovery of the deferred support and production costs from the U.S. government. On November 9, 2012, the U.S. government filed an answer to our claim and asserted a counterclaim for credits that it alleges were offset by deferred support cost invoices. We believe that the U.S. government’s counterclaim is without merit, and have filed an answer challenging it on multiple grounds. The litigation is in the discovery phase, and the Court has not yet set a trial date. If, contrary to our belief, it is determined that some or all of the deferred support or production costs are not recoverable, we could be required to record pre-tax losses and make indemnification payments to ULA for up to $317 of the costs questioned by the DCMA.
Other Indemnifications In conjunction with our sales of Electron Dynamic Devices, Inc. and Rocketdyne Propulsion and Power businesses and our Commercial Airplanes facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma, we agreed to indemnify, for an indefinite period, the buyers for costs relating to pre-closing environmental conditions and certain other items. We are unable to assess the potential number of future claims that may be asserted under these indemnifications, nor the amounts thereof (if any). As a result, we cannot estimate the maximum potential amount of future payments under these indemnities and therefore, no liability has been recorded. To the extent that claims have been made under these indemnities and/or are probable and reasonably estimable, liabilities associated with these indemnities are included in the environmental liability disclosure in Note 8.
Credit Guarantees We have issued credit guarantees, principally to facilitate the sale and/or financing of commercial aircraft. Under these arrangements, we are obligated to make payments to a guaranteed party in the event that lease or loan payments are not made by the original lessee or debtor or certain specified services are not performed. A substantial portion of these guarantees has been extended on behalf of original lessees or debtors with less than investment-grade credit. Our commercial aircraft credit guarantees are collateralized by the underlying commercial aircraft and certain other assets. Current outstanding credit guarantees expire within the next five years.
Note 10 – Debt
On May 18, 2016, we issued $1,200 of fixed rate senior notes consisting of $400 due June 15, 2023 that bear an annual interest rate of 1.875%, $400 due June 15, 2026 that bear an annual interest rate of 2.25%, and $400 due June 15, 2046 that bear an annual interest rate of 3.375%. The notes are unsecured senior obligations and rank equally in right of payment with our existing and future unsecured and unsubordinated indebtedness. The net proceeds of the issuance totaled $1,170, after deducting underwriting discounts, commissions and offering expenses.

19


Note 11 – Postretirement Plans
The components of net periodic benefit cost were as follows:
  
Six months ended June 30
 
Three months ended June 30
Pension Plans
2016

 
2015

 
2016

 
2015

Service cost

$326

 

$884

 

$163

 

$442

Interest cost
1,526

 
1,494

 
762

 
747

Expected return on plan assets
(1,998
)
 
(2,016
)
 
(999
)
 
(1,008
)
Amortization of prior service costs
20

 
98

 
10

 
49

Recognized net actuarial loss
394

 
792

 
197

 
396

Settlement/curtailment/other losses
33

 
111

 
18

 
73

Net periodic benefit cost

$301

 

$1,363

 

$151

 

$699

Net periodic benefit cost included in Earnings/(loss) from operations

$1,092

 

$1,308

 

$463

 

$523

  
Six months ended June 30
 
Three months ended June 30
Other Postretirement Benefits
2016

 
2015

 
2016

 
2015

Service cost

$64

 

$70

 

$32

 

$35

Interest cost
130

 
124

 
65

 
62

Expected return on plan assets
(4
)
 
(4
)
 
(2
)
 
(2
)
Amortization of prior service credits
(62
)
 
(68
)
 
(31
)
 
(34
)
Recognized net actuarial loss
12

 
15

 
6

 
11

Settlement and curtailment loss


 
5

 

 
3

Net periodic benefit cost

$140

 

$142

 

$70

 

$75

Net periodic benefit cost included in Earnings/(loss) from operations

$150

 

$161

 

$62

 

$69

Note 12 – Share-Based Compensation and Other Compensation Arrangements
Restricted Stock Units
On February 22, 2016, we granted to our executives 777,837 restricted stock units (RSUs) as part of our long-term incentive program with a grant date fair value of $117.50 per unit. The RSUs granted under this program will vest and settle in common stock (on a one-for-one basis) on the third anniversary of the grant date.
Performance-Based Restricted Stock Units
On February 22, 2016, we granted to our executives 721,176 performance-based restricted stock units (PBRSUs) as part of our long-term incentive program with a grant date fair value of $126.74 per unit. Compensation expense for the award is recognized over the three-year performance period based upon the grant date fair value estimated using a Monte-Carlo simulation model. The model used the following assumptions: expected volatility of 22.44% based upon historical stock volatility, a risk-free interest rate of 0.92%, and no expected dividend yield because the units earn dividend equivalents.

20


Performance Awards
On February 22, 2016, we granted to our executives performance awards as part of our long-term incentive program with a payout based on the achievement of financial goals for the three-year period ending December 31, 2018. At June 30, 2016, the minimum payout amount is $0 and the maximum amount we could be required to pay out is $351.
Note 13 – Shareholders' Equity
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive income/(loss) (AOCI) by component for the six and three months ended June 30, 2016 and 2015 were as follows:
 
Currency Translation Adjustments

 
Unrealized Gains and Losses on Certain Investments

 
Unrealized Gains and Losses on Derivative Instruments

 
Defined Benefit Pension Plans & Other Postretirement Benefits

 
Total (1)

Balance at January 1, 2015

$53

 

($8
)
 

($136
)
 

($13,812
)
 

($13,903
)
Other comprehensive income/(loss) before reclassifications
(44
)
 
4

 
(66
)
 
31

 
(75
)
Amounts reclassified from AOCI

 

 
28

 
530

(2) 
558

Net current period Other comprehensive income/(loss)
(44
)
 
4

 
(38
)
 
561

 
483

Balance at June 30, 2015

$9

 

($4
)
 

($174
)
 

($13,251
)
 

($13,420
)
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016

($39
)
 

 

($197
)
 

($12,512
)
 

($12,748
)
Other comprehensive income/(loss) before reclassifications
7

 
(1
)
 
41

 
(385
)
 
(338
)
Amounts reclassified from AOCI

 

 
43

 
248

(2) 
291

Net current period Other comprehensive income/(loss)
7

 
(1
)
 
84

 
(137
)
 
(47
)
Balance at June 30, 2016

($32
)
 

($1
)
 

($113
)
 

($12,649
)
 

($12,795
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2015

($35
)
 

($7
)
 

($215
)
 

($13,558
)
 

($13,815
)
Other comprehensive income before reclassifications
44

 
3

 
25

 
31

 
103

Amounts reclassified from AOCI

 

 
16

 
276

(2) 
292

Net current period Other comprehensive income
44

 
3

 
41

 
307

 
395

Balance at June 30, 2015

$9

 

($4
)
 

($174
)
 

($13,251
)
 

($13,420
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016

($16
)
 

($2
)
 

($116
)
 

($12,704
)
 

($12,838
)
Other comprehensive income/(loss) before reclassifications
(16
)
 
1

 
(17
)
 
(65
)
 
(97
)
Amounts reclassified from AOCI

 

 
20

 
120

(2) 
140

Net current period Other comprehensive income/(loss)
(16
)
 
1

 
3

 
55

 
43

Balance at June 30, 2016

($32
)
 

($1
)
 

($113
)
 

($12,649
)
 

($12,795
)
(1)     Net of tax.
(2) 
Primarily relates to amortization of actuarial losses for the six months and three months ended June 30, 2015 totaling $511 and $267 (net of tax of ($284) and ($147)) and for the six and three months ended June 30, 2016 totaling $261 and $130 (net of tax of ($145) and ($73)). These are included in the net periodic pension cost of which a portion is allocated to production as inventoried costs. See Note 11.

21


Note 14 – Derivative Financial Instruments
Cash Flow Hedges
Our cash flow hedges include foreign currency forward contracts and commodity purchase contracts. We use foreign currency forward contracts to manage currency risk associated with certain transactions, specifically forecasted sales and purchases made in foreign currencies. Our foreign currency contracts hedge forecasted transactions through 2021. We use commodity derivatives, such as fixed-price purchase commitments to hedge against potentially unfavorable price changes for items used in production. Our commodity contracts hedge forecasted transactions through 2020.
Fair Value Hedges
Interest rate swaps under which we agree to pay variable rates of interest are designated as fair value hedges of fixed-rate debt. The net change in fair value of the derivatives and the hedged items is reported in Boeing Capital interest expense.
Derivative Instruments Not Receiving Hedge Accounting Treatment
We have entered into agreements to purchase and sell aluminum to address long-term strategic sourcing objectives and international business requirements. These agreements are derivative instruments for accounting purposes. The quantities of aluminum in these agreements offset and are priced at prevailing market prices. We also hold certain foreign currency forward contracts which do not qualify for hedge accounting treatment.
Notional Amounts and Fair Values
The notional amounts and fair values of derivative instruments in the Condensed Consolidated Statements of Financial Position were as follows:
  
Notional amounts (1)
Other assets
Accrued liabilities
  
June 30
2016

December 31
2015

June 30
2016

December 31
2015

June 30
2016

December 31
2015

Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts

$2,435


$2,727


$47


$23


($206
)

($304
)
Interest rate contracts
125

125

11

9




Commodity contracts
32

40

2

2

(7
)
(13
)
Derivatives not receiving hedge accounting treatment:
 
 
 
 
 
 
Foreign exchange contracts
440

436

10

4

(12
)
(11
)
Commodity contracts
716

725





 
 
Total derivatives

$3,748


$4,053

70

38

(225
)
(328
)
Netting arrangements
 
 
(43
)
(23
)
43

23

Net recorded balance
 
 

$27


$15


($182
)

($305
)
(1) 
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

22


Gains/(losses) associated with our cash flow and undesignated hedging transactions and their effect on Other comprehensive income/(loss) and Net earnings were as follows: 
  
Six months ended June 30
 
Three months ended June 30
  
2016

 
2015

 
2016

 
2015

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

$41

 

($66
)
 

($21
)
 

$24

Commodity contracts


 


 
4

 
1

Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts
(38
)
 
(23
)
 
(17
)
 
(14
)
Commodity contracts
(5
)
 
(5
)
 
(3
)
 
(2
)
Forward points recognized in Other income, net:
 
 
 
 
 
 
 
Foreign exchange contracts
4

 
7

 
2

 
2

Undesignated derivatives recognized in Other income, net:
 
 
 
 
 
 
 
Foreign exchange contracts


 
2

 
(2
)
 
3

Based on our portfolio of cash flow hedges, we expect to reclassify losses of $83 (pre-tax) out of Accumulated other comprehensive loss into earnings during the next 12 months. Ineffectiveness related to our hedges recognized in Other income was insignificant for the six and three months ended June 30, 2016 and 2015.
We have derivative instruments with credit-risk-related contingent features. For foreign exchange contracts with original maturities of at least five years, our derivative counterparties could require settlement if we default on our five-year credit facility. For certain commodity contracts, our counterparties could require collateral posted in an amount determined by our credit ratings. The fair value of foreign exchange and commodity contracts that have credit-risk-related contingent features that are in a net liability position at June 30, 2016 was $40. At June 30, 2016, there was no collateral posted related to our derivatives.

23


Note 15 – Fair Value Measurements
The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
 
June 30, 2016
 
December 31, 2015
 
Total

 
Level 1

 
Level 2

 
Total

 
Level 1

 
Level 2

Assets
 
 
 
 
 
 
 
 
 
 
 
Money market funds

$2,817

 

$2,817

 
 
 

$4,504

 

$4,504

 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
199

 
 
 

$199

 
87

 
 
 

$87

Corporate notes
210

 
 
 
210

 
79

 
 
 
79

U.S. government agencies
88

 
 
 
88

 
83

 
 
 
83

Other
47

 
47

 
 
 
20

 
20

 
 
Derivatives
27

 
 
 
27

 
15

 
 
 
15

Total assets

$3,388

 

$2,864

 

$524

 

$4,788

 

$4,524

 

$264

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

($182
)
 
 
 

($182
)
 

($305
)
 
 
 

($305
)
Total liabilities

($182
)
 

 

($182
)
 

($305
)