BOEING CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations and Financial Condition Overview The global outbreak of COVID-19, 787 production issues and associated rework, and the residual impacts of the 737 MAX grounding in 2019 continue to have significant adverse impacts on our business and are expected to continue to negatively impact revenue, earnings and operating cash flow in future quarters. They are also having a significant impact on our liquidity - see Liquidity Matters in Note 1 to our Condensed Consolidated Financial Statements for a further discussion of liquidity and additional actions we are taking in response to these challenges. The COVID-19 pandemic has caused an unprecedented shock to demand for commercial air travel, creating a tremendous challenge for our customers, our business and the entire commercial aerospace manufacturing and services sectors. The latest International Air Transport Association (IATA) forecast projects recovery of passenger traffic in 2021 to approximately 40% of 2019 levels, as international markets see continued reopening challenges. Additionally, global economic activity is improving, but continues to be impacted by COVID-19, and governments continue to severely restrict travel to contain the spread of the virus. While recovery is accelerating, we continue to expect that that it will remain uneven as travel restrictions and varying regional travel protocols continue to impact air travel. Generally, we expect domestic travel to recover faster than international travel. As a result, we expect the narrow-body market to recover faster than the wide-body market. Also, the pace of the commercial market recovery will be heavily dependent on COVID-19 infection rates, vaccination rates, and government travel and other restrictions on trade and commercial activity. Demand for dedicated freighters continues to be strong, underpinned by a strong recovery in global trade and overall air cargo growth. Overall cargo capacity remains challenged given the large impact that COVID-19 has had on international passenger operations, which also carry cargo. Airline financial performance, which also plays a role in the demand for new capacity, has been adversely impacted by the COVID-19 pandemic. According to IATA, net losses for the airline industry were $138 billion in 2020 and are expected to be approximately $52 billion in 2021. Our customers are taking actions to combat the effects of the COVID-19 pandemic on the market by preserving liquidity. This comes in many forms such as deferrals of advances and other payments to suppliers, deferrals of deliveries, reduced spending on services, and, in some cases, cancellation of orders. While the outlook is improving and we have seen an increase in new orders in 2021, we continue to face a challenging environment in the near to medium term as airlines have adjusted to reduced traffic which in turn has resulted in lower demand for commercial aerospace products and services. The current environment is also affecting the financial viability of some airlines. We continue to expect commercial air travel to return to 2019 levels in 2023 to 2024. We expect it will take a few years beyond that for the industry to return to long-term trend growth. To balance the supply and demand given the COVID-19 shock and to preserve our long-term potential and competitiveness, we have reduced the production rates of several of our Commercial Airplanes (BCA) programs. These rate decisions are based on our ongoing assessments of the demand environment and availability of aircraft financing. There is significant uncertainty with respect to when commercial air traffic levels will recover, and whether, and at what point, capacity will return to and/or exceed pre-COVID-19 levels. During the fourth quarter of 2020, we made adjustments to our estimates regarding timing of 777X entry into service. We now anticipate that the first 777X delivery will occur in late 2023. We will closely monitor the key factors that affect backlog and future demand for each of our commercial aircraft programs, including customers’ evolving fleet plans, the wide-body replacement cycle and the cargo market. We will maintain a disciplined rate management process, and make adjustments as appropriate in the future. Notwithstanding the changes we have made to production rates, risk remains that further reductions will be required. Additionally, if we are unable to make timely deliveries of the large number of aircraft in inventory as of September 30, 2021, future revenues, earnings and cash flows will be adversely impacted. 38 Table of Contents Deliveries and production have also been impacted by production issues and associated rework. For example, deliveries of the 787 are currently paused and the production rate has been reduced while we focus on inspections and rework and continue to engage in detailed discussions with the Federal Aviation Administration (FAA) regarding required actions for resuming deliveries. Risk remains that these issues may continue to impact the timing of delivery of airplanes in inventory and/or our ability to achieve planned production rates. Revenues, earnings, and cash flows will continue to be impacted until we are able to resume timely deliveries. The long-term outlook for the industry remains positive due to the fundamental drivers of air travel demand: economic growth, increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. The shock from COVID-19 has reduced the near to medium term demand, but our Commercial Market Outlook forecast projects a 4% growth rate for passenger and cargo traffic over a 20 year period. Based on long-term global economic growth projections of 2.7% average annual GDP growth, we project demand for approximately 43,610 new airplanes over the next 20 years. The industry remains vulnerable to exogenous developments including fuel price spikes, credit market shocks, acts of terrorism, natural disasters, conflicts, epidemics, pandemics and increased global environmental regulations. The Continuing Resolution (CR), enacted by U.S. Congress on September 30, 2021, continues federal funding at FY21 appropriated levels through December 3, 2021. Congress and the President must enact either full-year FY22 appropriations bills or an additional CR to fund government departments and agencies beyond December 3, 2021 or a government shutdown could result, which may impact the Company’s operations. Deliveries of the 737 MAX resumed in the fourth quarter of 2020, when the FAA rescinded the order that grounded 737 MAX aircraft in the U.S. In addition, other non-U.S. civil aviation authorities, including the Brazilian National Civil Aviation Agency, Transport Canada, and the European Union Aviation Safety Agency (EASA) have subsequently approved return of operations, allowing us to resume deliveries in those jurisdictions. About 175 countries have approved the resumption of 737 MAX operations. Orders to suspend operations of 737 MAX aircraft from certain non-U.S. civil aviation authorities, including the Civil Aviation Administration of China, are still in effect. The grounding has had a significant adverse impact on our operations and creates significant uncertainty. We are focused on safely returning the 737 MAX to service for all of our customers. At Global Services (BGS), while the outlook is improving, we are continuing to see a direct impact on our commercial supply chain business as fewer flights and more aircraft parked and/or retired result in a decreased demand for our parts and logistics offerings. Additionally, our commercial customers are curtailing discretionary spending, such as modifications and upgrades and focusing on required maintenance. Similar to BCA, we expect a multi-year recovery period for the commercial services business. The demand outlook for our government services business, which in 2019 accounted for just under half of BGS revenue, remains stable. At Defense, Space & Security (BDS), we continue to see a healthy market with solid demand for our major platforms and programs both domestically and internationally. However, while we continue to experience near-term production disruptions and inefficiencies due to COVID-19 impacts, we are seeing improvements in 2021. We have implemented procedures to promote employee safety in our facilities, including more frequent and enhanced cleaning and adjusted schedules and work flows to support physical distancing. These actions have resulted, and will continue to result, in increased operating costs. In addition, a number of our suppliers have suspended or otherwise reduced their operations, and we are experiencing some supply chain shortages. Our suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of COVID-19. We continue to monitor the health and stability of the supply chain as we ramp up production. We also continue to have large numbers of employees working from home. These measures and disruptions have reduced overall productivity and adversely impacted our financial position, results of operations, and cash flows. We expect further adverse impacts in future quarters. 39 Table of Contents On September 9, 2021, President Biden signed an Executive Order mandating vaccinations for the federal workforce and federal contractors. On September 24, 2021, the Administration released implementation guidelines, which require that all federal contractors and other workers at federal contractor workplaces either be fully vaccinated or have an approved reasonable accommodation for disability or sincerely held religious belief, and requirements to follow CDC guidance at contractor workplaces. Boeing is requiring our U.S.-based workers to be fully vaccinated or have an approved reasonable accommodation by December 8, 2021. We will be monitoring these requirements and their implementation for any potential impacts to our operations. In July 2020, we announced business transformation efforts to assess our business across five key pillars: infrastructure, overhead and organization, portfolio and investments, supply chain health and operational excellence. We continue to make progress across all five key pillars as we utilize a lower production rate environment to transform and improve our business processes. Within the infrastructure pillar we are assessing our overall facility requirements in light of reduced demand in our commercial businesses and remote and virtual work opportunities for large numbers of our workforce. The consolidation of the 787 production in South Carolina during the first quarter of 2021 is an example of this. We also anticipate a reduction of approximately 30% in office space needs compared to our pre-COVID capacity. During 2020 and 2021, we have made certain reductions to our footprint and are planning to implement further reductions in 2021 and over the next few years. However, as we consolidate our footprint, terminate leases and dispose of properties, we may incur near term adverse impacts to earnings. The overhead and organization pillar is focused on our cost structure and how we are organized so we can right size our workforce and simplify and reduce management layers and bureaucracy. We have recorded severance costs for approximately 19,000 employees. The portfolio and investments pillar includes aligning our portfolio and investments to focus on our core business and the changes in market conditions. Through our portfolio and investment prioritization, we are reducing research and development and capital expenditures. The supply chain pillar is focused on supply chain health and stability, reducing indirect procurement spend and streamlining our transportation, logistics and warehousing approach. We are reducing indirect spend by reducing expenditures in areas such as freight and logistics, purchased services and others. The operational excellence pillar is focused on improving performance, enhancing quality and reducing rework. For example, our information technology teams are evaluating opportunities to form or expand strategic partnerships with vendors that allow us to simplify and optimize our operations, and reduce overall costs. These activities are not intended to constrain our capacity, but rather to enable the Company to emerge stronger and be more resilient when the market recovers. We expect that successful execution of these measures will improve near term liquidity and long term cost competitiveness. 40 Table of Contents Consolidated Results of Operations The following table summarizes key indicators of consolidated results of operations: (Dollars in millions, except per share data) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Revenues $47,493 $42,854 $15,278 $14,139 GAAP Earnings/(loss) from operations $1,269 ($4,718) $329 ($401) Operating margins 2.7 % (11.0) % 2.2 % (2.8) % Effective income tax rate 62.2 % 40.1 % 57.4 % 49.6 % Net loss attributable to Boeing Shareholders ($59) ($3,453) ($109) ($449) Diluted loss per share ($0.10) ($6.10) ($0.19) ($0.79) Non-GAAP (1) Core operating earnings/(loss) $461 ($5,773) $59 ($754) Core operating margins 1.0 % (13.5) % 0.4 % (5.3) % Core loss per share ($1.72) ($7.88) ($0.60) ($1.39) (1) These measures exclude certain components of pension and other postretirement benefit expense. See pages 57-59 for important information about these non-GAAP measures and reconciliations to the most comparable GAAP measures. Revenues The following table summarizes Revenues: (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Commercial Airplanes $14,743 $11,434 $4,459 $3,596 Defense, Space & Security 20,678 19,478 6,617 6,848 Global Services 12,037 11,810 4,221 3,694 Boeing Capital 209 205 71 71 Unallocated items, eliminations and other (174) (73) (90) (70) Total $47,493 $42,854 $15,278 $14,139 Revenues for the nine months ended September 30, 2021 increased by $4,639 million compared with the same period in 2020 driven by higher revenues at BCA, BDS, and BGS. BCA revenues increased by $3,309 million primarily driven by higher 737 MAX deliveries due to recertification and return to service in many jurisdictions and $370 million of charges for 737 MAX customer considerations in 2020, partially offset by lower 787 deliveries. BDS revenues increased by $1,200 million primarily from higher revenue on the KC-46A Tanker program and the absence of charges related to the KC-46A Tanker program in 2021. BGS revenues increased by $227 million primarily due to higher commercial services and government services volume. While commercial services volume is beginning to recover, it remains below pre-pandemic levels. Revenues for the three months ended September 30, 2021 increased by $1,139 million driven by higher revenues at BCA and BGS, partially offset by lower revenues at BDS. BCA revenues increased by $863 million primarily driven by higher 737 MAX deliveries due to recertification and return to service in many jurisdictions, partially offset by lower 787 deliveries. BDS revenues decreased by $231 million primarily 41 Table of Contents due to changes on Commercial Crew in 2021 and net lower volume. BGS revenues increased by $527 million primarily due to higher commercial services volume. Revenues will continue to be significantly impacted until deliveries ramp up and the commercial airline industry recovers from the impacts of COVID-19. Earnings/(Loss) From Operations The following table summarizes Earnings/(loss) from operations: (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Commercial Airplanes ($2,021) ($6,199) ($693) ($1,369) Defense, Space & Security 1,799 1,037 436 628 Global Services 1,616 307 644 271 Boeing Capital 99 47 42 30 Segment operating earnings/(loss) 1,493 (4,808) 429 (440) Pension FAS/CAS service cost adjustment 576 773 192 260 Postretirement FAS/CAS service cost adjustment 232 282 78 93 Unallocated items, eliminations and other (1,032) (965) (370) (314) Earnings/(loss) from operations (GAAP) $1,269 ($4,718) $329 ($401) FAS/CAS service cost adjustment * (808) (1,055) (270) (353) Core operating earnings/(loss) (Non-GAAP) ** $461 ($5,773) $59 ($754) * The FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. ** Core operating earnings/(loss) is a Non-GAAP measure that excludes the FAS/CAS service cost adjustment. See pages 57-59. Earnings from operations for the nine months ended September 30, 2021 were $1,269 million, compared with a loss of $4,718 million during the same period in 2020. BCA loss from operations decreased by $4,178 million due to higher 737 MAX deliveries, lower period expense, lower 737 MAX customer considerations and lower research and development spending, partially offset by lower 787 deliveries. BDS earnings from operations increased by $762 million largely due to the absence of charges related to the KC-46A Tanker program in 2021.The increase was partially offset by a $185 million increase to the reach-forward loss on Commercial Crew in the third quarter of 2021 driven by the second uncrewed Orbital Flight Test now anticipated in 2022 and the latest assessment of remaining work, and higher charges in 2021 on VC-25B. BGS earnings from operations increased by $1,309 million primarily due to charges incurred in the second quarter of 2020 as a result of the COVID-19 pandemic, higher commercial services volume and severance costs of $130 million in 2020. Charges in the second quarter of 2020 included $370 million for higher expected credit losses primarily driven by customer liquidity issues, $237 million of inventory write-downs and $153 million of related impairments of distribution rights primarily driven by airlines' decisions to retire certain aircraft, $99 million of contract termination and facility impairments charges. Earnings from operations for the three months ended September 30, 2021 were $329 million, compared with a loss of $401 million during the same period in 2020. BCA loss from operations decreased by $676 million due to higher 737 MAX deliveries, lower period expense, partially offset by favorable 737 MAX customer considerations in 2020 and lower 787 deliveries. BDS earnings from operations decreased by $192 million, primarily due to the $185 million charge on Commercial Crew. BGS earnings from operations increased by $373 million, primarily due to higher commercial services volume and severance charges incurred in 2020. 42 Table of Contents Lower commercial airplane deliveries and the COVID-19 pandemic will continue to have a significant adverse impact on future earnings and margins until deliveries ramp up and return to historical levels. Core operating earnings for the nine and three months ended September 30, 2021 were $461 million and $59 million, compared with core operating losses of $5,773 million and $754 million during the same periods in 2020, primarily due to earnings and losses from operations at BCA, BDS and BGS as described above. Unallocated Items, Eliminations and Other The most significant items included in Unallocated items, eliminations and other are shown in the following table: (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Share-based plans ($171) ($80) ($29) ($37) Deferred compensation (86) 34 8 (39) Amortization of previously capitalized interest (66) (69) (22) (19) Research and development expense, net (144) (160) (59) (44) Eliminations and other unallocated items (565) (690) (268) (175) Unallocated items, eliminations and other ($1,032) ($965) ($370) ($314) Share-based plans expense for the nine and three months ended September 30, 2021 increased by $91 million and decreased by $8 million compared with the same periods in 2020. The higher expense during the nine months ended September 30, 2021 was primarily related to a one-time stock grant of Restricted Stock Units to most employees in December 2020. This grant was in lieu of a 2021 salary merit increase. Deferred compensation expense was $86 million for the nine months ended September 30, 2021 compared with income of $34 million in the same period in 2020. Deferred compensation was income of $8 million for the three months ended September 30, 2021 compared with expense of $39 million in the same period in 2020. Changes in deferred compensation were primarily driven by broad market conditions and changes in our stock price. Unallocated research and development expense for the nine and three months ended September 30, 2021 were relatively consistent with the same periods in 2020 and primarily related to enterprise investments in product development. Eliminations and other unallocated items for the nine months ended September 30, 2021 decreased by $125 million compared with the same period in 2020 primarily due to higher income on operating investments in 2021. Eliminations and other unallocated items for the three months ended September 30, 2021 increased by $93 million compared with the same period in 2020 primarily due to the timing of expense allocations, partially offset by higher income on operating investments in 2021. 43 Table of Contents Net periodic pension benefit costs included in Earnings/(loss) from operations were as follows: (Dollars in millions) Nine months ended September 30 Three months ended September 30 Pension Plans 2021 2020 2021 2020 Allocated to business segments ($578) ($775) ($192) ($261) Pension FAS/CAS service cost adjustment 576 773 192 260 Net periodic benefit cost included in Earnings/(loss) from operations ($2) ($2) $— ($1) The pension FAS/CAS service cost adjustment recognized in Earnings/(loss) from operations during the nine and three months ended September 30, 2021 decreased by $197 million and $68 million compared with the same periods in the prior year, due to reductions in allocated pension cost year over year. The net periodic benefit cost included in Earnings/(loss) from operations during 2021 and 2020 reflects the fact that nonunion and the majority of union employees have transitioned to company funded defined contribution retirement savings plans and do not generate ongoing Financial Accounting Standards (FAS) service costs. For discussion related to Postretirement Plans, see Note 12 to our Condensed Consolidated Financial Statements. Other Earnings Items (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Earnings/(loss) from operations $1,269 ($4,718) $329 ($401) Other income, net 419 325 30 119 Interest and debt expense (2,021) (1,458) (669) (643) Loss before income taxes (333) (5,851) (310) (925) Income tax benefit 207 2,349 178 459 Net loss from continuing operations (126) (3,502) (132) (466) Less: Net loss attributable to noncontrolling interest (67) (49) (23) (17) Net loss attributable to Boeing Shareholders ($59) ($3,453) ($109) ($449) Other income, net increased by $94 million and decreased by $89 million during the nine and three months ended September 30, 2021 compared with the same periods in the prior year, primarily due to changes in non-operating pension income. Non-operating pension income increased $126 million during the nine months ended September 30, 2021 compared with the same period in 2020 primarily due to lower interest cost and higher expected return on plan assets, partially offset by higher settlement charges and higher amortization of net actuarial losses. Non-operating pension income decreased $55 million during the three months ended September 30, 2021 compared with the same period in 2020 primarily due to higher settlement charges and higher amortization of actuarial losses, partially offset by lower interest cost and higher expected return on plan assets. Non-operating postretirement income was $16 million and $6 million during the nine and three months ended September 30, 2021 compared with $37 million and $10 million of expense during the same periods in 2020. Interest and debt expense for the nine and three months ended September 30, 2021 was higher compared with the same periods in the prior year primarily as a result of higher debt balances. For discussion related to Income Taxes, see Note 3 to our Condensed Consolidated Financial Statements. 44 Table of Contents Total Costs and Expenses (“Cost of Sales”) Cost of sales, for both products and services, consists primarily of raw materials, parts, sub-assemblies, labor, overhead and subcontracting costs. Our BCA segment predominantly uses program accounting to account for cost of sales. Under program accounting, cost of sales for each commercial airplane program equals the product of (i) revenue recognized in connection with customer deliveries and (ii) the estimated cost of sales percentage applicable to the total remaining program. For long-term contracts, the amount reported as cost of sales is recognized as incurred. Substantially all contracts at our BDS segment and certain contracts at our BGS segment are long-term contracts with the U.S. government and other customers that generally extend over several years. Costs on these contracts are recorded as incurred. Cost of sales for commercial spare parts is recorded at average cost. The following table summarizes cost of sales: (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 Change 2021 2020 Change Cost of sales $41,962 $42,851 ($889) $13,566 $13,105 $461 Cost of sales as a % of Revenues 88.4 % 100.0 % (11.6) % 88.8 % 92.7 % (3.9) % Cost of sales for the nine months ended September 30, 2021 decreased by $889 million, or 2% compared with the same period in 2020, primarily due to higher period expense at BCA and BGS in 2020 and charges recorded at BDS in 2020 on the KC-46A Tanker program, partially offset by higher revenues in 2021. Cost of sales for the three months ended September 30, 2021 increased by $461 million, or 4% compared with the same period in 2020, primarily due to higher BCA and BGS revenues in 2021, partially offset by lower period expenses at BCA. Cost of sales as a percentage of Revenues decreased during the nine months ended September 30, 2021 compared with the same period in 2020 primarily due to higher period expense at BCA and BGS in 2020, higher revenues in 2021 and KC-46A Tanker charges recorded at BDS in 2020. Cost of sales as a percentage of Revenues decreased during the three months ended September 30, 2021 compared with the same period in 2020 primarily due to higher revenues at BCA and BGS in 2021. Research and Development The following table summarizes our Research and development expense: (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Commercial Airplanes $817 $1,107 $293 $321 Defense, Space & Security 530 494 193 164 Global Services 80 110 30 45 Other 144 160 59 44 Total $1,571 $1,871 $575 $574 Research and development expense decreased by $300 million during the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to lower spending on the 777X program and lower BCA and enterprise investments in product development. Research and development expense during the three months ended September 30, 2021 was consistent with the same period in 2020. 45 Table of Contents Backlog (Dollars in millions) September 30 2021 December 31 2020 Commercial Airplanes $289,644 $281,588 Defense, Space & Security 58,435 60,847 Global Services 18,781 20,632 Unallocated items, eliminations and other 248 337 Total Backlog $367,108 $363,404 Contractual backlog $348,193 $339,309 Unobligated backlog 18,915 24,095 Total Backlog $367,108 $363,404 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 during the nine months ended September 30, 2021 was primarily due to orders in excess of deliveries, changes in price escalation, and changes in orders that in our assessment do not meet the accounting requirements of Accounting Standards Codification (ASC) 606 for inclusion in backlog, partially offset by cancellations. During 2021, we have had higher ASC 606 adjustments of 787 orders as a result of delivery delays related to the inspections and rework. If 737 MAX aircraft remain grounded in certain jurisdictions for an extended period of time, 787 aircraft deliveries continue to be paused, and/or if entry into service of the 777X, 737 MAX 7 and/or 737 MAX 10 is further delayed, we may experience additional reductions to backlog and/or significant order cancellations. Additionally, we may continue to experience fewer new orders and increased cancellations across all of our commercial airplane programs as a result of the COVID-19 pandemic and associated impacts on demand. Unobligated backlog includes U.S. and non-U.S. government definitive contracts for which funding has not been authorized. The decrease during the nine months ended September 30, 2021 was primarily due to reclassifications to contractual backlog related to BDS and BGS contracts, partially offset by contract awards. Additional Considerations Global Trade We continually monitor the global trade environment in response to geopolitical economic developments, as well as changes in tariffs, trade agreements, or sanctions that may impact the Company. The global economy continues to experience significant adverse impacts due to the COVID-19 pandemic, including a decline in overall trade in general and in aerospace in particular. There is a great deal of uncertainty regarding the duration, scale, and localization of these impacts to the global economy and governments are enacting a wide range of responses to mitigate the unfolding economic impacts. We are closely monitoring the current impact and potential future economic consequences of COVID-19 to the global economy, the aerospace sector, and our Company. These adverse economic impacts have resulted in fewer orders than previously anticipated for our commercial aircraft. China is a significant market for commercial airplanes and represents a significant component of our commercial airplanes backlog. Since 2018, the U.S. and China imposed an escalating series of tariffs on each other’s imports. Certain aircraft parts and components that Boeing procures are subject to these tariffs. The U.S. and China entered into a Phase I agreement in January 2020. However, implementation of this agreement is incomplete and overall diplomatic relations between the U.S. and China have deteriorated. We continue monitoring developments for potential adverse impacts to the Company. Beginning in June 2018, the U.S. Government has imposed tariffs on steel and aluminum imports. In response to these tariffs, several major U.S. trading partners have imposed, or announced their intention to impose, tariffs on U.S. goods. In May 2019, the U.S. Government, Mexico and Canada reached an agreement to end the steel and aluminum tariffs between these countries. Implementation of the U.S./ 46 Table of Contents Mexico/Canada Free Trade Agreement (USMCA) will also result in lower tariffs. We continue to monitor the potential for any extra costs that may result from the remaining global tariffs. The current status of U.S.-Russia relations is creating an adverse climate for our business. The U.S. Government continues to impose and/or consider imposing sanctions on certain businesses and individuals in Russia. We continue to monitor and evaluate additional sanctions and export restrictions that may be imposed by the U.S. Government and any responses from Russia that could directly affect our supply chain, business partners or customers. We also continue to support the 737 MAX return to service in Russia. The U.S. and European Union (EU) have been engaged in two long-running disputes at the World Trade Organization (WTO) relating to large civil aircraft. As part of those disputes, in October 2019, the WTO authorized the U.S. to impose approximately $7.50 billion in annual tariffs on EU products in connection with the EU’s provision of eight instances of launch aid subsidies to Airbus. Following this authorization, the U.S. began to impose 15% tariffs on new Airbus airplanes imported into the U.S. as well as fuselages that Airbus manufactures in Europe and imports into the U.S. In October 2020, the WTO authorized the EU to impose approximately $3.99 billion in annual tariffs on U.S. products in connection with a tax incentive used by Boeing in Washington state that has since been repealed. Shortly thereafter, the EU began to impose 15% tariffs on Boeing airplanes imported into the EU. On June 15, 2021, the U.S. and EU announced that they had reached a cooperative framework to address the large civil aircraft disputes. As part of the framework, among other items, both sides announced an intent to continue to suspend tariffs related to the disputes for five years. The U.S. and U.K. announced a similar agreement on June 17, 2021. Segment Results of Operations and Financial Condition Commercial Airplanes Business Environment and Trends See Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the impacts of COVID-19 on the airline industry environment. Results of Operations (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Revenues $14,743 $11,434 $4,459 $3,596 Loss from operations ($2,021) ($6,199) ($693) ($1,369) Operating margins (13.7) % (54.2) % (15.5) % (38.1) % Revenues BCA revenues increased by $3,309 million for the nine months ended September 30, 2021 compared with the same period in 2020 primarily driven by higher 737 MAX deliveries due to recertification and return to service in many jurisdictions, partially offset by lower 787 deliveries. Revenue was also lower in the prior year period due to $370 million of 737 MAX customer considerations. BCA revenues increased by $863 million for the three months ended September 30, 2021 compared with the same period in 2020 primarily driven by higher 737 MAX deliveries due to recertification and return to service in many jurisdictions, partially offset by lower 787 deliveries. While we resumed deliveries of 737 MAX aircraft in December 2020, the 737 MAX grounding is still in effect in certain non-U.S. jurisdictions and 787 deliveries are currently paused. Revenues will continue to be significantly impacted until deliveries ramp up and the commercial airline industry recovers from the impacts of COVID-19. 47 Table of Contents Commercial airplane deliveries, including intercompany deliveries, were as follows: 737 * 747 767 * 777 787 Total Deliveries during the first nine months of 2021 179 (12) 4 24 (9) 20 14 241 Deliveries during the first nine months of 2020 12 (10) 2 20 (8) 15 49 98 Deliveries during the third quarter of 2021 66 (4) 2 11 (5) 6 0 85 Deliveries during the third quarter of 2020 3 (3) 1 6 (2) 5 13 28 Cumulative deliveries as of 9/30/2021 7,661 1,564 1,230 1,673 1,006 Cumulative deliveries as of 12/31/2020 7,482 1,560 1,206 1,653 992 * Intercompany deliveries identified by parentheses. Loss From Operations BCA loss from operations was $2,021 million for nine months ended September 30, 2021 compared with $6,199 million in the same period in 2020 reflecting higher 737 MAX deliveries, lower period expense, lower 737 MAX customer considerations and lower research and development spending, partially offset by lower 787 deliveries. Period expense for the nine months ended September 30, 2021 included $1,501 million of abnormal production costs related to 737 MAX and $183 million of abnormal production costs related to the 787 program. Period expense for the nine months ended September 30, 2020, included $2,099 million of abnormal production costs related to 737 MAX, $610 million of severance costs, $270 million of abnormal production costs from the temporary suspension of Puget Sound operations in response to COVID-19, and a $336 million charge related to 737NG frame fitting component repair costs. BCA loss from operations was $693 million for three months ended September 30, 2021 compared with $1,369 million in the same period in 2020 reflecting higher 737 MAX deliveries, lower period expense, partially offset by favorable 737 MAX customer considerations in 2020 and lower 787 deliveries. Period expense for the three months ended September 30, 2021 included $418 million of abnormal production costs related to 737 MAX and $183 million of abnormal production costs related to the 787 program. Period expense for the three months ended September 30, 2020, included $590 million of abnormal production costs related to 737 MAX and $142 million of severance costs. Lower commercial airplane deliveries and the COVID-19 pandemic will continue to have a significant adverse impact on future earnings and margins until deliveries ramp up and return to historical levels. Backlog Our total backlog represents the estimated transaction prices on unsatisfied and partially satisfied performance obligations to our customers where we believe it is probable that we will collect the consideration due and where no contingencies remain before we and the customer are required to perform. Backlog does not include prospective orders where customer controlled contingencies remain, such as the customer receiving approval from its board of directors, shareholders or government or completing financing arrangements. All such contingencies must be satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly certain. Backlog excludes options and Boeing Capital (BCC) orders. A number of our customers may have contractual remedies, including rights to reject individual airplane deliveries if the actual delivery date is significantly later than the contractual delivery date. We address customer claims and requests for other contractual relief as they arise. The value of orders in backlog is adjusted as changes to price and schedule are agreed to with customers and is reported in accordance with the requirements of Topic 606. BCA total backlog increased from $281,588 million as of December 31, 2020 to $289,644 million at September 30, 2021 reflecting new orders in excess of deliveries, changes in projected price escalation and changes in orders that in our assessment do not meet the accounting requirements of ASC 606 for inclusion in backlog, partially offset by aircraft order cancellations. Aircraft order cancellations during the nine months ended September 30, 2021 totaled $25,376 million and primarily relate to 737 MAX and 787 aircraft. ASC 606 adjustments for the nine months ended September 30, 2021 resulted in an increase to 48 Table of Contents backlog of $3,846 million primarily due to 777X aircraft, partially offset by 737 MAX and 787 aircraft. The ASC 606 adjustments include aircraft orders where a customer controlled contingency now exists, as well as orders where we can no longer assert that the customer is committed to perform or that it is probable that the customer will pay the full amount of consideration when it is due. If 737 MAX aircraft remain grounded in certain jurisdictions for an extended period of time, 787 aircraft deliveries continue to be paused, and/or if entry into service of the 777X, 737 MAX 7 and/or 737 MAX 10 is further delayed, we may experience additional reductions to backlog and/or significant order cancellations. Additionally, we may continue to experience fewer new orders and increased cancellations across all of our commercial airplane programs as a result the COVID-19 pandemic and associated impacts on demand. Accounting Quantity The following table provides details of the accounting quantities and firm orders by program. Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders. Firm orders include military derivative aircraft that are not included in program accounting quantities. All revenues and costs associated with military derivative aircraft production are reported in the BDS segment. Program As of 9/30/2021 737 747 767 777 777X 787 † Program accounting quantities 10,400 1,574 1,243 1,740 350 1,500 Undelivered units under firm orders 3,334 9 97 57 253 413 (13) Cumulative firm orders 10,995 1,573 1,327 1,730 253 1,419 As of 12/31/2020 737 747 767 777 777X 787 † Program accounting quantities 10,000 1,574 1,207 1,700 350 1,500 Undelivered units under firm orders 3,282 8 75 41 191 458 (22) Cumulative firm orders 10,764 1,568 1,281 1,694 191 1,450 † Aircraft ordered by BCC are identified in parentheses. Program Highlights 737 Program The accounting quantity for the 737 program increased by 400 during the nine months ended September 30, 2021 due to the program's normal progress of obtaining additional orders and delivering airplanes. We continue to make progress on the certification of the 737 MAX 7 and 737 MAX 10. We currently anticipate the first delivery of 737 MAX 7 in 2022 and the 737 MAX 10 in 2023. See further discussion of the 737 MAX Grounding and COVID-19 Impacts in Note 9 to our Condensed Consolidated Financial Statements . 747 Program We are currently producing at a rate of 0.5 aircraft per month. We will complete production of the 747 in 2022. We believe that ending production of the 747 will not have a material impact on our financial position, results of operations or cash flows. 767 Program The accounting quantity for the 767 program increased by 36 and 12 units during the nine and three months ended September 30, 2021 due to the program's normal progress of obtaining additional orders and delivering airplanes. The 767 assembly line includes the commercial program and a derivative to support the tanker program. The commercial program has near break-even gross margins. We are currently producing at a rate of 3 aircraft per month. 49 Table of Contents 777 and 777X Programs The accounting quantity for the 777 program increased by 40 units during the three months ended September 30, 2021 due to the program's normal progress of obtaining additional orders and delivering airplanes. There were no changes to the accounting quantity for the 777X program during the nine months ended September 30, 2021. The production rate expectation for the combined 777/777X program remains at 2 per month in 2021. In 2013, we launched the 777X-8 and 777X-9, which feature new composite wings, new engines and folding wing-tips. The first flight of the 777X was completed during the first quarter of 2020. We continue to anticipate that the first 777X delivery will occur in late 2023. We recorded a $6.5 billion reach-forward loss on the 777X program in the fourth quarter of 2020. We did not record an increase to the reach-forward loss in the first three quarters of 2021. The 777X fourth quarter 2020 revised schedule and reach-forward loss reflected a number of factors, including an updated assessment of global certification requirements informed by continued discussions with regulators and a management decision in the fourth quarter of 2020 to make modifications to the aircraft’s design, an updated assessment of COVID-19 impacts on market demand, and discussions with our customers with respect to aircraft delivery timing. These factors resulted in adjustments to production rates and the program accounting quantity, increased change incorporation costs, and associated customer and supply chain impacts. The timing of the certification will ultimately be determined by the regulators, and further determinations with respect to anticipated certification requirements could result in additional delays in entry into service and/or additional cost increases. The level of profitability on the 777X program will be subject to a number of factors. These factors include continued market uncertainty, the impacts of COVID-19 on our production system as well as impacts on our supply chain and customers, customer negotiations, further production rate adjustments for the 777X or other commercial aircraft programs, contraction of the accounting quantity and potential risks associated with the testing program and the timing of aircraft certification. One or more of these factors could result in additional reach-forward losses on the 777X program in future periods. 787 Program During 2020, we experienced significant reductions in deliveries due to the impacts of COVID-19 on our customers as well as production issues and associated rework. At December 31, 2020, we had approximately 80 787 aircraft in inventory. Deliveries resumed in March 2021 and two aircraft were delivered in the first quarter of 2021. We delivered 12 aircraft in the second quarter prior to deliveries being paused in May 2021. Deliveries remained paused during the third quarter of 2021. At September 30, 2021 we have approximately 105 aircraft in inventory. We have identified production quality issues, including in our supply chain, which have contributed to the pause in 787 deliveries. In July 2021, we announced that we were reprioritizing production resources to support inspections and rework. We continue to conduct inspections and rework and are engaging in detailed discussions with the FAA regarding required actions for resuming delivery of the 787. We are currently producing at a rate of 2 per month and now expect to continue to produce at this rate until deliveries resume. We have determined that in the current environment a production rate of 2 per month represents an abnormally low production rate, and we have also determined that rework costs are excessive and should also be accounted for as abnormal production costs that are being expensed as incurred. As a result of ongoing rework and lower production rates, we expect to incur approximately $1 billion of abnormal production costs on a cumulative basis. We expect the production rate to return to 5 per month over time after deliveries resume. When deliveries resume, we plan to prioritize delivering aircraft from inventory. We continue to work with customers and suppliers regarding timing of future deliveries and production rate changes. We are also continuing to implement changes in the production process designed to ensure that newly-built airplanes meet our specifications and do not require further inspections. The exact timing of deliveries and future production rates will depend upon ongoing inspections and rework, ongoing customer and supplier engagement, production stability and our activities with the FAA. During the first quarter of 2021, we consolidated 787 production in South Carolina, in line with our previous assumptions, which did not have a significant financial impact on the program. The 787 program 50 Table of Contents has near break-even gross margins. The production issues and associated rework, as well as the temporary rate reduction and delivery pause, are pressuring gross margins and, as discussed above, are expected to result in further abnormal costs in future quarters that will be expensed as incurred. China is a significant market for the 787 program, and if the program is unable to obtain orders from China in future quarters, we may be required to further adjust production rate assumptions in future periods. If we are required to further reduce the accounting quantity and/or production rates, experience further delivery delays, or experience other factors that result in lower margins, the program could record a reach-forward loss in future periods. Additional Considerations The development and ongoing production of commercial aircraft is extremely complex, involving extensive coordination and integration with suppliers and highly-skilled labor from employees and other partners. Meeting or exceeding our performance and reliability standards, as well as those of customers and regulators, can be costly and technologically challenging, such as the 787 production issues and associated rework. In addition, the introduction of new aircraft and derivatives, such as the 777X and 737 MAX derivatives, involves increased risks associated with meeting development, production and certification schedules. These challenges include increased global regulatory scrutiny of all development aircraft in the wake of the 737 MAX accidents. 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 due to changes in the inflation rate or other economic indicators, performance or reliability issues involving completed aircraft, capital expenditures and other costs associated with increasing or adding new production capacity, learning curve, additional change incorporation, achieving anticipated cost reductions, the addition of regulatory requirements in connection with certification in one or more jurisdictions, flight test and certification schedules, costs, schedule and demand for new airplanes and derivatives and status of customer claims, supplier claims or assertions and other contractual negotiations. While we believe the cost and revenue estimates incorporated in the consolidated financial statements are appropriate, the technical complexity of our airplane programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, order cancellations or other financially significant exposure. Defense, Space & Security Business Environment and Trends United States Government Defense Environment Overview The Omnibus appropriations acts for fiscal year 2021 (FY21), enacted in December 2020, provided FY21 appropriations for government departments and agencies, including $704 billion for the United States Department of Defense (U.S. DoD), $23 billion for the National Aeronautics and Space Administration (NASA) and $18 billion for the FAA. FY21 appropriations included funding for Boeing’s major programs, such as the F/A-18 Super Hornet, F-15EX, CH-47 Chinook, AH-64 Apache, V-22 Osprey, KC-46A Tanker, P-8 Poseidon and Space Launch System. In May 2021, the U.S. government released the President’s budget request for fiscal year 2022 (FY22), which included $715 billion in funding for the U.S. DoD, $25 billion in funding for NASA and $19 billion for the FAA. While the President’s budget request for FY22 includes funding for a majority of Boeing’s programs, it did not include funding for F/A-18 Super Hornet, P-8 Poseidon and CH-47F Block II production aircraft. While there is some continued congressional support for F/A-18 and CH-47F Block II production aircraft for FY22, there is ongoing uncertainty with respect to these and other program-level appropriations for FY22 and future fiscal years. These programs also continue to pursue non-U.S. sales opportunities. 51 Table of Contents The Continuing Resolution (CR), enacted by U.S. Congress on September 30, 2021, continues federal funding at FY21 appropriated levels through December 3, 2021. Congress and the President must enact either full-year FY22 appropriations bills or an additional CR to fund government departments and agencies beyond December 3, 2021 or a government shutdown could result, which may impact the Company’s operations. Future budget cuts or investment priority changes, including changes associated with the authorizations and appropriations process, could result in reductions, cancellations, and/or delays of existing contracts or programs. Any of these impacts could have a material effect on our results of operations, financial position, and/or cash flows. Results of Operations (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Revenues $20,678 $19,478 $6,617 $6,848 Earnings from operations $1,799 $1,037 $436 $628 Operating margins 8.7 % 5.3 % 6.6 % 9.2 % 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 period may not be indicative of future operating results. In addition, depending on the customer and their funding sources, our orders might be structured as annual follow on contracts, or as one large multi-year order or long-term award. As a result, period-to-period comparisons of backlog are not necessarily indicative of future workloads. The following discussions of comparative results among periods should be viewed in this context. Deliveries of units for new-build production aircraft, including remanufactures and modifications, were as follows: Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 F/A-18 Models 15 14 4 5 F-15 Models 11 3 3 CH-47 Chinook (New) 12 19 6 4 CH-47 Chinook (Renewed) 5 3 1 2 AH-64 Apache (New) 19 18 4 7 AH-64 Apache (Remanufactured) 42 44 11 12 P-8 Models 11 9 5 3 KC-46 Tanker 7 10 3 4 Total 122 120 37 37 52 Table of Contents Revenues BDS revenues for the nine months ended September 30, 2021 increased by $1,200 million compared with the same period in 2020, primarily due to higher revenue on the KC-46A Tanker program due to new orders for 27 aircraft received during the first quarter of 2021, and the absence of charges related to the KC-46A Tanker program in 2021, which reduced revenue in 2020. Cumulative contract catch-up adjustments for the nine months ended September 30, 2021 were $432 million less unfavorable than the comparable period in the prior year due to the absence of Tanker charges. BDS revenues for the three months ended September 30, 2021 decreased by $231 million compared with the same period in 2020, primarily due higher net unfavorable cumulative contract adjustments of $34 million compared to the prior year period. This was largely to due changes on Commercial Crew during the quarter, discussed below. Net lower volume also contributed to the decrease. Earnings From Operations BDS earnings from operations for the nine months ended September 30, 2021 increased by $762 million largely due to the absence of charges related to the KC-46A Tanker program. The first quarter of 2020 included charges of $827 million and $168 million related to KC-46A Tanker and VC-25B. The first quarter of 2021 included an increase to the reach-forward loss on VC-25B of $318 million, which is largely due to COVID-19 impacts and performance issues at a key supplier. The third quarter of 2021 included an increase to the reach-forward loss on Commercial Crew of $185 million driven by the second uncrewed Orbital Flight Test now anticipated in 2022 and the latest assessment of remaining work. As a result, the net unfavorable cumulative contract catch-up adjustments for the nine months ended September 30, 2021 were $707 million lower than the comparable period in the prior year. BDS earnings from operations for the three months ended September 30, 2021 decreased $192 million compared with the same period in 2020 largely due to higher unfavorable net contract cumulative catch-up adjustments which were $37 million more unfavorable than the prior year period largely due to the $185 million charge on Commercial Crew. BDS earnings from operations includes equity earnings of $48 million and $11 million for the nine and three months ended September 30, 2021 compared with equity earnings of $45 million and $10 million for the same periods in 2020. Backlog BDS backlog decreased from $60,847 million as of December 31, 2020 to $58,435 million at September 30, 2021, primarily due to revenue recognized on contracts awarded in prior periods. Additional Considerations Our BDS business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases, the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Examples of these programs include Ground-based Midcourse Defense, Proprietary and Space Launch System programs. Some of our development programs are contracted on a fixed-price basis and BDS customers are increasingly seeking fixed-price proposals for new programs. Examples of significant fixed-price development programs include Commercial Crew, KC-46A Tanker, MQ-25, T-7A Red Hawk, VC-25B, and commercial and military satellites. New programs could also have risk for reach-forward loss upon contract award and during the period of contract performance. Many development 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 53 Table of Contents 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. Global Services Results of Operations (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Revenues $12,037 $11,810 $4,221 $3,694 Earnings from operations $1,616 $307 $644 $271 Operating margins 13.4 % 2.6 % 15.3 % 7.3 % Revenues BGS revenues for the nine months ended September 30, 2021 increased by $227 million compared with the same period in 2020 primarily due to higher commercial services and government services volume. While commercial services volume is beginning to recover, it remains below pre-pandemic levels. The net favorable impact of cumulative contract catch-up adjustments for the nine months ended September 30, 2021 were consistent with the comparable period in the prior year. We expect the impacts of the COVID-19 pandemic to continue to have an adverse impact on BGS commercial revenues in future quarters until the commercial airline industry environment recovers. BGS revenues for the three months ended September 30, 2021 increased by $527 million compared with the same period in 2020 primarily due to higher commercial services volume. While commercial services volume is beginning to recover, it remains below pre-pandemic levels. The net favorable impact of cumulative contract catch-up adjustments for the three months ended September 30, 2021 were $54 million lower than the comparable period in the prior year. We expect the impacts of the COVID-19 pandemic to continue to have an adverse impact on BGS commercial revenues in future quarters until the commercial airline industry environment recovers. Earnings From Operations BGS earnings from operations for the nine months ended September 30, 2021 increased by $1,309 million compared with the same period in 2020, primarily due to charges incurred in the second quarter of 2020 due to the COVID-19 pandemic, as well as higher commercial services volume. Charges in the second quarter of 2020 included $370 million for higher expected credit losses primarily driven by customer liquidity issues, $237 million of inventory write-downs and $153 million of related impairments of distribution rights primarily driven by airlines' decisions to retire certain aircraft and $99 million of contract termination and facility impairments charges. Additionally, severance costs for the nine months ended September 30, 2020 were $130 million. The net favorable impact of cumulative contract catch-up adjustments for the nine months ended September 30, 2021 were $4 million lower than the comparable period in the prior year. BGS earnings from operations for the three months ended September 30, 2021 increased by $373 million compared with the same period in 2020, primarily due to higher commercial services volume, as well as $66 million of severance charges incurred in 2020. The net favorable impact of cumulative contract catch-up adjustments for the three months ended September 30, 2021 were $67 million lower than the comparable period in the prior year. Backlog BGS backlog decreased from $20,632 million as of December 31, 2020 to $18,781 million at September 30, 2021, primarily due to revenue recognized on contracts awarded in prior years. 54 Table of Contents Boeing Capital Results of Operations (Dollars in millions) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Revenues $209 $205 $71 $71 Earnings from operations $99 $47 $42 $30 Operating margins 47.4 % 22.9 % 59.2 % 42.3 % 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 for the nine months ended September 30, 2021 increased by $4 million compared with the same period in 2020 primarily due to higher gains on re-lease of assets. BCC’s revenues for the three months ended September 30, 2021 were consistent with the same period in 2020. Earnings From Operations BCC’s earnings from operations are presented net of interest expense, provision for (recovery of) losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Earnings from operations for the nine months ended September 30, 2021 increased by $52 million compared with the same period in 2020 primarily due to lower asset impairment expense. Earnings from operations for the three months ended September 30, 2021 increased by $12 million compared with the same period in 2020 primarily due to lower provision for losses and lower depreciation expense. Financial Position The following table presents selected financial data for BCC: (Dollars in millions) September 30 2021 December 31 2020 Customer financing and investment portfolio, net $1,782 $1,961 Other assets, primarily cash and short-term investments 408 402 Total assets $2,190 $2,363 Other liabilities, primarily deferred income taxes $351 $392 Debt, including intercompany loans 1,525 1,640 Equity 314 331 Total liabilities and equity $2,190 $2,363 Debt-to-equity ratio 4.9-to-1 5-to-1 BCC’s customer financing and investment portfolio at September 30, 2021 decreased $179 million from December 31, 2020 primarily due to note payoffs and portfolio run-off. BCC enters into certain intercompany transactions with Boeing, reflected in Unallocated items, eliminations and other, in the form of intercompany guarantees and other subsidies that mitigate the effects of certain credit quality or asset impairment issues on the BCC segment. There are no uncommitted aircraft subject to leases scheduled to be returned off lease in the next 12 months. 55 Table of Contents Liquidity and Capital Resources Cash Flow Summary (Dollars in millions) Nine months ended September 30 2021 2020 Net loss ($126) ($3,502) Non-cash items 2,942 2,874 Changes in working capital (6,948) (13,773) Net cash used by operating activities (4,132) (14,401) Net cash provided/(used) by investing activities 7,389 (16,823) Net cash (used)/provided by financing activities (1,238) 32,274 Effect of exchange rate changes on cash and cash equivalents (34) 26 Net increase in cash & cash equivalents, including restricted 1,985 1,076 Cash & cash equivalents, including restricted, at beginning of year 7,835 9,571 Cash & cash equivalents, including restricted, at end of period $9,820 $10,647 Operating Activities Net cash used by operating activities was $4.1 billion during the nine months ended September 30, 2021, compared with $14.4 billion during the same period in 2020. The $10.3 billion year over year improvement is primarily driven by nearly break-even earnings in 2021 and improved working capital. The changes in working capital reflect the significant increase in commercial airplane inventory in 2020 driven by lower deliveries due to the COVID-19 pandemic and the 737 MAX grounding. In 2021, inventories stabilized as the decrease in 737 MAX inventory following the resumption of 737 MAX deliveries was offset by the continued buildup of 787 aircraft caused by production issues and 777X inventory growth Compensation payments to 737 MAX customers totaled $2.0 billion and $1.7 billion during the nine months ended September 30, 2021 and 2020. In the first quarter of 2021, we paid $0.7 billion consistent with the terms of the Deferred Prosecution Agreement between Boeing and the U.S. Department of Justice. Additionally, in the third quarter of 2021, we received income tax refunds of $1.3 billion. Cash provided by Advances and progress billings was $0.8 billion in 2021, as compared with $0.4 billion in 2020. The reduction in 787 deliveries and the residual impacts of the 737 MAX grounding are expected to continue to have a significant negative impact on our operating cash flows during 2021. Payables to suppliers who elected to participate in supply chain financing programs decreased by $1.0 billion during the nine months ended September 30, 2021 and 2020. The decrease for both periods is primarily due to reductions in commercial purchases from suppliers and timing of payments. Supply chain financing is not material to our overall liquidity. Investing Activities Cash provided by investing activities was $7.4 billion during the nine months ended September 30, 2021, compared with cash used of $16.8 billion during the same period in 2020, due to net proceeds from investments of $7.8 billion in 2021 compared to net contributions to investments of $16.1 billion in 2020. In the nine months ended September 30, 2021 and 2020, capital expenditures totaled $0.8 billion and $1.0 billion. We expect capital expenditures in 2021 to be lower than in 2020. Financing Activities Cash used by financing activities was $1.2 billion during the nine months ended September 30, 2021 compared with cash provided of $32.3 billion during the same period in 2020. During the nine months ended September 30, 2021, net repayments were $1.2 billion compared with net borrowings of $33.6 billion in the same period in 2020. The absence of dividends in 2021 reflects the Company’s decision in March 2020 to suspend the declaration or payment of dividends until further notice. For further discussion see Liquidity Matters in Note 1 to our Condensed Consolidated Financial Statements. As of September 30, 2021 the total debt balance was $62.4 billion, down from $63.6 billion at December 31, 2020. At September 30, 2021, $5.4 billion of debt was classified as short-term. Debt, 56 Table of Contents including intercompany loans, attributable to BCC totaled $1.5 billion, $0.3 billion of which was classified as short-term. Capital Resources The impacts of the COVID-19 pandemic, 737 MAX grounding, and reduction in 787 deliveries are having a significant negative impact on our liquidity and ongoing operations and creating significant uncertainty. We have and are continuing to take significant actions to manage and preserve our liquidity. For further discussion see Liquidity Matters in Note 1 to our Condensed Consolidated Financial Statements. At September 30, 2021, we had $9.8 billion of cash and $10.2 billion of short term investments. At September 30, 2021, we had $14.8 billion of unused borrowing capacity on revolving credit line agreements, of which $3.1 billion was set to expire in October 2021, $3.2 billion expires in October 2022, $5.3 billion expires in March 2023, and $3.2 billion expires in October 2024. In October 2021, we renewed the 364-day facility for $3.1 billion, which now expires in October 2022. This 364-day facility has a one-year term out option that allows us to extend the maturity of any borrowings one additional year. We anticipate that these credit lines will remain undrawn and primarily serve as back-up liquidity to support our general corporate borrowing needs. Any future borrowings may affect our credit ratings and are subject to various debt covenants. At September 30, 2021, 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. Customer Financing commitments totaled $13.3 billion and $11.5 billion at September 30, 2021 and December 31, 2020. The increase relates to new financing commitments. 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. Off-Balance Sheet Arrangements We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion of these arrangements, see Note 10 to our Condensed 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 17 to our Condensed Consolidated Financial Statements. Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $629 million at September 30, 2021. For additional information, see Note 9 to our Condensed Consolidated Financial Statements. Non-GAAP Measures Core Operating Earnings, Core Operating Margin and Core Earnings Per Share Our unaudited condensed consolidated interim financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) which we supplement with certain non-GAAP financial information. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such 57 Table of Contents 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 FAS/CAS service cost adjustment. The FAS/CAS service cost adjustment represents the difference between the Financial Accounting Standards (FAS) pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. Core earnings per share excludes both the FAS/CAS service cost adjustment and non-operating pension and postretirement expenses. Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. Pension costs, comprising service and prior service costs computed in accordance with GAAP are allocated to BCA and certain BGS businesses supporting commercial customers. Pension costs allocated to BDS and BGS businesses supporting government customers are computed in accordance with U.S. Government Cost Accounting Standards (CAS), which employ different actuarial assumptions and accounting conventions than GAAP. CAS costs are allocable to government contracts. Other postretirement benefit costs are allocated to all business segments based on CAS, which is generally based on benefits paid. The Pension FAS/CAS service cost adjustments recognized in Earnings/(loss) from operations were benefits of $576 million and $192 million for the nine and three months ended September 30, 2021, compared with benefits of $773 million and $260 million for the nine and three months ended September 30, 2020. The lower benefits in 2021 were primarily due to reductions in allocated pension cost year over year. The non-operating pension expenses included in Other income, net were benefits of $381 million and $29 million for the nine and three months ended September 30, 2021, compared with benefits of $255 million and $84 million for the nine and three months ended September 30, 2020. The higher benefits for the nine months ended September 30, 2021 were primarily due to lower interest cost and higher expected return on plan assets, partially offset by higher settlement charges and higher amortization of actuarial losses. The lower benefits for the three months ended September 30, 2021 were primarily due to higher settlement charges and higher amortization of actuarial losses, partially offset by lower interest cost and higher expected return on plan assets. For further discussion of pension and other postretirement costs see the Management’s Discussion and Analysis on page 44 of this Form 10-Q and on page 57 of our 2020 Annual Report on Form 10-K. 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 costs primarily represent costs driven by market factors and costs not allocable to U.S. government contracts. 58 Table of Contents Reconciliation of GAAP Measures to Non-GAAP Measures The table below reconciles the non-GAAP financial measures of core operating earnings/(loss), core operating margin and core earnings/(loss) per share with the most directly comparable GAAP financial measures of earnings/(loss) from operations, operating margins and diluted earnings/(loss) per share. (Dollars in millions, except per share data) Nine months ended September 30 Three months ended September 30 2021 2020 2021 2020 Revenues $47,493 $42,854 $15,278 $14,139 Earnings/(loss) from operations, as reported $1,269 ($4,718) $329 ($401) Operating margins 2.7 % (11.0) % 2.2 % (2.8) % Pension FAS/CAS service cost adjustment (1) ($576) ($773) ($192) ($260) Postretirement FAS/CAS service cost adjustment (1) (232) (282) (78) (93) FAS/CAS service cost adjustment (1) ($808) ($1,055) ($270) ($353) Core operating earnings/(loss) (non-GAAP) $461 ($5,773) $59 ($754) Core operating margins (non-GAAP) 1.0 % (13.5) % 0.4 % (5.3) % Diluted loss per share, as reported ($0.10) ($6.10) ($0.19) ($0.79) Pension FAS/CAS service cost adjustment (1) (0.98) (1.36) (0.33) (0.46) Postretirement FAS/CAS service cost adjustment (1) (0.40) (0.50) (0.13) (0.16) Non-operating pension expense (2) (0.64) (0.46) (0.05) (0.16) Non-operating postretirement expense (2) (0.03) 0.07 (0.01) 0.02 Provision for deferred income taxes on adjustments (3) 0.43 0.47 0.11 0.16 Core loss per share (non-GAAP) ($1.72) ($7.88) ($0.60) ($1.39) Weighted average diluted shares (in millions) 587.3 566.3 589.0 566.6 (1) FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. This adjustment is excluded from Core operating earnings/(loss) (non-GAAP). (2) Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. These expenses are included in Other income, net and are excluded from Core loss per share (non-GAAP). (3) The income tax impact is calculated using the U.S. corporate statutory tax rate.