Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations and Financial Condition
Overview
The COVID-19 pandemic, 787 production issues and associated rework, and the residual impacts of the 737 MAX grounding 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. The COVID-19 pandemic has caused an unprecedented shock to demand for air travel, creating a tremendous challenge for our customers, our business and the entire commercial aerospace manufacturing and services sector. The latest International Air Transport Association (IATA) release reported that passenger traffic in 2021 recovered to approximately 40% of 2019 levels, as international markets saw continued reopening challenges. Travel restrictions and global economic activity were improving at the end of 2021, but improvements were delayed by the global outbreak of the Omicron variants. Governments continue to change travel policy and restrictions due to the virus as well as the war in Ukraine, with global sanctions and economic effects raising energy and other costs. We continue to expect that the recovery will remain uneven as travel restrictions and varying regional travel protocols continue to ease and lessen their impact on air travel.
Generally, we continue to 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 resultant government restrictions. We are seeing a strong recovery in travel demand for our airline customers in North America and Europe. 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 influences 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. IATA also forecasts $11.5 billion of losses for the industry globally in 2022, with approximately $10 billion of profits in North America driven by the robust domestic market being more than offset by losses in other regions. 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 continues to improve, 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 balanced market conditions. As we managed through the effects of the COVID-19 pandemic, we reduced the production rates of several of our Commercial Airplanes (BCA) programs. These rate decisions continue to be based on our ongoing assessments of the demand environment and availability of aircraft financing. There is uncertainty with respect to when commercial air traffic capacity will return to and/or exceed pre-COVID-19 levels. We 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 have implemented appropriate production rate adjustments in response to these factors, but risk remains that we will decide to implement further rate reductions in future quarters. Additionally, if we are unable to make timely deliveries of the large number of aircraft in inventory as of March 31, 2022, future revenues, earnings and cash flows will be adversely impacted.
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During the first quarter of 2022, we made adjustments to our estimates regarding timing of 777X-9 entry into service. We now anticipate that the first 777X-9 delivery will be delayed until 2025, based on an updated assessment of the time required to meet certification requirements. During the first quarter of 2022 we launched the 777X-8 freighter and we expect first delivery to be in 2027.
The 737 MAX 7 and MAX 10 models are also currently going through Federal Aviation Administration (FAA) certification activities. The 737 MAX 7 completed FAA certification flight testing in 2021 and is expected to enter service later in 2022. The 737 MAX 10 is expected to begin FAA certification flight testing later in 2022 and enter service in 2023. Section 116 of the December 2020 Aircraft Certification, Safety and Accountability Act (ACSAA) prohibits the FAA from issuing a type certificate to aircraft after December 27, 2022 unless the aircraft’s flight crew alerting system meets certain requirements. As a result, if the MAX 7 and MAX 10 aircraft are not certified before December 27, 2022 we may encounter further certification delays. We are working closely with the FAA on implementation of ACSAA legislation and expect any necessary actions to be defined later this year. If we are unable to achieve entry into service consistent with our current assumptions, future revenues, earnings and cash flows will be adversely impacted.
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. Over 185 countries have approved the resumption of 737 MAX operations. The Civil Aviation Administration of China issued an airworthiness directive in the fourth quarter of 2021 outlining actions required for airlines to return to service. The 737 MAX has yet to return to service in China. While we expect 737 MAX deliveries to China to resume in 2022, subject to final regulatory approvals, risk remains around the timing and rate of those deliveries. Orders to suspend operations of 737 MAX aircraft from non-U.S. civil aviation authorities are still in effect in a small number of countries.
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 rework of undelivered aircraft and continue to engage in detailed discussions with the FAA regarding required actions for resuming deliveries. Risk remains that these issues may continue to impact the timing of airplane deliveries 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 gross domestic product (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.
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 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 remains stable; government services comprises approximately half of BGS revenue, which is unchanged from pre-pandemic levels.
At Defense, Space & Security (BDS), we continue to see stable demand reflecting the important role our products and services have in ensuring our national security. Outside of the U.S., we are seeing similar solid demand as governments prioritize security, defense technology and global cooperation given evolving threats. However, we continue to experience near-term production disruptions and inefficiencies due to COVID-19 impacts.
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As a result of the war in Ukraine, we recorded earnings charges totaling $212 million during the first quarter of 2022, primarily related to asset impairments. We have temporarily closed our facilities in Ukraine and Russia and are focused on supporting our employees in those countries. We have also suspended our business in Russia, including parts, maintenance and technical support for Russian airlines, and purchases from Russian suppliers. We are complying with U.S. and international sanctions and export control restrictions. We have sufficient material and parts to avoid production disruptions in the near-term, but future impacts to our production from disruptions in our supply chain are possible. The war in Ukraine is also impacting our airline and lessor customers. We are closely monitoring developments and potential Boeing impacts, and will continue to take mitigating actions as appropriate.
In addition, we and our suppliers are experiencing supply chain disruptions as a result of the impacts of COVID-19, global supply chain constraints, and labor shortages. We and our suppliers are also experiencing inflationary pressures. We continue to monitor the health and stability of the supply chain as we ramp up production. These measures and disruptions have reduced overall productivity and adversely impacted our financial position, results of operations and cash flows.
We continue to transform and improve our business processes. These activities are not intended to constrain our capacity but 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.
Consolidated Results of Operations
The following table summarizes key indicators of consolidated results of operations:
(Dollars in millions, except per share data) Three months ended March 31
2022 2021
Revenues $13,991 $15,217
GAAP
Loss from operations ($1,169) ($83)
Operating margins (8.4) % (0.5) %
Effective income tax rate 23.2 % 1.9 %
Net loss attributable to Boeing Shareholders ($1,219) ($537)
Diluted loss per share ($2.06) ($0.92)
Non-GAAP (1)
Core operating loss ($1,452) ($353)
Core operating margins (10.4) % (2.3) %
Core loss per share ($2.75) ($1.53)
(1) These measures exclude certain components of pension and other postretirement benefit expense. See pages 48-49 for important information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.
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Revenues
The following table summarizes Revenues:
(Dollars in millions) Three months ended March 31
2022 2021
Commercial Airplanes $4,161 $4,269
Defense, Space & Security 5,483 7,185
Global Services 4,314 3,749
Boeing Capital 46 60
Unallocated items, eliminations and other (13) (46)
Total $13,991 $15,217
Revenues for the three months ended March 31, 2022 decreased by $1,226 million compared with the same period in 2021 driven by lower revenues at BCA and BDS, partially offset by higher revenues at BGS. BCA revenues decreased by $108 million primarily driven by lower wide-body deliveries, partially offset by higher 737 MAX deliveries. BDS revenues decreased by $1,702 million primarily due to net unfavorable effects of cumulative contract catch-up adjustments, lower revenue on the KC-46A Tanker program resulting from new orders for 27 aircraft received during the first quarter of 2021 and lower P-8 volume resulting from reduced production rates. BGS revenues increased by $565 million primarily due to higher commercial services volume. While commercial services volume is recovering, it remains below pre-pandemic levels.
Revenues will continue to be significantly impacted until the global supply chain stabilizes, labor shortages diminish, deliveries ramp up, and commercial airlines recover from the impacts of COVID-19.
Loss From Operations
The following table summarizes Loss from operations:
(Dollars in millions) Three months ended March 31
2022 2021
Commercial Airplanes ($859) ($856)
Defense, Space & Security (929) 405
Global Services 632 441
Boeing Capital (36) 21
Segment operating (loss)/earnings (1,192) 11
Pension FAS/CAS service cost adjustment 208 193
Postretirement FAS/CAS service cost adjustment 75 77
Unallocated items, eliminations and other (260) (364)
Loss from operations (GAAP) ($1,169) ($83)
FAS/CAS service cost adjustment * (283) (270)
Core operating loss (Non-GAAP) ** ($1,452) ($353)
* 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 48-49.
Loss from operations for the three months ended March 31, 2022 increased by $1,086 million compared with the same period in 2021. BDS loss from operations for the three months ended March 31, 2022 was $929 million, compared with earnings from operations of $405 million during the same period in 2021,
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primarily due to charges on the VC-25B, T-7A Red Hawk, KC-46A Tanker, and MQ-25 programs in the first quarter of 2022. BGS earnings from operations increased by $191 million primarily due to higher commercial services volume and favorable mix.
Core operating losses for the three months ended March 31, 2022 increased by $1,099 million compared to the same period in 2021, primarily due to changes in Segment operating (loss)/earnings as described above.
For discussion related to Postretirement Plans, see Note 11 to our Condensed Consolidated Financial Statements.
Unallocated Items, Eliminations and Other
The most significant items included in Unallocated items, eliminations and other are shown in the following table:
(Dollars in millions) Three months ended March 31
2022 2021
Share-based plans ($83) ($128)
Deferred compensation 42 (52)
Amortization of previously capitalized interest (23) (22)
Research and development expense, net (52) (42)
Eliminations and other unallocated items (144) (120)
Unallocated items, eliminations and other ($260) ($364)
Share-based plans expense for the three months ended March 31, 2022 decreased by $45 million compared with the same period in 2021 due to expenses incurred in 2021 associated with a grant of restricted stock units to most employees in December 2020.
Deferred compensation income was $42 million for the three months ended March 31, 2022 compared with expense of $52 million in the same period in 2021 primarily driven by broad market conditions and changes in our stock price.
Unallocated research and development expense for the three months ended March 31, 2022 was largely consistent with the same period in 2021.
Other Earnings Items
(Dollars in millions) Three months ended March 31
2022 2021
Loss from operations ($1,169) ($83)
Other income, net 181 190
Interest and debt expense (630) (679)
Loss before income taxes (1,618) (572)
Income tax benefit 376 11
Net loss from continuing operations (1,242) (561)
Less: Net loss attributable to noncontrolling interest (23) (24)
Net loss attributable to Boeing Shareholders ($1,219) ($537)
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For the three months ended March 31, 2022 and 2021, non-operating pension income included in Other income, net was $220 million and $177 million. Non-operating pension income increased $43 million during the three months ended March 31, 2022 compared with the same period in 2021 primarily due to lower amortization of net actuarial losses, partially offset by higher interest cost and lower expected return on plan assets. Non-operating postretirement income was $15 million during the three months ended March 31, 2022 compared with $5 million of expense during the same period in 2021.
Other income, net included losses of $50 million during the three months ended March 31, 2022 reclassified from Accumulated other comprehensive loss (AOCI) associated with certain cash flow hedges because it is probable the forecasted transactions will not occur.
Interest and debt expense for the three months ended March 31, 2022 was lower compared with the same period in the prior year primarily as a result of lower debt balances.
For discussion related to Income Taxes, see Note 3 to our Condensed Consolidated Financial Statements.
Total Costs and Expenses (“Cost of Sales”)
Cost of sales, for both products and services, consists primarily of raw materials, parts, sub-assemblies, labor, overhead and subcontracting costs. Our 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) Three months ended March 31
2022 2021 Change
Cost of sales $13,645 $13,808 ($163)
Cost of sales as a % of Revenues
97.5 % 90.7 % 6.8 %
Cost of sales for the three months ended March 31, 2022 decreased by $163 million, or 1% compared with the same period in 2021, primarily due to lower revenues at BCA and BDS in 2022, partially offset by charges recorded at BDS in 2022 and higher revenues at BGS in 2022. Cost of sales as a percentage of Revenues increased during the three months ended March 31, 2022 compared with the same period in 2021 primarily due to higher charges recorded at BDS in 2022 than in 2021.
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Research and Development
Research and development expense, net is summarized in the following table:
(Dollars in millions) Three months ended March 31
2022 2021
Commercial Airplanes $321 $269
Defense, Space & Security 233 163
Global Services 27 25
Other 52 42
Total $633 $499
Research and development expense increased by $134 million during the three months ended March 31, 2022 compared to the same period in 2021. The increase at BCA is due to higher spending on product development. The increase at BDS reflects higher bid and proposal costs and timing of product development expenditures.
Backlog
(Dollars in millions) March 31
2022 December 31
2021
Commercial Airplanes $290,930 $296,882
Defense, Space & Security 59,739 59,828
Global Services 19,822 20,496
Unallocated items, eliminations and other 344 293
Total Backlog $370,835 $377,499
Contractual backlog $348,414 $356,362
Unobligated backlog 22,421 21,137
Total Backlog $370,835 $377,499
Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, orders where customers have the unilateral right to terminate, and unobligated U.S. and non-U.S. government contract funding. The decrease in contractual backlog during the three months ended March 31, 2022 was primarily due to changes in orders that in our assessment do not meet the accounting requirements of Accounting Standards Codification (ASC) 606 for inclusion in backlog and cancellations, partially offset by reclassifications from unobligated backlog and orders in excess of deliveries. During 2022, we have had higher ASC 606 adjustments of 737 MAX and 777X aircraft partially offset by 787 aircraft. If 787 aircraft deliveries continue to be paused, we remain unable to deliver 737 MAX aircraft in China for an extended period of time, and/or 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 increase in unobligated backlog during the three months ended March 31, 2022 was primarily due to contract awards, partially offset by reclassifications to contractual backlog related to BDS and BGS contracts.
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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.
The current state of U.S.-China relations remains a significant watch item. China is a very 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, as of the December 31, 2021 deadline, 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./Mexico/Canada Free Trade Agreement (USMCA) will also result in lower tariffs. The U.S. Government has also reached agreements to ease steel and/or aluminum tariffs with the United Kingdom, the European Union (EU) and Japan. We continue to monitor the potential for any extra costs that may result from the remaining global tariffs.
We are complying with all U.S. and other government export control restrictions and sanctions imposed 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 or other governments, as well as any responses from Russia that could affect our supply chain, business partners or customers, for any additional impacts to our business.
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.
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Results of Operations
(Dollars in millions) Three months ended March 31
2022 2021
Revenues $4,161 $4,269
Loss from operations ($859) ($856)
Operating margins (20.6) % (20.1) %
Revenues
BCA revenues decreased by $108 million for the three months ended March 31, 2022 compared with the same period in 2021 primarily due to lower wide-body deliveries partially offset by higher 737 MAX deliveries.
We resumed deliveries of 737 MAX aircraft in December 2020 following rescission by the FAA of its grounding order. While most non-U.S. jurisdictions have approved return to service of the 737 MAX, the 737 MAX has yet to return to service in China and deliveries have not yet resumed. Labor shortages and supplier issues contributed to lower first quarter 2022 deliveries. 787 deliveries have been paused since May 2021. Revenues will continue to be impacted until deliveries of the 737 MAX further ramp up, deliveries of the 787 resume and the commercial airline industry recovers from the impacts of COVID-19.
Commercial airplane deliveries, including intercompany deliveries, were as follows:
737 * 747 767 * 777 787 Total
Deliveries during the first three months of 2022 86 (5) 1 5 (3) 3 0 95
Deliveries during the first three months of 2021 63 (5) 1 5 (1) 6 2 77
Cumulative deliveries as of 3/31/2022 7,831 1,568 1,243 1,680 1,006
Cumulative deliveries as of 12/31/2021 7,745 1,567 1,238 1,677 1,006
* Intercompany deliveries identified by parentheses.
Loss From Operations
BCA loss from operations was $859 million for three months ended March 31, 2022 compared with $856 million in the same period in 2021. The 2022 loss reflects lower wide-body deliveries partially offset by higher 737 MAX deliveries. Period expense for the three months ended March 31, 2022 included abnormal production costs totaling $500 million including $312 million related to the 787 program and $188 million related to 737 MAX. Period expense for abnormal production costs for the three months ended March 31, 2021 comprised of $568 million related to 737 MAX. Period expenses in the first quarter of 2022 were also higher due to charges related to the war in Ukraine and higher research and development spending.
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 as well as orders where customers have the unilateral right to terminate. 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
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adjusted as changes to price and schedule are agreed to with customers and is reported in accordance with the requirements of ASC 606.
BCA total backlog decreased from $296,882 million as of December 31, 2021 to $290,930 million at March 31, 2022 reflecting an increase in the number of existing orders that in our assessment do not meet the accounting requirements of ASC 606 for inclusion in backlog and order cancellations, partially offset by new orders in excess of deliveries. The net ASC 606 adjustments for the three months ended March 31, 2022 resulted in a decrease to backlog of $12,737 million primarily due to 737 MAX and 777X aircraft, partially offset by 787 aircraft. ASC 606 adjustments include consideration of aircraft orders where a customer controlled contingency may exist, as well as an assessment of whether the customer is committed to perform, impacts of geopolitical events or related sanctions, or whether it is probable that the customer will pay the full amount of consideration when it is due. If 787 aircraft deliveries continue to be paused, we are unable to ramp up deliveries of 737 MAX aircraft, 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 3/31/2022 737 747 767 777 777X 787 †
Program accounting quantities 10,800 1,574 1,255 1,780 400 1,500
Undelivered units under firm orders 3,365 5 103 74 224 405 (11)
Cumulative firm orders 11,196 1,573 1,346 1,754 224 1,411
As of 12/31/2021 737 747 767 777 777X 787 †
Program accounting quantities 10,400 1,574 1,243 1,750 350 1,500
Undelivered units under firm orders 3,414 6 108 58 253 411 (14)
Cumulative firm orders 11,159 1,573 1,346 1,735 253 1,417
† Aircraft ordered by BCC are identified in parentheses.
Program Highlights
737 Program The accounting quantity for the 737 program increased by 400 units during the three months ended March 31, 2022 due to the program's normal progress of obtaining additional orders and delivering airplanes. See further discussion of the 737 MAX 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 expect to complete production of the 747 in the fourth quarter of 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 12 units during the three months ended March 31, 2022 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.
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777 and 777X Programs During the first quarter of 2022, we launched the 777X-8 freighter with first delivery expected in 2027. The accounting quantity for the 777X program increased by 50 units during the three months ended March 31, 2022 reflecting the launch of the 777X-8 freighter.
During the first quarter of 2022, we revised the estimated first delivery date of the 777X-9, previously expected in late 2023, and now expect it will occur in 2025, based on an updated assessment of the time required to meet certification requirements. We are working towards Type Inspection Authorization (TIA) which will enable us to begin FAA certification flight testing. The timing of TIA and 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.
In April 2022, we decided to pause production of the 777X-9 during 2022 and 2023. We expect that the production pause will result in abnormal production costs of approximately $1.5 billion beginning in the second quarter of 2022 and continue until 777X-9 production resumes.
The 777X program has near break-even gross margins at March 31, 2022. 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.
The accounting quantity for the 777 program increased by 30 units during the three months ended March 31, 2022 due to the program's normal progress of obtaining additional orders and delivering airplanes. The production rate for the combined 777/777X program is expected to increase from 2 per month to 3 per month in the second half of 2022.
787 Program At March 31, 2022 we have approximately 115 aircraft in inventory. Deliveries remain paused due to production quality issues. We continue to conduct inspections and rework on undelivered aircraft and engage in detailed discussions with the FAA regarding required actions for resuming delivery of the 787. We are currently producing at very low rates and expect that to continue until deliveries resume, gradually returning to 5 per month over time. In the third quarter of 2021, we determined that in the current environment production rates below 5 per month represent abnormally low production rates and result in abnormal production costs, and that inspections and rework costs on inventoried aircraft are excessive and should also be accounted for as abnormal production costs that are required to be expensed as incurred. As a result of these impacts, we continue to expect to incur approximately $2 billion of abnormal production costs on a cumulative basis with most being incurred by the end of 2023. 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 and rework.
During the fourth quarter of 2021, we recorded a loss of $3.5 billion on the program primarily due to the additional rework, as well as other actions required to resume 787 deliveries, taking longer than expected. These impacts have resulted in longer than expected delivery delays and associated customer considerations.
The timing of the resumption of deliveries and future production rates will depend upon rework, ongoing customer and supplier engagement, production stability and our activities with the FAA. China is a significant market for the 787 program, and if the program is unable to obtain additional orders from China in future quarters, we may be required to further adjust production rate assumptions. 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 additional losses and higher abnormal production costs in future periods.
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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 Consolidated Appropriations Act, 2022, enacted in March 2022, provided FY22 appropriations for government departments and agencies, including $742.3 billion for the U.S. DoD and $24 billion for NASA. The enacted FY22 appropriations included funding for Boeing’s major programs, including the F/A-18 Super Hornet, F-15EX, CH-47 Chinook, AH-64 Apache, V-22 Osprey, KC-46A tanker, and the Space Launch System.
In April 2022, the U.S. government released certain details of the President’s budget request for fiscal year 2023 (FY23), which included requests for $773 billion in funding for the U.S. DoD and $26 billion for NASA. The FY23 defense budget requests funding for many of Boeing’s programs, but does not request funding for F/A-18, CH-47F Block II, V-22, or P-8 production aircraft. These programs also continue to pursue non-U.S. sales opportunities. There is ongoing uncertainty with respect to program-level appropriations for U.S. DoD, NASA and other government agencies for FY23 and beyond. 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.
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Results of Operations
(Dollars in millions) Three months ended March 31
2022 2021
Revenues $5,483 $7,185
(Loss)/earnings from operations ($929) $405
Operating margins (16.9 %) 5.6 %
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:
Three months ended March 31
2022 2021
F/A-18 Models 4 4
F-15 Models 1 3
CH-47 Chinook (New) 4 3
CH-47 Chinook (Renewed) 3 3
AH-64 Apache (New) 7 9
AH-64 Apache (Remanufactured) 15 15
P-8 Models 3 3
KC-46 Tanker 4 2
Total 41 42
Revenues
BDS revenues for the three months ended March 31, 2022 decreased by $1,702 million compared with the same period in 2021, primarily due to lower revenue on the KC-46A Tanker program from new orders for 27 aircraft received during the first quarter of 2021, lower P-8 volume as production was reduced to one per month, and timing of material receipts. Cumulative contract catch-up adjustments for the three months ended March 31, 2022 were $570 million more unfavorable than the comparable period in the prior year largely due to charges on VC-25B, KC-46A Tanker, and MQ-25.
Loss/Earnings From Operations
BDS loss from operations was $929 million for the three months ended March 31, 2022 compared with earnings from operations of $405 million in the same period in 2021 primarily due to charges on the VC-25B, T-7A Red Hawk, KC-46A Tanker, and MQ-25 programs in the first quarter of 2022. During the first quarter of 2022, we recorded a $660 million earnings charge on VC-25B compared to $318 million in the same period in 2021. The charge in the first quarter of 2022 was primarily due to higher supplier costs, higher costs to finalize certain technical requirements and schedule delays. We recorded earnings charges of $367 million related to the T-7A Red Hawk program including a $300 million increase to the estimated losses associated with future production aircraft lots that we believe are probable of being exercised as well as $67 million related to the T-7A Red Hawk Engineering, Manufacturing, and Development (EMD) contract. The increase to the losses associated with future production aircraft is
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primarily due to ongoing supply chain negotiations which are impacted by supply chain constraints, COVID-19, and inflationary pressures. The KC-46A Tanker program recorded earnings charges of $165 million primarily reflecting higher supply chain and other costs. MQ-25 also increased its anticipated loss by $78 million due to additional customer testing requirements and supplier quality challenges. As a result of the earnings charges above, the net unfavorable cumulative contract catch-up adjustments for the three months ended March 31, 2022 were $890 million higher than the comparable period in the prior year.
BDS loss from operations includes equity earnings of $27 million for the three months ended March 31, 2022 compared with $7 million for the same period in 2021.
Backlog
BDS backlog decreased from $59,828 million as of December 31, 2021 to $59,739 million at March 31, 2022, 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 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.
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Global Services
Results of Operations
(Dollars in millions) Three months ended March 31
2022 2021
Revenues $4,314 $3,749
Earnings from operations $632 $441
Operating margins 14.6 % 11.8 %
Revenues
BGS revenues for the three months ended March 31, 2022 increased by $565 million compared with the same period in 2021 primarily due to higher commercial services volume. While commercial services volume is recovering, it remains below pre-pandemic levels. 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 fully recovers. The net favorable impact of cumulative contract catch-up adjustments for the three months ended March 31, 2022 was $49 million lower than the comparable period in the prior year.
Earnings From Operations
BGS earnings from operations for the three months ended March 31, 2022 increased by $191 million compared with the same period in 2021, primarily due to higher commercial services volume and favorable mix. The net favorable impact of cumulative contract catch-up adjustments for the three months ended March 31, 2022 was $64 million lower than the comparable period in the prior year.
Backlog
BGS backlog decreased from $20,496 million as of December 31, 2021 to $19,822 million at March 31, 2022, primarily due to revenue recognized on contracts awarded in prior years.
Boeing Capital
Results of Operations
(Dollars in millions) Three months ended March 31
2022 2021
Revenues $46 $60
(Loss)/earnings from operations ($36) $21
Operating margins (78.3) % 35.0 %
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 three months ended March 31, 2022 decreased by $14 million compared with the same period in 2021 primarily due to lower gains on re-lease of assets.
Loss/Earnings From Operations
BCC’s loss from operations is presented net of interest expense, provision for (recovery of) losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Loss from operations for the three months ended March 31, 2022 was $36 million compared with earnings from
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operations of $21 million in the same period in 2021 primarily due to an increase in the allowance for losses on receivables as a result of the war in Ukraine.
Financial Position
The following table presents selected financial data for BCC:
(Dollars in millions) March 31
2022 December 31
2021
Customer financing and investment portfolio, net $1,641 $1,720
Other assets, primarily cash and short-term investments 339 462
Total assets $1,980 $2,182
Other liabilities, primarily deferred income taxes $173 $347
Debt, including intercompany loans 1,525 1,525
Equity 282 310
Total liabilities and equity $1,980 $2,182
Debt-to-equity ratio 5.4-to-1 4.9-to-1
BCC’s customer financing and investment portfolio at March 31, 2022 decreased $79 million from December 31, 2021 primarily due to an increase in the allowance for losses and portfolio run-off, partially offset by new volume.
BCC enters into certain intercompany transactions with other Boeing segments, 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.
Liquidity and Capital Resources
Cash Flow Summary
(Dollars in millions) Three months ended March 31
2022 2021
Net loss ($1,242) ($561)
Non-cash items 1,312 1,212
Changes in assets and liabilities (3,286) (4,038)
Net cash used by operating activities (3,216) (3,387)
Net cash provided by investing activities 2,965 2,764
Net cash used by financing activities (396) (48)
Effect of exchange rate changes on cash and cash equivalents (3) (18)
Net decrease in cash & cash equivalents, including restricted (650) (689)
Cash & cash equivalents, including restricted, at beginning of year 8,104 7,835
Cash & cash equivalents, including restricted, at end of period $7,454 $7,146
Operating Activities Net cash used by operating activities was $3.2 billion during the three months ended March 31, 2022, compared with $3.4 billion during the same period in 2021. Net loss increased by $0.7 billion in 2022, which was more than offset by $0.8 billion of reductions to cash used by Changes in assets and liabilities in 2022. The year-over-year improvement to cash used by Changes in assets and liabilities was driven by improvements in receivables, payables, and accrued liabilities. Cash used by Advances and progress billings was $0.5 billion in 2022, as compared with $0.4 billion of cash provided in 2021. Cash used by Inventories was $1.2 billion in 2022, as compared with $0.7 billion of cash used in 2021. Compensation payments to 737 MAX customers totaled $0.6 billion and $1.2 billion during the
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three months ended March 31, 2022 and 2021. 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. The pause 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 until 787 deliveries resume and 737 MAX deliveries ramp up.
Payables to suppliers who elected to participate in supply chain financing programs decreased by $0.2 billion during the three months ended March 31, 2022 and remained flat during the three months ended March 31, 2021. Supply chain financing is not material to our overall liquidity.
Investing Activities Cash provided by investing activities was $3.0 billion during the three months ended March 31, 2022, compared with $2.8 billion during the same period in 2021, due to net proceeds from investments of $3.3 billion in 2022 compared to $3.1 billion in 2021. In the three months ended March 31, 2022 and 2021, capital expenditures were consistent at $0.3 billion. We expect capital expenditures in 2022 to be higher than in 2021.
Financing Activities Cash used by financing activities was $0.4 billion during the three months ended March 31, 2022 compared with $48.0 million during the same period in 2021. During the three months ended March 31, 2022, net repayments were $0.4 billion compared with $33 million in the same period in 2021.
As of March 31, 2022 the total debt balance was $57.7 billion, down from $58.1 billion at December 31, 2021. At March 31, 2022, $2.6 billion of debt was classified as short-term. Debt, 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, 787 production issues and associated rework, and residual impacts of the 737 MAX grounding 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 March 31, 2022, we had $7.4 billion of cash and $4.9 billion of short-term investments. At March 31, 2022, we had $14.7 billion of unused borrowing capacity on revolving credit line agreements, of which $6.3 billion expires in October 2022, $5.3 billion expires in March 2023, and $3.2 billion expires in October 2024. Of the $6.3 billion scheduled to expire in October 2022, $3.1 billion 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 March 31, 2022, 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 $12.8 billion and $12.9 billion at March 31, 2022 and December 31, 2021. The decrease relates to the expiration of 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.
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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 16 to our Condensed Consolidated Financial Statements.
Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $653 million at March 31, 2022. 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 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 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 Loss from operations were benefits of $208 million and $193 million for the three months ended March 31, 2022 and 2021. The higher benefits in 2022 were primarily due to increases in allocated pension cost year over year. The non-operating pension expenses included in Other income, net were benefits of $220 million and $177 million for the three months ended March 31, 2022 and 2021. The higher benefits for the three months ended March 31, 2022 were primarily due to lower amortization of actuarial losses, partially offset by higher interest cost and lower expected return on plan assets.
For further discussion of pension and other postretirement costs see the Management’s Discussion and Analysis on page 36 of this Form 10-Q and on page 29 of our 2021 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.
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Reconciliation of GAAP Measures to Non-GAAP Measures
The table below reconciles the non-GAAP financial measures of core operating earnings/(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) Three months ended March 31
2022 2021
Revenues $13,991 $15,217
Loss from operations, as reported ($1,169) ($83)
Operating margins (8.4) % (0.5) %
Pension FAS/CAS service cost adjustment (1)
($208) ($193)
Postretirement FAS/CAS service cost adjustment (1)
(75) (77)
FAS/CAS service cost adjustment (1)
($283) ($270)
Core operating loss (non-GAAP) ($1,452) ($353)
Core operating margins (non-GAAP) (10.4) % (2.3) %
Diluted loss per share, as reported ($2.06) ($0.92)
Pension FAS/CAS service cost adjustment (1)
(0.35) (0.33)
Postretirement FAS/CAS service cost adjustment (1)
(0.13) (0.13)
Non-operating pension expense (2)
(0.37) (0.30)
Non-operating postretirement expense (2)
(0.02) (0.01)
Provision for deferred income taxes on adjustments (3)
0.18 0.16
Core loss per share (non-GAAP) ($2.75) ($1.53)
Weighted average diluted shares (in millions) 591.7 585.4
(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.