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
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
2023 2022
Revenues $17,921 $13,991
GAAP
Loss from operations ($149) ($1,162)
Operating margins (0.8) % (8.3) %
Effective income tax rate 14.3 % 23.2 %
Net loss attributable to Boeing Shareholders ($414) ($1,219)
Diluted loss per share ($0.69) ($2.06)
Non-GAAP (1)
Core operating loss ($440) ($1,445)
Core operating margins (2.5) % (10.3) %
Core loss per share ($1.27) ($2.75)
(1) These measures exclude certain components of pension and other postretirement benefit expense. See pages 42-43 for important information about these non-GAAP measures and reconciliations to the most directly comparable GAAP measures.
Revenues
The following table summarizes Revenues:
(Dollars in millions) Three months ended March 31
2023 2022
Commercial Airplanes $6,704 $4,194
Defense, Space & Security 6,539 5,483
Global Services 4,720 4,314
Unallocated items, eliminations and other (42)
Total $17,921 $13,991
Revenues for the three months ended March 31, 2023 increased by $3,930 million compared with the same period in 2022 driven by higher revenues at Commercial Airplanes (BCA), Defense, Space & Security (BDS) and Global Services (BGS). BCA revenues increased by $2,510 million primarily driven by higher 737 and 787 deliveries. BDS revenues increased by $1,056 million primarily due to lower charges on development programs, the U.S. Air Force (USAF) KC-46A Lot 9 Tanker award, and increased sales across several programs. BGS revenues increased by $406 million primarily due to higher commercial services revenue driven by the market recovery across the commercial portfolio, partially offset by lower government services revenue.
Revenues will continue to be significantly impacted until the global supply chain stabilizes, labor instability diminishes, and deliveries ramp up.
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Loss From Operations
The following table summarizes Loss from operations:
(Dollars in millions) Three months ended March 31
2023 2022
Commercial Airplanes ($615) ($897)
Defense, Space & Security (212) (929)
Global Services 847 632
Segment operating earnings/(loss) 20 (1,194)
Pension FAS/CAS service cost adjustment 223 208
Postretirement FAS/CAS service cost adjustment 68 75
Unallocated items, eliminations and other (460) (251)
Loss from operations (GAAP) ($149) ($1,162)
FAS/CAS service cost adjustment * (291) (283)
Core operating loss (Non-GAAP) ** ($440) ($1,445)
* 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 loss is a Non-GAAP measure that excludes the FAS/CAS service cost adjustment. See pages 42-43.
Loss from operations for the three months ended March 31, 2023 was $149 million compared with a loss of $1,162 million during the same period in 2022. BDS loss from operations decreased by $717 million compared to the same period in 2022 due to lower charges on fixed-price development programs partially offset by the operational impact of labor instability and supply chain disruption across other programs. BCA loss from operations decreased by $282 million reflecting higher 737 and 787 deliveries and charges in 2022 due to the war in Ukraine, partially offset by higher research and development spending. BGS earnings from operations increased by $215 million primarily due to higher commercial services revenue, partially offset by lower government services revenue.
Core operating loss for the three months ended March 31, 2023 was $440 million compared with $1,445 million for the same period in 2022. The decrease in core operating loss was primarily due to changes in Segment operating earnings/(loss) 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
2023 2022
Share-based plans ($52) ($83)
Deferred compensation (54) 42
Amortization of previously capitalized interest (23) (23)
Research and development expense, net (76) (52)
Eliminations and other unallocated items (255) (135)
Unallocated items, eliminations and other ($460) ($251)
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Share-based plans expense for the three months ended March 31, 2023 decreased by $31 million compared with the same period in 2022 due to fewer share-based grants in the first quarter of 2023.
Deferred compensation expense of $54 million for the three months ended March 31, 2023 compared with income of $42 million in the same period in 2022 was primarily driven by changes in our stock price and broad stock market conditions.
Research and development expense for the three months ended March 31, 2023 increased by $24 million compared with the same period in 2022 due to spending on enterprise product development.
Eliminations and other unallocated expense for the three months ended March 31, 2023 increased by $120 million compared with the same period in 2022 primarily due to timing of allocations.
Other Earnings Items
(Dollars in millions) Three months ended March 31
2023 2022
Loss from operations ($149) ($1,162)
Other income, net 302 181
Interest and debt expense (649) (637)
Loss before income taxes (496) (1,618)
Income tax benefit 71 376
Net loss from continuing operations (425) (1,242)
Less: net loss attributable to noncontrolling interest (11) (23)
Net loss attributable to Boeing Shareholders ($414) ($1,219)
Other income, net for the three months ended March 31, 2023 increased by $121 million compared with the same period in 2022 primarily due to higher interest income on short-term investments reflecting higher interest rates, partially offset by a decrease in non-operating pension income. For discussion on changes related to non-operating pension and postretirement expenses, see Note 11 to our Condensed Consolidated Financial Statements.
Other income, net for the three months ended March 31, 2022 included losses of $50 million that were associated with certain cash flow hedges reclassified from Accumulated other comprehensive loss because it was probable the forecasted transactions would not occur. This also contributed to the increase in Other income, net in 2023.
Interest and debt expense for the three months ended March 31, 2023 was largely consistent compared with the same period in the prior year.
In August 2022, the President signed into law the Inflation Reduction Act of 2022, which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we do not expect to have a material impact on our results of operations, financial condition or cash flows. 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 aircraft 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
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customers that generally extend over several years. 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
2023 2022 Change
Cost of sales $15,998 $13,638 $2,360
Cost of sales as a % of Revenues
89.3 % 97.5 % (8.2) %
Cost of sales for the three months ended March 31, 2023 increased by $2,360 million, or 17% compared with the same period in 2022, primarily due to higher revenues at BCA, BDS and BGS. Cost of sales as a percentage of Revenues decreased during the three months ended March 31, 2023 compared with the same period in 2022 primarily due to lower charges on BDS development programs.
Research and Development
Research and development expense, net is summarized in the following table:
(Dollars in millions) Three months ended March 31
2023 2022
Commercial Airplanes $444 $321
Defense, Space & Security 195 233
Global Services 26 27
Other 76 52
Total $741 $633
Research and development expense increased by $108 million during the three months ended March 31, 2023 compared to the same period in 2022, primarily due to higher research and development expenditures on the 777X program as well as other BCA and enterprise investments in product development.
Backlog
(Dollars in millions) March 31
2023 December 31
2022
Commercial Airplanes $333,656 $329,824
Defense, Space & Security 58,150 54,373
Global Services 18,835 19,338
Unallocated items, eliminations and other 805 846
Total Backlog $411,446 $404,381
Contractual backlog $388,753 $381,977
Unobligated backlog 22,693 22,404
Total Backlog $411,446 $404,381
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 increase in contractual backlog during the three months ended March 31, 2023 was primarily due to increases in BCA and BDS backlog. If we remain unable to deliver 737 aircraft in China for an extended period of time, and/or entry into service of the 777X, 737-7 and/or 737-10 is further delayed, we may experience reductions to backlog and/or significant order cancellations.
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Unobligated backlog includes U.S. and non-U.S. government definitive contracts for which funding has not been authorized. Unobligated backlog was largely unchanged during the three months ended March 31, 2023.
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 current state of U.S.-China relations remains an ongoing watch item. Since 2018, the U.S. and China have imposed tariffs on each other’s imports. Certain aircraft parts and components that Boeing procures are subject to these tariffs. We are mitigating import costs through Duty Drawback Customs procedures. China is a significant market for commercial aircraft. Boeing has long-standing relationships with our Chinese customers, who represent a key component of our commercial aircraft backlog. Overall, the U.S.-China trade relationship remains stalled as economic and national security concerns continue to be a challenge .
Beginning in June 2018, the U.S. Government 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. The U.S. has subsequently reached agreements with Mexico, Canada, the United Kingdom, the European Union, and Japan to ease or remove tariffs on steel and/or aluminum. 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.
Supply Chain We and our suppliers are experiencing supply chain disruptions as a result of global supply chain constraints and labor instability. 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 factors have reduced overall productivity and adversely impacted our financial position, results of operations and cash flows.
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 included in our 2022 Annual Report on Form 10-K for a discussion of the airline industry environment.
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Results of Operations
(Dollars in millions) Three months ended March 31
2023 2022
Revenues $6,704 $4,194
Loss from operations ($615) ($897)
Operating margins (9.2) % (21.4) %
Revenues
BCA revenues increased by $2,510 million for the three months ended March 31, 2023 compared with the same period in 2022 primarily due to higher 787 and 737 deliveries.
Commercial airplane deliveries, including intercompany deliveries, were as follows:
737 * 747 767 * 777 787 Total
Deliveries during the first three months of 2023 113 (2) 1 1 4 11 130
Deliveries during the first three months of 2022 86 (5) 1 5 (3) 3 95
Cumulative deliveries as of 3/31/2023 8,245 1,573 1,272 1,705 1,048
Cumulative deliveries as of 12/31/2022 8,132 1,572 1,271 1,701 1,037
* Intercompany deliveries identified by parentheses.
Loss From Operations
BCA loss from operations was $615 million for the three months ended March 31, 2023 compared with $897 million in the same period in 2022 reflecting higher 737 and 787 deliveries and charges in 2022 due to the war in Ukraine, partially offset by higher research and development spending. Abnormal production costs for the three months ended March 31, 2023 were $505 million including $379 million related to the 787 program and $126 million related to the 777X program. Abnormal production costs for the three months ended March 31, 2022 were $500 million, including $312 million related to the 787 program and $188 million related to the 737 program.
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 customer financing 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 adjusted as changes to price and schedule are agreed to with customers and is reported in accordance with the requirements of Accounting Standards Codification (ASC) 606.
BCA total backlog increased from $329,824 million as of December 31, 2022 to $333,656 million at March 31, 2023 reflecting n ew orders in excess of deliveries and a decrease in the value of existing orders that in our assessment do not meet the accounting requirements of ASC 606 for inclusion in backlog, partially offset by order cancellations. Aircraft order cancellations during the three months ended March 31, 2023 totaled $4,443 million and primarily relate to 737 aircraft. The net ASC 606 adjustments for the three months ended March 31, 2023 resulted in an increase to backlog of $5,658 million due to a
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net decrease of 777X, 737 and 787 aircraft in the ASC 606 reserve. 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 we remain unable to deliver 737 aircraft in China for an extended period of time, and/or entry into service of the 777X, 737-7 and/or 737-10 is further delayed, we may experience reductions to backlog and/or significant order cancellations.
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 certain 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 3/31/2023 737 747 767 777 777X 787 †
Program accounting quantities 11,200 1,574 1,267 1,790 400 1,600
Undelivered units under firm orders 3,585 120 65 263 522 (11)
Cumulative firm orders 11,830 1,573 1,392 1,770 263 1,570
As of 12/31/2022 737 747 767 777 777X 787 †
Program accounting quantities 10,800 1,574 1,267 1,790 400 1,600
Undelivered units under firm orders 3,653 1 106 69 244 505 (8)
Cumulative firm orders 11,785 1,573 1,377 1,770 244 1,542
† Boeing customer financing aircraft orders 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, 2023 due to the program's normal progress of obtaining additional orders and delivering airplanes.
The first 737 MAX passenger flight in China since 2019 occurred on January 13, 2023, and 737 MAX operators in China are continuing to return their 737 MAX fleets to revenue service. In April 2023, the Civil Aviation Administration of China released the second 737 Aircraft Evaluation Report, which was another step toward resuming deliveries. There continues to be uncertainty regarding timing of resumption of deliveries in China. We continue to work with a small number of customers who have requested to defer deliveries or to cancel orders for 737 MAX aircraft, and we are remarketing and/or delaying deliveries of certain aircraft included within inventory.
We have approximately 225 aircraft in inventory as of March 31, 2023, including approximately 140 aircraft in inventory that were configured for customers in China. We are remarketing some of these aircraft to other customers. We anticipate delivering most of the aircraft in inventory by the end of 2024. In the event that we are unable to resume aircraft deliveries in China or remarket those aircraft and/or ramp up deliveries consistent with our assumptions, our expectation of delivery timing could be impacted.
In April 2023, our fuselage supplier notified us that a non-standard manufacturing process was used on two fittings in the aft fuselage section of certain 737-7, 737-8 and 737 military derivative aircraft. This issue does not affect the 737-9 or 737-10 minor models. There is not an immediate safety of flight issue and the in-service fleet can continue operating safely. This will impact timing of near-term deliveries as we perform rework on affected aircraft, and we are working with our customers to reschedule certain deliveries. We are not changing the supplier master schedule including anticipated production rate increases, which may result in increased near-term inventory. We expect final assembly production to
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recover in the coming months. We increased the production rate to 31 per month in 2022 and plan to increase the production rate to 38 per month later this year.
We are following the lead of the Federal Aviation Administration (FAA) as we work through the certification process of the 737-7 and 737-10 models. We continue to expect the 737-7 to be certified and begin delivering in 2023 and the 737-10 to begin FAA certification flight testing in 2023 with first delivery in 2024. In 2022, we provisioned for the estimated costs associated with safety enhancements that will be required on all new 737 MAX aircraft and previously delivered 737 MAX aircraft one year and three years after the issuance of a type certificate for the 737-10, respectively. We do not expect those costs to be material. If we experience delays in achieving certification and/or incorporating safety enhancements, future revenues, cash flows and results of operations could be adversely impacted.
See further discussion of the 737 MAX in Note 5 and Note 9 to our Consolidated Financial Statements .
747 Program We completed production of the 747 in the fourth quarter of 2022 and delivery of the last aircraft occurred in February 2023. Ending production of the 747 did not have a material impact on our financial position, results of operations or cash flows.
767 Program The 767 assembly line includes the commercial program and a derivative to support the KC-46A Tanker program. The commercial program has near break-even gross margins. We are currently producing at a rate of 3 aircraft per month.
777 and 777X Programs We are currently producing at a combined production rate of 3 per month for the 777/777X programs.
We continue to expect the first delivery of the 777X-9 to occur in 2025. 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. We launched the 777X-8 freighter during the first quarter of 2022 and expect first delivery in 2027.
In April 2022, we decided to pause production of the 777X-9 during 2022 and 2023. We implemented the production pause during the second quarter of 2022, and it is expected to result in abnormal production costs of approximately $1.5 billion that are being period expensed as incurred until 777X-9 production resumes. Cumulative abnormal costs recorded through March 31, 2023 totaled $0.5 billion including $126 million of abnormal costs expensed during the three months ended March 31, 2023.
The 777X program has near break-even gross margins at March 31, 2023. The level of profitability on the 777X program will be subject to a number of factors. These factors include production disruption due to labor instability and supply chain disruption, 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 We continue to conduct inspections and rework on undelivered aircraft due to production quality issues, including in our supply chain. We have implemented changes in the production process designed to ensure that newly-built airplanes meet our specifications and do not require further inspections and rework. Deliveries were temporarily paused in late February 2023 pending validation of our prior analysis. We received FAA authorization to resume deliveries in March. We delivered 11 aircraft during the first quarter of 2023. At March 31, 2023 and December 31, 2022, we had approximately 95 and 100 aircraft in inventory. Most of the aircraft in inventory at December 31, 2022 are expected to deliver by the end of 2024.
We are currently producing at 3 per month and expect to return to 5 per month in 2023. In the third quarter of 2021, we determined that production rates below 5 per month represented abnormally low production rates and result in abnormal production costs that are required to be expensed as incurred. We also determined that the inspections and rework costs on inventoried aircraft are excessive and
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should also be accounted for as abnormal production costs. Cumulative abnormal costs recorded through March 31, 2023 totaled $2.1 billion, and we continue to expect to incur up to $2.8 billion 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.
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 737-7 and 737-10, 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
In March 2023, the U.S. government released the President's budget request for fiscal year 2024 (FY24), which requested $842 billion in funding for the United States Department of Defense (U.S. DoD) and $27 billion for the National Aeronautics and Space Administration (NASA). The President's budget request does not request funding for F/A-18, V-22, or P-8 production aircraft. The P-8 program continues to pursue U.S. and non-U.S. sales opportunities.
There is ongoing uncertainty with respect to program-level appropriations for the U.S. DoD, NASA and other government agencies for FY24 and beyond. U.S. government discretionary spending, including defense spending, is likely to continue to be subject to pressure. 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.
The U.S. Government could experience a disruption to its operations and/or payments as a result of the U.S. Treasury exhausting extraordinary measures after reaching its debt limit. This potential disruption, and/or any associated macroeconomic impacts, could have a material effect on our results of operations, financial position, and/or cash flows.
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Non-U.S. Defense Environment Overview The non-U.S. market continues to be driven by complex and evolving security challenges and the need to modernize aging equipment and inventories. BDS expects that it will continue to have a wide range of opportunities across Asia, Europe and the Middle East given the diverse regional threats. At March 31, 2023, 30% of BDS backlog was attributable to non-U.S. customers.
Results of Operations
(Dollars in millions) Three months ended March 31
2023 2022
Revenues $6,539 $5,483
Loss from operations ($212) ($929)
Operating margins (3.2 %) (16.9 %)
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 new-build production units, including remanufactures and modifications, were as follows:
Three months ended March 31
2023 2022
F/A-18 Models 7 4
F-15 Models 2 1
CH-47 Chinook (New) 5 4
CH-47 Chinook (Renewed) 1 3
AH-64 Apache (New) 7 7
AH-64 Apache (Remanufactured) 13 15
P-8 Models 3 3
KC-46 Tanker 1 4
Commercial Satellites 3
Total 42 41
Revenues
BDS revenues for the three months ended March 31, 2023 increased by $1,056 million compared with the same period in 2022 primarily due to lower charges on development programs, the USAF KC-46A Lot 9 Tanker award, and increased sales from space and weapons programs. Cumulative contract catch-up adjustments for the three months ended March 31, 2023 were $353 million less unfavorable than the comparable period in the prior year largely due to lower charges on development programs. The USAF awarded 15 aircraft for Lot 9 on the KC-46A Tanker program.
Loss From Operations
BDS loss from operations was $212 million for the three months ended March 31, 2023 compared with loss from operations of $929 million in the same period in 2022 primarily due to less unfavorable impacts of cumulative contract catch-up adjustments, which amounted to $670 million less than the prior year comparable period. During the first quarter of 2022, losses incurred on major development programs
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totaled $1,270 million. The reach-forward loss on the KC-46A Tanker program increased by $245 million during the first quarter of 2023 primarily due to the cost of rework that was identified as a result of supplier quality issues. Operations were also impacted by labor instability and supply chain disruption across other programs.
Charges on major fixed-price development programs in the first quarter of 2022 included VC-25B ($660 million), T-7A Red Hawk Production Options ($300 million), T-7A Red Hawk EMD ($67 million), KC-46A Tanker ($165 million), and MQ-25 ($78 million). See further discussion of fixed-price contracts in Note 9 to our Condensed Consolidated Financial Statements.
BDS loss from operations includes our share of loss from equity method investments of $14 million for the three months ended March 31, 2023 compared with equity earnings of $27 million for the same period in 2022.
Backlog
BDS backlog increased from $54,373 million as of December 31, 2022 to $58,150 million at March 31, 2023, primarily due to the timing of awards, partially offset by 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. Some 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. 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. A number of our ongoing fixed-price development programs have reach-forward losses. 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 or other financially significant exposure. Risk remains that we may be required to record additional reach-forward losses in future periods.
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Global Services
Results of Operations
(Dollars in millions) Three months ended March 31
2023 2022
Revenues $4,720 $4,314
Earnings from operations $847 $632
Operating margins 17.9 % 14.6 %
Revenues
BGS revenues for the three months ended March 31, 2023 increased by $406 million compared with the same period in 2022 primarily due to higher commercial services revenue driven by the market recovery across the commercial portfolio, partially offset by lower government services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the three months ended March 31, 2023 was $53 million worse than the net favorable impact in the prior year comparable period.
Earnings From Operations
BGS earnings from operations for the three months ended March 31, 2023 increased by $215 million compared with the same period in 2022, primarily due to higher commercial services revenue, partially offset by lower government services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the three months ended March 31, 2023 was $58 million worse than the net favorable impact in the prior year comparable period.
Backlog
BGS backlog decreased from $19,338 million as of December 31, 2022 to $18,835 million at March 31, 2023, primarily due to revenue recognized on contracts awarded in prior years.
Liquidity and Capital Resources
Cash Flow Summary
(Dollars in millions) Three months ended March 31
2023 2022
Net loss ($425) ($1,242)
Non-cash items 1,276 1,312
Changes in assets and liabilities (1,169) (3,286)
Net cash used by operating activities (318) (3,216)
Net cash (used)/provided by investing activities (1,823) 2,965
Net cash used by financing activities (1,680) (396)
Effect of exchange rate changes on cash and cash equivalents 10 (3)
Net decrease in cash & cash equivalents, including restricted (3,811) (650)
Cash & cash equivalents, including restricted, at beginning of year 14,647 8,104
Cash & cash equivalents, including restricted, at end of period $10,836 $7,454
Operating Activities Net cash used by operating activities was $0.3 billion during the three months ended March 31, 2023, compared with $3.2 billion during the same period in 2022. The $2.9 billion improvement is primarily driven by lower net loss of $0.8 billion and improved changes in assets and liabilities of $2.1 billion.
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Changes in assets and liabilities for the three months ended March 31, 2023 improved by $2.1 billion compared with the same period in 2022 primarily driven by favorable changes in Advances and progress billings ($1.9 billion), Inventories ($0.8 billion), and Accounts payable ($0.6 billion), partially offset by growth in Unbilled receivables ($0.7 billion) and Accounts receivable ($0.6 billion). Cash provided by Advances and progress billings was $1.4 billion in the first quarter of 2023, as compared with cash used of $0.5 billion during the same period in 2022. Inventory improvements were driven by higher 737 and 787 deliveries. Growth in Accounts payable in 2023 is a source of cash while reductions in Accounts payable in 2022 were a use of cash generally reflecting increases in production rates. Growth in Unbilled receivables and Accounts receivable in 2023 was a use of cash, generally reflecting an increase in revenue. Concessions paid to 737 MAX customers totaled $0.1 billion and $0.6 billion during the three months ended March 31, 2023 and 2022. The $0.8 billion decrease in net loss is primarily driven by the absence of charges on BDS development programs recorded during the first quarter of 2022.
Payables to suppliers who elected to participate in supply chain financing programs increased by $0.1 billion during three months ended March 31, 2023 and decreased by $0.2 billion during the three months ended March 31, 2022. Supply chain financing is not material to our overall liquidity.
Investing Activities Cash used by investing activities was $1.8 billion during the three months ended March 31, 2023, compared with cash provided of $3.0 billion during the same period in 2022. The increase in use of cash during the three months ended March 31, 2023 compared to the same period in 2022 is primarily due to net contributions to investments of $1.4 billion in 2023 compared to net proceeds from investments of $3.3 billion in 2022. In the three months ended March 31, 2023 and 2022, capital expenditures were $0.5 billion and $0.3 billion. We continue to expect capital expenditures in 2023 to be higher than in 2022.
Financing Activities Cash used by financing activities was $1.7 billion during the three months ended March 31, 2023 compared with $0.4 billion during the same period in 2022. During the three months ended March 31, 2023, net repayments on our debt were $1.7 billion compared with $0.4 billion in the same period in 2022.
As of March 31, 2023 the total debt balance was $55.4 billion, down from $57.0 billion at December 31, 2022. At March 31, 2023, $7.9 billion of debt was classified as short-term.
Capital Resources
We expect to be able to fund our cash requirements through cash and short-term investments and cash provided by operations, as well as continued access to capital markets. At March 31, 2023, we had $10.8 billion of cash, $4.0 billion of short-term investments, and $12.0 billion of unused borrowing capacity on revolving credit line agreements. During 2022, we entered into a $5.8 billion 364-day revolving credit agreement expiring in August 2023, a $3.0 billion three-year revolving credit agreement expiring in August 2025, and amended our $3.2 billion five-year revolving credit agreement, which expires in October 2024, primarily to incorporate a LIBOR successor rate. The 364-day credit facility has a one-year term out option which allows us to extend the maturity of any borrowings one year beyond the aforementioned expiration date. We anticipate that these credit lines will remain undrawn and primarily serve as back-up liquidity to support our general corporate borrowing needs.
Our increased debt balance resulted in downgrades to our credit ratings in 2020, and our ratings remained unchanged as of March 31, 2023. However, during the first quarter of 2023, Moody's upgraded the outlook on our credit rating from negative to stable primarily driven by an improvement in operating cash flow and a reduction of 737 and 787 aircraft in inventory. We expect to be able to access capital markets when we require additional funding in order to pay off existing debt, address further impacts to our business related to market developments, fund outstanding financing commitments or meet other business requirements. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook or credit ratings, and/or associated changes in demand for our products and services. These risks will be particularly acute if we are subject to further credit rating downgrades. The occurrence of any or all of
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these events may adversely affect our ability to fund our operations and financing or contractual commitments.
Any future borrowings may affect our credit ratings and are subject to various debt covenants. At March 31, 2023, 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 in the credit agreements). When considering debt covenants, we continue to have substantial borrowing capacity.
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 16 to our Condensed Consolidated Financial Statements.
Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $788 million at March 31, 2023. For additional information, see Note 9 to our Condensed Consolidated Financial Statements.
Non-GAAP Measures
Core Operating Loss, Core Operating Margin and Core Loss 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 loss, core operating margin and core loss 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 loss 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 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 $223 million for the three months ended March 31, 2023, compared with benefits of $208 million for the same period in 2022. The higher benefits in 2023 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 $134 million for the three months ended March 31, 2023, compared with benefits of $220 million for the same period in 2022. The lower benefits in 2023 were primarily due to higher interest cost and lower expected return on plan assets, offset by lower amortization of net actuarial losses.
For further discussion of pension and other postretirement costs see the Management’s Discussion and
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Analysis on page 24 of our 2022 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.
Reconciliation of Non-GAAP Measures to GAAP Measures
The table below reconciles the non-GAAP financial measures of core operating loss, core operating margin and core loss per share with the most directly comparable GAAP financial measures of loss from operations, operating margins and diluted loss per share.
(Dollars in millions, except per share data) Three months ended March 31
2023 2022
Revenues $17,921 $13,991
Loss from operations, as reported ($149) ($1,162)
Operating margins (0.8) % (8.3) %
Pension FAS/CAS service cost adjustment (1)
($223) ($208)
Postretirement FAS/CAS service cost adjustment (1)
(68) (75)
FAS/CAS service cost adjustment (1)
($291) ($283)
Core operating loss (non-GAAP) ($440) ($1,445)
Core operating margins (non-GAAP) (2.5) % (10.3) %
Diluted loss per share, as reported ($0.69) ($2.06)
Pension FAS/CAS service cost adjustment (1)
(0.37) (0.35)
Postretirement FAS/CAS service cost adjustment (1)
(0.11) (0.13)
Non-operating pension expense (2)
(0.23) (0.37)
Non-operating postretirement expense (2)
(0.02) (0.02)
Provision for deferred income taxes on adjustments (3)
0.15 0.18
Core loss per share (non-GAAP) ($1.27) ($2.75)
Weighted average diluted shares (in millions) 602.5 591.7
(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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our market risk since December 31, 2022.
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