What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-26 compared with 2023-04-26 · 194 added, 154 removed, 298 unchanged (54% of the section changed)

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The following table summarizes key indicators of consolidated results of operations:

(Dollars in millions, except per share data) Three months ended March 31

(Dollars in millions, except per share data) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Revenues $37,672 $30,672 $19,751 $16,681

Loss from operations ($149) ($1,162)

(Loss)/earnings from operations ($248) ($382) ($99) $780

Operating margins (0.7) % (1.2) % (0.5) % 4.7 %

Effective income tax rate 35.9 % 12.8 % 62.8 % 57.6 %

Net loss attributable to Boeing Shareholders ($414) ($1,219)

Diluted loss per share ($0.69) ($2.06)

Core operating loss ($440) ($1,445)

Net (loss)/earnings attributable to Boeing Shareholders ($563) ($1,026) ($149) $193

Diluted (loss)/earnings per share ($0.93) ($1.73) ($0.25) $0.32

Core operating (loss)/earnings ($830) ($949) ($390) $496

Core operating margins (2.2) % (3.1) % (2.0) % 3.0 %

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The following table summarizes Revenues:

(Dollars in millions) Three months ended March 31

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Commercial Airplanes $15,544 $10,452 $8,840 $6,258

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Total $37,672 $30,672 $19,751 $16,681

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 for the six months ended June 30, 2023 increased by $7,000 million compared with the same period in 2022 driven by higher revenues at all three operating segments.

Commercial Airplanes (BCA) revenues increased by $5,092 million primarily driven by higher 787 deliveries due to the delivery pause in the prior year and higher 737 deliveries.

Defense, Space & Security (BDS) revenues increased by $1,032 million primarily due to lower charges on development programs, increased sales from space and proprietary programs, and the U.S.

Air Force (USAF) KC-46A Lot 9 Tanker award in the first quarter of 2023.

Global Services (BGS) revenues increased by $854 million primarily due to higher commercial services revenue driven by market recovery across the commercial portfolio and higher government services revenue.

Revenues for the three months ended June 30, 2023 increased by $3,070 million compared with the same period in 2022 driven by higher revenues at BCA and BGS.

BCA revenues increased by $2,582 million driven by higher 787 deliveries.

BGS revenues increased by $448 million due to higher commercial

services revenue driven by market recovery across the commercial portfolio and higher government services revenue.

BDS revenues decreased by $24 million compared with the same period in 2022.

Unfavorable cumulative contract catch-up adjustments were $217 million higher than the comparable period in the prior year largely due to operational instability and charges on development programs.

This was largely offset by increased volume on space and proprietary programs.

Revenues will continue to be significantly impacted until the global supply chain stabilizes, labor instability diminishes, and deliveries ramp up.

Loss From Operations

The following table summarizes Loss from operations:

(Dollars in millions) Three months ended March 31

Loss/Earnings from Operations

The following table summarizes (Loss)/earnings from operations:

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Commercial Airplanes ($998) ($1,116) ($383) ($219)

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Global Services 1,703 1,360 856 728

Segment operating earnings/(loss) 20 (1,194)

Segment operating (loss)/earnings (34) (614) (54) 580

Pension FAS/CAS service cost adjustment 445 413 222 205

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Unallocated items, eliminations and other (796) (335) (336) (84)

Loss from operations (GAAP) ($149) ($1,162)

(Loss)/earnings from operations (GAAP) ($248) ($382) ($99) $780

FAS/CAS service cost adjustment * (582) (567) (291) (284)

Core operating loss (Non-GAAP) ** ($440) ($1,445)

Core operating (loss)/earnings (Non-GAAP) ** ($830) ($949) ($390) $496

* 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.

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See pages 47-49.

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.

Loss from operations for the six months ended June 30, 2023 decreased by $134 million compared with the same period in 2022.

BDS loss from operations decreased by $119 million compared to the same period in 2022 primarily due to less unfavorable impacts of cumulative contract catch-up adjustments, which amounted to $242 million less than the prior year comparable period.

BCA loss from operations decreased by $118 million reflecting higher 737 and 787 deliveries, partially offset by higher spending on research and development and abnormal production costs.

BGS earnings from operations increased by $343 million primarily due to higher commercial services revenue, partially offset by lower government services performance.

Loss from operations for the three months ended June 30, 2023 was $99 million compared with earnings of $780 million during the same period in 2022.

BDS loss from operations was $527 million for the three months ended June 30, 2023 compared with earnings from operations of $71 million in the same period in 2022.

The year over year decrease reflects the change in unfavorable cumulative contract catch-up charges which were $428 million higher than the comparable period in the prior year.

BCA loss from operations increased by $164 million reflecting higher spending on research and development, higher abnormal production costs, and 777 delivery timing, partially offset by higher 787 deliveries.

BGS earnings from operations increased by $128 million primarily due to higher commercial services and government services revenue.

Core operating loss for the six months ended June 30, 2023 decreased by $119 million compared with the same period in 2022.

Core operating loss for the three months ended June 30, 2023 was $390 million compared with core operating earnings of $496 million for the same period in 2022.

The changes in core

operating (loss)/earnings were 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

The most significant items included in Unallocated items, eliminations and other (expense)/income are shown in the following table:

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Share-based plans ($38) ($108) $14 ($25)

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Unallocated items, eliminations and other ($796) ($335) ($336) ($84)

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.

Share-based plans expense for the six months ended June 30, 2023 decreased by $70 million compared with the same period in 2022 due to fewer share-based grants in the first half of 2023.

The difference in share-based plans income of $14 million for the three months ended June 30, 2023 compared with expense of $25 million in the same period in 2022 is attributable to the timing of corporate allocations.

Deferred compensation expense was $96 million and $42 million for the six and three months ended June 30, 2023 compared with income of $166 million and $124 million in the same period in 2022 primarily driven by broad stock market conditions and changes in our stock price.

Research and development expense for the six and three months ended June 30, 2023 increased by $31 million and $7 million compared with the same period in 2022 due to spending on enterprise product development.

Eliminations and other unallocated expense for the six and three months ended June 30, 2023 increased by $238 million and $118 million compared with the same periods in 2022 primarily due to the settlement of a shareholder derivative lawsuit in the prior year which resulted in a benefit of $219 million in the second quarter of 2022.

The year over year variances also reflect timing of allocations.

Other Earnings Items

(Dollars in millions) Three months ended March 31

Loss from operations ($149) ($1,162)

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

(Loss)/earnings from operations ($248) ($382) ($99) $780

Other income, net 622 434 320 253

Interest and debt expense (1,270) (1,293) (621) (656)

Loss before income taxes (496) (1,618)

Income tax benefit 71 376

Net loss from continuing operations (425) (1,242)

(Loss)/earnings before income taxes (896) (1,241) (400) 377

Income tax benefit/(expense) 322 159 251 (217)

Net (loss)/earnings from continuing operations (574) (1,082) (149) 160

net loss attributable to noncontrolling interest (11) (56) (33)

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.

Net (loss)/earnings attributable to Boeing Shareholders ($563) ($1,026) ($149) $193

Other income, net for the six and three months ended June 30, 2023 increased by $188 million and $67 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.

Other income, net for the six months ended June 30, 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.

Interest and debt expense for the six and three months ended June 30, 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.

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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.

government and other 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

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 Change 2023 2022 Change

Cost of sales $33,810 $28,191 $5,619 $17,812 $14,553 $3,259

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89.7 % 91.9 % (2.2) % 90.2 % 87.2 % 3.0 %

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.

Cost of sales for the six months ended June 30, 2023 increased by $5,619 million, or 20% compared with the same period in 2022, primarily due to higher revenues at all three operating segments.

Cost of sales as a percentage of Revenues decreased during the six months ended June 30, 2023 compared with the same period in 2022 primarily due to lower charges on BDS development programs.

Cost of sales for the three months ended June 30, 2023 increased by $3,259 million compared with the same period in 2022, primarily due to higher revenues at BCA and BGS.

Cost of sales as a percentage of Revenues for the three months ended June 30, 2023 increased during the three months ended June 30, 2023 compared with the same period in 2022 primarily due to lower margins on several BDS programs.

Research and Development

Research and development expense, net is summarized in the following table:

(Dollars in millions) Three months ended March 31

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Commercial Airplanes $915 $693 $471 $372

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Global Services 54 54 28 27

Other 149 118 73 66

Total $1,538 $1,331 $797 $698

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.

(Dollars in millions) March 31

Research and development expense increased by $207 million and $99 million during the six and three months ended June 30, 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.

(Dollars in millions) June 30

2023 December 31

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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.

The increase in contractual backlog during the six months ended June 30, 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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government definitive contracts for which funding has not been authorized.

Unobligated backlog was largely unchanged during the three months ended March 31, 2023.

Unobligated backlog was largely unchanged during the six months ended June 30, 2023.

Additional Considerations

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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 .

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.

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Results of Operations

(Dollars in millions) Three months ended March 31

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Revenues $15,544 $10,452 $8,840 $6,258

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Operating margins (6.4) % (10.7) % (4.3) % (3.5) %

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.

BCA revenues increased by $5,092 million for the six months ended June 30, 2023 compared with the same period in 2022 primarily driven by higher 787 deliveries due to the delivery pause in the prior year and higher 737 deliveries.

BCA revenues increased by $2,582 million for the three months ended June 30, 2023 compared with the same period in 2022 driven by higher 787 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

Deliveries during the first six months of 2023 216 (5) 1 9 (1) 9 31 266

Deliveries during the first six months of 2022 189 (8) 3 12 (7) 12 216

Deliveries during the second quarter of 2023 103 (3) 8 (1) 5 20 136

Deliveries during the second quarter of 2022 103 (3) 2 7 (4) 9 121

Cumulative deliveries as of 6/30/2023 8,348 1,573 1,280 1,710 1,068

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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.

BCA loss from operations was $998 million for the six months ended June 30, 2023 compared with $1,116 million in the same period in 2022 reflecting higher 737 and 787 deliveries, partially offset by higher spending on research and development and abnormal production costs.

Abnormal production costs for the six months ended June 30, 2023 were $955 million including $693 million related to the 787 program and $262 million related to the 777X program.

Abnormal production costs for the six months ended June 30, 2022 were $885 million, including $595 million related to the 787 program, $188 million related to the 737 program and $102 million related to the 777X program.

BCA loss from operations was $383 million for the three months ended June 30, 2023 compared with $219 million in the same period in 2022 reflecting higher spending on research and development, higher abnormal production costs, and 777 delivery timing, partially offset by higher 787 deliveries.

Abnormal production costs for the three months ended June 30, 2023 were $450 million, including $314 million related to the 787 program and $136 million related to the 777X program.

Abnormal production costs for the three months ended June 30, 2022 were $385 million, including $283 million related to the 787 program and $102 million related to the 777X program.

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.

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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

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.

BCA total backlog increased from $329,824 million as of December 31, 2022 to $362,866 million at June 30, 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 six months ended June 30, 2023 totaled $10,061 million and primarily relate to 737 aircraft.

The net ASC 606 adjustments for the six months ended June 30, 2023 resulted in an increase to backlog of $12,989 million due to a net decrease of 777X and 737 aircraft, partially offset by an increase in 787 aircraft in the ASC 606 reserve.

or related sanctions, or whether it is probable that the customer will pay the full amount of consideration when it is due.

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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.

737 Program The accounting quantity for the 737 program increased by 400 units during the six months ended June 30, 2023 due to the program's normal progress of obtaining additional orders and delivering airplanes.

Return-to-service of the China 737 MAX fleet is largely complete.

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.

However, there continues to be uncertainty regarding timing of resumption of deliveries in China.

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

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.

There is not a safety of flight issue and the in-service fleet can continue operating safely.

While this impacted deliveries in the second quarter, newly built aircraft now meet our specifications.

We have approximately 220 aircraft in inventory as of June 30, 2023, including 85 aircraft for customers in China, as well as 55 aircraft that were originally designated for customers in China and have been remarketed to other customers.

We continue to expect to deliver most of the aircraft in inventory by the end of 2024.

In the event that we are unable to resume aircraft deliveries in China and/or ramp up deliveries consistent with our assumptions, our expectation of delivery timing could be impacted.

We are currently transitioning the production rate from 31 per month to 38 per month;

however, we continue to experience supply chain disruptions and are monitoring supply chain readiness to support current production rates as well as planned production rate increases.

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.

We continue to expect the 737-7 to be certified in 2023, and now expect first delivery in 2024.

We continue to expect 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.

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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 .

See further discussion of the 737 MAX in Note 9 to our Condensed 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.

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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.

We launched the 777X-8 freighter during the first quarter of 2022 and continue to 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.

We implemented the production pause during the second quarter of 2022, and it is now expected to result in abnormal production costs of approximately $1.0 billion that are being period expensed as incurred until 777X-9 production resumes.

Cumulative abnormal costs recorded through June 30, 2023 totaled $587 million including $262 million of abnormal costs expensed during the six months ended June 30, 2023.

The 777X program has near break-even gross margins at June 30, 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.

One or more of these factors could result in 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.

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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 delivered 11 aircraft during the first quarter of 2023 and 20 aircraft during the second quarter of 2023.

At June 30, 2023 and December 31, 2022, we had approximately 85 and 100 aircraft in inventory and expect to deliver most by the end of 2024.

We are currently producing at 4 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

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 also determined that the inspections and rework costs on inventoried aircraft are excessive and should also be accounted for as abnormal production costs.

Cumulative abnormal costs recorded through June 30, 2023 totaled $2.4 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.

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Any of these impacts could have a material effect on our results of operations, financial position, and/or cash flows.

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.

Defense Environment Overview The non-U.S.

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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.

At June 30, 2023, 31% of BDS backlog was attributable to non-U.S.

Results of Operations

(Dollars in millions) Three months ended March 31

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Revenues $12,706 $11,674 $6,167 $6,191

Loss from operations ($212) ($929)

(Loss)/earnings from operations ($739) ($858) ($527) $71

Operating margins (5.8) % (7.3) % (8.5) % 1.1 %

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Deliveries of new-build production units, including remanufactures and modifications, were as follows:

Three months ended March 31

Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

F/A-18 Models 13 8 6 4

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Commercial Satellites 3

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

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).

Total 80 81 38 40

BDS revenues for the six months ended June 30, 2023 increased by $1,032 million compared with the same period in 2022 primarily due to lower charges on development programs, increased sales from space and proprietary programs, and the USAF KC-46A Lot 9 Tanker award in the first quarter of 2023.

Cumulative contract catch-up adjustments for the six months ended June 30, 2023 were $136 million less unfavorable than the comparable period in the prior year largely due to lower charges on development programs, partially offset by unfavorable performance on other programs.

BDS revenues for the three months ended June 30, 2023 decreased by $24 million compared with the same period in 2022.

Unfavorable cumulative contract catch-up adjustments were $217 million higher than the comparable period in the prior year largely due to operational instability and charges on development programs.

This was largely offset by increased volume on space and proprietary programs.

Loss/Earnings From Operations

BDS loss from operations was $739 million for the six months ended June 30, 2023 compared with $858 million in the same period in 2022 primarily due to less unfavorable impacts of cumulative contract catch-up adjustments, which amounted to $242 million less than the prior year comparable period.

During the first half of 2023, losses incurred on development programs totaled $828 million, including $288 million on the Commercial Crew program, $245 million on the KC-46A Tanker program, and $189 million on the T-7A

During the first half of 2022, losses incurred on development programs totaled $1,667 million, including $686 million on VC-25B, $454 million on T-7A, $225 million on MQ-25 and $209 million on KC-46A Tanker.

The increase in reach-forward losses in 2023 primarily reflect a delay in the Commercial Crew program's crewed flight test previously scheduled for July 2023, the cost of rework on the KC-46A Tanker program that was identified as a result of supplier quality issues, and higher estimated production costs on the T-7A program.

Operations were also impacted by continued labor instability, development technical challenges and supply chain disruption across other programs including F-15 and satellites.

Higher period expenses also contributed to lower earnings in 2023.

BDS loss from operations was $527 million for the three months ended June 30, 2023 compared with earnings from operations of $71 million in the same period in 2022.

The year over year decrease in earnings reflects an increase in unfavorable cumulative contract catch-up adjustments which were $428 million higher than the comparable period in the prior year.

During the second quarter of 2023, losses incurred on development programs totaled $514 million compared with $397 million in the same period in 2022.

Earnings in 2023 were adversely impacted by lower margins on several programs including F-15 and satellite programs reflecting continued labor instability, development technical challenges and supply chain disruption.

Higher period expenses also contributed to lower earnings in 2023.

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.

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.

BDS (loss)/earnings from operations includes our share of earnings from equity method investments of $10 million and $24 million for the six and three months ended June 30, 2023 compared with equity earnings of $40 million and $13 million for the same periods in 2022.

BDS backlog increased from $54,373 million as of December 31, 2022 to $57,505 million at June 30, 2023, primarily due to the timing of awards, partially offset by revenue recognized on contracts awarded in prior periods.

Additional Considerations

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Results of Operations

(Dollars in millions) Three months ended March 31

(Dollars in millions) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Revenues $9,466 $8,612 $4,746 $4,298

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Operating margins 18.0 % 15.8 % 18.0 % 16.9 %

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.

BGS revenues for the six months ended June 30, 2023 increased by $854 million compared with the same period in 2022 primarily due to higher commercial services revenue driven by market recovery across the commercial portfolio and higher government services revenue.

The net unfavorable impact of cumulative contract catch-up adjustments for the six months ended June 30, 2023 was $33 million worse than the net favorable impact in the prior year comparable period.

BGS revenues for the three months ended June 30, 2023 increased by $448 million compared with the same period in 2022 primarily due to higher commercial services revenue driven by market recovery across the commercial portfolio and higher government services revenue.

The net favorable impact of cumulative contract catch-up adjustments for the three months ended June 30, 2023 was $20 million better than the net unfavorable 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.

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.

BGS earnings from operations for the six months ended June 30, 2023 increased by $343 million compared with the same period in 2022, primarily due to higher commercial services revenue, partially offset by lower government services performance.

The net unfavorable impact of cumulative contract catch-up adjustments for the six months ended June 30, 2023 was $49 million worse than the net favorable impact in the prior year comparable period.

BGS earnings from operations for the three months ended June 30, 2023 increased by $128 million compared with the same period in 2022, primarily due to higher commercial services and government services revenue.

The net favorable impact of cumulative contract catch-up adjustments for the three months ended June 30, 2023 was $9 million better than the net favorable impact in the prior year comparable period.

BGS backlog decreased from $19,338 million as of December 31, 2022 to $18,455 million at June 30, 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

(Dollars in millions) Six months ended June 30

Net loss ($574) ($1,082)

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Changes in assets and liabilities 934 (4,373)

Net cash used by operating activities (318) (3,216)

Net cash provided/(used) by operating activities 2,557 (3,135)

Net cash (used)/provided by investing activities (4,838) 6,231

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Effect of exchange rate changes on cash and cash equivalents 2 (71)

Net decrease in cash & cash equivalents, including restricted (3,811) (650)

Net (decrease)/increase in cash & cash equivalents, including restricted (7,372) 2,027

Cash & cash equivalents, including restricted, at beginning of year 14,647 8,104

Cash & cash equivalents, including restricted, at end of period $7,275 $10,131

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.

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.

Operating Activities Net cash provided by operating activities was $2.6 billion during the six months ended June 30, 2023, compared with cash used of $3.1 billion during the same period in 2022.

The $5.7 billion improvement is primarily driven by improved changes in assets and liabilities of $5.3 billion and lower net loss of $0.5 billion.

Changes in assets and liabilities for the six months ended June 30, 2023 improved by $5.3 billion compared with the same period in 2022 primarily driven by favorable changes in Advances and progress billings ($3.1 billion), Inventories ($1.0 billion), and Accounts payable ($0.5 billion).

Cash provided by Advances and progress billings was $2.2 billion for the six months ended June 30, 2023, as compared with cash used of $0.9 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.

Growth in Accounts payable in 2023 is a source of cash generally reflecting increases in production rates.

Concessions paid to 737 MAX customers totaled $0.3 billion and $0.8 billion during the six months ended June 30, 2023 and 2022.

The $0.5 billion decrease in net loss is primarily driven by lower charges on BDS development programs recorded during the first half of 2023 as compared to the same period in 2022 and increased earnings at BGS.

Payables to suppliers who elected to participate in supply chain financing programs increased by $0.1 billion for the six months ended June 30, 2023 and 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.

Investing Activities Cash used by investing activities was $4.8 billion during the six months ended June 30, 2023, compared with cash provided of $6.2 billion during the same period in 2022.

The increase in use of cash during the six months ended June 30, 2023 compared to the same period in 2022 is primarily due to net contributions to investments of $3.9 billion in 2023 compared to net proceeds from investments of $6.8 billion in 2022.

In the six months ended June 30, 2023 and 2022, capital expenditures were $0.8 billion and $0.6 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.

Financing Activities Cash used by financing activities was $5.1 billion during the six months ended June 30, 2023 compared with $1.0 billion during the same period in 2022.

During the six months ended June 30, 2023, net repayments on our debt were $5.1 billion compared with $1.0 billion in the same period in 2022.

As of June 30, 2023 the total debt balance was $52.3 billion, down from $57.0 billion at December 31, 2022.

At June 30, 2023, $4.6 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.

At June 30, 2023, we had $7.3 billion of cash, $6.5 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.

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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.

Our credit ratings remained unchanged as of June 30, 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.

We expect to be able to access capital markets if 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.

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These risks will be particularly acute if we are subject to further credit rating downgrades.

The occurrence of any or all of

these events may adversely affect our ability to fund our operations and financing or contractual commitments.

The occurrence of any or all of 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.

At June 30, 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).

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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.

Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $800 million at June 30, 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

Core Operating Loss/Earnings, 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.

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.

Core operating (loss)/earnings, 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.

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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 Pension FAS/CAS service cost adjustments recognized in (Loss)/earnings from operations were benefits of $445 million and $222 million for the six and three months ended June 30, 2023, compared with benefits of $413 million and $205 million for the same periods 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 non-operating pension expenses included in Other income, net were benefits of $268 million and $134 million for the six and three months ended June 30, 2023, compared with benefits of $441 million and $221 million for the same periods 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

Analysis on page 24 of our 2022 Annual Report on Form 10-K.

For further discussion of pension and other postretirement costs see the Management’s Discussion and 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.

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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

The table below reconciles the non-GAAP financial measures of core operating (loss)/earnings, core operating margin and core loss per share with the most directly comparable GAAP financial measures of (loss)/earnings from operations, operating margins and diluted (loss)/earnings per share.

(Dollars in millions, except per share data) Six months ended June 30 Three months ended June 30

2023 2022 2023 2022

Revenues $37,672 $30,672 $19,751 $16,681

Loss from operations, as reported ($149) ($1,162)

(Loss)/earnings from operations, as reported ($248) ($382) ($99) $780

Operating margins (0.7) % (1.2) % (0.5) % 4.7 %

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Postretirement FAS/CAS service cost adjustment (1)

(137) (154) (69) (79)

FAS/CAS service cost adjustment (1)

($582) ($567) ($291) ($284)

Core operating loss (non-GAAP) ($440) ($1,445)

Core operating (loss)/earnings (non-GAAP) ($830) ($949) ($390) $496

Core operating margins (non-GAAP) (2.2) % (3.1) % (2.0) % 3.0 %

Diluted loss per share, as reported ($0.69) ($2.06)

Diluted (loss)/earnings per share, as reported ($0.93) ($1.73) ($0.25) $0.32

Pension FAS/CAS service cost adjustment (1)

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Provision for deferred income taxes on adjustments (3)

0.31 0.37 0.15 0.18

Core loss per share (non-GAAP) ($2.08) ($3.11) ($0.82) ($0.37)

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(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).

This adjustment is excluded from Core operating (loss)/earnings (non-GAAP).

(2) Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis