BOEING CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations and Financial Condition Consolidated Results of Operations The following table summarizes key indicators of consolidated results of operations: (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 GAAP (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)/earnings attributable to Boeing Shareholders ($563) ($1,026) ($149) $193 Diluted (loss)/earnings per share ($0.93) ($1.73) ($0.25) $0.32 Non-GAAP (1) Core operating (loss)/earnings ($830) ($949) ($390) $496 Core operating margins (2.2) % (3.1) % (2.0) % 3.0 % Core loss per share ($2.08) ($3.11) ($0.82) ($0.37) (1) These measures exclude certain components of pension and other postretirement benefit expense. See pages 47-49 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) Six months ended June 30 Three months ended June 30 2023 2022 2023 2022 Commercial Airplanes $15,544 $10,452 $8,840 $6,258 Defense, Space & Security 12,706 11,674 6,167 6,191 Global Services 9,466 8,612 4,746 4,298 Unallocated items, eliminations and other (44) (66) (2) (66) Total $37,672 $30,672 $19,751 $16,681 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 33 Table of Contents 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/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) Defense, Space & Security (739) (858) (527) 71 Global Services 1,703 1,360 856 728 Segment operating (loss)/earnings (34) (614) (54) 580 Pension FAS/CAS service cost adjustment 445 413 222 205 Postretirement FAS/CAS service cost adjustment 137 154 69 79 Unallocated items, eliminations and other (796) (335) (336) (84) (Loss)/earnings from operations (GAAP) ($248) ($382) ($99) $780 FAS/CAS service cost adjustment * (582) (567) (291) (284) 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. ** Core operating loss is a Non-GAAP measure that excludes the FAS/CAS service cost adjustment. See pages 47-49. 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 34 Table of Contents 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 (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) Deferred compensation (96) 166 (42) 124 Amortization of previously capitalized interest (47) (47) (24) (24) Research and development expense, net (149) (118) (73) (66) Eliminations and other unallocated items (466) (228) (211) (93) Unallocated items, eliminations and other ($796) ($335) ($336) ($84) 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) 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)/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 Less: net loss attributable to noncontrolling interest (11) (56) (33) 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 35 Table of Contents 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 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 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. 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 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) 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 Cost of sales as a % of Revenues 89.7 % 91.9 % (2.2) % 90.2 % 87.2 % 3.0 % 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. 36 Table of Contents Research and Development Research and development expense, net is summarized in the following table: (Dollars in millions) Six months ended June 30 Three months ended June 30 2023 2022 2023 2022 Commercial Airplanes $915 $693 $471 $372 Defense, Space & Security 420 466 225 233 Global Services 54 54 28 27 Other 149 118 73 66 Total $1,538 $1,331 $797 $698 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. Backlog (Dollars in millions) June 30 2023 December 31 2022 Commercial Airplanes $362,866 $329,824 Defense, Space & Security 57,505 54,373 Global Services 18,455 19,338 Unallocated items, eliminations and other 738 846 Total Backlog $439,564 $404,381 Contractual backlog $417,037 $381,977 Unobligated backlog 22,527 22,404 Total Backlog $439,564 $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 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. 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 six months ended June 30, 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 37 Table of Contents 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. Results of Operations (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 Loss from operations ($998) ($1,116) ($383) ($219) Operating margins (6.4) % (10.7) % (4.3) % (3.5) % Revenues 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. 38 Table of Contents Commercial airplane deliveries, including intercompany deliveries, were as follows: 737 * 747 767 * 777 787 Total 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 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 $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. 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 $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. 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 39 Table of Contents 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 6/30/2023 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 3,818 112 62 318 569 (8) Cumulative firm orders 12,166 1,573 1,392 1,772 318 1,637 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 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. 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. 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. 40 Table of Contents 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 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. 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 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. 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 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 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 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 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 June 30, 2023 totaled $2.4 billion, and we continue to expect to incur up to $2.8 billion with most being 41 Table of Contents 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. 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 June 30, 2023, 31% of BDS backlog was attributable to non-U.S. customers. 42 Table of Contents Results of Operations (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)/earnings from operations ($739) ($858) ($527) $71 Operating margins (5.8) % (7.3) % (8.5) % 1.1 % 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: Six months ended June 30 Three months ended June 30 2023 2022 2023 2022 F/A-18 Models 13 8 6 4 F-15 Models 6 5 4 4 CH-47 Chinook (New) 7 9 2 5 CH-47 Chinook (Renewed) 4 4 3 1 AH-64 Apache (New) 12 13 5 6 AH-64 Apache (Remanufactured) 29 28 16 13 P-8 Models 5 6 2 3 KC-46 Tanker 1 8 4 Commercial Satellites 3 Total 80 81 38 40 Revenues 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 43 Table of Contents program. 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)/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. Backlog 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 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. 44 Table of Contents Global Services Results of Operations (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 Earnings from operations $1,703 $1,360 $856 $728 Operating margins 18.0 % 15.8 % 18.0 % 16.9 % Revenues 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 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. Backlog 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. 45 Table of Contents Liquidity and Capital Resources Cash Flow Summary (Dollars in millions) Six months ended June 30 2023 2022 Net loss ($574) ($1,082) Non-cash items 2,197 2,320 Changes in assets and liabilities 934 (4,373) Net cash provided/(used) by operating activities 2,557 (3,135) Net cash (used)/provided by investing activities (4,838) 6,231 Net cash used by financing activities (5,093) (998) Effect of exchange rate changes on cash and cash equivalents 2 (71) 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 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 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 $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 $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. 46 Table of Contents 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 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. 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 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 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. 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 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 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). 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 $800 million at June 30, 2023. For additional information, see Note 9 to our Condensed Consolidated Financial Statements. Non-GAAP Measures 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 47 Table of Contents 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)/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. 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)/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 $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. 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. 48 Table of Contents Reconciliation of Non-GAAP Measures to GAAP Measures 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)/earnings from operations, as reported ($248) ($382) ($99) $780 Operating margins (0.7) % (1.2) % (0.5) % 4.7 % Pension FAS/CAS service cost adjustment (1) ($445) ($413) ($222) ($205) Postretirement FAS/CAS service cost adjustment (1) (137) (154) (69) (79) FAS/CAS service cost adjustment (1) ($582) ($567) ($291) ($284) 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)/earnings per share, as reported ($0.93) ($1.73) ($0.25) $0.32 Pension FAS/CAS service cost adjustment (1) (0.73) (0.70) (0.37) (0.35) Postretirement FAS/CAS service cost adjustment (1) (0.23) (0.26) (0.11) (0.13) Non-operating pension expense (2) (0.45) (0.74) (0.22) (0.37) Non-operating postretirement expense (2) (0.05) (0.05) (0.02) (0.02) 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) Weighted average diluted shares (in millions) 603.9 592.8 605.5 596.4 (1) FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. This adjustment is excluded from Core operating (loss)/earnings (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. 49 Table of Contents