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) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Revenues $55,776 $46,628 $18,104 $15,956 GAAP Loss from operations ($1,056) ($3,174) ($808) ($2,792) Operating margins (1.9) % (6.8) % (4.5) % (17.5) % Effective income tax rate (10.8) % (0.4) % (48.9) % (5.6) % Net loss attributable to Boeing Shareholders ($2,199) ($4,301) ($1,636) ($3,275) Diluted loss per share ($3.64) ($7.24) ($2.70) ($5.49) Non-GAAP (1) Core operating loss ($1,919) ($4,020) ($1,089) ($3,071) Core operating margins (3.4) % (8.6) % (6.0) % (19.2) % Core loss per share ($5.35) ($9.31) ($3.26) ($6.18) (1) These measures exclude certain components of pension and other postretirement benefit expense. See pages 48-50 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) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Commercial Airplanes $23,420 $16,755 $7,876 $6,303 Defense, Space & Security 18,187 16,981 5,481 5,307 Global Services 14,278 13,044 4,812 4,432 Unallocated items, eliminations and other (109) (152) (65) (86) Total $55,776 $46,628 $18,104 $15,956 Revenues for the nine months ended September 30, 2023 increased by $9,148 million compared with the same period in 2022 driven by higher revenues at all three operating segments. Commercial Airplanes (BCA) revenues increased by $6,665 million primarily driven by higher 787 and 737 deliveries. Global Services (BGS) revenues increased by $1,234 million primarily due to higher commercial services revenue driven by market recovery across the commercial portfolio. Defense, Space & Security (BDS) revenues increased by $1,206 million primarily due to lower charges on development programs and higher revenues on space and proprietary programs. Revenues for the three months ended September 30, 2023 increased by $2,148 million compared with the same period in 2022 driven by higher revenues at all three operating segments. BCA revenues increased by $1,573 million driven by higher 787 deliveries, partially offset by lower 737 deliveries. BGS revenues increased by $380 million due to higher commercial services revenue driven by market recovery across the commercial portfolio. BDS revenues increased by $174 million compared with the same period 32 Table of Contents in 2022. BDS net unfavorable cumulative contract catch-up adjustments were $540 million better than the comparable period in the prior year primarily due lower charges on development programs, partially offset by the KC-46A Tanker Lot 8 award in the third quarter of 2022. 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) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Commercial Airplanes ($1,676) ($1,738) ($678) ($622) Defense, Space & Security (1,663) (3,656) (924) (2,798) Global Services 2,487 2,093 784 733 Segment operating loss (852) (3,301) (818) (2,687) Pension FAS/CAS service cost adjustment 663 621 218 208 Postretirement FAS/CAS service cost adjustment 200 225 63 71 Unallocated items, eliminations and other (1,067) (719) (271) (384) Loss from operations (GAAP) ($1,056) ($3,174) ($808) ($2,792) FAS/CAS service cost adjustment * (863) (846) (281) (279) Core operating loss (Non-GAAP) ** ($1,919) ($4,020) ($1,089) ($3,071) * 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 48-50. Loss from operations for the nine months ended September 30, 2023 decreased by $2,118 million compared with the same period in 2022. BDS loss from operations decreased by $1,993 million compared to the same period in 2022 primarily due to a reduction in net unfavorable cumulative contract catch-up adjustments, which were $2,483 million better than the net unfavorable impact in the prior year comparable period. BCA loss from operations decreased by $62 million reflecting higher 737 and 787 deliveries and lower other period expenses, partially offset by higher spending on research and development and higher abnormal production costs. BGS earnings from operations increased by $394 million primarily due to higher commercial services revenue, partially offset by lower government services performance and unfavorable mix. Loss from operations for the three months ended September 30, 2023 decreased by $1,984 million compared to the same period in 2022. BDS loss from operations decreased by $1,874 million compared with the same period in 2022. The year over year decrease reflects a reduction in net unfavorable cumulative contract catch-up adjustments, which were $1,891 million better than the net unfavorable impact in the prior year comparable period. BGS earnings from operations increased by $51 million primarily due to higher commercial services revenue. BCA loss from operations increased by $56 million reflecting higher spending on research and development, partially offset by lower other period expenses. Core operating loss for the nine and three months ended September 30, 2023 decreased by $2,101 million and $1,982 million, respectively, compared with the same periods in 2022. The changes in core operating loss were primarily due to changes in Segment operating loss as described above. For information related to Postretirement Plans, see Note 12 to our Condensed Consolidated Financial Statements. 33 Table of Contents 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) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Share-based plans ($33) ($64) $5 $44 Deferred compensation (71) 204 25 38 Amortization of previously capitalized interest (71) (71) (24) (24) Research and development expense, net (222) (161) (73) (43) Eliminations and other unallocated items (670) (627) (204) (399) Unallocated items, eliminations and other ($1,067) ($719) ($271) ($384) Share-based plans expense for the nine months ended September 30, 2023 decreased by $31 million compared with the same period in 2022 due to fewer share-based grants in 2023. Share-based plans income for the three months ended September 30, 2023 decreased by $39 million compared with the same period in 2022 primarily due to the timing of corporate allocations. Deferred compensation expense of $71 million for the nine months ended September 30, 2023 compared with income of $204 million in the same period in 2022 is driven by broad stock market conditions and changes in our stock price. Deferred compensation income of $25 million for the three months ended September 30, 2023 compared with $38 million in the same period in 2022 is primarily driven by broad stock market conditions. Research and development expense for the nine and three months ended September 30, 2023 increased by $61 million and $30 million compared with the same period in 2022 due to spending on enterprise product development. Eliminations and other unallocated items expense for the nine and three months ended September 30, 2023 increased by $43 million and decreased by $195 million, respectively, compared with the same periods in 2022. The decrease in the third quarter of 2023 reflects a $200 million settlement in the third quarter of 2022 with the Securities and Exchange Commission related to the 737 MAX accidents. Other Earnings Items (Dollars in millions) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Loss from operations ($1,056) ($3,174) ($808) ($2,792) Other income, net 919 722 297 288 Interest and debt expense (1,859) (1,921) (589) (628) Loss before income taxes (1,996) (4,373) (1,100) (3,132) Income tax expense (216) (17) (538) (176) Net loss from continuing operations (2,212) (4,390) (1,638) (3,308) Less: net loss attributable to noncontrolling interest (13) (89) (2) (33) Net loss attributable to Boeing Shareholders ($2,199) ($4,301) ($1,636) ($3,275) Other income, net for the nine and three months ended September 30, 2023 increased by $197 million and $9 million compared with the same period in 2022 primarily due to higher interest income on short-term investments reflecting higher investment balances and interest rates, partially offset by a decrease in non-operating pension income. For information on changes related to non-operating pension and postretirement expenses, see Note 12 to our Condensed Consolidated Financial Statements. 34 Table of Contents Other income, net for the nine months ended September 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 nine and three months ended September 30, 2023 was lower compared with the same period in the prior year primarily as a result of lower debt balances. 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) Nine months ended September 30 Three months ended September 30 2023 2022 Change 2023 2022 Change Cost of sales $50,749 $44,962 $5,787 $16,939 $16,771 $168 Cost of sales as a % of Revenues 91.0 % 96.4 % (5.4) % 93.6 % 105.1 % (11.5) % Cost of sales for the nine and three months ended September 30, 2023 increased by $5,787 million and $168 million, or 13% and 1%, respectively, compared with the same periods in 2022, primarily due to higher revenues at all three operating segments. Cost of sales as a percentage of Revenues decreased during the nine and three months ended September 30, 2023 compared with the same periods in 2022 primarily due to lower charges on BDS development programs. 35 Table of Contents Research and Development Research and development expense, net is summarized in the following table: (Dollars in millions) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Commercial Airplanes $1,538 $1,102 $623 $409 Defense, Space & Security 652 706 232 240 Global Services 84 89 30 35 Other 222 161 73 43 Total $2,496 $2,058 $958 $727 Research and development expense increased by $438 million and $231 million during the nine and three months ended September 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) September 30 2023 December 31 2022 Commercial Airplanes $392,105 $329,824 Defense, Space & Security 57,802 54,373 Global Services 18,441 19,338 Unallocated items, eliminations and other 830 846 Total Backlog $469,178 $404,381 Contractual backlog $446,199 $381,977 Unobligated backlog 22,979 22,404 Total Backlog $469,178 $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 nine months ended September 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 nine months ended September 30, 2023. Additional Considerations The Continuing Resolution (CR) enacted on September 30, 2023, continues federal funding at fiscal year 2023 appropriated levels through November 17, 2023. Congress and the President must enact either full-year fiscal year 2024 (FY24) appropriations bills or an additional CR to fund government departments and agencies after November 17, 2023, or a government shutdown could result. We rely on the U.S. government in various aspects of our defense, commercial, and services businesses. In the event of a shutdown, requirements to furlough employees in the U.S. Department of Defense (U.S. DoD), the Department of Transportation or other government agencies could result in payment delays, impair our ability to perform work on existing contracts or otherwise impact our operations, negatively impact future orders, and/or cause other disruptions or delays. There is uncertainty regarding which government 36 Table of Contents functions would shut down or continue operations during a lapse in appropriations, and corresponding uncertainty regarding the extent or magnitude of potential impacts to our operations. Global Trade We continually monitor the global trade environment in response to geopolitical economic developments, as well as changes in tariffs, trade agreements, or sanctions that may impact the Company. The current state of U.S.-China relations remains an ongoing watch item. Since 2018, the U.S. and China have imposed tariffs on each other’s imports. Certain aircraft parts and components that Boeing procures are subject to these tariffs. We are mitigating import costs through Duty Drawback Customs procedures. China is a significant market for commercial aircraft. Boeing has long-standing relationships with our Chinese customers, who represent a key component of our commercial aircraft backlog. Overall, the U.S.-China trade relationship remains stalled as economic and national security concerns continue to be a challenge . Beginning in June 2018, the U.S. Government imposed tariffs on steel and aluminum imports. In response to these tariffs, several major U.S. trading partners have imposed, or announced their intention to impose, tariffs on U.S. goods. The U.S. has subsequently reached agreements with Mexico, Canada, Japan, the United Kingdom, and the European Union 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. The current conflict in Israel and the Gaza Strip has the potential to impact certain of our suppliers, and has already impacted some operations for our airline and lessor customers. We are closely monitoring developments, supporting our employees and customers, and will take mitigating actions as appropriate. 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. 37 Table of Contents Results of Operations (Dollars in millions) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Revenues $23,420 $16,755 $7,876 $6,303 Loss from operations ($1,676) ($1,738) ($678) ($622) Operating margins (7.2) % (10.4) % (8.6) % (9.9) % Revenues BCA revenues increased by $6,665 million for the nine months ended September 30, 2023 compared with the same period in 2022 primarily driven by higher 787 and 737 deliveries. BCA revenues increased by $1,573 million for the three months ended September 30, 2023 compared with the same period in 2022 driven by higher 787 deliveries, partially offset by lower 737 deliveries. Commercial airplane deliveries, including intercompany deliveries, were as follows: 737 * 747 767 * 777 787 Total Deliveries during the first nine months of 2023 286 (6) 1 17 (6) 17 50 371 Deliveries during the first nine months of 2022 277 (10) 3 21 (10) 18 9 328 Deliveries during the third quarter of 2023 70 (1) 8 (5) 8 19 105 Deliveries during the third quarter of 2022 88 (2) 9 (3) 6 9 112 Cumulative deliveries as of 9/30/2023 8,418 1,573 1,288 1,718 1,087 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 $1,676 million for the nine months ended September 30, 2023 compared with $1,738 million in the same period in 2022 reflecting higher 737 and 787 deliveries and lower other period expenses, partially offset by higher spending on research and development and higher abnormal production costs. Abnormal production costs for the nine months ended September 30, 2023 were $1,379 million, including $937 million related to the 787 program and $442 million related to the 777X program. Abnormal production costs for the nine months ended September 30, 2022 were $1,326 million, including $925 million related to the 787 program, $213 million related to the 777X program and $188 million related to the 737 program. BCA loss from operations was $678 million for the three months ended September 30, 2023 compared with $622 million in the same period in 2022 reflecting higher spending on research and development, partially offset by lower other period expenses. Abnormal production costs for the three months ended September 30, 2023 were $424 million, including $244 million related to the 787 program and $180 million related to the 777X program. Abnormal production costs for the three months ended September 30, 2022 were $441 million, including $330 million related to the 787 program and $111 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 38 Table of Contents 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 $392,105 million at September 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 nine months ended September 30, 2023 totaled $11,612 million and primarily relate to 737 and 777X aircraft. The net ASC 606 adjustments for the nine months ended September 30, 2023 resulted in an increase to backlog of $17,871 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 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 9/30/2023 737 747 767 777 777X 787 † Program accounting quantities 11,200 1,574 1,279 1,790 400 1,600 Undelivered units under firm orders 4,031 104 53 318 666 (8) Cumulative firm orders 12,449 1,573 1,392 1,771 318 1,753 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 nine months ended September 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. We continue to work with airlines and government officials to resume airplane deliveries to customers in China, however, there continues to be uncertainty regarding timing. 39 Table of Contents We have approximately 250 aircraft in inventory as of September 30, 2023, including 85 aircraft for customers in China. 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. 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. During the third quarter of 2023, we discovered non-conforming holes in the aft pressure dome of certain 737-7, 737-8 and 737 military derivative aircraft. We are working with our fuselage supplier to rework non-conforming fuselages and ensure newly built aircraft meet our specifications. There is not an immediate safety of flight issue and the in-service fleet can continue operating safely. Inspections and rework have begun on completed aircraft and resulted in lower than expected deliveries in the third quarter of 2023. The recent non-conformance has also disrupted and slowed the production of newly built aircraft including the planned transition from 31 per month to 38 per month, which is now expected by the end of 2023. 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 with 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 accounting quantity for the 767 program increased by 12 units during the three months ended September 30, 2023 due to the program's normal progress of obtaining additional orders and delivering airplanes. The 767 assembly line includes the commercial program and a derivative to support the 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 continue to expect abnormal production costs of approximately $1.0 billion that are being period expensed as incurred until 777X-9 production resumes. We have been gradually restarting the 777X production system and expect all phases to resume during the fourth quarter of 2023. Cumulative abnormal costs recorded through September 30, 2023 totaled $767 million including $442 million of abnormal costs expensed during the nine months ended September 30, 2023. 40 Table of Contents The 777X program has near break-even gross margins at September 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 787 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. At September 30, 2023 and December 31, 2022, we had approximately 75 and 100 aircraft in inventory and expect to deliver most by the end of 2024. We are currently transitioning the production rate from 4 per month to 5 per month. 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 September 30, 2023 totaled $2.6 billion and our estimate of total abnormal costs increased from $2.8 billion to $3.0 billion in the third quarter of 2023 primarily due to supply chain disruption. We do not expect abnormal costs related to abnormally low production rates to continue beyond September 30, 2023, and we expect the remaining abnormal costs related to inspections and rework to be incurred by the end of 2024. 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 737 and 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. 41 Table of Contents 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 FY24, which requested $842 billion in funding for the 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. In addition, 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 September 30, 2023, 29% of BDS backlog was attributable to non-U.S. customers. Results of Operations (Dollars in millions) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Revenues $18,187 $16,981 $5,481 $5,307 Loss from operations ($1,663) ($3,656) ($924) ($2,798) Operating margins (9.1) % (21.5) % (16.9) % (52.7 %) 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. 42 Table of Contents Deliveries of new-build production units, including remanufactures and modifications, were as follows: Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 F/A-18 Models 16 11 3 3 F-15 Models 6 9 4 T-7A Red Hawk 1 1 CH-47 Chinook (New) 8 10 1 1 CH-47 Chinook (Renewed) 7 6 3 2 AH-64 Apache (New) 17 20 5 7 AH-64 Apache (Remanufactured) 38 36 9 8 MH-139 1 4 1 4 P-8 Models 7 10 2 4 KC-46 Tanker 4 9 3 1 Commercial Satellites 3 2 2 Total 108 117 28 36 Revenues BDS revenues for the nine months ended September 30, 2023 increased by $1,206 million compared with the same period in 2022 primarily due to lower charges on development programs and higher revenues on space and proprietary programs. Net unfavorable cumulative contract catch-up adjustments for the nine months ended September 30, 2023 were $676 million better than the comparable period in the prior year largely due to lower charges on development programs in 2023, partially offset by unfavorable performance on other programs. BDS revenues for the three months ended September 30, 2023 increased by $174 million compared with the same period in 2022. Net unfavorable cumulative contract catch-up adjustments for the three months ended September 30, 2023 were $540 million better than the comparable period in the prior year primarily due lower charges on development programs, partially offset by the KC-46A Tanker Lot 8 award in the third quarter of 2022. Loss From Operations BDS loss from operations was $1,663 million for the nine months ended September 30, 2023 compared with $3,656 million in the same period in 2022 primarily due to a reduction in net unfavorable cumulative contract catch-up adjustments, which were $2,483 million better than the net unfavorable impact in the prior year comparable period. The reduction in unfavorable cumulative contract catch-up adjustments included $2,983 million related to the five large fixed-price development programs, partially offset by a $500 million increase in net unfavorable cumulative catch-up adjustments on the remaining portfolio and lower margins on several programs in 2023 than the comparable period in the prior year. During the nine months ended September 30, 2023, losses incurred on the five development programs totaled $1,446 million compared with $4,429 million in the same period in 2022. Additionally, operations were impacted by continued labor instability, development technical challenges and supply chain disruption across other programs including F-15 and satellites. Results in 2023 were also affected by the $315 million impact of satellite contract discussed below. Higher period expenses also contributed to the loss from operations in 2023. BDS loss from operations was $924 million for the three months ended September 30, 2023 compared with $2,798 million in the same period in 2022. The year over year decrease reflects a reduction in net unfavorable cumulative contract catch-up adjustments, which were $1,891 million better than the net unfavorable impact in the prior year comparable period. During the third quarter of 2023, losses incurred on development programs totaled $618 million compared with $2,762 million in the same period in 2022. These reductions were partially offset by lower margins on several programs including F-15 and satellites 43 Table of Contents reflecting continued labor instability, development technical challenges and supply chain disruption. During the three months ended September 30, 2023 , we recorded earnings charges of $315 million resulting from a customer agreement. The charge includes estimated customer considerations as well as increased costs to enhance the constellation and meet lifecycle commitments. See further discussion of fixed-price contracts in Note 9 to our Condensed Consolidated Financial Statements. BDS loss from operations includes our share of earnings from equity method investments of $34 million and $24 million for the nine and three months ended September 30, 2023 compared with equity earnings of $2 million for the nine months ended September 30, 2022 and equity loss of $38 million for the three months ended September 30, 2022. Backlog BDS backlog increased from $54,373 million as of December 31, 2022 to $57,802 million at September 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 reduced award or incentive 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) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Revenues $14,278 $13,044 $4,812 $4,432 Earnings from operations $2,487 $2,093 $784 $733 Operating margins 17.4 % 16.0 % 16.3 % 16.5 % Revenues BGS revenues for the nine months ended September 30, 2023 increased by $1,234 million compared with the same period in 2022 primarily due to higher commercial services revenue driven by market recovery across the commercial portfolio. The net unfavorable impact of cumulative contract catch-up adjustments for the nine months ended September 30, 2023 was $54 million worse than the net favorable impact in the prior year comparable period. BGS revenues for the three months ended September 30, 2023 increased by $380 million compared with the same period in 2022 primarily due to higher commercial services revenue driven by market recovery across the commercial portfolio. The net unfavorable impact of cumulative contract catch-up adjustments for the three months ended September 30, 2023 was $21 million worse than the net favorable impact in the prior year comparable period. Earnings From Operations BGS earnings from operations for the nine months ended September 30, 2023 increased by $394 million compared with the same period in 2022, primarily due to higher commercial services revenue, partially offset by lower government services performance and unfavorable mix. The net unfavorable impact of cumulative contract catch-up adjustments for the nine months ended September 30, 2023 was $60 million worse than the net favorable impact in the prior year comparable period. BGS earnings from operations for the three months ended September 30, 2023 increased by $51 million compared with the same period in 2022, primarily due to higher commercial services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the three months ended September 30, 2023 was $11 million worse than the net unfavorable impact in the prior year comparable period. Backlog BGS backlog decreased from $19,338 million as of December 31, 2022 to $18,441 million at September 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) Nine months ended September 30 2023 2022 Net loss ($2,212) ($4,390) Non-cash items 3,118 3,436 Changes in assets and liabilities 1,673 1,009 Net cash provided by operating activities 2,579 55 Net cash (used)/provided by investing activities (5,241) 6,521 Net cash used by financing activities (5,131) (1,016) Effect of exchange rate changes on cash and cash equivalents (22) (134) Net (decrease)/increase in cash & cash equivalents, including restricted (7,815) 5,426 Cash & cash equivalents, including restricted, at beginning of year 14,647 8,104 Cash & cash equivalents, including restricted, at end of period $6,832 $13,530 Operating Activities Net cash provided by operating activities was $2.6 billion during the nine months ended September 30, 2023, compared with $0.1 billion during the same period in 2022. The $2.5 billion improvement is primarily driven by increases in Advances and progress billings in 2023, partially offset by an income tax refund received in 2022. During the nine months ended September 30, 2023, cash provided by Advances and progress billings was $3.0 billion as compared with $0.2 billion during the same period in 2022. This improvement was partially offset by an unfavorable change in Accrued liabilities of $3.0 billion, primarily driven by higher accrued losses on BDS fixed-price development programs recorded in the prior year and a $1.5 billion income tax refund received during the third quarter of 2022. Concessions paid to 737 MAX customers totaled $0.3 billion and $1.0 billion during the nine months ended September 30, 2023 and 2022. Payables to suppliers who elected to participate in supply chain financing programs increased by $0.4 billion during the nine months ended September 30, 2023 and decreased by $0.1 billion during the nine months ended September 30, 2022. Supply chain financing is not material to our overall liquidity. Investing Activities Cash used by investing activities was $5.2 billion during the nine months ended September 30, 2023, compared with cash provided of $6.5 billion during the same period in 2022. The increase in use of cash during the nine months ended September 30, 2023 compared to the same period in 2022 is primarily due to net contributions to investments of $4.0 billion in 2023 compared to net proceeds from investments of $7.4 billion in 2022. In the nine months ended September 30, 2023 and 2022, capital expenditures were $1.1 billion and $0.9 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 nine months ended September 30, 2023 compared with $1.0 billion during the same period in 2022. During the nine months ended September 30, 2023, net repayments on our debt were $5.1 billion compared with $1.0 billion in the same period in 2022. As of September 30, 2023 the total debt balance was $52.3 billion, down from $57.0 billion at December 31, 2022. At September 30, 2023, $4.9 billion of debt was classified as short-term. Capital Resources We expect to be able to fund our cash requirements through cash and short-term investments and cash provided by operations, as well as continued access to capital markets. At September 30, 2023, we had $6.8 billion of cash, $6.6 billion of short-term investments, and $10.0 billion of unused borrowing capacity on revolving credit line agreements. In the third quarter of 2023, we entered into a $3.0 billion five-year 46 Table of Contents revolving credit agreement expiring in August 2028 and a $0.8 billion 364-day revolving credit agreement expiring in August 2024. The 364-day credit facility has a one-year term out option which allows us to extend the maturity of any borrowings until August 2025. The legacy three-year revolving credit agreement expiring in August 2025, which consists of $3.0 billion of total commitments, and the legacy five-year revolving credit agreement expiring in October 2024, as amended, which consists of $3.2 billion of total commitments, each remain in effect. 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 September 30, 2023. During the third quarter of 2023, S&P upgraded the outlook on our credit rating from negative to stable primarily driven by improving deliveries and expected increases in production. In October 2023, Fitch upgraded our credit rating outlook from stable to positive driven by declining inventory levels, improving production and delivery profile, growing backlog, and forecasted positive free cash flow. 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 September 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 17 to our Condensed Consolidated Financial Statements. Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $855 million at September 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 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, Core operating margin and Core loss per share exclude the FAS/CAS service cost adjustment. The FAS/CAS service cost adjustment represents the difference between the Financial Accounting Standards (FAS) pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. Core loss per share excludes both the FAS/CAS service cost adjustment and non-operating pension and postretirement expenses. Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. Pension costs allocated to BDS and BGS businesses supporting government customers are computed in accordance with U.S. Government Cost Accounting Standards (CAS), which employ different actuarial assumptions and accounting conventions than GAAP. CAS costs are allocable to government contracts. Other postretirement benefit costs are allocated to all business segments based on CAS, which is generally based on benefits paid. The Pension FAS/CAS service cost adjustments recognized in Loss from operations were benefits of $663 million and $218 million for the nine and three months ended September 30, 2023, compared with benefits of $621 million and $208 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 $402 million and $134 million for the nine and three months ended September 30, 2023, compared with benefits of $666 million and $225 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, 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) Nine months ended September 30 Three months ended September 30 2023 2022 2023 2022 Revenues $55,776 $46,628 $18,104 $15,956 Loss from operations, as reported ($1,056) ($3,174) ($808) ($2,792) Operating margins (1.9) % (6.8) % (4.5) % (17.5) % Pension FAS/CAS service cost adjustment (1) ($663) ($621) ($218) ($208) Postretirement FAS/CAS service cost adjustment (1) (200) (225) (63) (71) FAS/CAS service cost adjustment (1) ($863) ($846) ($281) ($279) Core operating loss (non-GAAP) ($1,919) ($4,020) ($1,089) ($3,071) Core operating margins (non-GAAP) (3.4) % (8.6) % (6.0) % (19.2) % Diluted loss per share, as reported ($3.64) ($7.24) ($2.70) ($5.49) Pension FAS/CAS service cost adjustment (1) (1.10) (1.04) (0.36) (0.35) Postretirement FAS/CAS service cost adjustment (1) (0.33) (0.38) (0.10) (0.12) Non-operating pension expense (2) (0.66) (1.13) (0.23) (0.37) Non-operating postretirement expense (2) (0.07) (0.07) (0.02) (0.03) Provision for deferred income taxes on adjustments (3) 0.45 0.55 0.15 0.18 Core loss per share (non-GAAP) ($5.35) ($9.31) ($3.26) ($6.18) Weighted average diluted shares (in millions) 605.0 594.0 607.2 596.3 (1) FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. This adjustment is excluded from Core operating loss (non-GAAP). (2) Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. These expenses are included in Other income, net and are excluded from Core loss per share (non-GAAP). (3) The income tax impact is calculated using the U.S. corporate statutory tax rate. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes to our market risk since December 31, 2022. 49 Table of Contents