BOEING CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview On January 5, 2024, an Alaska Airlines 737-9 flight made an emergency landing after a mid-exit door plug detached in flight. Following the accident, the Federal Aviation Administration (FAA) grounded and required inspections of all 737-9 aircraft with a mid-exit door plug, which constituted the large majority of the approximately 220 737-9 aircraft in the in-service fleet. On January 24, 2024, the FAA approved an enhanced maintenance and inspection process that was required to be performed on each of the grounded 737-9 aircraft. Our 737-9 operators returned their fleets to service in the first quarter. All 737-9 aircraft in production are undergoing this same enhanced inspection process prior to delivery. The Alaska Airlines accident and the resulting actions we are taking, including slowing production, to improve compliance with our manufacturing quality control requirements have significantly impacted our financial position, results of operations and cash flows during the first half of 2024. 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 2024 2023 2024 2023 Revenues $33,435 $37,672 $16,866 $19,751 GAAP Loss from operations ($1,176) ($248) ($1,090) ($99) Operating margins (3.5) % (0.7) % (6.5) % (0.5) % Effective income tax rate 5.2 % 35.9 % 5.0 % 62.8 % Net loss attributable to Boeing Shareholders ($1,782) ($563) ($1,439) ($149) Diluted loss per share ($2.90) ($0.93) ($2.33) ($0.25) Non-GAAP (1) Core operating loss ($1,780) ($830) ($1,392) ($390) Core operating margins (5.3) % (2.2) % (8.3) % (2.0) % Core loss per share ($4.04) ($2.08) ($2.90) ($0.82) (1) These measures exclude certain components of pension and other postretirement benefit expense. See pages 51-52 for important information about these non-GAAP measures and reconciliations to the most directly comparable GAAP measures. 36 Table of Contents Revenues The following table summarizes Revenues: (Dollars in millions) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Commercial Airplanes $10,656 $15,544 $6,003 $8,840 Defense, Space & Security 12,971 12,706 6,021 6,167 Global Services 9,934 9,466 4,889 4,746 Unallocated items, eliminations and other (126) (44) (47) (2) Total $33,435 $37,672 $16,866 $19,751 Revenues for the six months ended June 30, 2024, decreased by $4,237 million compared with the same period in 2023 driven by lower revenues at Commercial Airplanes (BCA), partially offset by higher revenues at Global Services (BGS) and Defense, Space & Security (BDS). BCA revenues decreased by $4,888 million primarily driven by lower 737 and 787 deliveries and 737-9 customer considerations related to the January 2024 grounding. BGS revenues increased by $468 million primarily due to higher commercial services revenue, partially offset by lower government services revenue. BDS revenues increased by $265 million primarily due to higher volume on weapons and proprietary programs, partially offset by higher net unfavorable cumulative catch-up adjustments on major fixed-price development programs. Revenues for the three months ended June 30, 2024, decreased by $2,885 million compared with the same period in 2023 driven by lower revenues at BCA and BDS, partially offset by higher revenues at BGS. BCA revenues decreased by $2,837 million primarily driven by lower 787 and 737 deliveries. BDS revenues decreased by $146 million compared with the same period in 2023 primarily driven by higher unfavorable cumulative contract catch-up adjustments on certain major fixed-price development programs, partially offset by increased volume on weapons and proprietary programs. BGS revenues increased by $143 million primarily due to higher commercial services revenue, partially offset by lower government services revenue. Revenues will continue to be significantly impacted until the global supply chain stabilizes, labor instability diminishes, and deliveries ramp up. Loss from Operations The following table summarizes Loss from operations: (Dollars in millions) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Commercial Airplanes ($1,858) ($998) ($715) ($383) Defense, Space & Security (762) (739) (913) (527) Global Services 1,786 1,703 870 856 Segment operating loss (834) (34) (758) (54) Unallocated items, eliminations and other (946) (796) (634) (336) Pension FAS/CAS service cost adjustment 460 445 230 222 Postretirement FAS/CAS service cost adjustment 144 137 72 69 Loss from operations (GAAP) ($1,176) ($248) ($1,090) ($99) FAS/CAS service cost adjustment * (604) (582) (302) (291) Core operating loss (Non-GAAP) ** ($1,780) ($830) ($1,392) ($390) * 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. 37 Table of Contents ** Core operating loss is a Non-GAAP measure that excludes the FAS/CAS service cost adjustment. See pages 51-52. Loss from operations for the six months ended June 30, 2024, increased by $928 million compared with the same period in 2023. BCA loss from operations increased by $860 million reflecting lower deliveries, lower margins driven by production disruption, and 737-9 customer considerations related to the January 2024 grounding, partially offset by lower abnormal production costs. BDS loss from operations increased by $23 million compared to the same period in 2023 primarily due to higher charges in 2024 on certain major fixed-price development programs, partially offset by volume growth in 2024 and lower unfavorable cumulative contract catch-up adjustments on other programs. BGS earnings from operations increased by $83 million primarily due to higher commercial services revenue, partially offset by lower government services revenue. Loss from operations on Unallocated items, eliminations and other increased by $150 million compared with the same period in 2023 primarily due to an increase in eliminations and other unallocated items, partially offset by a decrease in share-based plans expense. Loss from operations for the three months ended June 30, 2024, increased by $991 million compared with the same period in 2023. BDS loss from operations increased by $386 million compared to the same period in 2023 primarily due to an increase in unfavorable cumulative contract catch-up adjustments driven by higher charges in 2024 on certain major fixed-price development programs. BCA loss from operations increased by $332 million reflecting lower deliveries and lower margins driven by production disruption, partially offset by lower abnormal production costs. BGS earnings from operations increased by $14 million primarily due to higher commercial services revenue, partially offset by lower government services revenue. Loss from operations on Unallocated items, eliminations and other increased by $298 million compared with the same period in 2023 primarily due to an increase in eliminations and other unallocated items. Core operating loss for the six and three months ended June 30, 2024, increased by $950 million and $1,002 million compared with the same periods in 2023, primarily due to changes in Loss from operations as described above. For information related to Postretirement Plans, see Note 13 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 2024 2023 2024 2023 Share-based plans $53 ($38) $43 $14 Deferred compensation (49) (96) (19) (42) Amortization of previously capitalized interest (46) (47) (23) (24) Research and development expense, net (188) (149) (99) (73) Eliminations and other unallocated items (716) (466) (536) (211) Unallocated items, eliminations and other ($946) ($796) ($634) ($336) Share-based plans income for the six and three months ended June 30, 2024, was $53 million and $43 million compared to share-based plans expense of $38 million and income of $14 million for the same periods in 2023. The increase in share-based plans income for the six and three months ended June 30, 2024 compared with the same periods in 2023 was primarily due to fewer outstanding share-based awards in 2024. 38 Table of Contents Deferred compensation expense for the six months ended June 30, 2024, decreased by $47 million compared with the same period in 2023 primarily driven by changes in our stock price. Deferred compensation expense for the three months ended June 30, 2024, decreased by $23 million compared with the same period in 2023 primarily driven by changes in broad stock market conditions. Research and development expense for the six and three months ended June 30, 2024, increased by $39 million and $26 million compared with the same periods in 2023 due to higher spending on enterprise product development. Eliminations and other unallocated items expense for the six and three months ended June 30, 2024, includes an earnings charge of $244 million that reflects a fine that would be paid if an agreement with the U.S. Department of Justice is approved by the federal district court. For additional discussion, see Note 18 to our Condensed Consolidated Financial Statements. Other Earnings Items (Dollars in millions) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Loss from operations ($1,176) ($248) ($1,090) ($99) Other income, net 525 622 248 320 Interest and debt expense (1,242) (1,270) (673) (621) Loss before income taxes (1,893) (896) (1,515) (400) Income tax benefit 99 322 76 251 Net loss from continuing operations (1,794) (574) (1,439) (149) Less: net loss attributable to noncontrolling interest (12) (11) Net loss attributable to Boeing Shareholders ($1,782) ($563) ($1,439) ($149) Other income, net for the six and three months ended June 30, 2024, decreased by $97 million and $72 million compared with the same periods in 2023 primarily due to a decrease in interest income on short-term investments and non-operating pension income. For information on changes related to non-operating pension and postretirement expenses, see Note 13 to our Condensed Consolidated Financial Statements. Interest and debt expense for the six and three months ended June 30, 2024, decreased by $28 million and increased by $52 million compared with the same periods in the prior year. For additional discussion related to Income Taxes, see Note 4 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 39 Table of Contents 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 2024 2023 Change 2024 2023 Change Cost of sales $30,330 $33,810 ($3,480) $15,637 $17,812 ($2,175) Cost of sales as a % of Revenues 90.7 % 89.7 % 1.0 % 92.7 % 90.2 % 2.5 % Cost of sales for the six months ended June 30, 2024, decreased by $3,480 million, or 10%, compared with the same period in 2023, primarily due to lower revenues at BCA. Cost of sales as a percentage of Revenues remained largely unchanged during the six months ended June 30, 2024, compared with the same period in 2023. Cost of sales for the three months ended June 30, 2024, decreased by $2,175 million, or 12%, compared with the same period in 2023, primarily due to lower revenues at BCA. Cost of sales as a percentage of Revenues increased during the three months ended June 30, 2024, compared with the same period in 2023 primarily due to higher charges on BDS fixed-price development programs and lower margins at BCA. 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 2024 2023 2024 2023 Commercial Airplanes $1,073 $915 $555 $471 Defense, Space & Security 494 420 259 225 Global Services 67 54 41 28 Other 188 149 99 73 Total $1,822 $1,538 $954 $797 Research and development expense increased by $284 million and $157 million during the six and three months ended June 30, 2024, compared to the same periods in 2023. The increase in expense was primarily due to higher spending on the 777X program at BCA. Backlog (Dollars in millions) June 30 2024 December 31 2023 Commercial Airplanes $436,574 $440,507 Defense, Space & Security 59,055 59,012 Global Services 19,487 19,869 Unallocated items, eliminations and other 758 807 Total Backlog $515,874 $520,195 Contractual backlog $495,358 $497,094 Unobligated backlog 20,516 23,101 Total Backlog $515,874 $520,195 40 Table of Contents Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, orders where customers have the unilateral right to terminate, and unobligated U.S. and non-U.S. government contract funding. The decrease in contractual backlog during the six months ended June 30, 2024, was primarily due to a decrease in BCA backlog. We may experience reductions to backlog and/or significant order cancellations due to production disruptions and/or further delays to entry into service of the 777X, 737-7 and/or 737-10. 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, 2024. 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 and we have 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 quality and safety as well as the health and stability of the supply chain. 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 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. 41 Table of Contents Segment Results of Operations and Financial Condition Commercial Airplanes Results of Operations (Dollars in millions) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Revenues $ 10,656 $ 15,544 $ 6,003 $ 8,840 Loss from operations ($ 1,858 ) ($ 998 ) ($ 715 ) ($ 383 ) Operating margins (17.4)% (6.4)% (11.9) % (4.3) % Revenues BCA revenues decreased by $4,888 million for the six months ended June 30, 2024, compared with the same period in 2023 driven by lower 737 and 787 deliveries and 737-9 customer considerations related to the January 2024 grounding. BCA revenues decreased by $2,837 million for the three months ended June 30, 2024, compared with the same period in 2023 driven by lower 787 and 737 deliveries. Commercial airplane deliveries, including intercompany deliveries, were as follows: 737 * 747 767 * 777 787 Total Deliveries during the first six months of 2024 137 (2) 9 (5) 7 22 175 Deliveries during the first six months of 2023 216 (5) 1 9 (1) 9 31 266 Deliveries during the second quarter of 2024 70 (1) 6 (3) 7 9 92 Deliveries during the second quarter of 2023 103 (3) 8 (1) 5 20 136 Cumulative deliveries as of 6/30/2024 8,665 1,573 1,312 1,734 1,132 Cumulative deliveries as of 12/31/2023 8,528 1,573 1,303 1,727 1,110 * Intercompany deliveries identified by parentheses. Loss From Operations BCA loss from operations was $ 1,858 million for the six months ended June 30, 2024, compared with $ 998 million in the same period in 2023 reflecting lower deliveries, lower margins driven by production disruption, and 737-9 customer considerations related to the January 2024 grounding, partially offset by lower abnormal production costs. BCA loss from operations was $ 715 million for the three months ended June 30, 2024, compared with $ 383 million in the same period in 2023 reflecting lower deliveries and lower margins driven by production disruption, partially offset by lower abnormal production costs. 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 probable. Backlog excludes options and 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. 42 Table of Contents BCA total backlog decreased from $440,507 million as of December 31, 2023, to $436,574 million at June 30, 2024 reflecting an increase in the value of existing orders that, in our assessment, do not meet the accounting requirements of ASC 606 for inclusion in backlog and cancellations, partially offset by new orders in excess of deliveries. Aircraft order cancellations during the six months ended June 30, 2024 totaled $2,400 million and primarily relate to 737 aircraft. Net ASC 606 adjustments during the six months ended June 30, 2024 totaled $4,784 million and primarily related to 737 aircraft. ASC 606 adjustments include consideration of aircraft orders where a customer-controlled contingency may exist, as well as an assessment of whether the customer is committed to perform, impacts of geopolitical events or related sanctions, or whether it is probable that the customer will pay the full amount of consideration when it is due. We may experience reductions to backlog and/or significant order cancellations due to production disruptions and/or further delays to entry into service of the 777X, 737-7 and/or 737-10. 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 6/30/2024 737 767 777 † 777X 787 † Program accounting quantities 11,600 1,279 1,790 500 1,700 Undelivered units under firm orders 4,173 * 95 51 (2) 442 716 (8) Cumulative firm orders 12,838 1,407 1,785 442 1,848 As of 12/31/2023 737 767 777 777X 787 † Program accounting quantities 11,600 1,279 1,790 500 1,700 Undelivered units under firm orders 4,332 104 48 416 726 (8) Cumulative firm orders 12,860 1,407 1,775 416 1,836 † Customer financing aircraft orders are identified in parentheses. * Approximate undelivered orders by minor model: 737-7 (7%), 737-8 (65%), 737-9 (5%) and 737-10 (23%). Program Highlights 737 Program On January 10, 2024, the FAA notified Boeing that it had initiated an investigation into the 737 quality control system (737-9 Production Audit). This was followed by the FAA announcing actions to increase its oversight of Boeing, including conducting: 1. An audit involving the 737-9 production line and its suppliers to evaluate Boeing’s compliance with approved quality procedures, 2. Increased monitoring of Boeing’s 737-9 in-service events, and 3. An assessment of safety risks around delegated authority and quality oversight, and examination of options to move these functions under independent third parties. On January 24, 2024, the FAA stated it will not approve production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with required quality control procedures. The FAA communicated its findings from the 737-9 Production Audit of Boeing and Spirit AeroSystems Holdings, Inc. (Spirit) on February 28, 2024. The FAA found multiple instances where the companies 43 Table of Contents failed to comply with manufacturing quality control requirements and provided 90 days from March 1, 2024, to submit a corrective action plan. On May 30, 2024, we submitted our safety and quality plan to address the issues identified by the FAA. Our planned production rates are dependent on our suppliers' ability to support our operations and our ability to meet heightened quality control requirements. Prior to the Alaska Airlines accident, we were operating at a production rate of 38 per month. During the first half of 2024, as part of our plan to address the issues identified, we slowed production rates and delayed planned production rate increases to reduce traveled work in our factory, as well as at our suppliers. During the first quarter of 2024, we began conducting fuselage inspections at Spirit to improve quality prior to shipment to Boeing. In the second quarter of 2024, production rates gradually increased as we implemented new processes as part of our safety and quality plan. We are working to return to 38 per month by the end of 2024. As of June 30, 2024, we had approximately 90 737-8 aircraft in inventory that were produced prior to 2023, including approximately 65 aircraft for customers in China. We expect to deliver most of the aircraft in inventory by the end of 2024. We are following the lead of the FAA as we work through the certification process of the 737-7 and 737-10 models. During the first quarter of 2024, the program completed the first phase of FAA certification flight testing for the 737-10. As of June 30, 2024, we had approximately 35 737-7 and 737-10 aircraft in inventory. We are planning to incorporate engineering solutions to the de-icing systems on the 737-7 and 737-10 prior to certification, which has delayed certification and first deliveries. The production slow-down and certification delays had an adverse impact on our financial position, results of operations and cash flows during the first half of 2024. This is expected to continue until production rates recover. In the event that we are unable to deliver aircraft and/or increase future production rates consistent with our assumptions, our financial position, results of operations and cash flows will continue to be adversely affected. See further discussion of the 737 MAX in Note 10 and Note 18 to our Condensed Consolidated Financial Statements . 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 at a production rate of approximately 3 aircraft per month. We are continuing to experience factory disruption, including supply chain delays and quality issues. We have slowed production in 2024 to reduce traveled work in our factory and enable supply chain recovery, resulting in higher near-term production costs. See further discussion of the KC-46A Tanker program in Note 10 to our Condensed Consolidated Financial Statements. 777 and 777X Programs We are currently at a combined production rate of 4 per month for the 777/777X programs. In the fourth quarter of 2023, the 777X program resumed production. The programs are experiencing factory disruption including supply chain delays and challenges associated with the resumption of 777X production. We are following the lead of the FAA as we work through the certification process. In July 2024, we obtained approval from the FAA to begin the first phase of FAA certification flight testing. We expect the first delivery of the 777-9 to occur in 2025 and the 777-8 freighter to occur in 2027. First delivery of the 777-8 passenger aircraft is not expected to occur before 2030. The 777X program had near break-even gross margins at June 30, 2024. The level of profitability on the 777X program will be subject to a number of factors. These factors include aircraft certification requirements and timing, change incorporation on completed aircraft, production disruption due to labor instability and supply chain disruption, customer delivery timing and negotiations, further production rate adjustments for the 777X or other commercial aircraft programs, and contraction of the accounting quantity. One or more of these factors could result in reach-forward losses in future periods. 44 Table of Contents 787 Program In the first half of 2024, we slowed production to below 5 per month primarily reflecting supply chain constraints and production issues. Delays associated with business class seats are also adversely impacting 2024 deliveries. As of June 30, 2024, we had approximately 35 aircraft in inventory that were produced prior to 2023 and required rework which we expect to complete by the end of 2024. The inspections and rework costs on inventoried aircraft are accounted for as abnormal production costs, and we expensed $157 million in the six months ended June 30, 2024. Additional Considerations On June 30, 2024, we entered into an agreement to acquire Spirit. See Note 2 to our Condensed Consolidated Financial Statements We are currently in contract negotiations with the International Association of Machinists and Aerospace Workers District 751 (IAM 751). IAM 751 represents over 30,000 Boeing manufacturing employees primarily located in Washington state. The current contract will expire on September 12, 2024. If we are unable to successfully negotiate a new contract with IAM 751 and/or experience work stoppages or other disruptions, our financial position, results of operations and cash flows could be adversely impacted. Defense, Space & Security Overview The Consolidated Appropriations Act, 2024, and the Further Consolidated Appropriations Act, 2024, enacted in March 2024, provided fiscal year 2024 appropriations for government departments and agencies, including $844 billion for the U.S. Department of Defense (U.S. DoD) and $25 billion for the National Aeronautics and Space Administration (NASA). They included funding for Boeing’s major programs, including P-8, CH-47 Chinook, F-15, KC-46A Tanker, AH-64 Apache, V-22 Osprey, and Space Launch System. In March 2024, the U.S. government released the President's budget request for fiscal year 2025 (FY25), which requested $850 billion in funding for the U.S. DoD and $25 billion for NASA. There is ongoing uncertainty with respect to program-level appropriations for the U.S. DoD, NASA and other government agencies for FY25 and beyond. Future budget cuts or investment priority changes, including changes associated with the authorizations and appropriations process, could result in reductions, cancellations and/or delays of existing contracts or programs. Any of these impacts could have a material effect on our results of operations, financing position, and/or cash flows. 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, 2024, 31% of BDS backlog was attributable to non-U.S. customers. 45 Table of Contents Results of Operations (Dollars in millions) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Revenues $12,971 $12,706 $6,021 $6,167 Loss from operations ($762) ($739) ($913) ($527) Operating margins (5.9) % (5.8) % (15.2) % (8.5 %) 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 2024 2023 2024 2023 F/A-18 Models 4 13 3 6 F-15 Models 7 6 6 4 CH-47 Chinook (New) 2 7 1 2 CH-47 Chinook (Remanufactured) 5 4 4 3 AH-64 Apache (New) 3 12 3 5 AH-64 Apache (Remanufactured) 13 29 7 16 P-8 Models 3 5 2 2 KC-46 Tanker 5 1 2 Commercial Satellites 3 Total 42 80 28 38 Revenues BDS revenues for the six months ended June 30, 2024 increased by $265 million compared with the same period in 2023. The increase reflects higher volume on weapons and proprietary programs, partially offset by higher net unfavorable cumulative catch-up adjustments on major fixed-price development programs. Net unfavorable cumulative contract catch-up adjustments for the six months ended June 30, 2024 were $118 million higher than the prior year comparable period. BDS revenues for the three months ended June 30, 2024 decreased by $146 million compared with the same period in 2023. Unfavorable cumulative contract catch-up adjustments were $222 million higher than the comparable period in the prior year largely due to charges on certain major fixed-price development programs. This was partially offset by increased volume on weapons and proprietary programs. Loss From Operations BDS loss from operations was $762 million for the six months ended June 30, 2024, compared with $739 million in the same period in 2023. Net unfavorable cumulative contract catch-up adjustments were $282 million higher than the comparable period in the prior year. Higher charges in 2024 on major fixed-price development programs of $438 million were partially offset by volume growth in 2024 and lower unfavorable cumulative contract catch-up adjustments on other programs. During the first half of 2024, losses incurred on the five major fixed-price development programs totaled $1,266 million, including 46 Table of Contents KC-46A Tanker $519 million, T-7A Red Hawk $372 million, VC-25B $250 million, and Commercial Crew $125 million. During the first half of 2023, losses incurred on development programs totaled $828 million, including Commercial Crew $288 million, KC-46A Tanker $245 million, T-7A Red Hawk $189 million and MQ-25 $106 million. These higher charges were offset by less unfavorable cumulative contract catch-up adjustments on fighter and satellite programs and higher volume from weapons and proprietary programs. See further discussion of fixed-price contracts in Note 10 to our Condensed Consolidated Financial Statements. BDS loss from operations was $913 million for the three months ended June 30, 2024, compared with loss from operations of $527 million in the same period in 2023. The year over year increase in losses reflects an increase in unfavorable cumulative contract catch-up adjustments which were $440 million higher than the comparable period in the prior year. During the second quarter of 2024, losses incurred on the five major fixed-price development programs totaled $1,044 million compared with $514 million in the same period in 2023. Earnings in 2023 were adversely impacted by lower margins on several programs including fighters and satellite programs reflecting labor instability, development technical challenges and supply chain disruption. See further discussion of fixed-price contracts in Note 10 to our Condensed Consolidated Financial Statements. BDS loss from operations includes our share of earnings from equity method investments of $95 million and $20 million for the six and three months ended June 30, 2024, compared with $10 million and $24 million for the same periods in 2023. Backlog BDS backlog of $59,055 million at June 30, 2024 compared with $59,012 million as of December 31, 2023, reflects 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. 47 Table of Contents Global Services Results of Operations (Dollars in millions) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Revenues $9,934 $9,466 $4,889 $4,746 Earnings from operations $1,786 $1,703 $870 $856 Operating margins 18.0 % 18.0 % 17.8 % 18.0 % Revenues BGS revenues for the six months ended June 30, 2024 increased by $468 million compared with the same period in 2023, primarily due to higher commercial services revenue, partially offset by lower government services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the six months ended June 30, 2024 was $65 million higher than the prior year comparable period. BGS revenues for the three months ended June 30, 2024 increased by $143 million compared with the same period in 2023, primarily due to higher commercial services revenue, partially offset by lower government services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the three months ended June 30, 2024 was $55 million worse than the net favorable impact in the prior year comparable period. Earnings From Operations BGS earnings from operations for the six months ended June 30, 2024 increased by $83 million compared with the same period in 2023, primarily due to higher commercial services revenue, partially offset by lower government services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the six months ended June 30, 2024 was $70 million higher than the prior year comparable period. BGS earnings from operations for the three months ended June 30, 2024 increased by $14 million compared with the same period in 2023, primarily due to higher commercial services revenue, partially offset by lower government services revenue. The net unfavorable impact of cumulative contract catch-up adjustments for the three months ended June 30, 2024 was $64 million worse than the net favorable impact in the prior year comparable period. Backlog BGS total backlog decreased from $19,869 million at December 31, 2023 to $19,487 million at June 30, 2024, primarily due to revenue recognized on contracts awarded in prior years, partially offset by timing of awards. 48 Table of Contents Liquidity and Capital Resources Cash Flow Summary (Dollars in millions) Six months ended June 30 2024 2023 Net loss ($1,794) ($574) Non-cash items 2,039 2,197 Changes in assets and liabilities (7,530) 934 Net cash (used)/provided by operating activities (7,285) 2,557 Net cash used by investing activities (26) (4,838) Net cash provided/(used) by financing activities 5,538 (5,093) Effect of exchange rate changes on cash and cash equivalents (25) 2 Net decrease in cash & cash equivalents, including restricted (1,798) (7,372) Cash & cash equivalents, including restricted, at beginning of year 12,713 14,647 Cash & cash equivalents, including restricted, at end of period $10,915 $7,275 Operating Activities Net cash used by operating activities was $7.3 billion during the six months ended June 30, 2024, compared with cash provided of $2.6 billion during the same period in 2023. The $9.9 billion increase in cash used by operating activities was primarily driven by changes in commercial airplane program inventory. Changes in assets and liabilities for the six months ended June 30, 2024, decreased by $8.5 billion compared with the same period in 2023 primarily driven by unfavorable changes in Inventories ($5.7 billion), Accounts payable ($1.1 billion), and Unbilled receivables ($0.6 billion). The growth in Inventories was primarily driven by lower deliveries on our commercial airplane programs in the first half of 2024 as compared to the same period in 2023. Concessions paid to 737 MAX customers totaled $681 million and $273 million for the six months ended June 30, 2024 and 2023. Reductions in Accounts payable in 2024 were a use of cash while growth in Accounts payable in 2023 was a source of cash. The increase in Unbilled receivables was primarily driven by revenue recognized at BDS in excess of billings. Payables to suppliers who elected to participate in supply chain financing programs decreased by $0.2 billion during the six months ended June 30, 2024 and increased by $0.1 billion during the six months ended June 30, 2023. Investing Activities Cash used by investing activities was $26 million during the six months ended June 30, 2024, compared with $4.8 billion during the same period in 2023. The decrease in cash outflows during the six months ended June 30, 2024, compared to the same period in 2023 was primarily due to net proceeds from investments of $1.6 billion in 2024 compared with net contributions to investments of $3.9 billion in 2023. During the six months ended June 30, 2024 and 2023, capital expenditures were $1.0 billion and $0.8 billion. We continue to expect capital expenditures in 2024 to be higher than in 2023. Financing Activities Cash provided by financing activities was $5.5 billion during the six months ended June 30, 2024, compared with cash used of $5.1 billion during the same period in 2023. During the six months ended June 30, 2024, net borrowings were $5.6 billion compared with net repayments of $5.1 billion during the same period in 2023, primarily due to the $10.0 billion of fixed-rate senior notes issued in the second quarter of 2024. As of June 30, 2024, the total debt balance was $57.9 billion, up from $52.3 billion at December 31, 2023. At June 30, 2024, $4.8 billion of debt was classified as short-term. Capital Resources On June 30, 2024, we entered into an agreement to acquire Spirit in an all-stock transaction at an equity value of approximately $4.7 billion, or $37.25 per share of Spirit Class A Common Stock. The transaction 49 Table of Contents will include the assumption of Spirit's net debt at closing. See Note 2 to our Condensed Consolidated Financial Statements. 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, 2024, we had $10.9 billion of cash, $1.7 billion of short-term investments, and $10.0 billion of unused borrowing capacity on revolving credit line agreements. In the second quarter of 2024, we entered into a $4.0 billion five-year revolving credit agreement expiring in May 2029. Effective May 15, 2024, we terminated the $0.8 billion 364-day revolving credit agreement expiring in August 2024, and the $3.2 billion five-year revolving credit agreement expiring in October 2024, as amended. Our legacy $3.0 billion three-year revolving credit agreement expiring in August 2025 and legacy $3.0 billion five-year revolving credit agreement expiring in August 2028 each remain in effect. We continue to be in full compliance with all covenants contained in our debt and credit facility agreements. We anticipate that these credit lines will remain undrawn and primarily serve as back-up liquidity to support our general corporate borrowing needs. We continue to maintain investment grade credit ratings. During the second quarter of 2024, Moody’s downgraded our long-term and short-term credit ratings to Baa3/P-3 with negative outlook from Baa2/P-2 with negative watch. Our S&P and Fitch credit ratings remained unchanged; however, S&P and Fitch revised our credit outlook to negative from stable. The revisions to our credit ratings and outlook were primarily driven by concern that we will be unable to deliver commercial aircraft at the volumes required to materially expand free cash flow and retire debt in a reasonable timeframe. We expect to be able to access capital markets when we require additional funding in order to pay off existing debt, address further impacts to our business related to market developments, fund outstanding financing commitments or meet other business requirements. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook or credit ratings, and/or associated changes in demand for our products and services. These risks will be particularly acute if we are subject to further credit rating downgrades. The occurrence of any or all of 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, 2024, 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 11 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 18 to our Condensed Consolidated Financial Statements. Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $831 million at June 30, 2024. For additional information, see Note 10 to our Condensed Consolidated Financial Statements. 50 Table of Contents Non-GAAP Measures Core Operating Earnings/(Loss), Core Operating Margin and Core Earnings/(Loss) Per Share Our unaudited condensed consolidated interim financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) which we supplement with certain non-GAAP financial information. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Core operating earnings/(loss), Core operating margin and Core earnings/(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 earnings/(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 $460 million and $230 million for the six and three months ended June 30, 2024, compared with benefits of $445 million and $222 million for the same periods in 2023. The higher benefits in 2024 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 $245 million and $122 million for the six and three months ended June 30, 2024, compared with benefits of $268 million and $134 million for the same periods in 2023. The lower benefits in 2024 were primarily due to lower expected return on plan assets and higher amortization of actuarial losses, partially offset by lower interest cost. For further discussion of pension and other postretirement costs see the Management’s Discussion and Analysis on page 26 of our 2023 Annual Report on Form 10-K. Management uses core operating earnings/(loss), core operating margin and core earnings/(loss) 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. 51 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) Six months ended June 30 Three months ended June 30 2024 2023 2024 2023 Revenues $33,435 $37,672 $16,866 $19,751 Loss from operations, as reported ($1,176) ($248) ($1,090) ($99) Operating margins (3.5) % (0.7) % (6.5) % (0.5) % Pension FAS/CAS service cost adjustment (1) ($460) ($445) ($230) ($222) Postretirement FAS/CAS service cost adjustment (1) (144) (137) (72) (69) FAS/CAS service cost adjustment (1) ($604) ($582) ($302) ($291) Core operating loss (non-GAAP) ($1,780) ($830) ($1,392) ($390) Core operating margins (non-GAAP) (5.3) % (2.2) % (8.3) % (2.0) % Diluted loss per share, as reported ($2.90) ($0.93) ($2.33) ($0.25) Pension FAS/CAS service cost adjustment (1) (0.75) (0.73) (0.37) (0.37) Postretirement FAS/CAS service cost adjustment (1) (0.23) (0.23) (0.12) (0.11) Non-operating pension income (2) (0.40) (0.45) (0.20) (0.22) Non-operating postretirement income (2) (0.06) (0.05) (0.03) (0.02) Provision for deferred income taxes on adjustments (3) 0.30 0.31 0.15 0.15 Core loss per share (non-GAAP) ($4.04) ($2.08) ($2.90) ($0.82) Weighted average diluted shares (in millions) 614.8 603.9 616.6 605.5 (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 expense/(income) represents the components of net periodic benefit cost/(income) other than service cost/(income). This expense/(income) is included in Other income, net and is 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, 2023. 52 Table of Contents