Item 1A. Risk Factors
An investment in our common stock or debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past or projected future performance. We urge investors to consider carefully the risk factors described below in evaluating the information contained in this report.
Risks Related to COVID-19
We face significant risks related to the spread of the COVID-19 virus and developments surrounding the global pandemic have had, and will continue to have, significant effects on our business, financial condition, results of operations, and cash flows. We also face significant risks related to the global economic downturn and severe reduction in commercial air traffic caused by the pandemic. These risks include materially reduced demand for our products and services, increased instability in our supply chain, and challenges to the ongoing viability of some of our customers. We may face similar risks in connection with any future public health crises, including resurgences in the spread of COVID-19.
The COVID-19 pandemic has subjected our business, operations, financial performance, cash flows and financial condition to a number of risks, including, but not limited to those discussed below.
Operations-related risks: As a result of the COVID-19 pandemic, we are facing increased operational challenges from the need to protect employee health and safety. These challenges have included, and may in the future include production site shutdowns, and workplace disruptions and restrictions on the movement of people, raw materials and goods, both at our own facilities and those of our customers and suppliers.
For example, during the second quarter of 2020, we temporarily suspended operations in Puget Sound, South Carolina, and Philadelphia, as well as at several other key production sites. We had not previously experienced a complete suspension of our operations at these production sites. While we have resumed operations at all of our production sites we cannot predict whether or where further production disruptions could be required or what the ongoing impact of COVID-19-related operating restrictions will be. For example, we continue to experience additional operating costs due to social distancing requirements and other factors related to COVID-19 restrictions. We cannot predict the impact that future production disruptions may have on our business, operations, financial performance and financial condition. We continue to monitor federal, state, and municipal health authorities for new or modified guidance and requirements concerning the COVID-19 pandemic, and we may be required to impose additional operational restrictions and/or suspend operations at key production sites based on these requirements and recommendations and/or workplace disruptions caused by COVID-19.
Many of our suppliers also were required to suspend operations during the second quarter of 2020, and they may experience additional disruptions in 2021. Any such disruptions could have severe adverse impacts on our production costs, delivery schedule and/or ability to meet customer commitments.
Any prolonged suspension of operations or delayed recovery in our operations, and/or any similar suspension of operations or delayed recovery at one or more of our key suppliers, or the failure of any of our key suppliers, would result in further challenges to our business, leading to a further material adverse effect on our business, financial condition, results of operations, and cash flows.
Liquidity risks:The COVID-19 pandemic has also had a significant impact on our liquidity and overall debt levels. During the year ended December 31, 2020, net cash used by operating activities was $18.4 billion. At December 31, 2020, cash and short-term investments totaled $25.6 billion. Our debt balance totaled $63.6 billion at December 31, 2020, up from $27.3 billion at December 31, 2019. We expect negative operating cash flows in future quarters until deliveries begin to return to historical levels, and if
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the pace and scope of the recovery are worse than we currently contemplate, we may need to obtain additional financing in order to fund our operations and obligations. If we were to need to obtain additional financing, uncertainty related to COVID-19 and its impact on us and the aerospace industry, as well as continued uncertainty with respect to our credit rating could limit our access to credit markets and we may have difficulty obtaining financing on terms acceptable to us or at all. In addition, certain of our customers may also be unable to make timely payments to us. Factors that could limit our access to additional liquidity include further disruptions in the global capital markets and/or additional declines in our financial performance, outlook or credit ratings. The occurrence of any or all of these events could adversely affect our ability to fund our operations and/or meet outstanding debt obligations and contractual commitments. In addition, further downgrades in our credit ratings could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets, and a significant downgrade could have an adverse impact on our businesses.
Customer-related risks: Commercial air traffic has fallen dramatically due to the COVID-19 pandemic. This trend has impacted passenger traffic most severely. Near-term cargo traffic has also fallen, but to a lesser extent as global trade has begun to recover. Most airlines have significantly reduced their capacity, and many could implement further reductions in the near future. Many airlines are also implementing significant reductions in staffing. These capacity changes are causing, and are expected to continue to cause, negative impacts to our customers’ revenue, earnings, and cash flow, and in some cases may threaten the future viability of some of our customers, potentially causing defaults within our customer financing portfolio, which was $2.0 billion as of December 31, 2020 and/or requiring us to remarket aircraft that have already been produced and/or are currently in backlog. If we are unable to successfully remarket these aircraft and/or the narrow-body and wide-body markets do not recover as soon as we are currently assuming, or if we are required to further reduce production rates and/or contract the accounting quantity on any of our commercial programs, we could experience material reductions in earnings and/or be required to recognize a reach-forward loss on one or more of our programs. For example, in the fourth quarter of 2020, we recognized a reach-forward loss on the 777X program in part due to impacts related to the COVID-19 pandemic. In addition, if 737 MAX aircraft in one or more jurisdictions remain grounded for an extended period of time, we may experience additional reductions to backlog and/or significant order cancellations. Additionally, we may experience fewer new orders and increased cancellations across all of our commercial airplane programs as a result of the COVID-19 pandemic and associated impacts on demand. Our customers may also lack sufficient liquidity to purchase new aircraft due to impacts from the pandemic. We are also observing a significant increase in the number of requests for payment deferrals, contract modifications, lease restructurings and similar actions, and these trends may lead to additional charges, impairments and other adverse financial impacts in our business over time. In addition, to the extent that customers have valid rights to cancel undelivered aircraft, we may be required to refund pre-delivery payments, putting additional constraints on our liquidity.
In addition to the near-term impact, there is risk that the industry implements longer-term strategies involving reduced capacity, shifting route patterns, and mitigation strategies related to impacts from COVID-19 and the risk of future public health crises. In addition, airlines may experience reduced demand due to reluctance by the flying public to travel due to travel restrictions and/or social distancing requirements.
As a result, there is significant uncertainty with respect to when commercial air traffic levels will begin to recover, and whether and at what point capacity will return to and/or exceed pre-COVID-19 levels. The COVID-19 pandemic also has increased, and its aftermath is also expected to continue to increase, uncertainty with respect to global trade volumes, which could put negative pressure on cargo traffic levels. Any of these factors would have a significant impact on the demand for both single-aisle and wide-body commercial aircraft, as well as for the services we provide to commercial airlines. In addition, a lengthy period of reduced industry-wide demand for commercial aircraft would put additional pressure on our suppliers, resulting in increased procurement costs and/or additional supply chain disruption. To
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the extent that the COVID-19 pandemic or its aftermath further impacts demand for our products and services or impairs the viability of some of our customers and/or suppliers, our financial condition, results of operations, and cash flows could be adversely affected, and those impacts could be material.
Other risks: The magnitude and duration of the global COVID-19 pandemic is uncertain and continues to adversely affect our business and operating and financial results. For example, during the fourth quarter of 2020, due in part to the prolonged adverse impact of the pandemic on our earnings, we recorded an increase of $2.5 billion to the valuation allowance associated with deferred income tax assets. The pandemic also is expected to heighten many of the other risks described below. Further, the COVID-19 pandemic may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our operations or financial results.
Risks Related to Our Business and Operations
We are subject to a number of risks and uncertainties related to the 737 MAX. These risks include uncertainties regarding the timing and conditions of 737 MAX regulatory approvals, in certain non-U.S. jurisdictions, lower than planned production rates and/or delivery rates, increased considerations to customers, increased supplier costs and supply chain health, changes to the assumptions and estimates made in our financial statements regarding the 737 program, and potential outcomes of various 737 MAX-related legal proceedings and government investigations.
On March 13, 2019, the Federal Aviation Administration (FAA) issued an order to suspend operations of all 737 MAX aircraft in the U.S. and by U.S. aircraft operators following two fatal 737 MAX accidents. Non-U.S. civil aviation authorities issued directives to the same effect. Deliveries of the 737 MAX were suspended until December 2020. The grounding has reduced revenues, operating margins, and cash flows, and will continue to do so until production rates return to pre-grounding levels. In connection with the effort to return the 737 MAX to service, we developed software updates for the 737 MAX, together with an associated pilot training and supplementary education program. We continue to work with certain non-U.S. civil aviation authorities to complete remaining steps toward certification and readiness for return to service worldwide. Any delays in certification in one or more jurisdictions and/or the ramp-up of deliveries or other liabilities associated with the accidents or grounding could have a material adverse effect on our financial position, results of operations, and/or cash flows. In addition, multiple legal actions have been filed against us related to the 737 MAX. We also are fully cooperating with U.S. government investigations related to the accidents and the 737 MAX, including investigations by the Securities and Exchange Commission. In January 2021, we entered into a Deferred Prosecution Agreement with the U.S. Department of Justice that resolves the Department of Justice’s previously disclosed investigation into us regarding the evaluation of the 737 MAX airplane by the FAA. We expensed $744 in the fourth quarter of 2020 related to this agreement. Any further adverse impacts related to any such litigation or investigation could have a further material impact on our financial position, results of operations and/or cash flows.
During 2019, we announced plans to reduce, and ultimately to suspend 737 production. Impacts related to these actions significantly increased costs to produce aircraft included in the current accounting quantity and have resulted in reduced 737 program and overall BCA segment operating margins. We have also made significant assumptions regarding estimated costs expected to be incurred in 2021 that should be included in program inventory and those estimated costs that will be expensed when incurred as abnormal production costs. If we are unable to return the 737 MAX aircraft to service in one or more jurisdictions or deliver 737 aircraft to customers on the schedule and/or at a pace consistent with our expectations, we will incur significant additional costs and/or delay the planned ramp-up of 737 production. These delays would also result in significant additional disruption to the 737 production system and further delay efforts to restore and/or implement previously planned increases in the 737
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production rate. Cash flows continue to be negatively impacted by delayed payments from customers, higher costs and inventory levels, and payments made to customers in connection with disruption to their operations. In addition, we have experienced claims and assertions from customers in connection with the grounding, and we recorded an earnings charge of $8,259 million, net of insurance recoveries of $500 million, in 2019, in connection with an estimate of potential concessions and other considerations to customers for disruptions related to the grounding and associated delivery delays.
Any further delays in regulatory approval of the 737 MAX in one or more jurisdictions, further disruptions to suppliers and/or the long-term health of the production system, supplier claims or assertions, or changes to estimated concessions or other considerations we expect to provide to customers could have a material adverse effect on our financial position, results of operations, and/or cash flows. In the event of unanticipated additional training requirements in one or more jurisdictions, delays in regulatory approval, and/or delays in our ability to resume deliveries to one or more customers, we may be required to take actions with longer-term impact, such as further changes to our production plans, employment reductions and/or the expenditure of significant resources to support our supply chain and/or customers.
We have made significant estimates with respect to the 737 program regarding the number of units to be produced, the period during which those units are likely to be produced, and the units’ expected sales prices, production costs, program tooling and other non-recurring costs, and routine warranty costs. In addition to the estimated timing of the resumption of deliveries, we have made assumptions regarding outcomes of accident investigations and other government inquiries, timing of future 737 production rate increases, timing and sequence of future deliveries, supply chain health as we implement our production plans, as well as outcomes of negotiations with customers. Any changes in these estimates and/or assumptions with respect to the 737 program could have a material impact on our financial position, results of operations, and/or cash flows. For additional information, see our discussion under “Management’s Discussion and Analysis-Critical Accounting Policies and Estimates-737 MAX Grounding” on pages 55 - 56.
In addition to the impact of COVID-19 described above, our Commercial Airplanes and Global Services businesses depend heavily on commercial airlines, and are subject to unique risks.
Market conditions have a significant impact on demand for our commercial aircraft and related services. The commercial aircraft market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors underlying long-term traffic growth are sustained economic growth and political stability both in developed and emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of aircraft financing, world trade policies, government-to-government relations, technological advances, price and other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the airline industry has been cyclical and very competitive and has experienced significant profit swings and constant challenges to be more cost competitive. Significant deterioration in the global economic environment, the airline industry generally, or the financial stability of one or more of our major customers could result in fewer new orders for aircraft or services, or could cause customers to seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues, profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.
We enter into firm fixed-price aircraft sales contracts with indexed price escalation clauses which could subject us to losses if we have cost overruns or if increases in our costs exceed the applicable escalation rate. Commercial aircraft sales contracts are often entered into years before the aircraft are delivered. In order to help account for economic fluctuations between the contract date and delivery date, aircraft pricing generally consists of a fixed amount as modified by price escalation formulas
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derived from labor, commodity and other price indices. Our revenue estimates are based on current expectations with respect to these escalation formulas, but the actual escalation amounts are outside of our control. Escalation factors can fluctuate significantly from period to period. Changes in escalation amounts can significantly impact revenues and operating margins in our Commercial Airplanes business.
We derive a significant portion of our revenues from a limited number of commercial airlines. We can make no assurance that any customer will exercise purchase options, fulfill existing purchase commitments or purchase additional products or services from us. In addition, fleet decisions, airline consolidations or financial challenges involving any of our major commercial airline customers could significantly reduce our revenues and limit our opportunity to generate profits from those customers.
Our Commercial Airplanes business depends on our ability to maintain a healthy production system, achieve planned production rate targets, successfully develop new aircraft or new derivative aircraft, and meet or exceed stringent performance and reliability standards.
The commercial aircraft business is extremely complex, involving extensive coordination and integration with U.S and non-U.S. suppliers, highly-skilled labor from thousands of employees and other partners, and stringent regulatory requirements, including the risk of evolving standards for commercial aircraft certification, and performance and reliability standards. In addition, the introduction of new aircraft programs and/or derivatives, such as the 777X, involves increased risks associated with meeting development, testing, production, and certification schedules. The 737 program has also experienced significant disruption due to the grounding of the 737 MAX and associated suspension of 737 MAX production for part of 2020. As a result, our ability to deliver aircraft on time, satisfy regulatory and customer requirements, and achieve or maintain, as applicable, program profitability is subject to significant risks. For example, 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. Delays on the 737 MAX and 777X programs have resulted in, and may continue to result in, customers having the right to terminate orders and or substitute orders for other Boeing aircraft.
We must minimize disruption caused by production changes and achieve productivity improvements in order to meet customer demand and maintain our profitability. We have previously announced plans to adjust production rates on several of our commercial aircraft programs. We continue to engage in significant ongoing development, testing and production of the 777X aircraft. In addition, we continue to seek opportunities to reduce the costs of building our aircraft, including working with our suppliers to reduce supplier costs, identifying and implementing productivity improvements, and optimizing how we manage inventory. If production rate changes at any of our commercial aircraft assembly facilities are delayed or create significant disruption to our production system, or if our suppliers cannot timely deliver components to us at the cost and rates necessary to achieve our targets, we may be unable to meet delivery schedules and/or the financial performance of one or more of our programs may suffer.
Operational challenges impacting the production system for one or more of our commercial aircraft programs could result in production delays and/or failure to meet customer demand for new aircraft, either of which would negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely complex. Operational issues, including delays or defects in supplier components, failure to meet internal performance plans, or delays or failures to achieve required regulatory approval, could result in significant out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to aircraft performance and/or increased warranty or fleet support costs. For example, in the fourth quarter of 2020, we expanded the scope of production inspections on the 787 program, and those inspections and associated rework are delaying scheduled deliveries and resulting in additional 787 aircraft in inventory.
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If our commercial airplanes fail to satisfy performance and reliability requirements, we could face additional costs and/or lower revenues. Developing and manufacturing commercial aircraft that meet or exceed our performance and reliability standards, as well as those of customers and regulatory agencies, can be costly and technologically challenging. These challenges are particularly significant with newer aircraft programs. Any failure of any Boeing aircraft to satisfy performance or reliability requirements could result in disruption to our operations, higher costs and/or lower revenues.
Changes in levels of U.S. government defense spending or overall acquisition priorities could negatively impact our financial position and results of operations.
We derive a substantial portion of our revenue from the U.S. government, primarily from defense related programs with the U.S. DoD. Levels of U.S. defense spending are very difficult to predict and may be impacted by numerous factors such as the evolving nature of the national security threat environment, U.S. national security strategy, U.S. foreign policy, the domestic political environment, macroeconomic conditions and the ability of the U.S. government to enact relevant legislation such as authorization and appropriations bills.
Although FY21 appropriations have been enacted, long-term uncertainty remains with respect to overall levels of defense spending beyond FY21, and it is likely that U.S. government discretionary spending, including defense spending, will continue to be subject to pressure. In addition, the timeliness of future appropriations for government departments and agencies remains a recurrent risk. A lapse in appropriations for government department or agencies would result in a full or partial government shutdown, which could impact the Company’s operations. Alternatively, Congress may fund government departments and agencies with one or more Continuing Resolutions; however, this could restrict the execution of certain program activities and delay new programs or competitions.
There continues to be uncertainty with respect to future acquisition priorities and program-level appropriations for the U.S. DoD and other government agencies (including NASA), including tension between modernization investments, sustainment investments, and investments in new technologies or emergent capabilities. Future investment priority changes or budget cuts, including changes associated with the authorizations and appropriations process could result in reductions, cancellations, and/or delays of existing contracts or programs, or future program opportunities. Any of these impacts could have a material effect on the results of the Company’s operations, financial position and/or cash flows.
In addition, as a result of the significant ongoing uncertainty with respect to both U.S. defense spending and the evolving nature of the national security threat environment, we also expect the U.S. DoD to continue to emphasize affordability, innovation, cybersecurity, and delivery of technical data and software in its procurement processes. If we can no longer adjust successfully to these changing acquisition policies our revenues and market share could be impacted.
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Our ability to deliver products and services that satisfy customer requirements is heavily dependent on the performance and financial stability of our subcontractors and suppliers, as well as on the availability of raw materials and other components.
We rely on other companies including U.S. and non-U.S. subcontractors and suppliers to provide and produce raw materials, integrated components and sub-assemblies, and production commodities and to perform some of the services that we provide to our customers. If one or more of our suppliers or subcontractors experiences financial difficulties, delivery delays or other performance problems, we may be unable to meet commitments to our customers or incur additional costs. In addition, if one or more of the raw materials on which we depend (such as aluminum, titanium or composites) becomes unavailable or is available only at very high prices, we may be unable to deliver one or more of our products in a timely fashion or at budgeted costs. In some instances, we depend upon a single source of supply. Any service disruption from one of these suppliers, either due to circumstances beyond the supplier’s control, such as geopolitical developments, or as a result of performance problems or financial difficulties, could have a material adverse effect on our ability to meet commitments to our customers or increase our operating costs.
Competition within our markets and with respect to the products we sell may reduce our future contracts and sales.
The markets in which we operate are highly competitive and one or more of our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. In our Commercial Airplanes business, we anticipate increasing competition among non-U.S. aircraft manufacturers of commercial jet aircraft. In our BDS business, we anticipate that the effects of defense industry consolidation, shifting acquisition and budget priorities, and continued cost pressure at our U.S. DoD and non-U.S. customers will intensify competition for many of our BDS products. Our BGS segment faces competition from many of the same strong U.S. and non-U.S. competitors facing BCA and BDS. Furthermore, we are facing increased international competition and cross-border consolidation of competition. There can be no assurance that we will be able to compete successfully against our current or future competitors or that the competitive pressures we face will not result in reduced revenues and market share.
We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks of doing business in other countries.
In 2020, non-U.S. customers, which includes foreign military sales (FMS), accounted for approximately 37% of our revenues. We expect that non-U.S. sales will continue to account for a significant portion of our revenues for the foreseeable future. As a result, we are subject to risks of doing business internationally, including:
•changes in regulatory requirements;
•changes in the global trade environment, including disputes with authorities in non-U.S. jurisdictions, including international trade authorities, that could impact sales and/or delivery of products and services outside the U.S. and/or impose costs on our customers in the form of tariffs, duties, or penalties attributable to the importation of Boeing products and services;
•U.S. and non-U.S. government policies, including requirements to expend a portion of program funds locally and governmental industrial cooperation or participation requirements;
•fluctuations in international currency exchange rates;
•volatility in international political and economic environments and changes in non-U.S. national priorities and budgets, which can lead to delays or fluctuations in orders;
•the complexity and necessity of using non-U.S. representatives and consultants;
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•the uncertainty of the ability of non-U.S. customers to finance purchases, including the availability of financing from the Export-Import Bank of the United States;
•uncertainties and restrictions concerning the availability of funding credit or guarantees;
•imposition of domestic and international taxes, export controls, tariffs, embargoes, sanctions and other trade restrictions;
•the difficulty of management and operation of an enterprise spread over many countries;
•compliance with a variety of non-U.S. laws, as well as U.S. laws affecting the activities of U.S. companies abroad; and
•unforeseen developments and conditions, including terrorism, war, epidemics and international tensions and conflicts.
While the impact of these factors is difficult to predict, any one or more of these factors could adversely affect our operations in the future. For example, since 2018, the U.S. and China have imposed tariffs on each other’s imports. China is a very significant market for commercial airplanes and represents a significant component of our commercial airplanes backlog.In addition, the U.S. and European Union (EU) have been engaged in two long-running disputes at the World Trade Organization (WTO) relating to large civil aircraft, including one that has resulted in the imposition of tariffs on certain of our products. Impacts from these or future potential tariffs, or deterioration in trade relations between the U.S. and one or more other countries, could have a material adverse impact on our revenues, operating earnings, and/or cash flows.
We use estimates in accounting for many contracts and programs. Changes in our estimates could adversely affect our future financial results.
Contract and program accounting require judgment relative to assessing risks, estimating revenues and costs and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts and programs, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions have to be made regarding the length of time to complete the contract or program because costs also include expected increases in wages and employee benefits, material prices and allocated fixed costs. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance. Supplier claims and assertions are also assessed and considered in estimating costs and profit rates. Estimates of future award fees are also included in sales and profit rates.
With respect to each of our commercial aircraft programs, inventoriable production costs (including overhead), program tooling and other non-recurring costs and routine warranty costs are accumulated and charged as cost of sales by program instead of by individual units or contracts. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts limited by the ability to make reasonably dependable estimates. To establish the relationship of sales to cost of sales, program accounting requires estimates of (a) the number of units to be produced and sold in a program, (b) the period over which the units can reasonably be expected to be produced and (c) the units’ expected sales prices, production costs, program tooling and other non-recurring costs, and routine warranty costs for the total program. Several factors determine accounting quantity, including firm orders, letters of intent from prospective customers and market studies. Changes to customer or model mix, production costs and rates, learning curve, changes to price escalation indices, costs of derivative aircraft, supplier performance, customer and supplier negotiations/settlements, supplier claims and/or certification issues can impact these estimates. In addition, on development programs such as the 777X, we are subject to risks with respect to the timing and conditions of aircraft certification, including potential gaps between when aircraft are certified in various jurisdictions, and our estimates with
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respect to timing of future certifications could have an impact on overall program status. Any such change in estimates relating to program accounting may adversely affect future financial performance.
Because of the significance of the judgments and estimation processes described above, materially different sales and profit amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. For additional information on our accounting policies for recognizing sales and profits, see our discussion under “Management’s Discussion and Analysis – Critical Accounting Policies – Contract Accounting/Program Accounting” on pages 53 – 55 and Note 1 to our Consolidated Financial Statements on pages 68 – 81 of this Form 10-K.
We may not realize the anticipated benefits of mergers, acquisitions, joint ventures/strategic alliances or divestitures.
As part of our business strategy, we may merge with or acquire businesses and/or form joint ventures and strategic alliances. Whether we realize the anticipated benefits from these acquisitions and related activities depends, in part, upon our ability to integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the performance of the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected by unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. Consolidations of joint ventures could also impact our reported results of operations or financial position. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs.
Risks Related to Our Contracts
We conduct a significant portion of our business pursuant to U.S. government contracts, which are subject to unique risks.
In 2020, 51% of our revenues were earned pursuant to U.S. government contracts, which include FMS through the U.S. government. Business conducted pursuant to such contracts is subject to extensive procurement regulations and other unique risks.
Our sales to the U.S. government are subject to extensive procurement regulations, and changes to those regulations could increase our costs. New procurement regulations, or changes to existing requirements, could increase our compliance costs or otherwise have a material impact on the operating margins of our BDS and BGS businesses. These requirements may result in increased compliance costs, and we could be subject to additional costs in the form of withheld payments and/or reduced future business if we fail to comply with these requirements in the future. Compliance costs attributable to current and potential future procurement regulations such as these could negatively impact our financial condition and operating results.
The U.S. government may modify, curtail or terminate one or more of our contracts. The U.S. government contracting party may modify, curtail or terminate its contracts and subcontracts with us, without prior notice and either at its convenience or for default based on performance. In addition, funding pursuant to our U.S. government contracts may be reduced or withheld as part of the U.S.
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Congressional appropriations process due to fiscal constraints, changes in U.S. national security strategy and/or priorities or other reasons. Further uncertainty with respect to ongoing programs could also result in the event that the U.S. government finances its operations through temporary funding measures such as “continuing resolutions” rather than full-year appropriations. Any loss or anticipated loss or reduction of expected funding and/or modification, curtailment, or termination of one or more large programs could have a material adverse effect on our earnings, cash flow and/or financial position.
We are subject to U.S. government inquiries and investigations, including periodic audits of costs that we determine are reimbursable under U.S. government contracts. U.S. government agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit government contractors. These agencies review our performance under contracts, cost structure and compliance with applicable laws, regulations, and standards, as well as the adequacy of and our compliance with our internal control systems and policies. Any costs found to be misclassified or inaccurately allocated to a specific contract will be deemed non-reimbursable, and to the extent already reimbursed, must be refunded. Any inadequacies in our systems and policies could result in withholds on billed receivables, penalties and reduced future business. Furthermore, if any audit, inquiry or investigation uncovers improper or illegal activities, we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with the U.S. government. We also could suffer reputational harm if allegations of impropriety were made against us, even if such allegations are later determined to be false.
We enter into fixed-price contracts which could subject us to losses if we have cost overruns.
Our BDS and BGS defense businesses generated approximately 69% and 72% of their 2020 revenues from fixed-price contracts. While fixed-price contracts enable us to benefit from performance improvements, cost reductions and efficiencies, they also subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and revenues. If our estimated costs exceed our estimated price, we recognize reach-forward losses which can significantly affect our reported results. For example in 2020, we recorded additional reach-forward losses of $1,320 million on the KC-46A Tanker contract reflecting $551 million of costs associated with the agreement signed in April 2020 with the U.S. Air Force to develop and integrate a new Remote Vision System, and the remaining costs reflect production inefficiencies including impacts of COVID-19 disruption. New programs could also have risk for reach-forward loss upon contract award and during the period of contract performance. For example, in 2018, in connection with winning the T-7A Red Hawk and MQ-25 competitions, we recorded a loss of $400 million associated with options for 346 T-7A Red Hawk aircraft and a loss of $291 million related to the MQ-25 Engineering, Manufacturing and Development (EMD) contract. The long term nature of many of our contracts makes the process of estimating costs and revenues on fixed-price contracts inherently risky. Fixed-price contracts often contain price incentives and penalties tied to performance which can be difficult to estimate and have significant impacts on margins. In addition, some of our contracts have specific provisions relating to cost, schedule and performance.
Fixed-price development contracts are generally subject to more uncertainty than fixed-price production contracts. Many of these development programs have highly complex designs. In addition, technical or quality issues that arise during development could lead to schedule delays and higher costs to complete, which could result in a material charge or otherwise adversely affect our financial condition. Examples of significant BDS fixed-price development contracts include Commercial Crew, KC-46A Tanker, T-7A Red Hawk, VC-25B Presidential Aircraft, MQ-25, and commercial and military satellites.
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We enter into cost-type contracts which also carry risks.
Our BDS and BGS defense businesses generated approximately 31% and 28% of their 2020 revenues from cost-type contracting arrangements. Some of these are development programs that have complex design and technical challenges. These cost-type programs typically have award or incentive fees that are subject to uncertainty and may be earned over extended periods. In these cases the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Programs whose contracts are primarily cost-type include Ground-based Midcourse Defense (GMD), Proprietary and SLS programs.
We enter into contracts that include in-orbit incentive payments that subject us to risks.
Contracts in the commercial satellite industry and certain government satellite contracts include in-orbit incentive payments. These in-orbit payments may be paid over time after final satellite acceptance or paid in full prior to final satellite acceptance. In both cases, the in-orbit incentive payment is at risk if the satellite does not perform to specifications for up to 15 years after acceptance. The net present value of in-orbit incentive fees we ultimately expect to realize is recognized as revenue in the construction period. If the satellite fails to meet contractual performance criteria, customers will not be obligated to continue making in-orbit payments and/or we may be required to provide refunds to the customer and incur significant charges.
Risks Related to Cybersecurity and Business Disruptions
Unauthorized access to our or our customers’ information and systems could negatively impact our business.
We face certain security threats, including threats to the confidentiality, availability and integrity of our data and systems. We maintain an extensive network of technical security controls, policy enforcement mechanisms, monitoring systems and management oversight in order to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks, including cyber-attacks, could result in significant financial or information losses and/or reputational harm. In addition, we manage information and information technology systems for certain customers. Many of these customers face similar security threats. If we cannot prevent the unauthorized access, release and/or corruption of our customers’ confidential, classified or personally identifiable information, our reputation could be damaged, and/or we could face financial losses.
Business disruptions could seriously affect our future sales and financial condition or increase our costs and expenses.
Our business may be impacted by disruptions including threats to physical security, information technology or cyber-attacks or failures, damaging weather or other acts of nature and pandemics or other public health crises. Any of these disruptions could affect our internal operations or our ability to deliver products and services to our customers. Any significant production delays, or any destruction, manipulation or improper use of our data, information systems or networks could impact our sales, increase our expenses and/or have an adverse effect on the reputation of Boeing and of our products and services.
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Risks Related to Legal and Regulatory Matters
The outcome of litigation and of government inquiries and investigations involving our business is unpredictable and an adverse decision in any such matter could have a material effect on our financial position and results of operations.
We are involved in a number of litigation matters. These matters may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits, or future lawsuits, could have a material impact on our financial position and results of operations. In addition, we are subject to extensive regulation under the laws of the United States and its various states, as well as other jurisdictions in which we operate. As a result, we are sometimes subject to government inquiries and investigations of our business due, among other things, to our business relationships with the U.S. government, the heavily regulated nature of our industry, and in the case of environmental proceedings, our current or past ownership of certain property. Any such inquiry or investigation could potentially result in an adverse ruling against us, which could have a material impact on our financial position and results of operations.
Our operations expose us to the risk of material environmental liabilities.
We are subject to various U.S. federal, state, local and non-U.S. laws and regulations related to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if we were to violate or become liable under environmental laws or regulations. In some cases, we may be subject to such costs due to environmental impacts attributable to our current or past manufacturing operations or the operations of companies we have acquired. In other cases, we may become subject to such costs due to an indemnification agreement between us and a third party relating to such environmental liabilities. In addition, new laws and regulations, more stringent enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new remediation requirements could result in additional costs. For additional information relating to environmental contingencies, see Note 13 to our Consolidated Financial Statements.
Risks Related to Financing and Liquidity
We may be unable to obtain debt to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms or in sufficient amounts.
We depend, in part, upon the issuance of debt to fund our operations and contractual commitments. In addition, our debt balances have increased significantly since 2019, driven primarily by impacts related to the 737 MAX grounding and the COVID-19 pandemic, and we expect to continue to actively manage our liquidity. Our increased debt balance has also resulted in downgrades to our credit ratings. As of December 31, 2020, our debt totaled $63.6 billion of which approximately $20.4 billion of principal payments on outstanding debt become due over the next three years. In addition, as of December 31, 2020, our airplane financing commitments totaled $11,512 million. If we require additional funding in order to pay off existing debt, address further impacts to our business related to the 737 MAX, COVID-19, or broader market developments, fund outstanding financing commitments or meet other business requirements, our market liquidity may not be sufficient. These risks will be particularly acute if we are subject to further credit rating downgrades. 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, including impacts described above related to the
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COVID-19 pandemic and/or associated changes in demand for our products and services. The occurrence of any or all of these events may adversely affect our ability to fund our operations and contractual or financing commitments.
Substantial pension and other postretirement benefit obligations have a material impact on our earnings, shareholders’ equity and cash flows from operations, and could have significant adverse impacts in future periods.
Many of our employees have earned benefits under defined benefit pension plans. Potential pension contributions include both mandatory amounts required under the Employee Retirement Income Security Act and discretionary contributions to improve the plans' funded status. The extent of future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions as well as on our annual pension costs and/or result in a significant change to shareholders' equity. For U.S. government contracts, we allocate pension costs to individual contracts based on U.S. Cost Accounting Standards which can also affect contract profitability. We also provide other postretirement benefits to certain of our employees, consisting principally of health care coverage for eligible retirees and qualifying dependents. Our estimates of future costs associated with these benefits are also subject to assumptions, including estimates of the level of medical cost increases. For a discussion regarding how our financial statements can be affected by pension and other postretirement plan accounting policies, see “Management's Discussion and Analysis-Critical Accounting Policies-Pension Plans” on pages 57 - 58 of this Form 10-K. Although under Generally Accepted Accounting Principles in the United States of America (GAAP) the timing of periodic pension and other postretirement benefit expense and plan contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash or stock we would contribute to our plans.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to liabilities that are unique to the products and services we provide. We maintain insurance for certain risks and, in some circumstances, we may receive indemnification from the U.S. government. The amount of our insurance coverage may not cover all claims or liabilities and we may be forced to bear substantial costs. For example, liabilities arising from the use of certain of our products, such as aircraft technologies, space systems, spacecraft, satellites, missile systems, weapons, cyber security, border security systems, anti-terrorism technologies, and/or air traffic management systems may not be insurable on commercially reasonable terms. While some of these products are shielded from liability within the U.S. under the SAFETY Act provisions of the 2002 Homeland Security Act, no such protection is available outside the U.S., potentially resulting in significant liabilities. The amount of insurance coverage we maintain may be inadequate to cover these or other claims or liabilities.
A significant portion of our customer financing portfolio is concentrated among certain customers and in certain types of Boeing aircraft, which exposes us to concentration risks.
A significant portion of our customer financing portfolio is concentrated among certain customers and in distinct geographic regions. Our portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 and 747-8 aircraft, and among customers that we believe have less than investment-grade credit. If one or more customers holding a significant portion of our portfolio assets experiences financial difficulties or otherwise defaults on or does not renew its leases with us at their expiration, and we are unable to redeploy the aircraft on reasonable terms, or if the types of
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aircraft that are concentrated in our portfolio suffer greater than expected declines in value, our earnings, cash flows and/or financial position could be materially adversely affected.
Risks Related to Labor
Some of our and our suppliers’ workforces are represented by labor unions, which may lead to work stoppages.
Approximately 47,000 employees, which constitute 33% of our total workforce, were union represented as of December 31, 2020. We experienced a work stoppage in 2008 when a labor strike halted commercial aircraft and certain BDS program production. We may experience additional work stoppages in the future, which could adversely affect our business. We cannot predict how stable our relationships, currently with 10 U.S. labor organizations and 12 non-U.S. labor organizations, will be or whether we will be able to meet the unions’ requirements without impacting our financial condition. The unions may also limit our flexibility in dealing with our workforce. Union actions at suppliers can also affect us. Work stoppages and instability in our union relationships could delay the production and/or development of our products, which could strain relationships with customers and cause a loss of revenues which would adversely affect our operations.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2. Properties
We occupied approximately 86 million square feet of floor space on December 31, 2020 for manufacturing, warehousing, engineering, administration and other productive uses, of which approximately 93% was located in the United States. The following table provides a summary of the floor space by business as of December 31, 2020:
(Square feet in thousands) Owned Leased Government Owned(1) Total
(1) Excludes rent-free space furnished by U.S. government landlord of 49 square feet.
(2) Other includes sites used for BCC, common internal services and our Corporate Headquarters.
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At December 31, 2020, we occupied in excess of 77.4 million square feet of floor space at the following major locations:
•Commercial Airplanes – Greater Seattle, WA; Charleston, SC; Portland, OR; Greater Los Angeles, CA; Salt Lake City, UT; Canada; and Australia
•Defense, Space & Security – Greater St. Louis, MO; Greater Seattle, WA; Greater Los Angeles, CA; Philadelphia, PA; Mesa, AZ; Huntsville, AL; Oklahoma City, OK; Heath, OH; Greater Washington, DC; Australia; and Houston, TX
•Global Services – San Antonio, TX; Greater Miami, FL; Dallas, TX; Jacksonville, FL; Germany; Mesa, AZ; and Greater Denver, CO
•Other – Chicago, IL; Greater Seattle, WA; Greater Los Angeles, CA ; Greater St. Louis, MO; and Greater Washington, DC.
Most runways and taxiways that we use are located on airport properties owned by others and are used jointly with others. Our rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. government furnishes us certain office space, installations and equipment at U.S. government bases for use in connection with various contract activities.
To support business needs, property requirements are being evaluated to align with previously announced staffing reductions, utilization studies, and strategic growth investments to optimize footprint.
Item 3. Legal Proceedings
Currently, we are involved in a number of legal proceedings. For a discussion of contingencies related to legal proceedings, see Note 21 to our Consolidated Financial Statements, which is hereby incorporated by reference.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market for our common stock is the New York Stock Exchange where it trades under the symbol BA. As of January 25, 2021, there were 99,383 shareholders of record.
Issuer Purchases of Equity Securities
The following table provides information about purchases we made during the quarter ended December 31, 2020 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
(Dollars in millions, except per share data)
(a) (b) (c) (d)
(1)A total of 24,385 shares were transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units during the period. We did not purchase any shares of our common stock in the open market pursuant to our repurchase program. We purchased 77 shares in swap transactions.
(2)On March 21, 2020, the Board of Directors terminated its prior authorization to repurchase shares of the Company's outstanding common stock. Share repurchases under this plan had been suspended since April 2019.
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Item 6. Selected Financial Data
Five-Year Summary (Unaudited)
(1) In March 2020, the Board of Directors suspended the declaration and/or payment of cash dividends until further notice.
(2) 2016 Backlog does not reflect impact of the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations and Financial Condition
Overview
We are a global market leader in the design, development, manufacture, sale, service and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. We are one of the two major manufacturers of 100+ seat airplanes for the worldwide commercial airline industry and one of the largest defense contractors in the U.S. While our principal operations are in the U.S., we conduct operations in an expanding number of countries and rely on an extensive network of non-U.S. partners, key suppliers and subcontractors.
Our strategy is centered on successful execution in healthy core businesses – Commercial Airplanes (BCA), Defense, Space & Security (BDS), and Global Services (BGS) – supplemented and supported by Boeing Capital (BCC). Taken together, these core businesses have historically generated substantial earnings and cash flow that permit us to invest in new products and services. We focus on producing the products and providing the services that the market demands, and continue to find new ways to improve efficiency and quality to provide a fair return for our shareholders. BCA is committed to being the leader in commercial aviation by offering airplanes and services that deliver superior design, safety, efficiency and value to customers around the world. BDS integrates its resources in defense, intelligence, communications, security, space and services to deliver capability-driven solutions to customers at reduced costs. Our BDS strategy is to leverage our core businesses to capture key next-generation programs while expanding our presence in adjacent and international markets, underscored by an intense focus on growth and productivity. BGS provides support for commercial and defense through innovative, comprehensive, and cost-competitive product and service solutions. BCC facilitates, arranges, structures and provides selective financing solutions for our Boeing customers.
Business Environment and Trends
The global outbreak of COVID-19 and the residual impacts of the 737 MAX grounding continue to have significant adverse impacts on our business and are expected to continue to negatively impact revenue, earnings and operating cash flow in future quarters. They are also having a significant impact on our liquidity - see Liquidity Matters in Note 1 to our Consolidated Financial Statements for a further discussion of liquidity and additional actions we are taking in response to these challenges.
The COVID-19 pandemic has caused an unprecedented shock to demand for air travel, creating a tremendous challenge for our customers, our business and the entire commercial aerospace manufacturing and services sector. Global economic growth, a primary driver for air travel, is expected to have declined to between -4% and -5% in 2020. The latest International Air Transport Association (IATA) forecast projected full-year 2020 passenger traffic to be down more than 60% compared to 2019 as global economic activity slows due to COVID-19, and governments severely restricted travel to contain the spread of the virus. The recovery remains slow and uneven as travel restrictions and varying regional travel protocols continue to impact air travel. Generally, we expect domestic travel to recover faster than international travel. As a result, we expect the narrow-body market to recover faster than the wide-body market. Also, the pace of the commercial market recovery will be heavily dependent on COVID-19 infection rates, progress on testing, government travel restrictions, and timing and availability of a vaccine. Air cargo traffic levels contracted this year due to weak global trade growth and capacity limitations given the large impact that COVID-19 has had on international passenger operations, which also carry cargo. Demand for dedicated freighters is developing better relative to cargo traffic trends.
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Airline financial performance, which also plays a role in the demand for new capacity, has been adversely impacted by the COVID-19 pandemic. According to IATA, net losses in 2020 for the airline industry are expected to be approximately $118 billion, compared to net profits of $26 billion in 2019. Our customers are taking actions to combat the effects of the COVID-19 pandemic on the market by preserving liquidity. This comes in many forms such as deferrals of advances and other payments to suppliers, deferrals of deliveries, reduced spending on services, and, in some cases, cancellation of orders. We face a challenging environment in the near to medium term as airlines adjust to reduced traffic which in turn will lower demand for commercial aerospace products and services. The current environment is also affecting the financial viability of some airlines.
We currently expect it will take approximately three years for world-wide travel to return to 2019 levels and a few years beyond that for the industry to return to long-term trend growth of approximately 5%. To balance the supply and demand given the COVID-19 shock and to preserve our long-term potential and competitiveness, we have reduced the production rates of several of our BCA programs. These rate decisions are based on our ongoing assessments of the demand environment and availability of aircraft financing. There is significant uncertainty with respect to when commercial air traffic levels will recover, and whether, and at what point, capacity will return to and/or exceed pre-COVID-19 levels. During the fourth quarter of 2020, we made adjustments to our estimates regarding timing of 777X entry into service and market demand. We now anticipate that the first 777X delivery will occur in late 2023. We will closely monitor the key factors that affect backlog and future demand including customers’ evolving fleet plans, the wide-body replacement cycle and the cargo market. We will maintain a disciplined rate management process, and make adjustments as appropriate in the future. Notwithstanding the changes we have made to production rates, risk remains that further reductions will be required. Additionally, if we are unable to make timely deliveries of the large number of aircraft in inventory as of December 31, 2020, future revenues, earnings and cash flows will be adversely impacted.
The long-term outlook for the industry remains positive due to the fundamental drivers of air travel demand: economic growth, increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. The shock from COVID-19 has reduced the near to medium term demand, but our Commercial Market Outlook forecast projects a 4% growth rate for passenger and cargo traffic over a 20 year period. Based on long-term global economic growth projections of 2.5% average annual GDP growth, we project demand for approximately 43,000 new airplanes over the next 20 years. The industry remains vulnerable to exogenous developments including fuel price spikes, credit market shocks, acts of terrorism, natural disasters, conflicts, epidemics, pandemics and increased global environmental regulations.
Deliveries of the 737 MAX resumed in the fourth quarter of 2020, when the FAA rescinded the order that grounded 737 MAX aircraft in the U.S. Orders to suspend operations of 737 MAX aircraft from certain non-U.S. civil aviation authorities, including the Civil Aviation Administration of China, are still in effect. The grounding has had a significant adverse impact on our operations and creates significant uncertainty. We are focused on safely returning the 737 MAX to service for all of our customers.
At BGS, we are seeing a direct impact on our commercial supply chain business as fewer flights and more aircraft retirements result in a decreased demand for our parts and logistics offerings. Additionally, our commercial customers are curtailing discretionary spending, such as modifications and upgrades and focusing on required maintenance. Similar to BCA, we expect a multi-year recovery period for the commercial services business. The demand outlook for our government services business, which in 2019 accounted for just under half of BGS revenue, remains stable.
At BDS, we continue to see a healthy market with solid demand for our major platforms and programs both domestically and internationally. However, we experienced near-term production impacts associated with our temporary suspension of operations at various locations in 2020 .
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In March and April of 2020, as a result of COVID-19, we temporarily suspended operations at multiple locations including the Puget Sound area, South Carolina and Philadelphia. Operations in Puget Sound and Philadelphia resumed during the week of April 20, while operations in South Carolina resumed beginning on May 3. We have implemented procedures to promote employee safety in our facilities, including more frequent and enhanced cleaning and adjusted schedules and work flows to support physical distancing. These actions have resulted, and will continue to result, in increased operating costs. In addition, a number of our suppliers have suspended or otherwise reduced their operations, and we are experiencing some supply chain shortages. Our suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of COVID-19. We also continue to have large numbers of employees working from home. These measures and disruptions have reduced overall productivity and adversely impacted our financial position, results of operations, and cash flows in 2020. We expect further adverse impacts in future quarters.
In July 2020, we announced our business transformation efforts to assess our business across five key pillars – infrastructure, overhead and organization, portfolio and investments, supply chain health and operational excellence. We continue to make progress across all five key pillars as we utilize a lower production rate environment to transform and improve our business processes.Within the infrastructure pillar we are assessing our overall facility requirements in light of reduced demand in our commercial businesses and remote and virtual work opportunities for large numbers of our workforce. The consolidation of the 787 production in South Carolina is an example of this. We also anticipate a reduction of approximately 30% in office space needs compared to our current capacity. During 2020, we made certain reductions to our footprint and are planning to implement further reductions over the next few years. However, as we consolidate our footprint, we may incur near term adverse impacts to earnings. The overhead and organization pillar is focused on our cost structure and how we are organized so we can right size our workforce and simplify and reduce management layers and bureaucracy. During 2020, we recorded severance costs for approximately 26,000 employees, of which approximately 18,000 have left the Company as of December 31, 2020, and the remainder are expected to leave in 2021. The portfolio and investments pillar includes aligning our portfolio and investments to focus on our core business and the changes in market conditions. Through our portfolio and investment prioritization, we reduced research and development and capital expenditures during 2020 by $1.3 billion from the prior year.The supply chain pillar is focused on supply chain health and stability, reducing indirect procurement spend and streamlining our transportation, logistics and warehousing approach. We reduced indirect spend in 2020, by reducing expenditures in areas such as freight and logistics, purchased services and others. The operational excellence pillar is focused on improving performance, enhancing quality and reducing rework. For example, our information technology teams are evaluating opportunities to form or expand strategic partnerships with vendors that allow us to simplify and optimize our operations, and reduce overall costs.These activities are not intended to constrain our capacity, but to enable the Company to emerge stronger and be more resilient when the market recovers. We expect that successful execution of these measures will improve near term liquidity and long term cost competitiveness.
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Consolidated Results of Operations
The following table summarizes key indicators of consolidated results of operations:
(Dollars in millions, except per share data)
GAAP
Operating margins (22.0) % (2.6) % 11.9 %
Effective income tax rate 17.5 % 71.8 % 9.9 %
Net (loss)/earnings attributable to Boeing Shareholders ($11,873) ($636) $10,460
Diluted (loss)/earnings per share ($20.88) ($1.12) $17.85
Non-GAAP (1)
Core operating margins (24.3 %) (4.4 %) 10.5 %
(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 comparable GAAP measures.
Revenues
The following table summarizes Revenues:
(Dollars in millions)
Unallocated items, eliminations and other (65) (503) (2)
Revenues decreased by $18,401 million in 2020 compared with 2019 primarily due to lower revenues in our commercial airplanes and commercial services businesses. Revenues for each of our segments have been adversely impacted by COVID-19. BCA revenues decreased by $16,093 million due to lower deliveries driven by the impacts of the COVID-19 pandemic, 787 production issues, and the 737 MAX grounding, offset by lower charges related to estimated potential concessions and other considerations to 737 MAX customers. BDS revenues increased by $162 million primarily due to higher fighter aircraft and other volume, partially offset by the impact of higher unfavorable cumulative contract catch-up adjustments, largely due to the KC-46A Tanker charges in 2020. BGS revenues decreased by $2,925 million primarily due to lower commercial services revenue driven by impacts of the COVID-19 pandemic. The changes in Unallocated items, eliminations and other primarily reflect the timing of eliminations for intercompany aircraft deliveries, as well as reserves related to cost accounting litigation recorded in 2019. We expect the impacts of the COVID-19 pandemic to continue to significantly impact revenues in future quarters until the commercial airline industry recovers.
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Revenues decreased by $24,568 million in 2019 compared with 2018 primarily due to lower revenues at BCA, partially offset by higher revenues at BGS. Lower BCA revenues are primarily driven by lower 737 MAX deliveries and a revenue reduction of $8,259 million recorded in 2019 for estimated potential concessions and other considerations to customers for disruptions and associated delivery delays related to the 737 MAX grounding, net of insurance recoveries. The changes in Unallocated items, eliminations and other primarily reflect the timing of eliminations for intercompany aircraft deliveries and the sale of aircraft previously leased to customers.
Loss/Earnings From Operations
The following table summarizes (Loss)/earnings from operations:
(Dollars in millions)
Postretirement FAS/CAS service cost adjustment 359 344 322
Unallocated items, eliminations and other (2,355) (2,073) (1,477)
Core operating (loss)/earnings (Non-GAAP) ** ($14,150) ($3,390) $10,660
* 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 earnings is a Non-GAAP measure that excludes the FAS/CAS service cost adjustment. See pages 51 - 52.
Loss from operations increased by $10,792 million in 2020 compared with 2019 primarily due to increased losses at BCA and decreased earnings at BGS and BDS. BCA loss from operations increased by $7,190 million. The loss in 2020 primarily reflects a reach-forward loss recorded in the fourth quarter of $6,493 million on the 777X program. The reach-forward loss reflects a number of factors, including an updated assessment of global certification requirements informed by continued discussions with regulators and resulting in a management decision to make modifications to the aircraft’s design, an updated assessment of COVID-19 impacts on market demand, and discussions with our customers with respect to aircraft delivery timing. These factors resulted in adjustments to production rates and the program accounting quantity, increased change incorporation costs, and associated customer and supply chain impacts. The loss in 2020 also reflects the absence of MAX deliveries during the first three quarters of the year, lower wide-body deliveries and lower program margins resulting from the COVID-19 pandemic and 787 production issues, abnormal production costs, 737NG frame fitting component repair costs, severance costs and 737 MAX customer considerations.
The loss in 2019 primarily reflects the absence of 737 MAX deliveries in the second, third and fourth quarters, and charges of $8,259 million for estimated 737 MAX customer considerations. BDS earnings decreased by $1,076 million in 2020 compared with 2019, primarily due to higher unfavorable cumulative contract catch-up adjustments, including charges of $1,320 million on KC-46A Tanker and $168 million on VC-25B in 2020, offset by $489 million of charges on Commercial Crew in 2019. The
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lower earnings were also driven by lower gains on property sales compared to 2019. BGS earnings from operations decreased by $2,247 million in 2020 compared with 2019 primarily due to lower commercial services revenue, as well as asset impairments and severance costs resulting from the COVID-19 market environment. We expect the impacts of the COVID-19 pandemic to continue to reduce earnings in future quarters until the commercial airline industry recovers.
Loss from operations was $1,975 million in 2019 compared with earnings from operations of $11,987 million in 2018. The decrease of $13,962 million is primarily due to a loss from operations at BCA of $6,657 million in 2019 compared to earnings from operations of $7,830 million in 2018, partially offset by higher earnings at BDS and BGS in 2019 compared with 2018. BCA results decreased by $14,487 million due to lower 737 deliveries and the earnings charges for estimated 737 MAX grounding customer considerations of $8,259 million, net of insurance recoveries. BDS earnings from operations increased by $923 million primarily due to lower charges in 2019 for development programs. BGS earnings from operations increased by $161 million primarily due to higher revenues, which was partially offset by less favorable performance and mix.
During 2020, 2019 and 2018, we recorded reach-forward losses on the KC-46A Tanker program of $1,320 million, $148 million, and $736 million, respectively.
Core operating loss increased by $10,760 million in 2020 compared with 2019 primarily due to higher losses at BCA and lower earnings at BGS and BDS.
Core operating earnings decreased by $14,050 million in 2019 compared with 2018 primarily due to a loss from operations at BCA in 2019, partially offset by higher earnings at BDS and BGS.
Unallocated Items, Eliminations and Other The most significant items included in Unallocated items, eliminations and other are shown in the following table:
(Dollars in millions)
Share-based plans ($120) ($65) ($76)
Deferred compensation (93) (174) (19)
Amortization of previously capitalized interest (95) (89) (92)
Research and development expense, net (240) (401) (144)
Customer financing impairment (250)
Eliminations and other unallocated items (1,807) (985) (998)
Unallocated items, eliminations and other ($2,355) ($2,073) ($1,477)
Share-based plans expense increased by $55 million in 2020, and decreased by $11 million in 2019. The increase in 2020 was due to increased grants of RSUs and other share-based compensation. See Note 17.
Deferred compensation expense decreased by $81 million in 2020 and increased by $155 million in 2019, primarily driven by changes in broad stock market conditions and our stock price.
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Research and development expense decreased by $161 million in 2020 and increased by $257 million in 2019 primarily due to spending by Boeing NeXt on product development.
In 2019, we recorded a $250 million charge related to the impairment of lease incentives with one customer that experienced liquidity issues, and a $109 million charge related to ongoing litigation associated with recoverable costs on U.S. government contracts. In 2018, we recorded a $148 million charge related to the outcome of the Spirit litigation.
Eliminations and other unallocated expense increased by $822 million in 2020 primarily due to earnings charges of $744 million in the fourth quarter of 2020 related to an agreement between Boeing and the U.S. Department of Justice in January 2021. See Note 13.Eliminations and other unallocated expense decreased by $13 million in 2019 primarily due to timing of expense allocations.
Net periodic pension benefit costs included in (Loss)/earnings from operations were as follows:
(Dollars in millions) Pension
The pension FAS/CAS service cost adjustment recognized in (Loss)/earnings from operations in 2020, 2019, and 2018 was largely consistent across all periods. The decrease in net periodic benefit cost included in (Loss)/earnings from operations in 2020 was primarily due to prior year service cost that was included in earnings in 2019. The net periodic benefit cost included in (Loss)/earnings from operations in 2019 was consistent with 2018, as reductions in current year service cost were offset by higher amortization of prior year service costs.
For additional discussion related to Postretirement Plans, see Note 16 to our Consolidated Financial Statements.
Other Earnings Items
(Dollars in millions)
Less: net loss attributable to noncontrolling interest (68)
Net (loss)/earnings attributable to Boeing Shareholders ($11,873) ($636) $10,460
Other income, net increased by $9 million in 2020 primarily due to lower non-operating postretirement expense, partially offset by lower non-operating pension income, lower interest income and higher foreign exchange losses. Other income, net increased by $346 million in 2019 primarily due to higher non-operating pension income.
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Non-operating pension income included in Other income, net was $340 million in 2020, $374 million in 2019, and $143 million in 2018. The decreased income in 2020 compared to 2019 was due to higher amortization of actuarial losses and lower asset returns, partially offset by lower interest cost. The increased income in 2019 compared to 2018 was due to lower amortization of actuarial losses, partially offset by lower asset returns and higher interest cost.
Non-operating postretirement expense included in Other income, net was $16 million in 2020, $107 million in 2019, and $101 million in 2018. The decreased expense in 2020 compared to 2019 was due to lower interest cost. The expense in 2019 was largely consistent with 2018.
Interest and debt expense increased by $1,434 million in 2020 and increased by $247 million in 2019 as a result of higher debt balances.
For additional discussion related to Income Taxes, see Note 4 to our 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 airplane 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)
Cost of sales decreased by $8,250 million in 2020 compared with 2019, primarily due to lower revenue in 2020, partially offset by higher charges in 2020 related to the 777X program, COVID-19 impacts, KC-46A Tanker program, abnormal production costs at BCA and severance costs. Cost of sales as a percentage of Revenues increased in 2020 compared to 2019 primarily due to the reach-forward loss on the 777X program, impacts of the 737 MAX grounding and the COVID-19 pandemic, as well as severance costs.
Cost of sales decreased by $9,397 million in 2019 compared with 2018, primarily due to lower revenue and lower reach-forward losses. Cost of sales as a percentage of Revenues increased in 2019 primarily due to the 737 MAX grounding.
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Research and Development The following table summarizes our Research and development expense:
(Dollars in millions)
Research and development expense decreased by $743 million in 2020 compared with 2019 primarily due to lower spending at BCA and at Boeing NeXt on product development.
Research and development expense decreased by $50 million in 2019 compared with 2018 primarily due to lower spending on 777X and 737 MAX, partially offset by higher spending on product development at BCA and Boeing NeXt.
Backlog
Our backlog at December 31 was as follows:
(Dollars in millions)
Unallocated items, eliminations and other 337 217
Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligated U.S. and non-U.S. government contract funding. The decrease in contractual backlog during 2020 was primarily due to a reduction for orders that in our assessment no longer meet the accounting requirements of Accounting Standards Codification (ASC) 606 for inclusion in backlog primarily due to 737 MAX and 777X, deliveries in excess of new orders, aircraft order cancellations and changes in projected price escalation. We are experiencing fewer new 737 MAX orders than we were receiving prior to the grounding. If 737 MAX aircraft remain grounded in certain jurisdictions for an extended period of time and/or if entry into service of the 777X, 737 MAX 7 and/or 737 MAX 10 is further delayed, we may experience additional reductions to backlog and/or significant order cancellations. Additionally, we may continue to experience fewer new orders and increased cancellations across all of our commercial airplane programs as a result of the COVID-19 pandemic and associated impacts on demand.
Unobligated backlog includes U.S. and non-U.S. government definitive contracts for which funding has not been authorized. The decrease in unobligated backlog in 2020 was primarily due to reclassifications to contractual backlog related to BGS and BDS contracts, partially offset by contract awards.
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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 global economy is currently experiencing significant adverse impacts due to the COVID-19 pandemic, including a decline in overall trade in general and in aerospace in particular. There is a great deal of uncertainty regarding the duration, scale, and localization of these impacts to the global economy and governments are enacting a wide range of responses to mitigate the unfolding economic impacts. We are closely monitoring the current impact and potential future economic consequences of COVID-19 to the global economy, the aerospace sector, and our Company. These adverse economic impacts have resulted in fewer orders than previously anticipated for our commercial aircraft.
China is a very significant market for commercial airplanes and represents a significant component of our commercial airplanes backlog.Since 2018, the U.S. and China imposed an escalating series of tariffs on each other’s imports. Certain aircraft parts and components that Boeing procures are subject to these tariffs. The U.S. and China entered into a Phase I agreement in January 2020. However, implementation of this agreement is incomplete and overall diplomatic relations between the U.S. and China have deteriorated. We continue monitoring developments for potential adverse impacts to the Company.
Beginning in June 2018, the U.S. Government has 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. In May 2019, the U.S. Government, Mexico and Canada reached an agreement to end the steel and aluminum tariffs between these countries. Implementation of the U.S./Mexico/Canada Free Trade Agreement (USMCA) will also result in lower tariffs. We continue to monitor the potential for any extra costs that may result from the remaining global tariffs.
The U.S. Government continues to impose and/or consider imposing sanctions on certain businesses and individuals in Russia. Although our operations or sales in Russia have not been impacted to date, we continue to monitor additional sanctions that may be imposed by the U.S. Government and any responses from Russia that could affect our supply chain, business partners or customers.
The U.S. and European Union (EU) have been engaged in two long-running disputes at the World Trade Organization (WTO) relating to large civil aircraft. As part of those disputes, in October 2019, the WTO authorized the U.S. to impose approximately $7.50 billion in annual tariffs on EU products in connection with the EU’s provision of eight instances of launch aid subsidies to Airbus. The U.S. is currently imposing 15% tariffs on new Airbus airplanes imported into the U.S. as well as fuselages that Airbus manufactures in Europe and imports into the U.S. In October 2020, the WTO authorized the EU to impose approximately $3.99 billion in annual tariffs on U.S. products in connection with a tax incentive used by Boeing in Washington state that has since been repealed. The EU is currently imposing 15% tariffs on Boeing airplanes imported into the EU. We will continue to assess and work with our customers on the possible impact of these tariffs, as deliveries to European customers are expected to increase in 2021.
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Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment See Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the impacts of COVID-19 on the airline industry environment.
Industry Competitiveness The industry continues to adjust to the unprecedented COVID-19 shock and subsequent economic impact, government restrictions, and new regulations. The commercial airplane market and the airline industry both remain extremely competitive. While the impacts and responses have varied globally, the reduction of demand and disruption in production has adversely impacted most manufacturers in the commercial airplane industry.
Continued access to global markets remains vital to our ability to fully realize our sales potential and long-term investment returns. Approximately 80% of Commercial Airplanes’ total backlog, in dollar terms, is with non-U.S. airlines. We face aggressive international competitors who are intent on increasing their market share. They offer competitive products and have access to most of the same customers and suppliers. The grounding of the 737 MAX and the associated suspension of 737 MAX deliveries significantly reduced our market share with respect to deliveries of single aisle aircraft in 2019 and 2020 and may provide competitors with an opportunity to obtain more orders and increase market share. With government support, Airbus has historically invested heavily to create a family of products to compete with ours. After the acquisition of a majority share of Bombardier’s C Series (now A220) in 2018, Airbus continues to expand in the 100-150 seat transcontinental market. Other competitors are also in different phases of developing commercial jet aircraft. Some of these competitors have historically enjoyed access to government-provided financial support, including “launch aid,” which greatly reduces the cost and commercial risks associated with airplane development activities. This has enabled the development of airplanes without broad commercial viability; others to be brought to market more quickly than otherwise possible; and many offered for sale below market-based prices. Competitors continue to make improvements in efficiency, which may result in funding product development, gaining market share and improving earnings. This market environment has resulted in intense pressures on pricing and other competitive factors, and we expect these pressures to continue or intensify in the coming years.
We are focused on improving our products and services and continuing our business transformation efforts, which enhances our ability to compete and positions us for market recovery. We are also focused on taking actions to ensure that Boeing is not harmed by unfair subsidization of competitors.
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Results of Operations
(Dollars in millions)
% of total company revenues 28 % 42 % 57 %
Revenues
BCA revenues decreased by $16,093 million in 2020 compared with 2019 due to lower deliveries primarily driven by the impacts of the COVID-19 pandemic, 787 production issues and the 737 MAX grounding. This was partially offset by lower charges related to estimated potential concessions and other considerations to 737 MAX customers of $498 million in 2020 compared with $8,259 million in 2019.
BCA revenues decreased by $25,244 million in 2019 compared with 2018 driven by lower 737 MAX deliveries and a revenue reduction of $8,259 million that was recorded in 2019 for estimated potential concessions and other considerations to customers related to the 737 MAX grounding, net of $500 million of insurance recoveries.
While we resumed deliveries of 737 MAX aircraft in December 2020, the 737 MAX grounding is still in effect in certain non-U.S. jurisdictions. The 737 MAX grounding will continue to have a significant impact on future revenues until deliveries ramp up, and COVID-19 will continue to have a significant impact on future revenues until the commercial airline industry recovers.
Commercial Airplanes deliveries as of December 31 were as follows:
* Intercompany deliveries identified by parentheses
† Aircraft accounted for as revenues by BCA and as operating leases in consolidation identified by parentheses
Loss/Earnings From Operations
BCA loss from operations was $13,847 million in 2020 compared with loss from operations of $6,657 million in 2019. The 2020 loss reflects the reach-forward loss on 777X of $6,493 million, lower deliveries and lower program margins resulting from the COVID-19 pandemic and 787 production issues and associated rework, $2,567 million of abnormal production costs related to 737 MAX, $623 million of
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severance cost, $498 million of 737 MAX customer considerations, $336 million related to 737NG frame fitting component repair costs and $270 million of abnormal production costs in the first half of 2020 from the temporary suspension of operations in response to COVID-19, partially offset by lower research and development spending. Lower 787 margins reflecting a reduction in the accounting quantity in the first quarter of 2020 also contributed to lower earnings. The 2019 loss primarily reflects the absence of 737 MAX deliveries in the second, third and fourth quarters of 2019 and charges of $8,259 million for estimated 737 MAX customer considerations.
BCA loss from operations was $6,657 million in 2019 compared with earnings from operations of $7,830 million in 2018. The decrease of $14,487 million is primarily due to lower 737 deliveries and earnings charges related to the 737 MAX.
The 737 MAX grounding and the COVID-19 pandemic will continue to have a significant adverse impact on future earnings and margins until 737 MAX deliveries ramp up and wide-body deliveries return to historical levels.
Backlog
Our total backlog represents the estimated transaction prices on unsatisfied and partially satisfied performance obligations to our customers where we believe it is probable that we will collect the consideration due and where no contingencies remain before we and the customer are required to perform. Backlog does not include prospective orders where customer controlled contingencies remain, such as the customer receiving approval from its board of directors, shareholders or government or completing financing arrangements. All such contingencies must be satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly certain. Backlog excludes options and BCC orders. 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 Topic 606.
BCA total backlog of $281,588 million at December 31, 2020 decreased from $376,593 million at December 31, 2019, reflecting a reduction for orders that in our assessment no longer meet the accounting requirements of ASC 606 for inclusion in backlog, aircraft order cancellations, changes in projected price escalation and deliveries in excess of new orders. Aircraft order cancellations during the year ended December 31, 2020 totaled $34,618 million and primarily relate to 737 MAX aircraft. The ASC 606 adjustments for the year ended December 31, 2020 totaled $54,450 million and primarily relate to 737 MAX aircraft and 777X aircraft. The ASC 606 adjustments include aircraft orders where a customer controlled contingency now exists, as well as orders where we can no longer assert that the customer is committed to perform or that it is probable that the customer will pay the full amount of consideration when it is due. If 737 MAX aircraft remain grounded in certain jurisdictions for an extended period of time and/or if entry into service of the 777X, 737 MAX 7 and/or 737 MAX 10 is further delayed, we may experience additional reductions to backlog and/or significant order cancellations. Additionally, we may continue to experience fewer new orders and increased cancellations across all of our commercial airplane programs as a result the COVID-19 pandemic and associated impacts on demand.
Accounting Quantity The accounting quantity is our estimate of the quantity of airplanes that will be produced for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. It is a key determinant of the gross margins we recognize on sales of individual airplanes throughout a program’s life. Estimation of each program’s accounting quantity takes into account several factors that are indicative of the demand for that program, including firm orders,
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letters of intent from prospective customers and market studies. We review our program accounting quantities quarterly.
The accounting quantity for each program may include units that have been delivered, undelivered units under contract, and units anticipated to be under contract in the reasonable future (anticipated orders). In developing total program estimates, all of these items within the accounting quantity must be considered.
The following table provides details of the accounting quantities and firm orders by program as of December 31. Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders. Firm orders include 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
† Aircraft ordered by BCC are identified in parentheses.
* At December 31, 2020, the 747 accounting quantity includes one already completed aircraft that has not been sold and is being remarketed.
** See 777 and 777X Programs for discussion of the 777X accounting quantity.
Program Highlights
737 Program We reduced the program accounting quantity from 10,400 at December 31, 2019 to 10,000 at March 31, 2020. This reflects a slower than previously planned production rate ramp-up caused by commercial airline industry uncertainty due to the impact of COVID-19. See further discussion of the 737 MAX Grounding and COVID-19 Impacts and Product Warranties in Note 13 to our Consolidated Financial Statements.
747 Program We are currently producing at a rate of 0.5 aircraft per month. We will complete production of the 747 in 2022. We believe that ending production of the 747 will 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 2020 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 tanker program. We are currently producing at a rate of 3 aircraft per month.
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777 and 777X Programs The accounting quantity for the 777 program increased by 10 units during 2020 due to the program’s normal progress of obtaining additional orders and delivering airplanes. The production rate expectation for the combined 777/777X program remains at 2 per month in 2021.
In 2013, we launched the 777X-8 and 777X-9, which feature new composite wings, new engines and folding wing-tips. The first flight of the 777X was completed during the first quarter of 2020.
During the first three quarters of 2020, we made adjustments to our estimates regarding timing of 777X entry into service and market demand. As previously disclosed, market uncertainties driven primarily by the impacts of COVID-19 resulted in lower planned production rates and created significant pressure on the 777X program’s revenue and cost estimates. While the 777X program did not have a reach-forward loss as of the third quarter of 2020 based on our assessment of the probable range of initial accounting quantities and other factors at that time, we noted that future levels of 777X profitability would be subject to a number of factors, including continued market uncertainty, the impacts of COVID-19 on our production system as well as on our supply chain and customers, subsequent production rate reductions for both 777X and other commercial programs, and potential risks associated with the testing program and the timing of 777X certification.
We now anticipate that the first 777X delivery will occur in late 2023. We also recorded a $6.5 billion reach-forward loss on the 777X program in the fourth quarter of 2020. The revised schedule and the reach-forward loss reflect a number of factors, including an updated assessment of global certification requirements informed by continued discussions with regulators and resulting in a management decision to make modifications to the aircraft’s design, an updated assessment of COVID-19 impacts on market demand, and discussions with our customers with respect to aircraft delivery timing. These factors resulted in adjustments to production rates and the program accounting quantity, increased change incorporation costs, and associated customer and supply chain impacts.
The timing of the 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.
The level of profitability on the 777X program will be subject to a number of factors. These factors include continued market uncertainty, the impacts of COVID-19 on our production system as well as impacts on our supply chain and customers, further production rate adjustments for the 777X or other commercial aircraft programs, contraction of the accounting quantity and potential risks associated with the testing program and the timing of aircraft certification. One or more of these factors could result in additional reach-forward losses on the 777X program in future periods.
787 Program During 2020, we experienced significant reductions in deliveries due to the impacts of COVID-19 on our customers as well as production issues and associated rework. The 787 program delivered four airplanes during the fourth quarter of 2020 and has a large number of undelivered airplanes in inventory at December 31, 2020. We expanded the scope of production inspections during the fourth quarter of 2020, and those inspections and associated rework are delaying scheduled deliveries and resulting in additional 787 aircraft in inventory. At December 31, 2020, we had approximately 80 787 aircraft in inventory. We expect deliveries to resume at a slow pace in early 2021, with the majority of the aircraft in inventory expected to be delivered by the end of 2021. We continue to work with customers to facilitate deliveries. We are implementing changes in the production process designed to ensure that newly-built airplanes meet our specifications and do not require further inspections. Pre-COVID-19, we were producing at a rate of 14 per month and had planned to adjust the 787 production rate to 12 per month in late 2020 and to 10 per month in early 2021. Due to the impacts of COVID-19 on customer demand, we now plan to reduce to 5 per month in 2021. As a result of the planned production rate changes, we reduced the accounting quantity for the 787 program by 100 units during the first quarter of 2020. The 787 program has near breakeven gross margins due to the
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reductions in the production rates and the reduction in the program accounting quantity. If we are required to further reduce the accounting quantity and/or production rates, experience further delivery delays, or experience other factors that could result in lower margins, the program could record a reach-forward loss in future periods. We made the decision during the third quarter of 2020 to consolidate 787 production in South Carolina in 2021, which did not have a significant financial impact on the program.
Fleet Support We provide the operators of our commercial airplanes with assistance and services to facilitate efficient and safe airplane operation. Collectively known as fleet support services, these activities and services begin prior to airplane delivery and continue throughout the operational life of the airplane. They include flight and maintenance training, field service support, engineering services, information services and systems and technical data and documents. The costs for fleet support are expensed as incurred and have historically been approximately 1% of total consolidated costs of products and services.
Program Development The following chart summarizes the time horizon between go-ahead and planned initial delivery for major Commercial Airplanes derivatives and programs.
Go-ahead and Initial Delivery
Reflects models in development during 2020
We launched the 737 MAX 7 in August 2011 and the 737 MAX 10 in June 2017. We launched the 777X in November 2013. We now anticipate that the first 737 MAX 10 and 777X delivery will occur in 2023. This schedule reflects a number of factors, including an updated assessment of global certification requirements informed by continued discussions with regulators and resulting in a management decision to make modifications to the aircraft’s design.
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. In addition, the introduction of new aircraft and derivatives, such as the 777X and 737 MAX derivatives, 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
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necessary or scheduled delivery dates could be extended, which could trigger termination provisions, order cancellations or other financially significant exposure.
Defense, Space & Security
Business Environment and Trends
United States Government Defense Environment Overview
The Omnibus appropriations acts for FY21, enacted in December 2020, provided FY21 appropriations for government departments and agencies, including the United States Department of Defense (U.S. DoD), the National Aeronautics and Space Administration (NASA) and the Federal Aviation Administration.
The enacted FY21 appropriations included funding for Boeing’s major programs, such as the F/A-18 Super Hornet, F-15EX, CH-47 Chinook, AH-64 Apache, V-22 Osprey, KC-46A Tanker, P-8 Poseidon and Space Launch System. However, there continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government agencies, including NASA. 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 the end of 2020, 31.8% of BDS backlog was attributable to non-U.S. customers.
Results of Operations
(Dollars in millions)
% of total company revenues 45 % 34 % 26 %
Operating margins 5.9 % 10.0 % 6.4 %
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.
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Deliveries of units for new-build production aircraft, including remanufactures and modifications were as follows:
C-17 Globemaster III 1
New-build satellite deliveries were as follows:
Commercial and civil satellites 2 1
Military satellites 1
Revenues
BDS revenues in 2020 increased by $162 million compared with 2019 reflecting higher revenues from fighter aircraft, Space Launch System, B-52 upgrades, proprietary and MQ-25, partially offset by reduced volume in missile defense. These net increases were offset by the unfavorable impact of cumulative contract catch-up adjustments, which was $312 million higher than the comparable period in the prior year, largely due to the KC-46A Tanker charges during 2020.
BDS revenues in 2019 decreased by $205 million compared with 2018 primarily due to timing associated with non-U.S. contract awards for fighters and the final C-17 sale occurring in 2018; in addition, the unfavorable impact of cumulative contract catch-up adjustments was $163 million higher than the prior year, reflecting increased unfavorable adjustments on the Commercial Crew contract and less favorable performance. These were partially offset by increases from new programs, including E-7 early warning aircraft, VC-25B, T-7A Red Hawk, and MQ-25, as well as from satellites and weapons.
Earnings From Operations
BDS earnings from operations in 2020 decreased by $1,076 million compared with 2019 primarily due to the unfavorable impact of cumulative contract catch-up adjustments, which was $828 million higher than the prior year, largely due to charges of $1,320 million on KC-46A Tanker and $168 million on VC-25B, offset by $489 million in charges on Commercial Crew in the prior period. The lower earnings in 2020 also reflect lower gains on property sales compared to the same period in 2019. These current period decreases were partially offset by the volume increases described above.
The KC-46A Tanker reach-forward loss of $1,320 million reflects $551 million of costs associated with the agreement signed in April 2020 with the U.S. Air Force to develop and integrate a new Remote Vision System, and the remaining costs reflect production inefficiencies including impacts of COVID-19 disruption. The $168 million reach-forward loss on VC-25B recorded in the first quarter was associated
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with engineering inefficiencies from the COVID-19 environment. We believe these inefficiencies will result in staffing challenges, schedule inefficiencies, and higher costs in the upcoming phases of the program.
BDS earnings from operations in 2019 increased by $923 million compared with 2018 primarily due to the absence of $691 million related to losses on the T-7A Red Hawk and MQ-25 contracts. The unfavorable impact of cumulative contract catch-up adjustments in 2019 was $62 million lower than the prior year. In 2019, BDS recorded charges of $489 million related to Commercial Crew and $148 million related to KC-46A Tanker compared with $736 million in 2018.
BDS earnings from operations include equity earnings of $141 million, $128 million and $147 million primarily from our ULA and non-U.S. joint ventures in 2020, 2019 and 2018, respectively.
Backlog
Total backlog of $60,847 million at December 31, 2020 was $2,844 million lower than December 31, 2019 due to the timing of awards and revenue recognized.
Additional Considerations
Our BDS business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases, the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Examples of these programs include Ground-based Midcourse Defense, Proprietary and Space Launch System programs.
Some of our development programs are contracted on a fixed-price basis, and BDS customers are increasingly seeking fixed-price proposals for new programs. 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. 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, the loss of satellite in-orbit incentive payments, or other financially significant exposure. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues.
Global Services
Business Environment and Trends
The aerospace markets we serve include parts distribution, logistics, and other inventory services; maintenance, engineering, and upgrades; training and professional services; and information services. Prior to COVID-19, we had expected the market to grow by around 3.5% annually, however the pandemic is having a direct impact on our commercial services business. See Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the impacts of COVID-19 on the airline industry environment.
Over the long-term, as the size of the worldwide commercial airline fleet continues to grow, so does demand for aftermarket services designed to increase efficiency and extend the economic lives of
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airplanes. Airlines are using data analytics to plan flight operations and predictive maintenance to improve their productivity and efficiency. Airlines continue to look for opportunities to reduce the size and cost of their spare parts inventory, frequently outsourcing spares management to third parties.
The demand outlook for our government services business has remained stable in 2020. Government services market segments are growing on pace with related fleets, but vary based on the utilization and age of the aircraft. The U.S. government services market is the single largest individual market, comprising over 50 percent of the government services markets served. Over the next decade, we expect U.S. growth to remain flat and non-U.S. fleets, led by Middle East and Asia Pacific customers, to add rotorcraft and commercial derivative aircraft at the fastest rates. We expect less than 20 percent of the worldwide fleet of military aircraft to be retired and replaced over the next ten years, driving increased demand for services to maintain aging aircraft and enhance aircraft capability.
BGS’ major customer, the U.S. government, remains subject to the spending limits and uncertainty described on page 40, which could restrict the execution of certain program activities and delay new programs or competitions.
Industry Competitiveness Aviation services is a competitive market with many domestic and international competitors. This market environment has resulted in intense pressures on pricing, and we expect these pressures to continue or intensify in the coming years. Continued access to global markets remains vital to our ability to fully realize our sales growth potential and long-term investment returns.
Results of Operations
(Dollars in millions)
% of total company revenues 27 % 24 % 17 %
Revenues
BGS revenues in 2020 decreased by $2,925 million compared with 2019 due to lower commercial services revenue driven by impacts of the COVID-19 pandemic. The favorable impact of cumulative contract catch-up adjustments in 2020 was $101 million lower than the comparable period in the prior year. We expect the impacts of the COVID-19 pandemic to continue to reduce BGS commercial revenues in future quarters until the commercial airline industry environment recovers.
BGS revenues in 2019 increased by $1,412 million compared with 2018 due to growth across our services portfolio, primarily driven by higher parts revenue, including the acquisition of KLX in the fourth quarter of 2018 and government services revenue, partially offset by lower commercial services revenue. The favorable impact of cumulative contract catch-up adjustments in 2019 was $80 million higher than the comparable period in the prior year.
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Earnings From Operations
BGS earnings from operations in 2020 decreased by $2,247 million compared with 2019, primarily due to lower commercial services revenue as well as earnings charges in 2020, including $531 million of inventory write-downs, $178 million of related impairments of distribution rights primarily driven by airlines' decisions to retire certain aircraft, $398 million for higher expected credit losses primarily driven by customer liquidity issues, $115 million of contract termination and facility impairment charges, as well as $72 million of severance costs. These charges reflect the significant impacts of the COVID-19 pandemic on commercial airline customers’ liquidity and demand for certain products as customers' fleet plans evolve to adapt to the sharp reduction in demand for air travel. The favorable impact of cumulative contract catch-up adjustments in 2020 was consistent with the prior year.
BGS earnings from operations in 2019 increased by $161 million compared with 2018 primarily due to higher revenues, partially offset by less favorable performance and mix. Earnings from operations for 2019 also includes a divestiture gain of $395 million and a charge of $293 million related to our decision in the fourth quarter to retire the Aviall brand and trade name. The favorable impact of cumulative contract catch-up adjustments in 2019 was $21 million higher than the comparable period in the prior year.
Backlog
BGS total backlog of $20,632 million at December 31, 2020 decreased by 10% from $22,902 million at December 31, 2019, primarily due to a reduction for commercial orders that, in our assessment, no longer meet the accounting requirements of ASC 606 for inclusion in backlog.
Boeing Capital
Business Environment and Trends
BCC’s gross customer financing and investment portfolio at December 31, 2020 totaled $1,974 million. A substantial portion of BCC’s portfolio is related to customers that we believe have less than investment-grade credit. BCC’s portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 and 747-8 aircraft.
BCC provided customer financing of $14 million and $419 million during 2020 and 2019. While we may be required to fund a number of new aircraft deliveries in 2021 and/or provide refinancing for existing bridge debt, we expect alternative financing will be available at reasonable prices from broad and globally diverse sources.
Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 7,300 western-built commercial jet aircraft (29.4% of current world fleet) were parked at the end of 2020, including both in-production and out-of-production aircraft types. Of these parked aircraft, a larger portion are expected to be retired compared to the pre-COVID-19 period, which directly impacts the Company in terms of number of new aircraft deliveries and financing opportunities, the ability of existing customers to meet current payment obligations and the value of aircraft in its portfolio. We continue to work closely with our customers to mitigate the risk. At the end of 2019 and 2018, 8.5% and 6.7% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of additional aircraft, particularly types with relatively few operators, are placed out of service. See Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the impacts of COVID-19 on the airline industry environment.
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Results of Operations
(Dollars in millions)
Earnings from operations $63 $28 $79
Operating margins 24 % 11 % 29 %
Revenues
BCC segment revenues consist principally of lease income from equipment under operating lease, interest income from financing receivables and notes, and other income. BCC’s revenues in 2020 increased by $17 million compared with 2019 primarily due to gains on re-lease of assets. BCC’s revenues in 2019 decreased by $30 million compared with 2018 primarily due to lower gains on the sale of assets.
Earnings From Operations
BCC’s earnings from operations are presented net of interest expense, provision for (recovery of) losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Earnings from operations in 2020 increased by $35 million compared with 2019 primarily due to higher revenues, lower asset impairment expenses and lower interest expenses. Earnings from operations in 2019 decreased by $51 million compared with 2018 primarily due to lower revenues and higher asset impairment expenses.
Financial Position
The following table presents selected financial data for BCC as of December 31:
Customer financing and investment portfolio, net $1,961 $2,251
Other assets, primarily cash and short-term investments 402 535
Other liabilities, primarily deferred income taxes $392 $432
Debt, including intercompany loans 1,640 1,960
Total liabilities and equity $2,363 $2,786
Debt-to-equity ratio 5-to-1 5-to-1
BCC’s customer financing and investment portfolio at December 31, 2020 decreased from December 31, 2019, primarily due to $321 million of note payoffs and portfolio run-off.
BCC enters into certain transactions with Boeing, reflected in Unallocated items, eliminations and other, in the form of intercompany guarantees and other subsidies that mitigate the effects of certain credit quality or asset impairment issues on the BCC segment.
Leased aircraft with a carrying value of approximately $57 million are scheduled to be returned off lease during 2021. We are seeking to remarket these aircraft or have the leases extended.
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Liquidity and Capital Resources
Cash Flow Summary
(Dollars in millions)
Net cash (used)/provided by operating activities (18,410) (2,446) 15,322
Effect of exchange rate changes on cash and cash equivalents 85 (5) (53)
Operating Activities Net cash used by operating activities was $18.4 billion during 2020, compared with net cash used by operating activities of $2.4 billion during 2019 and net cash provided by operating activities of $15.3 billion in 2018. The decrease in operating cash flows in 2020 is primarily driven by our net loss in 2020 and changes in working capital, partially offset by an increase in non-cash items. Non-cash items include the $6.5 billion reach-forward loss on the 777X program in 2020, which was recorded as a reduction to inventory. The year-over-year increase in non-cash items also reflects higher inventory write-downs and higher allowances for expected credit losses in 2020. The changes in working capital reflect increases in commercial airplane inventory due to the large number of undelivered aircraft in 2019 resulting from the 737 MAX grounding, and in 2020 due to the 737 MAX grounding, 787 production issues and COVID-19 impacts. Cash used by Advances and progress billings was $1.1 billion in 2020, as compared with $0.7 billion provided by Advances and progress billings in 2019. The changes in working capital in 2020 also reflect lower accounts payable due to reductions in commercial purchases from suppliers and lower supply chain financing. Compensation payments to 737 MAX customers totaled $2.2 billion during 2020 and $1.2 billion during 2019. The accrued liability for 737 MAX customer considerations at December 31, 2019 resulted in a $7.4 billion favorable change to working capital in 2019. The impacts of the COVID-19 pandemic and the 737 MAX grounding are expected to continue to have a significant negative impact on our operating cash flows during 2021.
The decrease in operating cash flows in 2019 compared to 2018 primarily reflected the impacts of the 737 MAX grounding resulting in lower earnings, higher inventory and lower advances and progress payments. In addition, compensation payments to 737 MAX customers of $1.2 billion for disruption to their operations also reduced 2019 cash from operating activities. Cash used to fund inventory was $12.4 billion during 2019 as we continued to produce aircraft while deliveries were suspended. Cash provided by Advances and progress billings was $0.7 billion in 2019, compared with $2.6 billion in 2018.
Payables to suppliers who elected to participate in supply chain financing programs declined by $1.9 billion for the year ended December 31, 2020, and increased by $2.6 billion and $0.6 billion for the same period in 2019 and 2018. Supply chain financing is not material to our overall liquidity. The decline for the year ended December 31, 2020 was primarily due to reductions in commercial purchases from suppliers. The increase for the years ended December 31, 2019 and 2018 reflects a combination of higher purchases, an extension of payment terms with certain suppliers, and increased utilization of our supply chain financing programs.
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Investing Activities Cash used by investing activities during 2020, 2019 and 2018 was $18.4 billion, $1.5 billion and $4.6 billion. The increase in cash outflows in 2020 compared to 2019 is primarily due to $17.4 billion of higher net contributions to investments. The reduction in cash outflows in 2019 compared with 2018 is primarily due to acquisitions completed in the second half of 2018 and the timing of investments. Acquisitions net of cash acquired were $0.5 billion in 2019, primarily related to the acquisition of KLX. Proceeds from dispositions was $0.5 billion in 2019 as a result of the divestiture of two businesses. Capital expenditures totaled $1.3 billion in 2020, compared with $1.8 billion in 2019 and $1.7 billion 2018. We expect capital expenditures in 2021 to be relatively consistent with 2020. Net contributions to investments were $17.3 billion in 2020, compared with net proceeds from investments of $0.1 billion in 2019 and $0.3 billion in 2018.
Financing Activities Cash provided by financing activities was $35.0 billion during 2020, compared with cash provided by financing activities of $5.7 billion in 2019 and cash used by financing activities of $11.7 billion in 2018. The increase of $29.3 billion compared with 2019 primarily reflects higher net borrowings, lower share repurchases, and lower dividend payments. Cash provided by financing activities increased $17.5 billion compared with 2018 primarily due to higher net borrowings and lower share repurchases, partially offset by higher dividend payments in 2019. During the twelve months ended December 31, 2020, new borrowings net of repayments were $36.3 billion compared with $13.2 billion and $1.4 billion in the same period in 2019 and 2018. The increase in 2020 is primarily due to $29.9 billion of fixed rate senior notes issued in 2020 and $13.8 billion of new borrowings under a two-year delayed draw term loan agreement entered into in the first quarter of 2020. For further discussion see Liquidity Matters in Note 1 to our Consolidated Financial Statements.
At December 31, 2020 and 2019 the recorded balance of debt was $63.6 billion and $27.3 billion, of which $1.7 billion and $7.3 billion were classified as short-term. This included $1.6 billion and $2.0 billion of debt attributable to BCC at December 31, 2020 and 2019, of which $0.9 billion and $0.5 billion were classified as short-term.
During the year ended December 31, 2020, we did not repurchase any shares through our open market share repurchase program compared to repurchases of 6.9 million and 26.1 million shares in 2019 and 2018 totaling $2.7 billion and $9.0 billion. Share repurchases under this plan had been suspended since April 2019. In March 2020, the Board of Directors terminated its prior authorization to repurchase shares of the Company's outstanding common stock. We had 0.6 million, 0.6 million, and 0.7 million shares transferred to us from employee tax withholdings in 2020, 2019, and 2018, respectively. During the twelve months ended December 31, 2020 we paid dividends of $1.2 billion compared with $4.6 billion and $3.9 billion in the same period in 2019 and 2018. In March 2020, the Company announced that our dividend will be suspended until further notice. In December 2018 we increased our quarterly dividend from $1.71 to $2.055, which resulted in $684 million of higher dividend payments in 2019 compared with 2018.
Capital Resources The impacts of the COVID-19 pandemic and 737 MAX grounding are having a significant negative impact on our liquidity and ongoing operations and creating significant uncertainty. We have and are continuing to take significant actions to manage and preserve our liquidity.For further discussion see Liquidity Matters in Note 1 to our Consolidated Financial Statements.
At December 31, 2020, we had $7.8 billion of cash and $17.8 billion of short term investments. At December 31, 2020, we had $9.5 billion of unused borrowing capacity on revolving credit line agreements. We anticipate that these credit lines will primarily serve as backup liquidity to support our general corporate borrowing needs. The $9.5 billion of unused borrowing capacity includes a $3.1 billion 364-day revolving credit facility, which expires in October 2021. We had no commercial paper borrowings at December 31, 2020, compared to commercial paper borrowings of $6.1 billion and $1.9 billion at December 31, 2019 and 2018, which were supported by unused commitments under the revolving credit agreement.
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Our debt balances have increased significantly since 2019, and we are continuing to actively manage our liquidity.Scheduled principal payments for debt for the next five years are as follows:
Our increased debt balance has also resulted in downgrades to our credit ratings. 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, including impacts described above related to the COVID-19 pandemic 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 December 31, 2020, 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). When considering debt covenants, we continue to have substantial borrowing capacity.
Customer financing commitments totaled $11.5 billion and $13.4 billion at December 31, 2020 and 2019. The decrease primarily relates to financing commitment amendments and expirations. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. Historically, we have not been required to fund significant amounts of outstanding commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required.
At December 31, 2020 and 2019, our pension plans were $13.7 billion and $15.9 billion underfunded as measured under GAAP. On an Employee Retirement Income Security Act (ERISA) basis our plans are more than 100% funded at December 31, 2020. We do not expect to make significant contributions to our pension plans in 2021. We may be required to make higher contributions to our pension plans in future years.
In the fourth quarter of 2020, we contributed $3 billion of our common stock to our pension fund. In the fourth quarter of 2020, we also began using our common stock in lieu of cash to fund Company contributions to our 401(k) plans for the foreseeable future, which we estimate will conserve approximately $1 billion of cash over the next 12 months. Under this approach, common stock is contributed to our 401(k) plans following each pay period. We expect this measure to further enable the Company to conserve cash. We have retained an independent fiduciary to manage and liquidate stock contributed to these plans at its discretion.
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Contractual Obligations
The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2020, and the estimated timing thereof.
(Dollars in millions) Total Lessthan 1year 1-3years 3-5years After 5years
(1) Excludes income tax matters. As of December 31, 2020, we have uncertain tax positions of $966 million. We are not able to reasonably estimate the timing of future cash flows related to uncertain tax positions. For further discussion of income taxes, see Note 4 to our Consolidated Financial Statements.
Pension and Other Postretirement Benefits Pension cash requirements are based on an estimate of our minimum funding requirements, pursuant to ERISA regulations, although we may make additional discretionary contributions. Estimates of other postretirement benefits are based on both our estimated future benefit payments and the estimated contributions to plans that are funded through trusts.
Purchase Obligations Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. Purchase obligations include amounts recorded as well as amounts that are not recorded on the Consolidated Statements of Financial Position.
Purchase Obligations Not Recorded on the Consolidated Statements of Financial Position Purchase obligations not recorded on the Consolidated Statements of Financial Position include agreements for inventory procurement, tooling costs, electricity and natural gas contracts, property, plant and equipment, customer financing equipment, and other miscellaneous production related obligations. The most significant obligation relates to inventory procurement contracts. We have entered into certain significant inventory procurement contracts that specify determinable prices and quantities, and long-term delivery timeframes. In addition, we purchase raw materials on behalf of our suppliers. These agreements require suppliers and vendors to be prepared to build and deliver items in sufficient time to meet our production schedules. The need for such arrangements with suppliers and vendors arises from the extended production planning horizon for many of our products. A significant portion of these inventory commitments is supported by firm contracts and/or has historically resulted in settlement through reimbursement from customers for penalty payments to the supplier should the customer not take delivery. These amounts are also included in our forecasts of costs for program and contract accounting. Some inventory procurement contracts may include escalation adjustments. In these limited cases, we have included our best estimate of the effect of the escalation adjustment in the amounts disclosed in the table above.
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Purchase Obligations Recorded on the Consolidated Statements of Financial Position Purchase obligations recorded on the Consolidated Statements of Financial Position primarily include accounts payable and certain other current and long-term liabilities including accrued compensation.
Industrial Participation Agreements We have entered into various industrial participation agreements with certain customers outside of the U.S. to facilitate economic flow back and/or technology or skills transfer to their businesses or government agencies as the result of their procurement of goods and/or services from us. These commitments may be satisfied by our local operations there, placement of direct work or vendor orders for supplies, opportunities to bid on supply contracts, transfer of technology or other forms of assistance. However, in certain cases, our commitments may be satisfied through other parties (such as our vendors) who purchase supplies from our non-U.S. customers. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. During 2020, we incurred no such penalties. As of December 31, 2020, we have outstanding industrial participation agreements totaling $26.4 billion that extend through 2034. Purchase order commitments associated with industrial participation agreements are included in purchase obligations in the table above. To be eligible for such a purchase order commitment from us, a non-U.S. supplier must have sufficient capability to meet our requirements and must be competitive in cost, quality and schedule.
Commercial Commitments
The following table summarizes our commercial commitments outstanding as of December 31, 2020.
Commercial aircraft financing commitments include commitments to provide financing related to aircraft on order, under option for deliveries or proposed as part of sales campaigns or refinancing with respect to delivered aircraft, based on estimated earliest potential funding dates. Based on historical experience, we anticipate that we will not be required to fund a significant portion of our financing commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required. See Note 13 to our 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 21 to our Consolidated Financial Statements.
Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of $565 million at December 31, 2020. For additional information, see Note 13 to our Consolidated Financial Statements.
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Off-Balance Sheet Arrangements
We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion of these arrangements, see Note 14 to our Consolidated Financial Statements.
Non-GAAP Measures
Core Operating Earnings, Core Operating Margin and Core Earnings Per Share
Our Consolidated 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, core operating margin and core earnings per share exclude the FAS/CAS service cost adjustment. 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 earnings 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, comprising service and prior service costs computed in accordance with GAAP are allocated to BCA and certain BGS businesses supporting commercial customers. 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 adjustment recognized in (loss)/earnings from operations during 2020 was a benefit of $1,024 million, largely consistent with a benefit of $1,071 million in 2019 and $1,005 million in 2018. The non-operating pension expense included in Other income, net was a benefit of $340 million in 2020, $374 million in 2019 and $143 million in 2018. The benefits in 2020, 2019, and 2018 reflect expected returns in excess of interest cost and amortization of actuarial losses.
For further discussion of pension and other postretirement costs see the Management’s Discussion and Analysis on pages 30 - 31 of this Form 10-K and see Note 22 to our Consolidated Financial Statements. 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 cost, primarily represent costs driven by market factors and costs not allocable to U.S. government contracts.
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Reconciliation of GAAP Measures to Non-GAAP Measures
The table below reconciles the non-GAAP financial measures of core operating earnings, core operating margin and core earnings per share with the most directly comparable GAAP financial measures of earnings from operations, operating margins and diluted earnings per share.
(Dollars in millions, except per share data)
(Loss)/earnings from operations, as reported ($12,767) ($1,975) $11,987
Operating margins (22.0) % (2.6) % 11.9 %
Pension FAS/CAS service cost adjustment(1) ($1,024) ($1,071) ($1,005)
Postretirement FAS/CAS service cost adjustment(1) ($359) ($344) ($322)
Core operating margins (non-GAAP) (24.3) % (4.4) % 10.5 %
Diluted (loss)/earnings per share, as reported ($20.88) ($1.12) $17.85
Pension FAS/CAS service cost adjustment(1) ($1.80) ($1.89) ($1.71)
Postretirement FAS/CAS service cost adjustment(1) ($0.63) ($0.61) ($0.55)
Non-operating pension expense(2) ($0.60) ($0.66) ($0.24)
Non-operating postretirement expense(2) $0.03 $0.19 $0.17
Provision for deferred income taxes on adjustments (3) $0.63 $0.62 $0.49
Core (loss)/earnings per share (non-GAAP) ($23.25) ($3.47) $16.01
Weighted average diluted shares (in millions) 569.0 566.0 586.2
(1)FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. This adjustment is excluded from Core operating (loss)/earnings (non-GAAP).
(2)Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. These expenses are included in Other income, net and are excluded from Core (loss)/earnings per share (non-GAAP).
(3)The income tax impact is calculated using the U.S. corporate statutory tax rate.
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Critical Accounting Policies & Estimates
Accounting for long-term contracts
Substantially all contracts at BDS and certain contracts at BGS are long-term contracts. Our long-term contracts typically represent a single distinct performance obligation due to the highly interdependent and interrelated nature of the underlying goods and/or services and the significant service of integration that we provide.
Accounting for long-term contracts involves a judgmental process of estimating the total sales, costs, and profit for each performance obligation. Cost of sales is recognized as incurred and revenue is determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales.