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.

Due to the size, duration and nature of many of our long-term contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Total sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance, and price adjustment clauses (such as inflation or index-based clauses). The majority of these long-term contracts are with the U.S. government where the price is generally based on estimated cost to produce the product or service plus profit. Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed in establishing contract price. Total cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, COVID-19 disruptions, asset utilization, and anticipated labor agreements.

Revenue and cost estimates for all significant long-term contract performance obligations are reviewed and reassessed quarterly. Changes in these estimates could result in recognition of cumulative catch-up adjustments to the performance obligation’s inception to date revenues, cost of sales and profit, in the period in which such changes are made. Changes in revenue and cost estimates could also result in a reach-forward loss or an adjustment to a reach-forward loss, which would be recorded immediately in earnings. For the years ended December 31, 2020, 2019 and 2018 net unfavorable cumulative catch-up adjustments, including reach-forward losses, across all long-term contracts decreased Earnings from operations by $942 million, $111 million and $190 million, respectively. The cumulative catch-up adjustments in 2020 were primarily due to reach-forward losses incurred on the KC-46A Tanker program.

Due to the significance of judgment in the estimation process described above, it is likely that materially different earnings could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods. If the combined gross margin for all long-term contract performance obligations for all of 2020 had been estimated to be higher or lower by 1%, it would have increased or decreased pre-tax income for the year by approximately $330 million. In addition, a number of our fixed price development contracts are in a reach-forward loss position. Changes to estimated losses are recorded immediately in earnings.

Program Accounting

Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to costs for the defined program accounting quantity. 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. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and

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anticipated contracts. For each program, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of sales recognized for airplanes delivered and accepted by the customer.

Factors that must be estimated include program accounting quantity, sales price, labor and employee benefit costs, material costs, procured part costs, major component costs, overhead costs, program tooling and other non-recurring costs, and warranty costs. Estimation of the accounting quantity for each program takes into account several factors that are indicative of the demand for the particular program, such as firm orders, letters of intent from prospective customers, and market studies. Total estimated program sales are determined by estimating the model mix and sales price for all unsold units within the accounting quantity, added together with the sales prices for all undelivered units under contract. The sales prices for all undelivered units within the accounting quantity include an escalation adjustment for inflation that is updated quarterly. Cost estimates are based largely on negotiated and anticipated contracts with suppliers, historical performance trends, and business base and other economic projections. Factors that influence these estimates include production rates, internal and subcontractor performance trends, customer and/or supplier claims or assertions, asset utilization, anticipated labor agreements, COVID-19 disruptions, and inflationary or deflationary trends.

To ensure reliability in our estimates, we employ a rigorous estimating process that is reviewed and updated on a quarterly basis. This includes reassessing the accounting quantity. Changes in estimates of program margins are normally recognized on a prospective basis; however, when estimated costs to complete a program exceed estimated revenues from undelivered units in the accounting quantity, a loss provision is recorded in the current period for the estimated loss on all undelivered units in the accounting quantity.

The program method of accounting allocates tooling and other non-recurring and production costs over the accounting quantity for each program. Because of the higher unit production costs experienced at the beginning of a new program and substantial investment required for initial tooling and other non-recurring costs, new commercial aircraft programs, typically have lower initial margins than established programs and a higher risk for reach-forward loss. Actual costs incurred for earlier units in excess of the estimated average cost of all units in the program accounting quantity are included within program inventory as deferred production costs. Deferred production, unamortized tooling and other non-recurring costs are expected to be fully recovered when all units in the accounting quantity are delivered as the expected unit cost for later deliveries is below the estimated average cost as learning curve and other improvements are realized.

Wenow 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.

Absent changes in the estimated revenues or costs, deliveries which are expected to begin in 2023 will be recorded at zero margin. Reductions to the estimated loss in subsequent periods are spread over all undelivered units in the accounting quantity, whereas increases to the estimated loss are recorded immediately. 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

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could result in additional reach-forward losses on the 777X program in future periods which may be material.

Due to the impacts of COVID-19 on our customers as well as production issues and associated rework, the 787 program has near breakeven gross margins at December 31, 2020. The margins reflect reductions in the production rate and program accounting quantity during 2020. If we are required to further reduce the accounting quantity and/or production rates or experience higher than anticipated costs or delays addressing production issues and associated rework, or other factors that could result in lower margins, the program could record a reach-forward loss in future periods which may be material.

The 747 and 767 programs also have near breakeven gross margins at December 31, 2020. If we are unable to mitigate risks associated with these programs, or if our assumptions with respect to items such as pricing, cost, accounting quantity or future production rates were to change, we could be required to record reach-forward losses in future periods which may be material.

737 MAX Grounding

In 2019, following two fatal 737 MAX accidents, the Federal Aviation Administration (FAA) and non-U.S. civil aviation authorities issued orders suspending commercial operations of 737 MAX aircraft. Deliveries of the 737 MAX were suspended following these orders. Deliveries resumed in late 2020 following rescission by the FAA of its grounding order.

Multiple legal actions have been filed against us as a result of the accidents. In addition, we are fully cooperating with U.S. government investigations related to the accidents and the 737 MAX program, including an investigation by the Securities and Exchange Commission, the outcome of which may be material. On January 6, 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. Other than with respect to the U.S. Department of Justice, we cannot reasonably estimate a range of loss, if any, not covered by available insurance that may result given the current status of the lawsuits, investigations and inquiries related to the 737 MAX.

In the preparation of our financial statements, we have made assumptions regarding outcomes of accident investigations and other government inquiries, timing and conditions of return to service, the timing of future 737 production rate increases, supplier readiness to support production rate changes, timing and sequence of future customer deliveries as well as outcomes of negotiations with customers impacted by the grounding. We have also made significant assumptions regarding estimated costs expected to be incurred in 2021 that should be included in program inventory and those costs that should be expensed when incurred as abnormal production costs. While these assumptions reflect our best estimate at this time, they are highly uncertain and significantly affect the estimates inherent in our financial statements.

In December 2020, we delivered 27 aircraft, in compliance with the FAA regulatory requirements. We have assumed that the remaining non-U.S. regulatory approvals will occur and enable deliveries during the first half of 2021. We have approximately 425 airplanes in inventory as of December 31, 2020. A number of customers have requested to defer deliveries or to cancel orders for 737 MAX aircraft, and we are remarketing and/or delaying deliveries of certain aircraft included within inventory. We now expect to deliver about half of the 737 MAX aircraft in inventory by the end of 2021. In the event that we are unable to resume aircraft deliveries in non-U.S. jurisdictions consistent with our assumptions of regulatory approval timing, our expectation of delivery timing could be impacted.

Due to the grounding and associated suspension of 737 MAX deliveries, we temporarily suspended 737 MAX production beginning in January 2020. We resumed early stages of 737 MAX production in May 2020 and continued to produce at low rates through the end of 2020.

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In addition, we reduced the number of aircraft included in the accounting quantity by 400 units in the first quarter of 2020 as a result of reductions to planned production rates due to COVID-19 driven market uncertainties.As we are producing at abnormally low production rates in 2020 and 2021, we expect to incur approximately $5.0 billion of abnormal production costs that are being expensed as incurred. The slowdown in the planned production rate ramp-up increased expected abnormal costs however this increase was offset by adjustments to the determination of the normal production level due to COVID-19 impacts on customer demand, as well as cost reduction activities, including significant reductions in employment levels. We expensed approximately $2.6 billion of abnormal production costs during the year ended December 31, 2020.

In addition to impacts related to the 737 MAX accidents and subsequent grounding, the 737 program continues to be significantly impacted by the COVID-19 pandemic and its effect on aircraft demand. These impacts have resulted in lower production and delivery rate assumptions. We currently expect to gradually increase the production rate to 31 per month by early 2022. We currently assume that we will implement further gradual production rate increases in subsequent periods based on market demand. The ongoing impacts of COVID-19 on market demand have also created significant uncertainty around the timing of deliveries of 737 MAX aircraft in inventory. We may need to recognize additional costs associated with remarketing and/or reconfiguring aircraft in inventory, which may reduce revenue and/or earnings in future periods.

We are working with our customers to minimize the impact to their operations from grounded and undelivered aircraft. We continue to reassess the liability for estimated potential concessions and other considerations to customers on a quarterly basis. This reassessment includes updating estimates to reflect revisions to return to service, delivery and production rate assumptions driven by timing of regulatory approvals, as well as latest information based on engagements with 737 MAX customers. The remaining liability of $5.5 billion at December 31, 2020 represents our current best estimate of future concessions and other considerations to customers, and is necessarily based on a series of assumptions. It is subject to change in future quarters as negotiations with customers mature and timing and conditions of return to service are better understood.

Our assumptions reflect our current best estimate, but actual timing and conditions of return to service and resumption of deliveries could differ from this estimate, the effect of which could be material. We are unable at this time to reasonably estimate potential future additional financial impacts or a range of loss, if any, due to continued uncertainties related to the timing and conditions of return to service, uncertainties related to the impacts of COVID-19 on our operations, supply chain and customers, future changes to the production rate, supply chain impacts, and/or the results of negotiations with particular customers. Any such impacts, including any changes in our estimates, could have a material adverse effect on our financial position, results of operations, and/or cash flows. For example, we expect that, in the event that we are unable to resume aircraft deliveries in non-U.S. jurisdictions consistent with our assumptions, the continued absence of revenue, earnings, and cash flows associated with 737 MAX deliveries would continue to have a material impact on our operating results. In the event that future production rate increases occur at a slower rate or take longer than we are currently assuming we expect that the growth in inventory and other cash flow impacts associated with production would decrease. However, while any prolonged production suspension or delays in planned production rate increases could mitigate the impact on our liquidity, it could significantly increase the overall expected costs to produce aircraft included in the accounting quantity, which would reduce 737 program margins and/or increase abnormal production costs in the future.

Goodwill Impairments

We test goodwill for impairment by performing a qualitative assessment or quantitative test. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors as an initial step in assessing the fair value of operations. If we determine it is more likely than

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not that the carrying value of the net assets is more than the fair value of the related operations, then a quantitative test is performed; otherwise, no further testing is required. For operations where the quantitative test is used, we compare the carrying value of net assets to the estimated fair value of the related operations. If the fair value is determined to be less than carrying value, the shortfall up to the carrying value of the goodwill represents the amount of goodwill impairment.

We generally estimate the fair values of the related operations using a combination of discounted cash flows and market-based valuation methodologies such as comparable public company trading values. Forecasts of future cash flows are based on our best estimate of future sales, operating costs, and changes in working capital. These forecasts reflect existing firm orders, expected future orders, expected production rates and delivery profiles, contracts with suppliers, labor agreements, and general market conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any. The cash flow forecasts are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. Therefore, changes in the stock price may also affect the amount of impairment recorded, if any.

We completed our annual assessment of goodwill as of April 1, 2020 and determined that there was no impairment of goodwill.

As a result of the continuing significant adverse impacts of the COVID-19 pandemic on our Commercial Airplanes and Commercial Services businesses, we concluded it is a triggering event for testing whether goodwill recorded by our Commercial Airplanes and Commercial Services reporting units is impaired. At December 31, 2020, Commercial Airplanes has $1,316 million of goodwill and Commercial Services has $3,087 million. We performed a quantitative test and determined the fair values of our Commercial Airplane and Commercial Services reporting units substantially exceeded their carrying values as of December 31, 2020. As of December 31, 2020, we also estimated the fair values of our other reporting units significantly exceeded their corresponding carrying values.

We will continue to monitor the impacts of the COVID-19 pandemic in future quarters. Changes in our forecasts, discount rates, or decreases in the value of our common stock could cause book values to exceed their fair values which may result in goodwill impairment charges in future periods.

Pension Plans

Many of our employees have earned benefits under defined benefit pension plans. Nonunion and the majority of union employees that had participated in defined benefit pension plans transitioned to a company-funded defined contribution retirement savings plan in 2016. Additional union employees transitioned to company-funded defined contribution retirement savings plans effective January 1, 2019. Accounting rules require an annual measurement of our projected obligation and plan assets. These measurements are based upon several assumptions, including the discount rate and the expected long-term rate of asset return. Future changes in assumptions or differences between actual and expected outcomes can significantly affect our future annual expense, projected benefit obligation and Shareholders’ equity.

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The projected benefit obligation is sensitive to discount rates. The projected benefit obligation would decrease by $2,591 million or increase by $2,930 million if the discount rate increased or decreased by 25 basis points. A 25 basis point change in the discount rate would not have a significant impact on pension cost. However, net periodic pension cost is sensitive to changes in the expected long-term rate of asset return. A decrease or increase of 25 basis points in the expected long-term rate of asset return would have increased or decreased 2020 net periodic pension cost by $145 million.

Deferred Income Taxes – Valuation Allowance

The Company has deferred income tax assets of $11,600 million at December 31, 2020, that can be used in future years to offset taxable income and reduce income taxes payable. The Company has deferred income tax liabilities of $9,430 million at December 31, 2020, that will partially offset deferred income tax assets and result in higher taxable income in future years and increase income taxes payable. Tax law determines whether future reversals of temporary differences will result in taxable and deductible amounts that offset each other in future years. The particular years in which temporary differences result in taxable or deductible amounts generally are determined by the timing of the recovery of the related asset or settlement of the related liability. The deferred income tax assets and liabilities relate primarily to U.S. federal and state tax jurisdictions.

On a quarterly basis, we assess the likelihood that we will be able to recover our deferred tax assets against future sources of taxable income and reduce the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of such assets will not be realized.

This assessment, which is completed on a taxing jurisdiction basis, takes into account both positive and negative evidence. A recent history of financial reporting losses is heavily weighted as a source of objectively verifiable negative evidence. Cumulative pre-tax losses in the three-year period ending with the current quarter is considered to be significant negative evidence regarding future profitability. If cumulative pre-tax losses adjusted for non-recurring items result in positive normalized earnings that would be considered an objectively verifiable source of positive evidence of the ability of the company to generate positive earnings in the future. When there is a recent history of operating losses and negative normalized earnings and a return to operating profitability has not yet been demonstrated, we cannot rely on projections of future earnings for purposes of assessing recoverability of our deferred tax assets. In such cases, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. The selection of methodologies and assessment of when temporary differences will result in taxable or deductible amounts involves significant management judgment and is inherently complex and subjective. We believe that the methodologies we use are reasonable and can be replicated on a consistent basis in future periods.

As described above, a recent history of financial reporting losses is heavily weighted as a source of objectively verifiable negative evidence of the Company’s ability to generate future taxable income to recover deferred tax assets. During 2019 and 2020 the Company generated significant losses and in the fourth quarter of 2020 the Company reached a three-year cumulative pre-tax loss position. We expect cumulative three-year losses to grow in 2021 as record earnings in 2018 are replaced by 2021 results. We also normalized earnings and other comprehensive income for certain non-recurring items and expect to reach a three-year cumulative loss position in 2021 as record earnings in 2018 are replaced with 2021 results. For purposes of assessing the recoverability of deferred tax assets, the Company determined that it could not include future projected earnings in the analysis due to recent history of losses.

Deferred tax liabilities represent the assumed source of future taxable income and the majority are assumed to generate taxable amounts during the next five years.Deferred tax assets include amounts

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related to pension and other postretirement benefits that are assumed to generate significant deductible amounts beyond five years.The Company’s valuation allowance of $3,094 million at December 31, 2020 primarily relates to pension and other postretirement benefit obligation deferred tax assets that are assumed to reverse beyond the period in which reversals of deferred tax liabilities are assumed to occur.Because the pension and other postretirement benefit obligations are recorded to both continuing operations and other comprehensive income (OCI), the Company recorded a portion of the fourth quarter increase in the valuation allowance to income tax expense in continuing operations ($2,513 million) and a portion to OCI ($196 million).

If the Company continues to generate losses and negative normalized earnings in future periods, additional valuation allowances may have to be recorded with corresponding adverse impacts on earnings and/or OCI. When income generation returns to more normal levels we can expect to see the allowance reverse and increase reported earnings and/or OCI.

For additional information regarding income taxes, see Note 4 of the Notes to the Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We have financial instruments that are subject to interest rate risk, principally fixed- and floating-rate debt obligations, and customer financing assets and liabilities. The investors in our fixed-rate debt obligations do not generally have the right to demand we pay off these obligations prior to maturity. Therefore, exposure to interest rate risk is not believed to be material for our fixed-rate debt. In the first quarter of 2020, we entered into a $13.8 billion two-year delayed draw floating-rate term loan credit agreement. An increase or decrease of 100 basis points in interest rates on this floating-rate debt would increase or decrease our pre-tax earnings by $138 million over the next 12 months. Historically, we have not experienced material gains or losses on our customer financing assets and liabilities due to interest rate changes.

Foreign Currency Exchange Rate Risk

We are subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. We use foreign currency forward contracts to hedge the price risk associated with firmly committed and forecasted foreign denominated payments and receipts related to our ongoing business. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2020, a 10% increase or decrease in the exchange rate in our portfolio of foreign currency contracts would have increased or decreased our unrealized losses by $245 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these forward currency contracts and the offsetting underlying commitments do not create material market risk.

Commodity Price Risk

We are subject to commodity price risk relating to commodity purchase contracts for items used in production that are subject to changes in the market price. We use commodity swaps and commodity purchase contracts to hedge against these potentially unfavorable price changes. Our commodity purchase contracts and derivatives are both sensitive to changes in the market price. At December 31, 2020, a 10% increase or decrease in the market price in our commodity derivatives would have increased or decreased our unrealized losses by $38 million. Consistent with the use of these contracts

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to neutralize the effect of market price fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these commodity purchase contracts and the offsetting swaps do not create material market risk.

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Item 8. Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements

Page

Consolidated Statements of Operations 62

Consolidated Statements of Comprehensive Income 63

Consolidated Statements of Financial Position 64

Consolidated Statements of Cash Flows 65

Consolidated Statements of Equity 66

Summary of Business Segment Data 67

Note 1 - Summary of Significant Accounting Policies 68

Note 2 - Goodwill and Acquired Intangibles 82

Note 3 - Earnings Per Share 83

Note 4 - Income Taxes 84

Note 5 - Accounts Receivable 88

Note 6 - Allowance for Losses on Financial Assets 88

Note 7 - Inventories 89

Note 8 - Contracts with Customers 90

Note 9 - Customer Financing 91

Note 10 - Property, Plant and Equipment 94

Note 11 - Investments 94

Note 13 - Liabilities, Commitments and Contingencies 96

Note 14 - Arrangements with Off-Balance Sheet Risk 103

Note 16 - Postretirement Plans 106

Note 17 - Share-Based Compensation and Other Compensation Arrangements 115

Note 18 - Shareholders’ Equity 118

Note 19 - Derivative Financial Instruments 120

Note 20 - Fair Value Measurements 122

Note 21 - Legal Proceedings 124

Note 22 - Segment and Revenue Information 125

Note 23 - Quarterly Financial Data 131

Reports of Independent Registered Public Accounting Firm 132

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The Boeing Company and Subsidiaries

Consolidated Statements of Operations

(Dollars in millions, except per share data)

Boeing Capital interest expense (43) (62) (69)

Income/(loss) from operating investments, net 9 (4) 111

Research and development expense, net (2,476) (3,219) (3,269)

Less: net loss attributable to noncontrolling interest (68)

Net (loss)/earnings attributable to Boeing Shareholders ($11,873) ($636) $10,460

Diluted (loss)/earnings per share ($20.88) ($1.12) $17.85

See Notes to the Consolidated Financial Statements on pages 67 – 131.

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The Boeing Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in millions)

Other comprehensive income/(loss), net of tax:

Currency translation adjustments 98 (27) (86)

Unrealized gain on certain investments, net of tax of $0, $0 and ($1) 1 2

Derivative instruments:

Total unrealized gain/(loss) on derivative instruments, net of tax 41 (22) (116)

Defined benefit pension plans & other postretirement benefits:

Other comprehensive (loss)/income, net of tax (980) (1,070) 1,290

Comprehensive loss related to noncontrolling interests (41) (21)

Less: Comprehensive loss related to noncontrolling interest (68) (41) (21)

See Notes to the Consolidated Financial Statements on pages 67 – 131.

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The Boeing Company and Subsidiaries

Consolidated Statements of Financial Position

(Dollars in millions, except per share data)

Assets

Short-term and other investments 17,838 545

Current portion of customer financing, net 101 162

Acquired intangible assets, net 2,843 3,338

Deferred income taxes 86 683

Other assets, net of accumulated amortization of $729 and $580 4,712 3,585

Liabilities and equity

Short-term debt and current portion of long-term debt 1,693 7,340

Shareholders’ equity:

Accumulated other comprehensive loss (17,133) (16,153)

Noncontrolling interests 241 317

See Notes to the Consolidated Financial Statements on pages 67 – 131.

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The Boeing Company and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in millions)

Cash flows – operating activities:

Non-cash items –

Treasury shares issued for 401(k) contribution 195

Investment/asset impairment charges, net 410 443 93

Customer financing valuation adjustments 12 250 (3)

Gain on dispositions, net (202) (691) (75)

Changes in assets and liabilities –

Income taxes receivable, payable and deferred (2,576) (2,476) (180)

Other long-term liabilities (222) (621) 87

Pension and other postretirement plans (794) (777) (153)

Net cash (used)/provided by operating activities (18,410) (2,446) 15,322

Cash flows – investing activities:

Property, plant and equipment additions (1,303) (1,834) (1,722)

Property, plant and equipment reductions 296 334 120

Acquisitions, net of cash acquired (455) (3,230)

Proceeds from dispositions 464

Purchase of distribution rights (127) (69)

Cash flows – financing activities:

Contributions from noncontrolling interests 7 35

Stock options exercised 36 58 81

Employee taxes on certain share-based payment arrangements (173) (248) (257)

Common shares repurchased (2,651) (9,000)

Effect of exchange rate changes on cash and cash equivalents 85 (5) (53)

Cash & cash equivalents, including restricted, at end of year 7,835 9,571 7,813

Less restricted cash & cash equivalents, included in Investments 83 86 176

Cash and cash equivalents at end of year $7,752 $9,485 $7,637

See Notes to the Consolidated Financial Statements on pages 67 – 131.

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The Boeing Company and Subsidiaries

Consolidated Statements of Equity

Boeing shareholders

Other comprehensive income, net of tax of ($379) 1,290 1,290

Share-based compensation and related dividend equivalents 238 (36) 202

Treasury shares issued for stock options exercised, net (45) 126 81

Treasury shares issued for other share-based plans, net (229) (20) (249)

Common shares repurchased (9,000) (9,000)

Cash dividends declared ($7.19 per share) (4,101) (4,101)

Changes in noncontrolling interests 35 35

Other comprehensive loss, net of tax of $298 (1,070) (1,070)

Share-based compensation and related dividend equivalents 245 (33) 212

Treasury shares issued for stock options exercised, net (47) 104 57

Treasury shares issued for other share-based plans, net (221) (19) (240)

Common shares repurchased (2,651) (2,651)

Cash dividends declared ($8.22 per share) (4,628) (4,628)

Changes in noncontrolling interests 287 287

Other comprehensive loss, net of tax of $52 (980) (980)

Share-based compensation 250 250

Treasury shares issued for stock options exercised, net (26) 63 37

Treasury shares issued for other share-based plans, net (214) 47 (167)

Treasury shares contributed to pension plans 952 2,048 3,000

Treasury shares issued for 401(k) contribution 80 115 195

Changes in noncontrolling interests (8) (8)

See Notes to the Consolidated Financial Statements on pages 67 – 131.

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The Boeing Company and Subsidiaries

Notes to the Consolidated Financial Statements

Summary of Business Segment Data

(Dollars in millions)

Revenues:

Unallocated items, eliminations and other (65) (503) (2)

(Loss)/earnings from operations:

Unallocated items, eliminations and other (2,355) (2,073) (1,477)

Less: net loss attributable to noncontrolling interest (68)

Net (loss)/earnings attributable to Boeing Shareholders ($11,873) ($636) $10,460

This information is an integral part of the Notes to the Consolidated Financial Statements. See Note 22 for further segment results.

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The Boeing Company and Subsidiaries

Notes to the Consolidated Financial Statements

Years ended December 31, 2020, 2019 and 2018

(Dollars in millions, except otherwise stated)

Note 1 – Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The Consolidated Financial Statements included in this report have been prepared by management of The Boeing Company (herein referred to as “Boeing,” the “Company,” “we,” “us,” or “our”). These statements include the accounts of all majority-owned subsidiaries and variable interest entities that are required to be consolidated. All significant intercompany accounts and transactions have been eliminated. As described in Note 22, we operate in four reportable segments: Commercial Airplanes (BCA); Defense, Space & Security (BDS), Global Services (BGS), and Boeing Capital (BCC). Effective at the beginning of 2020, certain programs were realigned between our BDS segment and Unallocated items, eliminations and other. Amounts in prior periods have been reclassified to conform to the current year presentation.

Liquidity Matters

The global outbreak of COVID-19 and the grounding of the 737 MAX airplane are having a significant adverse impact on our business and are expected to continue to negatively impact revenue, earnings and operating cash flow in future quarters. 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 aerospace manufacturing and services sector. We currently expect it will take approximately three years for travel to return to 2019 levels and a few years beyond that for the industry to return to long-term trend growth. 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 2020, net cash used by operating activities was $18.4 billion, and we expect negative operating cash flows in future quarters until commercial deliveries ramp up. In the first quarter of 2020, we entered into and fully drew on a $13.8 billion two-year delayed draw term loan credit agreement (delayed draw term loan facility). In the second quarter of 2020, we issued $25 billion of fixed rate senior notes that mature between 2023 and 2060. In the fourth quarter of 2020, we issued $4.9 billion of fixed rate senior notes that mature between 2024 and 2031. As a result, our cash and short-term investment balance was $25.6 billion and our debt balance was $63.6 billion at December 31, 2020.

The major credit rating agencies downgraded our short term and long term credit ratings during 2020, and there is risk for further downgrades. At December 31, 2020, our debt balance includes no commercial paper borrowings compared to $6.1 billion at December 31, 2019. In the current environment, we may have limited future access to the commercial paper market. In addition, we have term notes of $1.5 billion maturing in 2021.

At December 31, 2020, trade payables included $3.8 billion payable to suppliers who have elected to participate in supply chain financing programs. While access to supply chain financing has been reduced due to our current credit ratings and debt levels, we do not believe that these or future changes in the availability of supply chain financing will have a significant impact on our liquidity.

At December 31, 2020, we had $9.5 billion of unused borrowing capacity on revolving credit agreements. We anticipate that these credit lines will primarily serve as back-up liquidity to support our general corporate borrowing needs. Our borrowing capacity includes a $3.1 billion 364-day revolving credit facility, which is set to expire in October 2021.

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In addition to our debt issuances, we have taken a number of actions to improve liquidity. During the first quarter of 2020, our Board of Directors terminated its prior authorization to repurchase shares of the Company’s outstanding common stock and suspended the declaration and/or payment of dividends until further notice. We have also reduced production rates in our commercial business to reflect the impact of COVID-19 on the industry. We are executing on our plans to reduce our workforce through a combination of voluntary and involuntary layoffs and natural turnover. 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. In the fourth quarter of 2020, we began using our common stock in lieu of cash to fund Company contributions to our 401(k) plans. In December 2020, we awarded most of our employees a one-time stock grant that will vest in three years in lieu of merit increases. We expect these actions to further enable the Company to conserve cash.

We are also working with our customers and supply chain to accelerate receipts and conserve cash. For example, the United States Department of Defense (U.S. DoD) has taken steps to work with its industry partners to increase liquidity in the form of increased progress payment rates and reductions in withholds among other initiatives. We are also deferring certain tax payments pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

We have reduced discretionary spending, including reducing or deferring research and development and capital expenditures.

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. 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. We also anticipate a reduction in office space needs compared to our current capacity. 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. The portfolio and investments pillar includes aligning our portfolio and investments to focus on our core business and the changes in market conditions. The supply chain pillar is focused on supply chain health and stability, reducing indirect procurement spend and streamlining our transportation, logistics and warehousing approach. The operational excellence pillar is focused on improving performance, enhancing quality and reducing rework. 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.

Based on our current best estimates of market demand, planned production rates, timing of cash receipts and expenditures, our ability to successfully implement further actions to improve liquidity as well as our ability to access additional liquidity, if needed, we believe it is probable that we will be able to fund our operations for the foreseeable future.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that the accounting estimates and assumptions are appropriate given the increased uncertainties surrounding the severity and duration of the impacts of the COVID-19 pandemic, however actual results could differ from those estimates.

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Operating Cycle

For classification of certain current assets and liabilities, we use the duration of the related contract or program as our operating cycle, which is generally longer than one year.

Standards Issued and Implemented

In the first quarter of 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using a modified retrospective method, which resulted in the recognition of allowances for credit losses on our Consolidated Statement of Financial Position as of January 1, 2020 and a $162 cumulative-effect adjustment to retained earnings to align our credit loss methodology with the new standard. The standard replaces the incurred loss impairment methodology under Topic 310 with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and certain other financial assets. See Notes 5, 6, 9 and 14 for additional disclosures.

In the first quarter of 2020, we also adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the quantitative impairment test from a two-step process to a one-step process. The quantitative test is performed by comparing the carrying value of net assets to the estimated fair value of the related operations. If the fair value is determined to be less than carrying value, the shortfall up to the carrying value of the goodwill represents the amount of goodwill impairment. The standard continues to permit a company to test goodwill for impairment by performing a qualitative assessment or using the quantitative test.

Revenue and Related Cost Recognition

Commercial aircraft contracts The majority of our BCA segment revenue is derived from commercial aircraft contracts. For each contract, we determine the transaction price based on the consideration expected to be received. We allocate the transaction price to each commercial aircraft performance obligation based on relative standalone selling prices adjusted by an escalation formula as specified in the customer agreement. Revenue is recognized for each commercial aircraft performance obligation at the point in time when the aircraft is completed and accepted by the customer. We use program accounting to determine the amount reported as cost of sales.

In certain situations, where an aircraft is still in our possession, and title and risk of loss has passed to the customer (known as a bill-and-hold arrangement), revenue will be recognized when all specific requirements for transfer of control under a bill-and-hold arrangement have been met.

Payments for commercial aircraft sales are received in accordance with the customer agreement, which generally includes a deposit upon order and additional payments in accordance with a payment schedule, with the balance being due immediately prior to or at aircraft delivery. Advances and progress billings (contract liabilities) are normal and customary for commercial aircraft contracts and not considered a significant financing component as they are intended to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

Long-term contracts Substantially all contracts at BDS and certain contracts at BGS are long-term contracts with the U.S. government and other customers that generally extend over several years. Products sales under long-term contracts primarily include fighter jets, rotorcraft, cybersecurity products, surveillance suites, advanced weapons, missile defense, military derivative aircraft, satellite systems, and modification of commercial passenger aircraft to cargo freighters. Services sales under long-term contracts primarily include support and maintenance agreements associated with our commercial and defense products and space travel on Commercial Crew.

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BA US Equity

BA · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

BA US Equity☆

BA · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

BA US Equity