Boeing 2015 Annual Report

Item 1: Business

The Boeing Company, together with its subsidiaries (herein referred to as “Boeing,” the “Company,” “we,” “us,” “our”), is one of the world’s major aerospace firms. We are organized based on the products and services we offer. We operate in five principal segments:

  1. The unallocated activities of Engineering (Corporate and intercompany guarantees provided to BCC are included in Unallocated items)
  2. Operations & Technology (EO&T)
  3. Shared Services Group (SSG)
  4. eliminations
  5. other

EO&T provides Boeing with technical and functional capabilities, including information technology, research and development, test and evaluation, technology strategy development, environmental remediation management and intellectual property management.

Commercial Airplanes Segment

The Commercial Airplanes related support services, principally to the commercial airline industry worldwide. We are a leading producer of commercial aircraft and offer a family of commercial jetliners designed to meet a broad spectrum of global passenger and cargo requirements of airlines.

This family of commercial jet aircraft in production includes:

  • 737 narrow-body model
  • 747
  • 767
  • 777
  • 787 wide-body models

Development continues on:

  • 787-10
  • 737 MAX derivatives
  • 777X programs

The Commercial Airplanes segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents and technical advice to commercial and government customers worldwide.

Defense, Space & Security

Our BDS operations principally involve research, development, production, modification and support of the products and related systems as described below. BDS' primary customer is the United States Department of Defense (U.S. DoD) with approximately 62% of BDS 2015 revenues being derived from this customer (excluding foreign military sales through the U.S. government). Other significant BDS revenues were derived from the National Aeronautics and Space Administration (NASA), international defense markets, civil markets and commercial satellite markets. BDS consists of three capabilities-driven businesses: BMA, N&SS and GS&S. Additionally, the Phantom Works group is an integrated team that works with the three businesses via product development, rapid prototyping and customer engagement through experimentation and enterprise technology investment strategies.

This segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for global strike, including fighter aircraft and missile systems; vertical lift, including rotorcraft and tilt-rotor aircraft; autonomous systems; and mobility, surveillance and engagement, including command and control, battle management, airborne, anti- submarine, transport and tanker aircraft. The major programs in this segment include for global strike: EA-18G Growler Airborne Electronic Attack, F/A-18E/F Super Hornet, F-15 Strike Eagle and Joint Direct Attack Munition; for vertical lift: CH-47 Chinook, AH-64 Apache, and V-22 Osprey; for autonomous systems: ScanEagle and Integrator; and for mobility, surveillance and engagement: C-17 Globemaster III, P-8 programs, and KC-46A Tanker. C-17 Globemaster III production ended in 2015.

This segment is engaged in the research, development, production and modification of the following products and related services: electronics and information solutions, including command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), cyber and information solutions, and intelligence systems; strategic missile and defense systems; space and intelligence systems, including satellites and commercial satellite launch vehicles; and space exploration. The major programs in this segment include for strategic missile and defense systems: Ground-based Midcourse Defense (GMD); for space and intelligence systems: commercial, civil and military satellites; and for space exploration: Space Launch System (SLS), Commercial Crew and International Space Station. This segment also includes our joint venture operations related to United Launch Alliance.

This segment provides customers with mission readiness through total support solutions. Our global services business sustains aircraft and systems with a full spectrum of products and services through integrated logistics, including supply chain management and engineering support; maintenance, modification and upgrades for aircraft; and training systems and government services, including pilot and maintenance training. GS&S international operations include Boeing Defence U.K. Ltd., and Boeing Defence Australia, as well as Alsalam Aircraft Company, Aviation Training International, Ltd and Boeing Sikorsky International Services LLC, joint ventures. Integrated logistics comprises an integrated array of services that address the complete life cycle of aircraft and systems. Major programs supported include the F/A-18E/F, F-15, AH-64 Apache and CH-47 Chinook for domestic and international customers. Aircraft modernization and sustainment is performed at centers throughout the United States and around the world, providing rapid cycle time and aircraft services for military customers on a wide variety of BDS and non-BDS platforms. Major support is performed as part of the C-17 Globemaster III Integrated Sustainment Program. Aircraft programs include the Airborne Early Warning and Control (AEW&C) Peace Eagle contract with Turkey and Airborne Warning and Control Systems (AWACS) program. We delivered the final AEW&C aircraft to Turkey in 2015. Training systems and government services comprise a full range of training capabilities for domestic and international customers, including the design and development of trainers for multiple aircraft platforms and logistics and asset management solutions.

Boeing Capital Segment

BCC seeks to ensure that Boeing customers have the financing they need to buy and take delivery of their Boeing product and manages overall financing exposure. BCC’s portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments.

Financial and Other Business Information

See the Summary of Business Segment Data and Note 21 to our Consolidated Financial Statements for financial information, including revenues and earnings from operations, for each of our business segments.

Intellectual Property

We own numerous patents and have licenses for the use of patents owned by others, which relate to our products and their manufacture. In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties. For example, the U.S. government has licenses in our patents that are developed in performance of government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes. Unpatented research, development and engineering skills, as well as certain trademarks, trade secrets, and other intellectual property rights, also make an important contribution to our business. While our intellectual property rights in the aggregate are important to the operation of each of our businesses, we do not believe that our business would be materially affected by the expiration of any particular intellectual property right or termination of any particular intellectual property patent license agreement.

Non-U.S. Revenues

See Note 21 to our Consolidated Financial Statements for information regarding non-U.S. revenues.

Research and Development

Research and development expenditures involve experimentation, design, development and related test activities for defense systems, new and derivative jet aircraft including both commercial and military, advanced space and other company-sponsored product development. These are expensed as incurred including amounts allocable as reimbursable overhead costs on U.S. government contracts.

Our total research and development expense, net amounted to:

$3.3 billion

2015

$3.0 billion

2014

$3.1 billion

2013

Research and development costs also include bid and proposal efforts related to government products and services, as well as costs incurred in excess of amounts estimated to be recoverable under costsharing research and development agreements.

Bid and proposal costs were:

$286 million

2015

$289 million

2014

$285 million

2013

Employees

Total workforce level at December 31, 2015 was approximately 161,400. As of December 31, 2015, our principal collective bargaining agreements were with the following unions: Union Percent of our Employees Represented Status of the Agreements with Major Union The International Association of Machinists and Aerospace Workers (IAM) 22% We have two major agreements; one expiring in June 2022 and one in September 2024. The Society of Professional Engineering Employees in Aerospace (SPEEA) 13% We have two major agreements expiring in October 2016. The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) 1% We have one major agreement expiring in October 2022.

Competition

The commercial jet aircraft market and the airline industry remain extremely competitive. We faceaggressive international competitors who are intent on increasing their market share, such as:

Airbus Embraer Bombardier

and other entrants from Russia, China and Japan. We are focused on improving our processes and continuing cost reduction efforts. We intend to continue to compete with other airplane manufacturers by providing customers with greater value products, services, and support.

We continue to leverage our extensive customer support services network which spans the life cycle of the airplane:

  • aircraft acquisition
  • readying for service
  • maintenance and engineering
  • enhancing and upgrading
  • transitioning to the next model - as well as the daily cycle of gate-to-gate operations.

This enables us to provide a high level of customer satisfaction and productivity. BDS faces strong competition in all market segments, primarily from:

Lockheed Martin Corporation Northrop Grumman Corporation Raytheon Company General Dynamics Corporation

Non-U.S. companies such as BAE Systems and Airbus Group, continue to build a strategic presence in the U.S. market by strengthening their North American operations and partnering with U.S. defense companies. In addition, certain competitors have occasionally formed teams with other competitors to address specific customer requirements. BDS expects the trend of strong competition to continue into 2016.

Regulatory Matters

Our businesses are heavily regulated in most of our markets. We deal with numerous U.S. government agencies and entities, including but not limited to all of the branches of the U.S. military, NASA, the Federal Aviation Administration (FAA) and the Department of Homeland Security. Similar government authorities exist in our international markets.

The U.S. government, and other governments, may terminate any of our government contracts at their convenience, as well as for default, based on our failure to meet specified performance requirements. If any of our U.S. government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. government would pay only for the work that has been accepted and could require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default.

In the U.S., our commercial aircraft products are required to comply with FAA regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Internationally, similar requirements exist for airworthiness, installation and operational approvals. These requirements are generally administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities.

We are subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We continually assess our compliance status and management of environmental matters to ensure our operations are in substantial compliance with all applicable environmental laws and regulations. Investigation, remediation, and operation and maintenance costs associated with environmental compliance and management of sites are a normal, recurring part of our operations. These costs often are allowable costs under our contracts with the U.S. government. It is reasonably possible that costs incurred to ensure continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows if additional work requirements or more stringent clean-up standards are imposed by regulators, new areas of soil, air and groundwater contamination are discovered and/or expansions of work scope are prompted by the results of investigations. A Potentially Responsible Party (PRP) has joint and several liability under existing U.S. environmental laws. Where we have been designated a PRP by the Environmental Protection Agency or a state environmental agency, we are potentially liable to the government or third parties for the full cost of remediating contamination at our facilities or former facilities or at third-party sites. If we were required to fully fund the remediation of a site for which we were originally assigned a partial share, the statutory framework would allow us to pursue rights to contribution from other PRPs. For additional information relating to environmental contingencies, see Note 11 to our Consolidated Financial Statements.

Our international sales are subject to U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations relating to import-export control, investment, exchange controls and repatriation of earnings. International sales are also subject to varying currency, political and economic risks.

Raw Materials, Parts, and Subassemblies

We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and subcontractors. The most important raw materials required for our aerospace products are:

aluminum

(sheet, plate, forgings and extrusions)

titanium

(sheet, plate, forgings and extrusions)

composites

(including carbon and boron)

Although alternative sources generally exist for these raw materials, qualification of the sources could take one year or more. Many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of companies.

Suppliers

We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production schedules and program/contract profitability, thereby jeopardizing our ability to fulfill commitments to our customers. We are also dependent on the availability of energy sources, such as electricity, at affordable prices.

Seasonality

No material portion of our business is considered to be seasonal.

Executive Officers of the Registrant

See “Item 10. Directors, Executive Officers and Corporate Governance” in Part III.

Other Information

Boeing was originally incorporated in the State of Washington in

1916

and reincorporated in Delaware in

1934

Our principal executive offices are located at

100 N. Riverside Plaza,
Chicago, Illinois 60606
(312) 544-2000.

General information about us can be found at www.boeing.com

The information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the Securities and Exchange Commission (SEC). Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

These reports may also be obtained at the SEC’s public reference room at

100 F Street, N.E.,
Washington, D.C. 20549.

The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Boeing.

Forward-Looking Statements

This report, as well as our Annual Report to Shareholders, quarterly reports, and other filings we make with the SEC, press releases and other written and oral communications, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “expects,” “intends,” “projects,” “plans,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, as well as any other statement that does not directly relate to any historical or current fact. Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties and changes in circumstances that are difficult to predict. Many factors, including those set forth in the “Risk Factors” section below could cause actual results to differ materially and adversely from these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.

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

Overview: We are a global market leader in:

  • Design
  • Development
  • Manufacture
  • Sale
  • Service

& Support of

  • Commercial Jetliners
  • Military Aircraft
  • Satellites
  • Missile Defense
  • Human Space Flight
  • 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 many countries and rely on an extensive network of international partners, key suppliers and subcontractors.

Our strategy is centered on successful execution in healthy core businesses –

BDS

Commercial Airplanes and Defense, Space & Security

integrates its resources in defense, intelligence, communications, security, space and services to deliver capability-driven solutions to its 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. Our strategy also benefits us as the cyclicality of commercial and defense markets sometimes offset.

BCC

Supplemented and supported by Boeing Capital.

facilitates, arranges, structures and provides selective financing solutions for our Boeing customers.

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 we price our products and services to provide a fair return for our shareholders while continuing to find new ways to improve efficiency and quality. Commercial Airplanes is committed to being the leader in commercial aviation by offering airplanes and services that deliver superior design, efficiency and value to customers around the world.

Consolidated Results of Operations

Earnings From Operations and Core Operating Earnings (Non-GAAP)

The following table summarizes key indicators of consolidated results of operations:

Consolodated Results of Operations
GAAP
2015 2014 2013
Revenues

$96,114

$90,762

$86,623

Earnings from operations

7,443

7,473

6,562

Operating margins

7.7%

8.2%

7.6%

Consolodated Results of Operations
GAAP
2015 2014 2013
Effective income tax rate

27.7%

23.7%

26.4%

Net earnings

$5,176

$5,446

$4,585

Diluted earnings per share

$7.44

$7.38

$5.96

Consolodated Results of Operations
Non-GAAP
2015 2014 2013
Core operating earnings

$7,741

$8,860

$7,876

Core operating margin

8.1%

9.8%

9.1%

Core earnings per share

$7.72

$8.60

$7.07

(1) These measures exclude certain components of pension and other postretirement benefit expense. See page 43 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) Years ended December 31

2015 2014 2013
Commercial Airplanes $66,048 $59,990 $52,981
Defense, Space & Security 30,388 30,881 33,197
Boeing Capital 413 416 408
Unallocated items, eliminations and other (735) (525) 37
Total $96,114 $90,762 $86,623

Revenues in 2015 increased by

$5,352 million

or

6%

compared with 2014.

Commercial Airplanes revenues increased by

$6,058 million

or

10%

due to higher new airplane deliveries and mix.

BDS revenues decreased by

-$493 million

or

-2%

due to lower revenues in all three segments.

Revenues in 2014 increased by

$4,139 million

or

5%

compared with 2013.

Commercial Airplanes revenues increased by

$7,009 million

primarily due to higher new airplane deliveries.

BDS revenues decreased by

-$2,316 million

due to lower revenues in all three segments.

The changes in unallocated items, eliminations and other in 2015, 2014 and 2013 primarily reflect the timing of eliminations for intercompany aircraft deliveries.

Earnings From Operations

The following table summarizes Earnings from operations: (Dollars in millions) Years ended December 31,

2015

Commercial Airplanes $5,157
Defense, Space & Security 3,274
Boeing Capital 50
Unallocated pension and other postretirement benefit expense (298)
Other unallocated items and eliminations (740)
Earnings from operations (GAAP) $7,443
Unallocated pension and other postretirement benefit expense 298
Core operating earnings (Non-GAAP) $7,741

Earnings from operations in 2015 decreased by

-$30 million

compared with 2014

primarily reflecting a fourth quarter charge of

$885 million

related to the 747 program at Commercial Airplanes

and higher charges of

$410 million

related to the USAF KC-46A Tanker recorded by Commercial Airplanes

our Boeing Military Aircraft (BMA) segment, partially offset by lower unallocated pension and other postretirement benefit expense of $1,089 million.

The following table summarizes Earnings from operations: (Dollars in millions) Years ended December 31,

2014

Commercial Airplanes $5,795
Defense, Space & Security 3,133
Boeing Capital 92
Unallocated pension and other postretirement benefit expense (1,387)
Other unallocated items and eliminations (776)
Earnings from operations (GAAP) $7,473
Unallocated pension and other postretirement benefit expense 1,387
Core operating earnings (Non-GAAP) $8,860

Earnings from operations in 2014 increased by

$911 million

compared with 2013 primarily reflecting

higher earnings at Commercial Airplanes of

$616 million

and lower unallocated items

and enduring eliminations of

$485 million.

The decrease in unallocated items

is due to the A-12 litigation settlement of

$406 million

which was recorded in 2013 and

lower 2014 deferred compensation of

$194 million.

The A-12 aircraft litigation

settlement resulted in the Company recording a

$406 million

pre-tax charge in 2013

which consisted of writing-off A-12 inventory, recorded as cost of sales, and providing three EA-18G Growlers at no cost to the U.S. Navy, recorded as a reduction in revenues. During the second quarter of 2015 and of 2014, we recorded reach-forward losses of $835 million and $425 million on the USAF KC-46A Tanker contract.

The following table summarizes Earnings from operations: (Dollars in millions) Years ended December 31,

2013

Commercial Airplanes $6,411
Defense, Space & Security 3,235
Boeing Capital 107
Unallocated pension and other postretirement benefit expense (1,314)
Other unallocated items and eliminations (1,261)
Earnings from operations (GAAP) $6,562
Unallocated pension and other postretirement benefit expense 1,314
Core operating earnings (Non-GAAP) $7,876

The 2015 charge of

$513 million

was recorded at Commercial Airplanes

and our BMA segment at

$322 million

was recorded.

The 2014 charge of

$238 million

was recorded at Commercial Airplanes

Also, our BMA segment was

$187 million

for 2014.

Core operating earnings in 2015 decreased by

-$1,119 million

compared with 2014 primarily due to the 2015 747 charge and higher USAF KC-46A Tanker charges.

Core operating earnings in 2014 increased by

$984 million

compared with 2013 primarily reflecting higher earnings at Commercial Airplanes and the 2013 A-12 charge.

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) Years ended December 31,

Consolodated Results of Operations
Non-GAAP
2015 2014 2013
Share-based plans

($76)

($67)

($95)

Deferred compensation

(63)

(44)

(238)

Eliminations and other

(601)

(665)

(522)

Consolodated Results of Operations
Non-GAAP
2015 2014 2013
Litigation settlements

(406)

Sub-total (included in core operating earnings*)

(740)

(776)

(1,261)

Pension

(421)

(1,469)

(1,374)

Consolodated Results of Operations
Non-GAAP
2015 2014 2013
Postretirement

123

82

60

Pension and other postretirement benefit expense (excluded from core operating earnings*)

(298)

(1,387)

(1,314)

Total unallocated items, eliminations and other

($1,038)

($2,163)

($2,575)

* Core operating earnings is a Non-GAAP measure that excludes certain components of pension and other postretirement benefit expense. See page 43.

Deferred compensation expense increased by

$19 million

in 2015

Deferred compensation expense decreased by

-$194 million

in 2014

These were primarily driven by changes in broad stock market conditions and our stock price.

Eliminations and other unallocated expense decreased by

-$64 million

in 2015 due to the timing of the elimination of profit on intercompany aircraft deliveries.

The increase of

$143 million

in 2014 was primarily due to insurance recoveries which were recorded in the third quarter of 2013.

Litigation settlements include the 2013 charge of

$406 million

related to the settlement of the A-12 litigation.

Note 11 – Liabilities, Commitments and Contingencies

Accrued Liabilities

Accrued liabilities at December 31 consisted of the following:

2015 2014
Accrued compensation and employee benefit costs $5,624 $5,868
Environmental 566 601
Product warranties 1,485 1,504
Forward loss recognition 757 414
Dividends payable 721 637
Income Taxes Payable 262 119
Other 4,599 4,319
Total $14,014 $13,462

Environmental

The following table summarizes environmental remediation activity during the years ended December 31, 2015 and 2014.

2015 2014
Beginning balance – January 1 $601 $649
Reductions for payments made (78) (89)
Changes in estimates 43 41
Ending balance – December 31 $566 $601

The liabilities recorded represent our best estimate or the low end of a range of reasonably possible costs expected to be incurred to remediate sites, including operation and maintenance over periods of up to

30 years.

It is reasonably possible that we may incur charges that exceed these recorded amounts because of regulatory agency orders and directives, changes in laws and/or regulations, higher than expected costs and/or the discovery of new or additional contamination. As part of our estimating process, we develop a range of reasonably possible alternate scenarios that includes the high end of a range of reasonably possible cost estimates for all remediation sites for which we have sufficient information based on our experience and existing laws and regulations. There are some potential remediation obligations where the costs of remediation cannot be reasonably estimated.

At December 31, 2015 and 2014, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $853 and $874.

Product Warranties

The following table summarizes product warranty activity recorded during the years ended December 31, 2015 and 2014.

2015 2014
Beginning balance – January 1 $1,504 $1,570
Additions for current year deliveries 421 566
Reductions for payments made (323) (432)
Changes in estimates (117) (200)
Ending balance - December 31 $1,485 $1,504

Commercial Aircraft Commitments

In conjunction with signing definitive agreements for the sale of new aircraft

(Sale Aircraft)

We have entered into trade-in commitments with certain customers that give them the right to trade in used aircraft at a specified price upon the purchase of Sale Aircraft

The probability that trade-in commitments will be exercised is determined by using both quantitative information from valuation sources and qualitative information from other sources. The probability of exercise is assessed quarterly, or as events trigger a change, and takes into consideration the current economic and airline industry environments. Trade-in commitments, which can be terminated by mutual consent with the customer, may be exercised only during the period specified in the agreement, and require advance notice by the customer.

Trade-in commitment agreements

at December 31, 2015 have expiration dates from 2016 through 2026.

At December 31, 2015 and 2014, total contractual trade-in commitments were $1,585 and $2,392.

As of December 31, 2015 and 2014, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $240 and $446 and the fair value of the related trade-in aircraft was $240 and $446.

Financing Commitments

Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, totaled $16,283 and $16,723 as of December 31, 2015 and 2014.

The estimated earliest potential funding dates for these commitments as of December 31, 2015 are as follows:

Total

2016 $2,897
2017 3,664
2018 3,235
2019 2,884
2020 1,321
Thereafter 2,282

$16,283

As of December 31, 2015, $15,919 of these financing commitments related to customers we believe have less than investment-grade credit. We have concluded that no reserve for future potential losses is required for these financing commitments based upon the terms, such as collateralization and interest rates, under which funding would be provided.

Standby Letters of Credit and Surety Bonds

We have entered into standby letters of credit and surety bonds with financial institutions primarily relating to the guarantee of our future performance on certain contracts. Contingent liabilities on outstanding letters of credit agreements and surety bonds aggregated approximately:

$4,968

in 2015

$3,985

in 2014

Commitments to ULA

We and Lockheed Martin Corporation have each committed to provide ULA with additional capital contributions in the event ULA does not have sufficient funds to make a required payment to us under an inventory supply agreement. As of December 31, 2015, ULA’s total remaining obligation to Boeing under the inventory supply agreement was $120. See Note 6.

C-17

Production of the C-17 aircraft ended in the fourth quarter of 2015. At December 31, 2015, one aircraft remained unsold, while our backlog includes international orders for four C-17 aircraft that are scheduled for delivery in 2016. During 2015 we received orders for six C-17 aircraft and we believe it is probable that we will receive an order for the remaining unsold aircraft from an international customer. Should an order not materialize we could incur charges to write down inventory.

F/A-18

At December 31, 2015, our backlog included 48 F/A-18 aircraft under contract with the U.S. Navy. The orders in backlog include an order for 15 aircraft finalized in October 2015. The Consolidated Appropriations Act, 2016, passed in December 2015, funds 12 additional F/A-18 aircraft that, combined with the orders in backlog, would complete production in mid-2018. The President’s Fiscal Year 2017 Budget request submitted in February 2016 includes funding for two additional F/A-18 aircraft. We are continuing to work with our U.S. customers as well as international customers to secure additional orders that would extend the program beyond 2018. Should additional orders not materialize, it is reasonably possible that we will decide to end production of the F/A-18 in 2018. We are still evaluating the full financial impact of a potential production shutdown, including any recovery that may be available from the U.S. government.

KC-46A Tanker

We have also begun work on low rate initial production aircraft for the U.S. Air Force (USAF). The USAF is expected to authorize two low rate initial production lots in 2016 for a total of 19 aircraft, subject to satisfactory progress being made on the Engineering, Manufacturing and Development contract. At December 31, 2015, we had approximately $429 of capitalized precontract costs and $1,589 of potential termination liabilities to suppliers associated with the KC-46A Tanker.

Company Owned Life Insurance

McDonnell Douglas Corporation insured its executives with Company Owned Life Insurance (COLI), which are life insurance policies with a cash surrender value. Although we do not use COLI currently, these obligations from the merger with McDonnell Douglas are still a commitment at this time. We have loans in place to cover costs paid or incurred to carry the underlying life insurance policies.

The cash surrender value was:

$487

in 2015

$466

in 2014

& The total loans were:

$456

in 2015

$439

in 2014

As we have the right to offset the loans against the cash surrender value of the policies, we present the net asset in Other assets on the Consolidated Statements of Financial Position as of December 31, 2015 and 2014.

United States Government Defense Environment Overview

The enactment of The Bipartisan Budget Act of 2015 in November 2015 established overall defense spending levels for FY2016 and FY2017. However, uncertainty remains with respect to levels of defense spending for FY2018 and beyond, including risk of future sequestration cuts. Significant uncertainty also continues with respect to program-level appropriations for the U.S. Department of Defense (U.S. DoD) and other government agencies, including the National Aeronautics and Space Administration, within the overall budgetary framework described above. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the authorization 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 the results of the Company’s operations, financial position and/or cash flows. In addition to the risks described above, if Congress is unable to pass appropriations bills in a timely manner, a government shutdown could result which may have impacts above and beyond those resulting from budget cuts, sequestration impacts or program-level appropriations. For example, requirements to furlough employees in the U.S. DoD or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders.

KC-46A Tanker and BDS Fixed-Price Development Contracts

Fixed-price development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work.

BDS fixed-price contracts with significant development work include:

  • Commercial Crew
  • Saudi F-15
  • USAF KC-46A Tanker
  • commercial satillites
  • military satellites

The operational and technical complexities of these contracts create financial risk, which could trigger termination provisions, order cancellations or other financially significant exposure. Changes to cost and revenue estimates could result in lower margins or material charges for reach-forward losses. For example, during the second quarter of 2015, higher estimated costs to complete the KC-46A Tanker contract for the USAF resulted in a reach-forward loss of $835.

Recoverable Costs on Government Contracts

Our final incurred costs for each year are subject to audit and review for allowability by the U.S. government, which can result in payment demands related to costs they believe should be disallowed. We work with the U.S. government to assess the merits of claims and where appropriate reserve for amounts disputed. If we are unable to satisfactorily resolve disputed costs, we could be required to record an earnings charge and/or provide refunds to the U.S. government.

Russia/Ukraine

We continue to monitor political unrest involving Russia and Ukraine, where we and some of our suppliers source titanium products and/or have operations. A number of our commercial customers also have operations in Russia and Ukraine. To date, we have not experienced any significant disruptions to production or deliveries. Should suppliers or customers experience disruption, our production and/or deliveries could be materially impacted.

747 Program

During the fourth quarter of 2015, we recorded a charge of $885 to recognize a reach-forward loss on the 747 program primarily due to slower than expected growth in global cargo markets, resulting in market and pricing pressures and fewer orders than anticipated driving reductions in our planned production rates. The charge is primarily related to lower anticipated revenues reflecting ongoing pricing and market pressures as well as higher estimated costs due to the reduction in the production rate from 1.0 per month to 0.5 per month in September 2016. We currently plan to return to a rate of 1.0 per month in 2019. We have a number of completed aircraft in inventory as well as unsold production positions and we remain focused on obtaining additional orders and implementing cost-reduction efforts. If we are unable to obtain sufficient orders in 2016 and/or market, production and other risks cannot be mitigated, the program could face an additional reach-forward loss that may be material.

787 Program

During 2015 the 787 program continued to have near breakeven gross margins. The combination of production challenges, change incorporation on early build aircraft, schedule delays, customer and supplier impacts and changes to price escalation factors has created significant pressure on program profitability. If risks related to this program, including risks associated with planned production rate increases or introducing and manufacturing the 787-10 derivative as scheduled cannot be mitigated, the program could face additional customer claims and/or supplier assertions, as well as a reach-forward loss that may be material

Note 18 – Significant Group Concentrations of Risk

Credit Risk

Financial instruments involving potential credit risk are predominantly with commercial aircraft customers and the U.S. government.

$12,393

gross accounts receivable

$5,633

related predominantly to commercial aircraft customers

$4,864

related to the U.S. government.

These are included in the Consolidated Statements of Financial Position as of December 31, 2015, ($2,096 of accounts receivable and $3,537 of customer financing) and of the $3,586 in gross customer financing, $2,487 related to customers we believe have less than investment-grade credit including Silk Way Airlines, AirBridgeCargo Airlines and American Airlines who were associated with 13%, 13% and 9%, respectively, of our financing portfolio. Financing for aircraft is collateralized by security in the related asset and in some instances security in other assets as well.

Other Risk

As of December 31, 2015, approximately 38% of our total workforce was represented by collective bargaining agreements and approximately 13% of our total workforce was represented by agreements expiring in 2016.