XBRU:BAB Boeing Co Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      
Commission file number 1-442
 
THE BOEING COMPANY
 
(Exact name of registrant as specified in its charter)
Delaware
 
91-0425694
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 N. Riverside Plaza, Chicago, IL
 
60606-1596
(Address of principal executive offices)
 
(Zip Code)
 
(312) 544-2000
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company  
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of October 17, 2012, there were 754,076,883 shares of common stock, $5.00 par value, issued and outstanding.



THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended September 30, 2012
INDEX
Part I. Financial Information (Unaudited)
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 



Part I. Financial Information
Item 1. Financial Statements
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

(Dollars in millions, except per share data)
Nine months ended
September 30
 
Three months ended
September 30
  
2012

 
2011

 
2012


2011

Sales of products

$51,441

 

$40,441

 

$17,415



$14,907

Sales of services
7,955

 
8,739

 
2,593


2,820

Total revenues
59,396

 
49,180

 
20,008


17,727

 


 


 
 
 
 
Cost of products
(43,103
)
 
(32,335
)
 
(14,683
)

(12,006
)
Cost of services
(6,431
)
 
(7,177
)
 
(2,089
)

(2,319
)
Boeing Capital interest expense
(69
)
 
(94
)
 
(22
)

(32
)
Total costs and expenses
(49,603
)
 
(39,606
)
 
(16,794
)

(14,357
)

9,793

 
9,574

 
3,214


3,370

Income from operating investments, net
211

 
202

 
120


52

General and administrative expense
(2,774
)
 
(2,544
)
 
(916
)

(807
)
Research and development expense, net
(2,545
)
 
(3,005
)
 
(853
)

(901
)
(Loss)/gain on dispositions, net
(3
)
 
20

 
(1
)
 


Earnings from operations
4,682


4,247

 
1,564


1,714

Other income, net
39

 
76

 
17


49

Interest and debt expense
(346
)
 
(374
)
 
(115
)

(121
)
Earnings before income taxes
4,375

 
3,949

 
1,466


1,642

Income tax expense
(1,450
)
 
(1,325
)
 
(432
)

(548
)
Net earnings from continuing operations
2,925

 
2,624

 
1,034


1,094

Net (loss)/gain on disposal of discontinued operations, net of taxes of $2, $0, $1 and ($2)
(3
)
 
1

 
(2
)

4

Net earnings

$2,922



$2,625

 

$1,032



$1,098

Basic earnings per share from continuing operations

$3.86

 

$3.52

 

$1.36

 

$1.47

Net (loss)/gain on disposal of discontinued operations, net of taxes
 

 
 
 

 
 
Basic earnings per share

$3.86

 

$3.52

 

$1.36



$1.47

Diluted earnings per share from continuing operations

$3.84

 

$3.49

 

$1.35

 

$1.46

Net (loss)/gain on disposal of discontinued operations, net of taxes 

 
 
 

 
 
Diluted earnings per share

$3.84

 

$3.49

 

$1.35



$1.46

Cash dividends paid per share

$1.32

 

$1.26

 

$0.44



$0.42

Weighted average diluted shares (millions)
762.3

 
751.8

 
765.2


753.9

 
 
 
 
 
 
 
 
Comprehensive income

$4,165

 

$3,235

 

$1,590



$1,050

See Notes to the Condensed Consolidated Financial Statements.

1


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Financial Position
(Unaudited)
(Dollars in millions, except per share data)
September 30
2012

 
December 31
2011

Assets
 
 
 
Cash and cash equivalents

$6,582

 

$10,049

Short-term and other investments
4,590

 
1,223

Accounts receivable, net
5,437

 
5,793

Current portion of customer financing, net
318

 
476

Deferred income taxes
34

 
29

Inventories, net of advances and progress billings
36,817

 
32,240

Total current assets
53,778

 
49,810

Customer financing, net
4,028

 
4,296

Property, plant and equipment, net of accumulated depreciation of $14,554 and $13,993
9,496

 
9,313

Goodwill
4,961

 
4,945

Acquired intangible assets, net
2,930

 
3,044

Deferred income taxes
5,520

 
5,892

Investments
1,195

 
1,043

Other assets, net of accumulated amortization of $471 and $717
1,746

 
1,643

Total assets

$83,654

 

$79,986

Liabilities and equity
 
 
 
Accounts payable

$9,152

 

$8,406

Accrued liabilities
11,773

 
12,239

Advances and billings in excess of related costs
15,619

 
15,496

Deferred income taxes and income taxes payable
4,136

 
2,780

Short-term debt and current portion of long-term debt
2,172

 
2,353

Total current liabilities
42,852

 
41,274

Accrued retiree health care
7,454

 
7,520

Accrued pension plan liability, net
15,586

 
16,537

Non-current income taxes payable
166

 
122

Other long-term liabilities
900

 
907

Long-term debt
9,014

 
10,018

Shareholders’ equity:
 
 
 
Common stock, par value $5.00 – 1,200,000,000 shares authorized; 1,012,261,159 shares issued
5,061

 
5,061

Additional paid-in capital
4,068

 
4,033

Treasury stock, at cost – 258,532,626 and 267,556,388 shares
(16,055
)
 
(16,603
)
Retained earnings
29,775

 
27,524

Accumulated other comprehensive loss
(15,261
)
 
(16,500
)
Total shareholders’ equity
7,588

 
3,515

Noncontrolling interest
94

 
93

Total equity
7,682

 
3,608

Total liabilities and equity

$83,654

 

$79,986

See Notes to the Condensed Consolidated Financial Statements.

2


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Nine months ended
September 30
  
2012


2011

Cash flows – operating activities:
 

 
Net earnings

$2,922



$2,625

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
Non-cash items – 
 

 
Share-based plans expense
148


141

Depreciation and amortization
1,313


1,237

Investment/asset impairment charges, net
59


50

Customer financing valuation provision
(4
)

(220
)
Loss/(gain) on disposal of discontinued operations
5

 
(1
)
Loss/(gain) on dispositions, net
3

 
(20
)
Other charges and credits, net
559


358

Excess tax benefits from share-based payment arrangements
(43
)

(35
)
Changes in assets and liabilities – 
 

 
Accounts receivable
150


(911
)
Inventories, net of advances and progress billings
(4,588
)

(8,245
)
Accounts payable
857


1,447

Accrued liabilities
(123
)

(449
)
Advances and billings in excess of related costs
123


1,996

Income taxes receivable, payable and deferred
1,085


1,314

Other long-term liabilities
22


107

Pension and other postretirement plans
571


1,445

Customer financing, net
254


171

Other
28


82

Net cash provided by operating activities
3,341


1,092

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(1,208
)
 
(1,142
)
Property, plant and equipment reductions
29

 
54

Acquisitions, net of cash acquired
(18
)
 
(42
)
Contributions to investments
(10,331
)
 
(6,089
)
Proceeds from investments
6,941

 
8,006

Receipt of economic development program funds


 
69

Purchase of distribution rights
(6
)
 


Net cash (used)/provided by investing activities
(4,593
)
 
856

Cash flows – financing activities:
 
 
 
New borrowings
34

 
789

Debt repayments
(1,273
)
 
(895
)
Repayments of distribution rights financing
(72
)
 
(436
)
Stock options exercised, other
96

 
106

Excess tax benefits from share-based payment arrangements
43

 
35

Employee taxes on certain share-based payment arrangements
(72
)
 
(21
)
Dividends paid
(990
)
 
(932
)
Net cash used by financing activities
(2,234
)
 
(1,354
)
Effect of exchange rate changes on cash and cash equivalents
19

 
1

Net (decrease)/increase in cash and cash equivalents
(3,467
)
 
595

Cash and cash equivalents at beginning of year

$10,049

 

$5,359

Cash and cash equivalents at end of period

$6,582

 

$5,954

See Notes to the Condensed Consolidated Financial Statements.

3


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited)
 
Boeing shareholders
 
 
(Dollars in millions, except per share data)
Common
Stock

Additional
Paid-In
Capital

Treasury Stock

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-
controlling
Interest

Total

Balance January 1, 2011

$5,061


$3,866


($17,187
)

$24,784


($13,758
)

$96


$2,862

Net earnings



2,625


(2
)
2,623

Unrealized loss on derivative instruments, net of tax of $23




(46
)

(46
)
Unrealized loss on certain investments, net of tax of $2




(3
)

(3
)
Reclassification adjustment for gains realized in net earnings, net of tax of $1




(1
)

(1
)
Currency translation adjustment




(18
)

(18
)
Postretirement liability adjustment, net of tax of ($398)




680


680

Comprehensive income






3,235

Share-based compensation and related dividend equivalents

148


(8
)


140

Excess tax pools

20





20

Treasury shares issued for stock options exercised, net

(33
)
138




105

Treasury shares issued for other share-based plans, net

(52
)
39




(13
)
Treasury shares issued for 401(k) contribution

39

295




334

Cash dividends declared ($0.84 per share)






(622
)




(622
)
Balance September 30, 2011

$5,061


$3,988


($16,715
)

$26,779


($13,146
)

$94


$6,061

 
 
 
 
 
 
 
 
Balance January 1, 2012

$5,061


$4,033


($16,603
)

$27,524


($16,500
)

$93


$3,608

Net earnings



2,922


4

2,926

Unrealized gain on derivative instruments, net of tax of ($14)




25


25

Reclassification adjustment for losses realized in net earnings, net of tax ($5)
 
 
 
 
8

 
8

Currency translation adjustment
 
 
 
 
26

 
26

Postretirement liability adjustment, net of tax of ($679)




1,180


1,180

Comprehensive income






4,165

Share-based compensation and related dividend equivalents

155


(10
)


145

Excess tax pools

43





43

Treasury shares issued for stock options exercised, net

(43
)
138




95

Treasury shares issued for other share-based plans, net

(174
)
110




(64
)
Treasury shares issued for 401(k) contribution

54

300




354

Cash dividends declared ($0.88 per share)






(661
)




(661
)
Changes in non-controlling interest
 
 
 
 
 
(3
)
(3
)
Balance September 30, 2012

$5,061


$4,068


($16,055
)

$29,775


($15,261
)

$94


$7,682

See Notes to the Condensed Consolidated Financial Statements.

4


The Boeing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Summary of Business Segment Data
(Unaudited)

(Dollars in millions)
Nine months ended
September 30
 
Three months ended
September 30

2012

 
2011

 
2012

 
2011

Revenues:

 

 



Commercial Airplanes

$34,966

 

$25,476

 

$12,186



$9,515

Defense, Space & Security:

 

 



Boeing Military Aircraft
12,227

 
10,998

 
3,789


3,964

Network & Space Systems
5,672

 
6,693

 
1,990


2,269

Global Services & Support
6,365

 
5,814

 
2,060


1,967

Total Defense, Space & Security
24,264

 
23,505

 
7,839


8,200

Boeing Capital
325

 
416

 
101


126

Other segment
93

 
107

 
27


33

Unallocated items and eliminations
(252
)
 
(324
)
 
(145
)

(147
)
Total revenues

$59,396

 

$49,180

 

$20,008



$17,727

Earnings from operations:

 

 



Commercial Airplanes

$3,445

 

$2,514

 

$1,153



$1,085

Defense, Space & Security:

 

 



Boeing Military Aircraft
1,245

 
1,152

 
445


397

Network & Space Systems
360

 
511

 
161


178

Global Services & Support
712

 
630

 
221


249

Total Defense, Space & Security
2,317

 
2,293

 
827


824

Boeing Capital
102


133

 
33


19

Other segment
(203
)

11

 
(74
)

92

Unallocated items and eliminations
(979
)

(704
)
 
(375
)

(306
)
Earnings from operations
4,682

 
4,247

 
1,564


1,714

Other income, net
39

 
76

 
17


49

Interest and debt expense
(346
)
 
(374
)
 
(115
)

(121
)
Earnings before income taxes
4,375

 
3,949

 
1,466


1,642

Income tax expense
(1,450
)
 
(1,325
)
 
(432
)

(548
)
Net earnings from continuing operations
2,925

 
2,624

 
1,034


1,094

Net (loss)/gain on disposal of discontinued operations, net of taxes of $2, $0, $1 and ($2)
(3
)
 
1

 
(2
)

4

Net earnings

$2,922

 

$2,625

 

$1,032



$1,098

Research and development expense, net:

 

 



Commercial Airplanes

$1,638

 

$2,191

 

$534



$633

Defense, Space & Security:
 
 
 
 



Boeing Military Aircraft
455

 
369

 
166


119

Network & Space Systems
335

 
327

 
116


110

Global Services & Support
78

 
77

 
24


21

Total Defense, Space & Security
868

 
773

 
306


250

Other
39

 
41

 
13


18

Total research and development expense, net

$2,545

 

$3,005

 

$853



$901

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 17 for further segment results.

5


The Boeing Company and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)
Note 1 – Basis of Presentation
The condensed consolidated interim 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”). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The results of operations for the period ended September 30, 2012 are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in our 2011 Annual Report on Form 10-K.
Use of Estimates
Management makes assumptions and estimates to prepare financial statements in conformity with accounting principles generally accepted in the United States of America. Those assumptions and estimates directly affect the amounts reported in the condensed consolidated financial statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these Notes to the Condensed Consolidated Financial Statements.
Contract accounting is used for development and production activities predominantly by Defense, Space & Security (BDS). Contract accounting involves a judgmental process of estimating total sales and costs for each contract resulting in the development of estimated cost of sales percentages. Changes in estimated revenues, cost of sales and the related effect on operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contract’s percent complete. For the nine months ended September 30, 2012 and 2011, net favorable cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts increased operating earnings by $308 and $178 and earnings per share by $0.27 and $0.16. For the three months ended September 30, 2012 and 2011, net favorable cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts increased operating earnings by $74 and $25 and earnings per share by $0.07 and $0.02.
Note 2 – Earnings Per Share
The weighted-average number of shares outstanding used to compute earnings per share were as follows:
(Shares in millions)
Nine months ended
September 30
 
Three months ended
September 30
  
2012

 
2011

 
2012

 
2011

Weighted average shares outstanding
754.3

 
742.9

 
757.1

 
745.5

Participating securities
2.3

 
2.6

 
2.4

 
2.5

Basic weighted average shares outstanding
756.6

 
745.5

 
759.5

 
748.0

Dilutive potential common shares
5.7

 
6.3

 
5.7

 
5.9

Diluted weighted average shares outstanding
762.3

 
751.8

 
765.2

 
753.9

Basic earnings per share is calculated by the sum of (1) net earnings less declared dividends and dividend equivalents related to share-based compensation divided by the basic weighted average shares outstanding and (2) declared dividends and dividend equivalents related to share-based compensation divided by the weighted average shares outstanding.

6


The weighted average number of shares outstanding, included in the table below, were excluded from the computation of diluted earnings per share because the average market price did not exceed the exercise/threshold price. However, these shares may be dilutive potential common shares in the future.
(Shares in millions)
Nine months ended
September 30
 
Three months ended
September 30
 
2012

 
2011

 
2012

 
2011

Stock options
23.2

 
21.4

 
25.4

 
25.4

Performance Awards
4.7

 
5.2

 
5.0

 
5.2

Note 3 – Income Taxes
Our effective income tax rates were 33.1% and 29.5% for the nine and three months ended September 30, 2012 and 33.6% and 33.4% for the same periods in the prior year. The effective tax rates for the nine and three months ended September 30, 2012 are lower than the comparable prior year periods primarily due to discrete tax adjustments including settlement of non-US audits during the three months ended September 30, 2012 partially offset by research and development tax credits that existed in 2011, but do not exist in 2012. If Congress extends the research and development credit there will be a favorable impact on our 2012 effective income tax rate.
During the first quarter of 2012 we filed an appeal with the IRS for the 2007-2008 tax years. The 2009-2010 IRS audit began in the second quarter of 2012. We are also subject to examination in major state and international jurisdictions for the 2001-2011 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Note 4 – Accounts Receivable
Accounts receivable as of September 30, 2012, includes $112 of unbillable receivables on a long-term contract with LightSquared, LLC (LightSquared) related to the construction of two commercial satellites. One of the satellites has been delivered, and the other is substantially complete but remains in Boeing's possession. On May 14, 2012, LightSquared filed for Chapter 11 bankruptcy protection. We believe that our rights in the second satellite and related ground-segment assets are sufficient to protect the value of our receivables in the event LightSquared fails to make payments as contractually required or rejects its contract with us. As a result, we do not expect to incur any losses related to these receivables in connection with the LightSquared bankruptcy.
Note 5 – Inventories
Inventories consisted of the following:
 
September 30
2012

 
December 31
2011

Long-term contracts in progress

$15,082

 

$13,587

Commercial aircraft programs
40,141

 
35,080

Commercial spare parts, used aircraft, general stock materials and other
6,658

 
7,832

Inventory before advances and progress billings
61,881

 
56,499

Less advances and progress billings
(25,064
)
 
(24,259
)
Total

$36,817

 

$32,240


7


Long-Term Contracts in Progress
Long-term contracts in progress included Delta launch program inventory that is being sold at cost to United Launch Alliance (ULA) under an inventory supply agreement that terminates on March 31, 2021. At September 30, 2012 and December 31, 2011, the inventory balance was $785 and $1,085. At September 30, 2012, $534 of this inventory related to unsold launches. ULA is continuing to assess the future of the Delta II program. In the event ULA is unable to sell additional Delta II inventory, our earnings could be reduced by up to $35. See Note 10.
Inventory balances included $237 and $236 subject to claims or other uncertainties relating to the A-12 program at September 30, 2012 and December 31, 2011. See Note 16.
Capitalized precontract costs of $204 and $1,728 at September 30, 2012 and December 31, 2011, are included in inventories.
Commercial Aircraft Programs
At September 30, 2012 and December 31, 2011, commercial aircraft programs inventory included the following amounts related to the 787 program: $20,728 and $16,098 of work in process (including deferred production costs of $14,275 and $10,753), $1,862 and $1,770 of supplier advances, and $2,229 and $1,914 of unamortized tooling and other non-recurring costs. At September 30, 2012, $11,387 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $5,117 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
At September 30, 2012 and December 31, 2011, commercial aircraft programs inventory included the following amounts related to the 747 program: $1,018 and $448 of deferred production costs, net of previously recorded reach-forward losses, and $737 and $852 of unamortized tooling. At September 30, 2012, $1,067 of 747 deferred production costs and unamortized tooling costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $688 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling $2,908 and $2,564 at September 30, 2012 and December 31, 2011.
Note 6 – Customer Financing
Customer financing consisted of the following:
 
September 30
2012

 
December 31
2011

Financing receivables:
 
 
 
Investment in sales-type/finance leases

$1,893

 

$2,037

Notes
670

 
814

Operating lease equipment, at cost, less accumulated depreciation of $666 and $765
1,849

 
1,991

Gross customer financing
4,412

 
4,842

Less allowance for losses on receivables
(66
)
 
(70
)
Total

$4,346

 

$4,772

We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms. At September 30, 2012 and December 31, 2011, we individually evaluated for impairment customer financing receivables of $658 and $854. At September 30, 2012 and December 31, 2011, $454 and $485 was determined to be impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceed the carrying values of the receivables.

8


The adequacy of the allowance for losses estimate is assessed quarterly. Three primary factors influencing the level of our allowance for losses on customer financing receivables are customer credit ratings, default rates and collateral values. We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. Our rating categories are comparable to those used by the major credit rating agencies.
Our financing receivable balances by internal credit rating category are shown below: 
Rating categories
September 30
2012

 
December 31
2011

A

$34

 
 
BBB
1,221

 

$1,316

BB
62

 
67

B
54

 
103

CCC
534

 
512

D
556

 
653

Other
102

 
200

Total carrying value of financing receivables

$2,563

 

$2,851

At September 30, 2012, our allowance primarily related to receivables with ratings of CCC and we applied default rates that averaged 45% to the exposure associated with those receivables.
In the fourth quarter of 2011, American Airlines Inc. (American Airlines) filed for Chapter 11 bankruptcy protection. We believe that our customer financing receivables from American Airlines of $556 are sufficiently collateralized such that we do not expect to incur losses related to those receivables and have not recorded an allowance for losses as of September 30, 2012 as a result of the bankruptcy.
Declines in collateral values are also a significant driver of our allowance for losses. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft. Our customer financing portfolio consists primarily of financing receivables for out-of-production aircraft. The value of the collateral is closely tied to commercial airline performance and overall market conditions. The majority of customer financing carrying values are concentrated in the following aircraft models:
 
September 30
2012

 
December 31
2011

717 Aircraft ($470 and $480 accounted for as operating leases) (1)

$1,841

 

$1,906

757 Aircraft ($467 and $451 accounted for as operating leases) (1)
581

 
631

MD-80 Aircraft ($0 and $0 accounted for as operating leases) (1) (2)
454

 
485

737 Aircraft ($213 and $242 accounted for as operating leases)
340

 
394

MD-11 Aircraft ($295 and $321 accounted for as operating leases) (1)
295

 
321

767 Aircraft ($96 and $103 accounted for as operating leases)
248

 
307

(1) 
Out-of-production aircraft
(2) 
Disclosure omitted from 2011 financial statements


9


Note 7 – Investments
Our investments, which are recorded in Short-term and other investments or Investments, consisted of the following:
 
September 30
2012

 
December 31
2011

Time deposits

$4,505

 

$1,134

Pledged money market funds (1)
56

 
56

Available-for-sale investments
9

 
10

Equity method investments (2)
1,153

 
1,003

Restricted cash (3)
27

 
31

Other investments
35

 
32

Total

$5,785

 

$2,266

(1) 
Reflects amounts pledged in lieu of letters of credit as collateral in support of our workers’ compensation programs. These funds can become available within 30 days notice upon issuance of replacement letters of credit.
(2) 
Dividends received were $276 and $155 during the nine and three months ended September 30, 2012 and $185 and $43 during the nine and three months ended September 2011.
(3) 
Restricted to pay group term life insurance premiums for certain employees and certain claims related to workers' compensation.
Note 8 – Other Assets
Sea Launch
At September 30, 2012 and December 31, 2011, Other assets included $356 of receivables related to our former investment in the Sea Launch venture which became payable by certain Sea Launch partners following Sea Launch’s bankruptcy filing in June 2009. The $356 includes $147 related to a payment made by us under a bank guarantee on behalf of Sea Launch and $209 related to loans (partner loans) we made to Sea Launch. The net amounts owed to Boeing by each of the partners are as follows: S.P. Koroley Rocket and Space Corporation Energia of Russia – $223, PO Yuzhnoye Mashinostroitelny Zavod of Ukraine – $89 and KB Yuzhnoye of Ukraine – $44.
Although each partner is contractually obligated to reimburse us for its share of the bank guarantee, the Russian and Ukrainian partners have raised defenses to enforcement and contested our claims. On October 19, 2009, we filed a Notice of Arbitration with the Stockholm Chamber of Commerce seeking reimbursement from the other Sea Launch partners of the $147 bank guarantee payment. On October 7, 2010, the arbitrator ruled that the Stockholm Chamber of Commerce lacked jurisdiction to hear the matter but did not resolve the merits of our claim. We filed a notice appealing the arbitrator’s ruling on January 11, 2011. The Ukrainian partners responded to our appeal on June 30, 2012 and the Russian partner responded on July 3, 2012. We filed replies on September 20, 2012. No legal proceedings have commenced against the partners on the partner loans. We believe the partners have the financial wherewithal to pay and intend to pursue vigorously all of our rights and remedies. In the event we are unable to secure reimbursement of $147 related to our payment under the bank guarantee and $209 related to partner loans made to Sea Launch, we could incur additional pre-tax charges of up to $356.

10


Note 9 – Commitments and Contingencies
Financing Commitments
Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, totaled $17,998 and $15,866 at September 30, 2012 and December 31, 2011. The estimated earliest potential funding dates for these commitments at September 30, 2012 are as follows: 
  
Total

October through December 2012

$316

2013
1,425

2014
2,548

2015
3,793

2016
3,432

Thereafter
6,484

 

$17,998

Standby Letters of Credit and Surety Bonds
We have entered into standby letters of credit agreements 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 $4,621 and $6,199 at September 30, 2012 and December 31, 2011.
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 total contractual trade-in value was $1,164 and $273 at September 30, 2012 and December 31, 2011. We anticipate that a significant portion of these commitments will be exercised by customers.
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. The fair value of trade-in aircraft related to probable contractual trade-in commitments was $91 and $27 at September 30, 2012 and December 31, 2011. Trade-in commitment agreements have expiration dates from 2012 through 2023.
Commitments to ULA
We and Lockheed Martin Corporation have each committed to provide ULA with up to $462 of additional capital contributions in the event ULA does not have sufficient funds to make a required payment to us under an inventory supply agreement. See Note 5.

11


Product Warranties
The following table summarizes product warranty activity recorded during the nine months ended September 30, 2012 and 2011.
 
2012

 
2011

Beginning balance – January 1

$1,046

 

$1,076

Additions for current year deliveries
367

 
104

Reductions for payments made
(244
)
 
(196
)
Changes in estimates
212

 
7

Ending balance – September 30

$1,381

 

$991

Environmental
The following table summarizes environmental remediation activity during the nine months ended September 30, 2012 and 2011.
 
2012

 
2011

Beginning balance – January 1

$758

 

$721

Reductions for payments made
(61
)
 
(54
)
Changes in estimates
65

 
120

Ending balance – September 30

$762

 

$787

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 which include 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 September 30, 2012 and December 31, 2011, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $925 and $1,003.
C-17
At September 30, 2012, our backlog included 5 C-17 aircraft under contract with the U.S. Air Force (USAF) and international orders for 12 C-17 aircraft. We are currently producing C-17 aircraft at a rate of 10 per year. Should additional orders not materialize, it is reasonably possible that we will decide in 2013 to end production of the C-17 at a future date. We are still evaluating the full financial impact of a potential production shut-down, including additional pension curtailment charges, and any recovery that would be available from the U.S. government. Such recovery from the U.S. government would not include the costs incurred by us resulting from our direction to suppliers to begin working on aircraft beyond those currently under contract. At September 30, 2012, we had approximately $155 of inventory expenditures and potential termination liabilities to suppliers primarily associated with two unsold aircraft.
U.S. Government Defense Budget/Sequestration
In August 2011, the Budget Control Act (the Act) reduced the United States Department of Defense (U.S. DoD) top line budget by approximately $490 billion over 10 years starting in fiscal year 2012. In addition, barring Congressional action, further budget cuts (or sequestration) as outlined in the Act will be implemented starting in January 2013 which would lead to additional reductions of approximately $500 billion from the defense top line budget over the next nine years, resulting in aggregate reductions of about $1 trillion through 2021. In June 2012, the Office of Management and Budget (OMB) announced that the budget for Overseas Contingency Operations and any unobligated balances in prior year funds will also be included in aggregate reductions. In September 2012, OMB provided a report to Congress stating that it was unable to determine

12


the amount of sequestration at the program, project, and activity level until consistent, government-wide definitions are established. OMB did, however, estimate that sequestration would reduce non-exempt discretionary accounts in defense by about 9.4% and non-defense budgets by 8.2%. The U.S. DoD has taken the position that such reductions would generate significant operational risks and may require the termination of certain, as yet undetermined, procurement programs. Any reduction in levels of U.S. DoD spending, cancellations or delays impacting existing contracts or programs, including through sequestration, could have a material impact on the operating results of our BDS business. While U.S. DoD would sustain the bulk of sequestration cuts affecting the Company, civil programs and agencies would be significantly impacted as well.
In September 2012, Congress passed, and the President signed, legislation making continuing appropriations from October 1, 2012 through March 27, 2013. This will enable programs to continue at the same operations rate as in 2012.
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 Airborne Early Warning and Control (AEW&C), India P-8I, Saudi F-15, USAF KC-46A Tanker and commercial and 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 also result in lower margins or a material charge for reach-forward losses during the next 12 months.
Commercial Airplane Development Programs
The development and initial production of new commercial airplanes and new commercial airplane derivatives, which include the 787,747-8 and 737 MAX, entail significant commitments to customers and suppliers as well as substantial investments in working capital, infrastructure, and research and development. Changes to cost and revenue estimates could also result in lower margins or a material charge for reach-forward losses during the next 12 months.
Note 10 – Arrangements with Off-Balance Sheet Risk
We enter into arrangements with off-balance sheet risk in the normal course of business, primarily in the form of guarantees.
The following table provides quantitative data regarding our third-party guarantees. The maximum potential payments represent a “worst-case scenario,” and do not necessarily reflect amounts that we expect to pay. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees. The carrying amount of liabilities represents the amount included in Accrued liabilities. 
  
Maximum
Potential Payments
 
Estimated Proceeds from
Collateral/Recourse
 
Carrying Amount of
 Liabilities
 
September 30
2012

December 31
2011

 
September 30
2012

December 31
2011

 
September 30
2012

December 31
2011

Contingent repurchase commitments

$2,315


$3,290

 

$2,315


$3,290

 

$5


$7

Indemnifications to ULA:
 
 
 
 
 
 
 
 
Contributed Delta program launch inventory
215

215

 
 
 
 
 
 
Contract pricing
261

261

 
 
 
 
7

7

Other Delta contracts
157

137

 
 
 
 
8

8

Other indemnifications
144

212

 
 
 
 
33

51

Credit guarantees
13

17

 
4

12

 
2

2

Residual value guarantees
11

29

 
10

21

 
1

6


13


Contingent Repurchase Commitments We have entered into contingent repurchase commitments with certain customers in conjunction with signing definitive agreements for the sale of new aircraft. Under these commitments, we agreed to repurchase the Sale Aircraft at a specified price, generally 10 to 15 years after delivery of the Sale Aircraft. Our repurchase of the Sale Aircraft is contingent upon a future, mutually acceptable agreement for the sale of additional new aircraft, and the subsequent exercise by the customer of its right to sell the Sale Aircraft to us. The repurchase price specified in contingent repurchase commitments is generally lower than the expected fair value at the specified repurchase date. Estimated proceeds from collateral/recourse in the table above represent the lower of the contracted repurchase price or the expected fair value of each aircraft at the specified repurchase date.
Indemnifications to ULA In 2006, we agreed to indemnify ULA through December 31, 2020 against potential non-recoverability and non-allowability of $1,360 of Boeing Delta launch program inventory included in contributed assets plus $1,860 of inventory subject to an inventory supply agreement which ends on March 31, 2021. Since inception, ULA has consumed $1,221 of inventory that was contributed by us. ULA has made advance payments of $1,020 to us and we have recorded revenues and cost of sales of $717 under the inventory supply agreement through September 30, 2012. ULA is continuing to assess the future of the Delta II program. In the event ULA is unable to sell additional Delta II inventory, our earnings could be reduced by up to $35.
In June 2011, the Defense Contract Management Agency (DCMA) notified ULA that it had determined that $271 of deferred support costs are not recoverable under government contracts. In December 2011, the DCMA notified ULA of the potential non-recoverability of an additional $114 of deferred production costs. The DCMA has not yet issued a final decision related to the recoverability of the $114. ULA and Boeing believe that all costs are recoverable. In November 2011, ULA filed a certified claim with the USAF for collection of deferred support and production costs. The USAF issued a final decision denying ULA's certified claim in May 2012. On June 14, 2012, Boeing and ULA filed a suit in the Court of Federal Claims seeking recovery of the deferred support and production costs. If, contrary to our belief, it is determined that some or all of the deferred support or production costs are not recoverable, we could be required to record pre-tax losses and make indemnification payments to ULA for up to $317 of the costs questioned by the DCMA.
We agreed to indemnify ULA against potential losses that ULA may incur in the event ULA is unable to obtain certain additional contract pricing from the USAF for four satellite missions. We believe ULA is entitled to additional contract pricing. In December 2008, ULA submitted a claim to the USAF to re-price the contract value for two satellite missions. In March 2009, the USAF issued a denial of that claim. In June 2009, ULA filed a notice of appeal, and in October 2009, ULA filed a complaint before the Armed Services Board of Contract Appeals (ASBCA) for a contract adjustment for the price of the two satellite missions. In September 2009, the USAF exercised its option for a third satellite mission. During the third quarter of 2010, ULA submitted a claim to the USAF to re-price the contract value of the third mission. The USAF did not exercise an option for a fourth mission prior to the expiration. In March 2011, ULA filed a notice of appeal before the ASBCA, seeking to re-price the third mission. A hearing before the ASBCA has been scheduled for November 18, 2013. If ULA is unsuccessful in obtaining additional pricing, we may be responsible for a portion of the shortfall and may record up to $280 in pre-tax losses associated with the three missions, representing up to $261 for the indemnification payment and up to $19 for our portion of additional contract losses incurred by ULA.
Other Indemnifications As part of the 2004 sale agreement with General Electric Capital Corporation related to the sale of Boeing Capital’s (BCC) Commercial Financial Services business, BCC is involved in a loss sharing arrangement for losses on transferred portfolio assets, such as asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. At September 30, 2012 and December 31, 2011, our maximum future cash exposure to losses associated with the loss sharing arrangement was $144 and $212 and our accrued liability under the loss sharing arrangement was $33 and $51.
In conjunction with our sales of the Electron Dynamic Devices, Inc. and Rocketdyne Propulsion and Power businesses and the sale of our Commercial Airplanes facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma in 2005, we agreed to indemnify, for an indefinite period, the buyers for costs relating to pre-closing environmental contamination and certain other items. As it is impossible to assess whether there will

14


be damages in the future or the amounts thereof (if any), we cannot estimate the potential amount of future payments under these indemnities. Therefore, no liability has been recorded. There have been no claims submitted to date.
Credit Guarantees We have issued credit guarantees, principally to facilitate the sale and/or financing of commercial aircraft. Under these arrangements, we are obligated to make payments to a guaranteed party in the event that lease or loan payments are not made by the original lessee or debtor or certain specified services are not performed. A substantial portion of these guarantees has been extended on behalf of original lessees or debtors with less than investment-grade credit. Our commercial aircraft credit guarantees are collateralized by the underlying commercial aircraft and certain other assets. Current outstanding credit guarantees expire within the next eight years.
Residual Value Guarantees We have issued various residual value guarantees, principally to facilitate the sale and financing of certain commercial aircraft. Under these guarantees, we are obligated to make payments to the guaranteed party if the related aircraft or equipment fair values fall below a specified amount at a future time. These obligations are collateralized principally by the underlying commercial aircraft and expire within the next six years.
Note 11 – Debt
We have $4,600 currently available under credit line agreements, of which $2,300 is a 364-day revolving credit facility expiring in November 2013 and $2,300 is a five-year credit facility expiring in November 2017. The 364-day credit facility has a one-year term out option which allows us to extend the maturity of any borrowings one year beyond the aforementioned expiration date. We have given BCC exclusive access to $750 under the 364-day facility and $750 under the five-year facility. We continue to be in full compliance with all covenants contained in our debt or credit facility agreements, including those at BCC.


15


Note 12 – Postretirement Plans
The components of net periodic benefit cost were as follows:
  
Nine months ended
September 30

Three months ended
September 30
Pension Plans
2012


2011


2012

 
2011

Service cost

$1,233



$1,053

 

$411

 

$351

Interest cost
2,253


2,339

 
751

 
780

Expected return on plan assets
(2,874
)

(2,805
)
 
(958
)
 
(935
)
Amortization of prior service costs
168


182

 
56

 
61

Recognized net actuarial loss
1,452


942

 
484

 
314

Settlement and curtailment loss/(gain)
10


64

 

 
9

Net periodic benefit cost

$2,242

 

$1,775

 

$744

 

$580

Net periodic benefit cost included in Earnings from operations

$1,831

 

$1,304

 

$583

 

$389

 
Nine months ended
September 30
 
Three months ended
September 30
Other Postretirement Benefit Plans
2012

 
2011

 
2012

 
2011

Service cost

$108

 

$182

 

$36

 

$110

Interest cost
237

 
377

 
79

 
171

Expected return on plan assets
(6
)
 
(4
)
 
(2
)
 
(2
)
Amortization of prior service costs
(147
)
 
(72
)
 
(49
)
 
(24
)
Recognized net actuarial loss
90

 
142

 
30

 
76

Settlement and curtailment loss/(gain)
(2
)
 


 

 

Net periodic benefit cost

$280

 

$625

 

$94

 

$331

Net periodic benefit cost included in Earnings from operations

$414

 

$561

 

$132

 

$281

During the three months ended September 30, 2011, we determined the accumulated benefit obligation for certain other postretirement benefit plans was understated. As a result, we recognized an additional $294 of postretirement benefit obligations at September 30, 2011. This increased net periodic benefit cost during the nine and three months ended September 30, 2011 by $184, which includes service cost of $73, interest cost of $68 and recognized net actuarial loss of $43.
Under our accounting policy, a portion of net periodic benefit cost is allocated to production as inventoried costs. Of the $184 increase in net periodic benefit cost described above, the associated cost included in Earnings from operations was $161 for the nine and three months ended September 30, 2011, with the remaining cost of $23 classified as inventory.
During the nine months ended September 30, 2012 and 2011, we made discretionary pension contributions of $1,513 and $500. During the nine months ended September 30, 2012 and 2011, we made contributions to our other postretirement benefit plans of $11 and $12.

16


Note 13 – Share-Based Compensation and Other Compensation Arrangements
Stock Options
On February 27, 2012, we granted to our executives 6,114,922 options with an exercise price equal to the fair market value of our stock on the date of grant and which expire ten years after the date of grant. The stock options vest over a period of three years, with 34% vesting after the first year, 33% vesting after the second year and the remaining 33% vesting after the third year. The fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions: 
Grant Date
Expected Life
 
Expected Volatility

 
Expected Dividend Yield

 
Risk Free Interest Rate

 
Weighted-Average Grant Date Fair Value Per Share

2/27/2012
6 years
 
29.9
%
 
2.4
%
 
1.1
%
 

$16.89

We determined the expected term of the stock option grants to be six years, calculated using the “simplified” method in accordance with the SEC Staff Accounting Bulletin 110. We use the “simplified” method since we changed the vesting terms, tax treatment and the recipients of our stock options beginning in 2006 such that we believe our historical data no longer provides a reasonable basis upon which to estimate expected term and we do not have enough option exercise data from our grants issued subsequent to 2006 to support our own estimate.
Restricted Stock Units
On February 27, 2012, we granted to our executives 1,369,810 restricted stock units (RSUs) as part of our long-term incentive program with a grant date fair value of $75.40 per share. The RSUs granted under this program will vest and settle in common stock (on a one-for-one basis) on the third anniversary of the grant date. In addition to RSUs awarded under our long-term incentive program, we have granted RSUs to certain executives and employees to encourage retention or to reward various achievements.
Performance Awards
On February 27, 2012, we granted to our executives Performance Awards with the payout based on the achievement of financial goals for the three-year period ending December 31, 2014. The minimum payout amount is $0 and the maximum payout is $272.
Note 14 – Derivative Financial Instruments
Cash Flow Hedges
Our cash flow hedges include foreign currency forward contracts, foreign currency option contracts, and commodity purchase contracts. We use foreign currency forward and option contracts to manage currency risk associated with certain transactions, specifically forecasted sales and purchases made in foreign currencies. Our foreign currency contracts hedge forecasted transactions principally occurring within five years in the future, with certain contracts hedging transactions up to 2021. We use commodity derivatives, such as fixed-price purchase commitments to hedge against potentially unfavorable price changes for items used in production. These include commitments to purchase electricity at fixed prices through 2016.
Fair Value Hedges
Interest rate swaps under which we agree to pay variable rates of interest are designated as fair value hedges of fixed-rate debt. The net change in fair value of the derivatives and the hedged items is reported in BCC interest expense.
Derivative Instruments Not Receiving Hedge Accounting Treatment
We also hold certain derivative instruments, primarily foreign currency forward contracts, for risk management purposes that are not receiving hedge accounting treatment.

17


Notional Amounts and Fair Values
The notional amounts and fair values of derivative instruments in the Condensed Consolidated Statements of Financial Position were as follows:
  
Notional amounts (1)
Other assets
Accrued liabilities
  
September 30
2012

December 31
2011

September 30
2012

December 31
2011

September 30
2012

December 31
2011

Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts

$2,079


$2,536


$211


$185


($16
)

($33
)
Interest rate contracts
388

388

30

29



 
Commodity contracts
72

102



(84
)
(112
)
Derivatives not receiving hedge accounting treatment:
 
 
 
 
 
 
Foreign exchange contracts
578

605



2

(67
)
(47
)
Commodity contracts
12







(6
)


Total derivatives
3,129

3,631

241

216

(173
)
(192
)
Netting arrangements
 
 
(79
)
(61
)
79

61

Net recorded balance
 
 

$162


$155


($94
)

($131
)
(1) 
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.
Gains/(losses) associated with our cash flow and undesignated hedging transactions and their effect on other comprehensive loss and Net earnings were as follows: 
  
Nine months ended
September 30
 
Three months ended
September 30
  
2012

 
2011

 
2012

 
2011

Effective portion recognized in other comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts

$35

 

($20
)
 

$36

 

($79
)
Commodity contracts
(10
)
 
(26
)
 
1

 
(12
)
Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts
18

 
21

 
8

 
7

Commodity contracts
(26
)
 
(20
)
 
(8
)
 
(7
)
Forward points recognized in Other income/(expense), net:
 
 
 
 
 
 
 
Foreign exchange contracts
16

 
30

 
4

 
24

Undesignated derivatives recognized in Other income/(expense), net:
 
 
 
 
 
 
 
Foreign exchange contracts
(11
)
 
19

 
(1
)
 
8

Based on our portfolio of cash flow hedges, we expect to reclassify gains of $61 (pre-tax) out of Accumulated other comprehensive loss into earnings during the next 12 months. Ineffectiveness related to our hedges recognized in Other income/(expense) was insignificant for the nine and three months ended September 30, 2012 and 2011.
We have derivative instruments with credit-risk-related contingent features. For foreign exchange contracts with original maturities of at least five years, our derivative counterparties could require settlement if we default on our five-year credit facility. For commodity contracts, our counterparties could require collateral posted in an amount determined by our credit ratings. The fair value of foreign exchange and commodity contracts that have credit-risk-related contingent features that are in a net liability position at September 30, 2012 was $10. At September 30, 2012, there was no collateral posted related to our derivatives.

18


Note 15 – Fair Value Measurements
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. 
  
September 30, 2012
 
December 31, 2011
  
Total

 
Level 1

 
Level 2

 
Level 3

 
Total

 
Level 1

 
Level 2

 
Level 3

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds

$2,815

 

$2,815

 

 

 

$3,104

 

$3,104

 

 

Available-for-sale investments
9

 
5

 


 

$4

 
10

 
5

 

 

$5

Derivatives
162

 

 

$162

 

 
155

 

 

$155

 

Total assets

$2,986

 

$2,820

 

$162

 

$4

 

$3,269

 

$3,109

 

$155

 

$5

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives

($94
)
 

 

($94
)
 

 

($131
)
 

 

($131
)
 

Total liabilities

($94
)
 

 

($94
)
 

 

($131
)
 

 

($131
)
 

Money market funds and available-for-sale equity securities are valued using a market approach based on the quoted market prices of identical instruments. Available-for-sale debt investments are primarily valued using an income approach based on benchmark yields, reported trades and broker/dealer quotes.
Derivatives include foreign currency, commodity and interest rate contracts. Our foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the present value of the commodity index prices less the contract rate multiplied by the notional amount. The fair value of our interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve.
Certain assets have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents the nonrecurring losses recognized for the nine months ended September 30 and the fair value and asset classification of the related assets as of the impairment date:
  
2012
 
2011
  
Fair
Value

 
Total
Losses

 
Fair
Value

 
Total
Losses

Equipment under operating leases & Assets held for sale or re-lease

$25

 

($31
)
 

$111

 

($49
)
Property, plant and equipment
19

 
(21
)
 


 


Acquired intangible asset

 

 
8

 
(1
)
Total

$44

 

($52
)
 

$119

 

($50
)
The fair value of the impaired Operating lease equipment is derived by calculating a median collateral value from a consistent group of third party aircraft value publications. The values provided by the third party aircraft publications are derived from their knowledge of market trades and other market factors. Management reviews the publications quarterly to assess the continued appropriateness and consistency with market trends. Under certain circumstances, we adjust values based on the attributes and condition of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by third party publications, or on the expected net sales price for the aircraft.

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Property, plant and equipment and Acquired intangible assets were valued using an income approach based on the discounted cash flows associated with the underlying assets.
For Level 3 assets that were measured at fair value on a non-recurring basis during the nine months ended September 30, 2012, the following table presents the fair value of those assets as of the measurement date, valuation techniques and related unobservable inputs of those assets.
 
Fair
Value
 
Valuation
Technique(s)
 
Unobservable Input
 
Range
Median or Average
Equipment under operating leases & Assets held for sale or re-lease
$25
 
Market approach
 
Aircraft value publications
 
$24 - $53(1)
Median $35
 
 
Aircraft condition adjustments
 
($10) - $0(2)
Net ($10)
(1) 
The range represents the sum of the highest and lowest values for all aircraft subject to fair value measurement, according to the third party aircraft valuation publications that we use in our valuation process.
(2) 
The negative amount represents the sum for all aircraft subject to fair value measurement, of all downward adjustments based on consideration of individual aircraft attributes and condition. The positive amount represents the sum of all such upward adjustments.

Fair Value Disclosures
The fair values and related carrying values of financial instruments that are not required to be remeasured at fair value on the Condensed Consolidated Statements of Financial Position were as follows:
  
September 30, 2012
December 31, 2011
  
Carrying
Amount

Total Fair
Value

Level 1
Level 2

Level 3

Carrying
Amount

Total Fair
Value

Assets
 
 
 
 
 
 
 
Accounts receivable, net

$5,437


$5,454



$5,454



$5,793


$5,690

Notes receivable, net
650

710


710


792

836

Liabilities
 

 
 
 
 
 
Debt, excluding capital lease obligations
(10,988
)
(13,258
)

(13,189
)

($69
)
(12,136
)
(14,099
)
Accounts payable
(9,152
)
(9,148
)

(9,148
)

(8,406
)
(8,396
)
Residual value and credit guarantees
(3
)
(2
)


(2
)
(8
)
(9
)
Contingent repurchase commitments
(5
)
(7
)


(7
)
(7
)
(4
)
The fair values of Accounts receivable and Accounts payable are based on current market rates for loans of the same risk and maturities. The fair values of our variable rate notes receivable that reprice frequently approximate their carrying amounts. The fair values of fixed rate notes receivable are estimated using discounted cash flow analysis with interest rates currently offered on loans with similar terms to borrowers of similar credit quality. The fair value of our debt that is traded in the secondary market is classified as Level 2 and is based on current market yields. For our debt that is not traded in the secondary market, the fair value is classified as Level 2 and is based on our indicative borrowing cost derived from dealer quotes or discounted cash flows. The fair value of our debt classified as Level 3 is based on the median of the underlying collateral value as described above. The fair values of the residual value guarantees and contingent repurchase commitments are determined using a Black Futures Options formula and include such assumptions as the expected value of the aircraft on the settlement date, volatility of aircraft prices, time until settlement and the risk free discount rate. The fair value of the credit guarantees is estimated based on the expected cash flows of those commitments, given the creditor’s probability of default, and discounted using the risk free rate. With regard to other financial instruments with off-balance sheet risk, it is not

20


practicable to estimate the fair value of our indemnifications because the amount and timing of those arrangements are uncertain. Items not included in the above disclosures include cash, restricted cash, time deposits and other deposits, commercial paper, money market funds and long-term payables. The carrying values of those items, as reflected in the Condensed Consolidated Statements of Financial Position, approximate their fair value at September 30, 2012 and December 31, 2011. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash (Level 1).
Note 16 – Legal Proceedings
Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against us. Potentially material contingencies are discussed below.
We are subject to various U.S. government investigations, from which civil, criminal or administrative proceedings could result or have resulted. Such proceedings involve or could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. We believe, based upon current information, that the outcome of any such government disputes and investigations will not have a material effect on our financial position, results of operations, or cash flows, except as set forth below. Where it is reasonably possible that we will incur losses in excess of recorded amounts in connection with any of the matters set forth below, we have disclosed either the amount or range of reasonably possible losses in excess of such amounts or, where no such amount or range can be reasonably estimated, the reasons why no such estimate can be made.
A-12 Litigation
In 1991, the Department of the Navy (the Navy) notified McDonnell Douglas Corporation (now merged into The Boeing Company) and General Dynamics Corporation (together, the Team) that it was terminating for default the Team’s contract for development and initial production of the A-12 aircraft.
The Team had full responsibility for performance of the contract and both contractors are jointly and severally liable for any potential liabilities resulting from the termination. The Team filed a legal action to contest the Navy’s default termination, to assert its rights to convert the termination to one for “the convenience of the government,” and to obtain payment for work done and costs incurred on the A-12 contract but not paid to date. As of September 30, 2012, inventories included approximately $587 of recorded costs on the A-12 contract, against which we have established a loss provision of $350. The amount of the provision, which was established in 1990, was based on McDonnell Douglas Corporation’s belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, and that the best estimate of possible loss on termination for convenience was $350.
On August 31, 2001, the U.S. Court of Federal Claims issued a decision after trial upholding the government’s default termination of the A-12 contract. In 2003, the Court of Appeals for the Federal Circuit, finding that the trial court had applied the wrong legal standard, vacated the trial court’s 2001 decision and ordered the case sent back to the trial court for further proceedings. On May 3, 2007, the U.S. Court of Federal Claims issued a decision upholding the government’s default termination of the A-12 contract. We filed a Notice of Appeal on May 4, 2007 with the Court of Appeals for the Federal Circuit. On June 2, 2009, the Court of Appeals rendered an opinion affirming the trial court’s 2007 decision sustaining the government’s default termination. On May 23, 2011, the U.S. Supreme Court vacated the decision of the Court of Appeals upholding the default termination, and remanded the case to the Court of Appeals. On July 7, 2011, the Court of Appeals remanded the case to the trial court for additional factual determinations. On July 3, 2012, the trial court set a briefing schedule, which, absent extensions, we expect to be completed in March 2013. On December 29, 2009, the Navy sent letters to the Team requesting payment of $1,352 in unliquidated progress payments, plus applicable interest. On November 15, 2011, the Navy sent a letter confirming that it would not pursue payment from the Team pending all trial court and appellate proceedings adjudicating the issues remanded by the Supreme Court.

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We believe that the termination for default is contrary to law and fact and that the loss provision established by McDonnell Douglas Corporation in 1990, which was supported by an opinion from outside counsel, continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process as of September 30, 2012. Final resolution of the A-12 litigation will depend on the outcome of further proceedings or possible negotiations with the U.S. government. If after all legal proceedings are concluded, the court determines, contrary to our belief, that a termination for default was appropriate, we could incur an additional loss of up to $275, consisting principally of $237 of remaining inventory costs. If the courts further hold that a money judgment should be entered against the Team, we could be required to pay the U.S. government up to one-half of the unliquidated progress payments of $1,350 plus statutory interest from February 1991 (currently totaling up to $1,580). In that event, our loss would total approximately $1,738 in pre-tax charges. Should, however, the March 31, 1998 judgment of the U.S. Court of Federal Claims in favor of the Team be reinstated, we could be entitled to receive payment of approximately $1,185, including interest from June 26, 1991.
Employment, Labor and Benefits Litigation
We have been named as a defendant in two pending class action lawsuits filed in the U.S. District Court for the District of Kansas, each related to the 2005 sale of our former Wichita facility to Spirit AeroSystems, Inc. (Spirit). The first action involves allegations that Spirit’s hiring decisions following the sale were tainted by age discrimination, violated ERISA, violated our collective bargaining agreements, and constituted retaliation. The case was brought in 2006 as a class action on behalf of individuals not hired by Spirit. The court granted summary judgment in 2010 in favor of Boeing and Spirit on all class action claims, and during the third quarter of 2012 the Tenth Circuit Court of Appeals affirmed the summary judgment. No further proceedings are scheduled at this time, but individual claimants may elect to pursue their respective claims of age discrimination.
The second action, initiated in 2007, alleges collective bargaining agreement breaches and ERISA violations in connection with alleged failures to provide benefits to certain former employees of the Wichita facility. Written discovery closed by joint stipulation of the parties on June 6, 2011. Depositions concluded on August 18, 2011. Plaintiffs’ partial motion for summary judgment was filed on December 9, 2011. Boeing’s opposition and dispositive motions were filed on February 10, 2012. All briefing was completed on June 4, 2012. Spirit has agreed to indemnify Boeing for any and all losses in the first action, with the exception of claims arising from employment actions prior to January 1, 2005. While Spirit has acknowledged a limited indemnification obligation in the second action, we believe that Spirit is obligated to indemnify Boeing for any and all losses in the second action. The Company cannot reasonably estimate the range of loss, if any, that may result from this matter given the current procedural status of the litigation.
On October 13, 2006, we were named as a defendant in a lawsuit filed in the U.S. District Court for the Southern District of Illinois. Plaintiffs, seeking