06.30.2012 10-Q
Table of Contents

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 June 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 July 18, 2012, there were 751,797,604 shares of common stock, $5.00 par value, issued and outstanding.

Table of Contents

THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended June 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.
 
 
 

Table of Contents

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)
Six months ended
June 30
 
Three months ended
June 30
  
2012

 
2011

 
2012


2011

Sales of products

$34,026

 

$25,534

 

$17,341



$13,640

Sales of services
5,362

 
5,919

 
2,664


2,903

Total revenues
39,388

 
31,453

 
20,005


16,543

 


 


 
 
 
 
Cost of products
(28,420
)
 
(20,329
)
 
(14,759
)

(10,823
)
Cost of services
(4,342
)
 
(4,858
)
 
(1,962
)

(2,348
)
Boeing Capital interest expense
(47
)
 
(62
)
 
(19
)

(29
)
Total costs and expenses
(32,809
)
 
(25,249
)
 
(16,740
)

(13,200
)

6,579

 
6,204

 
3,265


3,343

Income from operating investments, net
91

 
150

 
45


88

General and administrative expense
(1,858
)
 
(1,736
)
 
(903
)

(870
)
Research and development expense, net
(1,692
)
 
(2,104
)
 
(857
)

(1,047
)
(Loss)/gain on dispositions, net
(2
)
 
20

 
(2
)
 
20

Earnings from operations
3,118


2,534

 
1,548


1,534

Other income, net
22

 
27

 
10


14

Interest and debt expense
(231
)
 
(253
)
 
(112
)

(123
)
Earnings before income taxes
2,909

 
2,308

 
1,446


1,425

Income tax expense
(1,018
)
 
(778
)
 
(479
)

(483
)
Net earnings from continuing operations
1,891

 
1,530

 
967


942

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



(1
)
Net earnings

$1,890

 

$1,527

 

$967



$941

Basic earnings per share from continuing operations

$2.51

 

$2.06

 

$1.28

 

$1.27

Net loss on disposal of discontinued operations, net of taxes

 

 

 

Basic earnings per share

$2.51

 

$2.06

 

$1.28



$1.27

Diluted earnings per share from continuing operations

$2.49

 

$2.04

 

$1.27

 

$1.25

Net loss on disposal of discontinued operations, net of taxes 

 

 

 

Diluted earnings per share

$2.49

 

$2.04

 

$1.27



$1.25

Cash dividends paid per share

$0.88

 

$0.84

 

$0.44



$0.42

Weighted average diluted shares (millions)
760.7

 
750.8

 
762.0


752.6

 


 


 
 
 
 
Comprehensive income

$2,575

 

$2,185

 

$1,246



$1,243

See Notes to the Condensed Consolidated Financial Statements.

1
Table of Contents

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

 
December 31
2011

Assets
 
 
 
Cash and cash equivalents

$6,305

 

$10,049

Short-term and other investments
4,002

 
1,223

Accounts receivable, net
5,894

 
5,793

Current portion of customer financing, net
344

 
476

Deferred income taxes
30

 
29

Inventories, net of advances and progress billings
35,033

 
32,240

Total current assets
51,608

 
49,810

Customer financing, net
4,068

 
4,296

Property, plant and equipment, net of accumulated depreciation of $14,385 and $13,993
9,453

 
9,313

Goodwill
4,955

 
4,945

Acquired intangible assets, net
2,980

 
3,044

Deferred income taxes
5,781

 
5,892

Investments
1,004

 
1,043

Other assets, net of accumulated amortization of $440 and $717
1,746

 
1,643

Total assets

$81,595

 

$79,986

Liabilities and equity
 
 
 
Accounts payable

$9,273

 

$8,406

Accrued liabilities
11,699

 
12,239

Advances and billings in excess of related costs
15,344

 
15,496

Deferred income taxes and income taxes payable
3,668

 
2,780

Short-term debt and current portion of long-term debt
2,466

 
2,353

Total current liabilities
42,450

 
41,274

Accrued retiree health care
7,478

 
7,520

Accrued pension plan liability, net
16,164

 
16,537

Non-current income taxes payable
226

 
122

Other long-term liabilities
650

 
907

Long-term debt
8,735

 
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
4,018

 
4,033

Treasury stock, at cost – 260,913,450 and 267,556,388 shares
(16,202
)
 
(16,603
)
Retained earnings
28,743

 
27,524

Accumulated other comprehensive loss
(15,816
)
 
(16,500
)
Total shareholders’ equity
5,804

 
3,515

Noncontrolling interest
88

 
93

Total equity
5,892

 
3,608

Total liabilities and equity

$81,595

 

$79,986

See Notes to the Condensed Consolidated Financial Statements.

2
Table of Contents

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


2011

Cash flows – operating activities:
 

 
Net earnings

$1,890



$1,527

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

 
Non-cash items – 
 

 
Share-based plans expense
99


96

Depreciation and amortization
848


816

Investment/asset impairment charges, net
45


16

Customer financing valuation provision
(1
)

(65
)
Loss on disposal of discontinued operations
2

 
4

Loss/(gain) on dispositions, net
2

 
(20
)
Other charges and credits, net
361


223

Excess tax benefits from share-based payment arrangements
(39
)

(32
)
Changes in assets and liabilities – 
 

 
Accounts receivable
(310
)

(747
)
Inventories, net of advances and progress billings
(2,737
)

(4,889
)
Accounts payable
742


1,134

Accrued liabilities
(594
)

(268
)
Advances and billings in excess of related costs
(152
)

626

Income taxes receivable, payable and deferred
705


685

Other long-term liabilities
(15
)

54

Pension and other postretirement plans
686


1,199

Customer financing, net
216


210

Other
(3
)

74

Net cash provided by operating activities
1,745

 
643

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(780
)
 
(762
)
Property, plant and equipment reductions
16

 
19

Acquisitions, net of cash acquired
(18
)
 
(16
)
Contributions to investments
(6,396
)
 
(4,454
)
Proceeds from investments
3,596

 
5,902

Receipt of economic development program funds


 
69

Purchase of distribution rights
(6
)
 


Net cash (used)/provided by investing activities
(3,588
)
 
758

Cash flows – financing activities:
 
 
 
New borrowings
24

 
36

Debt repayments
(1,233
)
 
(851
)
Repayments of distribution rights financing
(72
)
 
(406
)
Stock options exercised, other
71

 
80

Excess tax benefits from share-based payment arrangements
39

 
32

Employee taxes on certain share-based payment arrangements
(68
)
 
(18
)
Dividends paid
(658
)
 
(620
)
Net cash used by financing activities
(1,897
)
 
(1,747
)
Effect of exchange rate changes on cash and cash equivalents
(4
)
 
37

Net decrease in cash and cash equivalents
(3,744
)
 
(309
)
Cash and cash equivalents at beginning of year

$10,049

 

$5,359

Cash and cash equivalents at end of period

$6,305

 

$5,050

See Notes to the Condensed Consolidated Financial Statements.

3
Table of Contents

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

 

 

 
1,527

 

 
(5
)
 
1,522

Unrealized gain on derivative instruments, net of tax of ($26)

 

 

 

 
45

 

 
45

Unrealized loss on certain investments, net of tax of $1

 

 

 

 
(2
)
 

 
(2
)
Reclassification adjustment for gains realized in net earnings, net of tax

 

 

 

 
(1
)
 

 
(1
)
Currency translation adjustment

 

 

 

 
99

 

 
99

Postretirement liability adjustment, net of tax of ($303)

 

 

 

 
522

 

 
522

Comprehensive income

 

 

 

 

 

 
2,185

Share-based compensation and related dividend equivalents

 
102

 

 
(8
)
 

 

 
94

Excess tax pools

 
17

 

 

 

 

 
17

Treasury shares issued for stock options exercised, net

 
(28
)
 
110

 

 

 

 
82

Treasury shares issued for other share-based plans, net

 
(44
)
 
34

 

 

 

 
(10
)
Treasury shares issued for 401(k) contribution

 
32

 
184

 

 

 

 
216

Cash dividends declared ($0.84 per share)


 


 


 
(622
)
 


 


 
(622
)
Balance June 30, 2011

$5,061

 

$3,945

 

($16,859
)
 

$25,681

 

($13,095
)
 

$91

 

$4,824

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 1, 2012

$5,061

 

$4,033

 

($16,603
)
 

$27,524

 

($16,500
)
 

$93

 

$3,608

Net earnings

 

 

 
1,890

 

 
1

 
1,891

Unrealized loss on derivative instruments, net of tax of $7

 

 

 

 
(12
)
 

 
(12
)
Reclassification adjustment for losses realized in net earnings, net of tax ($5)
 
 
 
 
 
 
 
 
8

 
 
 
8

Currency translation adjustment
 
 
 
 
 
 
 
 
(10
)
 
 
 
(10
)
Postretirement liability adjustment, net of tax of ($402)

 

 

 

 
698

 

 
698

Comprehensive income

 

 

 

 

 

 
2,575

Share-based compensation and related dividend equivalents

 
106

 

 
(10
)
 

 

 
96

Excess tax pools

 
39

 

 

 

 

 
39

Treasury shares issued for stock options exercised, net

 
(31
)
 
104

 

 

 

 
73

Treasury shares issued for other share-based plans, net

 
(166
)
 
104

 

 

 

 
(62
)
Treasury shares issued for 401(k) contribution

 
37

 
193

 

 

 

 
230

Cash dividends declared ($0.88 per share)


 


 


 
(661
)
 


 


 
(661
)
Changes in non-controlling interest
 
 
 
 
 
 
 
 
 
 
(6
)
 
(6
)
Balance June 30, 2012

$5,061

 

$4,018

 

($16,202
)
 

$28,743

 

($15,816
)
 

$88

 

$5,892

See Notes to the Condensed Consolidated Financial Statements.

4
Table of Contents

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

(Dollars in millions)
Six months ended
June 30
 
Three months ended
June 30

2012

 
2011

 
2012

 
2011

Revenues:

 

 



Commercial Airplanes

$22,780

 

$15,961

 

$11,843



$8,843

Defense, Space & Security:

 

 



Boeing Military Aircraft
8,438

 
7,034

 
4,130


3,642

Network & Space Systems
3,682

 
4,424

 
1,887


2,078

Global Services & Support
4,305

 
3,847

 
2,175


1,968

Total Defense, Space & Security
16,425

 
15,305

 
8,192


7,688

Boeing Capital
224

 
290

 
99


147

Other segment
66

 
74

 
42


38

Unallocated items and eliminations
(107
)
 
(177
)
 
(171
)

(173
)
Total revenues

$39,388

 

$31,453

 

$20,005



$16,543

Earnings from operations:

 

 



Commercial Airplanes

$2,292

 

$1,429

 

$1,211



$920

Defense, Space & Security:

 

 



Boeing Military Aircraft
800

 
755

 
363


386

Network & Space Systems
199

 
333

 
126


192

Global Services & Support
491

 
381

 
259


220

Total Defense, Space & Security
1,490

 
1,469

 
748


798

Boeing Capital
69

 
114

 
31


62

Other segment
(129
)
 
(80
)
 
(50
)

(58
)
Unallocated items and eliminations
(604
)
 
(398
)
 
(392
)

(188
)
Earnings from operations
3,118

 
2,534

 
1,548


1,534

Other income, net
22

 
27

 
10


14

Interest and debt expense
(231
)
 
(253
)
 
(112
)

(123
)
Earnings before income taxes
2,909

 
2,308

 
1,446


1,425

Income tax expense
(1,018
)
 
(778
)
 
(479
)

(483
)
Net earnings from continuing operations
1,891

 
1,530

 
967


942

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



(1
)
Net earnings

$1,890

 

$1,527

 

$967



$941

Research and development expense, net:

 

 



Commercial Airplanes

$1,104

 

$1,558

 

$560



$771

Defense, Space & Security:

 

 



Boeing Military Aircraft
289

 
250

 
144


125

Network & Space Systems
219

 
217

 
112


110

Global Services & Support
54

 
56

 
25


27

Total Defense, Space & Security
562

 
523

 
281


262

Other
26

 
23

 
16


14

Total research and development expense, net

$1,692

 

$2,104

 

$857



$1,047

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 16 for further segment results.

5
Table of Contents

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 June 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 six and three months ended June 30, 2012, net favorable cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts increased operating earnings by $234 and $122 and earnings per share by $0.20 and $0.11. For the six and three months ended June 30, 2011, net favorable cumulative catch-up adjustments, including reach-forward losses, increased operating earnings by $153 and $100 and earnings per share by $0.14 and $0.09.
Note 2 – Earnings Per Share
The weighted-average number of shares outstanding used to compute earnings per share were as follows:
(Shares in millions)
Six months ended
June 30
 
Three months ended
June 30
  
2012

 
2011

 
2012

 
2011

Weighted average shares outstanding
751.8

 
741.7

 
753.5

 
743.0

Participating securities
2.4

 
2.5

 
2.4

 
2.5

Basic weighted average shares outstanding
754.2

 
744.2

 
755.9

 
745.5

Dilutive potential common shares
6.5

 
6.6

 
6.1

 
7.1

Diluted weighted average shares outstanding
760.7

 
750.8

 
762.0

 
752.6

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
Table of Contents

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)
Six months ended
June 30
 
Three months ended
June 30
 
2012

 
2011

 
2012

 
2011

Stock options
22.1

 
19.4

 
25.6

 
15.7

Performance Awards
4.5

 
4.1

 
4.5

 
4.1

Note 3 – Income Taxes
Our effective income tax rates were 35.0% and 33.1% for the six and three months ended June 30, 2012 and 33.7% and 33.9% for the same periods in the prior year. The effective tax rate for the six months ended June 30, 2012 is higher than the comparable prior year period primarily due to U.S. research and development tax credits that existed in 2011, but do not exist in 2012. The effective tax rate for the three months ended June 30, 2012 is lower than the comparable prior year period primarily due to discrete tax adjustments partially offset by research and development benefits 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 June 30, 2012, includes $116 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:
 
June 30
2012

 
December 31
2011

Long-term contracts in progress

$14,553

 

$13,587

Commercial aircraft programs
38,592

 
35,080

Commercial spare parts, used aircraft, general stock materials and other
6,749

 
7,832

Inventory before advances and progress billings
59,894

 
56,499

Less advances and progress billings
(24,861
)
 
(24,259
)
Total

$35,033

 

$32,240

Long-Term Contracts in Progress
Long-term contracts in progress included Delta launch program inventory that will be sold at cost to United Launch Alliance (ULA) under an inventory supply agreement that terminates on March 31, 2021. At June 30, 2012 and December 31, 2011, the inventory balance was $965 and $1,085. At June 30, 2012, $571 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 $50. See Note 10.

7
Table of Contents

Inventory balances included $237 and $236 subject to claims or other uncertainties relating to the A-12 program at June 30, 2012 and December 31, 2011. See Note 15.
Capitalized precontract costs of $236 and $1,728 at June 30, 2012 and December 31, 2011, are included in inventories.
Commercial Aircraft Programs
At June 30, 2012 and December 31, 2011, commercial aircraft programs inventory included the following amounts related to the 787 program: $19,494 and $16,098 of work in process (including deferred production costs of $13,184 and $10,753), $1,852 and $1,770 of supplier advances, and $2,145 and $1,914 of unamortized tooling and other non-recurring costs. At June 30, 2012, $10,925 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 $4,404 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
At June 30, 2012 and December 31, 2011, commercial aircraft programs inventory included the following amounts related to the 747 program: $765 and $448 of deferred production costs, net of previously recorded reach-forward losses, and $778 and $852 of unamortized tooling. At June 30, 2012, $916 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 $627 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 $2,776 and $2,564 at June 30, 2012 and December 31, 2011.
Note 6 – Customer Financing
Customer financing consisted of the following:
 
June 30
2012

 
December 31
2011

Financing receivables:
 
 
 
Investment in sales-type/finance leases

$1,919

 

$2,037

Notes
678

 
814

Operating lease equipment, at cost, less accumulated depreciation of $641 and $765
1,884

 
1,991

Gross customer financing
4,481

 
4,842

Less allowance for losses on receivables
(69
)
 
(70
)
Total

$4,412

 

$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 June 30, 2012 and December 31, 2011, we individually evaluated for impairment customer financing receivables of $678 and $854. At June 30, 2012 and December 31, 2011, $460 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.
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.

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Table of Contents

Our financing receivable balances by internal credit rating category are shown below: 
Rating categories
June 30
2012

 
December 31
2011

A

$34

 
 
BBB
1,239

 

$1,316

BB
61

 
67

B
58

 
103

CCC
523

 
512

D
587

 
653

Other
95

 
200

Total carrying value of financing receivables

$2,597

 

$2,851

At June 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 $583 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 June 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:
 
June 30
2012

 
December 31
2011

717 Aircraft ($474 and $480 accounted for as operating leases) (1)

$1,855

 

$1,906

757 Aircraft ($476 and $451 accounted for as operating leases) (1)
606

 
631

MD-80 Aircraft ($0 and $0 accounted for as operating leases) (1) (2)
460

 
485

737 Aircraft ($224 and $242 accounted for as operating leases)
361

 
394

MD-11 Aircraft ($300 and $321 accounted for as operating leases) (1)
300

 
321

767 Aircraft ($98 and $103 accounted for as operating leases)
265

 
307

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


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Table of Contents

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

 
December 31
2011

Time deposits

$3,915

 

$1,134

Pledged money market funds (1)
56

 
56

Available-for-sale investments
8

 
10

Equity method investments
963

 
1,003

Restricted cash (2)
29

 
31

Other investments
35

 
32

Total

$5,006

 

$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) 
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 June 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. 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.

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Table of Contents

Note 9 – Commitments and Contingencies
Financing Commitments
Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, totaled $20,267 and $15,866 at June 30, 2012 and December 31, 2011. The estimated earliest potential funding dates for these commitments at June 30, 2012 are as follows: 
  
Total

July through December 2012

$911

2013
1,299

2014
2,490

2015
3,813

2016
3,408

Thereafter
8,346

 

$20,267

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 $5,036 and $6,199 at June 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 $769 and $273 at June 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 $92 and $27 at June 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 $403 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.
Product Warranties
The following table summarizes product warranty activity recorded during the six months ended June 30, 2012 and 2011.
 
2012

 
2011

Beginning balance – January 1

$1,046

 

$1,076

Additions for current year deliveries
212

 
69

Reductions for payments made
(137
)
 
(123
)
Changes in estimates
86

 
8

Ending balance – June 30

$1,207

 

$1,030


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Table of Contents

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

 
2011

Beginning balance – January 1

$758

 

$721

Reductions for payments made
(33
)
 
(32
)
Changes in estimates
45

 
99

Ending balance – June 30

$770

 

$788

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 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 June 30, 2012 and December 31, 2011, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $966 and $1,003.
C-17
At June 30, 2012, our backlog included 7 C-17 aircraft under contract with the U.S. Air Force (USAF) and international orders for 13 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 June 30, 2012, we had approximately $80 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 2013. In addition, barring Congressional action, further budget cuts (or sequestration) as outlined in the Act will be implemented starting in January 2013. Sequestration would lead to additional reductions of approximately $500 billion from the Pentagon's top line budget over the next decade, resulting in aggregate reductions of about $1 trillion over 10 years. In June 2012, the Office of Management and Budget announced that the budget for Overseas Contingency Operations and any unobligated balances in prior year funds will also be included in aggregate reductions. 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.
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 USAF KC-46A Tanker, Airborne Early Warning and Control (AEW&C), India P-8I, Saudi F-15, 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.

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Table of Contents

Commercial Airplane Development Programs
The development and initial production of new commercial airplanes and new commercial airplane derivatives, which include the 787 and 747-8, 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
 
June 30
2012

December 31
2011

 
June 30
2012

December 31
2011

 
June 30
2012

December 31
2011

Contingent repurchase commitments

$3,249


$3,290

 

$3,249


$3,290

 

$7


$7

Indemnifications to ULA:
 
 
 
 
 
 
 
 
Contributed Delta program launch inventory
215

215

 


 


Contract pricing
261

261

 


 
7

7

Other Delta contracts
156

137

 


 
8

8

Other indemnifications
147

212

 
 
 
 
43

51

Credit guarantees
13

17

 
4

12

 
2

2

Residual value guarantees
16

29

 
13

21

 
2

6

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 2008, 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 $840 to us and we have recorded revenues and cost of sales of $717 under the inventory supply agreement through June 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 $50.
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.

13
Table of Contents

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 May 6, 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 June 30, 2012 and December 31, 2011, our maximum future cash exposure to losses associated with the loss sharing arrangement was $147 and $212 and our accrued liability under the loss sharing arrangement was $43 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 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.


14
Table of Contents

Note 11 – Postretirement Plans
The components of net periodic benefit cost were as follows:
  
Six months ended
June 30

Three months ended
June 30
Pension Plans
2012


2011


2012

 
2011

Service cost

$822



$702

 

$411

 

$350

Interest cost
1,502


1,559

 
751

 
780

Expected return on plan assets
(1,916
)

(1,870
)
 
(958
)
 
(935
)
Amortization of prior service costs
112


121

 
56

 
59

Recognized net actuarial loss
968


628

 
484

 
314

Settlement and curtailment loss
10


55

 
3

 
11

Net periodic benefit cost

$1,498

 

$1,195

 

$747

 

$579

Net periodic benefit cost included in Earnings from operations

$1,248

 

$915

 

$593

 

$389

 
Six months ended
June 30
 
Three months ended
June 30
Other Postretirement Benefit Plans
2012

 
2011

 
2012

 
2011

Service cost

$72

 

$72

 

$36

 

$36

Interest cost
158

 
206

 
79

 
103

Expected return on plan assets
(4
)
 
(2
)
 
(2
)
 
(1
)
Amortization of prior service costs
(98
)
 
(48
)
 
(49
)
 
(24
)
Recognized net actuarial loss
60

 
66

 
30

 
33

Settlement and curtailment loss
(2
)
 


 

 

Net periodic benefit cost

$186

 

$294

 

$94

 

$147

Net periodic benefit cost included in Earnings from operations

$282

 

$280

 

$133

 

$118

A portion of net periodic benefit cost is allocated to production as product costs and may remain in inventory at the end of the reporting period.
During the six months ended June 30, 2012 and 2011, we made discretionary pension contributions of $763 and $0. During the six months ended June 30, 2012 and 2011, we made contributions to our other postretirement benefit plans of $8 in both periods.
Note 12 – 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.

15
Table of Contents

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 $274.
Note 13 – 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 but without electing any form of hedge accounting.
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
  
June 30
2012

 
December 31
2011

 
June 30
2012

 
December 31
2011

 
June 30
2012

 
December 31
2011

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts

$2,332

 

$2,536

 

$173

 

$185

 

($33
)
 

($33
)
Interest rate contracts
388

 
388

 
30

 
29

 

 

Commodity contracts
65

 
102

 

 

 
(97
)
 
(112
)
Derivatives not receiving hedge accounting treatment:

 

 

 

 

 

Foreign exchange contracts
516

 
605

 


 
2

 
(61
)
 
(47
)
Commodity contracts
13

 


 


 


 
(7
)
 


Total derivatives
3,314

 
3,631

 
203

 
216

 
(198
)
 
(192
)
Netting arrangements
 
 
 
 
(74
)
 
(61
)
 
74

 
61

Net recorded balance
 
 
 
 

$129

 

$155

 

($124
)
 

($131
)
(1) 
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

16
Table of Contents

Gains/(losses) associated with our cash flow and undesignated hedging transactions and their effect on other comprehensive loss and Net earnings were as follows: 
  
Six months ended
June 30
 
Three months ended
June 30
  
2012

 
2011

 
2012

 
2011

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

($1
)
 

$59

 

($33
)
 

$23

Commodity contracts
(11
)
 
(14
)
 
3

 
(5
)
Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes:
 
 
 
 
 
 
 
Foreign exchange contracts
10

 
14

 
3

 
9

Commodity contracts
(18
)
 
(13
)
 
(11
)
 
(7
)
Forward points recognized in Other income/(expense), net:
 
 
 
 
 
 
 
Foreign exchange contracts
12

 
6

 
16

 


Undesignated derivatives recognized in Other income/(expense), net:
 
 
 
 
 
 
 
Foreign exchange contracts
(10
)
 
11

 
(14
)
 
(3
)
Based on our portfolio of cash flow hedges, we expect to reclassify gains of $28 (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 six and three months ended June 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, expiring November 2016. 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 June 30, 2012 was $11. At June 30, 2012, there was no collateral posted related to our derivatives.
Note 14 – 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. 
  
June 30, 2012
 
December 31, 2011
  
Total

 
Level 1

 
Level 2

 
Level 3

 
Total

 
Level 1

 
Level 2

 
Level 3

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds

$2,241

 

$2,241

 

 

 

$3,104

 

$3,104

 

 

Available-for-sale investments
8

 
4

 


 

$4

 
10

 
5

 

 

$5

Derivatives
129

 

 

$129

 

 
155

 

 

$155

 

Total assets

$2,378

 

$2,245

 

$129

 

$4

 

$3,269

 

$3,109

 

$155

 

$5

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives

($124
)
 

 

($124
)
 

 

($131
)
 

 

($131
)
 

Total liabilities

($124
)
 

 

($124
)
 

 

($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.

17
Table of Contents

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 six months ended June 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
)
 

$64

 

($15
)
Property, plant and equipment
18

 
(5
)
 


 


Acquired intangible assets

 

 
8

 
(1
)
Total

$43

 

($36
)
 

$72

 

($16
)
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.
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 six months ended June 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.

18
Table of Contents

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:
  
June 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

$5,894

 

$5,919

 

 

$5,919

 

 

$5,793

 

$5,690

Notes receivable, net
656

 
711

 

 
711

 

 
792

 
836

Liabilities