Boeing 2013 Annual Report Download - page 38

26
Earnings From Operations
Earnings from operations in 2013 increased by $1,084 million or 23% compared with 2012. Earnings
increased by $842 million primarily driven by higher new airplane deliveries and lower research and
development cost of $242 million due to lower spending on the 787 program partially offset by higher
spending on the 737 MAX and 777X. Operating margins increased from 9.6% in 2012 to 10.9% in 2013
primarily due to higher deliveries and lower research and development cost partially offset by the dilutive
impact of 787 deliveries.
Earnings from operations in 2012 increased by $1,216 million or 35% compared with 2011. This was
primarily due to higher new airplane deliveries, which drove an increase in earnings of $1,292 million, and
lower research and development expense of $666 million primarily due to lower spending on the 747-8
and 787-8 programs. These increases were partially offset by lower earnings of $742 million driven by
higher fleet support costs, increased operating costs associated with business growth, other period costs
and decreased earnings from commercial aviation services. The decrease in operating margins from 9.7%
in 2011 to 9.6% in 2012 was primarily due to the dilutive effect of the 787 and 747-8 deliveries.
Backlog
Firm backlog represents orders for products and services where no contingencies remain before we and
the customer are required to perform. Backlog does not include prospective orders where customer
controlled contingencies remain, such as the customers receiving approval from their Board of Directors,
shareholders or government and completing financing arrangements. All such contingencies must be
satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly
certain. Firm orders exclude options. A number of our customers may have contractual remedies that may
be implicated by program delays. We continue to address customer claims and requests for other
contractual relief as they arise. However, once orders are included in firm backlog, orders remain in backlog
until canceled or fulfilled, although the value of orders is adjusted as changes to price and schedule are
agreed to with customers.
The increase in contractual backlog during 2013 and 2012 was due to orders in excess of deliveries partially
reduced by cancellation of orders and changes in projected revenue escalation. The decrease in
unobligated backlog in 2013 was due to the reclassification from unobligated to contractual backlog related
to incremental funding of the existing multi-year contract for Commercial Airplanes’ share of the USAF
KC-46A Tanker contract.
Accounting Quantity The accounting quantity is our estimate of the quantity of airplanes that will be
produced for delivery under existing and anticipated contracts. The determination of the accounting quantity
is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and
anticipated contracts. It is a key determinant of the gross margins we recognize on sales of individual
airplanes throughout a program’s life. Estimation of each program’s accounting quantity takes into account
several factors that are indicative of the demand for that program, including firm orders, letters of intent
from prospective customers and market studies. We review our program accounting quantities quarterly.
The accounting quantity for each program may include units that have been delivered, undelivered units
under contract, and units anticipated to be under contract in the reasonable future (anticipated orders). In
developing total program estimates, all of these items within the accounting quantity must be considered.