Inventories at December 31 consisted of the following:
As a normal course of our Commercial Airplanes segment production process, our inventory may include a small quantity of airplanes that are completed but unsold. As of December 31, 2003 the value of completed but unsold aircraft in inventory was insignificant. As of December 31, 2002 these aircraft were valued at $246. Inventory balances included $233 subject to claims or other uncertainties primarily relating to the A-12 program as of December 31, 2003 and 2002.
Commercial aircraft inventory production costs incurred on inprocess and delivered units in excess of the estimated average cost of such units determined as described in Note 1 represent deferred production costs. As of December 31, 2003 and 2002, there were no significant excess deferred production costs or unamortized tooling costs not recoverable from existing firm orders for the 777 program. The deferred production costs and unamortized tooling included in the 777 program’s inventory at December 31 are summarized in the following table:
During the years ended December 31, 2003 and 2002, we purchased $746 and $706 of used aircraft. Used aircraft in inventory totaled $819 and $506 as of December 31, 2003 and 2002.
When we are unable to immediately sell used aircraft, we may place the aircraft on operating leases, or finance the sale of new aircraft with a short-term note receivable. The net change in the carrying amount of aircraft on operating lease, or sales financed under a note receivable, totaled $144 and $139 as of December 31, 2003 and 2002, and resulted in a decrease to Inventory and an offsetting increase to Customer and commercial financing. These changes in the Consolidated Statements of Financial Position are non-cash transactions and, therefore, are not reflected in the Consolidated Statements of Cash Flows.
The U.S. Government is currently reviewing the USAF proposal for the purchase/lease combination of 100 767 Tankers. If approved, delivery of the pre-modified aircraft from Commercial Airplanes to IDS is scheduled to begin in 2004. In order to meet the USAF’s proposed schedule for delivery of 100 767 Tankers, we have incurred significant development costs and inventoriable contract costs. These inventoriable costs are being deferred based on our assessment that it is probable the contract will be received. As of December 31, 2003, the Commercial aircraft programs and Long-term contracts in progress categories above contained $113 (Commercial Airplanes) and $35 (IDS), related to the USAF tanker inventoriable pre-contract costs.
Note 9 – Customer and Commercial Financing
Commercial equipment consists of executive aircraft, machine tools and production equipment, containers and marine equipment, chemical, oil and gas equipment and other equipment, which we believe has adequate collateral value.
Customer and commercial financing assets at December 31 consisted of the following:
Interest rates on fixed-rate notes ranged from 5.30% to 14.68%, and effective interest rates on variable-rate notes ranged from 1.55% to 15.11%.
The change in the valuation allowance for the years ended December 31, 2003 and 2002, consisted of the following:
During the years ended December 31, 2003 and 2002, $41 and $39 were recorded to increase the valuation allowance due to the normal growth of the customer financing portfolio. However, during the years ended December 31, 2003 and 2002, an additional pre-tax expense of $191 and $180 was recorded to increase the valuation allowance due to deteriorated airline credit ratings and depressed aircraft values based on our quarterly assessments of the adequacy of customer financing reserves.
The valuation allowance includes amounts recorded either as specific impairment allowances on receivables or general valuation allowances. As of December 31, 2003 and 2002, carrying amounts of impaired receivables were $1,706 and $1,367. Specific impairment allowances for losses of $141 and $50 were allocated to $535 and $146 of impaired receivables as of December 31, 2003 and 2002. Remaining allowance balances of $311 and $292 were recorded as general valuation allowances as of December 31, 2003 and 2002.
The average recorded investment in impaired receivables as of December 31, 2003 and 2002 was $1,758 and $277. Income recognition is generally suspended for receivables at the date when full recovery of income and principal becomes doubtful. Income recognition is resumed when receivables become contractually current and performance is demonstrated by the customer. The amount of interest income recognized on such receivables during the period in which they were considered impaired was $113, $24 and $7 for the years ended December 31, 2003, 2002 and 2001, of which $116, $17 and $4 was recognized on a cash basis, respectively.
During 2003, we recorded charges related to customer financing activities of $129 in earnings from operations, which includes impairment charges of $108 ($103 recorded by BCC) and $21 of charges related to the write-off of forward-starting interest rate swaps related to Hawaiian Holdings, Inc. During 2002, we recognized charges of $117 related to customer financing activities, of which $66 related to the return of 24 717s by AMR Corporation. During 2001, impairment charges were not significant.
The components of investment in sales-type/financing leases at December 31 were as follows:
Aircraft financing is collateralized by security in the related asset; historically, we have not experienced problems in accessing such collateral. However, the value of the collateral is closely tied to commercial airline performance and may be subject to reduced valuation with market decline. Our financing portfolio has a concentration of 757, 717, and MD-11 model aircraft that have valuation or market exposure. As of December 31, 2003 and 2002, sales-type/financing leases and operating leases attributable to aircraft financing included $1,378 and $1,175 attributable to 757 model aircraft ($511 and $356 accounted for as operating leases), $2,109 and $1,858 attributable to 717 model aircraft ($467 and $597 accounted for as operating leases) and $895 and $835 attributable to MD-11 model aircraft ($732 and $695 accounted for as operating leases).
Certain customers have filed for bankruptcy protection or requested lease or loan restructurings; these negotiations were in various stages as of December 31, 2003. During 2003, BCC completed a restructuring of United Airlines’ (United) aircraft loans and leases. United accounted for $1.2 billion (12% and 14%) of our aircraft financing portfolio at December 31, 2003 and 2002. During 2003, BCC agreed to restructure certain outstanding leases with American Trans Air Holdings Corp. (ATA) by extending terms and deferring a portion of its rent payments for a limited period of time. ATA accounted for $743 and $611 (7% and 7%) of our aircraft financing portfolio at December 31, 2003 and 2002. The terms of the restructured leases did not result in a charge to the valuation allowance. In addition to the customers discussed above, some other customers have requested a restructuring of their transactions. BCC has not reached agreement on any other restructuring requests that we believe would have a material adverse effect on our earnings, cash flows or financial position.
The operating lease aircraft category primarily includes new and used jet and commuter aircraft. As of December 31, 2003 and 2002, aircraft financing operating lease equipment included $270 and $786 of equipment available for re-lease. As of December 31, 2003 and 2002, commercial operating lease equipment included $46 and $23 of equipment available for re-lease. As of December 31, 2003, we had firm lease commitments for $122 of this equipment.
During 2002, AMR Corporation returned 24 717s to us that were recorded as operating leases. AirTran Holdings, Inc. (AirTran) signed an agreement with us in 2002 to lease the remaining 22 of the 717s. During 2002, two of the returned aircraft were placed out on operating lease. During 2003, the remaining aircraft were delivered and recorded as sales-type/financing leases upon delivery.
See Note 20 for a discussion regarding the creditworthiness of counterparties in customer and commercial financing arrangements.
Scheduled payments on customer and commercial financing are as follows:
Customer and commercial financing assets we leased under capital leases and have been subleased to others totaled $325 and $533 as of December 31, 2003 and 2002.
Note 10 – Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of the following:
Depreciation expense was $1,005, $1,094 and $1,140 for the years ended December 31, 2003, 2002 and 2001, respectively. Interest capitalized as construction-period property, plant and equipment costs amounted to $61, $71 and $72 for the years ended December 31, 2003, 2002 and 2001, respectively.
Rental expense for leased properties was $429, $519 and $318 for the years ended December 31, 2003, 2002 and 2001, respectively. These expenses, substantially all minimum rentals, are net of sublease income. Minimum rental payments under operating and capital leases with initial or remaining terms of one year or more aggregated $1,743 and $84 for the year ended December 31, 2003. Payments, net of sublease amounts, due during the next five years are as follows:
