Edgar Filing: BOEING CO

Document

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 March 31, 2019



¨		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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 April 17, 2019, there were 562,630,423 shares of common stock, $5.00 par value, issued and outstanding.

THE BOEING COMPANY

FORM 10-Q

For the Quarter Ended March 31, 2019

INDEX



Part I. Financial Information (Unaudited)		Page

Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Statements of Financial Position	3
	Condensed Consolidated Statements of Cash Flows	4
	Condensed Consolidated Statements of Equity	5
	Summary of Business Segment Data	6
	Note 1 - Basis of Presentation	7
	Note 2 - Acquisitions and Joint Ventures	8
	Note 3 - Earnings Per Share	8
	Note 4 - Income Taxes	10
	Note 5 - Inventories	10
	Note 6 - Contracts with Customers	10
	Note 7 - Customer Financing	11
	Note 8 - Investments	13
	Note 9 - Other Assets	13
	Note 10 - Leases	13
	Note 11 - Commitments & Contingencies	14
	Note 12 - Arrangements with Off-Balance Sheet Risk	18
	Note 13 - Debt	19
	Note 14 - Postretirement Plans	19
	Note 15 - Share-Based Compensation and Other Comprehensive Arrangements	19
	Note 16 - Shareholders' Equity	20
	Note 17 - Derivative Financial Instruments	21
	Note 18 - Fair Value Measurements	23
	Note 19 - Legal Proceedings	24
	Note 20 - Segment and Revenue Information	25
	Report of Independent Registered Public Accounting Firm	29

Forward-Looking Statements		30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Consolidated Results of Operations and Financial Condition	32
	Commercial Airplanes	37
	Defense, Space & Security	40
	Global Services	43
	Boeing Capital	43
	Liquidity and Capital Resources	44
	Off-Balance Sheet Arrangements	46
	Contingent Obligations	46
	Non-GAAP Measures	47
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	49

Part II. Other Information

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	52

Signature		53

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Part I. Financial Information

Item 1. Financial Statements

The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



(Dollars in millions, except per share data)	Three months ended March 31
	2019			2018
Sales of products		$20,225			$20,820
Sales of services	2,692			2,562
Total revenues	22,917			23,382

Cost of products	(16,238		)	(16,816		)
Cost of services	(2,389		)	(1,992		)
Boeing Capital interest expense	(18		)	(16		)
Total costs and expenses	(18,645		)	(18,824		)
	4,272			4,558
Income from operating investments, net	20			74
General and administrative expense	(1,184		)	(997		)
Research and development expense, net	(866		)	(764		)
Gain on dispositions, net	108			4
Earnings from operations	2,350			2,875
Other income, net	106			66
Interest and debt expense	(123		)	(102		)
Earnings before income taxes	2,333			2,839
Income tax expense	(184		)	(362		)
Net earnings		$2,149			$2,477

Basic earnings per share		$3.79			$4.19

Diluted earnings per share		$3.75			$4.15

Weighted average diluted shares (millions)	572.4			597.2

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)



(Dollars in millions)	Three months ended March 31
	2019			2018
Net earnings		$2,149			$2,477
Other comprehensive income, net of tax:
Currency translation adjustments	1			27
Unrealized gain on certain investments, net of tax of $0 and $0	1			2
Unrealized gain/(loss) on derivative instruments:
Unrealized gain/(loss) arising during period, net of tax of ($3) and $0	11			(2		)
Reclassification adjustment for (gains)/losses included in net earnings, net of tax of $1 and ($1)	(2		)	4
Total unrealized gain on derivative instruments, net of tax	9			2
Defined benefit pension plans and other postretirement benefits:
Amortization of prior service credits included in net periodic pension cost, net of tax of $6 and $10	(23		)	(36		)
Amortization of actuarial losses included in net periodic pension cost, net of tax of ($32) and ($60)	118			219
Pension and postretirement cost related to our equity method investments, net of tax of ($2) and $1	8			(3		)
Total defined benefit pension plans and other postretirement benefits, net of tax	103			180
Other comprehensive income, net of tax	114			211
Comprehensive income related to noncontrolling interests				(1		)
Comprehensive income, net of tax		$2,263			$2,687

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Financial Position

(Unaudited)



(Dollars in millions, except per share data)	March 31 2019			December 31 2018
Assets
Cash and cash equivalents		$6,836			$7,637
Short-term and other investments	893			927
Accounts receivable, net	3,669			3,879
Unbilled receivables, net	10,208			10,025
Current portion of customer financing, net	340			460
Inventories	65,369			62,567
Other current assets	2,194			2,335
Total current assets	89,509			87,830
Customer financing, net	2,236			2,418
Property, plant and equipment, net of accumulated depreciation of $18,821 and $18,568	12,594			12,645
Goodwill	7,967			7,840
Acquired intangible assets, net	3,498			3,429
Deferred income taxes	281			284
Investments	1,183			1,087
Other assets, net of accumulated amortization of $544 and $503	2,941			1,826
Total assets		$120,209			$117,359
Liabilities and equity
Accounts payable		$14,693			$12,916
Accrued liabilities	13,007			14,808
Advances and progress billings	52,534			50,676
Short-term debt and current portion of long-term debt	3,381			3,190
Total current liabilities	83,615			81,590
Deferred income taxes	1,656			1,736
Accrued retiree health care	4,535			4,584
Accrued pension plan liability, net	15,077			15,323
Other long-term liabilities	3,731			3,059
Long-term debt	11,363			10,657
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	6,573			6,768
Treasury stock, at cost - 448,849,765 and 444,619,970 shares	(54,630		)	(52,348		)
Retained earnings	58,090			55,941
Accumulated other comprehensive loss	(14,969		)	(15,083		)
Total shareholders’ equity	125			339
Noncontrolling interests	107			71
Total equity	232			410
Total liabilities and equity		$120,209			$117,359

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



(Dollars in millions)	Three months ended March 31
	2019			2018
Cash flows – operating activities:
Net earnings		$2,149			$2,477
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash items –
Share-based plans expense	47			45
Depreciation and amortization	521			501
Investment/asset impairment charges, net	34			20
Customer financing valuation adjustments	249			(1		)
Gain on dispositions, net	(108		)	(4		)
Other charges and credits, net	74			60
Changes in assets and liabilities –
Accounts receivable	206			92
Unbilled receivables	(183		)	(1,628		)
Advances and progress billings	1,857			1,917
Inventories	(2,725		)	283
Other current assets	164			(103		)
Accounts payable	1,624			591
Accrued liabilities	(919		)	(1,337		)
Income taxes receivable, payable and deferred	116			348
Other long-term liabilities	(281		)	(243		)
Pension and other postretirement plans	(188		)	(50		)
Customer financing, net	152			44
Other	(1		)	124
Net cash provided by operating activities	2,788			3,136
Cash flows – investing activities:
Property, plant and equipment additions	(501		)	(394		)
Property, plant and equipment reductions	110			27
Acquisitions, net of cash acquired	(276		)
Contributions to investments	(457		)	(249		)
Proceeds from investments	366			752
Purchase of distribution rights				(20		)
Other	(9		)	3
Net cash (used)/provided by investing activities	(767		)	119
Cash flows – financing activities:
New borrowings	5,237			2,687
Debt repayments	(4,374		)	(1,371		)
Contributions from noncontrolling interests	7			20
Stock options exercised	42			51
Employee taxes on certain share-based payment arrangements	(233		)	(226		)
Common shares repurchased	(2,341		)	(3,000		)
Dividends paid	(1,161		)	(1,006		)
Net cash used by financing activities	(2,823		)	(2,845		)
Effect of exchange rate changes on cash and cash equivalents, including restricted	1			8
Net (decrease) / increase in cash & cash equivalents, including restricted	(801		)	418
Cash & cash equivalents, including restricted, at beginning of year	7,813			8,887
Cash & cash equivalents, including restricted, at end of period	7,012			9,305
Less restricted cash & cash equivalents, included in Investments	176			70
Cash and cash equivalents at end of period		$6,836			$9,235

See Notes to the Condensed Consolidated Financial Statements.

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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 Interests			Total
Balance at January 1, 2018		$5,061		$6,804			($43,454	)		$49,618		($16,373	)		$57			$1,713
Net earnings									2,477					(1		)	2,476
Other comprehensive loss, net of tax of ($50)											211						211
Share-based compensation and related dividend equivalents			45														45
Treasury shares issued for stock options exercised, net			(25		)	75											50
Treasury shares issued for other share-based plans, net			(200		)	(17		)									(217		)
Common shares repurchased						(3,000		)									(3,000		)
Changes in noncontrolling interests														20			20
Balance at March 31, 2018		$5,061		$6,624			($46,396	)		$52,095		($16,162	)		$76			$1,298

Balance at January 1, 2019		$5,061		$6,768			($52,348	)		$55,941		($15,083	)		$71			$410
Net earnings									2,149								2,149
Other comprehensive income, net of tax of ($30)											114						114
Share-based compensation and related dividend equivalents			47														47
Treasury shares issued for stock options exercised, net			(36		)	77											41
Treasury shares issued for other share-based plans, net			(206		)	(18		)									(224		)
Common shares repurchased						(2,341		)									(2,341		)
Changes in noncontrolling interests														36			36
Balance at March 31, 2019		$5,061		$6,573			($54,630	)		$58,090		($14,969	)		$107			$232

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Summary of Business Segment Data

(Unaudited)



(Dollars in millions)	Three months ended March 31
	2019			2018
Revenues:
Commercial Airplanes		$11,822			$12,945
Defense, Space & Security	6,611			6,481
Global Services	4,619			3,950
Boeing Capital	66			65
Unallocated items, eliminations and other	(201		)	(59		)
Total revenues		$22,917			$23,382
Earnings from operations:
Commercial Airplanes		$1,173			$1,412
Defense, Space & Security	847			757
Global Services	653			647
Boeing Capital	20			20
Segment operating profit	2,693			2,836
Unallocated items, eliminations and other	(707		)	(326		)
FAS/CAS service cost adjustment	364			365
Earnings from operations	2,350			2,875
Other income, net	106			66
Interest and debt expense	(123		)	(102		)
Earnings before income taxes	2,333			2,839
Income tax expense	(184		)	(362		)
Net earnings		$2,149			$2,477

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 20 for further segment results.

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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 March 31, 2019 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 2018 Annual Report on Form 10-K. Certain amounts in prior periods have been adjusted to conform with the current year presentation.

Standards Issued and Implemented

In the first quarter of 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and recognized on our Condensed Consolidated Statement of Financial Position $1,064 of lease liabilities with corresponding right-of-use assets for operating leases. Our accounting for finance leases and lessor contracts remains substantially unchanged. The standard has no impact to cash provided or used by operating, investing, or financing activities on our Condensed Consolidated Statements of Cash Flows. As permitted under the standard, we elected prospective application of the new guidance and prior periods continue to be presented in accordance with Topic 840. Refer to our 2018 Annual Report on Form 10-K for disclosures required by Topic 840. We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

In the first quarter of 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815), using the modified retrospective method. The standard refines and simplifies hedge accounting requirements for both financial and commodity risks. The impact of the adoption was not material. See Note 17 for additional disclosures.

Significant Accounting Policies - Update

Our significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2018. Our updated significant accounting policies described below reflect the impact of adopting Topic 842.

Leases We determine if an arrangement is, or contains, a lease at the inception date. Operating leases are included in Other assets, with the related liabilities included in Accrued liabilities and Other long-term liabilities. Assets under finance leases are included in Property, plant and equipment, net, with the related liabilities included in Short-term debt and current portion of long-term debt and Long-term debt on the Condensed Consolidated Statements of Financial Position.

Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the present value of lease payments. Variable components of the lease payments such as fair market value adjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components which are accounted for as a single lease component.

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Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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 long-term contract’s percentage-of-completion. When the current estimates of total sales and costs for a long-term contract indicate a loss, a provision for the entire reach-forward loss on the long-term contract is recognized.

Net cumulative catch-up adjustments to prior years' revenue and earnings, including certain reach-forward losses, across all long-term contracts were as follows:



(In millions - except per share amounts)	Three months ended March 31
	2019		2018
Increase to Revenue		$160		$117
Increase to Earnings from Operations		$147		$78
Increase to Diluted EPS		$0.24		$0.11

Note 2 – Acquisitions and Joint Ventures

Strategic Partnership with Embraer

During the first quarter of 2019, we entered into definitive transaction documents with respect to a strategic partnership with Embraer S.A. (Embraer). The partnership contemplates that the parties enter into a joint venture comprising the commercial aircraft and services operations of Embraer, in which Boeing will acquire an 80 percent ownership stake for $4,200, as well as a joint venture to promote and develop new markets for the multi-mission medium airlift KC-390, in which Boeing will hold a 49 percent ownership stake. Embraer shareholders approved the transaction, which remains subject to regulatory approvals and other customary closing conditions. Assuming approvals are received in a timely manner, the transaction is expected to close by the end of 2019. If the transaction is not completed due to failure to obtain antitrust approvals, we would be required to pay a termination fee of $100.

Note 3 – Earnings Per Share

Basic and diluted earnings per share are computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares and participating securities. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Participating securities and common shares have equal rights to undistributed earnings.

Basic earnings per share is calculated by taking net earnings, less earnings available to participating securities, divided by the basic weighted average common shares outstanding.

Diluted earnings per share is calculated by taking net earnings, less earnings available to participating securities, divided by the diluted weighted average common shares outstanding.

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The elements used in the computation of basic and diluted earnings per share were as follows:



(In millions - except per share amounts)	Three months ended March 31
	2019		2018
Net earnings		$2,149		$2,477
Less: earnings available to participating securities	2		3
Net earnings available to common shareholders		$2,147		$2,474
Basic
Basic weighted average shares outstanding	567.7		590.8
Less: participating securities	0.6		0.7
Basic weighted average common shares outstanding	567.1		590.1
Diluted
Basic weighted average shares outstanding	567.7		590.8
Dilutive potential common shares⁽¹⁾	4.7		6.4
Diluted weighted average shares outstanding	572.4		597.2
Less: participating securities	0.6		0.7
Diluted weighted average common shares outstanding	571.8		596.5
Net earnings per share:
Basic		$3.79		$4.19
Diluted	3.75		4.15


⁽¹⁾	Diluted earnings per share includes any dilutive impact of stock options, restricted stock units, performance-based restricted stock units and performance awards.

The following table includes the number of shares that may be dilutive potential common shares in the future. These shares were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance condition was not met.



(Shares in millions)	Three months ended March 31
	2019	2018
Performance awards	2.6	2.9
Performance-based restricted stock units	0.5	0.5

Note 4 – Income Taxes

Our effective income tax rates were 7.9% and 12.8% for the three months ended March 31, 2019 and 2018. The effective tax rate for the three months ended March 31, 2019 was lower than the comparable prior period primarily due to a higher benefit attributable to applying a lower U.S. tax rate to intangible income derived from serving non-U.S. markets and higher excess tax benefits related to share-based payments.

Federal income tax audits have been settled for all years prior to 2015. The Internal Revenue Service (IRS) began the 2015-2017 federal tax audit in the first quarter of 2019. We are also subject to examination in major state and international jurisdictions for the 2001-2017 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next 12 months unrecognized tax benefits related to state matters under audit may decrease by up to $465 based on current estimates.

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Note 5 – Inventories

Inventories consisted of the following:



	March 31 2019		December 31 2018
Long-term contracts in progress		$1,159		$2,129
Commercial aircraft programs	55,490		52,753
Commercial spare parts, used aircraft, general stock materials and other	8,720		7,685
Total		$65,369		$62,567

Long-Term Contracts in Progress

Long-term contracts in progress includes 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. The inventory balance was $193 and $227 at March 31, 2019 and December 31, 2018. See indemnifications to ULA in Note 12.

Included in inventories are capitalized precontract costs of $661 at March 31, 2019 and $644 at December 31, 2018 primarily related to the KC-46A Tanker. See Note 11.

Commercial Aircraft Programs

At March 31, 2019 and December 31, 2018, commercial aircraft programs inventory included the following amounts related to the 787 program: $27,749 and $27,852 of work in process (including deferred production costs of $22,029 and $22,967), $2,379 and $2,453 of supplier advances, and $2,532 and $2,638 of unamortized tooling and other non-recurring costs. At March 31, 2019, $16,656 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 $7,905 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.

At March 31, 2019 and December 31, 2018, commercial aircraft programs inventory included $105 and $116 of unamortized tooling costs related to the 747 program. At March 31, 2019, $100 of unamortized tooling costs are expected to be recovered from units included in the program accounting quantity that have firm orders or commitments. At March 31, 2019, the program accounting quantity includes one already completed aircraft which is being remarketed.

Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling $2,724 and $2,844 at March 31, 2019 and December 31, 2018.

Note 6 – Contracts with Customers

Unbilled receivables increased from $10,025 at December 31, 2018 to $10,208 at March 31, 2019, primarily driven by revenue recognized at BDS and BGS in excess of billings.

Advances and progress billings increased from $50,676 at December 31, 2018 to $52,534 at March 31, 2019, primarily driven by advances on orders received in excess of revenue recognized at BCA, BDS and BGS.

Revenues recognized during the three months ended March 31, 2019 and 2018 from amounts recorded as Advances and progress billings at the beginning of each year were $5,897 and $6,453.

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Note 7 – Customer Financing

Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:



	March 31 2019			December 31 2018
Financing receivables:
Investment in sales-type/finance leases		$1,096			$1,125
Notes	609			730
Total financing receivables	1,705			1,855
Operating lease equipment, at cost, less accumulated depreciation of $220 and $203	879			782
Operative lease incentive				250
Gross customer financing	2,584			2,887
Less allowance for losses on receivables	(8		)	(9		)
Total		$2,576			$2,878

We acquire aircraft to be leased to customers through trades, lease returns, purchases in the secondary market, and new aircraft transferred from our Commercial Airplanes segment. Leasing arrangements typically range in terms from 1 to 12 years and may include options to extend or terminate the lease. Certain leases include provisions to allow the lessee to purchase the underlying aircraft at a specified price. A minority of leases contain variable lease payments based on actual aircraft usage and are paid in arrears.

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 March 31, 2019 and December 31, 2018, we individually evaluated for impairment customer financing receivables of $406 and $409, of which $395 and $398 were determined to be impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceeded the carrying values of the receivables.

The adequacy of the allowance for losses 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	March 31 2019		December 31 2018
BBB		$638		$883
BB	423		430
B	241		135
CCC	403		407
Total carrying value of financing receivables		$1,705		$1,855

At March 31, 2019, our allowance related to receivables with ratings of B, BB and BBB. We applied default rates that averaged 21.7%, 6.2% and 0.6%, respectively, to the exposure associated with those receivables.

Customer Financing Exposure

Customer financing is collateralized by security in the related asset. The value of the collateral is closely tied to commercial airline performance and overall market conditions and may be subject to reduced valuation with market decline. Declines in collateral values could result in asset impairments, reduced finance lease income, and an increase in the allowance for losses. Our customer financing collateral is concentrated in

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out-of-production aircraft and 747-8 aircraft. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft.

The majority of customer financing carrying values are concentrated in the following aircraft models:



	March 31 2019		December 31 2018
717 Aircraft ($201 and $204 accounted for as operating leases)		$882		$918
747-8 Aircraft ($131 and $132 accounted for as operating leases)	475		477
777 Aircraft ($169 and $60 accounted for as operating leases)	288		68
737 Aircraft ($259 and $263 accounted for as operating leases)	285		290
MD-80 Aircraft (accounted for as sales-type finance leases)	207		204
757 Aircraft ($24 and $24 accounted for as operating leases)	195		200
747-400 Aircraft ($42 and $45 accounted for as operating leases)	111		116

As part of selected lease transactions, Boeing may provide incentives to commercial customers. At December 31, 2018, Customer Financing included $250 of lease incentives with one customer experiencing liquidity issues. At March 31, 2019, we concluded that these lease incentives were impaired and recorded a charge of $250.

Lease income recorded in Revenue on the Condensed Consolidated Statements of Operations included $16 from sales-type/finance leases and $36 from operating leases.

As of March 31, 2019, undiscounted cash flows for sales-type/finance and operating leases over the next five years and thereafter are as follows:



	Sales-type/finance leases			Operating leases
Year 1		$203			$130
Year 2	159			106
Year 3	115			91
Year 4	106			74
Year 5	110			55
Thereafter	167			77
Total lease receipts	860			533
Less imputed interest	(189		)
Estimated unguaranteed residual values	425
Total		$1,096			$533

At March 31, 2019 and December 31, 2018 unguaranteed residual values remained unchanged. Guaranteed residual values at March 31, 2019 were not significant.

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Note 8 – Investments

Our investments, which are recorded in Short-term and other investments or Investments, consisted of the following:



	March 31 2019		December 31 2018
Equity method investments ⁽¹⁾		$1,143		$1,048
Time deposits	260		255
Available for sale debt instruments	451		491
Equity and other investments	46		44
Restricted cash & cash equivalents⁽²⁾	176		176
Total		$2,076		$2,014


⁽¹⁾	Dividends received were $63 and $88 for the three months ended March 31, 2019 and 2018.


⁽²⁾	Reflects amounts restricted in support of our workers’ compensation programs, employee benefit programs, and insurance premiums.

Note 9 – Other Assets

Sea Launch

At March 31, 2019 and December 31, 2018, Other assets included $244 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. At March 31, 2019, the net amounts owed to Boeing by each of the partners were as follows: S.P. Koroley Rocket and Space Corporation Energia of Russia (RSC Energia) – $111, PO Yuzhnoye Mashinostroitelny Zavod of Ukraine – $89 and KB Yuzhnoye of Ukraine – $44.

In 2013, we filed an action in the United States District Court for the Central District of California seeking reimbursement from the other Sea Launch partners. In 2016, the United States District Court for the Central District of California issued a judgment in favor of Boeing. Later that year, we reached an agreement which we believe will enable us to recover the outstanding receivable balance from RSC Energia over the next several years. We continue to pursue collection efforts against the former Ukrainian partners in connection with the court judgment. We continue to 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 from RSC Energia and the Ukrainian Sea Launch partners, we could incur additional charges.

Note 10 – Leases

Our operating lease assets primarily represent manufacturing and research and development facilities, warehouses, and offices. Our finance leases primarily represent computer equipment and are not significant. Total operating lease expense was $84 for the three months ended March 31, 2019, of which $14 was attributable to variable lease expenses.

For the three months ended March 31, 2019 cash payments against operating lease liabilities totaled $70 and non-cash transactions totaled $25 to recognize operating assets and liabilities for new leases.

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Supplemental Condensed Consolidated Statement of Financial Position information related to leases was as follows:



	March 31 2019
Operating leases:
Operating lease right-of-use assets		$1,008

Current portion of lease liabilities	241
Non-current portion of lease liabilities	823
Total operating lease liabilities		$1,064

Weighted average remaining lease term (years)	9
Weighted average discount rate	3.05		%

Maturities of lease liabilities were as follows:



	Operating leases
Year 1		$269
Year 2	214
Year 3	167
Year 4	138
Year 5	87
Thereafter	407
Total lease payments	1,282
Less imputed interest	(218		)
Total		$1,064

As of March 31, 2019, we have entered into operating leases that have not yet commenced of $220, primarily related to research and development and manufacturing facilities. These leases will commence between 2019 and 2020 with lease terms of 3 years to 24 years.

Note 11 – Commitments and Contingencies

737 MAX Grounding

On March 13, 2019, the Federal Aviation Administration (FAA) issued an order to suspend operations of all 737 MAX aircraft in the U.S. and by U.S. aircraft operators following two recent fatal 737 MAX accidents. Non-U.S. civil aviation authorities have issued directives to the same effect. We are working closely with the relevant government authorities to support both accident investigations. We are also fully cooperating with other U.S. government investigations related to the accidents. While production continues on the 737 MAX, deliveries have been suspended until clearance is granted by the appropriate regulatory authorities.

We have been developing a software update to the Maneuvering Characteristics Augmentation System (MCAS) on the 737 MAX, together with an associated pilot training and supplementary education program. We continue to work with the FAA and other regulatory agencies worldwide to develop and certify the software update and training program. Charges recognized during the first quarter of 2019 related to the MCAS software update and related pilot training were immaterial.

Prior to the grounding, Boeing had delivered 387 737 MAX aircraft of which 57 were delivered in the first quarter of 2019. On April 5, 2019, we announced plans to reduce the production rate from 52 aircraft per month to 42 per month effective April 15, 2019. The resulting impacts, which were reflected in the first quarter, increased costs to produce aircraft included in the current accounting quantity by $1,016 and reduced 737

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program and overall BCA segment margins. We will continue to evaluate production rates depending on the timing and conditions surrounding a return to service. Prior to the grounding, we expected MAX deliveries to approximate 90 percent of total 737 deliveries in 2019. In addition to the grounding, the timing of MAX deliveries during the quarter was adversely affected by delays in the supply chain. We may face additional costs, delays in return to service, and/or a prolonged reduction in the production rate.

The grounding has reduced revenues, operating earnings and cash flows during the first quarter of 2019 and will continue to adversely affect our results until deliveries resume and production rates increase. We may also experience claims or assertions from customers and/or suppliers in connection with the grounding. We are unable at this time to reasonably estimate potential future financial impacts or a range of loss, if any, because any such estimate would depend on many factors, including the ongoing status of the accident investigations and the timing and conditions surrounding a return to service. Any such impacts could have a material adverse effect on our financial position, results of operations, or cash flows.

Environmental

The following table summarizes environmental remediation activity during the three months ended March 31, 2019 and 2018.



	2019			2018
Beginning balance – January 1		$555			$524
Reductions for payments made	(11		)	(7		)
Changes in estimates	4			22
Ending balance – March 31		$548			$539

The liabilities recorded represent our best estimate or the low end of a range of reasonably possible costs expected to be incurred to remediate sites, including operation and maintenance over periods of up to 30 years. It is reasonably possible that we may incur charges that exceed these recorded amounts because of regulatory agency orders and directives, changes in laws and/or regulations, higher than expected costs and/or the discovery of new or additional contamination. As part of our estimating process, we develop a range of reasonably possible alternate scenarios that includes the high end of a range of reasonably possible cost estimates for all remediation sites for which we have sufficient information based on our experience and existing laws and regulations. There are some potential remediation obligations where the costs of remediation cannot be reasonably estimated. At March 31, 2019 and December 31, 2018, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $1,090 and $796.

Product Warranties

The following table summarizes product warranty activity recorded during the three months ended March 31, 2019 and 2018.



	2019			2018
Beginning balance – January 1		$1,127			$1,211
Additions for current year deliveries	50			70
Reductions for payments made	(8		)	(32		)
Changes in estimates	(60		)	(101		)
Ending balance – March 31		$1,109			$1,148

Commercial Aircraft Commitments

In conjunction with signing definitive agreements for the sale of new aircraft (Sale Aircraft), we have entered into trade-in commitments with certain customers that give them the right to trade in used aircraft at a specified price upon the purchase of Sale Aircraft. The probability that trade-in commitments will be exercised is

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

Trade-in commitment agreements at March 31, 2019 have expiration dates from 2019 through 2026. At March 31, 2019, and December 31, 2018 total contractual trade-in commitments were $1,504 and $1,519. As of March 31, 2019 and December 31, 2018, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $511 and $522 and the fair value of the related trade-in aircraft was $477 and $485.

Financing Commitments

Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, and refinancing of delivered aircraft, totaled $18,265 and $19,462 as of March 31, 2019 and December 31, 2018. The estimated earliest potential funding dates for these commitments as of March 31, 2019 are as follows:



	Total
April through December 2019		$981
2020	3,429
2021	3,087
2022	1,784
2023	3,261
Thereafter	5,723
		$18,265

As of March 31, 2019, $18,012 of these financing commitments related to customers we believe have less than investment-grade credit. We have concluded that no reserve for future potential losses is required for these financing commitments based upon the terms, such as collateralization and interest rates, under which funding would be provided.

Standby Letters of Credit and Surety Bonds

We have entered into standby letters of credit and surety bonds with financial institutions primarily relating to the guarantee of our future performance on certain contracts. Contingent liabilities on outstanding letters of credit agreements and surety bonds aggregated approximately $3,828 and $3,761 as of March 31, 2019 and December 31, 2018.

United States Government Defense Environment Overview

The Bipartisan Budget Act of 2018, passed in February 2018, raised the 2011 Budget Control Act spending caps for fiscal years 2018 and 2019 (FY18 and FY19). The consolidated spending bills signed into law in September 2018 provide defense funding for FY19, in compliance with the revised caps. These bills also provided FY19 appropriations for most of the federal government. The Consolidated Appropriations Act, enacted in February 2019, provided FY19 appropriations for the remaining parts of the federal government, including the National Aeronautics and Space Administration (NASA).

There continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government agencies, including NASA. The 2011 Budget Control Act continues to mandate spending caps on U.S. government discretionary spending for fiscal years 2020 and 2021 (FY20 and FY21). In March 2019, the Administration submitted its FY20 budget request, which calls for funding for the base national defense budget at the spending caps specified for FY20. The Administration also requested that an additional

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$98 billion in base national defense requirements be appropriated outside of the base funding request that is subject to the spending caps, in order to avoid raising the caps. The lower budget caps will take effect again in FY20 and FY21 unless Congress acts to raise or appropriate funding outside of the spending caps or to repeal or suspend the law. As a result, continued budget uncertainty and the risk of future sequestration cuts remain. Future budget cuts or investment priority changes could result in reductions, cancellations and/or delays of existing contracts or programs. Any of these impacts could have a material effect on the results of the Company’s operations, financial position and/or cash flows.

BDS Fixed-Price Development Contracts

Fixed-price development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work. BDS fixed-price contracts with significant development work include Commercial Crew, USAF KC-46A Tanker, T-X Trainer, VC-25B Presidential Aircraft, MQ-25 Stingray, 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 result in lower margins or material charges for reach-forward losses. For example, we have recorded reach-forward losses on the KC-46A Tanker and we continue to have risk for further losses if we experience further production, technical or quality issues, and delays in flight testing, certification and/or delivery. In addition, in 2018, in connection with winning the T-X Trainer and MQ-25 Stingray competitions, we recorded a loss of $400 associated with options for 346 T-X Trainer aircraft and a loss of $291 related to the MQ-25 Stingray Engineering, Manufacturing and Development (EMD) contract. Moreover, our fixed-price development programs remain subject to additional reach-forward losses if we experience further technical or quality issues, schedule delays, or increased costs.

KC-46A Tanker

In 2011, we were awarded a contract from the U.S. Air Force (USAF) to design, develop, manufacture and deliver four next generation aerial refueling tankers. This EMD contract is a fixed-price incentive fee contract valued at $4.9 billion and involves highly complex designs and systems integration. In 2016, the USAF authorized two low rate initial production (LRIP) lots for 7 and 12 aircraft valued at $2.8 billion. In January 2017, the USAF authorized an additional LRIP lot for 15 aircraft valued at $2.1 billion. On September 10, 2018, the USAF authorized an additional 18 aircraft valued at $2.9 billion. In January 2019, we delivered the first KC-46A Tanker to the USAF.

At March 31, 2019, we had approximately $383 of capitalized precontract costs and $784 of potential termination liabilities to suppliers.

Recoverable Costs on Government Contracts

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

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Note 12 – 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
	March 31 2019		December 31 2018		March 31 2019		December 31 2018		March 31 2019	December 31 2018
Contingent repurchase commitments		$1,642		$1,685		$1,642		$1,685
Indemnifications to ULA:
Contributed Delta program launch inventory	35		52
Other Delta contracts	176		176
Credit guarantees	106		106		46		51		30	16

Contingent Repurchase Commitments 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. See Note 5. ULA has yet to consume $35 of contributed inventory.

Potential payments for Other Delta contracts include $85 related to deferred support costs and $91 related to deferred production costs. 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. ULA and Boeing believe that all costs are recoverable and 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. In 2012, Boeing and ULA, through its subsidiary United Launch Services, filed a suit in the Court of Federal Claims seeking recovery of the deferred support and production costs from the U.S. government, which subsequently asserted a counterclaim for credits that it alleges were offset by deferred support cost invoices. We believe that the U.S. government’s counterclaim is without merit. The discovery phase of the litigation completed in 2017. The court has scheduled a final pre-trial conference on or after November 21, 2019. 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.

Other Indemnifications In conjunction with our sales of Electron Dynamic Devices, Inc. and Rocketdyne Propulsion and Power businesses and our BCA facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma, we agreed to indemnify, for an indefinite period, the buyers for costs relating to pre-closing environmental conditions and certain other items. We are unable to assess the potential number of future claims that may be asserted under these indemnifications, nor the amounts thereof (if any). As a result, we cannot estimate the maximum potential amount of future payments under these indemnities and therefore, no liability has been recorded. To the extent that claims have been made under these indemnities and/or are probable and reasonably estimable, liabilities associated with these indemnities are included in the environmental liability disclosure in Note 11.

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Credit Guarantees We have issued credit guarantees where we are obligated to make payments to a guaranteed party in the event that the original lessee or debtor does not make payments or perform certain specified services. Generally, these guarantees have been extended on behalf of guaranteed parties with less than investment-grade credit and are collateralized by certain assets. Current outstanding credit guarantees expire through 2036.

Note 13 – Debt

On February 15, 2019, we issued $1,500 of fixed rate senior notes consisting of $400 due March 1, 2024 that bear an annual interest rate of 2.8%, $400 due March 1, 2029 that bear an annual interest rate of 3.20%, $400 due March 1, 2039 that bear an annual interest rate of 3.5%, and $300 due March 1, 2059 that bear an annual interest rate of 3.825%. The notes are unsecured senior obligations and rank equally in right of payment with our existing and future unsecured and unsubordinated indebtedness. The net proceeds of the issuance totaled $1,451, after deducting underwriting discounts, commissions and offering expenses.

Note 14 – Postretirement Plans

The components of net periodic benefit cost/(income) for the three months ended March 31 were as follows:



	Pension		Postretirement
Pension Plans	2019	2018	2019