10-Q 1 a201803mar3110-q.htm 10-Q Document


boeingblacksmall300a03.jpg
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, 2018
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, 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
¨
(Do not check if a smaller reporting company)
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 18, 2018, there were 582,580,973 shares of common stock, $5.00 par value, issued and outstanding.



THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended March 31, 2018
INDEX
Part I. Financial Information (Unaudited)
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 

Item 3.
 
 
 
Item 4.
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 



Part I. Financial Information
Item 1. Financial Statements
The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except per share data)
Three months ended March 31
  
2018

 
2017

Sales of products

$20,820

 

$19,367

Sales of services
2,562

 
2,594

Total revenues
23,382

 
21,961

 
 
 


Cost of products
(16,816
)
 
(16,062
)
Cost of services
(1,992
)
 
(1,998
)
Boeing Capital interest expense
(16
)
 
(13
)
Total costs and expenses
(18,824
)
 
(18,073
)
 
4,558

 
3,888

Income from operating investments, net
74

 
81

General and administrative expense
(997
)
 
(929
)
Research and development expense, net
(764
)
 
(836
)
Gain on dispositions, net
4

 
2

Earnings from operations
2,875

 
2,206

Other income, net
66

 
26

Interest and debt expense
(102
)
 
(87
)
Earnings before income taxes
2,839

 
2,145

Income tax expense
(362
)
 
(566
)
Net earnings

$2,477

 

$1,579

 
 
 
 
Basic earnings per share

$4.19

 

$2.57

 
 
 
 
Diluted earnings per share

$4.15

 

$2.54

 
 
 
 
Cash dividends paid per share

$1.71

 

$1.42

 
 
 
 
Weighted average diluted shares (millions)
597.2

 
621.2

See Notes to the Condensed Consolidated Financial Statements.

1


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
Three months ended March 31
 
2018

 
2017

Net earnings

$2,477

 

$1,579

Other comprehensive income, net of tax:
 
 
 
Currency translation adjustments
27

 
34

Unrealized gain on certain investments, net of tax of $0 and ($1)
2

 
1

Unrealized gain on derivative instruments:
 
 
 
Unrealized (loss)/gain arising during period, net of tax of $0 and ($28)
(2
)
 
52

Reclassification adjustment for losses included in net earnings, net of tax of $(1) and ($9)
4

 
16

Total unrealized gain on derivative instruments, net of tax
2

 
68

Defined benefit pension plans and other postretirement benefits:
 
 
 
Amortization of prior service credits included in net periodic pension cost, net of tax of $10 and $16
(36
)
 
(28
)
Net actuarial gain arising during the period, net of tax of $0 and $(1)

 
3

Amortization of actuarial losses included in net periodic pension cost, net of tax of ($60) and ($72)
219

 
132

Pension and postretirement cost related to our equity method investments, net of tax of $1 and $1
(3
)
 
(2
)
Total defined benefit pension plans and other postretirement benefits, net of tax
180

 
105

Other comprehensive income, net of tax
211

 
208

Comprehensive income related to noncontrolling interests
(1
)
 

Comprehensive income, net of tax

$2,687

 

$1,787

See Notes to the Condensed Consolidated Financial Statements.

2


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Financial Position
(Unaudited)
(Dollars in millions, except per share data)
March 31
2018

 
December 31
2017

Assets
 
 
 
Cash and cash equivalents

$9,235

 

$8,813

Short-term and other investments
656

 
1,179

Accounts receivable, net
2,802

 
2,894

Unbilled receivables, net
9,822

 
8,194

Current portion of customer financing, net
244

 
309

Inventories
61,303

 
61,388

Other current assets
2,481

 
2,417

Total current assets
86,543

 
85,194

Customer financing, net
2,753

 
2,756

Property, plant and equipment, net of accumulated depreciation of $17,894 and $17,641
12,628

 
12,672

Goodwill
5,558

 
5,559

Acquired intangible assets, net
2,525

 
2,573

Deferred income taxes
325

 
321

Investments
1,248

 
1,260

Other assets, net of accumulated amortization of $514 and $482
1,969

 
2,027

Total assets

$113,549

 

$112,362

Liabilities and equity
 
 
 
Accounts payable

$12,613

 

$12,202

Accrued liabilities
10,983

 
13,069

Advances and progress billings
49,955

 
48,042

Short-term debt and current portion of long-term debt
1,981

 
1,335

Total current liabilities
75,532

 
74,648

Deferred income taxes
2,001

 
2,188

Accrued retiree health care
5,494

 
5,545

Accrued pension plan liability, net
16,279

 
16,471

Other long-term liabilities
2,474

 
2,015

Long-term debt
10,471

 
9,782

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
6,624

 
6,804

Treasury stock, at cost - 428,038,987 and 421,222,326 shares
(46,396
)
 
(43,454
)
Retained earnings
52,095

 
49,618

Accumulated other comprehensive loss
(16,162
)
 
(16,373
)
Total shareholders’ equity
1,222

 
1,656

Noncontrolling interests
76

 
57

Total equity
1,298

 
1,713

Total liabilities and equity

$113,549

 

$112,362

See Notes to the Condensed Consolidated Financial Statements.

3


The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Three months ended March 31
  
2018


2017

Cash flows – operating activities:
 

 
Net earnings

$2,477



$1,579

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

 
Non-cash items – 
 

 
Share-based plans expense
45


50

Depreciation and amortization
501


468

Investment/asset impairment charges, net
20


23

Customer financing valuation (benefit)/expense
(1
)

7

Gain on dispositions, net
(4
)
 
(2
)
Other charges and credits, net
60


58

Changes in assets and liabilities – 
 

 
Accounts receivable
92


(264
)
Unbilled receivables
(1,628
)
 
(568
)
Advances and progress billings
1,917

 
1,375

Inventories
283


(1,491
)
Other current assets
(103
)
 
(117
)
Accounts payable
591


616

Accrued liabilities
(1,337
)

(282
)
Income taxes receivable, payable and deferred
348


552

Other long-term liabilities
(243
)

(72
)
Pension and other postretirement plans
(50
)

10

Customer financing, net
44


231

Other
124


(75
)
Net cash provided by operating activities
3,136


2,098

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(394
)
 
(466
)
Property, plant and equipment reductions
27

 
9

Contributions to investments
(249
)
 
(605
)
Proceeds from investments
752

 
803

Purchase of distribution rights
(20
)
 
 
Other
3

 
(1
)
Net cash provided/(used) by investing activities
119

 
(260
)
Cash flows – financing activities:
 
 
 
New borrowings
2,687

 
872

Debt repayments
(1,371
)
 
(34
)
Contributions from noncontrolling interests
20

 


Stock options exercised
51

 
174

Employee taxes on certain share-based payment arrangements
(226
)
 
(107
)
Common shares repurchased
(3,000
)
 
(2,500
)
Dividends paid
(1,006
)
 
(868
)
Net cash used by financing activities
(2,845
)
 
(2,463
)
Effect of exchange rate changes on cash and cash equivalents, including restricted
8

 
20

Net increase/(decrease) in cash & cash equivalents, including restricted
418

 
(605
)
Cash & cash equivalents, including restricted, at beginning of year
8,887

 
8,869

Cash & cash equivalents, including restricted, at end of period
9,305

 
8,264

Less restricted cash & cash equivalents, included in Investments
70

 
74

Cash and cash equivalents at end of period

$9,235

 

$8,190

See Notes to the Condensed Consolidated Financial Statements.

4


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, 2017

$5,061


$4,762


($36,097
)

$41,754


($13,623
)

$60


$1,917

Net earnings
 
 
 
1,579

 


1,579

Other comprehensive loss, net of tax of $(94)
 
 
 
 
208

 
208

Share-based compensation and related dividend equivalents
 
48

 


 
 
48

Treasury shares issued for stock options exercised, net
 
(42
)
215

 
 
 
173

Treasury shares issued for other share-based plans, net
 
(164
)
62

 
 
 
(102
)
Common shares repurchased
 
 
(2,500
)
 
 
 
(2,500
)
Balance at March 31, 2017

$5,061


$4,604


($38,320
)

$43,333


($13,415
)

$60


$1,323

 
 
 
 
 
 
 
 
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 income, 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

See Notes to the Condensed Consolidated Financial Statements.

5


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

2018

 
2017

Revenues:
 
 
 
Commercial Airplanes

$13,652

 

$12,953

Defense, Space & Security
5,762

 
5,112

Global Services
3,943

 
3,653

Boeing Capital
65

 
92

Unallocated items, eliminations and other
(40
)
 
151

Total revenues

$23,382

 

$21,961

Earnings from operations:
 
 
 
Commercial Airplanes

$1,508

 

$870

Defense, Space & Security
649

 
549

Global Services
644

 
623

Boeing Capital
20

 
39

Segment operating profit
2,821

 
2,081

Unallocated items, eliminations and other
(311
)
 
(221
)
FAS/CAS service cost adjustment
365

 
346

Earnings from operations
2,875

 
2,206

Other income, net
66

 
26

Interest and debt expense
(102
)
 
(87
)
Earnings before income taxes
2,839

 
2,145

Income tax expense
(362
)
 
(566
)
Net earnings

$2,477

 

$1,579

This information is an integral part of the Notes to the Condensed Consolidated Financial Statements. See Note 19 for further segment results.

6


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, 2018 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 2017 Annual Report on Form 10-K. Prior period amounts have been adjusted to conform with the current year presentation.
Standards Issued and Not Yet Implemented
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We plan to adopt the new lease standard in 2019 and do not expect it to have a material effect on our financial position, results of operations or cash flows.
Standards Issued and Implemented
In the first quarter of 2018, we adopted the following Accounting Standards Updates (ASU): ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2017-07,Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost; ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The impact of the adoption of these standards to our unaudited Consolidated Financial Statements is presented in Note 2 and the additional disclosures are shown in Notes 6 and 19.
ASU 2014-09 In the first quarter of 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective method. Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services.
Most of our defense contracts at our Defense, Space & Security (BDS) and Global Services (BGS) segments and certain military derivative aircraft contracts at our Commercial Airplanes (BCA) segment now recognize revenue under the new standard as costs are incurred. Under previous U.S. generally accepted accounting principles (GAAP), revenue was generally recognized when deliveries were made, performance milestones were attained, or as costs were incurred. The new standard accelerates the timing of when the revenue is recognized, however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition or the use of program accounting for commercial airplane contracts in our BCA business. We continue to recognize revenue for these contracts at the point in time when the customer accepts delivery of the airplane. The adoption resulted in a cumulative adjustment to increase Retained earnings by $901 at January 1, 2016 and an increase of $128 to Net earnings for the first quarter of 2017.
ASU 2017-07 In the first quarter of 2018, we adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

7


The standard requires non-service cost components of net periodic benefit cost to be presented in non-operating earnings using a retrospective transition method. We applied a practical expedient as the estimation basis for the reclassification of prior period non-service cost components of net periodic benefit cost from Earnings from operations to Other income/(loss), net. Through the end of 2017, a portion of net periodic pension and other postretirement income or expense was not recognized in net earnings in the year incurred because it was allocated to production as product costs, and reflected in inventory at the end of the reporting periods. Effective January 1, 2018, in accordance with our adoption of ASU 2017-07, only service costs may be allocated to production costs and capitalized in inventory on a prospective basis. The impact of adoption was not material.
ASU 2016-18 In the first quarter of 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The standard requires companies to include restricted amounts with Cash & cash equivalents when reconciling the beginning and end of period total amounts shown on the Statements of Cash Flows. The impact of adoption was not material.
ASU 2018-02 In the first quarter of 2018, we early adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows a company to reclassify from Accumulated other comprehensive income/loss to Retained earnings the difference between the historical corporate income tax rate of 35% and the 21% rate enacted in the Tax Cuts and Jobs Act in December 2017. This resulted in an increase of $2,997 to Retained earnings and an increase of $2,997 to Accumulated other comprehensive loss.
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, 2017. Our significant accounting policies described below reflect the impact of the adoption of Topic 606 in the first quarter of 2018.
Revenue and Related Cost Recognition
Commercial aircraft contracts The majority of our BCA segment revenue is derived from commercial aircraft contracts. For each contract, we determine the transaction price based on the consideration expected to be received. We allocate the transaction price to each commercial aircraft performance obligation based on relative standalone selling prices adjusted by an escalation formula as specified in the customer agreement. Revenue is recognized for each commercial aircraft performance obligation at the point in time when the aircraft is completed and accepted by the customer. We use program accounting to determine the amount reported as cost of sales.
Where an aircraft is still in our possession, and title and risk of loss has passed to the customer (known as a bill-and-hold arrangement), revenue will be recognized when all specific requirements for transfer of control under a bill-and-hold arrangement have been met.
Payments for commercial aircraft sales are received in accordance with the customer agreement, which generally includes a deposit upon order and additional payments in accordance with a payment schedule, with the balance being due immediately prior to or at aircraft delivery. Advances and progress billings (contract liabilities) are normal and customary for commercial aircraft contracts and not considered a significant financing component as they are intended to protect us from the other party failing to adequately complete some or all of its obligations under the contract.
Long-term contracts Substantially all contracts at BDS, certain military derivative aircraft contracts at BCA and certain contracts at BGS are long-term contracts with the U.S. government and other customers that generally extend over several years. Products sales under long-term contracts primarily include fighter jets, rotorcraft, cybersecurity products, surveillance suites, advanced weapons, missile defense, military derivative aircraft, satellite systems, and modification of commercial passenger aircraft to cargo freighters. Services sales under long-term contracts primarily include support and maintenance agreements associated with our commercial and defense products and space travel on Commercial Crew.

8


For each long-term contract, we determine the transaction price based on the consideration expected to be received. We allocate the transaction price to each distinct performance obligation to deliver a good or service, or a collection of goods and/or services, based on the relative standalone selling prices. A long-term contract will typically represent a single distinct performance obligation due to the highly interdependent and interrelated nature of the underlying goods and/or services and the significant service of integration that we provide. While the scope and price on certain long-term contracts may be modified over their life, the transaction price is based on current rights and obligations under the contract and does not include potential modifications until they are agreed upon with the customer. When applicable, a cumulative adjustment or separate recognition for the additional scope and price may result. Long-term contracts can be negotiated with a fixed price or a price in which we are reimbursed for costs incurred plus an agreed upon profit. The Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed in establishing the price for contracts with the U.S. government. Certain long-term contracts include in the transaction price variable consideration, such as incentive and award fees, if specified targets are achieved. The amount included in the transaction price represents the expected value, based on a weighted probability, or the most likely amount. Incentive and award fees that cannot be reasonably estimated are recorded when awarded.
Long-term contract revenue is recognized over the contract term (over time) as the work progresses, either as products are produced or as services are rendered. We generally recognize revenue over time as we perform on long-term contracts because of continuous transfer of control to the customer. For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment of the transaction price associated with work performed to date on products or services that do not have an alternative use to the Company.
The accounting for long-term contracts involves a judgmental process of estimating total sales, costs and profit for each performance obligation. Cost of sales is recognized as incurred. The amount reported as revenues is determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. Recognizing revenue as costs are incurred provides an objective measure of progress on the long-term contract and thereby best depicts the extent of transfer of control to the customer.
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 reach-forward losses, across all long-term contracts were as follows:
 
Three months ended March 31
 
2018

 
2017

Increase to Revenue

$117

 

$207

Increase to Earnings from Operations

$78

 

$108

Increase to Diluted EPS

$0.11

 

$0.13

Due to the significance of judgment in the estimation process changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods.
Payments under long-term contracts may be received before or after revenue is recognized. The U.S. government customer typically withholds payment of a small portion of the contract price until contract completion. Therefore, long-term contracts typically generate Unbilled receivables (contract assets) but may generate Advances and progress billings (contract liabilities). Long-term contract Unbilled receivables and

9


Advances and progress billings are not considered a significant financing component because they are intended to protect either the customer or the Company in the event that some or all of the obligations under the contract are not completed.
Commercial spare parts contracts Certain contracts at our BGS segment include sales of commercial spare parts. For each contract, we determine the transaction price based on the consideration expected to be received. We allocate the transaction price to each distinct performance obligation, including each commercial spare part, based on relative standalone selling prices. Revenue is recognized for each commercial spare part performance obligation at the point in time of delivery to the customer. We may provide our customers with a right to return a commercial spare part where a customer may receive a full or partial refund, a credit applied to amounts owed, a different product in exchange, or any combination of these items. We consider the potential for customer returns in the estimated transaction price. The amount reported as cost of sales is recorded at average cost. Payments for commercial spare parts sales are typically received shortly after delivery.
Other service revenue contracts Certain contracts at our BGS segment are for sales of services to commercial customers including maintenance, training, data analytics and information-based services. We recognize revenue for these service performance obligations over time as the services are rendered. The method of measuring progress (such as straight-line or billable amount) varies depending upon which method best depicts the transfer of control to the customer based on the type of service performed. Cost of sales is recorded as incurred.
Concession sharing arrangements We account for sales concessions to our customers in consideration of their purchase of products and services as a reduction of the transaction price and the revenue that is recognized for the related performance obligations. The sales concessions incurred may be partially reimbursed by certain suppliers in accordance with concession sharing arrangements. We record these reimbursements, which are presumed to represent reductions in the price of the vendor’s products or services, as a reduction in Cost of products.
Unbilled Receivables and Advances and Progress Billings
Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which cannot yet be billed under terms of the contract with the customer. Advances and progress billings (contract liabilities) arise when the Company receives payments from customers in advance of recognizing revenue. The amount of Unbilled receivables or Advances and progress billings is determined for each contract.

10


Note 2 - Impact of Adoption of New Standards
In the first quarter of 2018, we adopted the following ASUs: ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost; and ASU 2016-18 Statement of Cash Flows (Topic 230) Restricted Cash; and ASU 2018-02 Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The impact to our unaudited Consolidated Financial Statements as a result of adopting these standards was as follows:
Condensed Consolidated Statement of Operations (Unaudited)
 
Three months ended March 31, 2017
(Dollars in millions)
Reported
 
Impact of New Standards
 
Restated
Sales of products

$18,512

 

$855

 

$19,367

Sales of services
2,464

 
130

 
2,594

Total revenues
20,976

 
985

 
21,961

 
 
 


 
 
Cost of products
(15,363
)
 
(699
)
 
(16,062
)
Cost of services
(1,888
)
 
(110
)
 
(1,998
)
Boeing Capital interest expense
(13
)
 


 
(13
)
Total costs and expenses
(17,264
)
 
(809
)
 
(18,073
)
 
3,712

 
176

 
3,888

Income from operating investments, net
81

 


 
81

General and administrative expense
(933
)
 
4

 
(929
)
Research and development expense, net
(838
)
 
2

 
(836
)
Gain on dispositions, net
2

 


 
2

Earnings from operations
2,024

 
182

 
2,206

Other income, net
22

 
4

 
26

Interest and debt expense
(87
)
 


 
(87
)
Earnings before income taxes
1,959

 
186

 
2,145

Income tax expense
(508
)
 
(58
)
 
(566
)
Net earnings

$1,451

 

$128

 

$1,579

 
 
 
 
 
 
Basic earnings per share

$2.36

 

$0.21

 

$2.57

 
 
 
 
 
 
Diluted earnings per share

$2.34

 

$0.20

 

$2.54


11


Condensed Consolidated Statement of Financial Position
(Dollars in millions)
December 31, 2017
Assets
Reported
 
Impact of New Standards
 
Restated
Cash and cash equivalents

$8,813

 


 

$8,813

Short-term and other investments
1,179

 


 
1,179

Accounts receivable, net
10,516

 

($7,622
)
 
2,894

Unbilled receivables, net


 
8,194

 
8,194

Current portion of customer financing, net
309

 


 
309

Inventories
44,344

 
17,044

 
61,388

Other current assets



2,417


2,417

Total current assets
65,161

 
20,033

 
85,194

Customer financing, net
2,740

 
16

 
2,756

Property, plant and equipment, net
12,672

 


 
12,672

Goodwill
5,559

 


 
5,559

Acquired intangible assets, net
2,573

 


 
2,573

Deferred income taxes
341

 
(20
)
 
321

Investments
1,260

 


 
1,260

Other assets, net of accumulated amortization
2,027

 


 
2,027

Total assets

$92,333

 

$20,029

 

$112,362

Liabilities and equity
 
 

 
 
Accounts payable

$12,202

 


 

$12,202

Accrued liabilities
15,292

 

($2,223
)
 
13,069

Advances and billings in excess of related costs
27,440

 
(27,440
)
 


Advances and progress billings


 
48,042

 
48,042

Short-term debt and current portion of long-term debt
1,335

 


 
1,335

Total current liabilities
56,269

 
18,379

 
74,648

Deferred income taxes
1,839

 
349

 
2,188

Accrued retiree health care
5,545

 


 
5,545

Accrued pension plan liability, net
16,471

 


 
16,471

Other long-term liabilities
2,015

 


 
2,015

Long-term debt
9,782

 


 
9,782

Shareholders’ equity:
 
 


 
 
Common stock
5,061

 


 
5,061

Additional paid-in capital
6,804

 


 
6,804

Treasury stock, at cost
(43,454
)
 


 
(43,454
)
Retained earnings
45,320

 
4,298

 
49,618

Accumulated other comprehensive loss
(13,376
)
 
(2,997
)
 
(16,373
)
Total shareholders’ equity
355

 
1,301

 
1,656

Noncontrolling interests
57

 


 
57

Total equity
412

 
1,301

 
1,713

Total liabilities and equity

$92,333

 

$20,029

 

$112,362


12


Condensed Consolidated Statement of Cash Flows (Unaudited)
(Dollars in millions)
Three months ended March 31, 2017
 
Reported

 
Impact of New Standards
Restated

Cash flows - operating activities:
 
 
 
 
 
Net earnings

$1,451

 

$128

 

$1,579

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

 
 
Non-cash items -
 
 

 
 
Share-based plans expense
50

 

 
50

Depreciation and amortization
471

 
(3
)
 
468

Investment/asset impairment charges, net
23

 

 
23

Customer financing valuation expense
7

 

 
7

Gain on dispositions, net
(2
)
 

 
(2
)
Other charges and credits, net
52

 
6

 
58

Changes in assets and liabilities -
 
 

 
 
Accounts receivable
(769
)
 
505

 
(264
)
Unbilled receivables

 
(568
)
 
(568
)
Advances and progress billings

 
1,375

 
1,375

Inventories
(31
)
 
(1,460
)
 
(1,491
)
Other current assets

 
(117
)
 
(117
)
Accounts payable
616

 

 
616

Accrued liabilities
(613
)
 
331

 
(282
)
Advances and billings in excess of related costs
249

 
(249
)
 

Income taxes receivable, payable and deferred
495

 
57

 
552

Other long-term liabilities
(72
)
 

 
(72
)
Pension and other postretirement plans
10

 

 
10

Customer financing, net
232

 
(1
)
 
231

Other
(75
)
 

 
(75
)
Net cash provided by operating activities
2,094

 
4

 
2,098

Cash flows - investing activities:
 
 

 
 
Property, plant and equipment additions
(466
)
 

 
(466
)
Property, plant and equipment reductions
9

 

 
9

Contributions to investments
(605
)
 

 
(605
)
Proceeds from investments
803

 

 
803

Other
(3
)
 
2

 
(1
)
Net cash used by investing activities
(262
)
 
2

 
(260
)
Cash flows - financing activities:
 
 

 
 
New borrowings
872

 

 
872

Debt repayments
(34
)
 

 
(34
)
Stock options exercised
174

 

 
174

Employee taxes on certain share-based payment arrangements
(107
)
 

 
(107
)
Common shares repurchased
(2,500
)
 

 
(2,500
)
Dividends paid
(868
)
 

 
(868
)
Net cash used by financing activities
(2,463
)
 

 
(2,463
)
Effect of exchange rate changes on cash & cash equivalents, including restricted
20

 

 
20

Net (decrease)/increase in cash & cash equivalents, including restricted
(611
)
 
6

 
(605
)
Cash & cash equivalents, including restricted*, at beginning of year
8,801

 
68

 
8,869

Cash & cash equivalents, including restricted*, at end of period

$8,190

 

$74

 
8,264

Less restricted cash & cash equivalents, included in Investments
 
 
 
 
74

Cash and cash equivalents at end of period
 
 
 
 

$8,190

* Reported balance excludes restricted amounts

13


Condensed Consolidated Statements of Equity (Unaudited)
 
Boeing shareholders
 
 
(Dollars in millions)
Common
Stock

Additional
Paid-In
Capital

Treasury Stock

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-
controlling
Interests

Total

Balance at January 1, 2017, as reported

$5,061


$4,762


($36,097
)

$40,714


($13,623
)

$60


$877

Cumulative Impact of Topic 606 at 1/1/2016
 
 
 
901

 
 
901

Impact of Topic 606 on 2016 earnings
 
 
 
139

 
 
139

Balance at January 1, 2017, as restated

$5,061


$4,762


($36,097
)

$41,754


($13,623
)

$60


$1,917

 
Boeing shareholders
 
 
(Dollars in millions)
Common
Stock

Additional
Paid-In
Capital

Treasury Stock

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-
controlling
Interests

Total

Balance at December 31, 2017, as reported

$5,061


$6,804


($43,454
)

$45,320


($13,376
)

$57


$412

Cumulative Impact of Topic 606 at 1/1/2016
 
 
 
901

 
 
901

Impact of Topic 606 on 2016 earnings
 
 
 
139

 
 
139

Impact of Topic 606 on 2017 earnings
 
 
 
261

 
 
261

Total impact of ASC 606 through December 31, 2017
 
 
 
1,301

 
 
1,301

Impact of ASU 2018-02
 
 
 
2,997

(2,997
)
 
 
Balance at December 31, 2017, as restated

$5,061


$6,804


($43,454
)

$49,618


($16,373
)

$57


$1,713

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.

14


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

2018


2017

Net earnings

$2,477

 

$1,579

Less: earnings available to participating securities
3

 
2

Net earnings available to common shareholders

$2,474

 

$1,577

Basic
 
 
 
Basic weighted average shares outstanding
590.8

 
614.4

Less: participating securities
0.7

 
0.8

Basic weighted average common shares outstanding
590.1

 
613.6

Diluted
 
 
 
Basic weighted average shares outstanding
590.8

 
614.4

Dilutive potential common shares(1)
6.4

 
6.8

Diluted weighted average shares outstanding
597.2

 
621.2

Less: participating securities
0.7

 
0.8

Diluted weighted average common shares outstanding
596.5

 
620.4

Net earnings per share:
 
 
 
Basic

$4.19

 

$2.57

Diluted
4.15

 
2.54

(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
 
2018

 
2017

Performance awards
2.9

 
5.6

Performance-based restricted stock units
0.5

 
1.3

Note 4 – Income Taxes
Our effective income tax rate was 12.8% for the three months ended March 31, 2018 and 26.4% in the comparable period in 2017. The 2018 tax rate reflects the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), which permanently reduced the U.S. corporate statutory rate from 35% to 21% effective January 1, 2018. The 2018 tax rate reflects tax benefits for sales of U.S. manufactured goods to non-U.S. customers and research and development credits as well as a 4% benefit from discrete tax benefits, primarily related to share-based payments recorded in the first quarter of 2018. The 2017 tax rate of 26.4% reflects the 35% statutory tax rate reduced by tax benefits for research and development credits, U.S. manufacturing activity and share-based payments.
In 2017, in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118, we recorded provisional amounts related to the TCJA, including the remeasurement of our U.S. net deferred tax liabilities and ancillary state tax effects, as well as the repatriation tax. We continue to assess available tax methods and elections, refine our computation of the repatriation tax and evaluate regulatory guidance, which may result in changes to our tax estimates.
Federal income tax audits have been settled for all years prior to 2013. The Internal Revenue Service (IRS) is currently examining the 2013-2014 tax years. We are also subject to examination in major state and international jurisdictions for the 2001-2016 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 federal and state matters under audit may decrease by up to $540 and $435, respectively, based on current estimates.
Note 5 – Inventories
Inventories consisted of the following:
 
March 31
2018

 
December 31
2017

Long-term contracts in progress

$1,926

 

$1,854

Commercial aircraft programs
53,008

 
52,861

Commercial spare parts, used aircraft, general stock materials and other
6,369

 
6,673

Total

$61,303



$61,388

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 $267 and $284 at March 31, 2018 and December 31, 2017. See indemnifications to ULA in Note 11.
Included in inventories are capitalized precontract costs of $691 at March 31, 2018 primarily related to the KC-46A Tanker and F/A-18, and $933 at December 31, 2017 primarily related to the KC-46A Tanker, C-17 and F/A-18. See Note 10.
Commercial Aircraft Programs
At March 31, 2018 and December 31, 2017, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,049 and $30,695 of work in process (including deferred production costs of $24,690 and $25,358), $2,839 and $3,189 of supplier advances, and $3,042 and $3,173 of unamortized tooling and other non-recurring costs. At March 31, 2018, $22,034 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $5,698 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.
At March 31, 2018 and December 31, 2017, commercial aircraft programs inventory included $138 and $151 of unamortized tooling costs related to the 747 program. At March 31, 2018, $133 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, 2018, 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 $2,958 and $2,976 at March 31, 2018 and December 31, 2017.

15


Note 6 – Contracts with Customers
Unbilled receivables increased from $8,194 at December 31, 2017 to $9,822 at March 31, 2018, primarily driven by revenue recognized at BDS in excess of billings.
Advances and progress billings increased from $48,042 at December 31, 2017 to $49,955 during the three months ended March 31, 2018, primarily driven by advances on orders received in excess of revenue recognized at BCA.
Revenues recognized during the three months ended March 31, 2018 and 2017 from amounts recorded as Advances and progress billings at the beginning of each year were $6,453 and $5,411.
Note 7 – Customer Financing
Customer financing primarily relates to the Boeing Capital (BCC) segment. Prior period amounts have been adjusted to conform with the current year presentation as a result of the adoption of Topic 606. Customer financing consisted of the following:
 
March 31
2018

 
December 31
2017

Financing receivables:
 
 
 
Investment in sales-type/finance leases

$1,265

 

$1,364

Notes
934

 
1,022

Total financing receivables
2,199

 
2,386

Operating lease equipment, at cost, less accumulated depreciation of $286 and $305
808

 
691

Gross customer financing
3,007

 
3,077

Less allowance for losses on receivables
(10
)
 
(12
)
Total

$2,997

 

$3,065

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, 2018 and December 31, 2017, we individually evaluated for impairment customer financing receivables of $417 and $422, of which $406 and $411 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
2018

 
December 31
2017

BBB

$1,130

 

$1,170

BB
490

 
627

B
173

 
177

CCC
406

 
412

Total carrying value of financing receivables

$2,199

 

$2,386

At March 31, 2018, our allowance related to receivables with ratings of B, BB and BBB. We applied default rates that averaged 22.9%, 7.4% and 0.8%, respectively, to the exposure associated with those receivables.

16


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 out-of-production aircraft and 747-8. 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
2018

 
December 31
2017

717 Aircraft ($256 and $269 accounted for as operating leases)

$1,039

 

$1,081

747-8 Aircraft ($136 and $138 accounted for as operating leases)
481

 
483

737 Aircraft ($257 and $127 accounted for as operating leases)
289

 
161

MD-80 Aircraft (accounted for as sales-type finance leases)
235

 
231

757 Aircraft ($26 and $27 accounted for as operating leases)
213

 
217

747-400 Aircraft ($83 and $88 accounted for as operating leases)
162

 
170

767 Aircraft ($0 and $25 accounted for as operating leases)
16

 
98

777 Aircraft ($17 and $0 accounted for as operating leases)
30

 
14

Note 8 – Investments
Our investments, which are recorded in Short-term and other investments or Investments, consisted of the following:
 
March 31
2018

 
December 31
2017

Equity method investments (1)

$1,203

 

$1,214

Time deposits
108

 
613

Available for sale debt instruments
478

 
490

Restricted cash & cash equivalents(2)
70

 
74

Equity and other investments
45

 
48

Total

$1,904

 

$2,439

(1) 
Dividends received were $88 and $96 for the three months ended March 31, 2018 and 2017.
(2) 
Reflects amounts restricted in support of our workers’ compensation programs, employee benefit programs, and insurance premiums.

17


Note 9 – Other Assets
Sea Launch
At March 31, 2018 and December 31, 2017, Other assets included $295 and $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. At March 31, 2018, 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) – $162, 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.
Spirit AeroSystems
As of March 31, 2018 and December 31, 2017, Other assets included $137 of receivables related to indemnifications from Spirit AeroSystems, Inc. (Spirit) for costs incurred related to pension and retiree medical obligations of former Boeing employees who were subsequently employed by Spirit. During the fourth quarter of 2014, Boeing filed a complaint against Spirit in the Delaware Superior Court seeking to enforce our rights to indemnification and to recover from Spirit amounts incurred by Boeing for pension and retiree medical obligations. During 2017, the court ruled against Boeing and denied our claim. In January 2018, Boeing filed a notice of appeal with the Delaware Supreme Court. We believe we have substantial arguments on appeal and expect to fully recover from Spirit.
Note 10 – Commitments and Contingencies
Environmental
The following table summarizes environmental remediation activity during the three months ended March 31, 2018 and 2017.
 
2018

 
2017

Beginning balance – January 1

$524

 

$562

Reductions for payments made
(7
)
 
(11
)
Changes in estimates
22

 
(26
)
Ending balance – March 31

$539

 

$525

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, 2018 and December 31, 2017, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $820 and $868.

18


Product Warranties
The following table summarizes product warranty activity recorded during the three months ended March 31, 2018 and 2017.
 
2018

 
2017

Beginning balance – January 1

$1,211

 

$1,414

Additions for current year deliveries
70

 
70

Reductions for payments made
(32
)
 
(74
)
Changes in estimates
(101
)
 
(65
)
Ending balance – March 31

$1,148

 

$1,345

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 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, 2018 have expiration dates from 2018 through 2026. At March 31, 2018, and December 31, 2017 total contractual trade-in commitments were $1,483 and $1,462. As of March 31, 2018 and December 31, 2017, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $385 and $155 and the fair value of the related trade-in aircraft was $364 and $155.
Financing Commitments
Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, and refinancing of delivered aircraft, totaled $10,038 and $10,221 as of March 31, 2018 and December 31, 2017. The estimated earliest potential funding dates for these commitments as of March 31, 2018 are as follows:
  
Total

April through December 2018

$1,354

2019
2,960

2020
1,699

2021
1,632

2022
994

Thereafter
1,399

 

$10,038

As of March 31, 2018, all 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.

19


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 $3,665 and $3,708 as of March 31, 2018 and December 31, 2017.
Commitments to ULA
We and Lockheed Martin Corporation have each committed to provide ULA with additional capital contributions in the event ULA does not have sufficient funds to make a required payment to us under an inventory supply agreement. As of March 31, 2018, ULA’s total remaining obligation to Boeing under the inventory supply agreement was $120. See Note 5.
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). In addition, the FY18 Omnibus spending bill signed into law on March 23, 2018 provides funding for the remainder of the fiscal year. However, the 2011 Budget Control Act continues to mandate limits on U.S. government discretionary spending and remains in effect after FY19. As a result, continued budget uncertainty and the risk of future sequestration cuts will remain unless Congress acts to repeal or suspend this law.
There continues to be uncertainty with respect to program-level appropriations for the U.S. DoD and other government agencies, including the National Aeronautics and Space Administration (NASA). Although FY19 spending topline levels have been agreed to, the lower budget caps and sequestration will take effect again in fiscal year 2020 and beyond unless Congress acts to repeal or suspend the law. 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, Saudi F-15, USAF KC-46A Tanker, and commercial and military satellites. The operational and technical complexities of these contracts create financial risk, which could trigger termination provisions, order cancellations or other financially significant exposure. Changes to cost and revenue estimates could result in lower margins or material charges for reach-forward losses. For example, we have a reach-forward loss on the KC-46A Tanker program. Moreover, this and our other 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 Engineering, Manufacturing and Development (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. At March 31, 2018, we had approximately $370 of capitalized precontract costs and $1,330 of potential termination liabilities to suppliers.

20


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.
Note 11 – 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
2018

December 31
2017

 
March 31
2018

December 31
2017

 
March 31
2018

December 31
2017

Contingent repurchase commitments

$1,527


$1,605

 

$1,527


$1,605

 




$9

Indemnifications to ULA:
 
 
 
 
 
 
 
 
Contributed Delta program launch inventory
67

72

 
 
 
 
 
 
Contract pricing
261

261

 
 
 
 
7

7

Other Delta contracts
191

191

 
 
 
 




Credit guarantees
117

109

 
57

55

 
13

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. Since inception, ULA has consumed $1,293 of the $1,360 of inventory that was contributed by us and has yet to consume $67. Under the inventory supply agreement, we have recorded revenues and cost of sales of $1,545 through March 31, 2018. ULA has made payments of $1,740 to us under the inventory supply agreement and we have made $48 of net indemnification payments to ULA.
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. In 2009, ULA, through its subsidiary United Launch Services, filed a claim and notice of appeal before the Armed Services Board of Contract Appeals (ASBCA) for a contract adjustment for the price of two of these missions, followed in 2011 by a subsequent claim and appeal with respect to a third mission. The USAF did not exercise an option for a fourth mission prior to the expiration of the contract. During the second quarter of 2016, the ASBCA ruled that ULA is entitled to additional contract pricing for each of the three missions and remanded to the parties to negotiate appropriate pricing. During the fourth quarter of 2016, the USAF appealed the ASBCA's ruling. In April 2017, the USAF withdrew its appeal. If ULA is ultimately unsuccessful in obtaining additional pricing, we may be responsible for an indemnification payment up to $261 and may record up to $280 in pre-tax losses associated with the three missions.
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, and during the fourth quarter, Boeing filed a motion for summary judgment for full recovery of its 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.
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 10.
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 12 – Debt
On February 23, 2018, we issued $1,400 of fixed rate senior notes consisting of $350 due March 1, 2023 that bear an annual interest rate of 2.8%, $350 due March 1, 2028 that bear an annual interest rate of 3.25%, $350 due March 1, 2038 that bear an annual interest rate of 3.55%, and $350 due March 1, 2048 that bear an annual interest rate of 3.625%. 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 $1,338, after deducting underwriting discounts, commissions and offering expenses.

21


Note 13 – Postretirement Plans
The components of net periodic benefit cost for the three months ended March 31 were as follows:

Pension
 
Other Postretirement Benefits
Three months ended March 31
2018

 
2017

 
2018

 
2017

Service cost

$108

 

$101

 

$24

 

$26

Interest cost
695

 
748

 
49

 
57

Expected return on plan assets
(1,002
)
 
(961
)
 
(2
)
 
(2
)
Amortization of prior service credits
(14
)
 
(10
)
 
(32
)
 
(34
)
Recognized net actuarial loss/(gain)
282

 
201

 
(3
)
 
3

Settlement/curtailment/other losses


 
1

 


 


Net periodic benefit cost

$69

 

$80

 

$36

 

$50

 
 
 
 
 
 
 
 
Net periodic benefit cost included in Earnings from operations

$82

 

$131

 

$22

 

$28

Net periodic benefit cost included in Other income, net
(42
)
 
(34
)
 
24

 
30

Net periodic benefit cost included in Earnings before income taxes

$40

 

$97

 

$46

 

$58

Note 14 – Share-Based Compensation and Other Compensation Arrangements
Restricted Stock Units
On February 26, 2018, we granted to our executives 260,730 restricted stock units (RSUs) as part of our long-term incentive program with a grant date fair value of $361.13 per unit. 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.
Performance-Based Restricted Stock Units
On February 26, 2018, we granted to our executives 241,284 performance-based restricted stock units (PBRSUs) as part of our long-term incentive program with a grant date fair value of $390.27 per unit. Compensation expense for the award is recognized over the three-year performance period based upon the grant date fair value estimated using a Monte-Carlo simulation model. The model used the following assumptions: expected volatility of 22.11% based upon historical stock volatility, a risk-free interest rate of 2.36%, and no expected dividend yield because the units earn dividend equivalents.
Performance Awards
On February 26, 2018, we granted to our executives performance awards as part of our long-term incentive program with a payout based on the achievement of financial goals for the three-year period ending December 31, 2020. At March 31, 2018, the minimum payout amount is $0 and the maximum amount we could be required to pay out is $375.

22


Note 15 – Shareholders' Equity
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss (AOCI) by component for the three months ended March 31, 2018 and 2017 were as follows:
 
Currency Translation Adjustments

 
Unrealized Gains and Losses on Certain Investments

 
Unrealized Gains and Losses on Derivative Instruments

 
Defined Benefit Pension Plans & Other Postretirement Benefits

 
Total (1)

Balance at January 1, 2017

($143
)
 

($2
)
 

($127
)
 

($13,351
)
 

($13,623
)
Other comprehensive (loss)/income before reclassifications
34

 
1

 
52

 
1

 
88

Amounts reclassified from AOCI

 

 
16

 
104

(2) 
120

Net current period Other comprehensive (loss)/income
34

 
1

 
68

 
105

 
208

Balance at March 31, 2017

($109
)
 

($1
)
 

($59
)
 

($13,246
)
 

($13,415
)
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018

($15
)
 

($2
)
 

$54

 

($16,410
)
 

($16,373
)
Other comprehensive (loss)/income before reclassifications
27

 
2

 
(2
)
 
(3
)
 
24

Amounts reclassified from AOCI

 

 
4

 
183

(2) 
187

Net current period Other comprehensive income
27

 
2

 
2

 
180

 
211

Balance at March 31, 2018

$12

 

$—

 

$56

 

($16,230
)
 

($16,162
)
(1)     Net of tax.
(2) 
Primarily relates to amortization of actuarial losses for the three months ended March 31, 2018 and 2017 totaling $219 and $132 (net of tax of ($60) and ($72)). These are included in the net periodic pension cost.
Note 16 – Derivative Financial Instruments
Cash Flow Hedges
Our cash flow hedges include foreign currency forward contracts and commodity purchase contracts. We use foreign currency forward 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 through 2024. We use commodity derivatives, such as fixed-price purchase commitments to hedge against potentially unfavorable price changes for items used in production. Our commodity contracts hedge forecasted transactions through 2021.
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 Boeing Capital interest expense.
Derivative Instruments Not Receiving Hedge Accounting Treatment
We have entered into agreements to purchase and sell aluminum to address long-term strategic sourcing objectives and non-U.S. business requirements. These agreements are derivative instruments for accounting purposes. The quantities of aluminum in these agreements offset and are priced at prevailing market prices. We also hold certain foreign currency forward contracts which do not qualify for hedge accounting treatment.
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
  
March 31
2018

December 31
2017

March 31
2018

December 31
2017

March 31
2018

December 31
2017

Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts

$3,141


$2,930


$138


$131


($55
)

($63
)
Interest rate contracts
125

125

3

3




Commodity contracts
35

56

4

4

(6
)
(6
)
Derivatives not receiving hedge accounting treatment:
 
 
 
 
 
 
Foreign exchange contracts
270

406

14

16

(4
)
(5
)
Commodity contracts
676

563





 
 
Total derivatives

$4,247


$4,080


$159


$154


($65
)

($74
)
Netting arrangements
 
 
(53
)
(61
)
53

61

Net recorded balance
 
 

$106


$93


($12
)

($13
)
(1) 
Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

23


Gains/(losses) associated with our cash flow and undesignated hedging transactions and their effect on Other comprehensive income/(loss) and Net earnings were as follows: 
  
Three months ended March 31
  
2018

 
2017

Effective portion recognized in Other comprehensive income, net of taxes:
 
 
 
Foreign exchange contracts

($2
)
 

$56

Commodity contracts


 
(4
)
Effective portion reclassified out of Accumulated other comprehensive loss into earnings, net of taxes:
 
 
 
Foreign exchange contracts
(4
)
 
(15
)
Commodity contracts


 
(1
)
Forward points recognized in Other income, net:
 
 
 
Foreign exchange contracts
6

 
1

Undesignated derivatives recognized in Other income, net:
 
 
 
Foreign exchange contracts
3

 
5

Based on our portfolio of cash flow hedges, we expect to reclassify losses of $14 (pre-tax) out of Accumulated other comprehensive loss into earnings during the next 12 months. Ineffectiveness related to our hedges recognized in Other income was insignificant for the three months ended March 31, 2018 and 2017.
We have derivative instruments with credit-risk-related contingent features. For foreign exchange contracts with original maturities of at least five years, our derivative counterparties could require settlement if we default on our five-year credit facility. For certain 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 March 31, 2018 was $15. At March 31, 2018, there was no collateral posted related to our derivatives.
Note 17 – Fair Value Measurements
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. 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.
 
March 31, 2018
 
December 31, 2017
 
Total