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boeingblacksmall300a14.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 September 30, 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 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 October 17, 2018, there were 567,885,369 shares of common stock, $5.00 par value, issued and outstanding.



THE BOEING COMPANY
FORM 10-Q
For the Quarter Ended September 30, 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.
 
 
 
 


Table of Contents

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)
Nine months ended September 30
 
Three months ended September 30
  
2018

 
2017

 
2018

 
2017

Sales of products

$64,848

 

$61,667

 

$22,463

 

$21,782

Sales of services
7,938

 
7,568

 
2,683

 
2,441

Total revenues
72,786

 
69,235

 
25,146

 
24,223

 
 
 


 


 


Cost of products
(53,134
)
 
(50,936
)
 
(18,882
)
 
(18,050
)
Cost of services
(6,215
)
 
(5,742
)
 
(2,140
)
 
(1,879
)
Boeing Capital interest expense
(51
)
 
(53
)
 
(18
)
 
(27
)
Total costs and expenses
(59,400
)
 
(56,731
)
 
(21,040
)
 
(19,956
)
 
13,386

 
12,504

 
4,106

 
4,267

Income from operating investments, net
112

 
169

 
32

 
49

General and administrative expense
(3,345
)
 
(2,890
)
 
(1,154
)
 
(918
)
Research and development expense, net
(2,417
)
 
(2,417
)
 
(826
)
 
(768
)
Gain on dispositions, net
76

 


 
69

 


Earnings from operations
7,812

 
7,366

 
2,227

 
2,630

Other income, net
63

 
91

 
12

 
40

Interest and debt expense
(317
)
 
(267
)
 
(106
)
 
(87
)
Earnings before income taxes
7,558

 
7,190

 
2,133

 
2,583

Income tax (expense)/benefit
(522
)
 
(2,052
)
 
230

 
(773
)
Net earnings

$7,036

 

$5,138

 

$2,363

 

$1,810

 
 
 
 
 
 
 
 
Basic earnings per share

$12.08

 

$8.49

 

$4.11

 

$3.03

 
 
 
 
 
 
 
 
Diluted earnings per share

$11.95

 

$8.39

 

$4.07

 

$2.99

 
 
 
 
 
 
 
 
Cash dividends paid per share

$5.13

 

$4.26

 

$1.71

 

$1.42

 
 
 
 
 
 
 
 
Weighted average diluted shares (millions)
588.9

 
612.8

 
580.8

 
606.3

See Notes to the Condensed Consolidated Financial Statements.

1

Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
Nine months ended September 30
 
Three months ended September 30
 
2018

 
2017

 
2018

 
2017

Net earnings

$7,036

 

$5,138

 

$2,363

 

$1,810

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
(55
)
 
121

 
2

 
44

Unrealized gain/(loss) on certain investments, net of tax of ($1), $0, $0 and $0
3

 


 

 

Unrealized (loss)/gain on derivative instruments:
 
 
 
 
 
 
 
Unrealized (loss)/gain arising during period, net of tax of $27, ($61), $1 and ($22)
(97
)
 
111

 
(4
)
 
40

Reclassification adjustment for losses included in net earnings, net of tax of ($5), ($24), ($3) and ($5)
19

 
44

 
9

 
10

Total unrealized (loss)/gain on derivative instruments, net of tax
(78
)
 
155

 
5

 
50

Defined benefit pension plans and other postretirement benefits:
 
 
 
 
 
 
 
Amortization of prior service credits included in net periodic pension cost, net of tax of $30, $47, $10 and $16
(106
)
 
(84
)
 
(35
)
 
(27
)
Net actuarial gain arising during the period, net of tax of $0, ($1), $0 and $0
1

 
3

 

 

Amortization of actuarial losses included in net periodic pension cost, net of tax of ($182), ($217), ($60) and ($72)
657

 
394

 
219

 
131

Settlements and curtailments included in net income, net of tax of ($3), $0, $0 and $0
6

 

 

 

Pension and postretirement cost related to our equity method investments, net of tax of $1, $1, $0 and $0
(4
)
 
(2
)
 
(1
)
 

Total defined benefit pension plans and other postretirement benefits, net of tax
554

 
311

 
183

 
104

Other comprehensive income, net of tax
424

 
587

 
190

 
198

Comprehensive income related to noncontrolling interests
(12
)
 
(1
)
 
(2
)
 

Comprehensive income, net of tax

$7,448

 

$5,724

 

$2,551

 

$2,008

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)
September 30
2018

 
December 31
2017

Assets
 
 
 
Cash and cash equivalents

$8,034

 

$8,813

Short-term and other investments
1,956

 
1,179

Accounts receivable, net
2,893

 
2,894

Unbilled receivables, net
9,936

 
8,194

Current portion of customer financing, net
431

 
309

Inventories
62,038

 
61,388

Other current assets
2,398

 
2,417

Total current assets
87,686

 
85,194

Customer financing, net
2,785

 
2,756

Property, plant and equipment, net of accumulated depreciation of $18,328 and $17,641
12,571

 
12,672

Goodwill
5,722

 
5,559

Acquired intangible assets, net
2,530

 
2,573

Deferred income taxes
323

 
321

Investments
1,190

 
1,260

Other assets, net of accumulated amortization of $466 and $482
1,852

 
2,027

Total assets

$114,659

 

$112,362

Liabilities and equity
 
 
 
Accounts payable

$13,663

 

$12,202

Accrued liabilities
12,869

 
13,069

Advances and progress billings
51,496

 
48,042

Short-term debt and current portion of long-term debt
1,389

 
1,335

Total current liabilities
79,417

 
74,648

Deferred income taxes
1,738

 
2,188

Accrued retiree health care
5,394

 
5,545

Accrued pension plan liability, net
15,927

 
16,471

Other long-term liabilities
2,905

 
2,015

Long-term debt
10,487

 
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
6,714

 
6,804

Treasury stock, at cost - 443,262,126 and 421,222,326 shares
(51,781
)
 
(43,454
)
Retained earnings
54,666

 
49,618

Accumulated other comprehensive loss
(15,949
)
 
(16,373
)
Total shareholders’ equity
(1,289
)
 
1,656

Noncontrolling interests
80

 
57

Total equity
(1,209
)
 
1,713

Total liabilities and equity

$114,659

 

$112,362

See Notes to the Condensed Consolidated Financial Statements.

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Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Nine months ended September 30
  
2018


2017

Cash flows – operating activities:
 

 
Net earnings

$7,036



$5,138

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

 
Non-cash items – 
 

 
Share-based plans expense
150


151

Depreciation and amortization
1,531


1,470

Investment/asset impairment charges, net
63


75

Customer financing valuation (benefit)/expense
(3
)

4

Gain on dispositions, net
(76
)
 


Other charges and credits, net
158


196

Changes in assets and liabilities – 
 

 
Accounts receivable
10


(558
)
Unbilled receivables
(1,732
)
 
(1,805
)
Advances and progress billings
3,457

 
4,714

Inventories
(173
)

(800
)
Other current assets
(5
)
 
(337
)
Accounts payable
1,181


780

Accrued liabilities
890


(102
)
Income taxes receivable, payable and deferred
(252
)

1,507

Other long-term liabilities
1


25

Pension and other postretirement plans
(89
)

(550
)
Customer financing, net
(175
)

634

Other
403


(99
)
Net cash provided by operating activities
12,375


10,443

Cash flows – investing activities:
 
 
 
Property, plant and equipment additions
(1,227
)
 
(1,304
)
Property, plant and equipment reductions
117

 
30

Acquisitions, net of cash acquired
(250
)
 


Contributions to investments
(2,145
)
 
(2,815
)
Proceeds from investments
1,369

 
2,612

Purchase of distribution rights
(56
)
 
(131
)
Other
(5
)
 
7

Net cash used by investing activities
(2,197
)
 
(1,601
)
Cash flows – financing activities:
 
 
 
New borrowings
4,696

 
876

Debt repayments
(4,029
)
 
(83
)
Contributions from noncontrolling interests
35

 


Stock options exercised
70

 
291

Employee taxes on certain share-based payment arrangements
(247
)
 
(118
)
Common shares repurchased
(8,415
)
 
(7,500
)
Dividends paid
(2,976
)
 
(2,575
)
Net cash used by financing activities
(10,866
)
 
(9,109
)
Effect of exchange rate changes on cash and cash equivalents, including restricted
(37
)
 
73

Net decrease in cash & cash equivalents, including restricted
(725
)
 
(194
)
Cash & cash equivalents, including restricted, at beginning of year
8,887

 
8,869

Cash & cash equivalents, including restricted, at end of period
8,162

 
8,675

Less restricted cash & cash equivalents, included in Investments
128

 
106

Cash and cash equivalents at end of period

$8,034

 

$8,569

See Notes to the Condensed Consolidated Financial Statements.

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Table of Contents

The Boeing Company and Subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited)
 
Boeing shareholders
 
 
(Dollars in millions, except per share data)
Common
Stock

Additional
Paid-In
Capital

Treasury Stock

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-
controlling
Interests

Total

Balance at January 1, 2017

$5,061


$4,762


($36,097
)

$41,754


($13,623
)

$60


$1,917

Net earnings
 
 
 
5,138

 
(1
)
5,137

Other comprehensive loss, net of tax of ($255)
 
 
 
 
587

 
587

Share-based compensation and related dividend equivalents
 
168

 
(18
)
 
 
150

Treasury shares issued for stock options exercised, net
 
(80
)
370

 
 
 
290

Treasury shares issued for other share-based plans, net
 
(178
)
64

 
 
 
(114
)
Treasury shares contributed to pension plans
 
2,082

1,418

 
 
 
3,500

Common shares repurchased
 
 
(7,500
)
 
 
 
(7,500
)
Cash dividends declared ($2.84 per share)
 
 
 
(1,709
)
 
 
(1,709
)
Balance at September 30, 2017

$5,061


$6,754


($41,745
)

$45,165


($13,036
)

$59


$2,258

 
 
 
 
 
 
 
 
Balance at January 1, 2018

$5,061


$6,804


($43,454
)

$49,618


($16,373
)

$57


$1,713

Net earnings
 
 
 
7,036

 
(12
)
7,024

Other comprehensive income, net of tax of ($133)
 
 
 
 
424

 
424

Share-based compensation and related dividend equivalents
 
167

 
(17
)
 
 
150

Treasury shares issued for stock options exercised, net
 
(37
)
107

 
 
 
70

Treasury shares issued for other share-based plans, net
 
(220
)
(19
)
 
 
 
(239
)
Common shares repurchased
 
 
(8,415
)
 
 
 
(8,415
)
Cash dividends declared ($3.42 per share)
 
 
 
(1,971
)
 
 
(1,971
)
Changes in noncontrolling interests
 
 
 
 
 
35

35

Balance at September 30, 2018

$5,061


$6,714


($51,781
)

$54,666


($15,949
)

$80


($1,209
)
See Notes to the Condensed Consolidated Financial Statements.

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Table of Contents

The Boeing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Summary of Business Segment Data
(Unaudited)
(Dollars in millions)
Nine months ended September 30
 
Three months ended September 30

2018

 
2017

 
2018

 
2017

Revenues:
 
 
 
 
 
 
 
Commercial Airplanes

$43,409

 

$42,626

 

$15,276



$15,393

Defense, Space & Security
17,084

 
15,304

 
5,729


5,050

Global Services
12,124

 
10,784

 
4,091


3,579

Boeing Capital
214

 
234

 
77


70

Unallocated items, eliminations and other
(45
)
 
287

 
(27
)
 
131

Total revenues

$72,786

 

$69,235

 

$25,146



$24,223

Earnings/(loss) from operations:
 
 
 
 



Commercial Airplanes

$5,175

 

$3,665

 

$2,023



$1,513

Defense, Space & Security
925

 
1,649

 
(245
)

486

Global Services
1,790

 
1,687

 
543


495

Boeing Capital
71

 
87

 
27


23

Segment operating profit
7,961

 
7,088

 
2,348

 
2,517

Unallocated items, eliminations and other
(1,168
)
 
(771
)
 
(458
)
 
(233
)
FAS/CAS service cost adjustment
1,019

 
1,049

 
337

 
346

Earnings from operations
7,812

 
7,366

 
2,227


2,630

Other income, net
63

 
91

 
12


40

Interest and debt expense
(317
)
 
(267
)
 
(106
)

(87
)
Earnings before income taxes
7,558

 
7,190

 
2,133


2,583

Income tax (expense)/benefit
(522
)
 
(2,052
)
 
230


(773
)
Net earnings

$7,036

 

$5,138

 

$2,363



$1,810


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

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Table of Contents

The Boeing Company and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)
Note 1Basis 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 September 30, 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 permits two approaches, one requiring retrospective application of the new guidance with restatement of prior years, and one requiring prospective application of the new guidance. We plan to adopt the new lease standard effective January 1, 2019 and apply it prospectively. We do not expect the new lease standard 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 ASUs: 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 Condensed 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 $73 to Net earnings for the first nine months of 2017.

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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. 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 companies 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 (TCJA) 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

8

Table of Contents

sales under long-term contracts primarily include support and maintenance agreements associated with our commercial and defense products and space travel on Commercial Crew.
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.
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:
 
Nine months ended September 30
 
Three months ended September 30
 
2018

 
2017

 
2018

 
2017

Increase/(decrease) to Revenue

($14
)
 

$426

 

($59
)
 

($44
)
Increase/(decrease) to Earnings from Operations

($314
)
 

$207

 

($155
)
 

($215
)
Increase/(decrease) to Diluted EPS

($0.50
)
 

$0.24

 

($0.30
)
 

($0.25
)
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.

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Table of Contents

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 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. The spare parts have discrete unit prices that represent fair value. We generally consider each spare part to be a separate performance obligation. 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

Table of Contents

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; 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 Condensed Consolidated Financial Statements as a result of adopting these standards was as follows:
Condensed Consolidated Statement of Operations (Unaudited)
 
Nine months ended September 30, 2017
 
Three months ended September 30, 2017
(Dollars in millions)
Reported
 
Impact of New Standards
 
Restated
 
Reported
 
Impact of New Standards
 
Restated
Sales of products

$60,484

 

$1,183

 

$61,667

 

$21,825

 

($43
)
 

$21,782

Sales of services
7,540

 
28

 
7,568

 
2,484

 
(43
)
 
2,441

Total revenues
68,024

 
1,211

 
69,235

 
24,309

 
(86
)
 
24,223

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products
(49,856
)
 
(1,080
)
 
(50,936
)
 
(18,050
)
 


 
(18,050
)
Cost of services
(5,730
)
 
(12
)
 
(5,742
)
 
(1,910
)
 
31

 
(1,879
)
Boeing Capital interest expense
(53
)
 


 
(53
)
 
(27
)
 


 
(27
)
Total costs and expenses
(55,639
)
 
(1,092
)
 
(56,731
)
 
(19,987
)
 
31

 
(19,956
)
 
12,385

 
119

 
12,504

 
4,322

 
(55
)
 
4,267

Income from operating investments, net