Commitments And Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

737 MAX Grounding

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

We have developed software and training updates for the 737 MAX and continue to work with the FAA and non-U.S. civil aviation authorities to complete remaining steps toward certification and readiness for return to service including addressing their questions on the software changes and how pilots will interact with the airplane controls and displays in different flight scenarios. The FAA and other civil aviation authorities worldwide will determine the timing and conditions of return to service in each relevant jurisdiction. Charges recognized during 2019 associated with the software updates and related pilot training were not material.

Prior to the grounding, Boeing had delivered 387 737 MAX aircraft of which 57 were delivered in the first quarter of 2019. On April 5, 2019, we announced plans to reduce the 737 production rate from 52 aircraft per month to 42 per month effective April 15, 2019. The resulting impacts, which were reflected in the first quarter, increased costs to produce aircraft included in the current accounting quantity by $1,016. Estimated costs to produce aircraft included in the current accounting quantity increased by $1,748 during the second quarter of 2019 and $872 during the third quarter of 2019, primarily to reflect updates to assumptions regarding timing of return to service and timing of planned production rate increases. These increases in the costs to produce aircraft in the current accounting quantity will reduce 737 program and overall BCA segment operating margins in future quarters after deliveries resume. Prior to the grounding, we expected 737 MAX deliveries to approximate 90 percent of total 737 deliveries in 2019 and we had planned to increase the production rate to 57 per month in 2019. In addition to the grounding, the timing of 737 MAX deliveries during the first quarter was adversely affected by delays in the supply chain. We may face additional costs, delays in return to service, and/or further reductions in the production rate. We are continuing to produce at 42 aircraft per month and we will continue to evaluate potential future reductions in the production rate, including a temporary shutdown in 737 production. For example, significant additional regulatory requirements and/or delays in return to service beyond our current assumption could cause customers to cancel or defer orders, which could also cause us to reduce or temporarily cease 737 MAX production.

The grounding has reduced revenues, operating earnings and cash flows in 2019 and will continue to adversely affect our results until deliveries resume and production rates increase. We are also working with our customers to minimize the impact to their operations. In the second quarter, we recorded an earnings charge of $5,610, net of insurance recoveries of $500, in connection with estimated potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays. This charge is reflected in the financial statements as a reduction in revenue, an increase in Other current assets and an increase in Accrued liabilities. During the third quarter of 2019, we collected the anticipated $500 from our insurance carriers and reduced the liability of $6,110 by $252 for payments, concessions and other in-kind considerations agreed to with customers. In addition, we reassessed the liability for estimated potential concessions and other considerations to customers. This reassessment included updating estimates to reflect revised return to service and production rate assumptions, as well as latest information based on engagements with 737 MAX customers. Based on this reassessment, we concluded that no significant adjustments to the recorded liability were required in the third quarter. The liability represents our best estimate of future concessions and other considerations to customers, and is necessarily based on a series of assumptions. While the FAA and other non-U.S. civil aviation authorities will determine the timing and conditions of return to service, we have assumed that regulatory approval of 737 MAX return to service begins in the fourth quarter of 2019. This assumption reflects our best estimate at this time, but actual timing and conditions of return to service could differ from this estimate, the effect of which could be material. In addition, we have assumed that we will gradually increase the 737 production rate from 42 per month to 57 per month by late 2020. Following return to service we expect the 737 MAX

airplanes produced during the grounding and included within inventory will be delivered over several quarters with the majority of them delivering in the first year. We are unable at this time to reasonably estimate potential future additional financial impacts or a range of loss, if any, due to continued uncertainties related to the timing and conditions of return to service, future changes to the production rate, supply chain impacts or the results of negotiations with particular customers. Any such impacts, including any changes in our estimates, could have a material adverse effect on our financial position, results of operations, and/or cash flows. For example, we expect that, in the event that we are unable to resume aircraft deliveries consistent with our assumptions, the continued absence of revenue, earnings, and cash flows associated with 737 MAX deliveries would continue to have the most material impact on our operating results. In the event that we decide to further reduce the 737 production rate or temporarily cease production, we expect that the growth in inventory and other cash flow impacts associated with production would decrease. However, while any such reduction or cessation of production could mitigate the impact of continued production on our liquidity it could significantly increase the overall expected costs to produce aircraft included in the accounting quantity, which would reduce 737 program margins in the future.

737NG Structure (Pickle Fork)

During the third quarter of 2019, we detected cracks in the "pickle forks," a component of the structure connecting the wings to the fuselages, of three 737-800NGs we were converting into freighters. We notified the FAA, which issued a directive requiring that 737NG airplanes with over 30,000 flight cycles be inspected for this condition by October 10, 2019, and that airplanes with over 22,600 flight cycles be inspected over the next 1,000 flight cycles. To date, all airplanes with over 30,000 flight cycles and approximately one third of planes with over 22,600 flights cycles have been inspected and this condition has been found on a small percentage of aircraft, and those aircraft will be repaired. Additional assessments are underway to determine the cause and potential implications of this condition for airplanes with fewer than 22,600 flight cycles. Depending on the results of these assessments, additional inspections or repairs may be required. Charges recognized in the third quarter in connection with estimated repair costs for aircraft with over 22,600 flight cycles were not material. However, we cannot reasonably estimate potential future financial impacts, if any, due to the ongoing nature of the inspections and repairs and pending the completion of investigations into the cause of the condition.

Environmental

The following table summarizes environmental remediation activity during the nine months ended September 30, 2019 and 2018.



	2019			2018
Beginning balance – January 1		$555			$524
Reductions for payments made	(34		)	(17		)
Changes in estimates	61			61
Ending balance – September 30		$582			$568

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 September 30, 2019 and December 31, 2018, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $1,064 and $796.

Product Warranties

The following table summarizes product warranty activity recorded during the nine months ended September 30, 2019 and 2018.



	2019			2018
Beginning balance – January 1		$1,127			$1,211
Additions for current year deliveries	128			176
Reductions for payments made	(166		)	(135		)
Changes in estimates	(7		)	(151		)
Ending balance – September 30		$1,082			$1,101

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 September 30, 2019 have expiration dates from 2019 through 2026. At September 30, 2019, and December 31, 2018 total contractual trade-in commitments were $1,421 and $1,519. As of September 30, 2019 and December 31, 2018, we estimated that it was probable we would be obligated to perform on certain of these commitments with net amounts payable to customers totaling $723 and $522 and the fair value of the related trade-in aircraft was $690 and $485.

Financing Commitments

Financing commitments related to aircraft on order, including options and those proposed in sales campaigns, and refinancing of delivered aircraft, totaled $15,607 and $19,462 as of September 30, 2019 and December 31, 2018. The estimated earliest potential funding dates for these commitments as of September 30, 2019 are as follows:



	Total
October through December 2019		$560
2020	3,104
2021	2,989
2022	1,348
2023	2,169
Thereafter	5,437
		$15,607

As of September 30, 2019, $15,452 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.

Funding Commitments

We have commitments to make additional capital contributions of $246 to joint ventures over the next eight years.

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 $3,598 and $3,761 as of September 30, 2019 and December 31, 2018.

United States Government Defense Environment Overview

The Bipartisan Budget Act (BBA) of 2019 raised the Budget Control Act limits on federal discretionary defense and non-defense spending for fiscal years 2020 and 2021 (FY20 and FY21), reducing budget uncertainty and the risk of sequestration. Although overall funding levels have been agreed to, the timeliness of FY20 funding for government departments and agencies, including the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA) and the Federal Aviation Administration (FAA), remains a risk. The Continuing Resolution (CR), enacted on September 27, 2019, continues federal funding at FY19 appropriations levels through November 21, 2019. Congress and the President must enact either full-year FY20 appropriations bills or an additional CR to fund government departments and agencies beyond November 21, 2019 in order to prevent a future government shutdown.

A government shutdown may impact the Company's operations. For example, requirements to furlough employees in the U.S. DoD, the Department of Transportation or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders. Congress may fund FY20 by passing one or more CRs; however, this could restrict the execution of certain program activities and delay new programs or competitions.

There continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government agencies, including NASA. 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 our results of operations, financial position and/or cash flows.

BDS Fixed-Price Development Contracts

Fixed-price development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work. BDS fixed-price contracts with significant development work include Commercial Crew, USAF KC-46A Tanker, T-7A Red Hawk (formerly T-X Trainer), VC-25B Presidential Aircraft, MQ-25, and commercial and military satellites. The operational and technical complexities of these contracts create financial risk, which could trigger termination provisions, order cancellations or other financially significant exposure. Changes to cost and revenue estimates could result in lower margins or material charges for reach-forward losses. For example, we have recorded reach-forward losses on the KC-46A Tanker and we continue to have risk for further losses if we experience further production, technical or quality issues. In addition, in 2018, in connection with winning the T-7A Red Hawk and MQ-25 competitions, we recorded a loss of $400 associated with options for 346 T-7A Red Hawk aircraft and a loss of $291 related to the MQ-25 Engineering, Manufacturing and Development (EMD) contract. Moreover, our fixed-price development programs remain subject to additional reach-forward losses if we experience further technical or quality issues, schedule delays, or increased costs.

KC-46A Tanker

In 2011, we were awarded a contract from the U.S. Air Force (USAF) to design, develop, manufacture and deliver four next generation aerial refueling tankers. This EMD contract is a fixed-price incentive fee contract valued at $4.9 billion and involves highly complex designs and systems integration. In 2016, the USAF authorized two low rate initial production (LRIP) lots for 7 and 12 aircraft valued at $2.8 billion. In January 2017, the USAF authorized an additional LRIP lot for 15 aircraft valued at $2.1 billion. On September 10, 2018, the USAF authorized an additional 18 aircraft valued at $2.9 billion. On September 27, 2019, the USAF authorized an additional LRIP lot for 15 aircraft valued at $2.6 billion.

At September 30, 2019, we had approximately $304 of capitalized precontract costs and $150 of potential termination liabilities to suppliers.

Recoverable Costs on Government Contracts

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