Commitments And Contingencies

6 Months Ended

Jun. 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 been developing a software update to the Maneuvering Characteristics Augmentation System (MCAS) on the 737 MAX, together with an associated pilot training and supplementary education program. We continue to work with the FAA and other regulatory agencies worldwide to develop and certify the software update and training program. Additionally, on June 26, 2019, the FAA directed us to address a specific condition of flight, unrelated to MCAS, that the planned software update did not previously address. We agreed with the FAA's decision and are currently working on the software update to address this requirement, and we will not offer the 737 MAX for certification until we have satisfied all requirements for certification and the safe return of the 737 MAX to service. Charges recognized during the first half of 2019 associated with the software updates and related pilot training were immaterial.

Prior to the grounding, Boeing had delivered 387 737 MAX aircraft of which 57 were delivered in the first quarter of 2019. On April 5, 2019, we announced plans to reduce the 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 and reduced 737 program and overall BCA segment operating margins. 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. During the second quarter of 2019, estimated costs to produce aircraft included in the current accounting quantity increased by $1,748 primarily due to higher costs associated with a longer than expected reduction in the production rate. 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.

The grounding has reduced revenues, operating earnings and cash flows during the first half of 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 estimated 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. The charge represents our best estimate of future concessions and other considerations to customers, and is necessarily based on a series of assumptions, including an assumption with respect to the timing of the 737 MAX’s return to service. While the FAA and other civil aviation authorities will determine the timing and conditions of return to service, this charge assumes that regulatory approval of 737 MAX return to service in the U.S. and other jurisdictions begins early 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, this charge assumes that we will gradually increase the 737 production rate from 42 per month to 57 per month in 2020, and that 737 MAX airplanes produced during the grounding and included within inventory will be delivered over several quarters following return to service. 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.

Environmental

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



	2019			2018
Beginning balance – January 1		$555			$524
Reductions for payments made	(24		)	(8		)
Changes in estimates	17			18
Ending balance – June 30		$548			$534

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 June 30, 2019 and December 31, 2018, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $1,099 and $796.

Product Warranties

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



	2019			2018
Beginning balance – January 1		$1,127			$1,211
Additions for current year deliveries	83			130
Reductions for payments made	(64		)	(72		)
Changes in estimates	(83		)	(140		)
Ending balance – June 30		$1,063			$1,129

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 June 30, 2019 have expiration dates from 2019 through 2026. At June 30, 2019, and December 31, 2018 total contractual trade-in commitments were $1,456 and $1,519. As of June 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 $739 and $522 and the fair value of the related trade-in aircraft was $706 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 $14,277 and $19,462 as of June 30, 2019 and December 31, 2018. The estimated earliest potential funding dates for these commitments as of June 30, 2019 are as follows:



	Total
July through December 2019		$873
2020	3,143
2021	2,994
2022	1,350
2023	2,134
Thereafter	3,783
		$14,277

As of June 30, 2019, $14,122 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 $248 to joint ventures over the next 8 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 $3,704 and $3,761 as of June 30, 2019 and December 31, 2018.

United States Government Defense Environment Overview

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

There continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government agencies, including NASA. The 2011 Budget Control Act continues to mandate spending caps on U.S. government discretionary spending for fiscal years 2020 and 2021 (FY20 and FY21) that are lower than FY18 and FY19. As a result, continued budget uncertainty and the risk of future sequestration cuts remain. Future budget cuts or investment priority changes could result in reductions, cancellations and/or delays of existing contracts or programs. Any of these impacts could have a material effect on our results of operations, financial position and/or cash flows.

Funding timeliness also remains a risk. If Congress is unable to pass appropriations bills before the beginning of FY20 on October 1, 2019, a government shutdown could result which may have impacts above and beyond those resulting from budget cuts, sequestration impacts or program-level appropriations. 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. Alternatively, Congress may fund FY20 by passing one or more Continuing Resolutions; however, this could restrict the execution of certain program activities and delay new programs or competitions.

BDS Fixed-Price Development Contracts

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

KC-46A Tanker

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

At June 30, 2019, we had approximately $404 of capitalized precontract costs and $1,104 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.