Liabilities, Commitments And Contingencies

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Liabilities, Commitments And Contingencies

Liabilities, Commitments and Contingencies

Accrued Liabilities

Accrued liabilities at December 31 consisted of the following:

	2019		2018
Accrued compensation and employee benefit costs		$5,582		$6,841
737 MAX customer concessions and other considerations	7,389
Environmental	570		555
Product warranties	1,267		1,127
Forward loss recognition	1,681		1,488
Dividends payable	1,159		1,160
Income taxes payable	670		485
Other	4,550		3,152
Total		$22,868		$14,808

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. Deliveries of the 737 MAX have been suspended until clearance is granted by the appropriate regulatory authorities. In addition, multiple legal actions have been filed against us as a result of the accidents. We also are fully cooperating with U.S. government investigations related to the accidents and the 737 MAX program, including investigations by the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate a range of loss, if any, not covered by available insurance that may result given the ongoing status of these law suits, investigations and inquiries.

We have developed software and pilot 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 updates and how pilots will interact with the airplane controls and displays in different flight scenarios. We have assumed that computer and simulator training will be required and as a result, we have provisioned for certain training costs.

Prior to the grounding, the 737 production rate was 52 per month and we had planned to increase the rate to 57 per month during 2019. Beginning in the second quarter of 2019, we reduced the production rate to 42 per month. We have continued to produce at a rate of 42 per month through December 2019, which has resulted in approximately 400 airplanes in inventory as of December 31, 2019. In December 2019, we announced the temporary suspension of 737 MAX production beginning in January 2020 due to a number of factors, including the 737 MAX grounding continuing longer than expected, our decision to prioritize delivery of stored aircraft, and uncertainty about the timing and conditions of return to service and global training approvals. We have assumed that we will resume 737 MAX aircraft production at low rates in 2020 as timing and conditions of return to service are better understood, and then we expect to gradually increase to previously planned production rates over the next few years. We have assumed that regulatory approval will enable 737 MAX deliveries to resume during mid-2020. The cumulative impacts of changes to assumptions regarding timing of return to service and timing of planned production rates and deliveries have increased the estimated costs to produce and deliver aircraft included in the current accounting quantity by approximately $6,300, which will be recorded in program inventory. This will result in lower 737 program margins in future periods after deliveries resume. In addition, the suspension of 737 MAX production and abnormally low production rates once production resumes will result in approximately $4,000 of abnormal production costs during 2020 and 2021 that will be expensed as incurred.

We are working with our customers to minimize the impact to their operations from grounded and undelivered aircraft. During the second quarter of 2019, we recorded an earnings charge (reduction in revenue) and a corresponding liability of $6,110 in connection with estimated potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays. We have insurance coverage for up to $500 of costs arising due to grounded aircraft and have received $500 from our insurance carriers, which partially offset the earnings charges. We continue to reassess the liability for estimated potential concessions and other considerations to customers on a quarterly basis, and in the third and fourth quarters of 2019, we recorded additional charges totaling $2,649. This reassessment includes updating estimates to reflect revised return to service and updated delivery and production rate assumptions, as well as latest information based on engagements with 737 MAX customers. The liability represents our current best estimate of future concessions and other considerations to customers, and is necessarily based on a series of assumptions.

The following table summarizes changes in the 737 MAX customer concessions and other considerations liability during 2019.

	2019
Beginning balance – January 1
Initial liability recorded in the second quarter of 2019		$6,110
Reductions for payments made	(1,237		)
Reductions for concessions and other in-kind considerations	(133		)
Changes in estimates	2,649
Ending balance – December 31		$7,389

We have also recorded additional expenses of $328 as a result of the 737 MAX grounding. These expenses include costs related to storage, pilot training and software updates.

The FAA and other non-U.S. civil aviation authorities will determine the timing and conditions of return to service. Our assumptions reflect our current best estimate, but actual timing and conditions of return to service and resumption of deliveries could differ from this estimate, the effect of which could be material. 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 future production rate increases occur at a slower rate or take longer than we are currently assuming we expect that the growth in inventory and other cash flow impacts associated with production would decrease. However, while any prolonged production suspension or delays in planned production rate increases could mitigate the impact 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 and/or increase abnormal production costs 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 half of the airplanes 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. A small percentage of airplanes with fewer than 22,600 flight cycles have also been inspected. We have estimated the number of aircraft that will have to be repaired in the future and provisioned for the estimated costs of completing the repairs. We recognized charges of $135 in 2019 for current and projected future aircraft repairs. However, we cannot estimate a range of reasonably possible losses, if any, in excess of amounts recognized 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 years ended December 31, 2019 and 2018.

	2019			2018
Beginning balance – January 1		$555			$524
Reductions for payments made	(47		)	(37		)
Changes in estimates	62			68
Ending balance – December 31		$570			$555

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 December 31, 2019 and 2018, the high end of the estimated range of reasonably possible remediation costs exceeded our recorded liabilities by $1,077 and $796.

Product Warranties

The following table summarizes product warranty activity recorded during the years ended December 31, 2019 and 2018.

	2019			2018
Beginning balance – January 1		$1,127			$1,211
Additions for current year deliveries	188			232
Reductions for payments made	(249		)	(193		)
Changes in estimates	201			(123		)
Ending balance – December 31		$1,267			$1,127

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 December 31, 2019 have expiration dates from 2020 through 2026. At December 31, 2019 and 2018, total contractual trade-in commitments were $1,407 and $1,519. As of December 31, 2019 and 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 $711 and $522 and the fair value of the related trade-in aircraft was $678 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 $13,377 and $19,462 as of December 31, 2019 and 2018. The estimated earliest potential funding dates for these commitments as of December 31, 2019 are as follows:

	Total
2020		$3,506
2021	2,981
2022	1,343
2023	2,163
2024	1,407
Thereafter	1,977
		$13,377

As of December 31, 2019, all of these financing commitments relate 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 $3,769 and $3,761 as of December 31, 2019 and 2018.

Company Owned Life Insurance

McDonnell Douglas Corporation insured its executives with Company Owned Life Insurance (COLI), which are life insurance policies with a cash surrender value. Although we do not use COLI currently, these obligations from the merger with McDonnell Douglas are still a commitment at this time. We have loans in place to cover costs paid or incurred to carry the underlying life insurance policies. As of December 31, 2019 and 2018, the cash surrender value was $448 and $466 and the total loans were $431 and $447. As we have the right to offset the loans against the cash surrender value of the policies, we present the net asset in Other assets on the Consolidated Statements of Financial Position as of December 31, 2019 and 2018.

United States Government Defense Environment Overview

The Bipartisan Budget Act 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. The consolidated appropriations acts for FY20, enacted in December 2019, provided FY20 appropriations for government departments and agencies, including the United States Department of Defense (U.S. DoD), the National Aeronautics and Space Administration (NASA) and the FAA.

The enacted FY20 appropriations included funding for Boeing’s major programs, such as the F/A-18 Super Hornet, F-15EX, CH-47 Chinook, AH-64 Apache, V-22 Osprey, KC-46A Tanker, P-8 Poseidon and Space Launch System. However, 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, including changes associated with the authorizations and appropriations process, 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, 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 of $148 on KC-46A Tanker and $489 on Commercial Crew in 2019. Moreover, our fixed-price development programs remain subject to additional reach-forward losses if we experience further production, 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 and involves highly complex designs and systems integration. Since 2016, the USAF has authorized five low rate initial production (LRIP) lots for a total of 67 aircraft. The EMD contract and authorized LRIP lots are valued at approximately $15 billion.

At December 31, 2019, we had approximately $331 of capitalized precontract costs and $225 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.