Consolidated Results of Operations and Financial Condition Overview We are a global market leader in the design, development, manufacture, sale, service and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. We are one of the two major manufacturers of 100+ seat airplanes for the worldwide commercial airline industry and one of the largest defense contractors in theU.S. While our principal operations are in theU.S. , we conduct operations in an expanding number of countries and rely on an extensive network of non-U.S. partners, key suppliers and subcontractors. Our strategy is centered on successful execution in healthy core businesses - Commercial Airplanes (BCA), Defense, Space & Security (BDS), and Global Services (BGS) - supplemented and supported byBoeing Capital (BCC). Taken together, these core businesses have historically generated substantial earnings and cash flow that permit us to invest in new products and services. We focus on producing the products and providing the services that the market demands, and continue to find new ways to improve efficiency and quality to provide a fair return for our shareholders. BCA is committed to being the leader in commercial aviation by offering airplanes and services that deliver superior design, safety, efficiency and value to customers around the world. BDS integrates its resources in defense, intelligence, communications, security, space and services to deliver capability-driven solutions to customers at reduced costs. Our BDS strategy is to leverage our core businesses to capture key next-generation programs while expanding our presence in adjacent and international markets, underscored by an intense focus on growth and productivity. BGS provides support for commercial and defense through innovative, comprehensive, and cost-competitive product and service solutions. BCC facilitates, arranges, structures and provides selective financing solutions for ourBoeing customers. OnMarch 13, 2019 , theFederal Aviation Administration (FAA ) issued an order to suspend operations of all 737 MAX aircraft in theU.S. and byU.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. The grounding is having a significant adverse impact on our operations and creates significant uncertainty. We are focused on safely returning the 737 MAX to service. 19
--------------------------------------------------------------------------------
Table of Contents
Consolidated Results of Operations The following table summarizes key indicators of consolidated results of operations: (Dollars in millions, except per share data) Years ended December 31, 2019 2018 2017 Revenues$76,559 $101,127 $94,005 GAAP (Loss)/earnings from operations ($1,975 )$11,987 $10,344 Operating margins (2.6 )% 11.9 % 11.0 % Effective income tax rate 71.8 % 9.9 % 16.3 % Net (loss)/earnings ($636 )$10,460 $8,458 Diluted (loss)/earnings per share ($1.12 )$17.85
Non-GAAP (1) Core operating (loss)/earnings ($3,390 )$10,660
Core operating margins (4.4 %) 10.5 % 9.5 % Core (loss)/earnings per share ($3.47 )$16.01
(1) These measures exclude certain components of pension and other postretirement
benefit expense. See page 42 - 43 for important information about these
non-GAAP measures and reconciliations to the most comparable GAAP measures.
Revenues
The following table summarizes Revenues: (Dollars in millions) Years ended December 31, 2019 2018 2017 Commercial Airplanes$32,255 $57,499 $54,612 Defense, Space & Security 26,227 26,392 23,938 Global Services 18,468 17,056 14,611Boeing Capital 244 274 307 Unallocated items, eliminations and other (635 ) (94 ) 537 Total$76,559 $101,127 $94,005 Revenues decreased by$24,568 million in 2019 compared with 2018 primarily due to lower revenues at BCA, partially offset by higher revenues at BGS. Lower BCA revenues are primarily driven by lower 737 MAX deliveries and a revenue reduction of$8,259 million recorded in 2019 for estimated potential concessions and other considerations to customers for disruptions and associated delivery delays related to the 737 MAX grounding, net of insurance recoveries. Revenues increased by$7,122 million in 2018 compared with 2017 due to higher revenues at BCA, BDS, and BGS. BCA revenues increased by$2,887 million due to higher 737 and 787 deliveries and favorable 737 and 787 model mix, which more than offset lower 777 and 747 deliveries. BDS revenues increased by$2,454 million primarily due to non-US contract awards for fighters, higher weapons revenue, the final C-17 aircraft sale and higher satellites revenue. BGS revenues increased by$2,445 million due to higher parts revenue, including the acquisition of KLX, Inc. (KLX) in the fourth quarter of 2018. 20
--------------------------------------------------------------------------------
Table of Contents
The changes in Unallocated items, eliminations and other in 2019, 2018 and 2017 primarily reflect the timing of eliminations for intercompany aircraft deliveries and the sale of aircraft previously leased to customers. Earnings From Operations The following table summarizes Earnings from operations: (Dollars in millions) Years ended December 31, 2019 2018 2017 Commercial Airplanes ($6,657 )$7,830 $5,285 Defense, Space & Security 2,608 1,657 2,383 Global Services 2,697 2,536 2,251Boeing Capital 28 79 114 Segment operating (loss)/profit (1,324 ) 12,102
10,033
Pension FAS/CAS service cost adjustment 1,071 1,005
1,127
Postretirement FAS/CAS service cost adjustment 344 322
311
Unallocated items, eliminations and other (2,066 ) (1,442 ) (1,127 ) (Loss)/earnings from operations (GAAP) ($1,975 )$11,987 $10,344 FAS/CAS service cost adjustment * (1,415 ) (1,327 )
(1,438 )
Core operating (loss)/earnings (Non-GAAP) ** (
* The FAS/CAS service cost adjustment represents the difference between the FAS
pension and postretirement service costs calculated under GAAP and costs
allocated to the business segments. ** Core operating earnings is a Non-GAAP measure that excludes the FAS/CAS service cost adjustment. See page 42. Loss from operations was$1,975 million in 2019 compared with earnings from operations of$11,987 million in 2018. The decrease of$13,962 million is primarily due to a loss from operations at BCA of$6,657 million in 2019 compared to earnings from operations of$7,830 million in 2018, partially offset by higher earnings at BDS and BGS in 2019 compared with 2018. BCA decreased by$14,487 million due to lower 737 deliveries and the earnings charge for the 737 MAX grounding of$8,259 million , net of insurance recoveries. BDS earnings from operations increased by$951 million primarily due to lower charges in 2019 for development programs. BGS earnings from operations increased by$161 million primarily due to higher revenues, which was partially offset by less favorable performance and mix. Earnings from operations increased by$1,643 million in 2018 compared with 2017 primarily due to higher earnings at BCA and BGS, which more than offset the decrease at BDS and the change in Unallocated items, eliminations and other. BCA earnings from operations increased by$2,545 million due to higher revenues and improved operating margins. The increase in operating margins is primarily due to higher 787 margins, improved cost performance and favorable delivery mix. BGS earnings from operations increased by$285 million primarily due to higher revenues, partially offset by higher period costs. BDS earnings from operations decreased by$726 million as earnings growth from higher revenues was more than offset by charges of$691 million related to winning the T-7A Red Hawk and MQ-25 competitions, as well as higher KC-46A Tanker reach-forward losses. During 2019, 2018 and 2017, we recorded reach-forward losses on the KC-46A Tanker program of$148 million ,$736 million , and$445 million , respectively. Core operating earnings decreased by$14,050 million in 2019 compared with 2018 primarily due to a loss from operations at BCA in 2019, partially offset by higher earnings at BDS and BGS. 21
--------------------------------------------------------------------------------
Table of Contents
Core operating earnings increased by$1,754 million in 2018 compared with 2017 primarily due to higher earnings at BCA and BGS, partially offset by lower earnings at BDS and higher unallocated expenses. Unallocated Items, Eliminations and Other The most significant items included in Unallocated items, eliminations and other are shown in the following table: (Dollars in millions) Years ended December 31, 2019 2018 2017 Share-based plans ($65 ) ($76 ) ($77 ) Deferred compensation (174 ) (19 ) (240 ) Amortization of previously capitalized interest (89 ) (92 ) (96 ) Research and development expense, net (384 ) (132 )
42
Customer financing impairment (250 ) Litigation (109 ) (148 ) Eliminations and other unallocated items (995 ) (975 )
(756 )
Unallocated items, eliminations and other (
Deferred compensation expense increased by$155 million in 2019 and decreased by$221 million in 2018, primarily driven by changes in broad stock market conditions and our stock price. Research and development expense increased by$252 million in 2019 and increased by$174 million in 2018 primarily due to spending byBoeing NeXt on product development. In 2019, we recorded a$250 million charge related to the impairment of lease incentives with one customer that experienced liquidity issues, and a$109 million charge related to ongoing litigation associated with recoverable costs onU.S. government contracts. In 2018, we recorded a$148 million charge related to the outcome of the Spirit litigation. Eliminations and other unallocated expense increased by$20 million in 2019 and$219 million in 2018 primarily due to timing of expense allocations. Net periodic pension benefit costs included in Earnings from operations were as follows: (Dollars in millions) Pension Years ended December 31, 2019 2018 2017 Allocated to business segments ($1,384 ) ($1,318 ) ($1,637 ) Pension FAS/CAS service cost adjustment 1,071
1,005 1,127 Net periodic benefit cost included in (Loss)/earnings from operations
($313 )
(
The pension FAS/CAS service cost adjustment recognized in Earnings from operations in 2019, 2018, and 2017 was largely consistent across all periods. The net periodic benefit cost included in Earnings from operations in 2019 was consistent with 2018, as reductions in current year service cost were offset by higher amortization of prior year service costs. The decrease in net periodic benefit cost included in Earnings from operations in 2018 compared to 2017 was primarily due to a lower portion of service cost recognized in Earnings from operations. For additional discussion related to Postretirement Plans, see Note 17 to our Consolidated Financial Statements. 22
--------------------------------------------------------------------------------
Table of Contents Other Earnings Items (Dollars in millions) Years ended December 31, 2019 2018 2017 (Loss)/earnings from operations ($1,975 )$11,987 $10,344 Other income, net 438 92 123 Interest and debt expense (722 ) (475 ) (360 ) (Loss)/earnings before income taxes (2,259 ) 11,604
10,107
Income tax benefit/(expense) 1,623 (1,144 )
(1,649 )
Net (loss)/earnings from continuing operations (
Other income, net increased by$346 million in 2019 primarily due to higher non-operating pension income. Other income, net decreased by$31 million in 2018 primarily due to lower gains from foreign exchange, partially offset by higher interest income. The non-operating pension income included in Other income, net was$374 million in 2019,$143 million in 2018, and$117 million in 2017. The increased income in 2019 compared to 2018 was due to lower amortization of actuarial losses, partially offset by decreases in expected return on assets and increases in interest cost. The increase in 2018 compared to 2017 was due to decreases in interest cost and increases in estimated return on assets, partially offset by higher amortization of actuarial losses. Interest and debt expense increased by$247 million in 2019 and increased by$115 million in 2018 as a result of higher debt balances. For additional discussion related to Income Taxes, see Note 5 to our Consolidated Financial Statements. Total Costs and Expenses ("Cost of Sales") Cost of sales, for both products and services, consists primarily of raw materials, parts, sub-assemblies, labor, overhead and subcontracting costs. Our BCA segment predominantly uses program accounting to account for cost of sales. Under program accounting, cost of sales for each commercial airplane program equals the product of (i) revenue recognized in connection with customer deliveries and (ii) the estimated cost of sales percentage applicable to the total remaining program. For long-term contracts, the amount reported as cost of sales is recognized as incurred. Substantially all contracts at our BDS segment and certain contracts at our BGS segment are long-term contracts with theU.S. government and other customers that generally extend over several years. Costs on these contracts are recorded as incurred. Cost of sales for commercial spare parts is recorded at average cost. The following table summarizes cost of sales: (Dollars in millions) Years ended December 31 2019 2018 Change 2018 2017 Change Cost of sales$72,093 $81,490 ($9,397 )$81,490 $76,612 $4,878
Cost of sales as a % of revenues 94.2 % 80.6 % 13.6 % 80.6 % 81.5 % (0.9 )% Cost of sales decreased by$9,397 million in 2019 compared with 2018, primarily due to lower revenue and lower reach-forward losses. Cost of sales as a percentage of Revenues increased in 2019 primarily due to the 737 MAX grounding. Cost of sales increased by$4,878 million in 2018 compared with 2017, primarily due to higher revenue and higher reach-forward losses. 23
--------------------------------------------------------------------------------
Table of Contents
Research and Development The following table summarizes our Research and development expense: (Dollars in millions) Years ended December 31, 2019 2018 2017 Commercial Airplanes$1,956 $2,188 $2,247 Defense, Space & Security 758 788 834 Global Services 121 161 140 Other 384 132 (42 ) Total$3,219 $3,269 $3,179 Research and development expense decreased by$50 million in 2019 compared with 2018 primarily due to lower spending on 777X and 737 MAX, partially offset by higher spending by BCA andBoeing NeXt on product development. Research and development expense increased by$90 million in 2018 compared with 2017 due to investment in product development, partially offset by lower spending on 777X and 787-10. Backlog Our backlog atDecember 31 was as follows: (Dollars in millions) Years ended December 31, 2019 2018 Commercial Airplanes$376,593 $408,140 Defense, Space & Security 63,908 61,277 Global Services 22,902 21,064 Total Backlog$463,403 $490,481 Contractual backlog$436,473 $462,070 Unobligated backlog 26,930$28,411 Total Backlog$463,403 $490,481 Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligatedU.S. and non-U.S. government contract funding. The decrease in contractual backlog during 2019 was primarily due to BCA deliveries in excess of new orders and a reduction in backlog related to orders from a customer that experienced liquidity issues, partially offset by BDS current year contract awards in excess of revenue recognized on contracts awarded in prior years Unobligated backlog includesU.S. and non-U.S. government definitive contracts for which funding has not been authorized. The decrease in unobligated backlog in 2019 was primarily due to reclassifications to contractual backlog related to BDS and BGS contracts partially offset by contract awards. Additional ConsiderationsExport-Import Bank of the United States Many of our non-U.S. customers finance purchases through theExport-Import Bank of the United States . The bank is authorized throughDecember 31, 2026 . 24
--------------------------------------------------------------------------------
Table of Contents
Global Trade We continually monitor the global trade environment for changes in tariffs, trade agreements, sanctions or other potential geopolitical economic developments that may impact the company. Beginning inJune 2018 , theU.S. Government has imposed tariffs on steel and aluminum imports. In response to these tariffs, several majorU.S. trading partners have imposed, or announced their intention to impose, tariffs onU.S. goods. InMay 2019 , theU.S. Government ,Mexico andCanada reached an agreement to end the steel and aluminum tariffs between these countries. Passage of theU.S. /Mexico /Canada Free Trade Agreement (USMCA) will also result in lower tariffs. We continue to monitor the potential for any extra costs that may result from the remaining global tariffs. Since 2018, theU.S. andChina imposed tariffs on approximately$34 billion of each other's exports inJuly 2018 . Certain aircraft parts and components thatBoeing procures are subject to these tariffs. Subsequently, theU.S. imposed tariffs on an additional$216 billion in Chinese goods, andChina imposed tariffs on an additional$76 billion worth ofU.S goods. TheU.S. andChina Phase I agreement inJanuary 2020 is a positive development for overall trade withChina . Negotiations to resolve remaining trade issues continue. Overall global trade tensions and increased market uncertainty have resulted in fewer orders than anticipated for our commercial aircraft. TheU.S. Government continues to impose and/or consider imposing sanctions on certain businesses and individuals inRussia . Although our operations or sales inRussia have not been impacted to date, we continue to monitor additional sanctions that may be imposed by theU.S. Government and any responses fromRussia that could affect our supply chain, business partners or customers. Segment Results of Operations and Financial Condition Commercial Airplanes Business Environment and Trends Airline Industry Environment Global economic growth, a primary driver for air travel, was 2.6% in 2019, slightly below the long-term average of approximately 3%. Passenger traffic is estimated to grow by 4% to 5% in 2019, close to the long-term average of approximately 5%. The grounding of the 737 MAX and suspension of 737 MAX deliveries has slowed growth at certain airlines. While growth was solid across most major world regions, there continues to be variation between regions and airline business models. Despite some moderation in the growth rates, airlines operating inAsia Pacific andEurope , as well as low-cost-carriers globally, are leading the 2019 growth in passenger traffic. Air cargo traffic growth is expected to contract this year due to weak global trade growth. Airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on increasing revenue through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services and related revenues. Airlines are also focusing on reducing costs and renewing fleets to leverage more efficient airplanes. Net profits in 2019 are expected to approximate$26 billion . The long-term outlook for the industry continues to remain positive due to the fundamental drivers of air travel demand: economic growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. Our 20-year forecast projects a long-term average growth rate of 4.6% per year for passenger traffic and 4.2% for cargo traffic. Based on long-term global economic growth projections of 2.7% average annual GDP growth, we project a$6.8 trillion market for approximately 44,000 new airplanes over the next 20 years. The industry remains vulnerable to exogenous developments including fuel price spikes, credit market shocks, acts of terrorism, natural disasters, conflicts, epidemics and increased global environmental regulations. 25
--------------------------------------------------------------------------------
Table of Contents
Industry Competitiveness The commercial jet airplane market and the airline industry remain extremely competitive. Market liberalization inEurope , theMiddle East andAsia is enabling low-cost airlines to continue gaining market share. These airlines are increasing the pressure on airfares. This results in continued cost pressures for all airlines and price pressure on our products. Major productivity gains are essential to ensure a favorable market position at acceptable profit margins. Continued access to global markets remains vital to our ability to fully realize our sales potential and long-term investment returns. Approximately 80% of Commercial Airplanes' total backlog, in dollar terms, is with non-U.S. airlines. We face aggressive international competitors who are intent on increasing their market share. They offer competitive products and have access to most of the same customers and suppliers. The grounding of the 737 MAX and the associated suspension of 737 MAX deliveries have significantly reduced our market share with respect to deliveries of single aisle aircraft in 2019 and may provide competitors with an opportunity to obtain more orders and increase market share. We are continuing to monitor the impact of the 737 MAX grounding on our suppliers and working to ensure that our supply chain can support our production plans once production resumes. With government support, Airbus has historically invested heavily to create a family of products to compete with ours. After the acquisition of a majority share of Bombardier's C Series (now A220) in 2018, Airbus continues to expand in the 100-150 seat transcontinental market. Additionally, other competitors fromRussia ,China andJapan are developing commercial jet aircraft. Some of these competitors have historically enjoyed access to government-provided financial support, including "launch aid," which greatly reduces the cost and commercial risks associated with airplane development activities. This has enabled the development of airplanes without commercial viability; others to be brought to market more quickly than otherwise possible; and many offered for sale below market-based prices. Many competitors have continued to make improvements in efficiency, which may result in funding product development, gaining market share and improving earnings. This market environment has resulted in intense pressures on pricing and other competitive factors, and we expect these pressures to continue or intensify in the coming years. We are focused on safely returning the 737 MAX to service, improving our products and services and continuing our cost-reduction efforts, which enhances our ability to compete. We are also focused on taking actions to ensure thatBoeing is not harmed by unfair subsidization of competitors. 26
--------------------------------------------------------------------------------
Table of Contents Results of Operations (Dollars in millions) Years ended December 31, 2019 2018 2017 Revenues$32,255 $57,499 $54,612 % of total company revenues 42 % 57 % 58 % (Loss)/earnings from operations ($6,657 )$7,830 $5,285 Operating margins (20.6 )% 13.6 % 9.7 % Research and development$1,956 $2,188 $2,247 Revenues BCA revenues decreased by$25,244 million in 2019 compared with 2018 driven by lower 737 MAX deliveries and a revenue reduction of$8,259 million that was recorded in 2019 for estimated potential concessions and other considerations to customers for disruptions and associated delivery delays related to the 737 MAX grounding, net of$500 million of insurance recoveries. BCA revenues increased by$2,887 million in 2018 compared with 2017 primarily due to higher 737 and 787 deliveries and favorable 737 and 787 model mix, which more than offset lower 777 and 747 deliveries. The 737 MAX grounding will continue to have a significant impact on revenues until deliveries resume. Commercial Airplanes deliveries as ofDecember 31 were as follows: 737 * 747 † 767 * 777 † 787 Total 2019 Cumulative deliveries 7,439 1,555 1,176 1,627 939 Deliveries 127 (19) 7 43 (23) 45 (2) 158
380
2018
Cumulative deliveries 7,312 1,548 1,133 1,582 781 Deliveries
580 (18) 6 27 (10) 48 145 806 2017 Cumulative deliveries 6,732 1,542 1,106 1,534 636 Deliveries 529 (17) 14 (1) 10 74 136 763
* Intercompany deliveries identified by parentheses † Aircraft accounted for as revenues by BCA and as operating leases in consolidation identified by parentheses
Loss/Earnings From Operations BCA loss from operations was$6,657 million in 2019 compared with earnings from operations of$7,830 million in 2018. The decrease of$14,487 million is primarily due to lower 737 deliveries and earnings charges related to the 737 MAX. The 737 MAX grounding and associated changes to our production rate will continue to adversely impact 737 program and overall BCA margins. BCA earnings from operations increased by$2,545 million in 2018 compared with 2017. The increase in operating earnings reflects higher revenues and improved operating margins. The increase in operating margins is primarily due to higher 787 margins, improved cost performance and favorable delivery mix. 27
--------------------------------------------------------------------------------
Table of Contents
Backlog
Our total backlog represents the estimated transaction prices on unsatisfied and partially satisfied performance obligations to our customers where we believe it is probable that we will collect the consideration due and where no contingencies remain before we and the customer are required to perform. Backlog does not include prospective orders where customer controlled contingencies remain, such as the customer receiving approval from its board of directors, shareholders or government or completing financing arrangements. All such contingencies must be satisfied or have expired prior to recording a new firm order even if satisfying such conditions is highly certain. Backlog excludes options and BCC orders. A number of our customers may have contractual remedies, including rights to reject individual airplane deliveries if the actual delivery date is significantly later than the contractual delivery date. We address customer claims and requests for other contractual relief as they arise. The value of orders in backlog is adjusted as changes to price and schedule are agreed to with customers and is reported in accordance with the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). BCA total backlog of$376,593 million atDecember 31, 2019 decreased from$408,140 million atDecember 31, 2018 , primarily due to deliveries in excess of new orders and a reduction in backlog related to orders from a customer that experienced liquidity issues. We are experiencing fewer new 737 MAX orders than we were receiving prior to the grounding. If 737 MAX aircraft remain grounded for an extended period of time, we may experience reductions to backlog and/or significant order cancellations. To date, the 737 MAX grounding has not resulted in significant order cancellations. Accounting Quantity The accounting quantity is our estimate of the quantity of airplanes that will be produced for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. It is a key determinant of the gross margins we recognize on sales of individual airplanes throughout a program's life. Estimation of each program's accounting quantity takes into account several factors that are indicative of the demand for that program, including firm orders, letters of intent from prospective customers and market studies. We review our program accounting quantities quarterly. The accounting quantity for each program may include units that have been delivered, undelivered units under contract, and units anticipated to be under contract in the reasonable future (anticipated orders). In developing total program estimates, all of these items within the accounting quantity must be considered. 28
--------------------------------------------------------------------------------
Table of Contents
The following table provides details of the accounting quantities and firm orders by program as ofDecember 31 . Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries plus undelivered firm orders. Program 737 † 747* 767 777 † 777X 787 † 2019 Program accounting quantities 10,400 1,574 1,195 1,690 ** 1,600 Undelivered units under firm orders 4,398 17 94 68 309 520 (29) Cumulative firm orders 11,837 1,572 1,270 1,695 309 1,459 (29) 2018 Program accounting quantities 10,400 1,574 1,195 1,680 ** 1,600 Undelivered units under firm orders 4,708 (75) 24 111 100 (2) 326 604 (30) Cumulative firm orders 12,020 1,572 1,244 1,682 326 1,385 2017 Program accounting quantities 9,800 1,570 1,171 1,625 ** 1,400 Undelivered units under firm orders 4,613 12 98 97 326 640 Cumulative firm orders 11,345 1,554 1,204 1,631 326 1,276 † Aircraft ordered by BCC are identified in parentheses. * AtDecember 31, 2019 , the 747 accounting quantity includes one already completed aircraft that has not been sold and is being remarketed. ** The accounting quantity for the 777X will be determined in the year of first airplane delivery. Program Highlights 737 Program See the discussion of the 737 MAX Grounding and 737NG Structure (Pickle Fork) in Note 14 to our Consolidated Financial Statements. 747 Program We are currently producing at a rate of 0.5 aircraft per month. We believe that ending production of the 747 at the end of the current accounting quantity would not have a material impact on our financial position, results of operations or cash flows. 767 Program The 767 assembly line includes the commercial program and a derivative to support the tanker program. We are increasing our combined production rate from 2.5 to 3 per month in 2020. 777 Program The accounting quantity for the 777 program increased by 10 units during 2019 due to the program's normal progress of obtaining additional orders and delivering airplanes. In 2013, we launched the 777X, which features a new composite wing, new engines and folding wing-tips. We have experienced issues in engine design and development on the 777X. The first flight of the 777X was completed onJanuary 25, 2020 , and first delivery is targeted for 2021. The 777 and 777X programs have a combined production rate of 5 per month. We plan to produce more 777 models and fewer 777X models in the near term than previously planned. We expect to deliver at an average rate of 3 per month in 2020. The 777X will have a separate program accounting quantity, which will be determined in the year of first airplane delivery. 787 Program At the end of the first quarter of 2019, we increased the production rate from 12 per month to 14 per month. As a result of fewer orders than anticipated, we plan to reduce the 787 production rate to 12 per month in late 2020 and to 10 per month in early 2021. We plan to return to a production rate of 12 per month in 2023. 29
--------------------------------------------------------------------------------
Table of Contents
Fleet Support We provide the operators of our commercial airplanes with assistance and services to facilitate efficient and safe airplane operation. Collectively known as fleet support services, these activities and services begin prior to airplane delivery and continue throughout the operational life of the airplane. They include flight and maintenance training, field service support, engineering services, information services and systems and technical data and documents. The costs for fleet support are expensed as incurred and have historically been approximately 1% of total consolidated costs of products and services. Program Development The following chart summarizes the time horizon between go-ahead and planned initial delivery for major Commercial Airplanes derivatives and programs. Go-ahead and Initial Delivery 737 MAX 7 2011 2020 737 MAX 8 2011 2017 737 MAX 9 2011 2018 737 MAX 10 2017 2021 787-10 2013 2018 777X 2013 2021 Reflects models in development during 2019 We launched the 737 MAX 7, 8 and 9 inAugust 2011 and the 737 MAX 10 inJune 2017 . We launched the 787-10 inJune 2013 and the 777X inNovember 2013 . Additional Considerations The development and ongoing production of commercial aircraft is extremely complex, involving extensive coordination and integration with suppliers and highly-skilled labor from employees and other partners. Meeting or exceeding our performance and reliability standards, as well as those of customers and regulators, can be costly and technologically challenging. In addition, the introduction of new aircraft and derivatives, such as the 777X, involves increased risks associated with meeting development, production and certification schedules. As a result, our ability to deliver aircraft on time, satisfy performance and reliability standards and achieve or maintain, as applicable, program profitability is subject to significant risks. Factors that could result in lower margins (or a material charge if an airplane program has or is determined to have reach-forward losses) include the following: changes to the program accounting quantity, customer and model mix, production costs and rates, changes to price escalation factors due to changes in the inflation rate or other economic indicators, performance or reliability issues involving completed aircraft, capital expenditures and other costs associated with increasing or adding new production capacity, learning curve, additional change incorporation, achieving anticipated cost reductions, flight test and certification schedules, costs, schedule and demand for new airplanes and derivatives and status of customer claims, supplier claims or assertions and other contractual negotiations. While we believe the cost and revenue estimates incorporated in the consolidated financial statements are appropriate, the technical complexity of our airplane programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, order cancellations or other financially significant exposure. Defense, Space & Security Business Environment and Trends 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 30
--------------------------------------------------------------------------------
Table of Contents
and the risk of sequestration. The consolidated appropriations acts for FY20, enacted inDecember 2019 , provided FY20 appropriations for government departments and agencies, including theUnited States Department of Defense (U.S. DoD ), theNational Aeronautics and Space Administration (NASA ) and theFederal Aviation Administration (FAA ). The enacted FY20 appropriations included funding forBoeing '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 theU.S. DoD and other government agencies, includingNASA . 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. Non-U.S. Defense Environment Overview The non-U.S. market continues to be driven by complex and evolving security challenges and the need to modernize aging equipment and inventories. BDS expects that it will continue to have a wide range of opportunities acrossAsia ,Europe and theMiddle East given the diverse regional threats. At the end of 2019, 29% of BDS backlog was attributable to non-U.S. customers. Results of Operations (Dollars in millions) Years ended December 31, 2019 2018 2017 Revenues$26,227 $26,392 $23,938
% of total company revenues 34 % 26 % 25 %
Earnings from operations
9.9 % 6.3 % 10.0 % Since our operating cycle is long-term and involves many different types of development and production contracts with varying delivery and milestone schedules, the operating results of a particular year, or year-to-year comparisons of revenues, earnings and backlog may not be indicative of future operating results. In addition, depending on the customer and their funding sources, our orders might be structured as annual follow-on contracts, or as one large multi-year order or long-term award. As a result, period-to-period comparisons of backlog are not necessarily indicative of future workloads. The following discussions of comparative results among periods should be viewed in this context. 31
--------------------------------------------------------------------------------
Table of Contents
Deliveries of units for new-build production aircraft, including remanufactures and modifications were as follows: Years ended December 31, 2019 2018 2017 F/A-18 Models 23 17 23 F-15 Models 11 10 16 C-17 Globemaster III 1 CH-47 Chinook (New) 13 13 9 CH-47 Chinook (Renewed) 22 17 35 AH-64 Apache (New) 37 11 AH-64 Apache (Remanufactured) 74 23 57 KC-46 Tanker 28 P-8 Models 18 16 19 C-40A 2 Total 229 96 170
New-build satellite deliveries were as follows:
Years ended
1 1
Revenues
BDS revenues in 2019 decreased by$165 million compared with 2018 due to timing associated with non-U.S. contract awards for fighters and the final C-17 sale in 2018, lower revenue related to charges on Commercial Crew, and lower volume from certain unmanned and vertical lift programs. These reductions were partially offset by increases from new programs, including E-7 early warning aircraft, VC-25B, T-7A Red Hawk, and MQ-25, as well as from satellites and weapons. The unfavorable impact of cumulative contract catch-up adjustments in 2019 was$163 million higher than the comparable period in the prior year, reflecting unfavorable adjustments on the Commercial Crew contract and less favorable performance. BDS revenues in 2018 increased by$2,454 million compared with 2017 primarily due to non-US contract awards for fighters, higher weapons revenue, the final C-17 aircraft sale and higher satellites revenue. The unfavorable impact of cumulative contract catch-up adjustments in 2018 was$359 million higher than the comparable period in the prior year, reflecting increased unfavorable adjustments on the KC-46A Tanker recorded in 2018. Earnings From Operations BDS earnings from operations in 2019 increased by$951 million compared with 2018 primarily due to lower net charges on development programs. In 2019, BDS recorded charges of$143 million compared with$722 million in 2018 related to the KC-46A Tanker contract. Also during 2019, BDS recorded charges of$489 million compared with$57 million in 2018 related to the Commercial Crew contract. In 2018, we recorded charges of$691 million related to losses on the T-7A Red Hawk and MQ-25 contracts. The unfavorable impact of cumulative contract catch-up adjustments in 2019 was$62 million lower than the comparable period in the prior year, reflecting lower net unfavorable adjustments on development programs. BDS earnings from operations in 2018 decreased by$726 million compared with 2017 as earnings growth from higher revenues was more than offset by the higher charges on development programs in 2018. In 32
--------------------------------------------------------------------------------
Table of Contents
2017, BDS recorded charges of$401 million related to the KC-46A Tanker contract. The unfavorable impact of cumulative contract catch-up adjustments in 2018 was$412 million higher than the comparable period in the prior year, driven by higher charges on development programs in 2018. BDS earnings from operations include equity earnings of$128 million ,$147 million and$183 million primarily from our ULA and non-U.S. joint ventures in 2019, 2018 and 2017, respectively. Backlog Total backlog of$63,908 million atDecember 31, 2019 increased by 4% from$61,277 million atDecember 31, 2018 , primarily due to current year contract awards in many of our programs greater than revenue recognized. Significant orders included F/A-18 fighters, Space Launch System, P-8A Poseidon, KC-46A Tanker, and E-7 Airborne Early Warning & Control, partially offset by revenue recognized on contracts awarded in prior years. Additional Considerations Our BDS business includes a variety of development programs which have complex design and technical challenges. Many of these programs have cost-type contracting arrangements. In these cases, the associated financial risks are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical performance issues arise. Examples of these programs include Ground-based Midcourse Defense, Proprietary and Space Launch System programs. Some of our development programs are contracted on a fixed-price basis and BDS customers are increasingly seeking fixed priced proposals for new programs. Examples of significant fixed-price development programs include Commercial Crew, KC-46A Tanker, T-7A Red Hawk, VC-25B Presidential Aircraft, MQ-25, and commercial and military satellites. New programs could also have risk for reach-forward loss upon contract award and during the period of contract performance. Many development programs have highly complex designs. As technical or quality issues arise during development, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the work or reduce our estimated price, either of which could result in a material charge or otherwise adversely affect our financial condition. These programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs creates financial risk as additional completion costs may become necessary or scheduled delivery dates could be extended, which could trigger termination provisions, the loss of satellite in-orbit incentive payments, or other financially significant exposure. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues. KC-46A Tanker The KC-46A Tanker is a derivative of our 767 commercial aircraft. In 2011, we were awarded a contract from theU.S. Air Force (USAF) to design, develop, manufacture and deliver next generation aerial refueling tankers. The contract contains production options for both low rate initial production (LRIP) aircraft and full rate production aircraft. Since 2016, the USAF has authorized five LRIP lots for a total of 67 aircraft. The Engineering, Manufacturing and Development (EMD) contract and the five authorized LRIP lots are valued at approximately$15 billion . If all options under the contract are exercised, we expect to deliver 179 aircraft for a total expected contract value of approximately$30 billion . InJanuary 2019 , we delivered the first KC-46A to the USAF, and byDecember 2019 , we had delivered a total of 28 aircraft. During 2017, we recorded reach-forward losses of$445 million related to this program, primarily reflecting higher estimated costs associated with certification and incorporating changes into LRIP aircraft. During 2018, we recorded additional reach-forward losses of$736 million primarily reflecting higher estimated costs associated with certification, flight testing and change incorporation on aircraft, as well as higher than expected effort to meet customer requirements in order to support delivery of the initial aircraft. During 2019, we recorded additional reach-forward losses of$148 million reflecting higher manufacturing costs. 33
--------------------------------------------------------------------------------
Table of Contents
As with any development program, this program remains subject to additional reach-forward losses and/or delivery delays if we experience further production, technical or quality issues. Commercial CrewNASA has contracted us to design and build the CST-100 Starliner spacecraft to transport crews to theInternational Space Station . OnDecember 20, 2019 the Starliner launched and successfully landed two days later completing an abbreviated uncrewed flight test that performed many mission objectives before returning to Earth as the first orbital land touchdown of a human-rated capsule inU.S. history. The flight test was abbreviated, however, because anomalies experienced during the mission prevented docking with theInternational Space Station . In the fourth quarter of 2019, we recorded an increase to the reach-forward loss of$410 million , primarily to provision for another uncrewed mission. Root cause analysis is underway andNASA is evaluating the data received during the mission to determine if another uncrewed mission is required. T-7A Red Hawk InSeptember 2018 , we were selected by the USAF to build the next generation training capability, known as T-7A Red Hawk (formerly T-X Trainer). The program includes aircraft and simulators as well as support and ground equipment. The contract is structured as an indefinite delivery/indefinite quantity fixed-price contract with a minimum of 206 aircraft and a maximum of 475 aircraft. The EMD contract is a fixed-price contract valued at$813 million and includes five aircraft and seven simulators, with a period of performance that runs through 2022. The production and support contracts are structured as options that begin with authorization from fiscal year 2022 to 2034. In connection with winning this competition in 2018, we recorded a reach-forward loss of$400 million associated with anticipated losses on the options for 346 aircraft that we believe are probable of being exercised. During 2019, we completed the aircraft's critical design review. We believe that our investment in this contract positions us for additional market opportunities for both trainer and light attack aircraft. MQ-25 InAugust 2018 , we were awarded an EMD contract to build the MQ-25 for theU.S. Navy . The EMD contract is a fixed-price contract that includes development and delivery of four aircraft and test articles at a contract price of$805 million . In connection with winning this competition, we recognized a reach-forward loss of$291 million . The period of performance runs from 2018 through 2024. In 2019, we conducted a successful first flight. The MQ-25 is theU.S. Navy's first operational carrier-based unmanned aircraft, and we believe that our investment in this contract positions us for long-term leadership in autonomy and artificial intelligence technologies along with additional market opportunities. United Launch Alliance See the discussion of Indemnifications to ULA and Financing Commitments in Notes 7 and 15 to our Consolidated Financial Statements. Sea Launch See the discussion of the Sea Launch receivables in Note 12 to our Consolidated Financial Statements. Global Services Business Environment and Trends The aerospace markets we serve include parts distribution, logistics, and other inventory services; maintenance, engineering, and upgrades; training and professional services; and information services. We expect the market to grow by around 3.5% annually. As the size of the worldwide commercial airline fleet continues to grow, so does demand for aftermarket services designed to increase efficiency and extend the economic lives of airplanes. Airlines are using data analytics to plan flight operations and predictive maintenance to improve their productivity and efficiency. Airlines continue to look for opportunities to reduce the size and cost of their spare parts inventory, frequently outsourcing spares management to third parties. 34
--------------------------------------------------------------------------------
Table of Contents
Government services market segments are growing on pace with related fleets, but vary based on the utilization and age of the aircraft. TheU.S. government services market is the single largest individual market, comprising over 50 percent of the government services markets served. Over the next decade, we expectU.S. growth to remain flat and non-U.S. fleets, led byMiddle East andAsia Pacific customers, to add rotorcraft and commercial derivative aircraft at the fastest rates. We expect less than 20 percent of the worldwide fleet of military aircraft to be retired and replaced over the next ten years, driving increased demand for services to maintain aging aircraft and enhance aircraft capability. BGS' major customer, theU.S. government, remains subject to the spending limits and uncertainty described on page 30, which could restrict the execution of certain program activities and delay new programs or competitions.Industry Competitiveness Aviation services is a competitive market with many domestic and international competitors. This market environment has resulted in intense pressures on pricing and we expect these pressures to continue or intensify in the coming years. Continued access to global markets remains vital to our ability to fully realize our sales growth potential and long-term investment returns. Results of Operations (Dollars in millions) Years ended December 31, 2019 2018 2017 Revenues$18,468 $17,056 $14,611 % of total company revenues 24 % 17 % 16 % Earnings from operations$2,697 $2,536 $2,251 Operating margins 14.6 % 14.9 % 15.4 % Revenues BGS revenues in 2019 increased by$1,412 million compared with 2018 due to the acquisition of KLX in the fourth quarter of 2018 and government services revenue, partially offset by lower commercial services revenue. The favorable impact of cumulative contract catch-up adjustments in 2019 was$80 million higher than the comparable period in the prior year. BGS revenues in 2018 increased by$2,445 million compared with 2017 due to growth across our services portfolio, primarily driven by higher parts revenue, including the acquisition of KLX. The favorable impact of cumulative contract catch-up adjustments in 2018 was$63 million lower than the comparable period in the prior year. Earnings From Operations BGS earnings from operations in 2019 increased by$161 million compared with 2018. The increase in earnings from operations reflects higher revenues, which was partially offset by less favorable performance and mix. Earnings from operations for 2019 also includes a divestiture gain of$395 million and a charge of$293 million related to our decision in the fourth quarter to retire the Aviall brand and trade name. The favorable impact of cumulative contract catch-up adjustments in 2019 was$21 million higher than the comparable period in the prior year. BGS earnings from operations in 2018 increased by$285 million compared with 2017 primarily due to higher revenues, partially offset by higher period costs. The favorable impact of cumulative contract catch-up adjustments in 2018 was$25 million lower than the comparable period in the prior year. 35
--------------------------------------------------------------------------------
Table of Contents
Backlog
BGS total backlog of$22,902 million atDecember 31, 2019 increased by 9% from$21,064 million atDecember 31, 2018 , primarily due to current year contract awards, partially offset by revenue recognized on contracts awarded in prior years.Boeing Capital Business Environment and Trends BCC's gross customer financing and investment portfolio atDecember 31, 2019 totaled$2,254 million . A substantial portion of BCC's portfolio is related to customers that we believe have less than investment-grade credit. BCC's portfolio is also concentrated by varying degrees acrossBoeing aircraft product types, most notably 717 and 747-8 aircraft. BCC provided customer financing of$419 million and$601 million during 2019 and 2018. While we may be required to fund a number of new aircraft deliveries in 2020 and/or provide refinancing for existing bridge debt, we expect alternative financing will be available at reasonable prices from broad and globally diverse sources. Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 2,200 western-built commercial jet aircraft (8.5% of current world fleet) were parked at the end of 2019, including both in-production and out-of-production aircraft types. Of these parked aircraft, approximately 20% are not expected to return to service. At the end of 2018 and 2017, 6.7% and 8.3% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of additional aircraft, particularly types with relatively few operators, are placed out of service. Results of Operations (Dollars in millions) Years ended December 31, 2019 2018 2017 Revenues$244 $274 $307 Earnings from operations$28 $79 $114 Operating margins 11 % 29 % 37 % Revenues BCC segment revenues consist principally of lease income from equipment under operating lease, interest income from financing receivables and notes, and other income. BCC's revenues in 2019 decreased by$30 million compared with 2018 primarily due to lower gains on the sale of assets. BCC's revenues in 2018 decreased by$33 million compared with 2017 primarily due to lower lease income driven by a smaller portfolio, partially offset by gains on asset sales. Earnings From Operations BCC's earnings from operations are presented net of interest expense, provision for (recovery of) losses, asset impairment expense, depreciation on leased equipment and other operating expenses. Earnings from operations in 2019 decreased by$51 million primarily due to lower revenues and higher asset impairment expenses. Earnings from operations in 2018 decreased by$35 million primarily due to lower revenues. 36
--------------------------------------------------------------------------------
Table of Contents
Financial Position The following table presents selected financial data for BCC as ofDecember 31 : (Dollars in millions) 2019
2018
Customer financing and investment portfolio, net$2,251
Other assets, primarily cash and short-term investments 535 717 Total assets
$2,786
Other liabilities, primarily deferred income taxes$432
Debt, including intercompany loans 1,960 2,487 Equity 394 497 Total liabilities and equity$2,786 $3,507 Debt-to-equity ratio 5.0-to-1 5.0-to-1 BCC's customer financing and investment portfolio atDecember 31, 2019 decreased fromDecember 31, 2018 , primarily due to$720 million of note payoffs and portfolio run-off and$250 million related to the impairment of lease incentives, partially offset by new volume. BCC enters into certain transactions withBoeing , reflected in Unallocated items, eliminations and other, in the form of intercompany guarantees and other subsidies that mitigate the effects of certain credit quality or asset impairment issues on the BCC segment. The$250 million impairment of lease incentives did not result in an earnings charge in the BCC segment because of an intercompany guarantee. Leased aircraft with a carrying value of approximately$58 million are scheduled to be returned off lease during 2020. We are seeking to remarket these aircraft or have the leases extended. Liquidity and Capital Resources Cash Flow Summary (Dollars in millions) Years ended December 31, 2019 2018 2017 Net (loss)/earnings ($636 )$10,460 $8,458 Non-cash items 2,819 2,578 2,636 Changes in working capital (4,629 ) 2,284 2,252
Net cash (used)/provided by operating activities (2,446 ) 15,322
13,346
Net cash used by investing activities (1,530 ) (4,621 ) (2,058 ) Net cash provided/(used) by financing activities 5,739 (11,722 ) (11,350 ) Effect of exchange rate changes on cash and cash equivalents (5 ) (53
) 80 Net increase/(decrease) in cash & cash equivalents, including restricted
1,758 (1,074 ) 18 Cash & cash equivalents, including restricted, at beginning of year 7,813 8,887
8,869
Cash & cash equivalents, including restricted, at end of year$9,571 $7,813
Operating Activities Net cash used by operating activities was$2.4 billion during 2019, compared with net cash provided by operating activities of$15.3 billion during 2018 and$13.3 billion in 2017. The decrease in operating cash flows in 2019 primarily reflects the impacts of the 737 MAX grounding that is resulting 37
--------------------------------------------------------------------------------
Table of Contents
in lower earnings, higher inventory and lower advances and progress payments. In addition, compensation payments to 737 MAX customers of$1.2 billion for disruption to their operations also reduced 2019 cash from operating activities. Cash used to fund Inventory was$12.4 billion during 2019 as we continued to produce aircraft while deliveries were suspended. Cash provided by Advances and progress billings was$0.7 billion in 2019, as compared with$2.6 billion in 2018. InDecember 2019 , we announced plans to temporarily suspend production of the 737 MAX beginning inJanuary 2020 . This will enable us to prioritize the delivery of stored aircraft. Net cash from operating activities in future quarters is expected to continue to be adversely impacted by the 737 MAX grounding. Discretionary contributions to our pension plans were insignificant in 2019 and 2018. During 2017, our discretionary contributions to our pension plans included 14.4 million shares of our common stock with an aggregate value of$3.5 billion and$0.5 billion in cash. Investing Activities Cash used by investing activities during 2019, 2018 and 2017 was$1.5 billion ,$4.6 billion and$2.1 billion . The reduction in 2019 compared with 2018 is primarily due to acquisitions completed in the second half of 2018 and the timing of investments. Acquisitions net of cash acquired were$0.5 billion in 2019, compared with$3.2 billion in 2018, primarily related to the acquisition of KLX. Proceeds from dispositions was$0.5 billion in 2019 as a result of the divestiture of two businesses. Capital expenditures totaled$1.8 billion in 2019, relatively consistent with$1.7 billion in 2018 and 2017. We expect capital expenditures in 2020 to be relatively consistent with 2019. Net proceeds from investments was$0.1 billion in 2019,$0.3 billion in 2018, and was insignificant in 2017. Financing Activities Cash provided by financing activities was$5.7 billion during 2019, compared with cash used by financing activities of$11.7 billion in 2018. The increase of$17.5 billion compared with 2018 primarily reflects higher net borrowings and lower share repurchases, partially offset by higher dividend payments in 2019. Cash used by financing activities was$11.7 billion during 2018, an increase of$0.4 billion compared with 2017, primarily due to higher dividend payments partially offset by higher net borrowings. Net borrowings were$13.2 billion in 2019,$1.4 billion in 2018 and$1.1 billion in 2017. AtDecember 31, 2019 and 2018 the recorded balance of debt was$27.3 billion and$13.8 billion of which$7.3 billion and$3.2 billion was classified as short-term. AtDecember 31, 2019 and 2018 this included$2.0 billion and$2.5 billion of debt attributable to BCC, of which$0.5 billion and$0.5 billion were classified as short-term. During 2019 and 2018 we repurchased 6.9 million and 26.1 million shares totaling$2.7 billion and$9.0 billion through our open market share repurchase program. In 2019 and 2018, we had 0.6 million shares transferred to us from employees for tax withholdings. AtDecember 31, 2019 , the amount available under the share repurchase plan, announced onDecember 17, 2018 , totaled$17.3 billion . Share repurchases under this plan are currently suspended. We increased our quarterly dividend from$1.71 to$2.055 inDecember 2018 , which resulted in$684 million of higher dividend payments in 2019 compared with 2018. Capital Resources We have substantial borrowing capacity. Any future borrowings may affect our credit ratings and are subject to various debt covenants as described below. We have a commercial paper program that serves as a source of short-term liquidity. AtDecember 31, 2019 , 2018, and 2017, commercial paper borrowings totaling$6,109 million ,$1,895 million and$600 million , respectively, which were supported by unused commitments under the revolving credit agreement. AtDecember 31, 2019 , we had$9.6 billion of unused borrowing capacity on revolving credit line agreements. We anticipate that these credit lines will primarily serve as backup liquidity to support our general corporate borrowing needs. Customer financing commitments totaled$13.4 billion and$19.5 billion atDecember 31, 2019 and 2018. The decrease primarily relates to financing commitment expirations and terminations. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. Historically, we have not been 38
--------------------------------------------------------------------------------
Table of Contents
required to fund significant amounts of outstanding commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required. As previously announced, we plan to acquire an 80% ownership stake in a joint venture comprised of the commercial aircraft and services operations of Embraer for$4.2 billion . We expect the transaction to close in the first half of 2020. In the event we require additional funding to support strategic business opportunities, our commercial aircraft financing commitments, unfavorable resolution of litigation or other loss contingencies, or other business requirements, including impacts related to the 737 MAX grounding, we expect to meet increased funding requirements by issuing commercial paper or term debt. We believe our ability to access external capital resources should be sufficient to satisfy existing short-term and long-term commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year. However, there can be no assurance of the cost or availability of future borrowings under our commercial paper program or in the debt markets. As ofJanuary 31, 2020 , we have received commitments from a syndicate of banks sufficient for us to enter into a$12 billion delayed draw two-year term loan credit facility. This facility may be increased at the Company's option if the facility is oversubscribed. The facility will enhance our liquidity and is expected to close inFebruary 2020 . AtDecember 31, 2019 and 2018, our pension plans were$15.9 billion and$15.3 billion underfunded as measured under GAAP. On an Employee Retirement Income Security Act (ERISA) basis our plans are more than 100% funded atDecember 31, 2019 . We do not expect to make significant contributions to our pension plans in 2020. We may be required to make higher contributions to our pension plans in future years. AtDecember 31, 2019 , we were in compliance with the covenants for our debt and credit facilities. The most restrictive covenants include a limitation on mortgage debt and sale and leaseback transactions as a percentage of consolidated net tangible assets (as defined in the credit agreements), and a limitation on consolidated debt as a percentage of total capital (as defined). When considering debt covenants, we continue to have substantial borrowing capacity. 39
--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations The following table summarizes our known obligations to make future payments pursuant to certain contracts as ofDecember 31, 2019 , and the estimated timing thereof. Less than 1 1-3 3-5 After 5 (Dollars in millions) Total year years years years Long-term debt (including current portion)$27,476 $7,306 $2,698 $1,780 $15,692 Interest on debt 12,408 803 1,479 1,341 8,785 Pension and other postretirement cash requirements 9,717 621 1,307 3,719 4,070 Finance lease obligations 238 71 98 26 43 Operating lease obligations 1,574 287 429 249 609 Purchase obligations not recorded on the Consolidated Statements of Financial Position 115,411 52,685 33,550 19,246 9,930 Purchase obligations recorded on the Consolidated Statements of Financial Position 22,315 20,867 1,423 3 22 Acquisition not recorded on the Consolidated Statements of Financial Position (2) 4,200 4,200
Total contractual obligations (1)
(1) Excludes income tax matters. As of
income taxes payable, including uncertain tax positions of
was
to be paid in 2020, we are not able to reasonably estimate the timing of
future cash flows related to the remaining net liability for income taxes
payable. For further discussion of income taxes, see Note 5 to our Consolidated Financial Statements.
(2) We plan to acquire an 80% ownership stake in a joint venture comprised of
the commercial aircraft and services operations of Embraer. For additional
information, see Note 2 to our Consolidated Financial Statements.
Pension and Other Postretirement Benefits Pension cash requirements are based on an estimate of our minimum funding requirements, pursuant to ERISA regulations, although we may make additional discretionary contributions. Estimates of other postretirement benefits are based on both our estimated future benefit payments and the estimated contributions to plans that are funded through trusts. Purchase Obligations Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. Purchase obligations include amounts recorded as well as amounts that are not recorded on the Consolidated Statements of Financial Position. 40
--------------------------------------------------------------------------------
Table of Contents
Purchase Obligations Not Recorded on the Consolidated Statements of Financial Position Purchase obligations not recorded on the Consolidated Statements of Financial Position include agreements for inventory procurement, tooling costs, electricity and natural gas contracts, property, plant and equipment, customer financing equipment, and other miscellaneous production related obligations. The most significant obligation relates to inventory procurement contracts. We have entered into certain significant inventory procurement contracts that specify determinable prices and quantities, and long-term delivery timeframes. In addition, we purchase raw materials on behalf of our suppliers. These agreements require suppliers and vendors to be prepared to build and deliver items in sufficient time to meet our production schedules. The need for such arrangements with suppliers and vendors arises from the extended production planning horizon for many of our products. A significant portion of these inventory commitments is supported by firm contracts and/or has historically resulted in settlement through reimbursement from customers for penalty payments to the supplier should the customer not take delivery. These amounts are also included in our forecasts of costs for program and contract accounting. Some inventory procurement contracts may include escalation adjustments. In these limited cases, we have included our best estimate of the effect of the escalation adjustment in the amounts disclosed in the table above. Purchase Obligations Recorded on the Consolidated Statements of Financial Position Purchase obligations recorded on the Consolidated Statements of Financial Position primarily include accounts payable and certain other current and long-term liabilities including accrued compensation. Industrial Participation Agreements We have entered into various industrial participation agreements with certain customers outside of theU.S. to facilitate economic flow back and/or technology or skills transfer to their businesses or government agencies as the result of their procurement of goods and/or services from us. These commitments may be satisfied by our local operations there, placement of direct work or vendor orders for supplies, opportunities to bid on supply contracts, transfer of technology or other forms of assistance. However, in certain cases, our commitments may be satisfied through other parties (such as our vendors) who purchase supplies from our non-U.S. customers. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. During 2019, we incurred no such penalties. As ofDecember 31, 2019 , we have outstanding industrial participation agreements totaling$24.8 billion that extend through 2034. Purchase order commitments associated with industrial participation agreements are included in purchase obligations in the table above. To be eligible for such a purchase order commitment from us, a non-U.S. supplier must have sufficient capability to meet our requirements and must be competitive in cost, quality and schedule. Commercial Commitments The following table summarizes our commercial commitments outstanding as ofDecember 31, 2019 . Total Amounts Committed/Maximum Less than 1-3 4-5 After 5 (Dollars in millions) Amount of Loss 1 year years years years Standby letters of credit and surety bonds$3,769 $1,657 $1,224 $180 $708 Commercial aircraft financing commitments 13,377 3,506 4,324 3,570 1,977 Total commercial commitments$17,146 $5,163
Commercial aircraft financing commitments include commitments to provide financing related to aircraft on order, under option for deliveries or proposed as part of sales campaigns or refinancing with respect to delivered aircraft, based on estimated earliest potential funding dates. Based on historical experience, we anticipate that we will not be required to fund a significant portion of our financing commitments. However, there can be no assurances that we will not be required to fund greater amounts than historically required. See Note 14 to our Consolidated Financial Statements. 41
--------------------------------------------------------------------------------
Table of Contents
Contingent Obligations We have significant contingent obligations that arise in the ordinary course of business, which include the following: Legal Various legal proceedings, claims and investigations are pending against us. Legal contingencies are discussed in Note 22 to our Consolidated Financial Statements. Environmental Remediation We are involved with various environmental remediation activities and have recorded a liability of$570 million atDecember 31, 2019 . For additional information, see Note 14 to our Consolidated Financial Statements. Off-Balance Sheet Arrangements We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion of these arrangements, see Note 15 to our Consolidated Financial Statements. Non-GAAP Measures Core Operating Earnings, Core Operating Margin and Core Earnings Per Share Our Consolidated Financial Statements are prepared in accordance with Generally Accepted Accounting Principles inthe United States of America (GAAP) which we supplement with certain non-GAAP financial information. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Core operating earnings, core operating margin and core earnings per share exclude the FAS/CAS service cost adjustment. The FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. Core earnings per share excludes both the FAS/CAS service cost adjustment and non-operating pension and postretirement expenses. Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. Pension costs, comprising service and prior service costs computed in accordance with GAAP are allocated to BCA and certain BGS businesses supporting commercial customers. Pension costs allocated to BDS and BGS businesses supporting government customers are computed in accordance withU.S. Government Cost Accounting Standards (CAS), which employ different actuarial assumptions and accounting conventions than GAAP. CAS costs are allocable to government contracts. Other postretirement benefit costs are allocated to all business segments based on CAS, which is generally based on benefits paid. The Pension FAS/CAS service cost adjustment recognized in (loss)/earnings from operations during 2019 was a benefit of$1,071 million , largely consistent with a benefit of$1,005 million in 2018 and$1,127 million in 2017. The non-operating pension expense included in Other income, net was a benefit of$374 million in 2019,$143 million in 2018 and$117 million in 2017. The benefits in 2019, 2018, and 2017 reflect expected returns in excess of interest cost and amortization of actuarial losses. For further discussion of pension and other postretirement costs see the Management's Discussion and Analysis on page 22 of this Form 10-K and see Note 23 to our Consolidated Financial Statements. Management uses core operating earnings, core operating margin and core earnings per share for purposes of evaluating and forecasting underlying business performance. Management believes these core earnings measures provide investors additional insights into operational performance as unallocated 42
--------------------------------------------------------------------------------
Table of Contents
pension and other postretirement benefit cost, primarily represent costs driven by market factors and costs not allocable toU.S. government contracts. Reconciliation of GAAP Measures to Non-GAAP Measures The table below reconciles the non-GAAP financial measures of core operating earnings, core operating margin and core earnings per share with the most directly comparable GAAP financial measures of earnings from operations, operating margins and diluted earnings per share. (Dollars in millions, except per share data) Years ended December 31, 2019 2018
2017
Revenues$76,559 $101,127
(Loss)/earnings from operations, as reported (
Operating margins (2.6 )% 11.9
% 11.0 %
Pension FAS/CAS service cost adjustment(1) ($1,071 ) ($1,005 ) ($1,127 ) Postretirement FAS/CAS service cost adjustment(1) ($344 ) ($322 ) ($311 ) FAS/CAS service cost adjustment(1) ($1,415 ) ($1,327 ) ($1,438 ) Core operating (loss)/earnings (non-GAAP) ($3,390 )$10,660
Core operating margins (non-GAAP) (4.4 )% 10.5
% 9.5 %
Diluted (loss)/earnings per share, as reported (
Pension FAS/CAS service cost adjustment(1) ($1.89 ) ($1.71 ) ($1.84 ) Postretirement FAS/CAS service cost adjustment(1) ($0.61 ) ($0.55 ) ($0.51 ) Non-operating pension expense(2) ($0.66 ) ($0.24 ) ($0.19 ) Non-operating postretirement expense(2)$0.19 $0.17
Provision for deferred income taxes on adjustments (3)$0.62 $0.49
Core (loss)/earnings per share (non-GAAP) ($3.47 )$16.01
Weighted average diluted shares (in millions) 566.0 586.2
610.7
(1) FAS/CAS service cost adjustment represents the difference between the FAS
pension and postretirement service costs calculated under GAAP and costs
allocated to the business segments. This adjustment is excluded from Core
operating (loss)/earnings (non-GAAP).
(2) Non-operating pension and postretirement expenses represent the components
of net periodic benefit costs other than service cost. These expenses are
included in Other income, net and are excluded from Core (loss)/earnings per
share (non-GAAP). (3) The income tax impact is calculated using theU.S. corporate statutory tax rate. 43
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies & Estimates Accounting for long-term contracts Substantially all contracts at BDS and certain contracts at BGS are long-term contracts. Our long-term contracts 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. Accounting for long-term contracts involves a judgmental process of estimating the total sales, costs, and profit for each performance obligation. Cost of sales is recognized as incurred and revenue is determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. Due to the size, duration and nature of many of our long-term contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Total sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance, and price adjustment clauses (such as inflation or index-based clauses). The majority of these long-term contracts are with theU.S. government where the price is generally based on estimated cost to produce the product or service plus profit. Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed in establishing contract price. Total cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates for all significant long-term contract performance obligations are reviewed and reassessed quarterly. Changes in these estimates could result in recognition of cumulative catch-up adjustments to the performance obligation's inception to date revenues, cost of sales and profit, in the period in which such changes are made. Changes in revenue and cost estimates could also result in a reach-forward loss or an adjustment to a reach-forward loss, which would be recorded immediately in earnings. For the years endedDecember 31, 2019 and 2018 net unfavorable cumulative catch-up adjustments, including reach-forward losses, across all long-term contracts decreased Earnings from operations by$111 million and$190 million . For the year endedDecember 31, 2017 , net favorable cumulative catch-up adjustments, including reach-forward losses, across all long-term contracts increased Earnings from operations by$250 million . Due to the significance of judgment in the estimation process described above, it is likely that materially different earnings could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods. If the combined gross margin for all long-term contract performance obligations for all of 2019 had been estimated to be higher or lower by 1%, it would have increased or decreased pre-tax income for the year by approximately$330 million . In addition, a number of our fixed price development contracts are in a reach-forward loss position. Changes to estimated losses are recorded immediately in earnings. 44
--------------------------------------------------------------------------------
Table of Contents
Program Accounting Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to costs for the defined program accounting quantity. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. For each program, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of sales recognized for airplanes delivered and accepted by the customer. Factors that must be estimated include program accounting quantity, sales price, labor and employee benefit costs, material costs, procured part costs, major component costs, overhead costs, program tooling and other non-recurring costs, and warranty costs. Estimation of the accounting quantity for each program takes into account several factors that are indicative of the demand for the particular program, such as firm orders, letters of intent from prospective customers, and market studies. Total estimated program sales are determined by estimating the model mix and sales price for all unsold units within the accounting quantity, added together with the sales prices for all undelivered units under contract. The sales prices for all undelivered units within the accounting quantity include an escalation adjustment for inflation that is updated quarterly. Cost estimates are based largely on negotiated and anticipated contracts with suppliers, historical performance trends, and business base and other economic projections. Factors that influence these estimates include production rates, internal and subcontractor performance trends, customer and/or supplier claims or assertions, asset utilization, anticipated labor agreements, and inflationary or deflationary trends. To ensure reliability in our estimates, we employ a rigorous estimating process that is reviewed and updated on a quarterly basis. Changes in estimates are normally recognized on a prospective basis; however, when estimated costs to complete a program exceed estimated revenues from undelivered units in the accounting quantity, a loss provision is recorded in the current period for the estimated loss on all undelivered units in the accounting quantity. The program method of accounting allocates tooling and other non-recurring and production costs over the accounting quantity for each program. Because of the higher unit production costs experienced at the beginning of a new program and substantial investment required for initial tooling and other non-recurring costs, new commercial aircraft programs, such as the 777X program, typically have lower initial margins than established programs. In addition, actual costs incurred for earlier units in excess of the estimated average cost of all units in the program accounting quantity are included within program inventory as deferred production costs. Deferred production, unamortized tooling and other non-recurring costs are expected to be fully recovered when all units in the accounting quantity are delivered as the expected unit cost for later deliveries is below the estimated average cost as learning curve and other improvements are realized. Due to the significance of judgment in the estimation process described above, it is reasonably possible that changes in underlying circumstances or assumptions could have a material effect on program gross margins. If the combined gross margin percentages for our commercial airplane programs had been estimated to be 1% higher or lower it would have an approximately$400 million impact on operating earnings for the year endedDecember 31, 2019 . 737 MAX Grounding OnMarch 13, 2019 , theFederal Aviation Administration (FAA ) issued an order to suspend operations of all 737 MAX aircraft in theU.S. and byU.S. aircraft operators following two fatal 737 MAX accidents. Non-U.S. civil aviation authorities have issued directives to the same effect. The grounding is having a significant adverse impact on our operations and creates significant uncertainty. 45
--------------------------------------------------------------------------------
Table of Contents
Multiple legal actions have been filed against us as a result of theOctober 29, 2018 accident of Lion Air Flight 610 and theMarch 10, 2019 accident of Ethiopian Airlines Flight 302. Further, we are fully cooperating with all ongoing governmental and regulatory investigations and inquiries relating to the accidents and the 737 MAX, including investigations by theU.S. Department of Justice and theSecurities 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 lawsuits, investigations, and inquiries. We have also experienced claims and/or assertions from customers and suppliers in connection with the grounding. As a result of the grounding, we reduced the 737 production rate from 52 per month to 42 per month in 2019 and inDecember 2019 , we announced plans to temporarily suspend 737 production beginning inJanuary 2020 . We have concluded that the suspension of production and the gradual resumption of production at low production rates will result in abnormal production costs which will be expensed when incurred rather than inventoried. Prior to the grounding, we had planned to increase the production rate to 57 per month in 2019. In the preparation of our financial statements, we have made assumptions regarding outcomes of accident investigations and other government inquiries, timing and conditions of return to service, the duration of the 737 MAX production suspension and timing of future 737 production rate increases, supplier readiness to support production rate changes, timing and sequence of future customer deliveries as well as outcomes of negotiations with customers impacted by the grounding. We have also made significant assumptions regarding estimated costs expected to be incurred in 2020 and 2021 that should be included in program inventory and those costs that should be expensed when incurred as abnormal production costs. While these assumptions reflect our best estimate at this time, they are highly uncertain and significantly affect the estimates inherent in our financial statements. TheFAA and other non-U.S. civil aviation authorities will determine the timing and conditions of the 737 MAX return to service in each relevant jurisdiction. We have assumed that regulatory approval of the 737 MAX will enable deliveries to resume during mid-2020. We have also assumed that, as a condition of return to service, regulators will require 737 MAX pilots to undergo computer and simulator training. 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 are also assuming that 737 MAX airplanes produced during the grounding and included within inventory will be delivered over several quarters with the majority of them delivering during the first year after the resumption of deliveries. The cumulative impacts of changes to assumptions regarding timing of return to service and timing of planned production rates have increased the estimated costs to produce aircraft included in the current accounting quantity by approximately$6.3 billion , which will be recorded in program inventory. In addition, the suspension of 737 MAX production and lower production rates is expected to result in approximately$4.0 billion of abnormal production costs in 2020 and 2021 that will be expensed as incurred. The increases in the estimated costs accounted for as program inventory will reduce 737 program and overall BCA segment operating margins in future periods after deliveries resume. Production costs incurred while production is suspended and a portion of production costs incurred while we gradually increase production rates to a normal level will be expensed as incurred as abnormal costs and will not be included in program inventory. We may face additional costs, delays in regulatory approval of the 737 MAX and/or the resumption of deliveries, and/or further delays in planned production rate increases which may result in further increases in program costs and/or abnormal production costs. We recorded an earnings charge and corresponding liability of$6.1 billion , in the second quarter of 2019, in connection with an estimate of potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays. The second quarter estimate of$6.1 billion was updated in the third and fourth quarters of 2019. The remaining liability of$7.4 billion atDecember 31, 2019 represents our current best estimate of future concessions and other considerations we expect to provide to customers. This estimate relies on the exercise of judgment by management and is significantly impacted by the assumptions described above, as well as the status of negotiations with 46
--------------------------------------------------------------------------------
Table of Contents
our customers. Any delays in our ability to resume deliveries, prolonged production suspension, further disruptions to our production system, supplier claims or assertions, or changes to estimated concessions and other considerations we expect to provide to customers could have a material adverse effect on our financial position, results of operations, and/or cash flows.Goodwill and Indefinite-Lived Intangible Impairments We test goodwill for impairment by performing a qualitative assessment or using a two-step impairment process. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors as an initial step in assessing the fair value of operations. If we determine it is more likely than not that the carrying value of the net assets is more than the fair value of the related operations, the two-step impairment process is then performed; otherwise, no further testing is required. For operations where the two-step impairment process is used, we first compare the book value of net assets to the fair value of the related operations. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment. We estimate the fair values of the related operations using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements and general market conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any. The cash flow forecasts are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation. Therefore, changes in the stock price may also affect the amount of impairment recorded, if any. We completed our assessment of goodwill as ofApril 1, 2019 and determined that there is no impairment of goodwill. As ofDecember 31, 2019 , we estimated that the fair value of each reporting unit significantly exceeded its corresponding carrying value. Changes in our forecasts, or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future periods. As ofDecember 31, 2018 , we had$490 million of indefinite-lived intangible assets related to the Jeppesen and Aviall brand and trade names acquired in business combinations. During 2019, we changed the name of theAviall business toBoeing Distribution Inc. and, in the fourth quarter, decided to retire the Aviall brand and trade name. As a result we recorded an earnings charge of$293 million to write-off theAviall indefinite-lived intangible asset. Accordingly, as ofDecember 31, 2019 , we had an indefinite-lived intangible asset with a carrying value of$197 million related to the Jeppesen brand and trade name. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment. A 10% decrease in the discounted cash flows would not impact the carrying value of the Jeppesen indefinite-lived intangible asset. 47
--------------------------------------------------------------------------------
Table of Contents
Pension Plans The majority of our employees have earned benefits under defined benefit pension plans. Nonunion and the majority of union employees that had participated in defined benefit pension plans transitioned to a company-funded defined contribution retirement savings plan in 2016. Additional union employees transitioned to company-funded defined contribution retirement savings plans effectiveJanuary 1, 2019 . Accounting rules require an annual measurement of our projected obligation and plan assets. These measurements are based upon several assumptions, including the discount rate and the expected long-term rate of asset return. Future changes in assumptions or differences between actual and expected outcomes can significantly affect our future annual expense, projected benefit obligation and Shareholders' equity. The following table shows the sensitivity of our pension plan liability and net periodic cost to a 25 basis point change in the discount rate as ofDecember 31, 2019 . Change in discount rate Change in discount rate (Dollars in millions) Increase 25 bps Decrease 25 bps Pension plans Projected benefit obligation ($2,231 )$2,778 Net periodic pension cost (10 ) 20 Pension cost is also sensitive to changes in the expected long-term rate of asset return. A decrease or increase of 25 basis points in the expected long-term rate of asset return would have increased or decreased 2019 net periodic pension cost by$149 million . Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We have financial instruments that are subject to interest rate risk, principally fixed-rate debt obligations, and customer financing assets and liabilities. Historically, we have not experienced material gains or losses on our customer financing assets and liabilities due to interest rate changes. As ofDecember 31, 2019 , the impact over the next 12 months of a 100 basis point rise in interest rates to our pre-tax earnings would not be significant. The investors in our fixed-rate debt obligations do not generally have the right to demand we pay off these obligations prior to maturity. Therefore, exposure to interest rate risk is not believed to be material for our fixed-rate debt. Foreign Currency Exchange Rate Risk We are subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. We use foreign currency forward contracts to hedge the price risk associated with firmly committed and forecasted foreign denominated payments and receipts related to our ongoing business. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. AtDecember 31, 2019 , a 10% increase or decrease in the exchange rate in our portfolio of foreign currency contracts would have increased or decreased our unrealized losses by$226 million . Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these forward currency contracts and the offsetting underlying commitments do not create material market risk. 48
--------------------------------------------------------------------------------
Table of Contents
Commodity Price Risk We are subject to commodity price risk relating to commodity purchase contracts for items used in production that are subject to changes in the market price. We use commodity swaps to hedge against these potentially unfavorable price changes. Our commodity purchase contracts and derivatives are both sensitive to changes in the market price. AtDecember 31, 2019 , a 10% increase or decrease in the market price in our commodity derivatives would have increased or decreased our unrealized losses by$63 million . Consistent with the use of these contracts to neutralize the effect of market price fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these commodity purchase contracts and the offsetting swaps do not create material market risk. 49
--------------------------------------------------------------------------------
Table of Contents
Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
Page
Consolidated Statements of Operations
51
Consolidated Statements of Comprehensive Income
52
Consolidated Statements of Financial Position
53
Consolidated Statements of Cash Flows
54
Consolidated Statements of Equity
55
Summary of Business Segment Data
56
Note 1 - Summary of Significant Accounting Policies
57
Note 2 -Acquisitions and Joint Ventures
69
Note 3 -Goodwill and Acquired Intangibles
71
Note 4 - Earnings Per Share
72
Note 5 - Income Taxes
73
Note 6 - Accounts Receivable
76
Note 7 - Inventories
77
Note 8 - Contracts with Customers
78
Note 9 - Customer Financing
78
Note 10 - Property, Plant and Equipment 81 Note 11 - Investments 82 Note 12 - Other Assets 82 Note 13 - Leases 83 Note 14 - Liabilities, Commitments and Contingencies
84
Note 15 - Arrangements with Off-Balance Sheet Risk
89
Note 16 - Debt
90
Note 17 - Postretirement Plans
92
Note 18 - Share-Based Compensation and Other Compensation Arrangements
101
Note 19 - Shareholders' Equity
105
Note 20 - Derivative Financial Instruments
106
Note 21 - Fair Value Measurements
109
Note 22 - Legal Proceedings
111
Note 23 - Segment and Revenue Information
111
Note 24 - Quarterly Financial Data
117
Reports of Independent Registered Public Accounting Firm 118 50
--------------------------------------------------------------------------------
Table of Contents
TheBoeing Company and Subsidiaries Consolidated Statements of Operations (Dollars in millions, except per share data) Years ended December 31, 2019 2018 2017 Sales of products$66,094 $90,229 $83,740 Sales of services 10,465 10,898 10,265 Total revenues 76,559 101,127 94,005 Cost of products (62,877 ) (72,922 ) (68,879 ) Cost of services (9,154 ) (8,499 ) (7,663 )Boeing Capital interest expense (62 ) (69 ) (70 ) Total costs and expenses (72,093 ) (81,490 ) (76,612 ) 4,466 19,637 17,393
(Loss)/income from operating investments, net (4 ) 111
204
General and administrative expense (3,909 ) (4,567 ) (4,095 ) Research and development expense, net (3,219 ) (3,269 ) (3,179 ) Gain on dispositions, net 691 75
21
(Loss)/earnings from operations (1,975 ) 11,987 10,344 Other income, net 438 92 123 Interest and debt expense (722 ) (475 ) (360 ) (Loss)/earnings before income taxes (2,259 ) 11,604
10,107
Income tax benefit/(expense) 1,623 (1,144 ) (1,649 ) Net (loss)/earnings ($636 )$10,460
Basic (loss)/earnings per share ($1.12 )$18.05
Diluted (loss)/earnings per share ($1.12 )$17.85
See Notes to the Consolidated Financial Statements on pages 56 - 117.
51
--------------------------------------------------------------------------------
Table of Contents
The Boeing Company and Subsidiaries Consolidated Statements of Comprehensive Income
(Dollars in millions) Years ended December 31, 2019 2018 2017 Net (loss)/earnings ($636 )$10,460 $8,458 Other comprehensive income/(loss), net of tax: Currency translation adjustments (27 )
(86 ) 128
Unrealized gain on certain investments, net of tax of
1 2 1
Derivative instruments:
Unrealized (loss)/gain arising during period, net of
tax of
(48 )
(146 ) 119
Reclassification adjustment for loss included in net
earnings, net of tax of (
26 30 52 Total derivative instruments, net of tax (22 ) (116 ) 171 Defined benefit pension plans & other postretirement benefits: Net actuarial (loss)/gain arising during the period, net of tax of$405 , ($105 ), and$248 (1,413 ) 384 (495 ) Amortization of actuarial losses included in net periodic pension cost, net of tax of ($133 ), ($242 ), and ($272 ) 464
878 542
Settlements and curtailments included in net income,
net of tax of
8
Pension and postretirement benefit/(cost) related to
our equity method investments, net of tax (
17 22 (11 ) Amortization of prior service credits included in net periodic pension cost, net of tax of$25 ,$39 , and$59 (89 ) (143 ) (117 ) Prior service (credit)/cost arising during the period, net of tax of$0 , ($94 ), and ($14 ) (1 ) 341 28 Total defined benefit pension plans & other postretirement benefits, net of tax (1,022 ) 1,490 (53 ) Other comprehensive (loss)/income, net of tax (1,070 ) 1,290 247 Comprehensive loss related to noncontrolling interests (41 ) (21 ) (2 ) Comprehensive (loss)/income, net of tax ($1,747 )
See Notes to the Consolidated Financial Statements on pages 56 - 117.
52
--------------------------------------------------------------------------------
Table of Contents
TheBoeing Company and Subsidiaries Consolidated Statements of Financial Position (Dollars in millions, except per share data) December 31, 2019 2018 Assets Cash and cash equivalents$9,485 $7,637 Short-term and other investments 545 927 Accounts receivable, net 3,266 3,879 Unbilled receivables, net 9,043 10,025 Current portion of customer financing, net 162 460 Inventories 76,622 62,567 Other current assets 3,106 2,335 Total current assets 102,229 87,830 Customer financing, net 2,136 2,418 Property, plant and equipment, net 12,502
12,645
Goodwill 8,060
7,840
Acquired intangible assets, net 3,338 3,429 Deferred income taxes 683 284 Investments 1,092 1,087 Other assets, net of accumulated amortization of$580 and$503 3,585 1,826 Total assets$133,625 $117,359 Liabilities and equity Accounts payable$15,553 $12,916 Accrued liabilities 22,868 14,808 Advances and progress billings 51,551
50,676
Short-term debt and current portion of long-term debt 7,340 3,190 Total current liabilities 97,312 81,590 Deferred income taxes 413 1,736 Accrued retiree health care 4,540 4,584 Accrued pension plan liability, net 16,276 15,323 Other long-term liabilities 3,422 3,059 Long-term debt 19,962 10,657
Shareholders' equity:
Common stock, par value
5,061 5,061 Additional paid-in capital 6,745 6,768 Treasury stock, at cost (54,914 ) (52,348 ) Retained earnings 50,644 55,941 Accumulated other comprehensive loss (16,153 ) (15,083 ) Total shareholders' equity (8,617 ) 339 Noncontrolling interests 317 71 Total equity (8,300 ) 410 Total liabilities and equity$133,625
See Notes to the Consolidated Financial Statements on pages 56 - 117.
53
--------------------------------------------------------------------------------
Table of Contents
TheBoeing Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in millions) Years ended December 31, 2019 2018 2017 Cash flows - operating activities: Net (loss)/earnings ($636 )$10,460 $8,458 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-cash items - Share-based plans expense 212 202 202 Depreciation and amortization 2,271 2,114 2,047 Investment/asset impairment charges, net 443 93 113 Customer financing valuation adjustments 250 (3 ) 2 Gain on dispositions, net (691 ) (75 ) (21 ) Other charges and credits, net 334 247 293 Changes in assets and liabilities - Accounts receivable 603 (795 ) (840 ) Unbilled receivables 982 (1,826 ) (1,600 ) Advances and progress billings 737 2,636 4,700 Inventories (12,391 ) 568 (1,403 ) Other current assets (682 ) 98 (19 ) Accounts payable 1,600 2 130 Accrued liabilities 7,781 1,117 335 Income taxes receivable, payable and deferred (2,476 ) (180 ) 656 Other long-term liabilities (621 ) 87 94 Pension and other postretirement plans (777 ) (153 ) (582 ) Customer financing, net 419 120 1,041 Other 196 610 (260 ) Net cash (used)/provided by operating activities (2,446 ) 15,322 13,346 Cash flows - investing activities: Property, plant and equipment additions (1,834 ) (1,722 ) (1,739 ) Property, plant and equipment reductions 334 120 92 Acquisitions, net of cash acquired (455 ) (3,230 ) (324 ) Proceeds from dispositions 464 Contributions to investments (1,658 ) (2,607 ) (3,569 ) Proceeds from investments 1,759 2,898 3,607 Purchase of distribution rights (127 ) (69 ) (131 ) Other (13 ) (11 ) 6 Net cash used by investing activities (1,530 ) (4,621 ) (2,058 ) Cash flows - financing activities: New borrowings 25,389 8,548 2,077 Debt repayments (12,171 ) (7,183 ) (953 ) Contributions from noncontrolling interests 7
35
Stock options exercised 58 81 311 Employee taxes on certain share-based payment arrangements (248 ) (257 ) (132 ) Common shares repurchased (2,651 ) (9,000 ) (9,236 ) Dividends paid (4,630 ) (3,946 ) (3,417 ) Other (15 ) Net cash provided/(used) by financing activities 5,739 (11,722 ) (11,350 ) Effect of exchange rate changes on cash and cash equivalents (5 )
(53 ) 80 Net increase/(decrease) in cash & cash equivalents, including restricted
1,758 (1,074 ) 18 Cash & cash equivalents, including restricted, at beginning of year 7,813
8,887 8,869 Cash & cash equivalents, including restricted, at end of year
9,571
7,813 8,887 Less restricted cash & cash equivalents, included in Investments
86 176 74 Cash and cash equivalents at end of year$9,485
See Notes to the Consolidated Financial Statements on pages 56 - 117.
54
--------------------------------------------------------------------------------
Table of Contents TheBoeing Company and Subsidiaries Consolidated Statements of EquityBoeing shareholders Accumulated Additional Other Non-
(Dollars in millions, except per Common Paid-In Treasury Retained Comprehensive controlling share data)
Stock Capital Stock Earnings Loss Interest Total Balance at January 1, 2017$5,061 $4,762 ($36,097 )$41,754 ($13,623 )$60 $1,917 Net earnings/(loss) 8,458 (2 ) 8,456 Impact of ASU 2018-02 2,997 (2,997 ) - Other comprehensive income, net of 247 247 tax of ($69 ) Share-based compensation and 238 (35 ) 203 related dividend equivalents Treasury shares issued for stock (88 ) 399 311 options exercised, net Treasury shares issued for other (190 ) 62 (128 ) share-based plans, net Treasury shares contributed to 2,082 1,418 3,500 pension plans Common shares repurchased (9,236 ) (9,236 ) Cash dividends declared ($5.97 per (3,556 ) (3,556 ) share) Changes in noncontrolling (1 ) (1 ) interests Balance at December 31, 2017$5,061 $6,804 ($43,454 )$49,618 ($16,373 )$57 $1,713 Net earnings/(loss) 10,460 (21 ) 10,439 Other comprehensive income, net of 1,290 1,290 tax of ($379 ) Share-based compensation and 238 (36 ) 202 related dividend equivalents Treasury shares issued for stock (45 ) 126 81 options exercised, net Treasury shares issued for other (229 ) (20 ) (249 ) share-based plans, net Common shares repurchased (9,000 ) (9,000 ) Cash dividends declared ($7.19 per (4,101 ) (4,101 ) share) Changes in noncontrolling 35 35 interests Balance at December 31, 2018$5,061 $6,768 ($52,348 )$55,941 ($15,083 )$71 $410 Net earnings/(loss) (636 ) (41 ) (677 ) Other comprehensive income, net of (1,070 ) tax of$298 (1,070 ) Share-based compensation and 212 related dividend equivalents 245 (33 ) Treasury shares issued for stock 57 options exercised, net (47 ) 104 Treasury shares issued for other (240 ) share-based plans, net (221 ) (19 ) Common shares repurchased (2,651 ) (2,651 ) Cash dividends declared ($8.22 per (4,628 ) share) (4,628 ) Changes in noncontrolling 287 interests 287
Balance at
See Notes to the Consolidated Financial Statements on pages 56 - 117.
55
--------------------------------------------------------------------------------
Table of ContentsThe Boeing Company and Subsidiaries Notes to the Consolidated Financial Statements Summary of Business Segment Data
(Dollars in millions) Years ended December 31, 2019 2018 2017 Revenues: Commercial Airplanes$32,255 $57,499 $54,612 Defense, Space & Security 26,227 26,392 23,938 Global Services 18,468 17,056 14,611Boeing Capital 244 274 307
Unallocated items, eliminations and other (635 ) (94 ) 537 Total revenues
$76,559 $101,127
(Loss)/earnings from operations: Commercial Airplanes ($6,657 )$7,830 $5,285 Defense, Space & Security 2,608 1,657 2,383 Global Services 2,697 2,536 2,251Boeing Capital 28 79 114 Segment operating (loss)/profit (1,324 ) 12,102
10,033
Unallocated items, eliminations and other (2,066 ) (1,442 ) (1,127 ) FAS/CAS service cost adjustment
1,415 1,327
1,438
(Loss)/earnings from operations (1,975 ) 11,987 10,344 Other income, net 438 92 123 Interest and debt expense (722 ) (475 ) (360 ) (Loss)/earnings before income taxes (2,259 ) 11,604 10,107 Income tax benefit/(expense) 1,623 (1,144 ) (1,649 ) Net (loss)/earnings ($636 )$10,460 $8,458
This information is an integral part of the Notes to the Consolidated Financial Statements. See Note 23 for further segment results.
56
--------------------------------------------------------------------------------
Table of ContentsThe Boeing Company and Subsidiaries Notes to the Consolidated Financial Statements Years endedDecember 31, 2019 , 2018 and 2017 (Dollars in millions, except per share data) Note 1 - Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The Consolidated Financial Statements included in this report have been prepared by management ofThe Boeing Company (herein referred to as "Boeing ," the "Company," "we," "us," or "our"). These statements include the accounts of all majority-owned subsidiaries and variable interest entities that are required to be consolidated. All significant intercompany accounts and transactions have been eliminated. As described in Note 23, we operate in four reportable segments: Commercial Airplanes (BCA); Defense, Space & Security (BDS), Global Services (BGS), andBoeing Capital (BCC). Effective at the beginning of 2019, all revenues and costs associated with military derivative aircraft production are reported in the BDS segment. Amounts in prior periods have been reclassified to conform to the current year presentation. Use of Estimates The preparation of financial statements in conformity withU.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating Cycle For classification of certain current assets and liabilities, we use the duration of the related contract or program as our operating cycle, which is generally longer than one year. Standards Issued and Implemented In the first quarter of 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and recognized on our Consolidated Statement of Financial Position$1,064 of lease liabilities with corresponding right-of-use assets for operating leases. Our accounting for finance leases and lessor contracts remains substantially unchanged. The standard has no impact to cash provided or used by operating, investing, or financing activities on our Consolidated Statements of Cash Flows. As permitted under the standard, we elected prospective application of the new guidance and prior periods continue to be presented in accordance with Topic 840. We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification. See Note 9 and 13 for additional disclosures. In the first quarter of 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815), using the modified retrospective method. The standard refines and simplifies hedge accounting requirements for both financial and commodity risks. The impact of the adoption was not material. See Note 20 for additional disclosures. 57
--------------------------------------------------------------------------------
Table of Contents
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. In certain situations, 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 and certain contracts at BGS are long-term contracts with theU.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. 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 theU.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. ForU.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 58
--------------------------------------------------------------------------------
Table of Contents
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 certain reach-forward losses, across all long-term contracts were as follows: 2019 2018 2017 Increase to Revenue$54 $137 $559
(Decrease)/increase to (Loss)/earnings from Operations (
($0.06 ) ($0.29
)
Significant adjustments during the three years endedDecember 31, 2019 included reach-forward losses of$148 ,$736 and$445 on KC-46A Tanker recorded during 2019, 2018, and 2017, as well as reach-forward losses on Commercial Crew of$489 during 2019. 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. TheU.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. 59
--------------------------------------------------------------------------------
Table of Contents
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. Financial Services Revenue We record financial services revenue associated with sales-type/finance leases, operating leases, and notes receivable. Lease and financing revenue arrangements are included in Sales of services on the Consolidated Statements of Operations. For sales-type/finance leases, we record financing receivables at lease inception. A financing receivable is recorded at the aggregate of future minimum lease payments, estimated residual value of the leased equipment, and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Income recognition is generally suspended for financing receivables at the date full recovery of income and principal becomes not probable. Income is recognized when financing receivables become contractually current and performance is demonstrated by the customer. Residual values, which are reviewed periodically, represent the estimated amount we expect to receive at lease termination from the disposition of the leased equipment. Actual residual values realized could differ from these estimates. Declines in estimated residual value that are deemed other-than-temporary are recognized in the period in which the declines occur. For operating leases, revenue on leased aircraft and equipment is recorded on a straight-line basis over the term of the lease. Operating lease assets, included in Customer financing, are recorded at cost and depreciated over the period that we project we will hold the asset to an estimated residual value, using the straight-line method. We periodically review our estimates of residual value and recognize forecasted changes by prospectively adjusting depreciation expense. For notes receivable, notes are recorded net of any unamortized discounts and deferred incremental direct costs. Interest income and amortization of any discounts are recorded ratably over the related term of the note. Reinsurance Revenue Our wholly-owned insurance subsidiary,Astro Ltd. , participates in a reinsurance pool for workers' compensation. The member agreements and practices of the reinsurance pool minimize any participating members' individual risk. Reinsurance revenues were$151 ,$145 and$141 during 2019, 2018 and 2017, respectively. Reinsurance costs related to premiums and claims paid to the reinsurance pool were$150 ,$136 and$144 during 2019, 2018 and 2017, respectively. Revenues and costs are presented net in Cost of sales in the Consolidated Statements of Operations.Fleet Support We provide assistance and support to facilitate efficient and safe aircraft operation to the operators of all our commercial airplane models. Collectively known as fleet support, these activities and support services 60
--------------------------------------------------------------------------------
Table of Contents
include flight and maintenance training, field service support, engineering support, and technical data and documents. Fleet support activity begins prior to aircraft delivery as the customer receives training, manuals, and technical consulting support. This activity continues throughout the aircraft's operational life. Services provided after delivery include field service support, consulting on maintenance, repair, and operational issues brought forth by the customer or regulators, updating manuals and engineering data, and the issuance of service bulletins that impact the entire model's fleet. Field service support involves our personnel located at customer facilities providing and coordinating fleet support activities and requests. The costs for fleet support are expensed as incurred as Cost of services. Research and Development Research and development includes costs incurred for experimentation, design, and testing, as well as bid and proposal efforts related to government products and services which are expensed as incurred unless the costs are related to certain contractual arrangements with customers. Costs that are incurred pursuant to such contractual arrangements are recorded over the period that revenue is recognized, consistent with our contract accounting policy. We have certain research and development arrangements that meet the requirement for best efforts research and development accounting. Accordingly, the amounts funded by the customer are recognized as an offset to our research and development expense rather than as contract revenues. Research and development expense included bid and proposal costs of$214 ,$234 and$288 in 2019, 2018 and 2017, respectively. Share-Based Compensation We provide various forms of share-based compensation to our employees. For awards settled in shares, we measure compensation expense based on the grant-date fair value net of estimated forfeitures. For awards settled in cash, or that may be settled in cash, we measure compensation expense based on the fair value at each reporting date net of estimated forfeitures. The expense is recognized over the requisite service period, which is generally the vesting period of the award. Income Taxes Provisions forU.S. federal, state and local, and non-U.S. income taxes are calculated on reported (Loss)/earnings before income taxes based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Tax-related interest and penalties are classified as a component of Income tax benefit/(expense). Postretirement Plans The majority of our employees have earned benefits under defined benefit pension plans. Nonunion and the majority of union employees that had participated in defined benefit pension plans transitioned to a company-funded defined contribution retirement savings plan in 2016. We also provide postretirement 61
--------------------------------------------------------------------------------
Table of Contents
benefit plans other than pensions, consisting principally of health care coverage to eligible retirees and qualifying dependents. Benefits under the pension and other postretirement benefit plans are generally based on age at retirement and years of service and, for some pension plans, benefits are also based on the employee's annual earnings. The net periodic cost of our pension and other postretirement plans is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate, the long-term rate of asset return, and medical trend (rate of growth for medical costs). A portion of the service cost component of net periodic pension and other postretirement income or expense is not recognized in net earnings in the year incurred because it is allocated to production as product costs, and reflected in inventory at the end of a reporting period. Actuarial gains and losses, which occur when actual experience differs from actuarial assumptions, are reflected in Shareholders' equity (net of taxes). If actuarial gains and losses exceed ten percent of the greater of plan assets or plan liabilities we amortize them over the average expected future lifetime of participants. The funded status of our pension and postretirement plans is reflected on the Consolidated Statements of Financial Position. Postemployment Plans We record a liability for postemployment benefits, such as severance or job training, when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. Environmental Remediation We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. We routinely assess, based on in-depth studies, expert analyses and legal reviews, our contingencies, obligations, and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties and/or insurance carriers. Our policy is to accrue and charge to current expense identified exposures related to environmental remediation sites when it is probable that a liability has been incurred and the amount can be reasonably estimated. The amount of the liability is based on our best estimate or the low end of a range of reasonably possible exposure for investigation, cleanup, and monitoring costs to be incurred. Estimated remediation costs are not discounted to present value as the timing of payments cannot be reasonably estimated. We may be able to recover a portion of the remediation costs from insurers or other third parties. Such recoveries are recorded when realization of the claim for recovery is deemed probable. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid instruments, such as commercial paper, time deposits, and other money market instruments, which have original maturities of three months or less. We aggregate our cash balances by bank where conditions for right of set-off are met, and reclassify any negative balances, consisting mainly of uncleared checks, to Accounts payable. Negative balances reclassified to Accounts payable were$101 and$127 atDecember 31, 2019 and 2018. Inventories Inventoried costs on commercial aircraft programs and long-term contracts include direct engineering, production and tooling and other non-recurring costs, and applicable overhead, which includes fringe benefits, production related indirect and plant management salaries and plant services, not in excess of estimated net realizable value. To the extent a material amount of such costs are related to an abnormal event or are fixed costs not appropriately attributable to our programs or contracts, they are expensed in the current period rather than inventoried. Inventoried costs include amounts relating to programs and contracts with long-term production cycles, a portion of which is not expected to be realized within one 62
--------------------------------------------------------------------------------
Table of Contents
year. Included in inventory for federal government contracts is an allocation of allowable costs related to manufacturing process reengineering. Commercial aircraft programs inventory includes deferred production costs and supplier advances. Deferred production costs represent actual costs incurred for production of early units that exceed the estimated average cost of all units in the program accounting quantity. Higher production costs are experienced at the beginning of a new or derivative airplane program. Units produced early in a program require substantially more effort (labor and other resources) than units produced later in a program because of volume efficiencies and the effects of learning. We expect that these deferred costs will be fully recovered when all units included in the accounting quantity are delivered as the expected unit cost for later deliveries is below the estimated average cost of all units in the program. Supplier advances represent payments for parts we have contracted to receive from suppliers in the future. As parts are received, supplier advances are amortized to work in process. The determination of net realizable value of long-term contract costs is based upon quarterly reviews that estimate costs to be incurred to complete all contract requirements. When actual contract costs and the estimate to complete exceed total estimated contract revenues, a loss provision is recorded. The determination of net realizable value of commercial aircraft program costs is based upon quarterly program reviews that estimate revenue and cost to be incurred to complete the program accounting quantity. When estimated costs to complete exceed estimated program revenues to go, a program loss provision is recorded in the current period for the estimated loss on all undelivered units in the accounting quantity. Used aircraft purchased by the Commercial Airplanes segment and general stock materials are stated at cost not in excess of net realizable value. See 'Aircraft Valuation' within this Note for a discussion of our valuation of used aircraft. Spare parts inventory is stated at lower of average unit cost or net realizable value. We review our commercial spare parts and general stock materials quarterly to identify impaired inventory, including excess or obsolete inventory, based on historical sales trends, expected production usage, and the size and age of the aircraft fleet using the part. Impaired inventories are charged to Cost of products in the period the impairment occurs. Included in inventory for commercial aircraft programs are amounts paid or credited in cash, or other consideration to certain airline customers, that are referred to as early issue sales consideration. Early issue sales consideration is recognized as a reduction to revenue when the delivery of the aircraft under contract occurs. If an airline customer does not perform and take delivery of the contracted aircraft, we believe that we would have the ability to recover amounts paid. However, to the extent early issue sales consideration exceeds advances and is not considered to be otherwise recoverable, it would be written off in the current period. Precontract Costs We may, from time to time, incur costs in excess of the amounts required for existing contracts. If we determine the costs are probable of recovery from future orders, then we capitalize the precontract costs we incur, excluding start-up costs which are expensed as incurred. Capitalized precontract costs are included in Inventories in the accompanying Consolidated Statements of Financial Position. Should future orders not materialize or we determine the costs are no longer probable of recovery, the capitalized costs would be written off. Property, Plant and Equipment Property, plant and equipment are recorded at cost, including applicable construction-period interest, less accumulated depreciation and are depreciated principally over the following estimated useful lives: new buildings and land improvements, from 10 to 40 years; and new machinery and equipment, from 4 to 20 years. The principal methods of depreciation are as follows: buildings and land improvements, 150% 63
--------------------------------------------------------------------------------
Table of Contents
declining balance; and machinery and equipment, sum-of-the-years' digits. Capitalized internal use software is included in Other assets and amortized using the straight line method over 5 years. Capitalized software as a service is included in Other assets and amortized using the straight line method over the term of the hosting arrangement which is typically no greater than 10 years. We periodically evaluate the appropriateness of remaining depreciable lives assigned to long-lived assets, including assets that may be subject to a management plan for disposition. Long-lived assets held for sale are stated at the lower of cost or fair value less cost to sell. Long-lived assets held for use are subject to an impairment assessment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of the impairment is the difference between the carrying amount and the fair value of the asset. Leases We determine if an arrangement is, or contains, a lease at the inception date. Operating leases are included in Other assets, with the related liabilities included in Accrued liabilities and Other long-term liabilities. Assets under finance leases, which primarily represent computer equipment, are included in Property, plant and equipment, net, with the related liabilities included in Short-term debt and current portion of long-term debt and Long-term debt on the Consolidated Statements of Financial Position. Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the present value of lease payments. Variable components of the lease payments such as fair market value adjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components which are accounted for as a single lease component. Asset Retirement Obligations We record all known asset retirement obligations for which the liability's fair value can be reasonably estimated, including certain asbestos removal, asset decommissioning and contractual lease restoration obligations. Recorded amounts are not material. We also have known conditional asset retirement obligations, such as certain asbestos remediation and asset decommissioning activities to be performed in the future, that are not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, these obligations have not been recorded in the Consolidated Financial Statements. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability's fair value. In addition, there may be conditional asset retirement obligations that we have not yet discovered (e.g. asbestos may exist in certain buildings but we have not become aware of it through the normal course of business), and therefore, these obligations also have not been included in the Consolidated Financial Statements.Goodwill and Other Acquired IntangiblesGoodwill and other acquired intangible assets with indefinite lives are not amortized, but are tested for impairment annually and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Our annual testing date isApril 1 . 64
--------------------------------------------------------------------------------
Table of Contents
We test goodwill for impairment by performing a qualitative assessment or using a two-step impairment process. If we choose to perform a qualitative assessment and determine it is more likely than not that the carrying value of the net assets is more than the fair value of the related operations, the two-step impairment process is then performed; otherwise, no further testing is required. For operations where the two-step impairment process is used, we first compare the carrying value of net assets to the fair value of the related operations. If the fair value is determined to be less than carrying value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment. Indefinite-lived intangibles consist of brand and trade names acquired in business combinations. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment. Our finite-lived acquired intangible assets are amortized on a straight-line basis over their estimated useful lives as follows: developed technology, from 2 to 14 years; product know-how, from 6 to 30 years; customer base, from 3 to 17 years; distribution rights, from 3 to 27 years; and other, from 1 to 32 years. We evaluate the potential impairment of finite-lived acquired intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of the impairment is the difference between the carrying amount and the fair value of the asset. Investments Time deposits are held-to-maturity investments that are carried at cost. Available-for-sale debt securities include commercial paper,U.S. government agency securities, and corporate debt securities. Available-for-sale debt securities are recorded at fair value, and unrealized gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Realized gains and losses on available-for-sale debt securities are recognized based on the specific identification method. Available-for-sale debt securities are assessed for impairment quarterly. The equity method of accounting is used to account for investments for which we have the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an investee of between 20% and 50%. The cumulative earnings approach is used for cash flow classification of distributions received from equity method investments. Other Equity investments are recorded at fair value, with gains and losses recorded through net earnings. Equity investments without readily determinable fair value are measured at cost, less impairments, plus or minus observable price changes. Equity investments without readily determinable fair value are assessed for impairment quarterly. We classify investment income and loss on our Consolidated Statements of Operations based on whether the investment is operating or non-operating in nature. Operating investments align strategically and are integrated with our operations. Earnings from operating investments, including our share of income or loss from equity method investments, dividend income from other equity investments, and any impairments or gain/loss on the disposition of these investments, are recorded in Income from operating investments, net. Non-operating investments are those we hold for non-strategic purposes. Earnings from non-operating investments, including interest and dividends on marketable securities, and any impairments or gain/loss on the disposition of these investments are recorded in Other income/(loss), net. 65
--------------------------------------------------------------------------------
Table of Contents
Derivatives
All derivative instruments are recognized in the financial statements and measured at fair value regardless of the purpose or intent of holding them. We use derivative instruments to principally manage a variety of market risks. For derivatives designated as hedges of the exposure to changes in fair value of the recognized asset or liability or a firm commitment (referred to as fair value hedges), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to include in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For our cash flow hedges, the derivative's gain or loss is initially reported in comprehensive income and is subsequently reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. We have agreements to purchase and sell aluminum to address long-term strategic sourcing objectives and international business requirements. These agreements are derivatives for accounting purposes but are not designated for hedge accounting treatment. We also hold certain derivative instruments for economic purposes that are not designated for hedge accounting treatment. For these aluminum agreements and for other derivative instruments not designated for hedge accounting treatment, the changes in their fair value are recorded in earnings immediately. Aircraft Valuation Used aircraft under trade-in commitments and aircraft under repurchase commitments In conjunction with signing a definitive agreement 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. Additionally, we have entered into contingent repurchase commitments with certain customers wherein we agree to repurchase the Sale Aircraft at a specified price, generally 10 to 15 years after delivery of the Sale Aircraft. Our repurchase of the Sale Aircraft is contingent upon a future, mutually acceptable agreement for the sale of additional new aircraft. If we execute an agreement for the sale of additional new aircraft, and if the customer exercises its right to sell the Sale Aircraft to us, a contingent repurchase commitment would become a trade-in commitment. Our historical experience is that contingent repurchase commitments infrequently become trade-in commitments. Exposure related to trade-in commitments may take the form of: (1) adjustments to revenue for the difference between the contractual
trade-in price in the definitive agreement and our best estimate of the
fair value of the trade-in aircraft as of the date of such agreement,
which would be recognized upon delivery of the Sale Aircraft, and/or (2) charges to cost of products for adverse changes in the fair value of trade-in aircraft that occur subsequent to signing of a definitive agreement for Sale Aircraft but prior to the purchase of the used trade-in aircraft. Estimates based on current aircraft values would be included in Accrued liabilities. The fair value of trade-in aircraft is determined using aircraft-specific data such as model, age and condition, market conditions for specific aircraft and similar models, and multiple valuation sources. This process uses our assessment of the market for each trade-in aircraft, which in most instances begins years before the return of the aircraft. There are several possible markets in which we continually pursue opportunities to place used aircraft. These markets include, but are not limited to, the resale market, which could potentially include the cost of long-term storage; the leasing market, with the potential for refurbishment costs to meet the leasing customer's requirements; or the scrap market. Trade-in aircraft valuation varies significantly depending on which market we determine is most likely for each aircraft. On a quarterly basis, we update our valuation analysis based on the actual activities associated with placing each aircraft into a market or using current published third-party aircraft valuations based on the type and age of the aircraft, adjusted for individual attributes and known conditions. 66
--------------------------------------------------------------------------------
Table of Contents
Used aircraft acquired by the Commercial Airplanes segment are included in Inventories at the lower of cost or net realizable value as it is our intent to sell these assets. To mitigate costs and enhance marketability, aircraft may be placed on operating lease. While on operating lease, the assets are included in Customer financing. Customer financing Customer financing includes operating lease equipment, notes receivable, and sales-type/finance leases. Sales-type/finance leases are treated as receivables, and allowances for losses are established as necessary. We assess the fair value of the assets we own, including equipment under operating leases, assets held for sale or re-lease, and collateral underlying receivables, to determine if their fair values are less than the related assets' carrying values. Differences between carrying values and fair values of sales-type/finance leases and notes and other receivables, as determined by collateral value, are considered in determining the allowance for losses on receivables. We use a median calculated from published collateral values from multiple third-party aircraft value publications based on the type and age of the aircraft to determine the fair value of aircraft. Under certain circumstances, we apply judgment based on the attributes of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by outside publications. Impairment review for assets under operating leases and held for sale or re-lease We evaluate for impairment assets under operating lease or assets held for sale or re-lease when events or changes in circumstances indicate that the expected undiscounted cash flow from the asset may be less than the carrying value. We use various assumptions when determining the expected undiscounted cash flow, including our intentions for how long we will hold an asset subject to operating lease before it is sold, the expected future lease rates, lease terms, residual value of the asset, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the remaining economic life of the asset. We record assets held for sale at the lower of carrying value or fair value less costs to sell. When we determine that impairment is indicated for an asset, the amount of impairment expense recorded is the excess of the carrying value over the fair value of the asset. Allowance for losses on customer financing receivables We record the potential impairment of customer financing receivables in a valuation account, the balance of which is an accounting estimate of probable but unconfirmed losses. The allowance for losses on receivables relates to two components of receivables: (a) receivables that are evaluated individually for impairment and (b) all other receivables. 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 of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectability include, but are not limited to, a customer's extended delinquency, requests for restructuring and filings for bankruptcy. We determine a specific impairment allowance based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral we would expect to realize. We review the adequacy of the allowance attributable to the remaining receivables (after excluding receivables subject to a specific impairment allowance) by assessing both the collateral exposure and the applicable cumulative default rate. Collateral exposure for a particular receivable is the excess of the carrying value of the receivable over the fair value of the related collateral. A receivable with an estimated fair value in excess of the carrying value is considered to have no collateral exposure. The applicable cumulative default rate is determined using two components: customer credit ratings and weighted average remaining contract term. Internally assigned credit ratings, our credit quality indicator, are determined for 67
--------------------------------------------------------------------------------
Table of Contents
each customer in the portfolio. Those ratings are updated based upon public information and information obtained directly from our customers. We have entered into agreements with certain customers that would entitle us to look beyond the specific collateral underlying the receivable for purposes of determining the collateral exposure as described above. Should the proceeds from the sale of the underlying collateral asset resulting from a default condition be insufficient to cover the carrying value of our receivable (creating a shortfall condition), these agreements would, for example, permit us to take the actions necessary to sell or retain certain other assets in which the customer has an equity interest and use the proceeds to cover the shortfall. Each quarter we review customer credit ratings, published historical credit default rates for different rating categories, and multiple third-party aircraft value publications as a basis to validate the reasonableness of the allowance for losses on receivables. There can be no assurance that actual results will not differ from estimates or that the consideration of these factors in the future will not result in an increase or decrease to the allowance for losses on receivables. Warranties In conjunction with certain product sales, we provide warranties that cover factors such as non-conformance to specifications and defects in material and design. The majority of our warranties are issued by our Commercial Airplanes segment. Generally, aircraft sales are accompanied by a 3 to 4-year standard warranty for systems, accessories, equipment, parts, and software manufactured by us or manufactured to certain standards under our authorization. These warranties are included in the programs' estimate at completion. On occasion we have made commitments beyond the standard warranty obligation to correct fleet-wide major issues of a particular model, resulting in additional accrued warranty expense. Warranties issued by our BDS segment principally relate to sales of military aircraft and weapons systems. These sales are generally accompanied by a six month to two-year warranty period and cover systems, accessories, equipment, parts, and software manufactured by us to certain contractual specifications. Estimated costs related to standard warranties are recorded in the period in which the related product delivery occurs. The warranty liability recorded at each balance sheet date reflects the estimated number of months of warranty coverage outstanding for products delivered times the average of historical monthly warranty payments, as well as additional amounts for certain major warranty issues that exceed a normal claims level. Estimated costs of these additional warranty issues are considered changes to the initial liability estimate. We provide guarantees to certain commercial airplane customers which include compensation provisions for failure to meet specified aircraft performance targets. We account for these performance guarantees as warranties. The estimated liability for these warranties is based on known and anticipated operational characteristics and forecasted customer operation of the aircraft relative to contractually specified performance targets, and anticipated settlements when contractual remedies are not specified. Estimated payments are recorded as a reduction of revenue at delivery of the related aircraft. We have agreements that require certain suppliers to compensate us for amounts paid to customers for failure of supplied equipment to meet specified performance targets. Claims against suppliers under these agreements are included in Inventories and recorded as a reduction in Cost of products at delivery of the related aircraft. These performance warranties and claims against suppliers are included in the programs' estimate at completion. Supplier Penalties We record an accrual for supplier penalties when an event occurs that makes it probable that a supplier penalty will be incurred and the amount is reasonably estimable. Until an event occurs, we fully anticipate accepting all products procured under production-related contracts. 68
--------------------------------------------------------------------------------
Table of Contents
Guarantees
We record a liability in Accrued liabilities for the fair value of guarantees that are issued or modified afterDecember 31, 2002 . For credit guarantees, the liability is equal to the present value of the expected loss. We determine the expected loss by multiplying the creditor's default rate by the guarantee amount reduced by the expected recovery, if applicable, for each future period the credit guarantee will be outstanding. If at inception of a guarantee, we determine there is a probable related contingent loss, we will recognize a liability for the greater of (a) the fair value of the guarantee as described above or (b) the probable contingent loss amount. Standards Issued and Not Yet Implemented InJune 2016 , theFinancial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The new standard is effective for reporting periods beginning afterDecember 15, 2019 . The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the new credit loss standard effectiveJanuary 1, 2020 . We do not expect the new credit loss standard to have a material effect on our financial position, results of operations or cash flows. Note 2 -Acquisitions and Joint Ventures Strategic Partnership with Embraer During the first quarter of 2019, we entered into definitive transaction documents with respect to a strategic partnership with Embraer S.A. (Embraer). The partnership contemplates that the parties enter into a joint venture comprising the commercial aircraft and services operations of Embraer, in whichBoeing will acquire an 80 percent ownership stake for$4,200 , as well as a joint venture to promote and develop new markets for the multi-mission, medium airlift C-390 Millennium, in whichBoeing will hold a 49 percent ownership stake. Embraer shareholders approved the transaction, which remains subject to regulatory approvals and other customary closing conditions. We are actively engaged with theEuropean Commission and have obtained unconditional clearance to close in all other required jurisdictions, includingthe United States ,China , andJapan . InBrazil , theAdministrative Council for Economic Defense (CADE)'s General-Superintendence (SG) has provided unconditional approval; the decision will become final in mid-February unless a review is requested by CADE Commissioners. We continue to be engaged with theEuropean Commission as it progresses its Phase II investigation of the transaction. Pending timely resolution of the remaining regulatory approvals, the transaction is expected to close in the first half of 2020. If the transaction is not completed due to failure to obtain antitrust approvals, we would be required to pay a termination fee of$100 . 69
--------------------------------------------------------------------------------
Table of Contents
KLX Inc. OnOctober 9, 2018 , we acquired all the outstanding shares of KLX Inc. (KLX). KLX is a global provider of aviation parts and services in the aerospace industry. Its capabilities include distribution and supply chain services. The KLX acquisition is intended to accelerate growth in our services business by allowingBoeing to offer commercial, defense, business and general aviation customers a broader range of offerings. The results of KLX's operations have been included in our Global Services segment from the acquisition date. KLX's revenues and earnings from operations fromOctober 9, 2018 throughDecember 31, 2018 were$356 and$50 . The final allocation of the purchase price was as follows: Cash and cash equivalents$225 Accounts receivable 260 Inventories 1,298 Other current assets 43 Property, plant & equipment 36Goodwill 2,056 Intangible assets 963 Other assets 78 Current liabilities (350 ) Other long-term liabilities (113 ) Long-term debt (1,210 ) Total net assets acquired$3,286 The goodwill has been allocated to the Global Services and Commercial Airplanes segments based on revenue synergies expected to be realized from the integration of KLX's products and services and expected cost synergies primarily resulting from the consolidation of procurement spending and functional support. Approximately$533 of the acquired goodwill and intangible assets is deductible for tax purposes. The acquired intangible assets primarily relate to customer and supplier relationships and have a weighted-average useful life of 17.5 years. 70
--------------------------------------------------------------------------------
Table of Contents
Note 3 -Goodwill and Acquired Intangibles Changes in the carrying amount of goodwill for the years endedDecember 31, 2019 and 2018 were as follows: Defense, Commercial Space & Global Airplanes Security Services Other Total Balance at January 1, 2018$992 $3,074 $1,493 $5,559 KLX acquisition 249 1,861 2,110 Other acquisitions 180 3 183 Goodwill adjustments (12 ) (12 )
Balance at
$7,840 KLX acquisition adjustments (51 ) (51 ) Acquisitions 72 188$62 322 Dispositions (49 ) (49 ) Goodwill adjustments (10 ) 8 (2 )
Balance at
$62 $8,060 As ofDecember 31, 2019 and 2018, we had indefinite-lived intangible assets with carrying amounts of$197 and$490 relating to trade names. During 2019, we recorded an impairment of$293 within Cost of Sales, as a result of our decision to retire the Aviall brand and trade name. As ofDecember 31, 2019 , we had indefinite-lived intangible assets with a carrying amount of$202 related to in process research and development. The gross carrying amounts and accumulated amortization of our acquired finite-lived intangible assets were as follows atDecember 31 : 2019 2018 Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Distribution rights$2,989 $1,262 $2,879 $1,101 Product know-how 553 354 536 324 Customer base 1,364 599 1,284 523 Developed technology 653 485 595 439 Other 280 200 218 186 Total$5,839 $2,900 $5,512 $2,573
Amortization expense for acquired finite-lived intangible assets for the years
ended
2020 2021 2022 2023 2024
Estimated amortization expense
During 2019 and 2018, we acquired
71
--------------------------------------------------------------------------------
Table of Contents
Note 4 - 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. The elements used in the computation of basic and diluted earnings per share were as follows: (In millions - except per share amounts) Years ended December 31, 2019 2018
2017
Net (loss)/earnings ($636 )$10,460
Less: earnings available to participating securities 7
6
Net (loss)/earnings available to common shareholders (
Basic
Basic weighted average shares outstanding 566.0 579.9
603.2
Less: participating securities 0.6 0.7
0.7
Basic weighted average common shares outstanding 565.4 579.2
602.5
Diluted
Basic weighted average shares outstanding 566.0 579.9
603.2
Dilutive potential common shares(1) 6.3
7.5
Diluted weighted average shares outstanding 566.0 586.2
610.7
Less: participating securities 0.6 0.7
0.7
Diluted weighted average common shares outstanding 565.4 585.5
610.0
Net (loss)/earnings per share: Basic ($1.12 )$18.05 $14.03 Diluted (1.12 ) 17.85 13.85
(1) Diluted (loss)/earnings per share includes any dilutive impact of stock
options, restricted stock units, performance-based restricted stock units and performance awards. 72
--------------------------------------------------------------------------------
Table of Contents
As a result of incurring a net loss for the year endedDecember 31, 2019 , potential common shares of 4.1 million were excluded from diluted loss per share because the effect would have been antidilutive. In addition, 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 (loss)/earnings per share because the effect was either antidilutive or the performance condition was not met. (Shares in millions) Years ended December 31, 2019 2018 2017 Performance awards 2.8 2.5 4.1
Performance-based restricted stock units 0.6 0.3 0.5
Note 5 - Income Taxes The components of earnings before income taxes were: Years ended December 31, 2019 2018 2017 U.S. ($2,792 )$11,166 $9,660 Non-U.S. 533 438 447 Total ($2,259 )$11,604 $10,107
Income tax (benefit)/expense consisted of the following:
Years ended
2019 2018 2017 Current tax (benefit)/expense U.S. federal ($308 )$1,873 $1,276 Non-U.S. 169 169 149 U.S. state (161 ) 97 23 Total current (300 ) 2,139 1,448 Deferred tax (benefit)/expense U.S. federal (953 ) (996 ) 204 Non-U.S. (3 ) (4 ) 3 U.S. state (367 ) 5 (6 ) Total deferred (1,323 ) (995 ) 201
Total income tax (benefit)/expense (
Net income tax payments were
73
--------------------------------------------------------------------------------
Table of Contents
The following is a reconciliation of theU.S. federal statutory tax to actual income tax expense: Years ended December 31, 2019 2018 2017 Amount Rate Amount Rate Amount Rate U.S. federal statutory tax ($474 ) 21.0 %$2,437 21.0 %$3,537 35.0 % Research and development credits (382 ) 16.9 (207 ) (1.8 ) (162 ) (1.6 ) Audit settlements(1) (371 ) 16.4 (412 ) (3.6 ) Foreign derived intangible income(2) (229 ) 10.1 (549 ) (4.7 ) Excess tax benefits(3) (180 ) 8.0 (181 ) (1.6 ) (207 ) (2.1 ) Other provision adjustments 66 (3.0 ) 91 1.0 26 0.3 Tax deductible dividends (53 ) 2.4 (48 ) (0.4 ) (68 ) (0.7 ) Tax on non-US activities 43 (1.9 ) 40 0.3 (95 ) (0.9 ) State income tax provision, net of effects onU.S. federal tax (43 ) 1.9 84 0.7 17 0.2 Impact of Tax Cuts and Jobs Act(4) (111 ) (1.0 ) (1,271 ) (12.6 )U.S. manufacturing activity tax benefit
(128 ) (1.3 )
Income tax (benefit)/expense (
(1) In the fourth quarter of 2019, we recorded a tax benefit of
the settlement of state tax audits spanning 15 tax years. In the third
quarter of 2018, we recorded a tax benefit of
of the 2013-2014 federal tax audit.
(2) On
revised the
rate from 35% to 21% effective
tax system and imposing a one-time tax on deemed repatriated earnings of
non-
apply a lowerU.S. tax rate to intangible income derived from serving non-U.S. markets. In 2019 and 2018, we recorded tax benefits related to foreign derived intangible income of$229 and$549 .
(3) In 2019, 2018 and 2017, we recorded excess tax benefits related to employee
share-based payments of
(4) In accordance with
Bulletin No. 118 (
provisional tax benefits of
rate and a provisional tax expense of
activities resulting from the TCJA. During the fourth quarter of 2018 and in
accordance with
provisional amounts recognized at
incremental benefit related to refinements to these provisional amounts
which was not significant. 74
--------------------------------------------------------------------------------
Table of Contents
Significant components of our deferred tax assets/(liabilities) at
2019
2018
Inventory and long-term contract methods of income recognition
($6,048 ) ($5,422 ) Pension benefits 3,495
3,344
737 MAX customer concessions and other considerations 1,626
Fixed assets, intangibles and goodwill (net of valuation
allowance of
(1,560 ) (1,616 ) Retiree health care benefits 1,120
1,124
Other employee benefits 849
873
Accrued expenses and reserves 627
411
Net operating loss, credit and capital loss carryovers (net
of valuation allowance of
595
258
Customer and commercial financing (268 ) (309 ) Other (166 ) (115 ) Net deferred tax assets/(liabilities)(2)$270
(
(1) Of the deferred tax asset for net operating loss and credit carryovers,
$251 expires on or beforeDecember 31, 2039 and$344 may be carried over indefinitely. (2) Included in the net deferred tax assets/(liabilities) as ofDecember 31 ,
2019 and 2018 are deferred tax assets in the amounts of
related to Accumulated other comprehensive loss.
Net deferred tax assets/(liabilities) at
2019 2018 Deferred tax assets$10,722 $8,835 Deferred tax liabilities (10,334 ) (10,194 ) Valuation allowance (118 ) (93 )
Net deferred tax assets/(liabilities)
The deferred tax assets are reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The TCJA one-time repatriation tax and Global Intangible Low Tax Income liabilities effectively taxed the undistributed earnings previously deferred fromU.S. income taxes. We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries because such earnings are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant. As ofDecember 31, 2019 and 2018, the amounts accrued for the payment of income tax-related interest and penalties included in the Consolidated Statements of Financial Position were not significant. The amounts of interest included in the Consolidated Statements of Operations were not significant for the years endedDecember 31, 2019 , 2018 and 2017. 75
--------------------------------------------------------------------------------
Table of Contents
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2019 2018
2017
Unrecognized tax benefits - January 1$2,412 $1,736
Gross increases - tax positions in prior periods 100 87
3
Gross decreases - tax positions in prior periods (1,418 ) (410 )
(44 ) Gross increases - current-period tax positions 344 1,208
220
Gross decreases - current period tax positions (1 ) Settlements
39 (206 ) Statute Lapse (3 ) Unrecognized tax benefits - December 31$1,476 $2,412
As ofDecember 31, 2019 , 2018 and 2017, the total amount of unrecognized tax benefits was$1,476 ,$2,412 and$1,736 , respectively, of which$1,287 ,$1,405 and$1,568 would affect the effective tax rate, if recognized. As ofDecember 31, 2019 , these amounts are primarily associated with the amount of research tax credits claimed, uncertainties in the TCJA, tax basis adjustments and theU.S. manufacturing activity tax benefit. Federal income tax audits have been settled for all years prior to 2015. The Internal Revenue Service (IRS) began the 2015-2017 federal tax audit in the first quarter of 2019. We are also subject to examination in major state and international jurisdictions for the 2007-2018 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 matters under audit may decrease by up to$710 based on current estimates. Note 6 - Accounts Receivable, net Accounts receivable atDecember 31 consisted of the following: 2019 2018 U.S. government contracts(1)$1,121 $1,877 Commercial Airplanes 29 51 Global Services(2) 1,967 1,783 Defense, Space, & Security(2) 220 222 Other 2 3 Less valuation allowance (73 ) (57 ) Total$3,266 $3,879 (1) Includes foreign military sales through theU.S. government (2) ExcludesU.S. government contracts
Accounts receivable expected to be collected after one year are not material.
76
--------------------------------------------------------------------------------
Table of Contents
Note 7 - Inventories Inventories atDecember 31 consisted of the following: 2019
2018
Long-term contracts in progress$1,187
Commercial aircraft programs 66,016
52,753
Commercial spare parts, used aircraft, general stock materials and other 9,419 7,685 Total$76,622 $62,567 Long-Term Contracts in Progress Long-term contracts in progress includes Delta launch program inventory that is being sold at cost toUnited Launch Alliance (ULA) under an inventory supply agreement that terminates onMarch 31, 2021 . The inventory balance was$176 and$227 atDecember 31, 2019 and 2018. See indemnifications to ULA in Note 15. Included in inventories are capitalized precontract costs of$711 atDecember 31, 2019 , primarily related to the KC-46A Tanker and Commercial Crew, and$644 atDecember 31, 2018 primarily related to KC-46A Tanker. See Note 14. Commercial Aircraft Programs AtDecember 31, 2019 and 2018, commercial aircraft programs inventory included the following amounts related to the 737 program:$1,313 and$463 of deferred production costs and$521 and$471 of unamortized tooling and other non-recurring costs. AtDecember 31, 2019 ,$1,829 of 737 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 is expected to be recovered from units included in the program accounting quantity that represent expected future orders. AtDecember 31, 2019 and 2018, commercial aircraft programs inventory included the following amounts related to the 777X program:$5,628 and$3,067 of work in process and$2,914 and$2,512 of unamortized tooling and other non-recurring costs. AtDecember 31, 2019 and 2018, commercial aircraft programs inventory included the following amounts related to the 787 program:$24,772 and$27,852 of work in process (including deferred production costs of$18,716 and$22,967 ),$2,202 and$2,453 of supplier advances, and$2,092 and$2,638 of unamortized tooling and other non-recurring costs. AtDecember 31, 2019 ,$14,386 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$6,422 is expected to be recovered from units included in the program accounting quantity that represent expected future orders. Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling$2,863 and$2,844 atDecember 31, 2019 and 2018. 77
--------------------------------------------------------------------------------
Table of Contents
Note 8 - Contracts with Customers Unbilled receivables decreased from$10,025 atDecember 31, 2018 to$9,043 atDecember 31, 2019 , primarily driven by timing of billings at BDS and BGS. Advances and progress billings increased from$50,676 atDecember 31, 2018 to$51,551 atDecember 31, 2019 , primarily driven by advances on orders received in excess of revenue recognized at BDS, BGS, and BCA. Revenues recognized for the years endedDecember 31, 2019 and 2018 from amounts recorded as Advances and progress billings at the beginning of each year were$16,778 and$24,737 . Certain commercial airplane customers are experiencing liquidity issues and seeking additional capital. Should these customers fail to address their liquidity issues, accounts receivable, unbilled receivables and certain inventory could become impaired. In addition we would have to remove contracts related to these customers from backlog and remarket any undelivered aircraft. The following table summarizes our contract assets under long-term contracts that were unbillable or related to outstanding claims as ofDecember 31 : Unbilled Claims 2019 2018 2019 2018 Current$6,931 $7,178 $9 $1
Expected to be collected after one year 2,112 2,847 14 2 Total
$9,043 $10,025 $23 $3 Unbilled receivables related to commercial customer incentives expected to be collected after one year were$211 and$150 atDecember 31, 2019 and 2018. Unbilled receivables related to claims are items that we believe are earned, but are subject to uncertainty concerning their determination or ultimate realization. Note 9 - Customer Financing Customer financing primarily relates to our BCC segment. Customer financing consisted of the following atDecember 31 : 2019
2018
Financing receivables: Investment in sales-type/finance leases$1,029 $1,125 Notes 443 730 Total financing receivables 1,472 1,855
Operating lease equipment, at cost, less accumulated
depreciation of
834 782 Operating lease incentive 250 Gross customer financing 2,306 2,887 Less allowance for losses on receivables (8 ) (9 ) Total$2,298 $2,878 78
--------------------------------------------------------------------------------
Table of Contents
The components of investment in sales-type/finance leases at
2019 2018 Minimum lease payments receivable$799 $908 Estimated residual value of leased assets 393 425 Unearned income (163 ) (208 ) Total$1,029 $1,125
Operating lease equipment primarily includes large commercial jet aircraft.
Financing receivable balances evaluated for impairment at
2019 2018
Individually evaluated for impairment
$1,472 $1,855 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. AtDecember 31, 2019 and 2018, we individually evaluated for impairment customer financing receivables of$400 and$409 , of which$388 and$398 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. Income recognition is generally suspended for financing receivables at the date full recovery of income and principal becomes not probable. Income is recognized when financing receivables become contractually current and performance is demonstrated by the customer. The average recorded investment in impaired financing receivables for the year endedDecember 31, 2019 was$392 , and the related interest income was insignificant. The change in the allowance for losses on financing receivables for the years endedDecember 31, 2019 , 2018 and 2017, consisted of the following: 2019 2018 2017 Beginning balance - January 1 ($9 ) ($12 ) ($10 )
Customer financing valuation benefit/(cost) 1 3 (2 )
Ending balance -
($8 ) ($9 ) ($12 )
Collectively evaluated for impairment (
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. 79
--------------------------------------------------------------------------------
Table of Contents
Our financing receivable balances atDecember 31 by internal credit rating category are shown below: Rating categories 2019 2018 BBB$573 $883 BB 385 430 B 122 135 CCC 392 407
Total carrying value of financing receivables
AtDecember 31, 2019 , our allowance related to receivables with ratings of B, BB and BBB. We applied default rates that averaged 22.1%, 5.3% and 0.6%, respectively, to the exposure associated with those receivables. 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 747-8 and out-of-production aircraft. 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 at
2019
2018
717 Aircraft ($124 and$204 accounted for as operating leases)$736 $918 747-8 Aircraft ($130 and$132 accounted for as operating leases) 475 477 737 Aircraft ($240 and$263 Accounted for as operating leases) 263 290 777 Aircraft ($236 and$60 accounted for as operating leases) 240
68
MD-80 Aircraft (Accounted for as sales-type finance leases) 186 204 757 Aircraft ($22 and$24 accounted for as operating leases) 182 200 747-400 Aircraft ($31 and$45 Accounted for as operating leases) 90 116 As part of selected lease transactions,Boeing may provide incentives to commercial customers. AtDecember 31, 2018 , Customer Financing included$250 of lease incentives with one customer that experienced liquidity issues. In the first quarter of 2019, we concluded that these lease incentives were impaired and recorded a charge of$250 . Charges related to customer financing asset impairment for the years endedDecember 31 were as follows: 2019 2018 2017Boeing Capital $53 $1 $13 OtherBoeing 217 38 30 Total$270 $39 $43 80
--------------------------------------------------------------------------------
Table of Contents
Lease income recorded in Revenue on the Consolidated Statements of Operations for the year endedDecember 31, 2019 included$62 from sales-type/finance leases and$139 from operating leases, of which$8 related to variable operating lease payments. As ofDecember 31, 2019 , undiscounted cash flows for notes receivable, sales-type/finance and operating leases over the next five years and thereafter are as follows: Notes Sales-type/finance Operating receivable leases leases Year 1$382 $191 $130 Year 2 7 141 103 Year 3 37 127 89 Year 4 17 118 74 Year 5 98 58 Thereafter 124 41 Total lease receipts 443 799 495 Less imputed interest (163 ) Estimated unguaranteed residual values 393 Total$443 $1,029 $495 AtDecember 31, 2019 andDecember 31, 2018 unguaranteed residual values were$393 and$425 . Guaranteed residual values atDecember 31, 2019 were not significant. Note 10 - Property, Plant and Equipment Property, plant and equipment atDecember 31 consisted of the following: 2019 2018 Land$527 $546
Buildings and land improvements 14,288 14,109 Machinery and equipment
15,723 15,221 Construction in progress 1,306 1,337
Gross property, plant and equipment 31,844 31,213 Less accumulated depreciation (19,342 ) (18,568 ) Total
$12,502 $12,645 Depreciation expense was$1,567 ,$1,556 and$1,548 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Interest capitalized during the years endedDecember 31, 2019 , 2018 and 2017 totaled$83 ,$81 and$110 , respectively. During 2019 and 2018, we acquired$128 and$78 of property, plant and equipment through non-cash investing and financing transactions. Accounts payable related to purchases of property, plant and equipment were$256 and$338 for the years endedDecember 31, 2019 and 2018. 81
--------------------------------------------------------------------------------
Table of Contents
Note 11 - Investments
Our investments, which are recorded in Short-term and other investments or
Investments, consisted of the following at
2019 2018 Equity method investments (1)$1,031 $1,048 Time deposits 50 255
Available for sale debt instruments 405 491 Equity and other investments
65 44
Restricted cash & cash equivalents (2) 86 176 Total
$1,637 $2,014
(1) Dividends received were
earnings at
method investments of$156 . (2) Reflects amounts restricted in support of our workers' compensation programs, employee benefit programs, and insurance premiums. Equity Method Investments Our equity method investments consisted of the following as ofDecember 31 : Ownership Segment Percentages Investment Balance 2019 2018 United Launch Alliance BDS 50%$771 $768 Other BCA, BDS, BGS and Other 260 280 Total equity method investments$1,031 $1,048 Note 12 - Other Assets Sea Launch AtDecember 31, 2019 and 2018, Other assets included$244 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 inJune 2009 . The net amounts owed toBoeing by each of the partners are as follows: S.P. Koroley Rocket and Space Corporation Energia ofRussia (RSC Energia) -$111 , PO Yuzhnoye Mashinostroitelny Zavod ofUkraine -$89 and KB Yuzhnoye ofUkraine -$44 . In 2013, we filed an action in theUnited States District Court for the Central District of California seeking reimbursement from the other Sea Launch partners. In 2016, theUnited States District Court for the Central District of California issued a judgment in favor ofBoeing . 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. In the fourth quarter of 2019, theU.S. Court of Appeals for the Ninth Circuit affirmed the decision of theU.S. District Court . 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. 82
--------------------------------------------------------------------------------
Table of Contents
Note 13 - Leases Our operating lease assets primarily represent manufacturing and research and development facilities, warehouses, and offices. Total operating lease expense was$326 for the year endedDecember 31, 2019 , of which$55 was attributable to variable lease expenses. For the year endedDecember 31, 2019 , cash payments against operating lease liabilities totaled$277 and non-cash transactions totaled$371 to recognize operating assets and liabilities for new leases. Supplemental Consolidated Statement of Financial Position information related to leases was as follows:December 31 2019 Operating leases: Operating lease right-of-use assets$1,182 Current portion of lease liabilities 252 Non-current portion of lease liabilities 978 Total operating lease liabilities$1,230 Weighted average remaining lease term (years) 9 Weighted average discount rate 3.35 % Maturities of operating lease liabilities for the next five years are as follows: Operating leases 2020$287 2021 235 2022 194 2023 151 2024 98 Thereafter 609 Total lease payments 1,574 Less imputed interest (344 ) Total$1,230 As ofDecember 31, 2019 , we have entered into an operating lease that has not yet commenced of$160 , primarily related to research and development and manufacturing facilities. This lease will commence in 2020 with a lease term of 15 years. 83
--------------------------------------------------------------------------------
Table of Contents
Payments due under operating leases net of sublease amounts and non-cancellable
future rentals under ASC 840 as of
Operating leases 2019$272 2020 232 2021 194 2022 165 2023 126 Thereafter 849 Total lease payments$1,838
Note 14 - Liabilities, Commitments and Contingencies
Accrued Liabilities
Accrued liabilities at
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 OnMarch 13, 2019 , theFederal Aviation Administration (FAA ) issued an order to suspend operations of all 737 MAX aircraft in theU.S. and byU.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 withU.S. government investigations related to the accidents and the 737 MAX program, including investigations by theU.S. Department of Justice and theSecurities 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 theFAA 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. 84
--------------------------------------------------------------------------------
Table of Contents
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 throughDecember 2019 , which has resulted in approximately 400 airplanes in inventory as ofDecember 31, 2019 . InDecember 2019 , we announced the temporary suspension of 737 MAX production beginning inJanuary 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 -
(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. TheFAA 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 85
--------------------------------------------------------------------------------
Table of Contents
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 theFAA , which issued a directive requiring that 737NG airplanes with over 30,000 flight cycles be inspected for this condition byOctober 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 endedDecember 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 -
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. AtDecember 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 . 86
--------------------------------------------------------------------------------
Table of Contents
Product Warranties The following table summarizes product warranty activity recorded during the years endedDecember 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 atDecember 31, 2019 have expiration dates from 2020 through 2026. AtDecember 31, 2019 and 2018, total contractual trade-in commitments were$1,407 and$1,519 . As ofDecember 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 ofDecember 31, 2019 and 2018. The estimated earliest potential funding dates for these commitments as ofDecember 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 ofDecember 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. 87
--------------------------------------------------------------------------------
Table of Contents
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 ofDecember 31, 2019 and 2018.Company Owned Life Insurance McDonnell Douglas Corporation insured its executives withCompany 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 ofDecember 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 ofDecember 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 inDecember 2019 , provided FY20 appropriations for government departments and agencies, including theUnited States Department of Defense (U.S. DoD ), theNational Aeronautics and Space Administration (NASA ) and theFAA . The enacted FY20 appropriations included funding forBoeing '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 theU.S. DoD and other government agencies, includingNASA . 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. 88
--------------------------------------------------------------------------------
Table of Contents
KC-46A Tanker In 2011, we were awarded a contract from theU.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 . AtDecember 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 theU.S. government, which can result in payment demands related to costs they believe should be disallowed. We work with theU.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 theU.S. government. Note 15 - 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. Estimated Maximum Proceeds from Carrying Potential Collateral/ Amount of Payments Recourse Liabilities December 31, 2019 2018 2019 2018 2019 2018 Contingent repurchase commitments$1,570 $1,685 $1,570 $1,685 Indemnifications to ULA: Contributed Delta inventory 30 52 Inventory supply agreement 34 85 Questioned costs 317 317$48 Credit guarantees 92 106 36 51 16$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 throughDecember 31, 2020 against potential non-recoverability and non-allowability of$1,360 ofBoeing 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. See Note 7. ULA has yet to consume $30 of contributed inventory. 89
--------------------------------------------------------------------------------
Table of Contents
In June 2011, theDefense 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 andBoeing 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 theU.S. government, which subsequently asserted a counterclaim for credits that it alleges were offset by deferred support cost invoices. We believe that theU.S. government's counterclaim is without merit. The discovery phase of the litigation completed in 2017. The parties have since agreed to engage in alternative dispute resolution, and the court has stayed the litigation pending that process. 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 up to $269 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 inWichita, Kansas andTulsa andMcAlester, 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 14. 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. Industrial Revenue Bonds Industrial Revenue Bonds (IRB) issued bySt. Louis County were used to finance the purchase and/or construction of real and personal property at ourSt. Louis site. Tax benefits associated with IRBs include a twelve-year property tax abatement and sales tax exemption fromSt. Louis County . We record these properties on our Consolidated Statements of Financial Position. We have also purchased the IRBs and therefore are the bondholders as well as the borrower/lessee of the properties purchased with the IRB proceeds. The liabilities and IRB assets are equal and are reported net in the Consolidated Statements of Financial Position. As of December 31, 2019 and 2018, the assets and liabilities associated with the IRBs were $271. Note 16 - Debt In the first quarter of 2019, we issued $1,500 of fixed rate senior notes consisting of $400 due March 1, 2024 that bear an annual interest rate of 2.8%, $400 due March 1, 2029 that bear an annual interest rate of 3.2%, $400 due March 1, 2039 that bear an annual interest rate of 3.5%, and $300 due March 1, 2059 that bear an annual interest rate of 3.825%. 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 $1,451, after deducting underwriting discounts, commissions and offering expenses. 90
--------------------------------------------------------------------------------
Table of Contents
In the second quarter of 2019, we issued $3,500 of fixed rate senior notes consisting of $600 due May 1, 2022 that bear an annual interest rate of 2.7%, $650 due May 1, 2026 that bear an annual interest rate of 3.1%, $600 due March 1, 2029 that bear an annual interest rate of 3.2%, $850 due May 1, 2034 that bear an annual interest rate of 3.6%, and $800 due May 1, 2049 that bear an annual interest rate of 3.9%. 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 $3,454, after deducting underwriting discounts, commissions and offering expenses. In the third quarter of 2019, we issued $5,500 of fixed rate senior notes consisting of $750 due August 1, 2021 that bear an annual interest rate of 2.3%, $1,000 due February 1, 2027 that bear an annual interest rate of 2.7%, $750 due February 1, 2030 that bear an annual interest rate of 2.95%, $750 due February 1, 2035 that bear an annual interest rate of 3.25%, $1,250 due February 1, 2050 that bear an annual interest rate of 3.75%, and $1,000 due August 1, 2059 that bear an annual interest rate of 3.95%. 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 $5,442, after deducting underwriting discounts, commissions and offering expenses. Interest incurred, including amounts capitalized, was $867, $624 and $541 for the years ended December 31, 2019, 2018 and 2017, respectively. Interest expense recorded by BCC is reflected asBoeing Capital interest expense on our Consolidated Statements of Operations. Total Company interest payments were $973, $616 and $527 for the years ended December 31, 2019, 2018 and 2017, respectively. We have $9,600 currently available under credit line agreements, of which $3,200 is a 364-day revolving credit facility expiring in October 2020, $3,200 expires in October 2022, and $3,200 expires in October 2024. The 364-day credit facility has a one-year term out option which allows us to extend the maturity of any borrowings one year beyond the aforementioned expiration date. We continue to be in full compliance with all covenants contained in our debt or credit facility agreements. Short-term debt and current portion of long-term debt at December 31 consisted of the following: 2019 2018 Unsecured debt securities $1,099 $1,151 Non-recourse debt and notes 21 25 Finance lease obligations 71 57 Commercial paper 6,109 1,895 Other notes 40 62 Total $7,340 $3,190 91
--------------------------------------------------------------------------------
Table of Contents
Debt at December 31 consisted of the following:
2019 2018 Unsecured debt securities 1.65% - 4.88% due through 2059 $17,404 $7,538 5.80% - 6.88% due through 2043 1,740 2,388 7.25% - 8.75% due through 2043 1,639 1,638 Commercial paper 6,109 1,895 Non-recourse debt and notes 6.98% notes due through 2021 37 62 Finance lease obligations due through 2044 229 156 Other notes 144 170 Total debt $27,302 $13,847 At December 31, 2019 and 2018, commercial paper borrowings totaling $6,109 and $1,895, with a weighted-average interest rate of 2.2% and 2.5%, were supported by unused commitments under the revolving credit agreement. Total debt at December 31 is attributable to: 2019 2018 BCC $1,960 $2,487 OtherBoeing 25,342 11,360 Total debt $27,302 $13,847 At December 31, 2019, $37 of debt (non-recourse debt) was collateralized by customer financing assets totaling $186. Scheduled principal payments for debt and minimum finance lease obligations for the next five years are as follows: 2020 2021 2022 2023
2024
Debt $7,306 $1,484 $1,214 $780
$1,000
Minimum finance lease obligations $71 $56 $42 $20
$6
Note 17 - Postretirement Plans The majority of our employees have earned benefits under defined benefit pension plans. Nonunion and the majority of union employees that had participated in defined benefit pension plans transitioned to a company-funded defined contribution retirement savings plan in 2016. Additional union employees transitioned to company-funded defined contribution retirement savings plans effective January 1, 2019. We fund our major pension plans through trusts. Pension assets are placed in trust solely for the benefit of the plans' participants, and are structured to maintain liquidity that is sufficient to pay benefit obligations as well as to keep pace over the long-term with the growth of obligations for future benefit payments. We also have other postretirement benefits (OPB) other than pensions which consist principally of health care coverage for eligible retirees and qualifying dependents, and to a lesser extent, life insurance to certain groups of retirees. Retiree health care is provided principally until age 65 for approximately two-thirds of those participants who are eligible for health care coverage. Certain employee groups, including 92
--------------------------------------------------------------------------------
Table of Contents
employees covered by mostUnited Auto Workers bargaining agreements, are provided lifetime health care coverage. The funded status of the plans is measured as the difference between the plan assets at fair value and the projected benefit obligation (PBO). We have recognized the aggregate of all overfunded plans in Other assets, and the aggregate of all underfunded plans in either Accrued retiree health care or Accrued pension plan liability, net. The portion of the amount by which the actuarial present value of benefits included in the PBO exceeds the fair value of plan assets, payable in the next 12 months, is reflected in Accrued liabilities. The components of net periodic benefit (income)/cost were as follows: Pension Other Postretirement Benefits Years ended December 31, 2019 2018 2017 2019 2018 2017 Service cost $2 $430 $402 $77 $94 $106 Interest cost 2,925 2,781 2,991 196 194 229 Expected return on plan assets (3,863 ) (4,009 ) (3,847 ) (8 ) (8 ) (7 ) Amortization of prior service credits (79 ) (56 ) (39 ) (35 ) (126 ) (137 ) Recognized net actuarial loss/(gain) 643 1,130 804 (46 ) (10 ) 10 Settlement/curtailment/other losses 44 1 Net periodic benefit (income)/cost ($372 ) $320 $312 $184 $144 $201 Net periodic benefit cost included in (Loss)/earnings from operations $313 $313 $510 $88 $84 $107 Net periodic benefit (income)/cost included in Other income, net (374 ) (143 ) (117 ) 107 101 123 Net periodic benefit (income)/cost included in (Loss)/earnings before income taxes ($61 ) $170 $393 $195 $185 $230 The following tables show changes in the benefit obligation, plan assets and funded status of both pensions and OPB for the years ended December 31, 2019 and 2018. Benefit obligation balances presented below reflect the PBO for our pension plans, and accumulated postretirement benefit obligations (APBO) for our OPB plans. 93
--------------------------------------------------------------------------------
Table of Contents Other Postretirement Pension Benefits 2019 2018 2019 2018 Change in benefit obligation Beginning balance $71,424 $80,393 $5,114 $6,085 Service cost 2 430 77 94 Interest cost 2,925 2,781 196 194 Amendments (377 ) 1 (58 ) Actuarial (gain)/loss 8,695 (6,352 ) 127 (732 ) Settlement/curtailment/other (756 ) (730 ) Gross benefits paid (4,658 ) (4,700 ) (474 ) (487 ) Subsidies 36 24 Exchange rate adjustment 13 (21 ) 3 (6 ) Ending balance $77,645 $71,424 $5,080 $5,114 Change in plan assets Beginning balance at fair value $56,102 $64,011 $132 $143 Actual return on plan assets 10,851 (2,585 ) 26 (3 ) Company contribution 16 16 1 2 Plan participants' contributions 6 7 Settlement payments (756 ) (764 ) Benefits paid (4,514 ) (4,557 ) (16 ) (17 ) Exchange rate adjustment 12 (19 ) Ending balance at fair value $61,711 $56,102 $149 $132 Amounts recognized in statement of financial position at December 31 consist of: Other assets $484 $138 Other accrued liabilities (142 ) (137 ) ($391 ) ($398 ) Accrued retiree health care (4,540 ) (4,584 ) Accrued pension plan liability, net (16,276 ) (15,323 ) Net amount recognized ($15,934 ) ($15,322 ) ($4,931 ) ($4,982 ) Amounts recognized in Accumulated other comprehensive loss at December 31 were as follows: Other Postretirement Pension Benefits 2019 2018 2019 2018 Net actuarial loss/(gain) $23,124 $22,061 ($625 ) ($783 ) Prior service credits (1,467 ) (1,546 ) (122 ) (158 ) Total recognized in Accumulated other comprehensive loss $21,657 $20,515 ($747 ) ($941 ) 94
--------------------------------------------------------------------------------
Table of Contents
The accumulated benefit obligation (ABO) for all pension plans was $75,787 and $69,376 at December 31, 2019 and 2018. Key information for our plans with ABO and PBO in excess of plan assets as of December 31 was as follows: 2019 2018 Accumulated benefit obligation $70,466 $66,306 Fair value of plan assets 55,907 52,894 2019 2018 Projected benefit obligation $72,325 $68,354 Fair value of plan assets 55,907 52,894 Assumptions The following assumptions, which are the weighted average for all plans, are used to calculate the benefit obligation at December 31 of each year and the net periodic benefit cost for the subsequent year. December 31, 2019 2018 2017 Discount rate: Pension 3.30 % 4.20 % 3.60 % Other postretirement benefits 3.00 % 4.00 % 3.30 % Expected return on plan assets 6.80 % 6.80 % 6.80 % Rate of compensation increase 4.30 % 5.30 % 5.30 %
Interest crediting rates for cash balance plans 5.15 % 5.15 % 5.15 %
The discount rate for each plan is determined based on the plans' expected future benefit payments using a yield curve developed from high quality bonds that are rated as Aa or better by at least half of the four rating agencies utilized as of the measurement date. The yield curve is fitted to yields developed from bonds at various maturity points. Bonds with the ten percent highest and the ten percent lowest yields are omitted. The present value of each plan's benefits is calculated by applying the discount rates to projected benefit cash flows. The pension fund's expected return on plan assets assumption is derived from a review of actual historical returns achieved by the pension trust and anticipated future long-term performance of individual asset classes. While consideration is given to recent trust performance and historical returns, the assumption represents a long-term, prospective return. The expected return on plan assets component of the net periodic benefit cost for the upcoming plan year is determined based on the expected return on plan assets assumption and the market-related value of plan assets (MRVA). Since our adoption of the accounting standard for pensions in 1987, we have determined the MRVA based on a five-year moving average of plan assets. As of December 31, 2019, the MRVA was approximately $3,674 less than the fair market value of assets. Assumed health care cost trend rates were as follows: December 31, 2019 2018 2017
Health care cost trend rate assumed next year 5.00 % 5.50 % 6.00 % Ultimate trend rate
4.50 % 4.50 % 4.50 %
Year that trend reached ultimate rate 2021 2021 2021
95
--------------------------------------------------------------------------------
Table of Contents
Plan Assets Investment Strategy The overall objective of our pension assets is to earn a rate of return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay benefits and address other cash requirements of the pension fund. Specific investment objectives for our long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities, achieving a competitive total investment return, achieving diversification between and within asset classes and managing other risks. Investment objectives for each asset class are determined based on specific risks and investment opportunities identified. We periodically update our long-term, strategic asset allocations. We use various analytics to determine the optimal asset mix and consider plan liability characteristics, liquidity characteristics, funding requirements, expected rates of return and the distribution of returns. We identify investment benchmarks to evaluate performance for the asset classes in the strategic asset allocation that are market-based and investable where possible. Actual allocations to each asset class vary from target allocations due to periodic investment strategy changes, market value fluctuations, the length of time it takes to fully implement investment allocation positions, and the timing of benefit payments and contributions. Short-term investments and exchange-traded derivatives are used to rebalance the actual asset allocation to the target asset allocation. The asset allocation is monitored and rebalanced periodically. The actual and target allocations by asset class for the pension assets at December 31 were as follows: Actual Allocations Target Allocations Asset Class 2019 2018 2019 2018 Fixed income 49 % 48 % 47 % 47 % Global equity 29 28 29 29 Private equity 5 5 5 5 Real estate and real assets 8 9 9 9 Hedge funds 9 10 10 10 Total 100 % 100 % 100 % 100 % Fixed income securities are invested primarily in a diversified portfolio of long duration instruments. Global equity securities are invested in a diversified portfolio ofU.S. and non-U.S. companies, across various industries and market capitalizations. Private equity investment vehicles are primarily limited partnerships (LPs) that mainly invest inU.S. and non-U.S. leveraged buyout, venture capital and special situation strategies. Real estate and real assets include global private investments that may be held through an investment in a limited partnership (LP) or other fund structures and publicly traded investments (such as Real Estate Investment Trusts (REITs) in the case of real estate). Real estate includes, but is not limited to, investments in office, retail, apartment and industrial properties. Real assets include, but are not limited to, investments in natural resources (such as energy, farmland and timber), commodities and infrastructure. Hedge fund investments seek to capitalize on inefficiencies identified across and within different asset classes or markets. Hedge fund strategy types include, but are not limited to directional, event driven, relative value, long-short and multi-strategy. Investment managers are retained for explicit investment roles specified by contractual investment guidelines. Certain investment managers are authorized to use derivatives, such as equity or bond futures, swaps, options and currency futures or forwards. Derivatives are used to achieve the desired market exposure of a security or an index, transfer value-added performance between asset classes, achieve the desired currency exposure, adjust portfolio duration or rebalance the total portfolio to the target asset allocation. 96
--------------------------------------------------------------------------------
Table of Contents
As a percentage of total pension assets, derivative net notional amounts were 4.3% and 4.4% for fixed income, including to-be-announced mortgage-backed securities and treasury forwards, and 3.6% and 5.5% for global equity and commodities at December 31, 2019 and 2018. Risk Management In managing the pension assets, we review and manage risk associated with funded status risk, interest rate risk, market risk, counterparty risk, liquidity risk and operational risk. Liability matching and asset class diversification are central to our risk management approach and are integral to the overall investment strategy. Further, asset classes are constructed to achieve diversification by investment strategy, by investment manager, by industry or sector and by holding. Investment manager guidelines for publicly traded assets are specified and are monitored regularly through the custodian. Credit parameters for counterparties have been established for managers permitted to trade over-the-counter derivatives. Valuation is governed through several types of procedures, including reviews of manager valuation policies, custodian valuation processes, pricing vendor practices, pricing reconciliation, and periodic, security-specific valuation testing. 97
--------------------------------------------------------------------------------
Table of Contents
Fair Value Measurements The following table presents our plan assets using the fair value hierarchy as of December 31, 2019 and 2018. 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. December 31, 2019 December 31, 2018 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Fixed income securities: Corporate $19,341 $19,336 $5 $17,481 $17,479 $2 U.S. government and agencies 5,759 5,759 5,589 5,589 Mortgage backed and asset backed 1,181 720 461 722 410 312 Municipal 1,317 1,317 1,255 1,255 Sovereign 1,076 1,076 967 967 Other 55 $7 48 106 $53 53 Derivatives: Assets Liabilities (143 ) (143 ) (51 ) (51 ) Cash equivalents and other short-term investments 769 769 1,068 1,068 Equity securities: U.S. common and preferred stock 4,866 4,866 3,744 3,744 Non-U.S. common and preferred stock 5,529 5,527 2 4,850 4,846 4 Derivatives: Assets 6 6 3 3 Liabilities (5 ) (5 ) (9 ) (9 ) Real estate and real assets: Real estate 454 454 422 422 Real assets 810 649 157 4 659 311 344 4 Derivatives: Assets 5 1 4 4 4 Liabilities (2 ) (2 ) (17 ) (1 ) (16 ) Total $41,018 $11,504 $29,042 $472 $36,793 $9,375 $27,100 $318 Fixed income common/collective/pooled funds $959 $938 Fixed income other 512 442 Equity common/collective pooled funds 6,301 5,264 Private equity 3,184 2,934 Real estate and real assets 3,605 3,792 Hedge funds 5,688 5,484 Total investments measured at NAV as a practical expedient $20,249 $18,854 Cash $207 $205 Receivables 383 404 Payables (146 ) (154 ) Total $61,711 $56,102 98
--------------------------------------------------------------------------------
Table of Contents
Fixed income securities are primarily valued upon a market approach, using matrix pricing and considering a security's relationship to other securities for which quoted prices in an active market may be available, or an income approach, converting future cash flows to a single present value amount. Inputs used in developing fair value estimates include reported trades, broker quotes, benchmark yields, and base spreads. Common/collective/pooled funds are typically common or collective trusts valued at their net asset values (NAVs) that are calculated by the investment manager or sponsor of the fund and have daily or monthly liquidity. Derivatives included in the table above are over-the-counter and are primarily valued using an income approach with inputs that include benchmark yields, swap curves, cash flow analysis, rating agency data and interdealer broker rates. Exchange-traded derivative positions are reported in accordance with changes in daily variation margin which is settled daily and therefore reflected in the payables and receivables portion of the table. Cash equivalents and other short-term investments (which are used to pay benefits) are held in a separate account which consists of a commingled fund (with daily liquidity) and separately held short-term securities and cash equivalents. All of the investments in this cash vehicle are valued daily using a market approach with inputs that include quoted market prices for similar instruments. In the event a market price is not available for instruments with an original maturity of one year or less, amortized cost is used as a proxy for fair value. Common and preferred stock equity securities are primarily valued using a market approach based on the quoted market prices of identical instruments. Private equity and private debt NAV valuations are based on the valuation of the underlying investments, which include inputs such as cost, operating results, discounted future cash flows and market based comparable data. For those investments reported on a one-quarter lagged basis (primarily LPs) we use NAVs, adjusted for subsequent cash flows and significant events. Real estate and real asset NAV valuations are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data. For those investments reported on a one-quarter lagged basis (primarily LPs) NAVs are adjusted for subsequent cash flows and significant events. Publicly traded REITs and infrastructure stocks are valued using a market approach based on quoted market prices of identical instruments. Exchange-traded commodities futures positions are reported in accordance with changes in daily variation margin which is settled daily and therefore reflected in the payables and receivables portion of the table. Hedge fund NAVs are generally based on the valuation of the underlying investments. This is primarily done by applying a market or income valuation methodology depending on the specific type of security or instrument held. Investments in private equity, private debt, real estate, real assets, and hedge funds are primarily calculated and reported by the General Partner (GP), fund manager or third party administrator. Additionally, some investments in fixed income and equity are made via commingled vehicles and are valued in a similar fashion. Pension assets invested in commingled and limited partnership structures rely on the NAV of these investments as the practical expedient for the valuations. 99
--------------------------------------------------------------------------------
Table of Contents
The following tables present a reconciliation of Level 3 assets held during the years ended December 31, 2019 and 2018. Transfers into and out of Level 3 are reported at the beginning-of-year values. Net Realized and Net Purchases, Net Transfers January 1 Unrealized Issuances and Into/(Out of) December 31 2019 Balance Gains/(Losses) Settlements Level 3 2019 Balance Fixed income securities: Corporate $2 $3 $5 Mortgage backed and asset backed 312 $11 137 $1 461 Equity securities: Non-U.S. common and preferred stock 1 1 2 Real assets 4 4 Total $318 $11 $141 $2 $472 Net Realized and Net Purchases, Net Transfers January 1 Unrealized Issuances and Into/(Out of) December 31 2018 Balance Gains/(Losses) Settlements Level 3 2018 Balance Fixed income securities: Corporate $2 $2 Mortgage backed and asset backed 310 ($3 ) $3 $2 312 Real assets 3 1 4 Total $315 ($3 ) $3 $3 $318 The changes in unrealized gains/(losses) for Level 3 mortgage backed and asset backed fixed income securities still held at December 31, 2019 and 2018 were a gain of $10 and a loss of $4. The changes in unrealized losses for Level 3 non-U.S. common and preferred stock equity securities still held at December 31, 2019 and 2018 were $1 and $0. OPB Plan Assets The majority of OPB plan assets are invested in a balanced index fund which is comprised of approximately 60% equities and 40% debt securities. The index fund is valued using a market approach based on the quoted market price of an identical instrument (Level 1). The expected rate of return on these assets does not have a material effect on the net periodic benefit cost. 100
--------------------------------------------------------------------------------
Table of Contents
Cash Flows Contributions Required pension contributions under the Employee Retirement Income Security Act (ERISA), as well as rules governing funding of our non-US pension plans, are not expected to be significant in 2020. We do not expect to make discretionary contributions to our pension plans in 2020. Estimated Future Benefit Payments The table below reflects the total pension benefits expected to be paid from the plans or from our assets, including both our share of the benefit cost and the participants' share of the cost, which is funded by participant contributions. OPB payments reflect our portion only. Year(s) 2020 2021 2022 2023 2024 2025-2029 Pensions $4,838 $4,808 $4,744 $4,650 $4,608 $21,757 Other postretirement benefits: Gross benefits paid 479 470 462 450 435 1,867 Subsidies (18 ) (18 ) (18 ) (18 ) (18 ) (93 ) Net other postretirement benefits $461 $452 $444 $432 $417 $1,774 Termination Provisions Certain of the pension plans provide that, in the event there is a change in control of the Company which is not approved by the Board of Directors and the plans are terminated within five years thereafter, the assets in the plan first will be used to provide the level of retirement benefits required by ERISA, and then any surplus will be used to fund a trust to continue present and future payments under the postretirement medical and life insurance benefits in our group insurance benefit programs. Should we terminate certain pension plans under conditions in which the plan's assets exceed that plan's obligations, theU.S. government will be entitled to a fair allocation of any of the plan's assets based on plan contributions that were reimbursed underU.S. government contracts. Defined Contribution Plans We provide certain defined contribution plans to all eligible employees. The principal plans are the Company-sponsored 401(k) plans. The expense for these defined contribution plans was $1,533, $1,480 and $1,522 in 2019, 2018 and 2017, respectively. Note 18 - Share-Based Compensation and Other Compensation Arrangements Share-Based Compensation Our 2003 Incentive Stock Plan, as amended and restated, permits awards of incentive and non-qualified stock options, stock appreciation rights, restricted stock or units, performance shares, performance restricted stock or units, performance units and other stock and cash-based awards to our employees, officers, directors, consultants, and independent contractors. The aggregate number of shares of our stock authorized for issuance under the plan is 87,000,000. Shares issued as a result of stock option exercises or conversion of stock unit awards will be funded out of treasury shares, except to the extent there are insufficient treasury shares, in which case new shares will be issued. We believe we currently have adequate treasury shares to satisfy these issuances during 2020. 101
--------------------------------------------------------------------------------
Table of Contents
Share-based plans expense is primarily included in General and administrative expense since it is incentive compensation issued primarily to our executives. The share-based plans expense and related income tax benefit were as follows: Years ended December 31, 2019 2018 2017
Restricted stock units and other awards $217 $213 $212 Income tax benefit
$47 $46 $46 Stock Options We discontinued granting options in 2014, replacing them with performance-based restricted stock units. Options granted through January 2014 had an exercise price equal to the fair market value of our stock on the date of grant and expire ten years after the date of grant. The stock options vested over a period of three years and were fully vested as of December 31, 2017. Stock option activity for the year ended December 31, 2019 is as follows: Weighted Average Remaining Weighted Average Contractual Aggregate Exercise Price
Life Intrinsic
Shares Per Share (Years) Value Number of shares under option: Outstanding at beginning of year 3,252,083 $72.47 Exercised (870,821) 66.16 Expired (5,679) 69.23 Outstanding at end of year 2,375,583 $74.79 2.44 $596 Exercisable at end of year 2,375,583 $74.79 2.44 $596 The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $279, $320 and $491, with a related tax benefit of $61, $70 and $175, respectively. No options vested during the years ended December 31, 2019, 2018 and 2017. Restricted Stock Units In February 2019, 2018 and 2017, we granted to our executives 233,582, 260,730 and 523,835 restricted stock units (RSUs) as part of our long-term incentive program with grant date fair values of $428.22, $361.13 and $178.72 per unit, respectively. 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. If an executive terminates employment because of retirement, involuntary layoff, disability, or death, the employee (or beneficiary) will receive a proration of stock units based on active employment during the three-year service period. In all other cases, the RSUs will not vest and all rights to the stock units will terminate. In addition to RSUs awarded under our long-term incentive program, we grant RSUs to certain executives and employees to encourage retention or to reward various achievements. These RSUs are labeled other RSUs in the table below. The fair values of all RSUs are estimated using the average of the high and low stock prices on the date of grant. 102
--------------------------------------------------------------------------------
Table of Contents
RSU activity for the year ended December 31, 2019 was as follows:
Long-Term Incentive Program
Other
Number of units: Outstanding at beginning of year 1,322,251 984,235 Granted 259,791 247,673 Dividends 22,571 20,576 Forfeited (73,591 ) (121,344 ) Distributed (625,997 ) (222,819 ) Outstanding at end of year 905,025 908,321 Unrecognized compensation cost $102
$132
Weighted average remaining contractual life (years) 1.8 2.6 The number of vested but undistributed RSUs at December 31, 2019 was not significant. Performance-Based Restricted Stock Units Performance-Based Restricted Stock Units (PBRSUs) are stock units that pay out based on the Company's total shareholder return as compared to a group of peer companies over a three-year period. The award payout can range from 0% to 200% of the initial PBRSU grant. PBRSUs granted in February 2017 and 2016 will not exceed 400% of the initial value (excluding dividend equivalent credits). The PBRSUs granted under this program will vest at the payout amount and settle in common stock (on a one-for-one basis) on the third anniversary of the grant date. If an executive terminates employment because of retirement, involuntary layoff, disability, or death, the employee (or beneficiary) remains eligible under the award and, if the award is earned, will receive a proration of stock units based on active employment during the three-year service period. In all other cases, the PBRSUs will not vest and all rights to the stock units will terminate. In February 2019, 2018 and 2017, we granted to our executives 214,651, 241,284 and 492,273 PBRSUs as part of our long-term incentive program. Compensation expense for the award is recognized over the three-year performance period based upon the grant date fair value. The grant date fair values were estimated using a Monte-Carlo simulation model with the assumptions presented below. The model includes no expected dividend yield as the units earn dividend equivalents. Risk Free Expected Interest Grant Date Grant Year Grant Date Performance Period Volatility Rate Fair Value 2019 2/25/2019 3 years 23.88 % 2.46 % $466.04 2018 2/26/2018 3 years 22.11 % 2.36 % 390.27 2017 2/27/2017 3 years 21.37 % 1.46 % 190.17 103
--------------------------------------------------------------------------------
Table of Contents
PBRSU activity for the year ended December 31, 2019 was as follows:
Long-Term Incentive Program Number of units: Outstanding at beginning of year
1,268,667
Granted
214,651
Performance based adjustment (1) 115,613 Dividends 65,042 Forfeited (60,755 ) Distributed (777,092 ) Outstanding at end of year 826,126 Unrecognized compensation cost
$91
Weighted average remaining contractual life (years) 1.8 (1) Represents net incremental number of units issued at vesting based on TSR for units granted in 2016 Other Compensation Arrangements Performance Awards Performance Awards are cash units that pay out based on the achievement of long-term financial goals at the end of a three-year period. Each unit has an initial value of $100 dollars. The amount payable at the end of the three-year performance period may be anywhere from $0 to $200 dollars per unit, depending on the Company's performance against plan for a three-year period. The Compensation Committee has the discretion to pay these awards in cash, stock, or a combination of both after the three-year performance period. Compensation expense, based on the estimated performance payout, is recognized ratably over the performance period. During 2019, 2018 and 2017, we granted Performance Awards to our executives as part of our long-term incentive program with the payout based on the achievement of financial goals for each three-year period following the grant date. The minimum payout amount is $0 and the maximum amount we could be required to pay out for the 2019, 2018 and 2017 Performance Awards is $392, $355 and $325, respectively. Deferred Compensation The Company has deferred compensation plans which permit employees to defer a portion of their salary, bonus, certain other incentive awards, and retirement contributions. Participants can diversify these amounts among 22 investment funds including aBoeing stock unit account. Total expense related to deferred compensation was $174, $19 and $240 in 2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the deferred compensation liability which is being marked to market was $1,779 and $1,572. 104
--------------------------------------------------------------------------------
Table of Contents
Note 19 - Shareholders' Equity On December 17, 2018, the Board approved a repurchase plan for up to $20,000 of common stock. Share repurchases under this plan are currently suspended. The program will expire when we have used all authorized funds or is otherwise terminated. As of December 31, 2019 and 2018, there were 1,200,000,000 shares of common stock and 20,000,000 shares of preferred stock authorized. No preferred stock has been issued. Changes in Share Balances The following table shows changes in each class of shares: Common Treasury Stock Stock Balance at January 1, 2017 1,012,261,159 395,109,568 Issued (20,746,426 ) Acquired 46,859,184
Balance at December 31, 2017 1,012,261,159 421,222,326 Issued
(3,409,330 ) Acquired 26,806,974
Balance at December 31, 2018 1,012,261,159 444,619,970 Issued
(2,797,002 ) Acquired 7,529,437
Balance at December 31, 2019 1,012,261,159 449,352,405
105
--------------------------------------------------------------------------------
Table of Contents
Accumulated Other Comprehensive Loss Changes in Accumulated other comprehensive loss (AOCI) by component for the years ended December 31, 2019, 2018 and 2017 were as follows:
Unrealized Defined Benefit Unrealized Gains Gains and Pension Plans & Currency and Losses on Losses on Other Translation Certain Derivative Postretirement Adjustments Investments Instruments Benefits Total (1) Balance at January 1, 2017 ($143 ) ($2 ) ($127 ) ($13,351 ) ($13,623 ) Other comprehensive (loss)/income before reclassifications 128 1 119 (478 ) (230 ) Amounts reclassified from AOCI 52 425 (2) 477 Net current period Other comprehensive (loss)/income 128 1 171 (53 ) 247 Impact of ASU 2018-02 (1 ) 10 (3,006 ) (2,997 ) Balance at December 31, 2017 ($15 ) ($2 ) $54 ($16,410 ) ($16,373 ) Other comprehensive income/(loss) before reclassifications (86 ) 2 (146 ) 747 517 Amounts reclassified from AOCI 30 743 (2) 773 Net current period Other comprehensive income/(loss) (86 ) 2 (116 ) 1,490 1,290 Balance at December 31, 2018 ($101 ) $- ($62 ) ($14,920 ) ($15,083 ) Other comprehensive (loss)/income before reclassifications (27 ) 1 (48 ) (1,397 ) (1,471 ) Amounts reclassified from AOCI 26 375 (2) 401 Net current period Other comprehensive (loss)/income (27 ) 1 (22 ) (1,022 ) (1,070 ) Balance at December 31, 2019 ($128 ) $1 ($84 ) ($15,942 ) ($16,153 ) (1) Net of tax.
(2) Primarily relates to amortization of actuarial losses for the years ended
December 31, 2019, 2018, and 2017 totaling $464, $878, and $542 (net of tax
of ($133), ($242), and ($272)), respectively. These are included in the net
periodic pension cost. See Note 17.
Note 20 - Derivative Financial Instruments Disclosures reflect the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815), in the first quarter of 2019. Prior period amounts have not been restated. Cash Flow Hedges Our cash flow hedges include foreign currency forward contracts, commodity swaps 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 2025. We use commodity derivatives, such as fixed-price purchase commitments and swaps to hedge against potentially unfavorable price changes for items used in production. Our commodity contracts hedge forecasted transactions through 2023. 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 inBoeing Capital interest expense. As of December 31, 2019, there are no fair value hedges reported on the Consolidated Statements of Financial Position. 106
--------------------------------------------------------------------------------
Table of Contents
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 Consolidated Statements of Financial Position as of December 31 were as follows: Notional Accrued amounts(1) Other assets liabilities 2019 2018 2019 2018 2019 2018 Derivatives designated as hedging instruments: Foreign exchange contracts $2,590 $3,407 $29 $32 ($60 ) ($132 ) Interest rate contracts 125 Commodity contracts 645 57 4 9 (72 ) (2 ) Derivatives not receiving hedge accounting treatment: Foreign exchange contracts 285 414 1 11 (6 ) (2 ) Commodity contracts 1,644 478 Total derivatives $5,164 $4,481 34 52 (138 ) (136 ) Netting arrangements (20 ) (24 ) 20 24 Net recorded balance $14 $28 ($118 ) ($112 ) (1) Notional amounts represent the gross contract/notional amount of the derivatives outstanding.
Gains/(losses) associated with our hedging transactions and forward points recognized in Other comprehensive income are presented in the following table: Years ended December 31,
2019 2018 Recognized in Other comprehensive income, net of taxes: Foreign exchange contracts $15 ($156 ) Commodity contracts (63 ) 10 107
--------------------------------------------------------------------------------
Table of Contents
Gains/(losses) associated with our hedging transactions and forward points reclassified from AOCI to earnings are presented in the following table: Years ended December 31, 2019 2018 Foreign exchange contracts Revenues Costs and expenses ($26 ) ($30 ) General and administrative (9 ) (12 ) Commodity contracts Revenues Costs and expenses $1 $2
General and administrative expense 1 2
Gains/(losses) related to undesignated derivatives on foreign exchange cash flow hedging transactions recognized in Other income, net were insignificant for the years ended December 31, 2019 and 2018. Forward points related to foreign exchange cash flow hedging transactions recognized in Other income, net was a gain of $1 for the year ended December 31, 2018. Based on our portfolio of cash flow hedges, we expect to reclassify losses of $8 (pre-tax) out of Accumulated other comprehensive loss into earnings during the next 12 months. 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 December 31, 2019 was $19. At December 31, 2019, there was no collateral posted related to our derivatives. 108
--------------------------------------------------------------------------------
Table of Contents
Note 21 - 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. December 31, 2019 December 31, 2018 Total Level 1 Level 2 Total Level 1 Level 2 Assets Money market funds $2,562 $2,562 $1,737 $1,737 Available-for-sale debt investments: Commercial paper 108 $108 78 $78 Corporate notes 242 242 420 420 U.S. government agencies 55 55 Other equity investments 33 33 12 12 Derivatives 14 14 28 $28 Total assets $3,014 $2,650 $364 $2,275 $1,749 $526 Liabilities Derivatives ($118 ) ($118 ) ($112 ) ($112 ) Total liabilities ($118 ) ($118 ) ($112 ) ($112 ) Money market funds, available-for-sale debt investments and equity securities are valued using a market approach based on the quoted market prices or broker/dealer quotes of identical or comparable instruments. Derivatives include foreign currency, commodity and interest rate contracts. Our foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the present value of the commodity index prices less the contract rate multiplied by the notional amount. The fair value of our interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Certain assets have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents the nonrecurring losses recognized for the years ended December 31 due to long-lived asset impairment, and the fair value and asset classification of the related assets as of the impairment date: 2019 2018 Total Total Fair Value Losses Fair Value Losses Investments $27 ($109 ) ($50 ) Customer financing assets 111 (20 ) $101 (39 ) Other assets and Acquired intangible assets 4 (310 ) Property, plant and equipment 41 (4 ) 44 (4 ) Total $183 ($443 ) $145 ($93 ) 109
--------------------------------------------------------------------------------
Table of Contents
Investments, Acquired intangible assets and Property, plant and equipment were primarily valued using an income approach based on the discounted cash flows associated with the underlying assets. The fair value of the impaired customer financing assets includes operating lease equipment and investments in sales type-leases/finance leases, and is derived by calculating a median collateral value from a consistent group of third party aircraft value publications. The values provided by the third party aircraft publications are derived from their knowledge of market trades and other market factors. Management reviews the publications quarterly to assess the continued appropriateness and consistency with market trends. Under certain circumstances, we adjust values based on the attributes and condition of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by third party publications, or on the expected net sales price for the aircraft. For Level 3 assets that were measured at fair value on a nonrecurring basis during the year ended December 31, 2019, the following table presents the fair value of those assets as of the measurement date, valuation techniques and related unobservable inputs of those assets. Fair Valuation Unobservable Range Value Technique(s) Input Median or Average Aircraft value $98 - $158(1) publications Median $123 Customer financing assets $111 Market approach Aircraft condition ($13) - $1(2) adjustments Net ($12)
(1) The range represents the sum of the highest and lowest values for all
aircraft subject to fair value measurement, according to the third party
aircraft valuation publications that we use in our valuation process.
(2) The negative amount represents the sum, for all aircraft subject to fair
value measurement, of all downward adjustments based on consideration of
individual aircraft attributes and condition. The positive amount represents
the sum of all such upward adjustments.
Fair Value Disclosures The fair values and related carrying values of financial instruments that are not required to be remeasured at fair value on the Consolidated Statements of Financial Position at December 31 were as follows: December 31, 2019 Carrying Total Fair Amount Value Level 1 Level 2 Level 3 Assets Notes receivable, net $443 $444
$444
Liabilities
Debt, excluding finance lease obligations and commercial paper (20,964 ) (23,119 ) (23,081 ) ($38 ) December 31, 2018 Carrying Total Fair Amount Value Level 1 Level 2 Level 3 Assets Notes receivable, net $730 $735
$735
Liabilities
Debt, excluding finance lease obligations and commercial paper (11,796 ) (12,746 ) (12,682 ) ($64 ) 110
--------------------------------------------------------------------------------
Table of Contents
The fair values of notes receivable are estimated with discounted cash flow analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality. The fair value of our debt that is traded in the secondary market is classified as Level 2 and is based on current market yields. For our debt that is not traded in the secondary market, the fair value is classified as Level 2 and is based on our indicative borrowing cost derived from dealer quotes or discounted cash flows. The fair values of our debt classified as Level 3 are based on discounted cash flow models using the implied yield from similar securities. With regard to other financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of our indemnifications and financing commitments because the amount and timing of those arrangements are uncertain. Items not included in the above disclosures include cash, restricted cash, time deposits and other deposits, commercial paper, money market funds, Accounts receivable, Unbilled receivables, Other current assets, Accounts payable and long-term payables. The carrying values of those items, as reflected in the Consolidated Statements of Financial Position, approximate their fair value at December 31, 2019 and 2018. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash (Level 1). Note 22 - Legal Proceedings Various legal proceedings, claims and investigations related to products, contracts, employment and other matters are pending against us. In addition, we are subject to variousU.S. government inquiries and investigations from which civil, criminal or administrative proceedings could result or have resulted in the past. Such proceedings involve or could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. We believe, based upon current information, that the outcome of any such legal proceeding, claim, or government dispute and investigation will not have a material effect on our financial position, results of operations, or cash flows. Where it is reasonably possible that we will incur losses in excess of recorded amounts in connection with any of the matters set forth below, we will disclose either the amount or range of reasonably possible losses in excess of such amounts or, where no such amount or range can be reasonably estimated, the reasons why no such estimate can be made. Multiple legal actions have been filed against us as a result of the October 29, 2018 accident of Lion Air Flight 610 and the March 10, 2019 accident of Ethiopian Airlines Flight 302. Further, we are subject to ongoing governmental and regulatory investigations and inquiries relating to the accidents and the 737 MAX, including investigations by theU.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 lawsuits, investigations, and inquiries. Note 23 - Segment and Revenue Information Effective at the beginning of 2019, all revenues and costs associated with military derivative aircraft production are reported in the BDS segment. Revenues and costs associated with military derivative aircraft production were previously reported in the BCA and BDS segments. Business segment data for 2018 and 2017 reflects the realignment for military derivative aircraft, as well as the realignment of certain programs from BDS to BGS. Our primary profitability measurements to review a segment's operating results are Earnings from operations and operating margins. We operate in four reportable segments: BCA, BDS, BGS, and BCC. All other activities fall within Unallocated items, eliminations and other. See page 56 for the Summary of Business Segment Data, which is an integral part of this note. 111
--------------------------------------------------------------------------------
Table of Contents
BCA develops, produces and markets commercial jet aircraft principally to the commercial airline industry worldwide. Revenue on commercial aircraft contracts is recognized at the point in time when an aircraft is completed and accepted by the customer. BDS engages in the research, development, production and modification of the following products and related services: manned and unmanned military aircraft and weapons systems, surveillance and engagement, strategic defense and intelligence systems, satellite systems and space exploration. BDS revenue is generally recognized over the contract term (over time) as costs are incurred. BGS provides parts, maintenance, modifications, logistics support, training, data analytics and information-based services to commercial and government customers worldwide. BGS segment revenue and costs include certain services provided to other segments. Revenue on commercial spare parts contracts is recognized at the point in time when a spare part is delivered to the customer. Revenue on other contracts is generally recognized over the contract term (over time) as costs are incurred. BCC facilitates, arranges, structures and provides selective financing solutions for ourBoeing customers. While our principal operations are inthe United States ,Canada andAustralia , some key suppliers and subcontractors are located inEurope andJapan . Revenues, including foreign military sales, are reported by customer location and consist of the following: Years ended December 31, 2019 2018 2017 Asia, other than China $10,662 $12,141 $9,195 Europe 10,366 12,976 11,240 Middle East 9,272 9,745 11,433 China 5,684 13,764 11,932 Canada 2,019 2,583 2,212 Oceania 2,006 2,298 1,931 Africa 1,113 1,486 815 Latin America, Caribbean and other 1,015 1,458 1,541 Total non-U.S. revenues 42,137 56,451 50,299 United States 42,681 44,676 43,706 Estimated potential concessions and other considerations to 737 MAX customers, net(1) (8,259 ) Total revenues $76,559 $101,127 $94,005 (1) Net of insurance recoveries Revenues from theU.S. government (including foreign military sales through theU.S. government), primarily recorded at BDS and BGS, represented 39%, 31%, and 31% of consolidated revenues for 2019, 2018, and 2017, respectively. Approximately 4% of operating assets were located outsidethe United States as of December 31, 2019 and 2018. The following tables present BCA, BDS and BGS revenues from contracts with customers disaggregated in a number of ways, such as geographic location, contract type and the method of revenue recognition. We believe these best depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. 112
--------------------------------------------------------------------------------
Table of Contents
BCA revenues by customer location consist of the following: Years ended December 31,
2019 2018
2017
Revenue from contracts with customers: Asia, other than China $7,395 $8,274 $6,482 Europe 5,829 9,719 8,478 Middle East 5,761 5,876 8,927 China 5,051 13,068 10,982 Other 3,450 5,185 4,365 Total non-U.S. revenues 27,486 42,122 39,234 United States 12,676 15,347 15,182
Estimated potential concessions and other considerations to 737 MAX customers, net(1) (8,259 ) Total revenues from contracts with customers 31,903 57,469
54,416
Intersegment revenues, eliminated on consolidation 352 30 196 Total segment revenues $32,255 $57,499 $54,612 Revenue recognized on fixed-price contracts 100 % 100
% 100 %
Revenue recognized at a point in time 100 % 100
% 100 %
(1) Net of insurance recoveries
BDS revenues on contracts with customers, based on the customer's location, consist of the following: Years ended December 31,
2019 2018
2017
Revenue from contracts with customers: U.S. customers $19,573 $19,576
$18,984
Non-U.S. customers(1) 6,654 6,816
4,954
Total segment revenue from contracts with customers $26,227 $26,392
$23,938 Revenue recognized over time 98 % 98 % 97 % Revenue recognized on fixed-price contracts 70 % 70 %
69 %
Revenue from the U.S. government(1) 89 % 88 % 89 % (1) Includes revenues earned from foreign military sales through theU.S. government. 113
--------------------------------------------------------------------------------
Table of Contents
BGS revenues consist of the following: Years ended December 31, 2019 2018
2017
Revenue from contracts with customers: Commercial $10,167 $9,227
$7,622
Government 8,107 7,658
6,940
Total revenues from contracts with customers 18,274 16,885
14,562
Intersegment revenues eliminated on consolidation 194 171
49
Total segment revenues $18,468 $17,056
$14,611
Revenue recognized at a point in time 55 % 54 %
50 %
Revenue recognized on fixed-price contracts 90 % 90 %
89 %
Revenue from the U.S. government(1) 34 % 36 % 39 % (1) Includes revenues earned from foreign military sales through theU.S. government. Earnings in Equity Method Investments We recorded Earnings from operations associated with our equity method investments of $90, $167 and $233, primarily in our BDS segment, for the years ended December 31, 2019, 2018 and 2017, respectively. Backlog Our total backlog represents the estimated transaction prices on performance obligations to our customers for which work remains to be performed. Backlog is converted into revenue in future periods as work is performed, primarily based on the cost incurred or at delivery and acceptance of products, depending on the applicable accounting method. Our backlog at December 31, 2019 was $463,403. We expect approximately 17% to be converted to revenue through 2020 and approximately 63% through 2023, with the remainder thereafter. 114
--------------------------------------------------------------------------------
Table of Contents
Unallocated Items, Eliminations and other Unallocated items, eliminations and other include common internal services that supportBoeing 's global business operations, intercompany guarantees provided to BCC and eliminations of certain sales between segments. Such sales include airplanes accounted for as operating leases and considered transferred to the BCC segment. We generally allocate costs to business segments based on theU.S. federal cost accounting standards. Components of Unallocated items, eliminations and other are shown in the following table. Years ended December 31, 2019 2018 2017 Share-based plans ($65 ) ($76 ) ($77 ) Deferred compensation (174 ) (19 ) (240 ) Amortization of previously capitalized interest (89 ) (92 ) (96 ) Research and development expense, net (384 ) (132 )
42
Customer financing impairment (250 ) Litigation (109 ) (148 ) Eliminations and other unallocated items (995 ) (975 )
(756 ) Unallocated items, eliminations and other ($2,066 ) ($1,442 ) ($1,127 )
Pension FAS/CAS service cost adjustment $1,071 $1,005
$1,127
Postretirement FAS/CAS service cost adjustment 344 322
311
FAS/CAS service cost adjustment $1,415 $1,327
$1,438
Pension and Other Postretirement Benefit Expense Pension costs, comprising GAAP service and prior service costs, are allocated to BCA and the commercial operations at BGS. Pension costs are allocated to BDS and BGS businesses supporting government customers usingU.S. Government Cost Accounting Standards (CAS), which employ different actuarial assumptions and accounting conventions than GAAP. These costs are allocable to government contracts. Other postretirement benefit costs are allocated to business segments based on CAS, which is generally based on benefits paid. FAS/CAS service cost adjustment represents the difference between the FAS pension and postretirement service costs calculated under GAAP and costs allocated to the business segments. Non-operating pension and postretirement expenses represent the components of net periodic benefit costs other than service cost. These expenses are included in Other income, net. 115
--------------------------------------------------------------------------------
Table of Contents
Effective in 2019, certain centrally managed assets that were previously recorded in the BCA, BDS and BGS segments have been realigned to Unallocated items, eliminations and other. Business segment data in the following tables for 2019, 2018 and 2017 reflects the realignment of these assets. Assets Segment assets are summarized in the table below. December 31, 2019 2018 Commercial Airplanes $73,995 $61,116 Defense, Space & Security 15,977 18,023 Global Services 18,605 17,856Boeing Capital 2,269 2,809
Unallocated items, eliminations and other 22,779 17,555 Total
$133,625 $117,359 Assets included in Unallocated items, eliminations and other primarily consist of Cash and cash equivalents, Short-term and other investments, deferred tax assets, capitalized interest, and assets managed centrally on behalf of the four principle business segments and intercompany eliminations. Capital Expenditures Years ended December 31, 2019 2018 2017 Commercial Airplanes $433 $604 $636 Defense, Space & Security 202 208 210 Global Services 218 231 180
Unallocated items, eliminations and other 981 679 713 Total
$1,834 $1,722 $1,739 Capital expenditures for Unallocated items, eliminations and other relate primarily to assets managed centrally on behalf of the four principal business segments. Depreciation and Amortization Years ended December 31, 2019 2018 2017 Commercial Airplanes $580 $565 $521 Defense, Space & Security 274 290 252 Global Services 424 348 322
$2,271 $2,114 $2,047 (1) Amounts shown in the table represent depreciation and amortization expense recorded by the individual business segments. Depreciation and amortization for centrally managed assets are included in segment operating earnings based on usage and occupancy. In 2019, $717 was included in the primary business segments, of which $407, $257, and $53 was included in BCA, BDS and BGS, respectively. In 2018, $692 was included in the primary business segments, of which $417, $213, and $62 was included in BCA, BDS and BGS, respectively. In 2017, $730 was included in the primary business segments, of which $427, $243, and $60 was included in BCA, BDS and BGS, respectively. 116
--------------------------------------------------------------------------------
Table of Contents
Note 24 - Quarterly Financial Data (Unaudited)
2019 2018 4th 3rd 2nd 1st 4th 3rd 2nd 1st Total revenues $17,911 $19,980 $15,751 $22,917 $28,341 $25,146 $24,258 $23,382 Total costs and expenses (18,708 ) (16,930 ) (17,810 ) (18,645 ) (22,090 ) (21,040 ) (19,536 ) (18,824 ) (Loss)/earnings from operations (2,204 ) 1,259 (3,380 ) 2,350 4,175 2,227 2,710 2,875 Net (loss)/earnings (1,010 ) 1,167 (2,942 ) 2,149 3,424 2,363 2,196 2,477 Basic (loss)/earnings per share (1.79 ) 2.07 (5.21 ) 3.79 6.00 4.11 3.77 4.19 Diluted (loss)/earnings per share (1.79 ) 2.05 (5.21 ) 3.75 5.93 4.07 3.73 4.15 Gross profit is calculated as Total revenues minus Total costs and expenses. Total costs and expenses includes Cost of products, Cost of services andBoeing Capital interest expense. During the first quarter of 2019, we concluded that lease incentives granted to a customer that experienced liquidity issues were impaired and recorded a charge of $250. During the first quarter of 2018, we recorded a reach-forward loss on KC-46A Tanker of $81. During the second quarter of 2019, we recorded a reduction to revenue of $5,610, related to estimated potential concessions and other considerations to customers for disruptions and associated delivery delays related to the 737 MAX grounding, net of insurance recoveries. Additionally, we recorded a charge of $109 related to ongoing litigation associated with recoverable costs onU.S. government contracts. During the second quarter of 2018, we recorded a charge of $148 related to the outcome of the Spirit litigation and a reach-forward loss on KC-46A Tanker of $426. During the third quarter of 2018, we recorded a tax benefit of $412 related to the settlement of the 2013-2014 federal tax audit. Additionally, we recorded reach-forward losses on KC-46A Tanker of $179, on T-7A Red Hawk of $400, and on MQ-25 of $291. During the fourth quarter of 2019, we recorded an additional reduction to revenue of $2,619 for estimated potential concessions and other considerations to customers and associated delivery delays related to the 737 MAX grounding. During the fourth quarter of 2019, we recorded a divestiture gain of $395 and a tax benefit of $371 related to the settlement of state tax audits spanning 15 tax years. Additionally, we recorded an impairment of $293 as a result of our decision to retire the Aviall brand and trade name, and reach-forward losses on Commercial Crew of $410 and on KC-46A Tanker of $108. During the fourth quarter of 2018, we recorded a reach-forward loss on KC-46A Tanker of $50. We increased our quarterly dividend from $1.71 to $2.055 in December 2018. 117
--------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial position ofThe Boeing Company and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted inthe United States of America . We have also audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 31, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 118
--------------------------------------------------------------------------------
Table of Contents
Cost Estimates for Fixed-Price Development Contracts - Refer to Notes 1 and 14 to the financial statements Critical Audit Matter Description As more fully described in Notes 1 and 14 to the consolidated financial statements, the Company recognizes revenue over time for long-term contracts as goods are produced or services are rendered. The Company uses costs incurred as the method for determining progress, and revenue is recognized based on costs incurred to date plus an estimate of margin at completion. The process of estimating margin at completion involves estimating the costs to complete production of goods or rendering of services and comparing those costs to the estimated final revenue amount. Fixed-price development contracts are inherently uncertain in that revenue is fixed while the estimates of costs required to complete these contracts are subject to significant variability. Due to the technical performance requirements in many of these contracts, changes to cost estimates could occur, resulting in lower margins or material reach-forward losses. Given the complexity of certain of the Company's fixed-price development contracts, including the KC-46A Tanker, Commercial Crew, United States Air Force VC-25B Presidential Aircraft, MQ-25 Stingray, and T-7A Red Hawk contracts, the limited amount of historical data available in certain instances and significant judgments necessary to estimate future costs at completion, auditing these estimates involved extensive audit effort and a high degree of auditor judgment and required audit professionals with industry and quantitative analytics experience. How the Critical Audit Matter Was Addressed in the Audit Our auditing procedures related to the cost estimates for fixed-price development contracts included the following, among others: • We evaluated the appropriateness and consistency of management's methods
and assumptions in developing its estimates.
• We performed inquiries of the Company's project managers and others
directly involved with the contracts and observed the work site to
evaluate project status and project challenges which may affect total
estimated costs to complete.
• We tested the accuracy and completeness of the data used in developing the
estimates. We developed independent expectations of likely outcomes using,
in part, the program's data and compared our expectations to management's
estimates.
• We tested the effectiveness of controls including those over the data used
in developing the estimates, the mathematical extrapolation of such data, and management's judgment regarding the range of possible outcomes relating to the specific estimates. • We performed retrospective reviews, comparing actual performance to
estimated performance, when evaluating the thoroughness and precision of
management's estimation process. Program Accounting Estimates for New Programs - Refer to Notes 1 and 7 to the financial statements Critical Audit Matter Description The introduction of new aircraft programs involves increased risk associated with meeting development, certification and production schedules. The Company uses program accounting in order to compute cost of sales and margin for each commercial airplane sold. The use of program accounting requires estimating and demonstrating customer demand for the number of units included in the program (program accounting quantity) and estimating the sales and costs over the expected life of each program. In particular, estimating the initial program accounting quantity and revenue for unsold units within the program accounting quantity involves measurement uncertainty resulting in a range of possible outcomes. Changes to revenue or 119
--------------------------------------------------------------------------------
Table of Contents
program accounting quantity estimates could occur, resulting in lower margins or material reach-forward losses. Auditing the estimated market demand and revenue for unsold units for the 777X program involved extensive audit effort and required professionals with industry and quantitative analytics experience given the high degree of complexity and subjectivity related to management's estimates. How the Critical Audit Matter Was Addressed in the Audit Our auditing procedures related to estimated market demand and revenue for unsold units for the 777X included the following, among others: • We inquired of the Company's management, including individuals responsible
for sales and pricing, to evaluate the status of current sales campaigns,
short and long-term market demand, and overall program status.
• We evaluated the appropriateness and consistency of management's methods
and assumptions used in developing its estimates related to the initial
program accounting quantity and revenue for unsold units. • We evaluated management's ability to estimate program revenue by
comparison to historical estimates and actual results on similar programs.
• We developed independent expectations of likely outcomes using, in part, the program's data and compared our expectations to management's estimates.
• We tested the effectiveness of controls including those over the data used
in developing the estimates, the mathematical extrapolation of such data, and management's judgment regarding the range of possible outcomes relating to the specific estimates. Liabilities related to the 737 MAX Grounding - Refer to Notes 14 and 22 to the financial statements Critical Audit Matter Description On March 13, 2019, theFederal Aviation Administration (FAA ) issued an order to suspend operations of all 737 MAX aircraft in theU.S. and byU.S. aircraft operators following two fatal accidents of 737 MAX aircraft. Non-U.S. civil aviation authorities have issued directives to the same effect (the "737 MAX Grounding"). In addition, multiple legal actions have been filed against the Company following the fatal accidents and various governmental and regulatory investigations and inquiries continue relating to the accidents and the 737 MAX aircraft. During 2019, the Company recorded a liability in connection with estimated payments, concessions and other in-kind consideration it intends to provide to customers for disruptions related to the 737 MAX Grounding and associated delivery delays. This liability totaled $7.4 billion at December 31, 2019 and is reflected in the financial statements in Accrued liabilities. This represents the Company's best estimate of future concessions and other consideration to its customers, and is necessarily based on individual negotiations with customers and a series of assumptions, including the timing and conditions of the 737 MAX's return to service in various jurisdictions and the timing of future production rate increases. Because the timing and conditions of the 737 MAX return to service in various jurisdictions will be determined by civil aviation authorities and is outside of the Company's control, the assumptions underlying the liability require a high degree of auditor judgment. Significant judgment is involved in management's ability to assess and reasonably estimate potential additional financial statement effects or a range of loss, if any, resulting from the outcome of 737 MAX-related litigation and the results of the various governmental and regulatory investigations and inquiries related to the 737 MAX. 120
--------------------------------------------------------------------------------
Table of Contents
The subjectivity of the liability associated with providing consideration to customers resulting from the 737 MAX Grounding and the complexity of assessing the outcome of the ongoing litigation and investigations related to the 737 MAX required a high degree of auditor judgment and increased audit effort. How the Critical Audit Matter Was Addressed in the Audit Our auditing procedures associated with liabilities related to the 737 MAX grounding included the following, among others: • We inquired of management to understand developments with the 737 MAX Grounding, including the status of regulatory approval for return to service in various jurisdictions and the status of consideration discussions with individual customers.
• We obtained written representations from management concerning its intent
to provide consideration to customers and the extent of that consideration.
• We tested the effectiveness of controls related to nonrecurring items and
loss contingencies associated with litigation, claims and assessments.
• We evaluated the significant assumptions used by management to estimate
the liability for customer consideration, including the timing and
conditions of 737 MAX return to service, and, where possible, we
corroborated the assumptions with management outside of the accounting and
finance organizations. • We reviewed the terms of customer contracts and correspondence with customers concerning potential consideration as a result of the 737 MAX Grounding. • We inquired of internal and external legal counsel to understand
developments related to contractual obligations to customers, litigation
and other claims relating to the 737 MAX Grounding and progression in potential settlement discussions.
• We read minutes of meetings of the Board of Directors and its committees
for evidence of unrecorded loss contingencies.
• We evaluated the Company's disclosures for consistency with our knowledge
of matters related to the 737 MAX Grounding. /s/Deloitte & Touche LLP Chicago, Illinois January 31, 2020
We have served as the Company's auditor since at least 1934; however, an earlier year could not be reliably determined.
121
--------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors ofThe Boeing Company Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting ofThe Boeing Company and subsidiaries (the "Company") as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019 of the Company, and our report dated January 31, 2020 expressed an unqualified opinion on those financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/Deloitte & Touche LLP Chicago, Illinois January 31, 2020 122
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source