Edgar Filing: BOEING CO

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-442



	THE BOEING COMPANY

(Exact name of registrant as specified in its charter)



Delaware		91-0425694
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 N. Riverside Plaza, Chicago, IL		60606-1596
(Address of principal executive offices)		(Zip Code)



	(312) 544-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

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

THE BOEING COMPANY

FORM 10-Q

For the Quarter Ended September 30, 2018

INDEX



Part I. Financial Information (Unaudited)		Page

Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Statements of Financial Position	3
	Condensed Consolidated Statements of Cash Flows	4
	Condensed Consolidated Statements of Equity	5
	Summary of Business Segment Data	6
	Note 1 – Basis of Presentation	7
	Note 2 - Impact of Adoption of New Standards	11
	Note 3 - Earnings Per Share	15
	Note 4 - Income Taxes	16
	Note 5 - Inventories	16
	Note 6 - Contracts with Customers	17
	Note 7 - Customer Financing	17
	Note 8 - Investments	19
	Note 9 - Other Assets	19
	Note 10 - Commitments & Contingencies	19
	Note 11 - Arrangements with Off-Balance Sheet Risk	22
	Note 12 - Debt	24
	Note 13 - Postretirement Plans	24
	Note 14 - Share-Based Compensation and Other Comprehensive Arrangements	25
	Note 15 - Shareholders' Equity	26
	Note 16 - Derivative Financial Instruments	27
	Note 17 - Fair Value Measurements	29
	Note 18 - Legal Proceedings	31
	Note 19 - Segment and Revenue Information	31
	Note 20 - Subsequent Events	34
	Report of Independent Registered Public Accounting Firm	35

Forward-Looking Statements		36

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
	Consolidated Results of Operations and Financial Condition	38
	Commercial Airplanes	44
	Defense, Space & Security	46
	Global Services	49
	Boeing Capital	50
	Liquidity and Capital Resources	51
	Off-Balance Sheet Arrangements	53
	Contingent Obligations	53
	Non-GAAP Measures	54
	Other	55
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	56

Part II. Other Information

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	58

Signature		59

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Part I. Financial Information

Item 1. Financial Statements

The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



(Dollars in millions, except per share data)	Nine months ended September 30						Three months ended September 30
	2018			2017			2018			2017
Sales of products		$64,848			$61,667			$22,463			$21,782
Sales of services	7,938			7,568			2,683			2,441
Total revenues	72,786			69,235			25,146			24,223

Cost of products	(53,134		)	(50,936		)	(18,882		)	(18,050		)
Cost of services	(6,215		)	(5,742		)	(2,140		)	(1,879		)
Boeing Capital interest expense	(51		)	(53		)	(18		)	(27		)
Total costs and expenses	(59,400		)	(56,731		)	(21,040		)	(19,956		)
	13,386			12,504			4,106			4,267
Income from operating investments, net	112			169			32			49
General and administrative expense	(3,345		)	(2,890		)	(1,154		)	(918		)
Research and development expense, net	(2,417		)	(2,417		)	(826		)	(768		)
Gain on dispositions, net	76						69
Earnings from operations	7,812			7,366			2,227			2,630
Other income, net	63			91			12			40
Interest and debt expense	(317		)	(267		)	(106		)	(87		)
Earnings before income taxes	7,558			7,190			2,133			2,583
Income tax (expense)/benefit	(522		)	(2,052		)	230			(773		)
Net earnings		$7,036			$5,138			$2,363			$1,810

Basic earnings per share		$12.08			$8.49			$4.11			$3.03

Diluted earnings per share		$11.95			$8.39			$4.07			$2.99

Cash dividends paid per share		$5.13			$4.26			$1.71			$1.42

Weighted average diluted shares (millions)	588.9			612.8			580.8			606.3

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)



(Dollars in millions)	Nine months ended September 30						Three months ended September 30
	2018			2017			2018			2017
Net earnings		$7,036			$5,138			$2,363			$1,810
Other comprehensive income, net of tax:
Currency translation adjustments	(55		)	121			2			44
Unrealized gain/(loss) on certain investments, net of tax of ($1), $0, $0 and $0	3
Unrealized (loss)/gain on derivative instruments:
Unrealized (loss)/gain arising during period, net of tax of $27, ($61), $1 and ($22)	(97		)	111			(4		)	40
Reclassification adjustment for losses included in net earnings, net of tax of ($5), ($24), ($3) and ($5)	19			44			9			10
Total unrealized (loss)/gain on derivative instruments, net of tax	(78		)	155			5			50
Defined benefit pension plans and other postretirement benefits:
Amortization of prior service credits included in net periodic pension cost, net of tax of $30, $47, $10 and $16	(106		)	(84		)	(35		)	(27		)
Net actuarial gain arising during the period, net of tax of $0, ($1), $0 and $0	1			3
Amortization of actuarial losses included in net periodic pension cost, net of tax of ($182), ($217), ($60) and ($72)	657			394			219			131
Settlements and curtailments included in net income, net of tax of ($3), $0, $0 and $0	6
Pension and postretirement cost related to our equity method investments, net of tax of $1, $1, $0 and $0	(4		)	(2		)	(1		)
Total defined benefit pension plans and other postretirement benefits, net of tax	554			311			183			104
Other comprehensive income, net of tax	424			587			190			198
Comprehensive income related to noncontrolling interests	(12		)	(1		)	(2		)
Comprehensive income, net of tax		$7,448			$5,724			$2,551			$2,008

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Financial Position

(Unaudited)



(Dollars in millions, except per share data)	September 30 2018			December 31 2017
Assets
Cash and cash equivalents		$8,034			$8,813
Short-term and other investments	1,956			1,179
Accounts receivable, net	2,893			2,894
Unbilled receivables, net	9,936			8,194
Current portion of customer financing, net	431			309
Inventories	62,038			61,388
Other current assets	2,398			2,417
Total current assets	87,686			85,194
Customer financing, net	2,785			2,756
Property, plant and equipment, net of accumulated depreciation of $18,328 and $17,641	12,571			12,672
Goodwill	5,722			5,559
Acquired intangible assets, net	2,530			2,573
Deferred income taxes	323			321
Investments	1,190			1,260
Other assets, net of accumulated amortization of $466 and $482	1,852			2,027
Total assets		$114,659			$112,362
Liabilities and equity
Accounts payable		$13,663			$12,202
Accrued liabilities	12,869			13,069
Advances and progress billings	51,496			48,042
Short-term debt and current portion of long-term debt	1,389			1,335
Total current liabilities	79,417			74,648
Deferred income taxes	1,738			2,188
Accrued retiree health care	5,394			5,545
Accrued pension plan liability, net	15,927			16,471
Other long-term liabilities	2,905			2,015
Long-term debt	10,487			9,782
Shareholders’ equity:
Common stock, par value $5.00 – 1,200,000,000 shares authorized; 1,012,261,159 shares issued	5,061			5,061
Additional paid-in capital	6,714			6,804
Treasury stock, at cost - 443,262,126 and 421,222,326 shares	(51,781		)	(43,454		)
Retained earnings	54,666			49,618
Accumulated other comprehensive loss	(15,949		)	(16,373		)
Total shareholders’ equity	(1,289		)	1,656
Noncontrolling interests	80			57
Total equity	(1,209		)	1,713
Total liabilities and equity		$114,659			$112,362

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



(Dollars in millions)	Nine months ended September 30
	2018			2017
Cash flows – operating activities:
Net earnings		$7,036			$5,138
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash items –
Share-based plans expense	150			151
Depreciation and amortization	1,531			1,470
Investment/asset impairment charges, net	63			75
Customer financing valuation (benefit)/expense	(3		)	4
Gain on dispositions, net	(76		)
Other charges and credits, net	158			196
Changes in assets and liabilities –
Accounts receivable	10			(558		)
Unbilled receivables	(1,732		)	(1,805		)
Advances and progress billings	3,457			4,714
Inventories	(173		)	(800		)
Other current assets	(5		)	(337		)
Accounts payable	1,181			780
Accrued liabilities	890			(102		)
Income taxes receivable, payable and deferred	(252		)	1,507
Other long-term liabilities	1			25
Pension and other postretirement plans	(89		)	(550		)
Customer financing, net	(175		)	634
Other	403			(99		)
Net cash provided by operating activities	12,375			10,443
Cash flows – investing activities:
Property, plant and equipment additions	(1,227		)	(1,304		)
Property, plant and equipment reductions	117			30
Acquisitions, net of cash acquired	(250		)
Contributions to investments	(2,145		)	(2,815		)
Proceeds from investments	1,369			2,612
Purchase of distribution rights	(56		)	(131		)
Other	(5		)	7
Net cash used by investing activities	(2,197		)	(1,601		)
Cash flows – financing activities:
New borrowings	4,696			876
Debt repayments	(4,029		)	(83		)
Contributions from noncontrolling interests	35
Stock options exercised	70			291
Employee taxes on certain share-based payment arrangements	(247		)	(118		)
Common shares repurchased	(8,415		)	(7,500		)
Dividends paid	(2,976		)	(2,575		)
Net cash used by financing activities	(10,866		)	(9,109		)
Effect of exchange rate changes on cash and cash equivalents, including restricted	(37		)	73
Net decrease in cash & cash equivalents, including restricted	(725		)	(194		)
Cash & cash equivalents, including restricted, at beginning of year	8,887			8,869
Cash & cash equivalents, including restricted, at end of period	8,162			8,675
Less restricted cash & cash equivalents, included in Investments	128			106
Cash and cash equivalents at end of period		$8,034			$8,569

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited)



	Boeing shareholders
(Dollars in millions, except per share data)	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Non- controlling Interests			Total
Balance at January 1, 2017		$5,061		$4,762			($36,097	)		$41,754			($13,623	)		$60			$1,917
Net earnings									5,138						(1		)	5,137
Other comprehensive loss, net of tax of ($255)												587						587
Share-based compensation and related dividend equivalents			168						(18		)							150
Treasury shares issued for stock options exercised, net			(80		)	370												290
Treasury shares issued for other share-based plans, net			(178		)	64												(114		)
Treasury shares contributed to pension plans			2,082			1,418												3,500
Common shares repurchased						(7,500		)										(7,500		)
Cash dividends declared ($2.84 per share)									(1,709		)							(1,709		)
Balance at September 30, 2017		$5,061		$6,754			($41,745	)		$45,165			($13,036	)		$59			$2,258

Balance at January 1, 2018		$5,061		$6,804			($43,454	)		$49,618			($16,373	)		$57			$1,713
Net earnings									7,036						(12		)	7,024
Other comprehensive income, net of tax of ($133)												424						424
Share-based compensation and related dividend equivalents			167						(17		)							150
Treasury shares issued for stock options exercised, net			(37		)	107												70
Treasury shares issued for other share-based plans, net			(220		)	(19		)										(239		)
Common shares repurchased						(8,415		)										(8,415		)
Cash dividends declared ($3.42 per share)									(1,971		)							(1,971		)
Changes in noncontrolling interests															35			35
Balance at September 30, 2018		$5,061		$6,714			($51,781	)		$54,666			($15,949	)		$80			($1,209	)

See Notes to the Condensed Consolidated Financial Statements.

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The Boeing Company and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Summary of Business Segment Data

(Unaudited)



(Dollars in millions)	Nine months ended September 30						Three months ended September 30
	2018			2017			2018			2017
Revenues:
Commercial Airplanes		$43,409			$42,626			$15,276			$15,393
Defense, Space & Security	17,084			15,304			5,729			5,050
Global Services	12,124			10,784			4,091			3,579
Boeing Capital	214			234			77			70
Unallocated items, eliminations and other	(45		)	287			(27		)	131
Total revenues		$72,786			$69,235			$25,146			$24,223
Earnings/(loss) from operations:
Commercial Airplanes		$5,175			$3,665			$2,023			$1,513
Defense, Space & Security	925			1,649			(245		)	486
Global Services	1,790			1,687			543			495
Boeing Capital	71			87			27			23
Segment operating profit	7,961			7,088			2,348			2,517
Unallocated items, eliminations and other	(1,168		)	(771		)	(458		)	(233		)
FAS/CAS service cost adjustment	1,019			1,049			337			346
Earnings from operations	7,812			7,366			2,227			2,630
Other income, net	63			91			12			40
Interest and debt expense	(317		)	(267		)	(106		)	(87		)
Earnings before income taxes	7,558			7,190			2,133			2,583
Income tax (expense)/benefit	(522		)	(2,052		)	230			(773		)
Net earnings		$7,036			$5,138			$2,363			$1,810

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

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The Boeing Company and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Dollars in millions, except per share data)

(Unaudited)

Note 1 – Basis of Presentation

The condensed consolidated interim financial statements included in this report have been prepared by management of The Boeing Company (herein referred to as “Boeing”, the “Company”, “we”, “us”, or “our”). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The results of operations for the period ended September 30, 2018 are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited Consolidated Financial Statements, including the notes thereto, included in our 2017 Annual Report on Form 10-K. Prior period amounts have been adjusted to conform with the current year presentation.

Standards Issued and Not Yet Implemented

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard permits two approaches, one requiring retrospective application of the new guidance with restatement of prior years, and one requiring prospective application of the new guidance. We plan to adopt the new lease standard effective January 1, 2019 and apply it prospectively. We do not expect the new lease standard to have a material effect on our financial position, results of operations or cash flows.

Standards Issued and Implemented

In the first quarter of 2018, we adopted the following ASUs: ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2017-07,Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost; ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash; ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

The impact of the adoption of these standards to our unaudited Condensed Consolidated Financial Statements is presented in Note 2 and the additional disclosures are shown in Notes 6 and 19.

ASU 2014-09 In the first quarter of 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective method. Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services.

Most of our defense contracts at our Defense, Space & Security (BDS) and Global Services (BGS) segments and certain military derivative aircraft contracts at our Commercial Airplanes (BCA) segment now recognize revenue under the new standard as costs are incurred. Under previous U.S. generally accepted accounting principles (GAAP), revenue was generally recognized when deliveries were made, performance milestones were attained, or as costs were incurred. The new standard accelerates the timing of when the revenue is recognized, however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition or the use of program accounting for commercial airplane contracts in our BCA business. We continue to recognize revenue for these contracts at the point in time when the customer accepts delivery of the airplane. The adoption resulted in a cumulative adjustment to increase Retained earnings by $901 at January 1, 2016 and an increase of $73 to Net earnings for the first nine months of 2017.

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ASU 2017-07 In the first quarter of 2018, we adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires non-service cost components of net periodic benefit cost to be presented in non-operating earnings using a retrospective transition method. We applied a practical expedient as the estimation basis for the reclassification of prior period non-service cost components of net periodic benefit cost from Earnings from operations to Other income/(loss), net. Through the end of 2017, a portion of net periodic pension and other postretirement income or expense was not recognized in net earnings in the year incurred because it was allocated to production as product costs, and reflected in inventory at the end of the reporting periods. Effective January 1, 2018, in accordance with our adoption of ASU 2017-07, only service costs may be allocated to production costs and capitalized in inventory on a prospective basis. The impact of adoption was not material.

ASU 2016-18 In the first quarter of 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The standard requires companies to include restricted amounts with Cash & cash equivalents when reconciling the beginning and end of period total amounts shown on the Statements of Cash Flows. The impact of adoption was not material.

ASU 2018-02 In the first quarter of 2018, we early adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows companies to reclassify from Accumulated other comprehensive income/loss to Retained earnings the difference between the historical corporate income tax rate of 35% and the 21% rate enacted in the Tax Cuts and Jobs Act (TCJA) in December 2017. This resulted in an increase of $2,997 to Retained earnings and an increase of $2,997 to Accumulated other comprehensive loss.

Significant Accounting Policies - Update

Our significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2017. Our significant accounting policies described below reflect the impact of the adoption of Topic 606 in the first quarter of 2018.

Revenue and Related Cost Recognition

Commercial aircraft contracts The majority of our BCA segment revenue is derived from commercial aircraft contracts. For each contract, we determine the transaction price based on the consideration expected to be received. We allocate the transaction price to each commercial aircraft performance obligation based on relative standalone selling prices adjusted by an escalation formula as specified in the customer agreement. Revenue is recognized for each commercial aircraft performance obligation at the point in time when the aircraft is completed and accepted by the customer. We use program accounting to determine the amount reported as cost of sales.

Where an aircraft is still in our possession, and title and risk of loss has passed to the customer (known as a bill-and-hold arrangement), revenue will be recognized when all specific requirements for transfer of control under a bill-and-hold arrangement have been met.

Payments for commercial aircraft sales are received in accordance with the customer agreement, which generally includes a deposit upon order and additional payments in accordance with a payment schedule, with the balance being due immediately prior to or at aircraft delivery. Advances and progress billings (contract liabilities) are normal and customary for commercial aircraft contracts and not considered a significant financing component as they are intended to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

Long-term contracts Substantially all contracts at BDS, certain military derivative aircraft contracts at BCA and certain contracts at BGS are long-term contracts with the U.S. government and other customers that generally extend over several years. Products sales under long-term contracts primarily include fighter jets, rotorcraft, cybersecurity products, surveillance suites, advanced weapons, missile defense, military derivative aircraft, satellite systems, and modification of commercial passenger aircraft to cargo freighters. Services

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sales under long-term contracts primarily include support and maintenance agreements associated with our commercial and defense products and space travel on Commercial Crew.

For each long-term contract, we determine the transaction price based on the consideration expected to be received. We allocate the transaction price to each distinct performance obligation to deliver a good or service, or a collection of goods and/or services, based on the relative standalone selling prices. A long-term contract will typically represent a single distinct performance obligation due to the highly interdependent and interrelated nature of the underlying goods and/or services and the significant service of integration that we provide. While the scope and price on certain long-term contracts may be modified over their life, the transaction price is based on current rights and obligations under the contract and does not include potential modifications until they are agreed upon with the customer. When applicable, a cumulative adjustment or separate recognition for the additional scope and price may result. Long-term contracts can be negotiated with a fixed price or a price in which we are reimbursed for costs incurred plus an agreed upon profit. The Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed in establishing the price for contracts with the U.S. government. Certain long-term contracts include in the transaction price variable consideration, such as incentive and award fees, if specified targets are achieved. The amount included in the transaction price represents the expected value, based on a weighted probability, or the most likely amount.

Long-term contract revenue is recognized over the contract term (over time) as the work progresses, either as products are produced or as services are rendered. We generally recognize revenue over time as we perform on long-term contracts because of continuous transfer of control to the customer. For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment of the transaction price associated with work performed to date on products or services that do not have an alternative use to the Company.

The accounting for long-term contracts involves a judgmental process of estimating total sales, costs and profit for each performance obligation. Cost of sales is recognized as incurred. The amount reported as revenues is determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. Recognizing revenue as costs are incurred provides an objective measure of progress on the long-term contract and thereby best depicts the extent of transfer of control to the customer.

Changes in estimated revenues, cost of sales and the related effect on operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a long-term contract’s percentage-of-completion. When the current estimates of total sales and costs for a long-term contract indicate a loss, a provision for the entire reach-forward loss on the long-term contract is recognized.

Net cumulative catch-up adjustments to prior years' revenue and earnings, including reach-forward losses, across all long-term contracts were as follows:



	Nine months ended September 30					Three months ended September 30
	2018			2017		2018			2017
Increase/(decrease) to Revenue		($14	)		$426		($59	)		($44	)
Increase/(decrease) to Earnings from Operations		($314	)		$207		($155	)		($215	)
Increase/(decrease) to Diluted EPS		($0.50	)		$0.24		($0.30	)		($0.25	)

Due to the significance of judgment in the estimation process changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods.

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Payments under long-term contracts may be received before or after revenue is recognized. The U.S. government customer typically withholds payment of a small portion of the contract price until contract completion. Therefore, long-term contracts typically generate Unbilled receivables (contract assets) but may generate Advances and progress billings (contract liabilities). Long-term contract Unbilled receivables and Advances and progress billings are not considered a significant financing component because they are intended to protect either the customer or the Company in the event that some or all of the obligations under the contract are not completed.

Commercial spare parts contracts Certain contracts at our BGS segment include sales of commercial spare parts. For each contract, we determine the transaction price based on the consideration expected to be received. The spare parts have discrete unit prices that represent fair value. We generally consider each spare part to be a separate performance obligation. Revenue is recognized for each commercial spare part performance obligation at the point in time of delivery to the customer. We may provide our customers with a right to return a commercial spare part where a customer may receive a full or partial refund, a credit applied to amounts owed, a different product in exchange, or any combination of these items. We consider the potential for customer returns in the estimated transaction price. The amount reported as cost of sales is recorded at average cost. Payments for commercial spare parts sales are typically received shortly after delivery.

Other service revenue contracts Certain contracts at our BGS segment are for sales of services to commercial customers including maintenance, training, data analytics and information-based services. We recognize revenue for these service performance obligations over time as the services are rendered. The method of measuring progress (such as straight-line or billable amount) varies depending upon which method best depicts the transfer of control to the customer based on the type of service performed. Cost of sales is recorded as incurred.

Concession sharing arrangements We account for sales concessions to our customers in consideration of their purchase of products and services as a reduction of the transaction price and the revenue that is recognized for the related performance obligations. The sales concessions incurred may be partially reimbursed by certain suppliers in accordance with concession sharing arrangements. We record these reimbursements, which are presumed to represent reductions in the price of the vendor’s products or services, as a reduction in Cost of products.

Unbilled Receivables and Advances and Progress Billings

Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which cannot yet be billed under terms of the contract with the customer. Advances and progress billings (contract liabilities) arise when the Company receives payments from customers in advance of recognizing revenue. The amount of Unbilled receivables or Advances and progress billings is determined for each contract.

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Note 2 - Impact of Adoption of New Standards

In the first quarter of 2018, we adopted the following ASUs: ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost; ASU 2016-18 Statement of Cash Flows (Topic 230) Restricted Cash; and ASU 2018-02 Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

The impact to our unaudited Condensed Consolidated Financial Statements as a result of adopting these standards was as follows:

Condensed Consolidated Statement of Operations (Unaudited)



	Nine months ended September 30, 2017									Three months ended September 30, 2017
(Dollars in millions)	Reported			Impact of New Standards			Restated			Reported			Impact of New Standards			Restated
Sales of products		$60,484			$1,183			$61,667			$21,825			($43	)		$21,782
Sales of services	7,540			28			7,568			2,484			(43		)	2,441
Total revenues	68,024			1,211			69,235			24,309			(86		)	24,223

Cost of products	(49,856		)	(1,080		)	(50,936		)	(18,050		)				(18,050		)
Cost of services	(5,730		)	(12		)	(5,742		)	(1,910		)	31			(1,879		)
Boeing Capital interest expense	(53		)				(53		)	(27		)				(27		)
Total costs and expenses	(55,639		)	(1,092		)	(56,731		)	(19,987		)	31			(19,956		)
	12,385			119			12,504			4,322			(55