So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

VV wrote:

So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

They "pay" for it because it hurts their profit. Without the deferred costs, profit would be higher.

sxf24 wrote:

For what it's worth, the compensation plan for Boeing's senior executives is disclosed in the proxy statement. I don't think stock price plays into how much they make.

Are you for real? https://www1.salary.com/BOEING-CO-Executive-Salaries.html

marcelh wrote:

VV wrote:

So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

They "pay" for it because it hurts their profit. Without the deferred costs, profit would be higher.

Which is why cash flow is a better metric for analyzing companies. In the case of the 787, that cash has already been spent.
This is a topic that has been beaten to death here. Usually it is brought up by partisans of another OEM to throw shade on Boeing.
They are simply fiscally ignorant, willfully or not.

VV wrote:

So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

I had to wade through it all also before getting a handle on it! So you're not alone.

If you ask Planeflyer nicely I'm sure you will get the Motley Fool links to AB & BA 2017 Annual returns.

(I don't have it to hand).

Look at the BA Interest-paid of $360million in 2017 - this is the one that matters IMO.

Gives an Interest-bearing debt of 9$Billion+ for the entire Corporation.

So the B787 "deferred debt" has been paid-off.
Exactly as noted by some here.

So all the Bills have in fact been paid. The cash has left the Bank Account.
The Bills have been presented/wages paid/whatever; and it all has been tabulated in the relevant Annual statement which show the cash has gone.

It is no longer "interest-Bearing Debt".
Shut the door.

End of story.



Lightsaber puts it perfectly above.

"It is now a debt owed by Boeing to Boeing".

In this case the 787 program will never be profitable for BA (within Boeing) as a whole until the deferred costs are cancelled by profitable sales of the 787.



cheers

Yeah

brindabella wrote:

VV wrote:

So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

I had to wade through it all also before getting a handle on it! So you're not alone.

If you ask Planeflyer nicely I'm sure you will get the Motley Fool links to AB & BA 2017 Annual returns.

(I don't have it to hand).

Look at the BA Interest-paid of $360million in 2017 - this is the one that matters IMO.

Gives an Interest-bearing debt of 9$Billion+ for the entire Corporation.

So the B787 "deferred debt" has been paid-off.
Exactly as noted by some here.

So all the Bills have in fact been paid. The cash has left the Bank Account.
The Bills have been presented/wages paid/whatever; and it all has been tabulated in the relevant Annual statement which show the cash has gone.

It is no longer "interest-Bearing Debt".
Shut the door.

End of story.



Lightsaber puts it perfectly above.

"It is now a debt owed by Boeing to Boeing".

In this case the 787 program will never be profitable for BA (within Boeing) as a whole until the deferred costs are cancelled by profitable sales of the 787.



cheers

That’s actually not 100% true as there is profit per plane built into the accounting block that is recognized with each delivery. That is the big unknown along with sales price that keeps one from figuring out exactly what it cost to make the plane today. Sales price you can get an ok read on in various places. What we don’t know is if Boeing was booking a gross profit of 10% or 15% or 5% on each plane. There is a number where you don’t get fully to zero but the booked profit would exceed the deferred cost written off.

Very rough math if you assume and average sales price of $125 million (which is likely a bit low on planes already sold) and a 10% profit margin you will book a profit of $16.25 billion so any writeoff less than that would mean you made a profit, though it wouldn’t cover R&D cost.

keesje wrote:

sxf24 wrote:

For what it's worth, the compensation plan for Boeing's senior executives is disclosed in the proxy statement. I don't think stock price plays into how much they make.

Are you for real? https://www1.salary.com/BOEING-CO-Executive-Salaries.html

You claimed executives want to inflate the stock price so they can make more.

I said their compensation is not tied to the stock price.

You post a link that shows Boeing executives make lots of money (a point that was never disputed).

I still say their compensation is not tied to the stock price, thus your allegations that they are not truthful on the earnings call in an effort to inflate the stock price is both wrong and inflammatory. In less polite circles, you'd be called a troll.

JayinKitsap wrote:

A sign of the efficiency drive. In Aug 2014 Boeing Commercial had 83,870 employees, in Oct 17 it had 59,608 employees. 71% of the peak number in '14. but planes are coming off the line faster than ever at this time. Unless they went to lots of contract employees it says they have cut costs big time.

To put this in perspective Bombardier Aerospace has 25,550 employees and delivered 5 C-Series aircraft.

Airbus produces about $608,000 revenue per employee. Boeing about $660,000. BBD aerospace about $438,000 per employee. Those aren’t perfect measures but they do give a general idea of how close Boeing and Airbus are in terms of efficiency and how far off the pace BBD is. But don’t underestimate the difference between Boeing and Airbus either. Given both employ north of 130,000 people that difference is an extra $7 billion in revenue that is probably at a pretty strong margin.

sxf24 wrote:

keesje wrote:

sxf24 wrote:

For what it's worth, the compensation plan for Boeing's senior executives is disclosed in the proxy statement. I don't think stock price plays into how much they make.

Are you for real? https://www1.salary.com/BOEING-CO-Executive-Salaries.html

You claimed executives want to inflate the stock price so they can make more.

I said their compensation is not tied to the stock price.

You post a link that shows Boeing executives make lots of money (a point that was never disputed).

I still say their compensation is not tied to the stock price, thus your allegations that they are not truthful on the earnings call in an effort to inflate the stock price is both wrong and inflammatory. In less polite circles, you'd be called a troll.

I'll help you here Keesje - the Equity part of there compensation is based on the stock price. It is a very significant part of there comp. Usually it's the largest just when they are about to retire or do retire (when it might not be publicly disclosed). It looks like 2/3 of the Chief FINANCIAL Officers Comp was based on the stock price.

https://www.sec.gov/Archives/edgar/data ... 3110-q.htm

The 10-Q is online.

"At March 31, 2018 and December 31, 2017, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,049 and $30,695 of work in process (including deferred production costs of $24,690 and $25,358), $2,839 and $3,189 of supplier advances, and $3,042 and $3,173 of unamortized tooling and other non-recurring costs."

From the 12/31/2017 10-K

"At December 31, 2017 and 2016, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,695 and $32,501 of work in process (including deferred production costs of $25,358 and $27,308), $3,189 and $2,398 of supplier advances, and $3,173 and $3,625 of unamortized tooling and other non-recurring costs"

The deferred production costs went down $668mm this quarter. They delivered 34 787, so reduction is $19.65mm per plane.

sxf24 wrote:

keesje wrote:

sxf24 wrote:

For what it's worth, the compensation plan for Boeing's senior executives is disclosed in the proxy statement. I don't think stock price plays into how much they make.

Are you for real? https://www1.salary.com/BOEING-CO-Executive-Salaries.html

You claimed executives want to inflate the stock price so they can make more.

I said their compensation is not tied to the stock price.

You post a link that shows Boeing executives make lots of money (a point that was never disputed).

I still say their compensation is not tied to the stock price, thus your allegations that they are not truthful on the earnings call in an effort to inflate the stock price is both wrong and inflammatory. In less polite circles, you'd be called a troll.

With all due to respect, you’re wrong on this one, sxf24.

The link Keesje posted shows - in a surprise to no one - that equity is a major component of executive pay. The value of equity compensation is directly tied to the firm’s stock price. Executives are typically awarded equity in the form of stock options that are worthless if the stock doesn’t hit a certain strike price.

So, yes, executive compensation in real dollar terms is absolutely impacted by stock price and management has an obvious incentive to drive the stock price higher. There’s nothing wrong with that. The whole reason for compensating executives with equity is to create an incentive for management to drive the firm value higher.

morrisond wrote:

sxf24 wrote:

keesje wrote:

Are you for real? https://www1.salary.com/BOEING-CO-Executive-Salaries.html

You claimed executives want to inflate the stock price so they can make more.

I said their compensation is not tied to the stock price.

You post a link that shows Boeing executives make lots of money (a point that was never disputed).

I still say their compensation is not tied to the stock price, thus your allegations that they are not truthful on the earnings call in an effort to inflate the stock price is both wrong and inflammatory. In less polite circles, you'd be called a troll.

I'll help you here Keesje - the Equity part of there compensation is based on the stock price. It is a very significant part of there comp. Usually it's the largest just when they are about to retire or do retire (when it might not be publicly disclosed). It looks like 2/3 of the Chief FINANCIAL Officers Comp was based on the stock price.

DfwRevolution wrote:

sxf24 wrote:

keesje wrote:

Are you for real? https://www1.salary.com/BOEING-CO-Executive-Salaries.html

You claimed executives want to inflate the stock price so they can make more.

I said their compensation is not tied to the stock price.

You post a link that shows Boeing executives make lots of money (a point that was never disputed).

I still say their compensation is not tied to the stock price, thus your allegations that they are not truthful on the earnings call in an effort to inflate the stock price is both wrong and inflammatory. In less polite circles, you'd be called a troll.

With all due to respect, you’re wrong on this one, sxf24.

The link Keesje posted shows - in a surprise to no one - that equity is a major component of executive pay. The value of equity compensation is directly tied to the firm’s stock price. Executives are typically awarded equity in the form of stock options that are worthless if the stock doesn’t hit a certain strike price.

So, yes, executive compensation in real dollar terms is absolutely impacted by stock price and management has an obvious incentive to drive the stock price higher. There’s nothing wrong with that. The whole reason for compensating executives with equity is to create an incentive for management to drive the firm value higher.

Receiving compensation in stock is quite different than having the amount of your compensation be based on the stock price.

Boeing's proxy statement, which is issued annually, describes how executive bonuses are determined. Executives do not get paid bigger bonuses if the stock price is higher. There is no financial incentive to not tell the trust on earnings calls as keesje so stupidly alleges.

osupoke07 wrote:

https://www.sec.gov/Archives/edgar/data/12927/000001292718000018/a201803mar3110-q.htm

The 10-Q is online.

"At March 31, 2018 and December 31, 2017, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,049 and $30,695 of work in process (including deferred production costs of $24,690 and $25,358), $2,839 and $3,189 of supplier advances, and $3,042 and $3,173 of unamortized tooling and other non-recurring costs."

From the 12/31/2017 10-K

"At December 31, 2017 and 2016, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,695 and $32,501 of work in process (including deferred production costs of $25,358 and $27,308), $3,189 and $2,398 of supplier advances, and $3,173 and $3,625 of unamortized tooling and other non-recurring costs"

The deferred production costs went down $668mm this quarter. They delivered 34 787, so reduction is $19.65mm per plane.

We had previously discussed differed costs dropping $20 million per plane. So only 1503 more to go!

Obviously it will get better. But the bulk of that is money owed to Boeing, not to an outside party.

Lightsaber

For the guys that think B is pulling the wool over eyes if you have real conviction short the stock.

So if Executives receive Equity as part of there comp - they want the price to go down?

I've been wanting to write a post on what program accounting and deferred production cost are for quite a while, as there seems to be a lot of confusion on these issues and they routinely hijack unrelated threads. Since this topic is actually about Boeing earnings, it seems very appropriate to do so here. (Sorry for the length; maybe this should be a sticky on the main page!)

When Boeing or Airbus launch a new airplane program, they incur two major startup costs. The first is research and development, which reflects the cost of designing the aircraft and its supporting technologies. Both Boeing and Airbus expense R&D as incurred. The second is production cost, which is where program accounting comes in. In any new program, the early aircraft are MUCH more costly to produce than later aircraft: the company is learning how to build them, kinks in the process are being ironed out, the initial production rate is low and unit costs are high, etc. The A380 and 787 were particularly disastrous examples as near-total breakdowns of their production systems resulted in billions and billions of extra cost over and above the initial R&D expense.

Given that production costs change dramatically while sales prices are relatively stable over the life of the program, Boeing uses program accounting to smooth the cost side (Airbus expenses actual production costs as incurred). Program accounting has three steps:

1. Estimate the number of aircraft they are reasonably confident will be sold (the "accounting block").
2. Estimate the total production cost over that block.
3. Calculate the expected average unit cost over the block.

This average unit cost is expensed against sales revenue as each aircraft is delivered. When actual costs are higher than the average unit cost, the difference is added to an account called "deferred production cost", which is then depleted as production costs decline and actual costs are lower than the average unit cost. The net effect of all this is that reported earnings are higher in the early years and lower in later years when costs fall. Boeing argues this gives a clearer picture of the program's overall financial situation, since a cornerstone of accounting is the "matching principal" whereby long-term costs are matched against long-term revenue. This is the subject of vigorous debate, but it's their justification.

I want to expand a little on the accounting block, since it's been the subject of much controversy. First, if Boeing can no longer be reasonably confident that the entire block will actually be sold, the program is in a "forward loss" position. Since some portion of deferred production costs may not be recovered after all, this usually requires a charge against current earnings (this occurred on the 747-8 due to slow sales). On the other hand, the accounting block can be increased if justified by additional potential sales. Boeing raised the 787 block from 1,100 units to 1,300 in late 2013 and to 1,400 last fall (they currently have 1,318 orders). Note that the accounting block size must be driven by likely future sales; they cannot just arbitrarily increase the block because production isn't going well and they need to spread costs over more units, as some have alleged. That would constitute accounting fraud, and the SEC has indicated they are watching Boeing's block sizes to guard against manipulation of earnings.

A few final notes on program accounting:

1. It has almost no effect on CASH FLOW. In the early years when production costs are high, employees and suppliers still need to be paid, and those bills drop over time and increase operating cash flow later on. The only cash impact is via the company's tax expense, which is actually increased in the early years because reported earnings are higher than they would otherwise be. Other than this, it has no effect on cash available to fund other projects, distribute as dividends or share buy-backs, use for M&A, etc.
2. Although deferred production costs are a liability against future earnings, they are not a debt owed to someone. This cannot be overstated, because I think some people believe deferred costs represent suppliers or employees who are waiting to be paid, which is not the case. Deferred production costs also are not bonds and have no connection to Boeing's external debt position. If Boeing suddenly could never deliver another 787 and had to take the entire $24.69 billion deferred production cost as a charge against next quarter's earnings, it would not write anyone a check.
3. Boeing reports earnings in both program accounting and actual cost terms. The program accounting number is "real" in the sense it drives the headline numbers and their tax bill, but it's pretty hard to argue Boeing is trying to hide something when both approaches are disclosed in their financials. If we're obsessing over deferred costs on an amateur forum, you can be pretty confident that professional analysts and regulators are paying attention too.

I'd also point out that accounting in general is perhaps less cut-and-dried than some believe. Although there's been progress on standardization, companies still have a lot of flexibility to capitalize things they "should" otherwise expense, allocate certain activities "opportunistically" to the operating/investing/financing categories, accelerate or delay the recognition of revenue, etc. In any undergraduate finance class or the Chartered Financial Analyst curriculum, literally one of the first things you're taught is to pick through financial statements (especially the footnotes, which is where all the good stuff is) and adjust for these idiosyncrasies. I don't hold the sell-side analyst community in particularly high regard - I think they are trying to predict an inherently unpredictable future and put far too much weight on short-term performance - but program accounting is not nearly clever or weird enough to fool anyone with even a tiny grasp on financial statement analysis.

Without further ado, here is the 787 deferred production cost history through 1Q 2018.



If Boeing is to clear the $24.69 billion deferred production cost over the 730 undelivered aircraft in the 1,400-unit accounting block, they must net $33.8 million per aircraft on average, which can be compared with the $19.65 million average in 1Q 2018. Note that this "net" is the difference between actual production cost and the budgeted average cost for the block - it has nothing to do with revenue. I leave it for others to judge whether this is achievable.

deleted. comment above was great!

VV wrote:

So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

Most people do not begin to understand the accounting of a corporation. I have a very basic understanding but know deferred costs are not bills that need to be paid. They will be used to offset future profits. How a corp goes about doing that is a strategic decision. Sometimes they write it all down in a single qtr and show no earnings. Other times they break it out over time.

I agree with the poster it seems like 787 deferred costs have become a catch all bucket for Boeing to fill for other deferred costs.

B2707SST wrote:

I've been wanting to write a post on what program accounting and deferred production cost are for quite a while, as there seems to be a lot of confusion on these issues and they routinely hijack unrelated threads. Since this topic is actually about Boeing earnings, it seems very appropriate to do so here. (Sorry for the length; maybe this should be a sticky on the main page!)


......

Great post thanks, I am not familiar with accounting, but the moment BA has no debt to external entities that will ask for interest it means the big monkey is OFF your back.

Of course they can do it because they hace a healthy and BIG backlog, and have reduced costs and personnel like crazy.... that is always good, because regular fixed expenses drag any business down.

The only thing that is left in the air is the actual profit and money on the 787 price to offset the production costs already incurred. I bet they are quite a few million below 100 million a piece price. Latest orders clearly show they can AND WILL aggressively price their product and eat Airbus lunch because they have done their homework in production expenses.

Clearly they can and they will paint a rosy picture to any shareholder as long as they are on the "right side" of the law, Airbus has done the same and any big company does it....anyone saying that accountants and financial people are good angels of heaven, is a fool as Wallstreet reminds us every 2 decades when we see it go bust.

I am Glad the Aerospace sector is strong and alive..... the engine makers...well..that is another story..maybe we should open another thread with the implications of the problems as a whole on the engine side of the Industry...

Best Regards

TRB

B2707SST wrote:

If Boeing is to clear the $24.69 billion deferred production cost over the 730 undelivered aircraft in the 1,400-unit accounting block, they must net $33.8 million per aircraft on average, which can be compared with the $19.65 million average in 1Q 2018

Your calculation of $19.5 ignores the reduction in deferred tooling. Whether to apportion cash flow from 787 sales to deferred production or tooling is largely arbitrary (as with much accounting), so it's better to look at the total deferred delta and its unit component as ~$23.5mn.

On that view, it becomes somewhat feasible for Boeing to zero-out its deferred balance without expanding the accounting block:

• The -10 is just entering production and its cost will be low-single-digits higher than -9's while its price is ~15-20% higher. $10-12mn more FCF than -9 per delivery seems doable.
• Moving to 14/yr, along with further learning curve improvements, should get something like ~5% lower production cost, meaning ~$5mn more FCF per delivery.
• Declining share of -8 deliveries and/or production rationalization of -8 means higher overall unit FCF.

An optimistic projection could see $40mn and $30mn unit FCF for -10 and -9 deliveries respectively, which gets close to the required pace of deferred reduction needed.

Probably Boeing will need to expand the block again by 100-200 units (or take a charge), but by ~2020 this program should be generating ~$5bn annual free cash flow. Pretty impressive.

At a capitalization rate of 8%, investors would value a free-standing 787 program at ~$60bn, which is ~30% of Boeing's market value. Seems about right to me.

Don't feed the troll.

While I can understand some people will never catch the meaning of "deferred cost", others are playing dumb to provoke people who understand it.

I do not think it is worth explaining any further.

One thing that makes me quite puzzled is the fact some "analysts" (or maybe charlatans) keep insisting telling the nonsense.

Matt6461 wrote:

Probably Boeing will need to expand the block again by 100-200 units (or take a charge)...

The current firm order count is at 1318 (which may or may not include the 10 frames removed due to the ASC 606 adjustment) and does not include the American Airlines order for 47 from this month nor the 40-frame MoU from Emirates last year (I imagine it will be firmed at Farnborough) along with a possible Malaysian MoU and whatever else we see at Farnborough. So I would expect by next year we should see the Accounting Block raised to at least 1400 to reflect what the current order book at the time will be.

VV wrote:

One thing that makes me quite puzzled is the fact some "analysts" (or maybe charlatans) keep insisting telling the nonsense.

It's click-bate to generate page hits for their advertisers.

Never unederestimate lazy thinking. Most the 787 naysayers are AB fanboys who see any B victory as as an AB failure.

I’m sorry to be indelicate but this zero sum thinking is very prevelant across the pond.

Planeflyer wrote:

Never unederestimate lazy thinking. Most the 787 naysayers are AB fanboys who see any B victory as as an AB failure.

I’m sorry to be indelicate but this zero sum thinking is very prevelant across the pond.

To be fair, almost every A380 discussion on this forum has a post about how expensive the program was and will never make any money, so it's just par for the course / sauce for the goose.

Stitch wrote:

Planeflyer wrote:

Never unederestimate lazy thinking. Most the 787 naysayers are AB fanboys who see any B victory as as an AB failure.

I’m sorry to be indelicate but this zero sum thinking is very prevelant across the pond.

To be fair, almost every A380 discussion on this forum has a post about how expensive the program was and will never make any money, so it's just par for the course / sauce for the goose.

I am confused. Are you saying the A380 and the 787 are equal some how ? How do you get that?

They each cost $30 plus billion to develop - A380 Yes 787 - Yes
One has written off development cost with no hope of recovery - A380 Yes 787 - No
One still costs more to manufacture than it sells for - A380 Yes 787 - No
One is struggling to build 6 frames per year to keep it's line open - A380 Yes 787 No
One is the garnering more sales quicker than any WB program ever - A380 No 787 Yes
One is delivering more planes quicker than any other WB program ever - A380 NO 787 Yes

But the do both have two wings and a tail. If it's a comparison you are looking for, it's not here.

Matt6461 wrote:

Stitch wrote:

To be fair, almost every A380 discussion on this forum has a post about how expensive the program was and will never make any money, so it's just par for the course / sauce for the goose.

Don't make the mistake of endorsing false equivalence in the pursuit of fairness.
It's actually true that the A380 was a misconceived project that never made or will make money, while the 787 was and is a great concept, poorly executed, that is now making billions of dollars.

Stitch wrote:

To be fair, almost every A380 discussion on this forum has a post about how expensive the program was and will never make any money, so it's just par for the course / sauce for the goose.

Don't make the mistake of endorsing false equivalence in the pursuit of fairness.
It's actually true that the A380 was a misconceived project that never made or will make money, while the 787 was and is a great concept, poorly executed, that is now making billions of dollars.
A.net shouldn't be cowed by partisanship; there's no reason to pretend that the 787 isn't far more successful than the failed A380.

lightsaber wrote:

osupoke07 wrote:

https://www.sec.gov/Archives/edgar/data/12927/000001292718000018/a201803mar3110-q.htm

The 10-Q is online.

"At March 31, 2018 and December 31, 2017, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,049 and $30,695 of work in process (including deferred production costs of $24,690 and $25,358), $2,839 and $3,189 of supplier advances, and $3,042 and $3,173 of unamortized tooling and other non-recurring costs."

From the 12/31/2017 10-K

"At December 31, 2017 and 2016, commercial aircraft programs inventory included the following amounts related to the 787 program: $30,695 and $32,501 of work in process (including deferred production costs of $25,358 and $27,308), $3,189 and $2,398 of supplier advances, and $3,173 and $3,625 of unamortized tooling and other non-recurring costs"

The deferred production costs went down $668mm this quarter. They delivered 34 787, so reduction is $19.65mm per plane.

We had previously discussed differed costs dropping $20 million per plane. So only 1503 more to go!

Obviously it will get better. But the bulk of that is money owed to Boeing, not to an outside party.

Lightsaber

Yeah, agreed. It's all balance sheet gross up to try to match the investment in production facilities with the related revenues. Will Boeing deliver another 1,500 planes? Maybe, but I imagine any effect of this balance and any potential future write-offs have long been factored into earnings forecasts.

Undelivered firm orders are 648, so at 12/month production, there is 54 months of production (with a planned increase up to 14 in 2019). Assuming no further improvements and $20mm per plane reduction of the deferred cost, that would reduce the deferred cost down to $11,730. I imagine the increase in production rate will give Boeing another step decrease in their fixed cost per frame and allow them to allocate more of the selling price to the deferred cost reduction.

Obviously, they are going to continue to get orders. They have at least 3-4 years before this really becomes a concern. Maybe a mid life NEO can generate another round of orders, or a 787-10ER / 787-9LR.

SC430 wrote:

Matt6461 wrote:

Stitch wrote:

To be fair, almost every A380 discussion on this forum has a post about how expensive the program was and will never make any money, so it's just par for the course / sauce for the goose.

Don't make the mistake of endorsing false equivalence in the pursuit of fairness.
It's actually true that the A380 was a misconceived project that never made or will make money, while the 787 was and is a great concept, poorly executed, that is now making billions of dollars.

My take on it - tt isn't about the A380 or 787. It's that pointing to "the other side of the pond" does go, and has gone, both ways. No need for the initial person to point fingers as it adds nothing to the conversation.

PlanesNTrains wrote:

No need for the initial person to point fingers as it adds nothing to the conversation.

Agreed. It's always totally irrelevant. But when A380/787 program equivalency is asserted, the community has two options:

• 1. Ignore the assertion as ridiculous
• 2. Correct the assertion as ridiculous

IMO it should be ~80/20 distribution of 1 and 2. Correcting every idiot occupies too much space and time, but *never* correcting idiots establishes a norm that a.net owes "fairness" to idiot's feelings rather than to the truth. Stupid ideas shouldn't be allowed to survive, regardless of people's feelings.

Matt6461 wrote:

Your calculation of $19.5 ignores the reduction in deferred tooling. Whether to apportion cash flow from 787 sales to deferred production or tooling is largely arbitrary (as with much accounting), so it's better to look at the total deferred delta and its unit component as ~$23.5mn.

True, but restricting the analysis to the change in deferred production isolates how much variable cost they are squeezing out of the 787 program. The result, nearly $50 million per frame over the past few years, is astounding, although of course the initial level was far too high given the disastrous start. Tooling should be amortized more or less pro rata, so the change in unamortized tooling would be a straightforward function of the production rate.

Matt6461 wrote:

On that view, it becomes somewhat feasible for Boeing to zero-out its deferred balance without expanding the accounting block:

• The -10 is just entering production and its cost will be low-single-digits higher than -9's while its price is ~15-20% higher. $10-12mn more FCF than -9 per delivery seems doable.
• Moving to 14/yr, along with further learning curve improvements, should get something like ~5% lower production cost, meaning ~$5mn more FCF per delivery.
• Declining share of -8 deliveries and/or production rationalization of -8 means higher overall unit FCF.

Agree with all of these, but one caveat on the second point. Revenue per frame has no impact on deferred production cost. The shift in delivery mix to higher-priced -9s and -10s definitely helps FCF, but it only reduces deferred production cost to the extent that those frames are produced for less than the accounting block average. If that's true, they could give the frames away and deferred cost would still fall.

This is worth emphasizing, since the evolution of deferred cost per delivery is a rough proxy for the change in variable cost. Any increase in revenue per frame gets applied on top of that figure. We don't have a similar proxy for revenue per frame on the 787 specifically, but it has to be rising since the deeply discounted launch orders are basically all delivered and the -9 and -10 are dominating the order book.

B2707SST wrote:

The shift in delivery mix to higher-priced -9s and -10s definitely helps FCF, but it only reduces deferred production cost to the extent that those frames are produced for less than the accounting block average. If that's true, they could give the frames away and deferred cost would still fall.

Zeroing out deferred balance means production cost + tooling = production revenue for a given accounting block.
You're saying the revenue side of that equation doesn't matter? That only average production cost matters? Doesn't seem right.
Maybe I've missed something fundamental here, if so please explain further.

B2707SST wrote:

I've been wanting to write a post on what program accounting and deferred production cost are for quite a while, as there seems to be a lot of confusion on these issues and they routinely hijack unrelated threads. Since this topic is actually about Boeing earnings, it seems very appropriate to do so here. (Sorry for the length; maybe this should be a sticky on the main page!)

When Boeing or Airbus launch a new airplane program, they incur two major startup costs. The first is research and development, which reflects the cost of designing the aircraft and its supporting technologies. Both Boeing and Airbus expense R&D as incurred. The second is production cost, which is where program accounting comes in. In any new program, the early aircraft are MUCH more costly to produce than later aircraft: the company is learning how to build them, kinks in the process are being ironed out, the initial production rate is low and unit costs are high, etc. The A380 and 787 were particularly disastrous examples as near-total breakdowns of their production systems resulted in billions and billions of extra cost over and above the initial R&D expense.

Given that production costs change dramatically while sales prices are relatively stable over the life of the program, Boeing uses program accounting to smooth the cost side (Airbus expenses actual production costs as incurred). Program accounting has three steps:

1. Estimate the number of aircraft they are reasonably confident will be sold (the "accounting block").
2. Estimate the total production cost over that block.
3. Calculate the expected average unit cost over the block.

This average unit cost is expensed against sales revenue as each aircraft is delivered. When actual costs are higher than the average unit cost, the difference is added to an account called "deferred production cost", which is then depleted as production costs decline and actual costs are lower than the average unit cost. The net effect of all this is that reported earnings are higher in the early years and lower in later years when costs fall. Boeing argues this gives a clearer picture of the program's overall financial situation, since a cornerstone of accounting is the "matching principal" whereby long-term costs are matched against long-term revenue. This is the subject of vigorous debate, but it's their justification.

I want to expand a little on the accounting block, since it's been the subject of much controversy. First, if Boeing can no longer be reasonably confident that the entire block will actually be sold, the program is in a "forward loss" position. Since some portion of deferred production costs may not be recovered after all, this usually requires a charge against current earnings (this occurred on the 747-8 due to slow sales). On the other hand, the accounting block can be increased if justified by additional potential sales. Boeing raised the 787 block from 1,100 units to 1,300 in late 2013 and to 1,400 last fall (they currently have 1,318 orders). Note that the accounting block size must be driven by likely future sales; they cannot just arbitrarily increase the block because production isn't going well and they need to spread costs over more units, as some have alleged. That would constitute accounting fraud, and the SEC has indicated they are watching Boeing's block sizes to guard against manipulation of earnings.

A few final notes on program accounting:

1. It has almost no effect on CASH FLOW. In the early years when production costs are high, employees and suppliers still need to be paid, and those bills drop over time and increase operating cash flow later on. The only cash impact is via the company's tax expense, which is actually increased in the early years because reported earnings are higher than they would otherwise be. Other than this, it has no effect on cash available to fund other projects, distribute as dividends or share buy-backs, use for M&A, etc.
2. Although deferred production costs are a liability against future earnings, they are not a debt owed to someone. This cannot be overstated, because I think some people believe deferred costs represent suppliers or employees who are waiting to be paid, which is not the case. Deferred production costs also are not bonds and have no connection to Boeing's external debt position. If Boeing suddenly could never deliver another 787 and had to take the entire $24.69 billion deferred production cost as a charge against next quarter's earnings, it would not write anyone a check.
3. Boeing reports earnings in both program accounting and actual cost terms. The program accounting number is "real" in the sense it drives the headline numbers and their tax bill, but it's pretty hard to argue Boeing is trying to hide something when both approaches are disclosed in their financials. If we're obsessing over deferred costs on an amateur forum, you can be pretty confident that professional analysts and regulators are paying attention too.

I'd also point out that accounting in general is perhaps less cut-and-dried than some believe. Although there's been progress on standardization, companies still have a lot of flexibility to capitalize things they "should" otherwise expense, allocate certain activities "opportunistically" to the operating/investing/financing categories, accelerate or delay the recognition of revenue, etc. In any undergraduate finance class or the Chartered Financial Analyst curriculum, literally one of the first things you're taught is to pick through financial statements (especially the footnotes, which is where all the good stuff is) and adjust for these idiosyncrasies. I don't hold the sell-side analyst community in particularly high regard - I think they are trying to predict an inherently unpredictable future and put far too much weight on short-term performance - but program accounting is not nearly clever or weird enough to fool anyone with even a tiny grasp on financial statement analysis.

Without further ado, here is the 787 deferred production cost history through 1Q 2018.



If Boeing is to clear the $24.69 billion deferred production cost over the 730 undelivered aircraft in the 1,400-unit accounting block, they must net $33.8 million per aircraft on average, which can be compared with the $19.65 million average in 1Q 2018. Note that this "net" is the difference between actual production cost and the budgeted average cost for the block - it has nothing to do with revenue. I leave it for others to judge whether this is achievable.

Thank you so much! So very informative.

Matt6461 wrote:

Stitch wrote:

To be fair, almost every A380 discussion on this forum has a post about how expensive the program was and will never make any money, so it's just par for the course / sauce for the goose.

Don't make the mistake of endorsing false equivalence in the pursuit of fairness.
It's actually true that the A380 was a misconceived project that never made or will make money, while the 787 was and is a great concept, poorly executed, that is now making billions of dollars.
A.net shouldn't be cowed by partisanship; there's no reason to pretend that the 787 isn't far more successful than the failed A380.

Very all said.

Here’s the relevant question.

Does the380 and or the 787 bolster the future of their respective companies?

Matt6461 wrote:

Zeroing out deferred balance means production cost + tooling = production revenue for a given accounting block.
You're saying the revenue side of that equation doesn't matter? That only average production cost matters? Doesn't seem right.
Maybe I've missed something fundamental here, if so please explain further.

I'm not following your first line. Zeroing out deferred production cost means that the cost overage of early frames has been fully recouped by the cost under-age (if that's a word) of later frames. Unamortized tooling is slightly different, so I'll get to that in a moment. Here is a simplified example that might clarify (I don't mean to sound patronizing!):

Assume we're in 2011; Boeing expects to sell 1,100 787s and expects to spend $55 billion in total to produce them. This works out to $50 million per frame, the expected unit production cost over the accounting block. Now let's assume that the first 30 aircraft actually cost $300 million each to build, or $9 billion in total. Under program accounting, when they deliver each frame (let's say for $90 million), they recognize $50 million in cost of goods sold (not $300 million) and book $40 million of operating profits (not $210 million in operating losses). The $250 million cost overage per frame gets added to deferred production cost, which is now $7.5 billion.

Let's fast forward to 2018 and say Boeing produces another 30 787s, but thanks to the learning curve, rate increases, supplier renegotiation, etc., actual unit cost has fallen to $30 million. We will ignore the more recent extensions of the 787 accounting block and assume it's still at 1,100 with a $50 million average expected cost. If they deliver these new aircraft for $90 million each, they recognize the same $50 million in cost of goods sold (not $30 million) and book the same $40 million of operating profits (not $60 million). The $20 million in cost under-age per frame, or $600 million, is subtracted from deferred production cost.

I am not certain how program accounting works once the deferred production expense goes to zero. There seem to be two possibilities: either actual production costs are recognized as incurred, or they use the average expected cost over each incremental extension of the accounting block (e.g. the next 500 737s), which would create a small deferred cost early in the block extension. Since only the 747 and 787 are carrying deferred production cost, it either does not exist for other programs or is not sufficiently material to be broken out. Interestingly, there is no mention of 737MAX deferred production cost in their reports.

As far as I know, revenue has no bearing on the deferred cost. It is purely the difference between actual cost and expected average cost for each frame built. Here's Boeing's explanation:

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.

I haven't looked into unamortized tooling as closely, but it should be more straightforward since most of the tooling expense is incurred up-front and doesn't change all that much later on. If Boeing spent $11 billion on tooling and expected to produce 1,100 units, it would charge each airplane with $10 million of tooling expense. After 600 airplanes, $6 billion of tooling expense would have been recognized, and the unamortized tooling expense remaining would be $5 billion. It's probably not quite this simple but that's the general idea.

marcelh wrote:

VV wrote:

So why do people believe Boeing will have to pay (spend cash) for this already paid deferred cost.

It is hard to understand how so many people can ignore that fact. It is crazy!

They "pay" for it because it hurts their profit. Without the deferred costs, profit would be higher.

I still do not understand this comment.
First, because the operating margin has been consistently at around 10% since many quarters.
And second, doesn't lower recognized profit mean lower taxes (cash to spend) and thus better cash flow?

Interesting article dealing with both companies....

https://www.bloomberg.com/gadfly/articl ... ts-on-cash

SC430 wrote:

Interesting article dealing with both companies....

These Bloomberg Opinion Pieces are just that - opinion pieces written by independent authors and can be as factual or facetious as the author wishes.

Stitch wrote:

SC430 wrote:

Interesting article dealing with both companies....

These Bloomberg Opinion Pieces are just that - opinion pieces written by independent authors and can be as factual or facetious as the author wishes.

I guess the value people give to articles depends a lot on if it confirms what they want to hear. Matches their opinions. The writers know who their public is and want to be appreciated/ rewarded.

Late 2010 Boeing was in deep problems, A was taking over 737 users with NEO, the delayed 787 was draining money at a rate never seen before, inflight fire grounded the test fleet, still the Quaterly reports were boosting great performance & results. They always do, whatever happens. It's a win-win for the company and stock owners.

http://investors.boeing.com/investors/i ... fault.aspx

Stitch wrote:

SC430 wrote:

Interesting article dealing with both companies....

These Bloomberg Opinion Pieces are just that - opinion pieces written by independent authors and can be as factual or facetious as the author wishes.

This piece illustrates why I think market perception - that Airbus is worth only half of Boeing - is way, way off.
If we look at the two firms' commercial biz, we should see roughly equal value long term: 787 is worth a little more than A350; A320 is worth a little more than 737; 767/777 are worth a little more than A330/A380.
Although short-term results favor Boeing, free cash flow in 2020 could be roughly even.
IMO Boeing is overpriced right now; Airbus is a strong buy.

B2707SST wrote:

As far as I know, revenue has no bearing on the deferred cost. It is purely the difference between actual cost and expected average cost for each frame built. Here's Boeing's explanation:

You're being too credulous about how the accounting works; you're crediting that self-serving explanation as if it's science instead of a largely arbitrary convention that companies can manipulate at will.
The stated rationale (average production cost) and the actual practice are different: Boeing defers exactly the amount of unit production cost in excess of unit revenue. That's all you need to know to realize that revenue matters here.

PlaneFlyer wrote:

Here’s the relevant question.

Does the380 and or the 787 bolster the future of their respective companies?

Yes for 787, for obvious reasons.

Re A380: question needs clarification. One could argue that the A380 was necessary to creating the modern Airbus and that only a project as grand as A380 could have motivated the structural changes by public/nationalist stakeholders that enabled the project and created today's more efficient Airbus. Is that worth $40bn? Maybe.

Moving forward, however, the A380 is an albatross on Airbus. Were it to disappear, Airbus could and IMO should build a clean sheet double-deck VLA, slightly smaller than A380, which would murder the 777X and capture a 50-year monopoly in the VLA space. If I'm right about that, then the A380 - more precisely Airbus' ego-driven unwillingness to let it die - is costing and will cost $billions in future profit.

bigjku wrote:

To put this in perspective Bombardier Aerospace has 25,550 employees and delivered 5 C-Series aircraft.

is the CSeries the only product Bombardier Aerospace works on?
How many of those BombA people actually work on the CSeries?

Matt6461 wrote:

The stated rationale (average production cost) and the actual practice are different: Boeing defers exactly the amount of unit production cost in excess of unit revenue. That's all you need to know to realize that revenue matters here.

[/quote]

Hopefully there won't be much of that going on anymore, the emphasis now is on reducing that number.
Lets keep it simple, because I for one have trouble following the more complicated stuff.
This is what I believe happens:

1.They have a production number for each program. Currently this is 1400 (I think) for the 787.
2. They divide the defeered costs by the production number and come up with a figure say $30 million
3. When the 787 is delivered and the money paid, Boeing will shift the $30 million from the deferred production account to cost of sales. Provided as Matt says that the sale price is high enough to cover the cost of production, plus, the unit deferred cost figure ($30 million) If the sale price is less than production cost + $30 million, then that lower amount will come off deferred costs, but
4. Obviously the higher the sell price the more profit, but it won't decrease the unit deferred cost at all. That is reduced by increasing the production number.

I totally agree that accounting is an inexact science with huge scope to vary the way matters are reported.

Ruscoe

WIederling wrote:

bigjku wrote:

To put this in perspective Bombardier Aerospace has 25,550 employees and delivered 5 C-Series aircraft.

is the CSeries the only product Bombardier Aerospace works on?
How many of those BombA people actually work on the CSeries?

No, I didn’t feel like looking up the rest as their financial reports weren’t done that day and they have lots of programs that trickle out planes. Last year it was like 12 business jets a month. CRJ was 26 total in 2017 and the backlog going in
To 2018 was only 42. They did 42 Q400 last year and seem to have sold a few of those recently. So maybe they built a total of 50 or so smaller airplanes plus the 5 C-Series. It’s pretty clear why they struggle to make much money.

Ruscoe wrote:

Matt6461 wrote:

The stated rationale (average production cost) and the actual practice are different: Boeing defers exactly the amount of unit production cost in excess of unit revenue. That's all you need to know to realize that revenue matters here.

Hopefully there won't be much of that going on anymore, the emphasis now is on reducing that number.
Lets keep it simple, because I for one have trouble following the more complicated stuff.
This is what I believe happens:

1.They have a production number for each program. Currently this is 1400 (I think) for the 787.
2. They divide the defeered costs by the production number and come up with a figure say $30 million
3. When the 787 is delivered and the money paid, Boeing will shift the $30 million from the deferred production account to cost of sales. Provided as Matt says that the sale price is high enough to cover the cost of production, plus, the unit deferred cost figure ($30 million) If the sale price is less than production cost + $30 million, then that lower amount will come off deferred costs, but
4. Obviously the higher the sell price the more profit, but it won't decrease the unit deferred cost at all. That is reduced by increasing the production number.

I totally agree that accounting is an inexact science with huge scope to vary the way matters are reported. Ruscoe[/quote]



My understanding is - there is an estimated profit built into the accounting block, so selling price does matter. If total sales dollars for the block excedes the estimate, it becomes added profit, if it is less than estimated , either the block is increased or the deficit is booked as a loss.

bob75013 wrote:

https://www.investors.com/news/boeing-q1-earnings-revenue-outlook-trump-tariff-tanker-midrange-plane/?src=A00220&yptr=yahoo

Highlights:

It now sees cash flow of $15 billion-$15.5 billion, up from an earlier estimate of around $15 billion.

Boeing booked 221 net commercial aircraft orders, and total backlog grew to $486 billion from $475 billion at the beginning of the quarter.

Boeing is pumping out airplanes at a record pace and aims to keep climbing. Its commercial air division saw first-quarter revenue grow to $13.7 billion, a 5 percent increase from last year. The business delivered 184 airplanes.

Muilenburg told CNBC in February that the company expects to be "building more than 900 airplanes a year" by 2020 — a rate of about one aircraft
every 10 hours.

Clear stock boosting. People don't really read. It about signaling & perception management.

- From "Around $15 Billion" free cash flow to $15-15.5. ** Wow !
- Boeing booked 221 net ....$486 billion from $475 billion at the beginning of the quarter. ** Business grows 4-5% / year
- Boeing is pumping out airplanes at a record pace. ** Yes but they are loosing market share.
- a 5 percent increase from last year. The business delivered 184 airplanes. ** Yes, that's the market since 20 years
- Muilenburg told the company expects .. one aircraft every 10 hours. ** Yes!? Wow!!. Is this a tv show?

Authors may own the stocks they discuss. The information and content are subject to change without notice.

It is what it is..

Keesje wrote:

Clear stock boosting.

A company seeking to maximize its share price? Quelle horreur!

Keesje wrote:

People don't really read

Says the guy who, after two decades opining on airplanes, still uses automotive drag approximations for airliners.

bob75013 wrote:

https://www.investors.com/news/boeing-q1-earnings-revenue-outlook-trump-tariff-tanker-midrange-plane/?src=A00220&yptr=yahoo

Highlights:

EPS climbed 68% to $3.64 with revenue up 6% to $23.38 billion. Operating cash flow jumped 49.5% to $3.14 billion.

Boeing raised its full-year EPS core earnings guidance to $14.30-$14.50 from a prior outlook of $13.80-$14. Analysts see 2018 EPS of $14.07. It now sees cash flow of $15 billion-$15.5 billion, up from an earlier estimate of around $15 billion.

Boeing booked 221 net commercial aircraft orders, and total backlog grew to $486 billion from $475 billion at the beginning of the quarter.

more from https://www.cnbc.com/2018/04/25/boeing- ... yptr=yahoo

Boeing is pumping out airplanes at a record pace and aims to keep climbing. Its commercial air division saw first-quarter revenue grow to $13.7 billion, a 5 percent increase from last year. The business delivered 184 airplanes.

Muilenburg told CNBC in February that the company expects to be "building more than 900 airplanes a year" by 2020 — a rate of about one aircraft every 10 hours.

900+ a year, that's crazy!!!