Revelation wrote:

IMHO it's not a big deal, and it stays that way as long as the 787 doesn't go through years of zero sales (like we've seen with 747-8i and A380).

Well Boeing hasn't accounted for 1.5x the compete development cost of the A380 program, on a frame half as large . . . not sure if that's not a big deal. A380 development cost, in fact the complete program is seen by many as a big freaking deal, and not in a good way.

FWIW: not trying to claim that the 787 program is in great trouble (most of that now is history, fortunately). However it seems that even bringing the subject of deferred 787 cost, is like waiving a red flag here.

Most would agree that the fiundamentals of deferred cost is not a bad thing. The question is at what point does it become a discussable or even bad thing? 2x the value of what historic programs (like 777, 757/767) saw, 5x, 10x, 100x, 1000x (taking into account 787 selling rate is 2 - 3x of what was historically seen on wide bodies). I think it's perfectly valid to bring up that discussion, without having to face many red flags. It would be equally nice if we could skip the Boeing going bust replies.

mjoelnir wrote:

The accounting block, it is actually called that, is the number of frames over that the cost should even out, end of story.

That is not correct. Your own quote gives the correct definition: estimated number of units of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts. The accounting quantity is not related to the profitability of the program except if a program would be in a loss position with the current accounting quantity then they have to declare a reach forward loss.

WIederling wrote:

Boeing’s Statements on Program Accounting:
“Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to costs for the defined program accounting quantity."

The accounting block must "close". Boeing is unable to demonstrate the ability to reliably estimate the relationship of sales to costs for this project.
They must extend the block all the time to stay out of a forward loss situation ( as the 748 shows ).
The stated purpose ( distributing profits ) has become irrelevant.

This not correct either. 787 program accounting quantity has been increased as there are future anticipated orders (not because of the profitability of the program) whereas 747 program accounting quantity has not been increased as there are no future anticipated orders (in fact the 747 program accounting quantiyy might have to be decreased).

Revelation wrote:

enzo011 wrote:

Revelation wrote:

Repaid? No, the money is already paid. You should be saying "accounted for" instead of "repaid", because all we're talking about is about the accounting.

And as above we see other programs grow the accounting quantity over time.

It's not as big a deal as Leeham or some here make it out to be.

So how should we see it? As a small little irritation that doesn't need any mentions or threads?

IMHO it's not a big deal, and it stays that way as long as the 787 doesn't go through years of zero sales (like we've seen with 747-8i and A380). Since 787 is still selling frames, it can reasonably predict revenues, so Boeing can grow the accounting quantity and spread the accumulated costs over more frames. In other words, it's able to kick the can down the road. Hopefully future revenues rise (since it's selling -9 and -10 frames with higher profit margins) and costs decrease (because it's building less costly -8 models) and the deferred cost issue diminishes. At least that's what many of us hope.

What we don't need is posts that start with "Let us wait for the scream on Wall Street when Boeing has to declare a forward loss or live with reduced profits in the future.". Competent investors understand how Boeing does their accounting, and this supposed day of screaming is not at hand.

I agree with you on a cash basis - the 787 program has been paid for, and that previously spent cash is not an issue for Boeing. This is mostly an Accounting issue, but I would argue it presents a future cash issue that should/does have investors concerned, and I think it's a bigger issue than your post seems to indicate.

Extending the Accounting block or taking a one-time writeoff/charge is not the end of the world - it's purely a paper exercise at this point. I would argue, though, that it is/would be the first signal from Boeing that future cash flows from the 787 program will be lower than they are currently communicating/projecting at the current accounting block, and that is something that investors do care about. Per the Leeham article, each of the remaining 787's in the current block will need to generate $41M in profit per aircraft to zero the deferred balance at exactly 1,300 units. At this junction, since Boeing hasn't extended the block or written off the program, their corporate forecasts must have the $41M per aircraft in their future cash flow guidance. By extending the block they will be acknowledging that the 787's are not making this type of profit per aircraft, and unless investors have already priced this into the stock (which they may have), you will see the stock take a hit.

This writeoff/block discussion also comes at a somewhat concerning time for Boeing, at least on the Commercial aircraft side with such a soft widebody market. One way they could maintain future cash flow projections and simultaneously extend the block would be by increasing 787 production rates - sell the aircraft cheaper, but produce more of them per year. With the widebody market as soft as it is today, and with no end in sight until probably the early 2020's, that is not an option - so here we are, where at least the 787 program will probably generate less per aircraft than many are anticipating, the 777x program seems to be slowing/softening (not an aircraft problem, just a widebody market problem), and new potential development on the NMA will eat cash flows.

Fortunately, the 737 line and their many other business units should more than help keep the enterprise as a whole fine - I'm not terribly worried about Boeing going anywhere in the near future.

Revelation wrote:

IMHO it's not a big deal, and it stays that way as long as the 787 doesn't go through years of zero sales (like we've seen with 747-8i and A380). Since 787 is still selling frames, it can reasonably predict revenues, so Boeing can grow the accounting quantity and spread the accumulated costs over more frames. In other words, it's able to kick the can down the road. Hopefully future revenues rise (since it's selling -9 and -10 frames with higher profit margins) and costs decrease (because it's building less costly -8 models) and the deferred cost issue diminishes. At least that's what many of us hope.

What we don't need is posts that start with "Let us wait for the scream on Wall Street when Boeing has to declare a forward loss or live with reduced profits in the future.". Competent investors understand how Boeing does their accounting, and this supposed day of screaming is not at hand.

Is the fact that it is still taking a while to really eat into the deferred cost a problem? Will it ever become a problem? If you look at scbriml post on the first page, post number 18, the deferred cost went down by only $90 million for Q1 this year. In that time only 6 788 were delivered in the first quarter this year (Link here), so for the 32 deliveries only 6 were for the very expensive to produce 788.

Should we read this as the 788 is so expensive to produce that only 6 out of 32 deliveries are really dragging down the profitability per frame delivered? Or that the 789 is still on a learning curve to cut production costs as well?

I would like to know why some posters have such faith in Wall Street. I think most people on Wall Street wouldn't know what is happening at Boeing, they only care about certain numbers that will effect the share price. This is also the view of management whose salaries and bonuses are tied to the share price. Surely that should ring some alarm bells?

heavymetal wrote:

By extending the block they will be acknowledging that the 787's are not making this type of profit per aircraft, and unless investors have already priced this into the stock (which they may have), you will see the stock take a hit.

Based on my read of Program Accounting, this is also wrong, Boeing can only extend the block if they anticipate future sales.
The 1300 number is is only fixed in stone if the market forecast is that no additional 787 a/c will be sold, all who believe that can go along with your thought process. However, based on all forecast being seen now, additional a/c will be sold beyond 1300 so the block will have to rise, in which case the $41mill will have to change, perhaps those on Wall Street are looking at the current block, anticipating future sales and have already included such in their stock prohections?

olle wrote:

The second point is that after that point the frame shall be produced in such quantities that upgrades is possible. This seems to be the problem special compared to the A350 that can be assumed to have paid back its investments much earlier. The risk is that Airbus can invest more into the 350 then Boeing can do into its 787.

Boeing invested heavily in the 787-9 as well as launching a third model (the 787-10). It doesn't appear they're scrounging the cushions for cash to upgrade.

mjoelnir wrote:

The accounting block is the number were early loses and later earnings should even out, if they do not even out, you have to declare a loss. You can not push it endless down the road to declare the loss.

No you can't, which is why Boeing was eventually forced to declare a Forward Loss on the 747-8 program in 2016 because the Accounting Quantity was no longer sufficient to cover the costs of the program due to an anticipation that there would be few, if any, additional orders. Even you would agree that the likelihood of there being few, if any, additional orders for the 787 program is extremely low so therefore Boeing is not yet in a position where they are forced to declare a Forward Loss on the program.

mjoelnir wrote:

Boeing has been fined before, for the way they used program accounting on the 777.

Have a link to that, mate?

I know of a private securities-fraud lawsuit against the company that was settled in 2002 regarding the 1997 Production Meltdown that resulted in a $2.6 billion write-off, but I am not aware of any SEC fines over the 777's use of Program Accounting.

heavymetal wrote:

By extending the block they will be acknowledging that the 787's are not making this type of profit per aircraft, and unless investors have already priced this into the stock (which they may have), you will see the stock take a hit.

By extending the Accounting Quantity, Boeing will be acknowledging that the 787 is a really popular airplane with airlines because it will have sold/delivered more than 1300 frames.

enzo011 wrote:

Is the fact that it is still taking a while to really eat into the deferred cost a problem?

Yes it is and Leeham.net was not being malicious in noting that. However, the 787 should be a viable commercial aircraft program for decades to come and over those decades, it will very likely secure many hundreds of more orders. And those hundreds of new future orders will reduce the average amount each frame has to contribute to the total deferred production cost below the current $46 million.

The big question is will that reduction per frame be enough, but anyone saying today that it will not be is just being malicious since they cannot possibly know the next 15-20 years.

Stitch wrote:

Yes it is and Leeham.net was not being malicious in noting that. However, the 787 should be a viable commercial aircraft program for decades to come and over those decades, it will very likely secure many hundreds of more orders. And those hundreds of new future orders will reduce the average amount each frame has to contribute to the total deferred production cost below the current $46 million.

The big question is will that reduction per frame be enough, but anyone saying today that it will not be is just being malicious since they cannot possibly know the next 15-20 years.

We can see the current frames delivered will only add to the average needed to wipe out the deferred cost of the accounting block. If the accounting block stays at 1300 then the average will increase as the current frames just aren't close to the average needed. Adding to the accounting block will decrease the average amount per frame needed to cut the deferred cost, but the question then is how long before we reach the situation again where $40 million per frame is needed for the new block?

As you say the big question is will the average reduction per frame be enough to clear the deferred cost, I would say it is just as malicious to claim it will be cleared within the next 15-20 years as well without taking a few charges as they cannot possibly know either. All we know is that it is taking a lot longer than anyone envisioned it would to firstly be in a position to start selling a frame for more than it cost to produce, and secondly to start eating into the deferred cost.

I also wonder how much the 788 is adding to the deferred cost. Boeing still has 75 or so deliveries of the 788 to go, but if the cost was very high surely it would have been better for them to rather change the model for the customers to the 789 that sells for a profit. You may not break even per delivery, but you could be closer to not losing money and the customer gets a bigger frame for no extra money and the operating cost would probably favour the 789 for the extra seats. Right?

enzo011 wrote:

Adding to the accounting block will decrease the average amount per frame needed to cut the deferred cost, but the question then is how long before we reach the situation again where $40 million per frame is needed for the new block?

Now that 787 deliveries are generating positive revenue, we should not see that again unless there is a significant production disruption that results in a significant increase in inventories.

enzo011 wrote:

As you say the big question is will the average reduction per frame be enough to clear the deferred cost, I would say it is just as malicious to claim it will be cleared within the next 15-20 years as well without taking a few charges as they cannot possibly know either.

Agreed.

enzo011 wrote:

All we know is that it is taking a lot longer than anyone envisioned it would to firstly be in a position to start selling a frame for more than it cost to produce, and secondly to start eating into the deferred cost.

Yes.

enzo011 wrote:

I also wonder how much the 788 is adding to the deferred cost. Boeing still has 75 or so deliveries of the 788 to go, but if the cost was very high surely it would have been better for them to rather change the model for the customers to the 789 that sells for a profit.

We should be seeing spikes from each "Terrible Teen" as it is delivered due to the very high production costs, but the last one is scheduled for delivery in August. And yes, Boeing likely is far more liberal with conversions from the -8 to the -9 than the reverse. I would not be surprised if customers wishing to swap from the -9 to the -8 are paying closer to list (as a percentage) and I also expect Boeing is charging closer to list for new 787-8 orders to cover the higher production costs of that model.

I'm going to kick myself for commenting in this thread. Boeing has used program accounting for some time. There is nothing sneaky or underhanded about it. The accounting block grows as the number of frames reasonably expected to be sold grows. That is how you account for profit and loss on each particular program. You could just throw all the costs and all the revenues in one pot and call it cash accounting, but then it takes digging to determine program results. Boeing isn't cheating or telling lies or anything else nefarious.

Over time, if inflation continues at a high enough rate, it will let Boeing show a net profit on the 787. Also as the number of frames in service grow, customer support will turn from warranty costs to positive cash flow. All of these things will help. Will the 787 ultimately prove profitable, nobody knows. Now let's talk about how many angels can dance on the head of a pin or something else where we are more likely to reach a consensus.

Stitch wrote:

Now that 787 deliveries are generating positive revenue, we should not see that again unless there is a significant production disruption that results in a significant increase in inventories.

I am looking at the amount of deliveries they have had the past few years against the orders. The backlog is about 710, but it has been coming down. Now an EK order would be a shot in the arm, but unless they can keep up the amount of orders with the deliveries, which they haven't been able to do in the past 2 years then you would surely see a reduction in the production rate at some point. Another factor is if there is a reduction in the production rate, what impact will that have on the profit per frame that can be achieved?

Surely the global slow down in widebody sales will hit the 787 as well, and just as Airbus has had cancellations with the A350 the 787 should expect some as well if it continues. But that is an industry wide problem that both OEMs have to deal with, its just a matter of timing I suppose. Will Boeing be able to book enough orders to keep up the production rate to reduce the deferred cost at a rate that will not require them to take a charge some time in the future.

The problem with these endless arguments about program accounting is that we ultimately don't know what costs are associated with the deferred $30bn being mentioned.

With Boeing investing heavily in buildings, plant and equipment it is not unreasonable to suggest a proportion of the $30bn would be made up of capital costs that are depreciated over a period of time as opposed to an accounting block.

As such Boeing's costs for producing the 787 could well be front loaded making earlier aircraft substantially more expensive to produce than aircraft being produced today or into the future.

I think we also fail to remember Boeing is still investing in the 787 (787-10). The 787-10 does not perform flight testing for zero cost, so as a consequence positive cash flows from sales are being impacted by the negative cash flows associated with bringing this aircraft to market.

At the end of the day the proof will be in the pudding. I’d rather wait for Boeings results.


For argument sakes

Could Boeing single out a write off 'just' for the terrible Teens in order to take a hit and improve the situation. This could somehow 'save face' a bit in the effort to come down.
Also, Boeing somehow Needs to start coming down quicker, as I see some 777x deferred cost coming in 3 years. Then the MOM is eventually on the horizon.

Ok I am in the camp who would prefer to take a big hit (and pain) once and then be better for the years to come. But I am neither at Wall Street nor at Boeing Board.

Flyglobal

travelhound wrote:

The problem with these endless arguments about program accounting is that we ultimately don't know what costs are associated with the deferred $30bn being mentioned.

I imagine the vast bulk of it is just the very high production costs of the first ~400 frames with all the Change Incorporation work done on them. Latest estimates averaged out over 363 frames, you're looking at around $75 million a frame (with the earliest frames peaking at around $600 million a piece).

Flyglobal wrote:

Could Boeing single out a write off 'just' for the terrible Teens in order to take a hit and improve the situation.

I'm not sure if Program Accounting allows that. The first five frames were written down when they were re-classified as Test Units, which required their costs immediately be written-off as they were now an R&D expense. The "Teens" have certainly been significant contributors to the Deferred Costs (I could see them easily being half the current total), but as they have been delivered, I am not sure if there is a way to write that off (perhaps they can do so as a Special Charge).

Flyglobal wrote:

Could Boeing single out a write off 'just' for the terrible Teens in order to take a hit and improve the situation. This could somehow 'save face' a bit in the effort to come down.
Also, Boeing somehow Needs to start coming down quicker, as I see some 777x deferred cost coming in 3 years. Then the MOM is eventually on the horizon.

They kinda did that last year when they moved some 787 test airframes from the 787 program into general R&D.

It's just moving deck chairs around on the balance sheet.

Astuteman wrote:

Share price is an emotional thing. It will be sensitive to HEADLINE profit figures

Astuteman wrote:

Programme accounting has a key part to play in keeping shareholder confidence up through a reasonable amount of predictability in the headline figures yes, even if the analysts are capable of digging underneath)

My position is that (1) program accounting has basically no impact on share values because even the moderately sophisticated see through it (2) that share prices have at least some probative value in assessing a firm's profitability.

Re (1) you may be taking a tack from the opposite side of what most folks say here. Your average a.netter will claim to dispel some profitability myth by pointing to accounting practices. As if your average a.netter has some accounting insight that Morgan Stanley lacks. You, OTOH, seem to argue that program accounting has some effect on investor information by specifically breaking out 787 losses/profits. I would certainly agree with that.

Re (2) the breakdown of military vs. commercial is important to asking which of the companies makes planes more efficiently. But I'd guess you'd be willing to admit that the breakdown you present - while perfectly competent on the information we have at hand - is based on a far less complete picture than institutional investors would receive either directly from OEM investor relations or via the "whisper wire" and its informational content. Many economists convincingly argue that the "whisper wire's" informational value is the most compelling reason financial industries tend to be concentrated in a few places - more opportunities to make contacts and pick up information on the cocktail circuit.

Wall Street/The City have failed pretty spectacularly of late but those failures related to systemic issues across the entire field. As to the core business of the relative value of firms, finance pros are pretty darn good. If they weren't, we'd be able to arbitrage them by buying undervalued Airbus shares or vice versa.

Astuteman wrote:

I think it would also be reasonable to make the argument that in growing from c. 20% market share to 50% market share, keen pricing must be considered to be part of the market share growth strategy embarked upon (which is why I won't get too defensive about assertions that history shows Boeing CA to be more profitable)

It's a reasonable long term business strategy as well as a reasonable industrial policy strategy in which to invest public support. We'd just need to convincing evidence that Airbus is on the cusp of leveraging its market position for greater margins now. I still don't see it.

Re the headline commercial margin figures you cite, those would still be impacted by Boeing's (1) still-low margins on 787 production, which is a far higher share of turnover than A350 production for Airbus (2) low current margins on 777 sales (3) heavier R&D in 2016 for 737 MAX and 777X than Airbus expended for A330NEO.

So I'd still defer to the finance d-bags, though I'd be happy to see them proved wrong.

zeke wrote:

They kinda did that last year when they moved some 787 test airframes from the 787 program into general R&D.

It's just moving deck chairs around on the balance sheet.

Basically, although there are tax benefits associated with R&D expenditures.

Straight from the earnings call today:

Boeing 787 deferred production costs fall about 2% in Q2 from Q1 to $26.5bn

https://twitter.com/R_Wall/status/890187384633032706

Just as Leeham predicted, deferred costs are not going down fast enough.

KarelXWB wrote:

Straight from the earnings call today:

Boeing 787 deferred production costs fall about 2% in Q2 from Q1 to $26.5bn

https://twitter.com/R_Wall/status/890187384633032706

Just as Leeham predicted, deferred costs are not going down fast enough.

And as our thread shows, "fast enough" is a subjective and debatable description of the situation.

It's a notable situation, but it's also not a dire threat like some make it out to be.

PW100 wrote:

FWIW: not trying to claim that the 787 program is in great trouble (most of that now is history, fortunately). However it seems that even bringing the subject of deferred 787 cost, is like waiving a red flag here.

Most would agree that the fiundamentals of deferred cost is not a bad thing. The question is at what point does it become a discussable or even bad thing? 2x the value of what historic programs (like 777, 757/767) saw, 5x, 10x, 100x, 1000x (taking into account 787 selling rate is 2 - 3x of what was historically seen on wide bodies). I think it's perfectly valid to bring up that discussion, without having to face many red flags. It would be equally nice if we could skip the Boeing going bust replies.

Yes it's strange that every time someone brings up the 787 deferred cost discussion, people come in with a link to the Boeing stock market and show how great the company is doing. I'm not interested in stock markets and it certainly doesn't answer the current status of the deferred costs. Discussing accounting methods and deferred costs is not a negative thing to do. On the contrary. Why some people experience it as a negative thing and don't like when other people talk about it goes beyond me.

Revelation wrote:

KarelXWB wrote:

Straight from the earnings call today:

Boeing 787 deferred production costs fall about 2% in Q2 from Q1 to $26.5bn

https://twitter.com/R_Wall/status/890187384633032706

Just as Leeham predicted, deferred costs are not going down fast enough.

And as our thread shows, "fast enough" is a subjective and debatable description of the situation.

It's a notable situation, but it's also not a dire threat like some make it out to be.

Yes the term fast enough is subjective. If it meant fast enough to be depleted within the current accounting block, then I could see a point. At 2% a quarter it will take 12 years.

However there is more to it. The 787-10 unit production costs have not yet stabilized so I believe there probably is a learning curve there. Once those costs stabilize through the learning curve and higher margin 787-10s start delivering, we might see a bigger drop in deferred production cost.

I read this today about the 787s being profitable and bringing in positive cash flow

The profitability of its 787 Dreamliner contributed to strong cash flow as the world's biggest plane maker focuses on streamlining production of new 737 MAX models and finishing development of other forthcoming planes. The company also benefited from cost-cutting.

https://finance.yahoo.com/news/boeing-r ... 11798.html

Newbiepilot wrote:

I read this today about the 787s being profitable and bringing in positive cash flow

That's really not the point of this discussion. As I just mentioned above, it's so weird that every time again someone tries to distract the discussion with how great Boeing is doing. We are trying to get a picture about the 787 deferred costs, not how good or bad the company is doing.

Boeing data shows it has 1275 orders and 565 deliveries for the 787. That means that to get the deferred cost to zero By the end of current accounting block (1300) they need a profit of about 36 million on average for a plane delivered. Not gonna happen especially considering there are 85 787-8's left to deliver that are apparently PITA's to produce.

KarelXWB wrote:

Newbiepilot wrote:

I read this today about the 787s being profitable and bringing in positive cash flow

That's really not the point of this discussion. As I just mentioned above, it's so weird that every time again someone tries to distract the discussion with how great Boeing is doing. We are trying to get a picture about the 787 deferred costs, not how good or bad the company is doing.

If a 787 is bringing in positive cash flow, it can be inferred that deferred production costs are declining since the airplanes sold for more than it cost to build them. Those two things go together. I am not trying to distract. I am sorry if it bothers you saying that there is more than simply doom and gloom going on that we can discuss.

Newbiepilot wrote:

I am sorry if it bothers you saying that there is more than simply doom and gloom going on that we can discuss.

What bothers me is that people are playing down deferred cost discussions by telling how great the stock market is. Or saying there's nothing to see here because the 787 is cash positive.

KarelXWB wrote:

Newbiepilot wrote:

I am sorry if it bothers you saying that there is more than simply doom and gloom going on that we can discuss.

What bothers me is that people are playing down deferred cost discussions by telling how great the stock market is. Or saying there's nothing to see here because the 787 is cash positive.

Leeham news just said the following, which as an aviation fan should be exciting, not bothersome since it is good news:

787 deferred production costs declined falling to 26.46bn from 26.99bn in Q1. DPC decreased by almost 16 million per plane produced in the quarter well ahead of our estimate of $12 million per plane.

That Leehamnews article requires a subscription to view, I hope they update it in the coming days and give a renewed estimate of their view. (without subscription)

https://leehamnews.com/2017/07/20/boein ... ap-widens/

Although, it's hard to tell where they got their $30bn deferred production cost number from, when most mainstream sources were reporting $27bn remaining in deferred costs in the 1Q-17 period.

As far as I can tell, deferred production costs dropped from $27.3bn in 4Q-16 to $27bn in 1Q-17 (about 1%) and dropped to $26.5bn in 2Q-17 (about 2%)...

I don't know if that is going to change leehamnews opinion regarding the deferred production costs coming down "fast enough"? But it looks pretty damn good to me!

mffoda wrote:

I don't know if that is going to change leehamnews opinion regarding the deferred production costs coming down "fast enough"? But it looks pretty damn good to me!

The point is that it is not good enough to clear the deferred cost pile within the accounting block of 1,300 aircraft. Many people argue Boeing will have to increase the accounting block, or book some major write offs.

KarelXWB wrote:

mffoda wrote:

I don't know if that is going to change leehamnews opinion regarding the deferred production costs coming down "fast enough"? But it looks pretty damn good to me!

The point is that it is not good enough to clear the deferred cost pile within the accounting block of 1,300 aircraft. Many people argue Boeing will have to increase the accounting block, or book some major write offs.

While my personal opinion is that an enlarged accounting block is required, the progress Boeing is showing is very impressive, which you seem to ignore. In 4Q16 deferred production costs dropped about 6 million per plane. In 2Q17 that increased to 16 million per plane. We haven't even seen the impact of the 787-10 yet. The 787 deferred production costs not shrinking fast enough is an opinion, not fact and even Leeham News is reporting that it is more than expected. I guess that is one of the reasons that the stock price is up 7% today even though I know you don't want to discuss that.

Newbiepilot wrote:

While my personal opinion is that an enlarged accounting block is required, the progress Boeing is showing is very impressive, which you seem to ignore. In 4Q16 deferred production costs dropped about 6 million per plane. In 2Q17 that increased to 16 million per plane.

I'm not ignoring. I would call it even more impressive if they clear the entire pile within the accounting block of 1,300 aircraft. That's not happening right now (and to be clear, that's not a negative thing; increasing the accounting block is fine).

I think you're reading way too much negativity into something that's meant to be optimistic.

A question to those that know more. Are the postings to deferred production costs made at the point at which work in progress costs exceed the expected long term production cost of the frame?

So for instance I would not expect the 787-10's to have added much to the pot as the production process is pretty well known. Also as a higher price frame it will have more leeway before hitting deferred production costs.

Normal frames in serial production should not be any part of the deferred cost bucket.

P.S It does look like some good progress being made by Boeing.

Boeing has also updated the numbers on their website:
http://www.boeing.com/investors/account ... ions.page/

The 30bn figure that is sometimes used includes the Unamortized Tooling and Other Non-Recurring Cost.


The drop is already increasing and should only get bigger over the next quarters. Production time per frame is steadily decreasing (also very good for cash flow), just 1 terrible teen to be delivered and the 787-10 going into regular production stream. I wouldn't be surprised if a quicker decrease would be used by Boeing as a reason to increase the accounting block. More so then the other way around where the deferred costs aren't going down as they would like to.

We will see what happens over the next 700+ deliveries.

mffoda wrote:

Although, it's hard to tell where they got their $30bn deferred production cost number from

It probably includes the 'Unamortized tooling and one-off costs' which has hovered around $3.5-4billion for the last three to four years. While separate from the deferred production costs, it still has to be accounted for and is often lumped together to provide a single figure. In fact that's how Boeing's website used to show it, but now doesn't total the two figures.

http://www.boeing.com/investors/account ... ions.page/

Newbiepilot wrote:

KarelXWB wrote:

mffoda wrote:

I don't know if that is going to change leehamnews opinion regarding the deferred production costs coming down "fast enough"? But it looks pretty damn good to me!

The point is that it is not good enough to clear the deferred cost pile within the accounting block of 1,300 aircraft. Many people argue Boeing will have to increase the accounting block, or book some major write offs.

While my personal opinion is that an enlarged accounting block is required, the progress Boeing is showing is very impressive, which you seem to ignore. In 4Q16 deferred production costs dropped about 6 million per plane. In 2Q17 that increased to 16 million per plane. We haven't even seen the impact of the 787-10 yet. The 787 deferred production costs not shrinking fast enough is an opinion, not fact and even Leeham News is reporting that it is more than expected. I guess that is one of the reasons that the stock price is up 7% today even though I know you don't want to discuss that.

I've been wanting to comment on this for a while. This has nothing to do with Boeing or Airbus, it is only finance and accounting. The profitibility of 787 program has almost nothing to do with the stock price Boeing has today.

Stock prices are merely based on how successful a company is perceived by investors, and how likely this company would pay dividends. It is not directly linked to how profitable a company is. Boeing as a company is much larger than the 787 program. Even if all wall street analysts point at how Boeing mismanged its program, this won't stop people from buying shares. Price could still increase as hill if Boeing maintains a positive future outlook, remember Boeing isnt only a civil airplane manufacturer, let only alone 787 manufacturer.

KarelXWB wrote:

mffoda wrote:

I don't know if that is going to change leehamnews opinion regarding the deferred production costs coming down "fast enough"? But it looks pretty damn good to me!

The point is that it is not good enough to clear the deferred cost pile within the accounting block of 1,300 aircraft. Many people argue Boeing will have to increase the accounting block, or book some major write offs.

If Boeing could not demonstrate to its accountants and auditors that it can clear the deferred costs with the current accounting block there would be a forward loss.

Eyad89 wrote:

Newbiepilot wrote:

KarelXWB wrote:

The point is that it is not good enough to clear the deferred cost pile within the accounting block of 1,300 aircraft. Many people argue Boeing will have to increase the accounting block, or book some major write offs.

While my personal opinion is that an enlarged accounting block is required, the progress Boeing is showing is very impressive, which you seem to ignore. In 4Q16 deferred production costs dropped about 6 million per plane. In 2Q17 that increased to 16 million per plane. We haven't even seen the impact of the 787-10 yet. The 787 deferred production costs not shrinking fast enough is an opinion, not fact and even Leeham News is reporting that it is more than expected. I guess that is one of the reasons that the stock price is up 7% today even though I know you don't want to discuss that.

I've been wanting to comment on this for a while. This has nothing to do with Boeing or Airbus, it is only finance and accounting. The profitibility of 787 program has almost nothing to do with the stock price Boeing has today.

Stock prices are merely based on how successful a company is perceived by investors, and how likely this company would pay dividends. It is not directly linked to how profitable a company is. Boeing as a company is much larger than the 787 program. Even if all wall street analysts point at how Boeing mismanged its program, this won't stop people from buying shares. Price could still increase as hill if Boeing maintains a positive future outlook, remember Boeing isnt only a civil airplane manufacturer, let only alone 787 manufacturer.

Um, you're absolutely and totally wrong about what investors who buy stocks look at.

Newbiepilot wrote:

KarelXWB wrote:

Newbiepilot wrote:

I am sorry if it bothers you saying that there is more than simply doom and gloom going on that we can discuss.

What bothers me is that people are playing down deferred cost discussions by telling how great the stock market is. Or saying there's nothing to see here because the 787 is cash positive.

Leeham news just said the following, which as an aviation fan should be exciting, not bothersome since it is good news:

787 deferred production costs declined falling to 26.46bn from 26.99bn in Q1. DPC decreased by almost 16 million per plane produced in the quarter well ahead of our estimate of $12 million per plane.

Leeham posted that quote, but it's not from them - that's from a Bernstein research note. Bernstein noted that Boeing beat their relatively low estimate of reducing the DPC balance by $12M per plane. If we stick to the current Accounting Block, which can be increased as/should future sales come in as noted well in this thread, that $16M number needs to become ~$40M.

It's good progress quarter-over-quarter but still a long way to go. Encouraging to see their cost reduction efforts paying off.

KarelXWB wrote:

That's really not the point of this discussion. As I just mentioned above, it's so weird that every time again someone tries to distract the discussion with how great Boeing is doing. We are trying to get a picture about the 787 deferred costs, not how good or bad the company is doing.

You yourself posted the hard data, so we have the factual "picture". Then it comes down to "what does it mean?". Some posters project this into dire things (loss of company valuation, inability to fund current and future programs, or worse), others push back showing it doesn't (company valuation remains strong, the program is producing strong positive cash flows, it's just a bookkeeping thing, or better).

If you think we shouldn't stray from the hard data, then IMHO you should use your moderator powers and lock the thread since we have what we need.

Otherwise, stand back and behold!

Revelation wrote:

You yourself posted the hard data, so we have the factual "picture". Then it comes down to "what does it mean?". Some posters project this into dire things (loss of company valuation, inability to fund current and future programs, or worse), others push back showing it doesn't (company valuation remains strong, the program is producing strong positive cash flows, it's just a bookkeeping thing, or better).

My personal opinion on the matter is irrelevant. All I'm doing is posting the hard data (as you name it), yet some people cannot resist to address the messenger. So I'm not fully understanding why some people need to be so defensive.

If you think we shouldn't stray from the hard data, then IMHO you should use your moderator powers and lock the thread since we have what we need.

That would be improper.

Otherwise, stand back and behold!

So after the figeures are published: how much much profit each remaining Frame in the accounting block now has to generate to clear the deferred cost?

Flyglobal

Newbiepilot wrote:

In 4Q16 deferred production costs dropped about 6 million per plane. In 2Q17 that increased to 16 million per plane.

The issue is that going forward, Boeing needs that to increase to $40 million per plane to clear the current costs across the remaining frames left to be delivered within the current Accounting Quantity ($30B over 710 frames). Even increasing the Accounting Quantity to 1600 "only" reduces the cost per frame from $40 million to $30 million ($30B over 1010 frames) which would require Boeing to double the profit of every 787 sold going forward on average.

Momo1435 wrote:

The drop is already increasing and should only get bigger over the next quarters. Production time per frame is steadily decreasing (also very good for cash flow), just 1 terrible teen to be delivered and the 787-10 going into regular production stream. I wouldn't be surprised if a quicker decrease would be used by Boeing as a reason to increase the accounting block.

The only way Boeing can increase the Accounting Quality is to sell more 787s. Which they will certainly do, but it's not going to be a panacea (see above).

sxf24 wrote:

If Boeing could not demonstrate to its accountants and auditors that it can clear the deferred costs with the current accounting block there would be a forward loss.

Yes. And even if they can increase the Accounting Quantity to 1600 based on the current order book (1275) and future sales over the next decade, they still need to effectively double the average profit per plane, which is a tough ask, IMO.

Flyglobal wrote:

So after the figeures are published: how much much profit each remaining Frame in the accounting block now has to generate to clear the deferred cost?

~$42 million ($30B divided by 710 unfilled orders).

As if the current accounting block will be the end of 787 production. We probably have not even see 50% of all 787s ordered, so Boeing has a lot of time and a lot of frames to reach zero, and if they do it with the 3556th 787 delivered, they done it perfectly.

Flyglobal wrote:

So after the figeures are published: how much much profit each remaining Frame in the accounting block now has to generate to clear the deferred cost?

Flyglobal

To figure that out, we have to wait for the 10-Q SEC filing, it is not available yet.

sxf24 wrote:

Eyad89 wrote:

Newbiepilot wrote:

While my personal opinion is that an enlarged accounting block is required, the progress Boeing is showing is very impressive, which you seem to ignore. In 4Q16 deferred production costs dropped about 6 million per plane. In 2Q17 that increased to 16 million per plane. We haven't even seen the impact of the 787-10 yet. The 787 deferred production costs not shrinking fast enough is an opinion, not fact and even Leeham News is reporting that it is more than expected. I guess that is one of the reasons that the stock price is up 7% today even though I know you don't want to discuss that.

I've been wanting to comment on this for a while. This has nothing to do with Boeing or Airbus, it is only finance and accounting. The profitibility of 787 program has almost nothing to do with the stock price Boeing has today.

Stock prices are merely based on how successful a company is perceived by investors, and how likely this company would pay dividends. It is not directly linked to how profitable a company is. Boeing as a company is much larger than the 787 program. Even if all wall street analysts point at how Boeing mismanged its program, this won't stop people from buying shares. Price could still increase as hill if Boeing maintains a positive future outlook, remember Boeing isnt only a civil airplane manufacturer, let only alone 787 manufacturer.

Um, you're absolutely and totally wrong about what investors who buy stocks look at.

Care to elaborate? What determines stock price then? And don't say profit because it is not. Simple.

Eyad89 wrote:

sxf24 wrote:

Eyad89 wrote:

I've been wanting to comment on this for a while. This has nothing to do with Boeing or Airbus, it is only finance and accounting. The profitibility of 787 program has almost nothing to do with the stock price Boeing has today.

Stock prices are merely based on how successful a company is perceived by investors, and how likely this company would pay dividends. It is not directly linked to how profitable a company is. Boeing as a company is much larger than the 787 program. Even if all wall street analysts point at how Boeing mismanged its program, this won't stop people from buying shares. Price could still increase as hill if Boeing maintains a positive future outlook, remember Boeing isnt only a civil airplane manufacturer, let only alone 787 manufacturer.

Um, you're absolutely and totally wrong about what investors who buy stocks look at.

Care to elaborate? What determines stock price then? And don't say profit because it is not. Simple.

For an industrial company like Boeing, most investors will look at cash flow and how of it is being returned to investors. You need profitability to generate cash to pay dividends and buy back stock. You can't be profitable unless you're building good products and selling them at a competitive price.

sxf24 wrote:

Eyad89 wrote:

sxf24 wrote:

Um, you're absolutely and totally wrong about what investors who buy stocks look at.

Care to elaborate? What determines stock price then? And don't say profit because it is not. Simple.

For an industrial company like Boeing, most investors will look at cash flow and how of it is being returned to investors. You need profitability to generate cash to pay dividends and buy back stock. You can't be profitable unless you're building good products and selling them at a competitive price.

What you said is true and not contradicting with what I said earlier. In fact, we are not even talking about the same thing. Naturally, a company has to be profitable to attract investors. BUT, its stock price does not depend on how profitable it is, it rather depends on how it performed comparing to market expectation and perception.


For example, sometimes a company makes a profit that is 20% higher than last year. Yet, its stock price falls, why? It's because investors expected a 30% increase in profit. Sometimes a stock price goes up even if a company makes a loss, why? Because it made a loss that is less than expected.

Real world example: Roll Royce made the largest loss in its history last year, a loss of over 4 billions pounds. Yet, its stock prices kept going up. Investors did not care, so the price went up. It is all about how investors perceive the healthiness of the company, and that is not by profit only.


I repeat what I said earlier, Boeing has the price it has today because that's what its investors believe it deserves based on the stock supply and demand. The deferred costs of 787 was announced in 2010, it could have impacted the stock then. Now investors are aware of it, and they have absorbed the shock already. It is not news anymore. The fact that 737MAX has entered service may have a much bigger impact on the price today than the status of 787, because it "news", and because this would alter the growth and expectations of the company.

Here is a link to some pretty solid articles on the 787 deferred cost projections.
https://seekingalpha.com/author/dhierin ... r_articles

bottom line, against the current accounting block of 1,300 units , the author projects that upon delivery of unit 1,300 deferred costs of $2.5-7.5 billion. Hardly earth shattering , especially since its likely future orders extend that accounting block upwards significantly. and of course, in any case this is talking about money already spent so any future potential charges will affect reported earnings but not cash flow.
Boeing is reporting $5 billion cash flow for the latest quarter and the positive cash flow is on an accelerating upward trend that is pretty dramatic. They are in an excellent and improving financial position.
As the 787 mix moves quickly out of 787-8's and into 787-9's and 10's one can expect the deferred costs reduction to accelerate sharply.

Anyone who cannot understand just how well Boeing is doing financially these days and looking forward is just plain dense.

Cue Airbus fanboys to say they have too much debt etc even though that is shrinking, they are making special pension contributions out of 2017 cash,making continued share buybacks , and CA margins all look to be pointing upwards.
The deferred cost discussions, while interesting, are not an indication of Boeings current or future cash flow trends.

Here are the latest figures per the latest BA 10-K filing:

At June 30, 2017 and December 31, 2016, commercial aircraft programs inventory included the following amounts related to the 787 program: $32,047 and $32,501 of work in process (including deferred production costs of $26,461 and $27,308), $2,608 and $2,398 of supplier advances, and $3,390 and $3,625 of unamortized tooling and other non-recurring costs. At June 30, 2017, $24,246 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 $5,605 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.

Source: https://www.sec.gov/Archives/edgar/data ... 1630C4AB99

As the program accounting quantity is 1,300 and there are 565 cumulative deliveries, there are 735 units left in the program accounting quantity. The calculation is as follows: ($26,461 million + $3.390 million) / 735 = $40.6 million per frame deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity.

It appears that not all the firm orders (1,275) are included in the program accounting, i.e the breakdown of 735 units left in the program accounting quantity is not 710 firm orders and 25 expected future orders. Some firm orders are not included in the program accounting quantity, as they apparently are delivered after the program accounting quantity has expired (otherwise the $5,605 million expected to be recovered from units included in the program accounting quantity that represent expected future orders doesn't make sense).

Folks: Again I would like to point out... there is NO requirement for Boeing to recover all the Differed Cost within the existing Accounting Block of 1300. They do need to either recover it out of the eventual final Accounting Block Size when the line closes, or take an Accounting Loss on their books.

The Accounting Block size changes with the life of the Program (the 737 started at 400 and was at 9000 at the end of 2016 - and is likely to exceed 10,000). Now the 787 is not likely to sell near as many as the 737; but, I predict at least 1750, likely over 2000, and it could well be over 2500. Given that they continue to cut cost and all new sales are at better margins than the earlier sales I just don't see this as an issue. I suspect that they will be able to cover this within the Accounting Block. I will leave it to the Accounting Professionals with the actual data working for Boeing to decide if and when they have to declare a loss.

Program Accounting and Deferred Cost is really nothing more than an Accounting Method to spread a large up front cost over a long time period. Amortization/Depreciation is another common Accounting Method that does the same. It has nothing to do with cash flow. Boeing has already paid for all Deferred Cost; and the 787 program is now cash positive as they are now building 787's for less than they sold them for.

Have a great day,

2175301 wrote:

Folks: Again I would like to point out... there is NO requirement for Boeing to recover all the Differed Cost within the existing Accounting Block of 1300. They do need to either recover it out of the eventual final Accounting Block Size when the line closes, or take an Accounting Loss on their books.

To put it more precisely: as you point out, there is NO requirement for Boeing to recover all the deferred production cost within the existing Accounting Block of 1300, BUT should Boeing realize that they will not recover all the deferred production cost within the existing accounting block, they HAVE TO book a reach forward loss amounting to the deferred production cost that cannot be recovered within the existing accounting block.

There's a related commercial point. A few of our a.net friends would like to see a rework of the 789 and 78J to boost MTOW and payload/range. The current 789 isn't competitive against the 359 at the outer end of the payload/range curve and the 78J can't compete on trans-Pacific routes. But with $26 bn in deferred production costs still to be recovered it's hard to see the Boeing board looking at further investment on the 787 for years to come. For now 787s are selling well but at some point the lack of growth headroom in the airframe is going to bite.