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mjoelnir
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Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 6:30 pm

in Q2 2018 deferred production cost for the 787 went from 24,690 million USD to 24,251 million USD a reduction of 449 million USD.

Unamortized Tooling and Other Non-Recurring Cost went from 3,042 to 2,899 million USD, 143 million USD reduction

Together 592 million USD, about 15.58 million USD reduction with every of the 38 delivered frames.


The numbers in Q1 were 668 million USD and 131 million USD, together 799 million USD. 23,5 million reduction with each of the 32 delivered frames.


Perhaps we start to see the result of the intensified campaign to push the A330 out of the market.
 
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QuarkFly
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 6:42 pm

mjoelnir wrote:
Perhaps we start to see the result of the intensified campaign to push the A330 out of the market.


I don't believe any pricing change to compete with the A330 will show up in earnings until Boeing collects the $$ for delivering the aircraft. Probably not for years from now.

The drop in the per-plane deferred production $$ recovered is likely because they delivered more 787-10's which are more expensive to manufacture and perhaps are requiring more time and $$ for post certification modifications on the first few -10 frames produced.
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bigjku
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 6:49 pm

QuarkFly wrote:
mjoelnir wrote:
Perhaps we start to see the result of the intensified campaign to push the A330 out of the market.


I don't believe any pricing change to compete with the A330 will show up in earnings until Boeing collects the $$ for delivering the aircraft. Probably not for years from now.

The drop in the per-plane deferred production $$ recovered is likely because they delivered more 787-10's which are more expensive to manufacture and perhaps are requiring more time and $$ for post certification modifications on the first few -10 frames produced.


There was also about 20% greater delivery time on Trent equipped 787’s at times during the quarter. That will reduce margins. Presumably RR should owe compensation at some point I would think.

You kind of need to see where the year ends. So far on an annual average basis they are still ahead of last year by a few million a frame. Needs a strong finish in next two quarters though.
 
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Momo1435
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 8:06 pm

Boeing also loaded the 1st 787-8s onto the assembly line in Everett during Q2 that have the design changes that will make the production of the 787-8 more similar to the 787-9 . These changes to the 787-8 are directly related to the production increase to 14 per month next year. Changes to the production and rate increase always have a negative impact on the deferred costs before they start to have a positive effect on the financial results.

The long term trend should be a constant increase in the reductions of the deferred costs, but there will always be specific reasons why the reductions seen per quarter can look a bit erratic at time.
 
Flyglobal
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 8:42 pm

I see the start of delivery of the 787-10 as the primary reason. A bit higher cost then probably later combined with launch customer discounts. The 787-9 should still bring higher margins at least in the range of the previous quarter. The 787-8 'unification' with the 787-9 parts and process should not be a real negative driver.
The new sales campaign where Boeing used the pricing power (Hawaiian, UA)) should kick in with lower margins not earlier then 2020 (late 2020 I think).

The question remains: when on earth will Boeing finally compensate the deferred cost in the booking. The accounting block needs to be extended, that’s for sure. But what else?

However, one question for the specialists: Would it be possible to separate the 'terrible teens' in a separate block and write off the losses made with those '20' (ok- some less) planes at once- I guess those 20- frames count for around 8 b$ deferred cost alone.

I see another accounting block with deferred cost coming- the 777x- never so much deferred cost for sure but still- let alone a potential 797. Somehow this deferred cost need to be out of the books rather sooner than later.


Flyglobal
 
bigjku
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 8:49 pm

Flyglobal wrote:
I see the start of delivery of the 787-10 as the primary reason. A bit higher cost then probably later combined with launch customer discounts. The 787-9 should still bring higher margins at least in the range of the previous quarter. The 787-8 'unification' with the 787-9 parts and process should not be a real negative driver.
The new sales campaign where Boeing used the pricing power (Hawaiian, UA)) should kick in with lower margins not earlier then 2020 (late 2020 I think).

The question remains: when on earth will Boeing finally compensate the deferred cost in the booking. The accounting block needs to be extended, that’s for sure. But what else?

However, one question for the specialists: Would it be possible to separate the 'terrible teens' in a separate block and write off the losses made with those '20' (ok- some less) planes at once- I guess those 20- frames count for around 8 b$ deferred cost alone.

I see another accounting block with deferred cost coming- the 777x- never so much deferred cost for sure but still- let alone a potential 797. Somehow this deferred cost need to be out of the books rather sooner than later.


Flyglobal


It’s not a critical accounting issue as far as impacting ongoing business operations so they don’t really have to do anything other than apply the rules as they exist to the block as they sell planes. There is no particular rush to deal with it and it doesn’t impact ongoing operations at all.

And no, you could transfer unsold planes to R&D expense and just write them off that way. I doubt you can do it with the sold airplanes.

I don’t see the rush to remove it at all. As an accounting method I actually prefer it as it gives good insight into what is going on.
 
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par13del
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 8:53 pm

I think it safe to say that Boeing will only look at writing off any portion of the deferred cost when the sales of the 787 start to dry up, based on the current backlog that may be another 5 years or so. Once they have a year or two of minimal sales, it then becomes time to review the total out-standing and start planning / preparing Wall St. for the potential loss.
 
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Stitch
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 9:24 pm

Flyglobal wrote:
The question remains: when on earth will Boeing finally compensate the deferred cost in the booking.


When their sales projections show that they have effectively made as many sales of the 787 family as they are going to and there remains Deferred Production Cost (so the program would be in a Forward Loss position).

Then again, they did that with the 747-8 and subsequently sold some 40 additional frames. :boggled:


Flyglobal wrote:
The accounting block needs to be extended, that’s for sure.


The current Accounting Block of 1400 frames is still within Boeing's current firm order book so I do not think we will see an AB increase for a time, as of yet.


Flyglobal wrote:
However, one question for the specialists: Would it be possible to separate the 'terrible teens' in a separate block and write off the losses made with those '20' (ok- some less) planes at once- I guess those 20- frames count for around 8 b$ deferred cost alone.


Those frames have already been accounted for (excuse the pun) so Boeing cannot retroactively declare them as part of a different block.
 
PlanesNTrains
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 10:35 pm

Stitch wrote:
Flyglobal wrote:
The question remains: when on earth will Boeing finally compensate the deferred cost in the booking.


When their sales projections show that they have effectively made as many sales of the 787 family as they are going to and there remains Deferred Production Cost (so the program would be in a Forward Loss position).

Then again, they did that with the 747-8 and subsequently sold some 40 additional frames. :boggled:


Flyglobal wrote:
The accounting block needs to be extended, that’s for sure.


The current Accounting Block of 1400 frames is still within Boeing's current firm order book so I do not think we will see an AB increase for a time, as of yet.


Flyglobal wrote:
However, one question for the specialists: Would it be possible to separate the 'terrible teens' in a separate block and write off the losses made with those '20' (ok- some less) planes at once- I guess those 20- frames count for around 8 b$ deferred cost alone.


Those frames have already been accounted for (excuse the pun) so Boeing cannot retroactively declare them as part of a different block.


I don’t have a link, bit I thought I saw a tweet today that they’d upped it to 1500?
-Dave


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george77300
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 10:44 pm

PlanesNTrains wrote:
Stitch wrote:
Flyglobal wrote:
The question remains: when on earth will Boeing finally compensate the deferred cost in the booking.


When their sales projections show that they have effectively made as many sales of the 787 family as they are going to and there remains Deferred Production Cost (so the program would be in a Forward Loss position).

Then again, they did that with the 747-8 and subsequently sold some 40 additional frames. :boggled:


Flyglobal wrote:
The accounting block needs to be extended, that’s for sure.


The current Accounting Block of 1400 frames is still within Boeing's current firm order book so I do not think we will see an AB increase for a time, as of yet.


Flyglobal wrote:
However, one question for the specialists: Would it be possible to separate the 'terrible teens' in a separate block and write off the losses made with those '20' (ok- some less) planes at once- I guess those 20- frames count for around 8 b$ deferred cost alone.


Those frames have already been accounted for (excuse the pun) so Boeing cannot retroactively declare them as part of a different block.


I don’t have a link, bit I thought I saw a tweet today that they’d upped it to 1500?


They have indeed. Was 1400. As of the Q2 2018 results it’s now to 1500. With the order book over 1400 already and with quite a few MOUs not firmed I guess it was inevitable to happen at some point.
 
Ruscoe
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 11:28 pm

Boeing reported in their 2nd qtr earnings (which are very good despite the constant talk on here about Boeing cutting prices) that the profitability of the 787 is still increasing.
Lower price does not necessarily mean lower profit, if the costs of production are being reduced.
It would be interesting to compare all this to the 350 deferred costs (or equivalent) but I can’t find the figures in the Airbus reports.
Has anyone else found them?
Ruscoe
 
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Stitch
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Re: Reduction of 787 deferred production cost slows.

Wed Jul 25, 2018 11:33 pm

Ruscoe wrote:
It would be interesting to compare all this to the 350 deferred costs (or equivalent) but I can’t find the figures in the Airbus reports. Has anyone else found them?


Airbus only used deferred production cost accounting for the first tranche of A350 airframes. For the remainder, the actual production cost is expensed in the quarter it is accrued.
 
aviationaware
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 4:20 am

Ruscoe wrote:
It would be interesting to compare all this to the 350 deferred costs (or equivalent) but I can’t find the figures in the Airbus reports.
Has anyone else found them?
Ruscoe

Airbus uses IFRS accounting, which means that they account on a contract basis. Boeing uses US-GAAP (so a difference to begin with) and further a very arcane Boeing-only specialty called Program Accounting (which the SEC has tried several times to remove without much success).
Since Airbus can not use Program Accounting, you will not find a comparable number for deferred production costs anywhere in the Airbus financial statements.
 
VV
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 6:40 am

According to the press releasethe Free Cash Flow during the first half of 2018 is just above US$ 7 billion.

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

In addition, according to the slide 2 of the presentation, in Q2 2018 they spent a total of US$ 4 billion to return cash to shareholders. They spent US$ 3 billion to buy back shares and spent US$ 1 billion to pay dividends.
http://s2.q4cdn.com/661678649/files/doc ... pdf#page=2

I know it is not relevant to the deferred production cost, but they don't seem to be very concerned by it.
 
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scbriml
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 7:19 am

VV wrote:
I know it is not relevant to the deferred production cost, but they don't seem to be very concerned by it.


Of course they're not because paying off deferred production costs is not an executive bonus metric and is something a future exec might have to worry about. Share price is, which is why they spend $billions buying their own shares. :spin:
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SFOtoORD
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 7:45 am

No amount of intelligent response can ward off a good fake conspiracy theory on this site.
 
mjoelnir
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 11:07 am

VV wrote:
According to the press releasethe Free Cash Flow during the first half of 2018 is just above US$ 7 billion.

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

In addition, according to the slide 2 of the presentation, in Q2 2018 they spent a total of US$ 4 billion to return cash to shareholders. They spent US$ 3 billion to buy back shares and spent US$ 1 billion to pay dividends.
http://s2.q4cdn.com/661678649/files/doc ... pdf#page=2

I know it is not relevant to the deferred production cost, but they don't seem to be very concerned by it.


The document you are referring to talks about operating cash flow. You than get free cash flow by subtracting CAPEX from operating cash flow.
 
Flying-Tiger
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 11:44 am

mjoelnir wrote:
in Q2 2018 deferred production cost for the 787 went from 24,690 million USD to 24,251 million USD a reduction of 449 million USD.

Unamortized Tooling and Other Non-Recurring Cost went from 3,042 to 2,899 million USD, 143 million USD reduction

Together 592 million USD, about 15.58 million USD reduction with every of the 38 delivered frames.


The numbers in Q1 were 668 million USD and 131 million USD, together 799 million USD. 23,5 million reduction with each of the 32 delivered frames.


Perhaps we start to see the result of the intensified campaign to push the A330 out of the market.


For me to understand properly: based on an accounting block of 1,500 frames and so far 710 being delivered it means that every yet-to-be delivered 787 needs to turn in 30,697 million USD to bring the accounting block to 0. (24,251 million USD devided by 790 frames to be delivered under accounting block). Which would mean more or less a 50 to 100% increase of what has been managed so far. Correct understanding?
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bigjku
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 11:55 am

Flying-Tiger wrote:
mjoelnir wrote:
in Q2 2018 deferred production cost for the 787 went from 24,690 million USD to 24,251 million USD a reduction of 449 million USD.

Unamortized Tooling and Other Non-Recurring Cost went from 3,042 to 2,899 million USD, 143 million USD reduction

Together 592 million USD, about 15.58 million USD reduction with every of the 38 delivered frames.


The numbers in Q1 were 668 million USD and 131 million USD, together 799 million USD. 23,5 million reduction with each of the 32 delivered frames.


Perhaps we start to see the result of the intensified campaign to push the A330 out of the market.


For me to understand properly: based on an accounting block of 1,500 frames and so far 710 being delivered it means that every yet-to-be delivered 787 needs to turn in 30,697 million USD to bring the accounting block to 0. (24,251 million USD devided by 790 frames to be delivered under accounting block). Which would mean more money or less a 50 to 100% increase of what has been managed so far. Correct understanding?


In rough terms yes. I would keep in mind that number is only about a 33% increase from the rate of last quarter. Given the three issues identified in this quarter (RR issues, 788 revisions and prep for a rate increase) it’s hard to identify why there was a change this quarter. The critical quarters for this number I would say are the next 4-6. It should stabilize higher the rest of this year and then increase next year with the rate jump. You need to hit the $30 million plus mark consistently next year.
 
bigjku
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 11:56 am

scbriml wrote:
VV wrote:
I know it is not relevant to the deferred production cost, but they don't seem to be very concerned by it.


Of course they're not because paying off deferred production costs is not an executive bonus metric and is something a future exec might have to worry about. Share price is, which is why they spend $billions buying their own shares. :spin:


What exactly should they spend billions on exactly? The reason a company exist is to return profits to shareholders after all.
 
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Revelation
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 12:00 pm

Flying-Tiger wrote:
For me to understand properly: based on an accounting block of 1,500 frames and so far 710 being delivered it means that every yet-to-be delivered 787 needs to turn in 30,697 million USD to bring the accounting block to 0. (24,251 million USD devided by 790 frames to be delivered under accounting block). Which would mean more or less a 50 to 100% increase of what has been managed so far. Correct understanding?

Whatever the amount is, you have to understand that the amount is being paid by Boeing to Boeing.

It's not a cash outflow from Boeing to the outside.

It's just a debit from one cell in the spreadsheet and a credit to another.

Once you understand that, the shock and horror aspect goes away.
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seahawk
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 12:02 pm

Revelation wrote:
Flying-Tiger wrote:
For me to understand properly: based on an accounting block of 1,500 frames and so far 710 being delivered it means that every yet-to-be delivered 787 needs to turn in 30,697 million USD to bring the accounting block to 0. (24,251 million USD devided by 790 frames to be delivered under accounting block). Which would mean more or less a 50 to 100% increase of what has been managed so far. Correct understanding?

Whatever the amount is, you have to understand that the amount is being paid by Boeing to Boeing.

It's not a cash outflow from Boeing to the outside.

It's just a debit from one cell in the spreadsheet and a credit to another.

Once you understand that, the shock and horror aspect goes away.


Well apart from the fact that the financial balance will show lesser or no earnings if they ever start to write off the deferred costs. So while it has no practical relevance for the health of the company, it has a big relevance for the bonuses of the management.
 
VV
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 12:10 pm

This is exactly the same old debate all over again.
What's the reality? Seven billion US dollars of free cash flow in the first half of 2018.
 
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Revelation
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 12:10 pm

VV wrote:
This is exactly the same old debate all over again.
What's the reality? Seven billion US dollars of free cash flow in the first half of 2018.

Some keep posting it thinking they're kicking the hornet's nest.

In reality they're making a mountain out of a molehill.
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StTim
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 12:18 pm

Not a mountain for sure - but bigger than a molehill.

It is a sideshow but what it does do is allow customers and Airbus to see how they are doing at reducing costs. Customers will be after price reductions if they start to achieve some of these reductions. It also gives Airbus a nice target to go after.
 
81819
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 12:33 pm

I suspect the profit per aircraft will jump around a fair bit from quarter to quarter.

I believe the increase in 787 profit margins relates more to reductions in Boeing's indirect costs, rather than reduction in direct costs. As such, once contracts relating to indirect costs start to expire we could see some really big jumps in profit numbers.

Again, this is good news for Boeing
 
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lightsaber
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 1:16 pm

This is Trent 1000 and the start of 787-10 production. While sad to see a decline in payout to differed costs per airframe, we can expect an acceleration in 2019.

But as noted, Boeing is incredibly cash flow positive:
VV wrote:
According to the press releasethe Free Cash Flow during the first half of 2018 is just above US$ 7 billion.

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

In addition, according to the slide 2 of the presentation, in Q2 2018 they spent a total of US$ 4 billion to return cash to shareholders. They spent US$ 3 billion to buy back shares and spent US$ 1 billion to pay dividends.
http://s2.q4cdn.com/661678649/files/doc ... pdf#page=2

I know it is not relevant to the deferred production cost, but they don't seem to be very concerned by it.

I think Boeing will be OK. They need to find stuff to invest in (aircraft leasing? or more parts vendors).

Lightsaber
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bigjku
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 1:55 pm

lightsaber wrote:
This is Trent 1000 and the start of 787-10 production. While sad to see a decline in payout to differed costs per airframe, we can expect an acceleration in 2019.

But as noted, Boeing is incredibly cash flow positive:
VV wrote:
According to the press releasethe Free Cash Flow during the first half of 2018 is just above US$ 7 billion.

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

In addition, according to the slide 2 of the presentation, in Q2 2018 they spent a total of US$ 4 billion to return cash to shareholders. They spent US$ 3 billion to buy back shares and spent US$ 1 billion to pay dividends.
http://s2.q4cdn.com/661678649/files/doc ... pdf#page=2

I know it is not relevant to the deferred production cost, but they don't seem to be very concerned by it.

I think Boeing will be OK. They need to find stuff to invest in (aircraft leasing? or more parts vendors).

Lightsaber


I expect one or two big M&A announcements before year end based on what I have heard from a few people.

R&D expense is stable year to year and if anything trended up his quarter to an annualized increase pace to grow 4-5% if they maintain this level of investment. With the 737 Max stuff winding down along with the 787-10 and 777X moving out of heavy R&D expense they must be investing in something.

I suspect R&D is kind of like a pipeline. You only have so much capacity in your people so you can’t just dump an extra few billion into it even if you wanted to. Boeing and Airbus spend a remarkably similar amount on R&D year after year. It’s kind of uncanny really. I suspect each has the same rough capacity for development work unless they hire on for special military projects from time to time.

I would be looking to sell if either Airbus or Boeing get deep into aircraft financing. The odd deal here and there I don’t mind but I don’t want a GE like situation in my portfolio. You can soak up such a huge amount of cash and capital when you start lending it out, even if it is to buy your own products. Both would have to borrow money to do very many big deals. One of the big appeals of both Boeing and Airbus is the low debt loads. Boeing has interest coverage ratios of 24.2 and Airbus is a 10. GE ran forever between 1.5 and 3. Taking on the debt necessary for either to get deep into aircraft financing would make them less appealing to me as an investor.
 
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Stitch
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 2:22 pm

StTim wrote:
It is a sideshow but what it does do is allow customers and Airbus to see how they are doing at reducing costs. Customers will be after price reductions if they start to achieve some of these reductions. It also gives Airbus a nice target to go after.


The truly amusing part of all this is that while many Airbus Aficionados constantly bang on about how Program Accounting is some "trick" or "cheat" that hurts their preferred OEM by giving Boeing some kind of "edge", it gives Airbus - and airlines - a pretty decent view of how much it costs Boeing to make a 787 on a quarterly basis which helps them in their own RFPs.

Airbus, on the other hand, can keep A350 production costs much more opaque because they report on a Division basis so the A350's production costs are bundled together with the A320's, A330's and A380's and reported as a combined basis.
 
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lightsaber
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 2:25 pm

Stitch wrote:
StTim wrote:
It is a sideshow but what it does do is allow customers and Airbus to see how they are doing at reducing costs. Customers will be after price reductions if they start to achieve some of these reductions. It also gives Airbus a nice target to go after.


The truly amusing part of all this is that while many Airbus Aficionados constantly bang on about how Program Accounting is some "trick" or "cheat" that hurts their preferred OEM by giving Boeing some kind of "edge", it gives Airbus - and airlines - a pretty decent view of how much it costs Boeing to make a 787 on a quarterly basis which helps them in their own RFPs.

Airbus, on the other hand, can keep A350 production costs much more opaque because they report on a Division basis so the A350's production costs are bundled together with the A320's, A330's and A380's and reported as a combined basis.

I 100% agree Airbus is using this valuable information for pricing of A330NEOs and A350. It is a quantifiable advantage for Airbus.

Airbus has a classy problem, they need to produce more A350s. ;)

But what matters is shipments of Pratt powered Aircraft. :spin:

Lightsaber
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MIflyer12
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 2:35 pm

george77300 wrote:
PlanesNTrains wrote:
Stitch wrote:

When their sales projections show that they have effectively made as many sales of the 787 family as they are going to and there remains Deferred Production Cost (so the program would be in a Forward Loss position).

Then again, they did that with the 747-8 and subsequently sold some 40 additional frames. :boggled:




The current Accounting Block of 1400 frames is still within Boeing's current firm order book so I do not think we will see an AB increase for a time, as of yet.




Those frames have already been accounted for (excuse the pun) so Boeing cannot retroactively declare them as part of a different block.


I don’t have a link, bit I thought I saw a tweet today that they’d upped it to 1500?


They have indeed. Was 1400. As of the Q2 2018 results it’s now to 1500. With the order book over 1400 already and with quite a few MOUs not firmed I guess it was inevitable to happen at some point.


Here's a source citing the new block count of 1,500. https://seekingalpha.com/article/419029 ... going-zero

I called an increase a few weeks ago when Farnborough orders pushed cumulative 787 orders to ~1,400.
 
VV
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Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 4:41 pm

Why do some people think the deferred production cost "has to be paid"?

It has already been paid (spent). Suppliers have already got paid for the goods and services, employees already received their wage, rent is paid and so on.

Deferred production cost is only an accounting mechanism that allows to do things.

There's nothing wrong to spread the accounting of production cost, like it is normal to spread the amortization of initial huge investment (that you already spent).

So why are people so obsessed by this deferred production cost? Who started this damn fuss in the first place?
 
User avatar
par13del
Posts: 10350
Joined: Sun Dec 18, 2005 9:14 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 4:54 pm

We finally have a thread dedicated to the dreaded Program Account and it is strangely quiet..........
 
PlanesNTrains
Posts: 9524
Joined: Tue Feb 01, 2005 4:19 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 9:22 pm

par13del wrote:
We finally have a thread dedicated to the dreaded Program Account and it is strangely quiet..........


Because the horse is dead. We can keep beating it if you want to, but it's still dead. :-)
-Dave


MAX’d out on MAX threads. If you are starting a thread, and it’s about the MAX - stop. There’s already a thread that covers it.
 
81819
Posts: 2008
Joined: Fri May 23, 2008 9:13 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 9:40 pm

VV wrote:
Why do some people think the deferred production cost "has to be paid"?

It has already been paid (spent). Suppliers have already got paid for the goods and services, employees already received their wage, rent is paid and so on.

Deferred production cost is only an accounting mechanism that allows to do things.

There's nothing wrong to spread the accounting of production cost, like it is normal to spread the amortization of initial huge investment (that you already spent).

So why are people so obsessed by this deferred production cost? Who started this damn fuss in the first place?


Just because Boeing has very low debt levels it doesn't mean Deferred Production Costs are paid for.

If, indirect costs are part of the Deferred Production Costs equation, it is possible the debt associated with the cost is held by a third party (i.e. a supplier) and not Boeing. In these cases Boeing would be indirectly paying the debt through supplier goods and services invoices.

For example, Boeing could have a contract with a supplier where R&D and tooling costs are paid for over a ten year period. At the end of the 10 year period the tooling and IP is transferred to Boeing, where Boeing subsequently gains assets with value. The supplier debt that is associated with R&D and tooling is paid off (through Boeing invoices) over the ten year period through goods and services invoices.

In this case the debt is not shown on Boeing's books, even though it would have a contractual obligation to pay the suppliers invoices (which would include a component for financing costs).
 
VV
Posts: 1862
Joined: Sat Feb 13, 2016 1:03 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 10:04 pm

PlanesNTrains wrote:
par13del wrote:
We finally have a thread dedicated to the dreaded Program Account and it is strangely quiet..........


Because the horse is dead. We can keep beating it if you want to, but it's still dead. :-)


Okay, maybe so.
However I am still puzzled by the fact this story has been repeated again and again by some blogs or even by some analysts.

Whoever started the nonsense should have had a wide audience. Does anybody know who started this gibberish?
 
VV
Posts: 1862
Joined: Sat Feb 13, 2016 1:03 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 10:07 pm

travelhound wrote:
Just because Boeing has very low debt levels it doesn't mean Deferred Production Costs are paid for.


What the heck does this even mean???

It is "deferred production cost". I am sure there is a clear definition of "deferred cost" on the Internet.
 
81819
Posts: 2008
Joined: Fri May 23, 2008 9:13 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 10:17 pm

VV wrote:
travelhound wrote:
Just because Boeing has very low debt levels it doesn't mean Deferred Production Costs are paid for.


What the heck does this even mean???

It is "deferred production cost". I am sure there is a clear definition of "deferred cost" on the Internet.


You were the one posing the question "Why do some people think the deferred production cost has to be paid"?"

I was simply stating Bieing may have contractual obligations to pay supplier invoices, where an element of the cost relates to Deferred Production Costs.

If this is correct then there are reasons why some people think deferred production costs have to be paid for.
 
VV
Posts: 1862
Joined: Sat Feb 13, 2016 1:03 pm

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 10:22 pm

travelhound wrote:
VV wrote:
travelhound wrote:
Just because Boeing has very low debt levels it doesn't mean Deferred Production Costs are paid for.


What the heck does this even mean???

It is "deferred production cost". I am sure there is a clear definition of "deferred cost" on the Internet.


You were the one posing the question "Why do some people think the deferred production cost has to be paid"?"

I was simply stating Bieing may have contractual obligations to pay supplier invoices, where an element of the cost relates to Deferred Production Costs.

If this is correct then there are reasons why some people think deferred production costs have to be paid for.


Are you kidding me?
 
User avatar
Stitch
Posts: 27226
Joined: Wed Jul 06, 2005 4:26 am

Re: Reduction of 787 deferred production cost slows.

Thu Jul 26, 2018 10:37 pm

travelhound wrote:
If, indirect costs are part of the Deferred Production Costs equation, it is possible the debt associated with the cost is held by a third party (i.e. a supplier) and not Boeing. In these cases Boeing would be indirectly paying the debt through supplier goods and services invoices.


Boeing's 10-Q outlines all of their liabilities and they do not list any "indirect costs", at least as a line-item.


travelhound wrote:
For example, Boeing could have a contract with a supplier where R&D and tooling costs are paid for over a ten year period. At the end of the 10 year period the tooling and IP is transferred to Boeing, where Boeing subsequently gains assets with value. The supplier debt that is associated with R&D and tooling is paid off (through Boeing invoices) over the ten year period through goods and services invoices. In this case the debt is not shown on Boeing's books, even though it would have a contractual obligation to pay the suppliers invoices (which would include a component for financing costs).


Well we're approaching two decades on from the earliest design of the 7E7 and 15 years since R&D contracts would have been signed, so all those costs would have been recovered under such a period. Any of those costs might also be classified under "supplier advances" of which the 787 program has around USD 3 billion.
 
mjoelnir
Topic Author
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 12:51 am

It is strange how many Boeing fans you can have your cake and it it.

If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

Dept levels is a smoke and mirror thing at Boeing. It is what you define as dept. In this case Boeing defines dept just as the bank loans and similar.
But there are other things Boeing has to pay and they are called collectively liabilities. That can be prepayments, unpaid bills from suppliers and so on. All together the liabilities 113,195 million USD. It is just a definition if you call an unpaid bill a dept or not.

If we look at assets Boeing has an inventory of 61,250. That includes the non existing inventory of about 24 billion deferred cost. They have to be booked somewhere, so instead of being booked on cost they are booked on inventory.
 
User avatar
Revelation
Posts: 24589
Joined: Wed Feb 09, 2005 9:37 pm

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 1:48 am

mjoelnir wrote:
It is strange how many Boeing fans you can have your cake and (eat) it.

Yep, tastes great, and yet, there it still is.

If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

And yet you pay no one, because the money's already been paid long ago.

Instead you debit one cell in the spread sheet and credit another, and life goes on.

Mmmm, cake.
Wake up to find out that you are the eyes of the world
The heart has its beaches, its homeland and thoughts of its own
Wake now, discover that you are the song that the morning brings
The heart has its seasons, its evenings and songs of its own
 
User avatar
Erebus
Posts: 1167
Joined: Tue Oct 20, 2015 2:40 am

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 2:58 am

Revelation wrote:
mjoelnir wrote:
If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

And yet you pay no one, because the money's already been paid long ago.


Paid with whose money?
 
heavymetal
Posts: 4586
Joined: Fri May 08, 2015 3:37 am

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 3:51 am

Revelation wrote:
mjoelnir wrote:
It is strange how many Boeing fans you can have your cake and (eat) it.

Yep, tastes great, and yet, there it still is.

If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

And yet you pay no one, because the money's already been paid long ago.

Instead you debit one cell in the spread sheet and credit another, and life goes on.

Mmmm, cake.


Yes I agree with everything here, the cash was spent long ago so nothing more than a "paper" cost from here on out. There is no more cash that will flow out as part of the deferred production and amortized tooling balances. It's a paper game on the cost front.

But, Boeing is not and cannot have their cake and eat it to. While it's no longer costing them anything, it impacts their ability to price the aircraft. Per their latest guidance, these deferred production costs will be zero'd out by the 1,500th delivery. As noted above, that means Boeing must sell at a $30M+ profit per remaining aircraft in the block. Yes - as long as they keep winning orders and have a clear line-of-sight to more than 1,500 orders, they can always keep extending the block, which will help lower that amount. And if they keep reducing production costs as they have been, that will also go a long way to lower that amount. But anybody's who's been in industry knows that this still presents a pricing challenge for Boeing. They will tell you as much.
 
Newbiepilot
Posts: 3641
Joined: Tue Aug 30, 2016 10:18 pm

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 4:12 am

Erebus wrote:
Revelation wrote:
mjoelnir wrote:
If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

And yet you pay no one, because the money's already been paid long ago.


Paid with whose money?


The increasing production rates and profit margins from both the 737NG and 777 are what mostly funded the 787 program development. Without those programs, the company would have been in a cash flow crisis.
 
VV
Posts: 1862
Joined: Sat Feb 13, 2016 1:03 pm

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 6:12 am

mjoelnir wrote:
It is strange how many Boeing fans you can have your cake and it it.

If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

Dept levels is a smoke and mirror thing at Boeing. It is what you define as dept. In this case Boeing defines dept just as the bank loans and similar.
But there are other things Boeing has to pay and they are called collectively liabilities. That can be prepayments, unpaid bills from suppliers and so on. All together the liabilities 113,195 million USD. It is just a definition if you call an unpaid bill a dept or not.

If we look at assets Boeing has an inventory of 61,250. That includes the non existing inventory of about 24 billion deferred cost. They have to be booked somewhere, so instead of being booked on cost they are booked on inventory.


Indeed, on one side you record the spending as deferred cost (that is paid off) and on the other side you record it as asset.

This cost will be recognized at a later date, most probably at the delivery of the good, but there won't be any cash transaction related to that cost (that has been paid off). It is the recorded asset against the recorded cost.

I think when the asset corresponding to the product is reduced at delivery (or even at progressive predelivery installments), the corresponding deferred cost also goes down. I guess if the total payments by the customer for a unit is lower than the total deferred cost then that unit generate a loss and the remaining deferred cost is carried until you can write it off using other unit(s) profit.

In my opinion it is just a way to manage cost versus the income flow. It is also a way to manage the operating margin. But deferred cost is certainly NOT a way to manage cash.

In any case there is no cash transaction when you write off a deferred cost because it has already been paid. It means employees already received their salaries, suppliers have been paid for the goods and services that have been provided.

I do not think there is any fanboysm in trying to understand what deferred production cost means.

I interpret your term "dept" as debts.

In my opinion everything that you have to pay back in cash at one point is a debt like some liabilities, issued bonds and loans.

But please understand that deferred cost is NOT a debt. It is only a way to record a spending. It is a very similar concept to amortization, but applied to the production of goods you sell as opposed to the production means like buildings or tooling for amortization.

I am still puzzled by the fact many people are so obsessed by the notion of "deferred" cost.
Very honestly I didn't have any any clue what it meant when the gibberish started in the Internet. I spent a lot of time trying to figure out what it really means. I think I started to understand it. I can only hope people do the effort to understand the thing too.
 
Odan
Posts: 26
Joined: Fri Jul 27, 2018 8:34 am

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 8:50 am

You are right. Program accounting gives us a good idea of the profitability of a program. And so far the 787 is simply not a profitable planes. Thats why the deferred costs are interesting.

The positive cashflow is currently still the money that was spent earlier.

Regards
 
VV
Posts: 1862
Joined: Sat Feb 13, 2016 1:03 pm

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 10:38 am

Odan wrote:
You are right. Program accounting gives us a good idea of the profitability of a program. And so far the 787 is simply not a profitable planes. Thats why the deferred costs are interesting.

The positive cashflow is currently still the money that was spent earlier.

Regards


I am not sure you can affirm that 787 program is not profitable.

In reality with 706 DELIVERIES so far, it is likely the total generated income already exceeds the total spending thus far, including the amount spent for development.
 
Flyglobal
Posts: 540
Joined: Sat Mar 15, 2008 6:25 am

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 10:39 am

Odan wrote:
You are right. Program accounting gives us a good idea of the profitability of a program. And so far the 787 is simply not a profitable planes. Thats why the deferred costs are interesting.

The positive cashflow is currently still the money that was spent earlier.

Regards


I also see the Advantage of program accounting in a transparent book regarding profitability.
In principle I do not like it in the Extended way Boing uses it. It should be limited somehow at least in amount or years or to a block of origin. Basically it allows the shareholder to get Returns over years during the accumulation Phase while later probably another shareholder who steps in later has accept smaller Returns then possible.
So: I as a potential shareholder whenever Boeing builds a new plane (hello MOM?) will buy shares as long as they build up deferred cost, while I sell when they start returning. Good.

Flyglobal
 
mjoelnir
Topic Author
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

Re: Reduction of 787 deferred production cost slows.

Fri Jul 27, 2018 10:57 am

VV wrote:
mjoelnir wrote:
It is strange how many Boeing fans you can have your cake and it it.

If the deferred cost is not cleaned up, the rest has to be booked as a loss.
The whole deferred cost has been taken out as earnings, when you remove the deferred cost you have to lower your earnings by the same amount. If you do not have enough earnings you will incure the loss.

Dept levels is a smoke and mirror thing at Boeing. It is what you define as dept. In this case Boeing defines dept just as the bank loans and similar.
But there are other things Boeing has to pay and they are called collectively liabilities. That can be prepayments, unpaid bills from suppliers and so on. All together the liabilities 113,195 million USD. It is just a definition if you call an unpaid bill a dept or not.

If we look at assets Boeing has an inventory of 61,250. That includes the non existing inventory of about 24 billion deferred cost. They have to be booked somewhere, so instead of being booked on cost they are booked on inventory.


Indeed, on one side you record the spending as deferred cost (that is paid off) and on the other side you record it as asset.

This cost will be recognized at a later date, most probably at the delivery of the good, but there won't be any cash transaction related to that cost (that has been paid off). It is the recorded asset against the recorded cost.

I think when the asset corresponding to the product is reduced at delivery (or even at progressive predelivery installments), the corresponding deferred cost also goes down. I guess if the total payments by the customer for a unit is lower than the total deferred cost then that unit generate a loss and the remaining deferred cost is carried until you can write it off using other unit(s) profit.

In my opinion it is just a way to manage cost versus the income flow. It is also a way to manage the operating margin. But deferred cost is certainly NOT a way to manage cash.

In any case there is no cash transaction when you write off a deferred cost because it has already been paid. It means employees already received their salaries, suppliers have been paid for the goods and services that have been provided.

I do not think there is any fanboysm in trying to understand what deferred production cost means.

I interpret your term "dept" as debts.

In my opinion everything that you have to pay back in cash at one point is a debt like some liabilities, issued bonds and loans.

But please understand that deferred cost is NOT a debt. It is only a way to record a spending. It is a very similar concept to amortization, but applied to the production of goods you sell as opposed to the production means like buildings or tooling for amortization.

I am still puzzled by the fact many people are so obsessed by the notion of "deferred" cost.
Very honestly I didn't have any any clue what it meant when the gibberish started in the Internet. I spent a lot of time trying to figure out what it really means. I think I started to understand it. I can only hope people do the effort to understand the thing too.


It is always very sensible to avoid the word earnings when there is talked about the deferred cost. The deferred cost is not only a way to record spending, it is also a way to show higher earnings when you defer it. People confuse cash with something the company owns. If you lend yourself money, you increase your cash, but also increase your liabilities. If you increase your earnings you increase the amount of what you own. A company shows what is owns in the recorded equity and the equity at Boeing is negative. So at the end of Q2 2018 Boeing owes more than it owns. Add to that something what Boeing declares as an asset, the deferred cost, does not really exists as an asset. So all the cash Boeing uses is on loan, they do not own it.

As I say people want to own the cake and eat it at the same time. Boeing showed excessive earnings when deferring the cost, or with other word they showed more profit , than if they would have booked the cost, instead of deferring it. Boeing has now to take the deferred cost out of its current and future earnings, that means showing less profits, or even a loss.
To avoid talking about earnings, people talk about cash flow, which is not a measurement if a company is earning money or loosing it. It is a measurement if a company is liquid.

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