Leeham News and Analysis
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Leeham News and Analysis
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Boeing announces $2bn in new charges
July 21, 2016, © Leeham Co.: Boeing today announced $1.66bn in new after tax charges to its 787 and 747-8 commercial programs and a $393m after tax charge for its KC-46A USAF tanker program.
“On a pretax basis at the segment level, Boeing Commercial Airplanes will now record an earnings impact totaling $2.78 billion and the Boeing Military Aircraft segment of Boeing Defense, Space & Security will report an earnings impact of $219 million,” Boeing said in a statement.
Boeing also announced that a planned production rate increase for the 747-8 from 0.5/mo to 1/mo in 2019 has been cancelled.
Tanker charge anticipated
The tanker charge was not unexpected. An additional delivery delay due to technical problems and issues with the wing-mounted WARPS refueling pods mean that first deliveries in 3Q2017 won’t have operational WARPS, a requirement by the USAF. These issues led Wall Street aerospace analysts to expect a new charge.
Boeing is writing off two more of the original six 787 test airplanes as unsellable. These now become research & development charges.
The 747-8 charge also was not a particular surprise, except perhaps as to timing. Market demand for the passenger and freighter versions is anemic, at best. The firming last week by Volga Dnepr at the Farnborough Air Show of some of the commitments for 20 747-8Fs announced the year before at the Paris Air Show aren’t enough to fill the production line over the six years of the deal. Not all of the 20 commitments were firmed up—Boeing won’t say how many were, though Reuters reports the number was 13. Four of the 20 have already been delivered. It’s not clear if the four are within the 13 or in addition to the 13.
Notable is that at last week’s air show, Boeing reaffirmed its 20-year forecast that demand for the 747-8F will recover in 2019. Today, the anticipated production rate hike is cancelled.
“This is Boeing,” one aerospace analyst said. “Everything is fine until it’s not fine. That’s so typical Boeing that I almost laugh about it.”
Analysts react
LNC talked with two Wall Street analysts just as the business day was closing in New York.
Both said the charges, both expected and unexpected, are largely immaterial in the overall scheme of things. Their summarized views:
- The 747-8 charge “clears the decks” on the program and no more charges should be forthcoming. “Talk of a rate increase in 2019 didn’t make sense the first time around,” one analyst said.
- The tanker charge was somewhat less than the expected $500m, but this may not be the end of them.
- Writing off two 787s is inconsequential to the $29bn in deferred production costs and $3bn in deferred tooling costs on the program. An $847m charge out of $29bn draws a shrug.
- The stock bears will continue to be bearish. The bulls will continue to be bullish.
Stock was off about 1% in after-hours trading.
The full press release follows.
Boeing to Recognize Cost Reclassification and Charges to Second-Quarter Earnings
Amounts relate to 787 test aircraft cost reclassification, cargo market pressures on the 747 program, and previously announced KC-46 Tanker issues
EPS guidance for 2016 to be updated on July 27
2016 revenue and cash guidance reaffirmed
CHICAGO, July 21, 2016 /PRNewswire/ — The Boeing Company [NYSE: BA] announced today it will recognize an impact to earnings across three programs when it announces second-quarter 2016 results on July 27.
On the 787 program, the company decided not to invest funds for the refurbishment and sale of the two remaining unsold flight test aircraft that were scheduled to be introduced into the modification line. These two aircraft were produced in 2009 and have been used extensively for flight and ground testing, with both airplanes achieving more than 6,700 flight and ground testing hours combined. Costs associated with these aircraft were reclassified from 787 program inventory to research and development expense resulting in a non-cash after-tax charge of $847 million ($1.33 per share).
To account for current and anticipated weakness in the air cargo market, the company plans to continue producing 747-8 aircraft at a rate of 0.5 per month and no longer increase the production rate to 1.0 per month in 2019. An $814 million after-tax charge ($1.28 per share) on the 747 program reflects a lower estimated total of 747-8 Freighter aircraft to be produced in the program accounting quantity and lower estimated revenues on future aircraft sales.
Dennis Muilenburg, CEO of The Boeing Co.
“These are the right, proactive decisions to strengthen our business going forward,” said Boeing Chairman, President and Chief Executive Officer Dennis Muilenburg. “Our investment in 787 flight test airplanes paved the way for the growing Dreamliner fleet today and helped refine improvements for other platforms. On the 747 program, we continue to monitor the air cargo market and aggressively drive productivity and cost reduction as we work to win additional orders to support ongoing production.”
Boeing Chief Financial Officer and Executive Vice President of Corporate Development & Strategy Greg Smith characterized the decisions as “prudent actions that reflect market realities, reduce future financial risk and ultimately drive value to our shareholders.”
The company will also recognize a $393 million after-tax charge ($0.62 per share) on the KC-46 Tanker program. This charge reflects higher costs associated with previously announced program schedule and technical challenges, including implementation of the hardware solution to resolve the refueling boom axial load issue identified during flight testing, delays in the certification process and concurrency between late-stage development testing and initial production.
“This additional investment in the KC-46 supports the delivery timeline for the initial production aircraft and our transition to full-rate production,” said Muilenburg. “With the aircraft recently refueling an F-16, A-10 and C-17, we have now completed all necessary Milestone C testing to receive customer approval to enter production – a major step forward for this multi-decade production and support program. We remain confident in the long-term value of the KC-46 for our customers and our shareholders.”
In total, the company will record an after-tax earnings impact of $2.1 billion. On a pretax basis at the segment level, Boeing Commercial Airplanes will now record an earnings impact totaling $2.78 billion and the Boeing Military Aircraft segment of Boeing Defense, Space & Security will report an earnings impact of $219 million.
Guidance for 2016 revenue and cash is reaffirmed and the company will update earnings per share guidance on July 27.
How can writing off the two flight test aircraft amount to $847 at this point. If they had been sold, they would never have recovered anything like this amount so the majority of this cost should surely have been taken to R&D a long time ago.
The two most expensive airliners in history.
Having them in ‘inventory’ meant was counted like all the others built but not yet delivered as ‘like cash in bank’
Watch them add the $850 mill as additional 787 program cost
I don’t think so. They were originally part of the program cost until they were sold. This write off will remove them from the program cost.
They did say ‘remove from program inventory’, as they were planned to be sold like all bar the first unit for previous Boeing programs.
Its a forgotten feature of accountancy rules, but inventory that hasnt been sold but is intended to be, is counted as ‘cash in hand’. Cars companies have 10’s billions of ‘cash in hand’ that is really cars moving from factory to dealer lots, some times 3 months supply.
@DofU
They were ‘planned to be sold’ some time in the dim distant past. This has not been the case for maybe 10 years given the extensive rework etc. Holding them as inventory over this period of time at cost must be plain wrong given they have effectively had minimal value beyond fairground attraction status since the end of the flight programme. Pure manipulation of financial statements to support senior management pay packets.
Boeing also appears to have forgotten the Accounting rule that inventory is supposed to be valued at lower of cost or market. no way the market price of those aircraft was ever $400 million a piece, so that write-off should have been taken years ago.
People go to jail for those kind of accounting fudges (unless you are Boeing and can claim lack of materiality). 😉
IMU massively overvalued inventory is an intrinsic property of project accounting.
A big toolbox of bookkeeping measures to boost the value of all assets and move dept out of sight developed over the last 40..50 years to compensate for the downsides of a carnivorous management culture.
As “planned to be sold” items their cost was probably booked as a valuable inventory item and moved into deferred cost. think about R&D budget volume if 6 frames at a $1B each had been booked there.
The way it was done the test frames represented the sky high starting point of the learning curve available
for deferring in scope of project accounting. … and prettily pimping the inventory value too. Looks good, man!
Written off =R+D=tax deductible
I would guess that there is little or no impact on the cash taxes. Cash taxes have a lot more to do with cash profits than accounting earnings. Since the 787s were produced in 2009 at an incredibly high cost, those implied losses were likely used to reduce Boeing’s tax liability in the past, even though the losses are only being booked for accounting purposes now.
So the Taxpayer bail out Boeing once again.
It may not cost the USAF but it sure costs us.
I am still awaiting MUCH greater 787 write offs out of the obscene $ 32 Billion balance sheet items B is still “suspensing”. Even over 850 units that’s north of $ 37 million per aircraft and it is totally unrealistic to think that is achievable given pricing pressures from A.
I am amazed that B’ s auditors keep drinking the koolaid… Is Arthur Andersen back in business?
“I am amazed that B’ s auditors keep drinking the koolaid”
Once you have gone there, there is no going ( actually you can’t even give the impression of turning around) back without a financial and share value implosion. Keyword is “debilitating addiction”.
J-P G: thank you I had forgotten our good friends at AA, enough to drive you to drink and then the need of AAA
Why isnt the headline ‘Boeing announces nearly $3 bill of charges’ as thats what the all up sum is very close to.
Some food for thought and debate. Using the 787-9s as a remaining 787 block proxy, the 787-9 has an apparent recent fair market value of $142.5M. Applying a very aspirational (very high) profit margin of 15.0%, that’s a $21.375M profit per plane. Over 850 remaining 87 block frames, that’s roughly a total of $18.2 billion. Subtract that sum from $31.6 billion in currently remains capitalized inventory and r&d costs, and you have a probable, “best case” , estimated, embedded program loss of $13.4 billion. The Feds are going to have an absolute field day picking apart Boeing’s failure to take much more major program writedowns–once 787 capitalized costs exceeded $20.0 billion or so.
It depends what you mean by 15% profit margin. Boeing would be delighted to make a 15% company-wide (or segment-wide) profit margin. It calls that kind of mid-teens range its “aspirational” target. But that includes everything: most notably, R&D costs and high-cost early production units.
When you get out to program maturity, a 15% cash margin would be pretty terrible. I don’t see any reason why the cash profit margin on the 787 can’t reach 25% by 2020, in line with where the 777 has been (according to most estimates I’ve seen). Maybe even higher, if Boeing’s cost-cutting plans are really successful.
The 787-9 is probably already profitable on a cash basis, with the 787-8 accounting for more than 100% of the incremental cash losses. Production costs decline pretty much continuously in the aircraft manufacturing business and could easily be 20% lower in 2020 on a unit basis than was the case at the beginning of 2016.
I don’t think Boeing has a prayer of making up the entire deferred cost within the 1,300 unit accounting block, but I also don’t think it’s remotely plausible that total production will end at 1,300 units. If it takes another 200 planes to reach breakeven, so be it.
The 777 had no real competitor for almost its entire life; that only changed very recently with the A35K. Its closest competitors were the A346 (not a great aircraft) and the MD11 and B744 (both Boeing owned, and neither that competitive anyway).
In comparison, the B789 has to compete against the A339. The B789 should have ~800 nm more range than a 245t A339, which helps for some niche missions. However, that’s its only advantage. Given that the A339 has significantly lower production costs and dramatically lower R&D costs, it’s very hard to see how Boeing could sell many hundreds of B789s at 777-like margins going forward.
He did say a notional an spread over the program its probably a good average, maybe even high.
On the other hand if it sells 2000 or so, it will break even!
Well done, our goal is to break even, no matter how much it costs.
One of our guys at work came up with a very painful saying
We Do It Right Because We Do it Twice!
Boeing are being brought kicking and squealing into line. The new paradigm of low(er) fuel prices and softer price points mean the program losses/ write downs are going to be huge. This is an appalling indictment of what program accounting allows companies to get away with and in particular how it has been applied by Boeing.
I am not privy to the detail of possible sanctions that can be brought against Boeing but the current environment of SOX and greater shareholder activism would suggest that senior management are at very real risk of either criminal or civil lawsuits brought for the unwillingness to account for the losses on this program.
In simple terms Airbus accommodated losses on the A380 as they were incurred, the pain has already been suffered but Boeing has an open and festering sore related to the B787 which will run and run. The current CEO should have opened with this write down on taking over, the longer you wait the greater the eventual pain.
Nearly correct, remember Airbus management gave an overly optimistic picture of A380 delays, it cost them their jobs and nearly cost them goal time. Lesson learnt. Current managements cautious approach to new programs is a legacy. The important thing about the A380 and A400 messes is Airbus learnt from them and did a better job of communicating A350 problems afterwards, but it seems to me all Boeing learnt was fear to try another new clean sheet project.
“..nd nearly cost them goal time.”
IMU linked to trading in shares based on yet undisclosed ( but required to be disclosed ) information. aka Insider Trading.
I am merely talking of the booking of cost, I take your point regarding the management speak but that is another matter. Note the weary acceptance of this news by investors, it has already been built into the BA price of the share but it was still worthwhile for senior management, they got their bonuses……
I read years ago that analysts were worried about the effect of selling the first 20-25 or so 787s as they completed re-work, they where well aware of the difference between the inventory value and the sales value of those aircraft.
No evidence of that, in that 787 inventory was separately listed from all other inventory which would be readily sellable. Yes there was speculation about the selling price but no info about the value on Boeings books.
As fuel prices have dropped the selling prices would have tanked along with that.
From Bloomberg in 2014 when they started selling the 10 or so 787s left on the flight line ( 3 more had been given to museums)
“Buyers would probably pay less than half the current $211.8 million list price of the 787-8 version, Kelly said. The 787 teens have a market value of $115 million each for a single-unit or small lot sale, according to Avitas estimates. Airlines will probably demand 10 percent to 15 percent discounts, bringing the price closer to $100 million”
‘Boeing recorded a $2.7 billion research and development expense after concluding it couldn’t sell the first three 787 flight-test Dreamliners in 2009 because they required “an inordinate amount of rework.”
http://www.bloomberg.com/news/articles/2014-02-25/boeing-said-to-seek-buyers-for-1-1-billion-of-early-787s
In 2012 it was estimated Boeing 787 inventory was $24 bill
Simple questions or observations. come to mind.
How many customers will buy a product that has a publicly acknowledged multi million loss built into the bottom line?
How many lessors will be willing to finance something that is not fair value?
Is this issue one of the reasons the Exim bank are having problems maintaining their credit lines?
I’d be delighted to a car for less than it cost to make
Ferrari for sure – Chrysler in no way!
That’s the Tesla.
We are talking airplanes here, so far they are doing just fine.
They are bought on a 20+ year produc9on basis as well as in service and how much revenue they will generate.
Its not like Boeing will stop making them tomorrow and then the parts disappear in a year.
Its not a Yugo in other words (granted early on you had to wonder) .