Wednesday, October 21, 2015

Boeing's Deferred Cost Soften During Third QTR

Boeing has been tap dancing around deferred cost for some time with its 787, KC-46 programs or the 737 Max programs. It is not to say they cannot become profitable over the long haul from having a swelling Deferred Cost notebook. However, it is to say the program risks do pile up in the form of cash as deferred cost.

Every Boeing risk can show up on a project can turn into a deferred cost line item. So what is the Gremlin called "Deferred Cost", set aside from a program profitability structure. As mentioned before on this Blog a recognition is given for this occurrence and moved off a project's books and set in its own room until further notice. Boeing can recover the accumulation of this cost through judicious use from its solutions gained while expending capital for mitigating of any risk encountered. The 787 project had more than 27 Billion deferred problems encountered during its inception until the end of the third quarter 2015. The accumulation of risk cost has been deferred into this pot during the journey from R & D to current production.

The 787 has only accumulated about a 2% gain in deferred cost during the third quarter which is a decrease from about a 8% increases found during 2013. The big news is the 787 learning curve on the factory floor. The Dreamliner is becoming a very efficient build from start to finish, pushing 787's out the door without expectations of any mishap in process. 

This is called a cash cow in the industry. More aircraft made this way reduces the margin of deferred cost or having accounting value set aside because it's viewed as part of the overarching development of the aircraft. A true per unit profitability has not been obtained through its continuation of R&D expenditures, nor experiencing other risks it has encountered during its deployment to customers. 

However the day is coming where the 787 will have a benchmark moment where Boeing will have an actual cost for the 787 which will give the 787 an actual profit mechanism. 

The deferred cost account then can have a contribution towards its reduction, coming from the 787 production flow and other programs borrowing from the 787 lessons learned and risk resolutions applied to its own program. Accounting is for people who love order out of chaos.

Boeing has a backlog window to achieve its cash goals providing a little more time for the 787 profitability segregated from deferred cost.