Wednesday, February 17, 2016

The 787 Gets Better As The A350 Rolls With Deliveries.

A strange headline indeed. The 787 is in almost every density market. It needs the A350 emergence in those same markets to complete the 787. Seattle/Boeing CEO Dennis Muilenburg thinks so and he preaches the 787 has only just begun an epic ride into the future. 

The Puget Sound Business Journal thinks so  Muilenburg: “Speaking before the Barclays Industrial Select Conference in Miami Beach on Wednesday, Muilenburg was open about the $28 billion in deferred costs on Boeing’s books due to the 787’s difficult early years. But he said he’s not looking back. "

“We invested a lot in 787 up front,” he said. “Deferred production inventory north of $28 billion that tells you we’ve made a substantial investment. That is investment that is now behind us.”

It’s a "Damn the SEC, full money pit climb out ahead" approach. In spite of declaration of an impending SEC audit, Boeing will answer any audit finding with "that's the way we've always done it" answer. I have often heard that response coming from any business floor and going to the top of the heap. How did I respond? I did the audit anyways and as an assigned hit on corporate policy and procedure with recommendations. 

Somewhere in between is the truth. Boeing has always pushed forward its front-end costs of making a new airplane. They have been audited continuously, and were fond essentially, Boeing is within the confines GAAP pronouncements and definition. The SEC is late to this dog fight, and has found in its sample testing an accounting loop-hole, which Boeing has exploited, thus tainting stock value.

In hopes of making a point here, it is important to note there are more than one way to skin a cat and appearance is everything. Boeing subscribed to the "appearance" methodology. It was early on where Boeing determined a spiraling, out of control costs for the 787 program. If Boeing recognizes to its stockholders a deep cost up front for which it incurs a never ending wait on profitability. Boeing will be buried until 2024, when stockholders won't wait that long and will dump Boeing stock with an unfair perception Boeing can't make money on the 787 when it will eventually.

Having said that, Boeing took the perfectly acceptable accounting principal, where "special costs” can be deferred only showing the usual production and materials expenses against every 787 delivered. While those "other costs" are placed in the Boeing 787 $28 Billion dollar money pit called Deferred Costs. These costs in this bucket includes but are not limited to process change, technology development, and production do-overs along the way.

Remember when the battery fix caused Boeing Billions of dollars to fix, "deferred cost". Another instance had delamination occurring on the factory floor. The fasteners during the 787 production onset were inconsistent and did not meet Boeing engineering standards. Production floor changes, streamlines the making a complete 787 as it occurred in the new SC plant. It was a mess in the early years. Those I am sure went into the deferred costs bucket when Boeing was amassing the 28.5 Billion costs recognition.

What the SEC hopes to prove is that some of those development items are not really a development item and should be classified as a part of building each 787, making the costs a recognized production cost, which will annoy the factory bottom line for a long time. Boeing cleared of some those costs off as deadwood from its production books by moving those cost to the aforementioned deferred cost barrel.

Boeing is confident they have used a generally accepted accounting industry practice in this many faceted journey of the 787. The SEC wants Boeing to show these one time or sometime costs up front which would cause Boeing to show all its development losses up front which is not generally accepted by the industry.

The interesting thing is that it will take about 1,300 787 delivered to erase the money pit, whether it’s is recognized in current year financials as a potential 28.5 billion loss up front, or as a deferred cost pit which is amortized over time allowing the 787 shows a cash positive flow going forward. This would be a drastic change to the Boeing Stock value thus taking about to 2024 to recover its stock. When the 1,300th 787 is delivered, it no longer matters how the 787 program was accounted from the beginning. 

This huge digression on the SEC does not address the article's headline.

The A350 entry into service allows the 787 to really shine since the A350 won't compare well with similar scenarios found in the market place.