Boeing Shares Fall on Accounting Probe Report -- Update
12 February 2016 - 07:21AM
Dow Jones News
By Doug Cameron and Jon Ostrower
Boeing Co. shares fell sharply Thursday following a media report
that the Securities and Exchange Commission is probing the
aerospace group's accounting methods on two of its jetliner
programs.
The SEC is investigating whether Boeing properly accounted for
the long-term costs and expected sales of its 787 Dreamliner and
the 747 aircraft, Bloomberg News reported, citing people with
knowledge of the matter. SEC enforcement officials haven't reached
any conclusions and could decide against bringing a case, the
report said.
Boeing declined to comment on the Bloomberg report. "We
typically do not comment on media inquiries of this nature," said
John Dern, a Boeing spokesman. The SEC declined to comment.
Shares in Boeing, the world's largest aerospace company by
sales, were down 9% in early afternoon trading Thursday. That put
it on pace for possibly one of the biggest declines in the stock's
history, exceeding an 8.9% drop late last month on the day Boeing
issued disappointing financial guidance. That was the biggest
single-day drop since 2001.
The report also fueled a selloff in other aerospace stocks at a
time when investors in the sector have become increasingly nervous
that a multiyear boom in aircraft orders could founder as Boeing
and rival Airbus Group SE boost production to record levels.
Boeing uses a method called program accounting for its jetliners
that enables it to spread the multibillion-dollar costs of
developing new airliners over many years of the jet program's
expected production. Under the method, which is compliant with
Generally Accepted Accounting Principles, Boeing has been able to
report consistent profits on the Dreamliner program even though it
has cost more to build each plane than Boeing has gotten selling
them.
Boeing says program accounting, which it has used for decades,
is critical to enable projects that can stretch over decades but
require huge outlays early on that would otherwise result in big
swings in earnings. The method allows for booking expected future
profits as a part of current earnings.
Boeing tallies the accumulated shortfall between unit costs and
revenue as "deferred production costs." For the Dreamliner, that
tally grew to $28.5 billion as of the fourth quarter after delivery
of more than 350 of the aircraft since 2011. The sum doesn't
include billions of dollars of research and other costs that went
to bringing the Dreamliner to market.
Boeing expects to erase that deficit over time, because costs
for making jets generally fall substantially as manufacturers scale
up output and learn how to produce more efficiently. The company
said last month that it expects to start making money on a unit
basis on each 787 delivery later this year once it accelerates
production to 12 Dreamliners a month from 10.
Program accounting requires Boeing to estimate cost levels,
sales volumes, and anticipated pricing for jets that might be made
years in the future. With the Dreamliner, it set the accounting
block--the number of planes over which it averages those costs and
revenue--far larger than it has for other programs, beginning with
an estimate of 1,100 aircraft and raising that in 2013 to 1,300
aircraft, which amounts to about a decade of planned production.
Boeing said those estimates were driven by forecast demand for the
jet.
RBC analyst Rob Stallard said that while Boeing has long used
program accounting, the scale of deferred losses on the 787 could
have triggered a change in view by federal overseers. "It is
perhaps the eye-watering size of this 787 deferred balance that has
drawn the SEC's interest," he said.
Few other companies use program accounting. Rival Airbus
accounts for its jet programs differently, using International
Financial Reporting Standards, booking cost overruns as they occur
rather than trying to amortize them over the life of future
aircraft production.
Airbus took repeated hits to earnings during the development of
the A380 superjumbo as the plane's development and production costs
grew. Airbus last year began delivering the first A380 jets that no
longer lose money.
The 787 and 747-8 programs both ran into costly technical and
supply-chain problems that delayed their introduction and triggered
big charges in recent years. However, while the upgrade of the 747
has also proved to be a slow seller over the last decade,
Dreamliner sales have been strong, reinforcing investor expectation
for future cash flow.
Still, Boeing's shares have fallen sharply this year on concerns
its earnings and cash flow would fall short of expectations, and on
the company's surprise announcement that it would deliver fewer
planes this year.
The worries have spread to the broader aerospace sector, and
Thursday's report triggered another selloff. Spirit AeroSystems
Holdings Inc, one of Boeing's largest suppliers, fell 10% at one
point, though the shares recovered partly and were down 5.6% at
$42.41 in the early afternoon.
Robert Wall and Aruna Viswanatha contributed to this
article.
Write to Doug Cameron at doug.cameron@wsj.com and Jon Ostrower
at jon.ostrower@wsj.com
(END) Dow Jones Newswires
February 11, 2016 15:06 ET (20:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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