The first Boeing 747-8 Intercontinental.

The first Boeing 747-8 Intercontinental.

Feds reportedly investigating Boeing’s 787, 747 accounting

  • By Robert Schmidt, Julie Johnsson and Matt Robinson Bloomberg News
  • Thursday, February 11, 2016 1:00pm
  • BusinessEverett

The Securities and Exchange Commission is investigating whether the Boeing Co. properly accounted for the costs and expected sales of two of its best-known jetliners, according to people with knowledge of the matter.

The probe centers on projections Boeing made about the long-term profitability for the 787 Dreamliner and the 747 jumbo aircraft, said one of the people, who asked not to be named because the investigation isn’t public. Both planes are among Boeing’s most iconic, renowned for the technological advancements as well as the development headaches they brought the company.

Underlying the SEC review is a financial reporting method known as “program accounting” that allows Boeing to spread the enormous up-front costs of manufacturing planes over many years. While the SEC has broadly blessed its use in the aerospace industry, critics have said the system can give too much leeway to smooth earnings and obscure potential losses.

“We typically do not comment on media inquiries of this nature,” Boeing spokesman Chaz Bickers said in an emailed statement. SEC spokesman John Nester declined to comment.

SEC enforcement officials have yet to reach any conclusions and could decide against bringing a case, said the people. The issues involved are complex, and there are few black-and-white rules governing how companies apply program accounting, one person said.

After the news broke, Boeing’s stock price plummeted as much as 11 percent in trading on Thursday, eventually closing down 6.8 percent at $108.42 per share. Stock prices for other aerospace companies took a hit, as well. However, most companies do not face the same questions about their accounting. Those that do use program accounting, such as Spirit Aerosystems and Triumph Group, are not carrying anything approaching Boeing’s nearly $30 billion deferred cost balance for the 787 program.

If the SEC acts against Boeing, it is unlikely to trickle down to other aerospace companies, RBC Capital analyst Rob Stallard said in a note to investors.

Program accounting has been around for decades. It was first championed by the aerospace industry to address the problem that companies’ biggest expenses are amassed up front, as they design planes and devise manufacturing processes. Costs typically fall as the assembly becomes more efficient, making it cheaper to build the later jets than the earlier ones.

The method, which is fully compliant with Generally Accepted Accounting Principles, lets companies average out the costs and anticipated profits over the duration of the “program” for a specific jet, a period that can last decades and encompass hundreds or even thousands of aircraft.

The expected costs and sales are estimates and they must be updated — and a loss recorded — when the program is determined to have reached a point where earnings won’t catch up to losses.

As part of the investigation, SEC enforcement attorneys are examining whether Boeing’s financial statements relied on sales forecasts that might be too optimistic, one person said. Another avenue of inquiry is whether Boeing’s estimates for declining production costs will come to fruition, the person said.

A whistleblower has given SEC officials internal documents and data about Boeing’s accounting, according to the people. The tipster first raised concerns with the regulator more than a year ago, one person said. SEC policy is to not reveal the identities of whistleblowers.

Over the years, a handful of aerospace analysts have questioned whether Boeing will be able to recoup its costs for both the 787 and the latest 747, both of which debuted far behind schedule in 2011. In general, the company has enjoyed a good reputation on Wall Street, earning billions of dollars in annual profits and winning buy recommendations from most researchers who follow the industry.

Boeing’s accounting projects that the company will eventually make money on the Dreamliner, despite already spending $28.5 billion on inventory and manufacturing. The forecast hinges on Boeing selling about 1,300 planes and assumes profits on its later deliveries will offset high costs stemming from early production snarls.

To do that, Boeing has to squeeze about $40 million from the cost of making each 787, according to analyst Richard Aboulafia, vice president of the Teal Group, a consulting firm in Fairfax, Virginia.

Many analysts expect Boeing will not make all that money back and will have to write off several billion dollars as a loss.

Boeing told investors during a January conference call that its Dreamliner expenses would plateau this year and then begin to decline as it speeds production.

“We still have work ahead of us on the 787,” Boeing Chief Executive Officer Dennis Muilenburg said on the call. He added that the company is “focused on solid day-to-day execution and risk reduction, while improving long-term productivity and cash flow.”

Some analysts are skeptical that margins will improve enough to offset money that Boeing has already poured into the 787. Credit Suisse Group analyst Robert Spingarn estimated the company may face a $7.5 billion shortfall on the jet, according to a December report.

Boeing’s outlook for the latest and largest version of its jumbo family, known as the 747-8, has also been questioned by some aerospace analysts.

Over the years, Boeing has recorded several accounting losses, totaling $2.6 billion, for the 747-8 program. The most recent was last month, when the company reported an after-tax loss of $569 million and announced it would halve its production to six jumbos a year.

Boeing’s current accounting estimates for the program’s profitability rely on it selling 35 more 747-8s.

Meeting those numbers could be a challenge. The company has only had 121 orders for the jet since 2005, and most of those sales came before the 2008 financial crisis. In addition, Boeing only netted two 747-8 sales over the previous two years. It ended up buying both planes itself as part of a lease-back deal with a Russian cargo company.

Boeing executives have said they are hopeful of a possible resurgence late this decade for the 747 freighter, whose size and cargo-loading capabilities are unmatched. The company’s other sales prospects for the 747 include replacements for the Air Force One aircraft that ferry U.S. presidents.

Jason Gursky, senior aerospace and defense analyst with Citigroup, isn’t as optimistic.

“We expect the line to fully close early next decade after the Air Force One replacement,” Gursky wrote in a Jan. 22 report. He said the 747 order book is “very weak.”

Having to work off enormous deferred production costs means Boeing will have much less cash for research and design to stay ahead in the market and compete with Airbus.

On Wednesday, Boeing Commercial Airplanes CEO Ray Conner said the company plans to cut jobs and trim other costs due to competition and pricing pressure from Airbus.

Herald writer Dan Catchpole contributed.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A closing sign hangs above the entrance of the Big Lots at Evergreen and Madison on Monday, July 22, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Big Lots announces it will shutter Everett and Lynnwood stores

The Marysville store will remain open for now. The retailer reported declining sales in the first quarter of the year.

George Montemor poses for a photo in front of his office in Lynnwood, Washington on Tuesday, July 30, 2024.  (Annie Barker / The Herald)
Despite high mortgage rates, Snohomish County home market still competitive

Snohomish County homes priced from $550K to $850K are pulling in multiple offers and selling quickly.

Henry M. Jackson High School’s robotic team, Jack in the Bot, shake hands at the 2024 Indiana Robotics Invitational.(Henry M. Jackson High School)
Mill Creek robotics team — Jack in the Bot — wins big

Henry M. Jackson High School students took first place at the Indiana Robotic Invitational for the second year in a row.

The computer science and robotics and artificial intelligence department faculty includes (left to right) faculty department head Allison Obourn; Dean Carey Schroyer; Ishaani Priyadarshini; ROBAI department head Sirine Maalej and Charlene Lugli. PHOTO: Arutyun Sargsyan / Edmonds College.
Edmonds College to offer 2 new four-year degree programs

The college is accepting applications for bachelor programs in computer science as well as robotics and artificial intelligence.

FILE — Boeing 737 MAX8 airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing said on Wednesday, Feb. 21, 2024, that it was shaking up the leadership in its commercial airplanes unit after a harrowing incident last month during which a piece fell off a 737 Max 9 jet in flight. (Ruth Fremson/The New York Times)
Federal judge rejects Boeing’s guilty plea related to 737 Max crashes

The plea agreement included a fine of up to $487 million and three years of probation.

Neetha Hsu practices a command with Marley, left, and Andie Holsten practices with Oshie, right, during a puppy training class at The Everett Zoom Room in Everett, Washington on Wednesday, July 3, 2024. (Annie Barker / The Herald)
Tricks of the trade: New Everett dog training gym is a people-pleaser

Everett Zoom Room offers training for puppies, dogs and their owners: “We don’t train dogs, we train the people who love them.”

Andy Bronson/ The Herald 

Everett mayor Ray Stephenson looks over the city on Tuesday, Jan. 5, 2015 in Everett, Wa. Stephanson sees  Utah’s “housing first” model – dealing with homelessness first before tackling related issues – is one Everett and Snohomish County should adopt.

Local:issuesStephanson

Shot on: 1/5/16
Economic Alliance taps former Everett mayor as CEO

Ray Stephanson will serve as the interim leader of the Snohomish County group.

Molbak's Garden + Home in Woodinville, Washington will close on Jan. 28. (Photo courtesy of Molbak's)
After tumultuous year, Molbak’s is being demolished in Woodinville

The beloved garden store closed in January. And a fundraising initiative to revitalize the space fell short.

Everett Mayor Cassie Franklin, Advanced Manufacturing Skills Center executive director Larry Cluphf, Boeing Director of manufacturing and safety Cameron Myers, Edmonds College President Amit Singh, U.S. Rep. Rick Larsen, and Snohomish County Executive Dave Somers participate in a ribbon-cutting ceremony on Tuesday, July 2 celebrating the opening of a new fuselage training lab at Paine Field. Credit: Arutyun Sargsyan / Edmonds College
‘Magic happens’: Paine Field aerospace center dedicates new hands-on lab

Last month, Edmonds College officials cut the ribbon on a new training lab — a section of a 12-ton Boeing 767 tanker.

Gov. Jay Inslee presents CEO Fredrik Hellstrom with the Swedish flag during a grand opening ceremony for Sweden-based Echandia on Tuesday, July 30, 2024, in Marysville, Washington. (Ryan Berry / The Herald)
Swedish battery maker opens first U.S. facility in Marysville

Echandia’s marine battery systems power everything from tug boats to passenger and car ferries.

Helion Energy CEO and co-founder David Kirtley talks to Governor Jay Inslee about Trenta, Helion’s 6th fusion prototype, during a tour of their facility on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
State grants Everett-based Helion a fusion energy license

The permit allows Helion to use radioactive materials to operate the company’s fusion generator.

People walk past the new J.sweets storefront in Alderwood Mall on Thursday, July 25, 2024, in Lynnwood, Washington. (Olivia Vanni / The Herald)
New Japanese-style sweets shop to open in Lynnwood

J. Sweets, offering traditional Japanese and western style treats opens, could open by early August at the Alderwood mall.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.