By Karl Sinclair
Feb. 04, 2025, © Leeham News: The Boeing Company (BA) released its 2024 FY Annual Report this week and as expected, it was awash with red ink.
On the Jan. 28, 2025, earnings call, CFO Brian West had this to say, in reference to a question regarding the inventory build-up:
“In terms of the inventory, we’ve got $87.5bn worth of inventory in the company right now…. So that is the big cash flow benefit that we’re going to see over the next couple of years-ish and it’s all because we’ve been sitting on this big investment that we look forward to having unwind with deliveries, and that’s what we’re focused the team on out in Seattle.”
Indeed, the balance sheet does indicate a figure of $87.55bn sitting in the Inventory account, but what is the detailed break-down of what is contained therein?
The recent five-month certification stoppage on the 777X program, due to the thrust-link breaks, forced Boeing to take a charge on the program in 2024 of $3.499bn This is in addition to the $6.493bn reach-forward loss taken on the 777X in 2020.
Along the way, Boeing has also recorded “abnormal production costs”. In 2023 and 2022 the program wrote off $513m and $325m, respectively.
For those keeping track, this is $10.83bn in losses for the variant, without having delivered a single aircraft to an airline or lessor.
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It is a recurring problem for Boeing and one that traces all the way back to when it started using program accounting to report earnings.
Inventory dumping ground
Each quarter, in the Boeing financial reports section titled Inventories, are the details of what makes up that account.
For Boeing Commercial Aircraft (BCA) it is broken down by program; 737 MAX, 787 and 777X.
It can get a little wordy, but if you can understand the code, you can make sense of it:
At December 31, 2024, and 2023, commercial aircraft programs inventory included the following amounts related to the 737 program: deferred production costs of $9,679 and $6,011 and unamortized tooling and other non-recurring costs of $909 and $792. (in millions)
Deferred production costs (DPC) are simply expenses that have been accumulated and will be pulled out at a later date.
Typically, expenses are recorded onto the Income Statement during the period for which they are incurred, matching revenues and costs.
Program Accounting allows Boeing to put those amounts into Inventory and keep them there, until it decides to pull them out.
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Falling onto the income statement
Normally these accrued amounts are expensed with a delivery. Other times, they are written off.
In the case of the 737 MAX, DPCs went up in 2024, from $6.011bn to $9.679bn.
Tooling also increased over the same period, from $792m to $909m.
Typically, tooling gets sold for scrap value prices, after a production run is finished, like the 757 program, for pennies on the dollar.
The final piece to the puzzle is Customer Compensation, which is also retained in Inventory.
Commercial aircraft programs inventory included amounts credited in cash or other consideration (early issue sales consideration) to airline customers totaling $5,837 and $4,126 at December 31, 2024, and 2023. (in millions)
In 2024, amounts relating to DPCs, tooling and customer compensation squirreled away in Inventory rose $4.447bn to $35.095bn. Expenses, not aircraft that can be sold.
Purposefully ambiguous?
Inventory is an asset account on the balance sheet. Assets are one of the things that are considered, when evaluating a corporation, and is used in various financial ratios, especially when the company CFO publicly declares an amount in an earnings call.
Source: Boeing 2024 10-K
A $35bn reduction, due to them being DPCs, would devalue Inventories to $52.55bn for 2024, a not insignificant amount.
Many investors would look at the balance sheet and assume that Boeing has over $87bn in product that it is able to sell to customers.
Another $10.43bn of inventory is spare parts, used aircraft and general stock materials. Removing that along with the DPCs leaves ~$42bn in Inventory, 48% of the number indicated on the balance sheet.
Historical Losses
Periodically, Boeing has announced write-offs against a particular program. This can come in the form of a reach-forward loss, an abnormal production charge or an adjustment, when funds are judged to be non-recoverable with aircraft sales.
Boeing commercial has written off a total of $42.972bn on its three main programs, the 737 MAX, the 777X and the 787, as of December 31, 2024.
It is worth noting that an eye-watering $38.9bn of those write-offs, charges and abnormal production costs have come since the grounding of the 737 MAX in 2019.
The final piece to the puzzle
As stated in the financials, Boeing relies heavily on the use of estimates, when using program accounting.
How many aircraft will be sold over the life of the program? How much revenue will be generated? What will the costs be to produce those airframes? How much profit will be generated?
All of these projections are updated on a quarterly basis and as parameters change. So do the estimates.
Boeing also reports in the financials, when it expects to zero the DPC balance on a program.
Here are the details for the 787 program, at the end of 2024:
At December 31, 2024, $11,224 [in millions] of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders, and $3,324 are expected to be recovered from units included in the program accounting quantity that represent expected future orders.
The current 787 firm orders are not enough to cover all of the amounts in the balance of DPCs sitting in Inventory on the Dreamliner program. The Boeing backlog for the 787 is 719 firm orders, after ASC606 accounting adjustments. They represent a shortfall of ~30% to zero out the balance.
Boeing expects that orders it has yet to receive will cover expenses made in the past.
It is going to be a long road to recovery for Boeing Commercial. Those amounts accrued in the deferred production costs will be on the balance sheet for a long time to come.
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