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Company: Boeing Company (Ticker Symbol: BA)

Transaction #4: Reacquisition of Equity – Accelerated Stock Repurchase Program (ASR)

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Understand the business and industry:

The Boeing Company is one of the world’s major aerospace firms and operates in four segments: Commercial Airplanes; Defense, Space & Security; Global Services; and Boeing Capital. Under the commercial airplane segment, Boeing produces and markets commercial jet aircraft and provides fleet support services worldwide. Research and development are conducted primarily for the production and modification of military aircraft and weapons under the defense, space, and security segment. The global services segment provides support for business conducted under both of the previous segments for both commercial and government customers. More specifically, Boeing’s customers are airlines, the US government and some US allied foreign governments in 150 different countries. Revenues are derived from US government contracts (31% in 2017), and non-US customers (55% in 2017) with the majority of revenue being derived from fixed-price contracts.

The largest costs for Boeing are depreciation and amortization. With respect to commercial airlines they have unique characteristics and will fare better in regulated but growing markets (Dempsey). However, when looking at fair prices relative to the value of the dollar, fair prices have been declining for more than 60 years. For these reasons, Boeing likely competes on value when selling to commercial airlines. With respect to defense products (fighter jets) they are competing on variety of performance criteria. Boeing has acquired technology through mergers; the F-15 aircraft is an example of this. They also face strong competition for government contracts from other US firms like Northrop Grumman.

Facts and background of the transaction:

This section will briefly explain the reason for the transaction and the parties involved. An Accelerated Share Repurchase program (ASR) is similar to a traditional stock repurchase plan. There are several reasons that a firm would choose to buy back its own stock. First, a share buyback will boost earnings per share (EPS), because any share buyback reduces outstanding shares. EPS is a ratio and the value will increase when the denominator decreases. In the basic EPS formula, the denominator is shares outstanding in the market.

Another reason for a stock repurchase program is to distribute excess cash back to shareholders (Anand). This occurs because the repurchase offer from the firm is slightly above the market price of the stock in most cases. Previous traditional stock repurchase programs at Boeing occurred over more than one accounting period. Here is one example: in December, 2017 Boeing announced an $18 billion dollar stock repurchase program. This replaces the previous program. In the previous $14 billion program, Boeing had already repurchased $9.2 billion in shares over an extended period of time (Rich). An ASR occurs more quickly and will likely occur within a single accounting year. An ASR has a settlement cycle, this cycle starts the day the trade is made and then ends when the shares are paid for. With ASR the firm is transferring some risk to the investment bank.

In reality a firm could obtain financing in order to complete a large scale ASR. In this case there would be two basic types of transactions to deal with. There would be the borrowing of funds used to repurchase stock with the associated interest expenses. There would also be the ASR transaction which involves these specific parties: Boeing, an investment bank, and shareholders. ASR gives more certainty to the overall cost of the repurchase program.

Define the problem :

Boeing plans to start an (ASR) program. This is a combination of transactions that will allow Boeing to repurchase a targeted number of shares immediately. This is at odds with historic repurchase programs and so it will require a new accounting procedure that is different than what was used with previous programs.

The researchable question here is what is the correct procedure for ASR. In this situation Boeing is entering into a forward contract with an investment bank (that will be purchasing the shares). Generally with ASR, earnings per share benefits are recognized immediately. At the same time gains or losses from the contract will bypass the firm’s income statement (Dickinson). On the other hand, regular gains and losses unrelated to ASR would still appear on the income statement. According to the details of transaction #4, the date on which Boeing pays the counterparties is April 24, 2018. In this transaction ‘stock retirement benefits’ simply mean the retirement reduces shares outstanding also.

Unlike the historic repurchase situation, Boeing is not purchasing shares directly from the open market. Boeing will purchase shares from an investment bank (for a fixed amount) that in turn will purchase shares from the market. Accelerated share repurchase is usually accomplished in two steps. First, Boeing would enter into a forward sale agreement with the investment bank and pay cash at this time. Second, the investment bank borrows the shares from clients or share lenders and delivers the shares to the company, which immediately reduces outstanding share count. Over time, ranging from days to several months, the shares would be returned to these share lenders by the investment bank through purchases in the open market (Investopedia).

Search for guidance :

Stock repurchasing is covered in the Equity section of the codification. While the ASR is outstanding, the value of shares may change. If the market price increases, the firm would record a liability. However, if the market price of shares decreases then the firm would record a receivable. Generally, the balance sheet would not reflect the possible asset or liability value of the ASR before the transaction settles. Paragraph 505-30-45-1 permits the cost of acquired stock to either be shown separately as a deduction from the total of capital stock, additional paid-in capital, and retained earnings, or be accorded the following accounting treatment appropriate for retired stock. A repurchase of shares above or below current market prices causes a portion of the purchase price to be allocated to other elements (505-30-50-3).

According to the details of transaction #4, the date on which Boeing pays the counterparties is April 24, 2018. This is the first of two simultaneous transactions that will need to be reported. The second is the forward contract indexed to its own stock. This is clearly outlined in ASC 505-30-25-6.

Analyze and document alternatives (for reporting purposes):

Utilizing the FASB Codification, it outlines specifically how to account for the ASR transactions. Boeing will pay the expected cost of 70% of the repurchased shares on April 24, 2018, but at maturity, the final payment (forward contract) is a bit more complex. You will need the prepayment amount, the volume-weighted average price (VWAP), the discount, and the number of shares delivered upfront. Additional guidance on how to account for this will be in Paragraph 505-30-55-1.

VWAP Calculation: Shares Bought x Share Price

Total Volume

Prepayment Calculation: $ Amount of Repurchase x 70%

The transaction has no mention of utilizing the exchange of stock (instead of cash) for payment to the investment bank for some of the payment for the transaction. This could be a great option if they are not wanting to fully reduce their cash reserves, but still wanted to reduce the number of investors who held their stock. The Codification states in Paragraph 505-30-55-5 “cash or shares of common stock” as a means to calculate the cost of the forward contact.

While the Codification doesn’t allow for much flexibility in how the transaction is recorded, there could be flexibility in how they handle the excess equity. They could have decided to do a dividend instead of a repurchase. This allows money to be returned to the investors, but doesn’t have a much risk in regard to the markets fluctuation (Picardo). They also could have given the investment bank a certain number of shares that they would have wanted, rather than the fixed amount of cash, and just had either additional payment or credits needed at the end of the requisition. The Codification doesn’t specify that you have to start with a payment of 70% of the shares expected cost.

Justify and document conclusion :

In addition to the demonstrable impact on a company’s Earning-per-Share value when an ASR is completed, there is also the added benefit related to a greater degree of internal controls. While there is an inherent covenant between a company and its shareholders; attempting to satisfy many and varied interests, from profits to acquisition to environmentally responsible sourcing can dilute the vision and values of the company in question.

Utilizing an ASR for repurchase of stock can help alleviate market volatility as the volume weighted average price is the primary cost driver in the transaction with the investment bank while granting Boeing the immediacy of share delivery. Also, evidence supports that firms using ASR have higher profit margins in the post announcement four quarters versus firms using open market purchases (Chemmanur).

Works Cited:

Anand, Kshitij. Good or bad? Top five reasons why companies go for share buyback. Web:

https://economictimes.indiatimes.com/markets/stocks/news/good-or-bad-top-five-reasons-why-companies-go-for-share-buyback/articleshow/57267018.cms

Accessed February 22, 2018.

Boeing Co. (2017). Form 10-K 2017. Retrieved from SEC EDGAR website https://www.sec.gov/cgi-bin/viewer?action=view&cik=12927&accession_number=0000012927-18-000007&xbrl_type=v

Accessed February 22, 2018.

Boeing Co. (2018). Boeing In Brief. Retrieved from http://www.boeing.com/company/general-info/index.page#/overview

Accessed February 22, 2018.

Chemmanur, Thomas J., Yingmei Cheng, and Tianming Zhang, 2010, Why do firms undertake accelerated share repurchase programs? Working paper, Boston College and Florida State University.

Dempsey, Paul. The Cyclical Crisis in Commercial Aviation. Web:

https://www.mcgill.ca/iasl/files/iasl/ASPL614-Airline-Financial-Woes.pdf

Accessed February 22, 2018.

Dickinson, Victoria. The Accounting Consequences of Accelerated Share Repurchases. Web:

http://accounting.uwaterloo.ca/seminars/09-10papers/ASR_June102009.pdf

Accessed February 22, 2018.

Financial Accounting Standards Board (FASB). (2010). Accounting standards codification. Retrieved from http://asc.fasb.org/

Investopedia. Accelerated Share Repurchase - ASR https://www.investopedia.com/terms/a/accelerated-share-repurchase.asp#ixzz57vW0pGcc

Accessed February 22, 2018.

Picardo, Elvis Impact of Share Repurchases. Web:

https://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp

Accessed February 26, 2018.

Rich, Gillian. Top-Performing Dow Stock Boeing Unloads Billions More On Investors. Web:

https://www.investors.com/news/top-performing-dow-stock-boeing-unloads-billions-more-on-investors/

Accessed February 22, 2018.

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