I was looking at financials from a company that had interest expense within Operating Expenses and further down the income statement as interest expense. The amounts were different. The company was Boeing Corporation. The interest expense within the operating section was labeled as BCC (Boeing Capital Corporation). BCC arranges financing for their customers. Why would the interest expense from BCC be considered an operating expense? copy paste from their 10k 2007 (little messy) but here is the link if you want a more readable format): http://www.sec.gov/Archives/edgar/data/12927/000119312508032328/d10k.htm#rom36886_11 (Dollars in millions except per share data) Years Ended December 31, 2007 2006 2005 Sales of products 57,049 52,644 $ 44,174 Sales of services 9,338 8,886 9,447 Total revenues 66,387 61,530 53,621 Cost of products (45,375 ) (42,490 ) (36,858 ) Cost of services (7,732 ) (7,594 ) (7,767 ) Boeing Capital Corporation interest expense (295 ) (353 ) (359 ) Total costs and expenses (53,402 ) (50,437 ) (44,984 ) 12,985 11,093 8,637 Income from operating investments, net 188 146 88 General and administrative expense (3,531 ) (4,171 ) (4,228 ) Research and development expense, net of credits of $130, $160, and $611 (3,850 ) (3,257 ) (2,205 ) Gain/(loss) on dispositions/business shutdown, net 38 (226 ) 520 Settlement with U.S. Department of Justice, net of accruals (571 ) Earnings from operations 5,830 3,014 2,812 Other income, net 484 420 301 Interest and debt expense (196 ) (240 ) (294 ) Earnings before income taxes 6,118 3,194 2,819 Income tax expense (2,060 ) (988 ) (257 ) Net earnings from continuing operations 4,058 2,206 2,562 Net gain/(loss) on disposal of discontinued operations, net of taxes of $9, 5 and (5) 16 9 (7 ) Cumulative effect of accounting change, net of taxes of 10 17 Net earnings 4,074 2,215 2,572 thank you
It’s typical to see interest expense as an operating line item for financial service companies. Since they are in the business of financing/lending money the associated leverage is considered an operating decision rather than a financing decision. For manufacturing/service companies that have a financing arm it’s typical to see the financing income/expenses broken out separately from manufacturing and services. The idea is for a potential investor to be able to break-out the financing separately so that he or she can evaluate the underlying company and the financing sub separately. For Boeing, there is probably additional disclosure breaking out the financing aspects of BCC while the interest expense below operating income is associated with either parent company debt or debt related to the manufacturing operations. Just imagine how hard it would be to assess a business like Boeing, Ford, or GE if the P&L from different types of businesses were all lumped together.
thank you. Much appreciated. It makes sense. I would assume that for fixed charge coverage, the interest expense considered operating would be added with the interest charges further down the income statement. thank you