Boeing Recognizes A $2.78 Billion Charge Ahead Of Q2 Earnings

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The Boeing Company

The market woke up to some troubling news yesterday as Boeing‘s (NYSE:BA) management announced that the company will report approximately $2.78 billion in pre-tax charges related to three of its most troubled programs — the 787, the 747 and the KC-46A. This is going to directly hurt its earnings figures this quarter, thouhg most analysts will exclude and tax-adjust these charges. The aerospace giant has affirmed that these charges are going to have little to no effect on cash flows. The company reaffirmed full year guidance with the announcement.

In the last 12 quarters, Boeing has beaten earnings estimates in all but one instance. Last quarter, the company incurred a one time charge on its KC-46A program, which led to a 22% decrease in its earnings. Boeing has had problems with the programs in question for some time now, however, no one expected the hit to be of this proportion. [1]

See our complete analysis of Boeing

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787 Program

The biggest of the charges is related to a write-off of 2 Boeing 787 Dreamliner aircraft which were expected to be delivered to customers this year. The two planes in question belong to a program that consisted of 6 test aircraft, of which three have been donated, and one refurbished and sold to the government of Mexico. The remaining two were also meant to be refurbished, however, management decided the costs associated with it were too high an investment; deciding to write them off instead. [2]

In a nutshell, an after-tax charge of $847 million, or $1.33 per share, is to be reclassified from program inventory to R&D expenses. An important thing to note here is that deferred costs will go down due to the reclassification and cash flows will not be affected.

Additionally, this move also sheds light on the fact that today, it is getting extremely expensive to design, test and launch an entirely new aircraft. As evidenced by this incident, it could take years, if not decades, for a new program to break even. This could explain why Airbus and Boeing have focused extensively — in the recent past — to launch re-engined versions of existing aircraft instead of starting new programs at all. Furthermore, this could explain why both industrial mammoths have relied heavily on aftermarket revenues to recover costs associated with aircraft manufacturing. [3]

747 Program

Depressed demand for large cargo aircraft has been catalogued for quite some time now and this has hurt the 747 program. In light of this, Boeing had previously announced slowing the production of its 747-8 model. Therefore, charges related to this program come as no big surprise for investors. Basically, Boeing expects to sell a smaller quantity of aircraft at a discounted price. This reflects lower aircraft in the accounting quantity and lower revenues. The company expects to keep the production rate fixed at 6 per year through 2019, and not increase production to 12 per year as earlier anticipated. Unlike the 787 write-off, this charge is likely to affect cash flows as the costs are higher and the company expected to generate less revenue at the lower unit sales rate. Boeing has realized an after-tax non-cash charge of $814 million, or $1.28 per share, in the program.

Recently, Volga-Dnepr group finalized a deal to purchase 20 Boeing 747-8Fs (4 of which have already been delivered). Despite this, it seems like nothing can save the Boeing 747 program in the near future. Accumulating charges and a lack of demand are going to plague the program for some time to come. [4]

KC-46A Program

Last month, the management revealed that the delivery date for the KC-46A has slipped from August 2017 to January 2018. The company will recognize an after-tax charge of $393 million, or $0.62 per share, this quarter. This is primarily due to a delay in manufacturing (taken up in order to keep the delivery on schedule) and technical challenges which includes a fix on the hardware related to the refuelling boom. Additional charges were incurred to flight test these technical challenges.

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Notes:
  1. Boeing Q1 Earnings Review, www.trefis.com []
  2. Things Just Got Ugly for Boeing, www.seekingalpha.com []
  3. Boeing 747 Financial Hit Underscores Cost of Launching a New Airliner, www.atwonline.com []
  4. Boeing Gets Lifeline Order From Russia, www.aviationweek.com []