Boeing Q2 Earnings: Significant One Time Charge Hurts Earnings

Boeing (NYSE:BA) reported earnings results for Q2 on July 27th. Revenues increased marginally (year on year) on the back of increased deliveries of the 777 and 787 aircraft. The increased sales in the commercial segment helped more than offset the expected yet disappointing performance in the defense segment. The company reported a GAAP earnings loss of 44 cents, which reflected charges totalling $3.23 per share announced last week in the 787, 747 and KC-46 tanker programs. On an adjusted basis, earnings were $2.87 per share. (We discussed these charges in our note last week.)  Additionally, the management revised guidance down by quite a bit with core earnings now expected in the $6.10-$6.30 range (down from $8.15-$8.35). Boeing shares were trading up 3% after the earnings call.

Key Highlights:

• As announced last week, Boeing incurred a $3 billion pre-tax charge on three programs – the 787, the 747 and the KC-40A. The company decided that the cost to refurbish two 787 program test jets was unwarranted and instead wrote them off . The 747 program has long been plagued by a sluggish market and slowing demand, leading to a significant charge. The KC-40A program has been held back by certain technical issues that have forced the company to make additional investments out of their own pockets. These charges had a significant adverse effect on the company’s earnings this time around.
• In a regulatory filing, Boeing announced that it may stop production of the iconic 747 jet. The “jumbo jet” has in the recent past faced some tough market conditions and declining demand. Airlines are now more interested in the smaller twin-engine jets that are more fuel efficient and have a better mileage. For now, the company has decided to cut production of the 747 to just 6 per annum. In the long run, discontinuing the program would be a very good move for the company financially as it seems plausible that the demand for the 747 may never reverse.
• Boeing’s backlog is still strong at $417 billion in the commercial space, which translates to nearly seven years of production. The 737 program has a robust backlog of nearly 4,400 orders, while the 787 program has 700 orders left to fulfil.
• Despite a tough few quarters for Defense, Space and Security, management has full confidence that the next five years are set to see increased defense spending, which hopefully translate to increased orders for Boeing. The company had recently lost out to competitors in terms of contract wins.

Notes:

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