July 21, 2016, © Leeham Co.: Boeing today announced $1.66bn in new after tax charges to its 787 and 747-8 commercial programs and a $393m after tax charge for its KC-46A USAF tanker program.
“On a pretax basis at the segment level, Boeing Commercial Airplanes will now record an earnings impact totaling $2.78 billion and the Boeing Military Aircraft segment of Boeing Defense, Space & Security will report an earnings impact of $219 million,” Boeing said in a statement.
Boeing also announced that a planned production rate increase for the 747-8 from 0.5/mo to 1/mo in 2019 has been cancelled.
Tanker charge anticipated
The tanker charge was not unexpected. An additional delivery delay due to technical problems and issues with the wing-mounted WARPS refueling pods mean that first deliveries in 3Q2017 won’t have operational WARPS, a requirement by the USAF. These issues led Wall Street aerospace analysts to expect a new charge.
Boeing is writing off two more of the original six 787 test airplanes as unsellable. These now become research & development charges.
The 747-8 charge also was not a particular surprise, except perhaps as to timing. Market demand for the passenger and freighter versions is anemic, at best. The firming last week by Volga Dnepr at the Farnborough Air Show of some of the commitments for 20 747-8Fs announced the year before at the Paris Air Show aren’t enough to fill the production line over the six years of the deal. Not all of the 20 commitments were firmed up—Boeing won’t say how many were, though Reuters reports the number was 13. Four of the 20 have already been delivered. It’s not clear if the four are within the 13 or in addition to the 13.
Notable is that at last week’s air show, Boeing reaffirmed its 20-year forecast that demand for the 747-8F will recover in 2019. Today, the anticipated production rate hike is cancelled.
“This is Boeing,” one aerospace analyst said. “Everything is fine until it’s not fine. That’s so typical Boeing that I almost laugh about it.”
Analysts react
LNC talked with two Wall Street analysts just as the business day was closing in New York.
Both said the charges, both expected and unexpected, are largely immaterial in the overall scheme of things. Their summarized views:
The 747-8 charge “clears the decks” on the program and no more charges should be forthcoming. “Talk of a rate increase in 2019 didn’t make sense the first time around,” one analyst said.
The tanker charge was somewhat less than the expected $500m, but this may not be the end of them.
Writing off two 787s is inconsequential to the $29bn in deferred production costs and $3bn in deferred tooling costs on the program. An $847m charge out of $29bn draws a shrug.
The stock bears will continue to be bearish. The bulls will continue to be bullish.
Stock was off about 1% in after-hours trading.
The full press release follows.
Boeing to Recognize Cost Reclassification and Charges to Second-Quarter Earnings
Amounts relate to 787 test aircraft cost reclassification, cargo market pressures on the 747 program, and previously announced KC-46 Tanker issues
EPS guidance for 2016 to be updated on July 27
2016 revenue and cash guidance reaffirmed
CHICAGO, July 21, 2016 /PRNewswire/ — The Boeing Company [NYSE: BA] announced today it will recognize an impact to earnings across three programs when it announces second-quarter 2016 results on July 27.
On the 787 program, the company decided not to invest funds for the refurbishment and sale of the two remaining unsold flight test aircraft that were scheduled to be introduced into the modification line. These two aircraft were produced in 2009 and have been used extensively for flight and ground testing, with both airplanes achieving more than 6,700 flight and ground testing hours combined. Costs associated with these aircraft were reclassified from 787 program inventory to research and development expense resulting in a non-cash after-tax charge of $847 million ($1.33 per share).
To account for current and anticipated weakness in the air cargo market, the company plans to continue producing 747-8 aircraft at a rate of 0.5 per month and no longer increase the production rate to 1.0 per month in 2019. An $814 million after-tax charge ($1.28 per share) on the 747 program reflects a lower estimated total of 747-8 Freighter aircraft to be produced in the program accounting quantity and lower estimated revenues on future aircraft sales.
Dennis Muilenburg, CEO of The Boeing Co.
“These are the right, proactive decisions to strengthen our business going forward,” said Boeing Chairman, President and Chief Executive Officer Dennis Muilenburg. “Our investment in 787 flight test airplanes paved the way for the growing Dreamliner fleet today and helped refine improvements for other platforms. On the 747 program, we continue to monitor the air cargo market and aggressively drive productivity and cost reduction as we work to win additional orders to support ongoing production.”
Boeing Chief Financial Officer and Executive Vice President of Corporate Development & Strategy Greg Smith characterized the decisions as “prudent actions that reflect market realities, reduce future financial risk and ultimately drive value to our shareholders.”
The company will also recognize a $393 million after-tax charge ($0.62 per share) on the KC-46 Tanker program. This charge reflects higher costs associated with previously announced program schedule and technical challenges, including implementation of the hardware solution to resolve the refueling boom axial load issue identified during flight testing, delays in the certification process and concurrency between late-stage development testing and initial production.
“This additional investment in the KC-46 supports the delivery timeline for the initial production aircraft and our transition to full-rate production,” said Muilenburg. “With the aircraft recently refueling an F-16, A-10 and C-17, we have now completed all necessary Milestone C testing to receive customer approval to enter production – a major step forward for this multi-decade production and support program. We remain confident in the long-term value of the KC-46 for our customers and our shareholders.”
In total, the company will record an after-tax earnings impact of $2.1 billion. On a pretax basis at the segment level, Boeing Commercial Airplanes will now record an earnings impact totaling $2.78 billion and the Boeing Military Aircraft segment of Boeing Defense, Space & Security will report an earnings impact of $219 million.
Guidance for 2016 revenue and cash is reaffirmed and the company will update earnings per share guidance on July 27.
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