Boeing Co. Earnings: Big Charges Lead to a Big Loss

By Markets Fool.com

Image source: Boeing.

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Last week, Boeing (NYSE: BA) announced that it would take three big charges in its Q2 earnings report, totaling $3 billion before tax and $2.1 billion after tax. Not surprisingly, these charges caused Boeing to report a loss for the second quarter.

However, leaving aside these unwelcome charges -- which mainly reflected problems that investors have known about for a while -- Boeing's Q2 performance was fairly good.

Q2 by the numbers

Boeing's revenue rose 0.9% year over year in Q2. Higher deliveries of the 777 and 787 widebodies drove a modest increase in the commercial airplanes division, more than offsetting a revenue decline for Boeing's defense business. Meanwhile, special charges severely impacted Boeing's operating margin and earnings.

Metric

Q2 2016

Q2 2015

Growth (YOY)

Revenue

$24.76 billion

$24.54 billion

0.9%

Commercial Airplanes Deliveries

199

197

1%

Core Operating Margin

(2.0)%

7%

N/A

Free Cash Flow

$2.56 billion

$2.61 billion

(1.6)%

Core EPS

($0.44)

$1.62

(127)%

Total Order Backlog

$472 billion

$480 billion

(1.7)%

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Data source: Boeing Q2 2016 earnings release.

While Boeing reported a loss in Q2 due to the $3 billion in charges it recorded, the loss was not nearly as bad as analysts were expecting. Core earnings per share came in at -$0.44, whereas analysts on average thought Boeing would lose $0.92 per share. Some of the discrepancy was driven by tax savings -- but most of it related to stronger operating performance.

Boeing's special charges didn't impact its cash flow performance. For the second quarter, free cash flow was down slightly on a year-over-year basis. That followed a nearly $1 billion year-over-year improvement in Q1. As a result, free cash flow increased by 44% for the first half of 2016.

Meanwhile, Boeing's backlog continued to decrease, but at a very moderate pace. At $472 billion, the company still has enough orders to support five years of production -- and even more than that on the commercial airplanes side of the business.

Has Dreamliner deferred production peaked?

Boeing has been producing 787s at a loss up until now, but it is working hard to improve the profitability of the 787 Dreamliner product line. The company has forecast that deferred production costs -- essentially accumulated production losses -- would peak around now.

In Q2, the 787 deferred production balance actually decreased by $978 million. However, that decline was driven by one of Boeing's special charges, in which it wrote off more than $1 billion of the deferred production balance after deciding not to try to sell two of the first Dreamliners it ever built.

Excluding the earnings charge, the 787 deferred production balance increased by $257 million last quarter. That's higher than the $141 million increase reported in Q1.

However, the lower-margin 787-8 represented a much larger chunk of Boeing's deliveries in Q2 than it did in Q1. This included one early build overweight Dreamliner which was likely sold at a bargain price due to its lower range. 787-8 deliveries will continue to decline as a percentage of the delivery mix in the future, leading to better profitability for the 787 program.

Deliveries of the 787-8 Dreamliner variant will decline going forward. Image source: The Motley Fool.

Looking ahead

Boeing reduced its 2016 EPS guidance by $2.05 on Wednesday. It now expects to report core EPS of $6.10-$6.30 for the full year.

However, excluding the negative impact of the $3 billion in pre-tax charges recorded in Q2, Boeing actually raised its guidance. Most notably, the company continues to forecast that its defense and security segment will post an operating margin in excess of 10%, despite being hit with a $219 million charge in that segment.

Thus, while Boeing posted a loss in Q2, its day-to-day operating performance remains solid. This good news helped Boeing shares gain 2% in pre-market trading on Wednesday morning.

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Adam Levine-Weinberg owns shares of Boeing. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.