Boeing to Take $2.1Bn In New Charges

Boeing to Recognize Cost Reclassification and Charges to Second-Quarter Earnings

(Source: Boeing Co.; issued July 21, 2016)

CHICAGO --- The Boeing Company 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.

"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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Boeing to Record Charges From Jet Programs (excerpt)

(Source: Wall Street Journal; published July 21, 2016)

By John Ostrower

Boeing Co. on Thursday revealed more expensive stumbles with the production of new commercial and military jets, saying it would take $2.1 billion in charges in its coming earnings.

The pretax charges, which have been expected by some industry analysts, stem from delays to developing its new Air Force refueling tanker, demand concerns about its biggest jetliner, the 747 jumbo, and the original high costs of its 787 Dreamliner, its most advanced jetliner.

The latest charges are part of a yearslong hangover of high initial development costs on crucial new programs, as well as continued struggles getting its tanker completed for the U.S. Air Force, its biggest defense contract. The problems have diluted the benefits of a surge in orders and deliveries of passenger planes in the past decade.

The charges will wipe out a total of $3.23 per share as part of its second quarterly earnings to be announced next Wednesday, according to the company.

Boeing Chief Executive Dennis Muilenburg has revealed a series of charges since taking the top seat at the company in July 2015. “These are the right, proactive decisions to strengthen our business going forward,” he said in a statement Thursday.

The company continues to face several long-term challenges, including sagging twin-aisle jet demand, pressure on its jet prices and declining market share against European and Canadian rivals for its highly lucrative single-aisle 737 jetliners.

A company spokesman said the company’s closely watched revenue and cash guidance for 2016 are unchanged.

But the delayed refueling tanker for the Air Force, known as the KC-46, will add $573 million, or 62 cents per share, more in charges to its $1.5 billion in cost overruns the program has suffered. The program is more than 40% past its original $4.9 billion budget, according to its initial contract. (end of excerpt)

Click here for the full story, on the Wall Street Journal website.

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