Boeing [BA] on Wednesday reported lower net income in the second quarter, largely as a result of a charge disclosed last week for an Air Force aerial refueling program, but the results handily beat consensus estimates and the company’s sales were strong due to higher commercial aircraft deliveries.
The $536 million after-tax charge for the KC-46 tanker program, which Boeing said last Friday would lop 77 cents per share from the bottom line, also resulted in the company reducing its earnings outlook for the year, although less than expected due to stronger operating performance, particularly at its defense segment.
Net income fell 33 percent to $1.1 billion, $1.59 earnings per share (EPS), from $1.7 billion ($2.24 EPS) a year ago. Core EPS results, which strip out unallocated pension expenses, fell 33 percent to $1.62 from $2.24, still topping analysts’ estimates by 25 cents.
Sales increased 14 percent to $24.5 billion from $22 billion, driven by strong revenue gains at Boeing’s commercial airplanes segment, which more than offset a slight decline in revenue at the defense, space & security segment.
Sales from commercial airplanes increased 18 percent to $16.9 billion on a record 197 aircraft deliveries, up 9 percent from a year ago. Operating earnings tumbled 22 percent to $1.2 billion largely due to a $513 million pre-tax impact from the KC-46 charge, which is based on the company’s 767 commercial aircraft.
Profits in the commercial segment were also negatively impacted by higher deliveries of 787 and 747 aircraft, both of which are currently being produced at a loss. Boeing officials said the 787 remains on track to turn cash positive later this year.
Defense segment sales slipped 3 percent to $7.5 billion as largely on lower volume in aircraft modernization and sustainment in the global services & support division and to a lesser extent the timing of aircraft deliveries and mix in the military aircraft division. Boeing delivered fewer military aircraft in the quarter.
Profits in the defense business fell 6 percent to $546 million, reflecting the $322 million pre-tax charge related to the segment’s portion of work on the tanker program.
Overall in the defense segment, 32 percent of the revenue came from international customers, Dennis Muilenburg, Boeing’s new president and CEO, said on the earnings call.
Boeing cut its core EPS guidance for 2015 by 50 cents to a range between $7.70 and $7.90 to account for the tanker charge. However, the reduction was less than the charge due to overall performance improvements across the company’s businesses.
Greg Smith, Boeing’s chief financial officer, said the improved performance across the commercial and defense portfolios added 27 cents EPS back to the forecast. He also said the company still has ongoing productivity initiatives for both its production and service activities, “so we still have some things to do that we want to capture.”
Muilenburg said the business environment remains positive, citing improving airline profitability, global air traffic growth, increasing long-term demand for commercial aircraft, support in Congress for the Obama Administration’s request for core Boeing military programs and for more F/A-18 Super Hornet aircraft.
Muilenburg said to expect “strategic consistency” as he transitions into role as Boeing’s new chief, having succeeded Jim McNerney, who remains chairman of the board. The biggest opportunity for the company is in executing on its commercial aircraft backlog, which provides seven years of production at the moment, in terms of being profitable, returning cash to shareholders, and funding innovation.
Funding innovation is at the top of the list for capital deployment, followed by returning cash to shareholders, and then acquisitions, Muilenburg said.
As far as risk, he said the KC-46 program is a reminder of making sure the company delivers on its development programs, adding that it sees “steady improvement overall in our ability to deliver on cost and schedule.”
As for the tanker program, Muilenburg, as he stated last week, said on Wednesday that the company understands the issues with fixing the integrated fuel system on the aircraft, which gives it confidence in leaving the schedule intact. He said first full-up tanker will be flown as planned later this summer although the sequence of some downstream flight-testing is being rephrased to maintain the delivery schedule.
Backlog at the end of the quarter stood at $589 billion, down from $495 billion at the end of the first quarter. Defense backlog stood at $58 billion, 39 percent of from international orders. Orders in the quarter were $18 billion and the company is expecting bookings to be in line with sales for the year.
Free cash flow was $2.6 billion in the quarter and the guidance for cash from operations for the year is unchanged at greater than $9 billion.