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Originally published July 23, 2014 at 7:27 AM | Page modified July 25, 2014 at 2:30 PM

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Boeing profit rises, but tanker program worries analysts

Boeing increased its full-year profit forecast after reporting a 1 percent increase in commercial jet revenue, but a $272 million after-tax expense for the KC-46A aerial tanker program overshadowed the raised forecast.

Bloomberg News


Boeing fell the most among stocks in the Dow Jones industrial average Wednesday as a cost for the Everett-based KC-46A aerial tanker rekindled concern the company would struggle with another new aircraft program.

The $272 million after-tax expense for the military jet overshadowed Boeing’s increase in its full-year profit forecast. Second-quarter earnings also beat analysts’ estimates, buoyed by faster production that is sending jetliner deliveries to record levels.

“It is worrying that Boeing is booking a charge of this magnitude at a relatively early stage in this long-term program, particularly given recent assurances from management that everything was going to plan,” Rob Stallard, a New York-based aerospace analyst with RBC Capital Markets, said in a note to investors.

The stock slid $3.03, or 2.3 percent, to close at $126.71, its sharpest daily drop since April 10. The decline was the biggest among the 30 companies in the Dow industrials, and the second-largest in the Standard & Poor’s 500 industrials index.

The delays in producing the 787 Dreamliner hang over the development of the tanker, which is modeled on the 767 widebody jet produced since the 1980s.

Redesigned wiring harnesses, rather than new innovations, increased engineering and manufacturing costs for the tanker, said Boeing CEO Jim McNerney.

“The issues at hand are well-defined and understood” and the spending kept the tanker on track to begin flight testing next year, McNerney told analysts Wednesday on a conference call.

With a potential market of 400 airplanes valued at $80 billion, the tanker “remains a franchise program for Boeing, and we expect to realize strong returns over decades of production and in-service support,” McNerney said.

The tanker charge “tarnished” Boeing’s quarter, Howard Rubel, a Jefferies analyst in New York, said in a telephone interview. “The company seems to be spending to keep the program on schedule as opposed to making excuses for why it’s going to slide.”

McNerney later elaborated a little on the tanker issue.

“The structure of all those airplanes came together extremely well,” he said in response to an analyst’s question.

“Where the challenges lie were really around the wiring and the wire harnesses themselves and the redesigning effort to either move those wires or do whatever rework was required.”

“It’s not a technology leap,” McNerney said. “We know how to do it. We’ve done some of it already on that first airplane, so we’re building off of that experience.

Earnings for 2014, excluding some pension expenses, will range from $7.90 to $8.10 a share, Boeing said, compared with a previous projection for $7.15 to $7.35.

Second-quarter profit on that basis of $2.42 a share exceeded the Bloomberg-compiled average estimate by analysts of $1.98, continuing Boeing’s streak of beating or matching estimates extending to 2009.

The company handed over 181 commercial jets to customers last quarter, the most ever.

Sales rose 1 percent to $22 billion, trailing the $23 billion projected by analysts.

Revenue in the commercial business rose 5 percent to $14.3 billion and slid 5.4 percent to $7.75 billion in Boeing’s defense operations as the U.S. government pares military spending.

Boeing’s results were buoyed by two tax-related gains: $116 million that had been previously announced as well as a $408 million benefit disclosed Wednesday.

The net gain from the one-time tax boost amounted to 34 cents a share, while a lower share count after Boeing spent $1.5 billion on stock repurchases also bolstered earnings per share, according to Christian Mayes, an Edward Jones & Co. analyst in Des Peres, Mo., who rates Boeing as “hold.

“They did a little bit better than expectations,” Mayes said by phone. “But after you strip out the one-time items, it wasn’t that much better.”

Since last year, Boeing has used a profit measure dubbed core earnings per share, a figure it says gives a clearer picture by adjusting for market fluctuations in pension cost.

Profit jumped 52 percent to $1.65 billion, or $2.24 a share, from $1.09 billion, or $1.41, a year earlier.

Boeing is benefiting as its factories churn out 737, 777 and 787 aircraft at the fastest pace ever amid an order backlog shared with Airbus that’s valued at about $1 trillion.

While Boeing still loses money on every Dreamliner it assembles, losses are shrinking as it smooths production kinks and takes advantage of supplier discounts that took effect earlier this year, Douglas Harned, a Sanford C. Bernstein & Co. analyst in New York, told clients Tuesday in a note.

Investors are tracking how the supplier agreements affect the 787’s deferred production cost, an accounting measure that is supposed to drop as the assembly expense declines with a projected gain in efficiency. Boeing estimated a ceiling of $25 billion last year, up from a previous forecast of $20 billion.

The cost measure rose 4.8 percent to $24.24 billion from the previous quarter, reflecting a slowing pace of increases “trending in the right direction,” said Jefferies’ Rubel.

McNerney said he intended to stay on at Boeing after he turns 65 next month.

The company’s policy is for executives to retire at that age.

“The heart will still be beating, the employees will still be cowering, I’ll be working hard,” he quipped. “There’s no end in sight. We’re continuing to build a succession plan and alternatives to succeed me eventually, but there’s no discussion of it yet.”

Seattle Times staff contributed to this story.

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