Boeing's US$418m tanker writedown rattles investors

[CHICAGO] Boeing Co absorbed a US$426 million cost blow as it prepares to deliver the first of its delay-plagued aerial tankers to the US Air Force, rattling investors accustomed to smooth sailing from the world's largest planemaker.

The latest tanker writedown covers the expense of retrofitting eight aircraft with upgraded software and other enhancements that resulted from flight-testing, Boeing said in a statement Wednesday as it reported earnings. The company had already amassed US$3 billion in charges developing the aerial refueler based on its 767 jetliner.

The tanker stumble marred an otherwise strong quarter for Boeing, with profit and sales exceeding Wall Street's estimates. The company's strong cash generation has made it one of the top performing US industrial stocks for more than a year, but the ascent has slowed in recent months as tariffs imposed by President Donald Trump have fueled trade tensions and threatened to dent Boeing's order book. The new tanker hit added to the sense of caution.

"The KC-46 has returned to again haunt Boeing's results," Robert Stallard, an analyst with Vertical Research Partners, said in a note to clients. "Management has previously expressed confidence that there would be no more tanker charges, and yet they keep coming."

The shares fell 1.6 per cent to US$352.38 at 9.30 am in New York. Boeing advanced 21 per cent this year through Tuesday, the third-biggest gain on the Dow Jones Industrial Average.

Adjusted earnings rose to US$3.33 a share, exceeding the US$3.27 average of estimates compiled by Bloomberg. Revenue climbed 5 per cent to US$24.3 billion, US$300 million more than analysts had predicted.

The Chicago-based company generated free cash flow of US$4.3 billion, topping estimates of US$2.1 billion, another sign its underlying business remains healthy. Boeing has pledged to return the equivalent of its free cash flow to investors, and spent US$3 billion to repurchase shares while paying out US$1 billion in dividends.

The manufacturer has finalized its design for the complex tankers, part of a potential US$44.3 billion program, after wrapping up flight-testing earlier this month. Boeing has wrestled with a handful of technical issues, including the plane's 59-foot extended boom accidentally scraping the protective coating off military airplanes refueling in mid-air.

Boeing took a US$307 million charge in its commercial-airplane division because of the tanker and cited cost growth of US$111 million in its defense unit, for a hit of US$418 million. In addition, the company said later, the global services operation took an $8 million blow, raising the total to US$426 million.

The manufacturer expects to deliver the first of the KC-46 aircraft to the US Air Force in October, more than two years behind schedule. The cost of preparing the tankers for that milestone probably weighed on Boeing's forecast for the year, Canaccord Genuity analyst Ken Herbert said.

The largest US industrial, known for raising its earning per share forecast as the year progresses, left that portion of its outlook unchanged. Boeing also lowered the full-year operating margin for its defense business to a range of 10 per cent to 10.5 per cent from the 11 per cent steer it had provided in April.

Boeing also raised its revenue forecast by US$1 billion to a range of US$97 billion and US$99 billion, while predicting an operating margin of greater than 11.5 per cent for the commercial airplane division.

"You've got to assume that would've been higher" if not for the new tanker expense, Mr Herbert said of the profit measure.

Boeing has worked hard to improve productivity in its factories, while making good on pledges to increase cash flow and share the gains with shareholders. The balance of inventory and factory costs for the 787 Dreamliner fell US$449 million to US$24.2 billion, freeing up cash.

The tanker expense hampered an effort by the commercial airplane and defense divisions to achieve the mid-teen profit margins goal set by Boeing Chief Executive Officer Dennis Muilenburg. They reported operating margins of 11.4 per cent and 9.3 per cent, respectively. The measure also dipped to 14.7 per cent from 16 per cent a year earlier for Boeing Global Services, a new division offering spare parts, maintenance and other services.

Investors have increasingly responded to cash rather than profit at Boeing, which has only missed targeted earnings twice this decade. The measure has been bolstered by advanced aircraft sales during a prolonged boom for commercial jets, as well as increasingly efficient 787 production following 10 years of losses.

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