July 23--Chicago-based aerospace and defense giant Boeing Co. reported higher-than-expected profit on Wednesday on the strength of its commercial airplane business, but hiccups with production of a new military refueling aircraft made investors skittish.
And during an earnings call with analysts Wednesday, Boeing CEO Jim McNerney called last week's downing of Malaysia flight 17, a Boeing 777, in Ukraine a "horrific tragedy" and a "particularly unsettling and painful moment in the history of civil aviation."
He said Boeing is providing technical assistance to the National Transportation Safety Board, which is supporting international authorities in the crash investigation.
Boeing's second-quarter profit totaled $1.7 billion, up 52 percent from a year earlier. Boeing reported core earnings, which exclude certain pension and retirement costs, of $2.42 per share, up 45 percent, far exceeding the average Wall Street estimate of $2.01 per share.
However, revenue fell slightly short of expectations, increasing 1 percent year-over-year, to $22 billion, compared with an expectation of $22.3 billion.
"Global demand remains high for the superior fuel efficiency and economics provided by our family of commercial airplanes," McNerney said during a call with analysts. "Global passenger traffic trends continue to be healthy, and air cargo traffic is still gradually improving."
Boeing increased its profit expectation to between $7.90 and $8.10 per share, up from $7.15 to $7.35. The company also bought back $1.5 billion of its stock in the quarter.
However, earnings were hurt by a $272 million additional charge for development of the KC-46A tanker, a military refueling aircraft based on Boeing's commercial 767. The charge involved engineering and manufacturing costs incurred when Boeing ran into wiring problems on the aircraft.
"The issues at hand are well defined and understood, which in no way mitigates our disappointment in having to take this charge," McNerney said. "But the actions we have taken to keep us on path to the next major program milestone." The long-term potential for the KC-46 tanker is 400 planes worth $80 billion, he said.
The revelation about production woes spooked investors on Wednesday when Boeing stock at midday was the biggest loser in the Dow Jones Industrial index. Shares of Boeing were trading Wednesday at $126.49, down 2.5 percent on the New York Stock Exchange.
"To us, 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," RBC Capital Markets analyst Robert Stallard wrote in a note to clients. "This may create doubt as to whether Boeing can generate the cash flow that many are hoping for."
Boeing endured criticism several years ago for engineering and production problems with its high-profile 787 Dreamliner, which ended up being delivered to customers some three years late.
Analysts also noted that favorable tax items -- such as resolution of previous tax disputes -- in the quarter put a misleading shine on the profit report, which explains why the numbers far exceeded analyst expectations. The tax items totaled more than half a billion dollars.
"While the headline number looked good, peering behind the results, a good portion of that was due to the one-time tax benefits that aren't likely to repeat," said Edward Jones Equity Research analyst Christian Mayes in an interview. Investors were looking for more improvement in the company's underlying business. "They probably still would have beat estimates but probably not by nearly as much."
Mayes noted that sales grew only 1 percent as profits grew 45 percent. "There's some disconnect there," he said, attributing the difference to the one-time tax bump. The tax benefit is also partly the reason for the increased profit outlook, he said.
"I think investors are looking through that and considering it to be not that high quality of an earnings result for this quarter," he said.
The company's commercial airplane business saw second-quarter revenue increase 5 percent to $14.3 billion on higher deliveries, which rose 7 percent to 181, including 30 Dreamliner jets, in the second quarter. The company's ability to churn out 787 Dreamliner jets is crucial to its financial performance this year as it is relying on commercial jets to offset a weak defense business.
While Boeing still loses money on each 787 it builds, it gets closer to breaking even as production increases. The planemaker delivered its first stretched Dreamliner 787-9 in the quarter.
The business segment booked 264 net orders during the quarter. Its backlog is more than 5,200 airplanes valued at a record $377 billion.
Boeing's commercial airline business is in a sweet spot now, Mayes said. Oil prices, a huge factor in the cost for airlines, are high enough that it makes sense to buy new fuel-efficient airplanes, but not so high that airlines have no money to buy new aircraft, he said. That coupled with demand from emerging economies around the world and low interest rates that allow airlines to economically borrow money to buy new planes has created a "perfect storm" -- in a good way -- for plane manufacturers, he said.
Boeing's defense business saw second-quarter revenue decline 5 percent, to $7.7 billion.
In response to a question Wednesday about McNerney's birthday next month and turning age 65, the CEO said he has no near-term plans to retire.
"Yeah, the heart will still be beating...I'll be working hard," he said. "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."
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