Boeing forecast for defense margins clouds profit beat, shares drop

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WASHINGTON (July 25): Boeing Co reported better-than-expected profit and revenue on Wednesday, but cut the full-year forecast for its defense business margins, citing US$426 million in higher costs on its long-delayed KC-46 aerial refueling tanker program.

Shares of the world's biggest planemaker fell 2.2% after it forecast a 2018 operating margin of 10% to 10.5% in its defense business, down from its previous outlook of 11%.

"Management has previously expressed confidence that there would be no more tanker charges, and yet they keep coming," Robert Stallard, an analyst at Vertical Research Partners, said in a research note, adding that the KC-46 program should "get less bad from 2019."

"Investors have generally shrugged off prior issues in Defence — but when they result in Boeing leaving its earnings and cash forecast unchanged, that's not good," Stallard said.

Boeing sees 2018 core earnings of US$14.30 to US$14.50 per share, unchanged from the same period last year, but below the Wall Street estimate of US$14.56 per share. Core earnings exclude some pension and other costs.

The Chicago-based company raised it full-year revenue forecast, but kept its earnings per share and cash flow forecasts unchanged.

Boeing stock has jumped more than 21% year to date on increased plane orders fueled by strong air travel demand and Boeing's ability to generate robust cash flow. But the shares are especially vulnerable if the trade war between Washington and Beijing escalates further, according to analysts.

Operating margins in its defense, space and security unit fell to 9.3% in the quarter from 11.9% a year earlier, reflecting increased costs of US$111 million in the KC-46 Tanker, Boeing said.

Boeing said the KC-46 US Air Force aerial refueling program has cost an additional US$426 million before taxes as the company works through test delays and production changes.

Boeing has already tallied some US$3 billion in total costs on the program, a derivative of its 767 commercial aircraft.

Last month, the Air Force said the first delivery of the KC-46 would be in October, more than two years behind schedule.

The KC-46 problems overshadowed Boeing's beat on quarterly profit. Core earnings were US$3.33 per share, besting the average analyst estimate of US$3.26 per share, according to Thomson Reuters I/B/E/S.

Overall revenue rose 5% to US$24.26 billion, also beating estimates, while commercial aircraft deliveries rose 6% to 194 aircraft. Boeing booked 239 net orders during the quarter, including 91 wide-body jets.

For the full year, the company expects total revenue of US$97 billion to US$99 billion, compared with its previous estimate of US$96 billion to US$98 billion.

In its commercial airplanes segment, its largest, operating margins rose to 11.4% from 9% a year ago on revenue of US$14.48 billion. Revenue was US$14.28 billion in the year-ago period.

The stock was down 2.2% to US$350.34.