Boeing's bottom line will be hit with hefty accounting charges from two problems that have been gnawing at the company for some time: lack of sales for the 717, its smallest and...
Boeing’s bottom line will be hit with hefty accounting charges from two problems that have been gnawing at the company for some time: lack of sales for the 717, its smallest and ill-fated jet; and the stalling of the Air Force 767 tanker deal.
In advance of its forthcoming 2004 earnings report, Boeing announced yesterday that it will take two pre-tax charges to its profits, totaling approximately $615 million, or $0.48 per share.
Boeing has decided to end 717 production next year, and for that will take a pre-tax charge of $340 million, or $0.27 per share. This figure includes expected payments to suppliers for termination of contracts.
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Boeing acknowledged that even if it eventually wins the tanker contract, the terms will be less favorable than had originally been agreed. In recognition of that, it is taking a pre-tax charge of $275 million, or $0.21 per share.
On government contracts, accounting rules allow deferral of expenses incurred for pre-contract development work, under the assumption that the contract award is probable and the expenses will later be reimbursed.
Until now the 767 tanker development expenses had been deferred. But the terms of the $26 billion deal from 2001 have been scrapped after a procurement scandal, and a new contract will have to be negotiated.
“The original contract being negotiated was for a lease with purchase option,” said Boeing spokeswoman Anne Eisele. “That is no longer on the table. The Department of Defense has said it prefers a traditional procurement with competition.”
The Pentagon changed its mind after revelations that the Air Force’s chief acquisitions officer, Darleen Druyun, had negotiated a job with Boeing while still employed by the government.
That scandal led directly to the resignations in 2003 of chief financial officer Mike Sears and chief executive Phil Condit. Since then, Arizona Sen. John McCain has relentlessly pursued Boeing to kill the deal.
A study of tanker alternatives commissioned by the Air Force is pending. The Pentagon formally decided in November to reopen the bidding. Airbus parent company European Defense & Space (EADS) is lobbying hard to take the contract away from Boeing.
Boeing says it fully expects to still win a tanker contract, just on different terms from originally agreed. “We welcome a re-competition against all comers,” Eisele said.
Boeing said no decision has been made on the potential phase-out of the 767 line in Everett. The status of the tanker deal will be assessed and a decision made on whether or not to close the production line around mid-year, Boeing said.
Analysts adjusted their earnings estimates upon the news. Joe Nadol of JPMorgan lowered his 2004 earnings per share (EPS) projection from $2.50 down to $2.00. However, he maintained his 2005 EPS estimate at $2.40.
The charges “will have a negative impact, but not tremendous,” said Adam Pilarski, an analyst with Avitas. “These are no big surprises.”
Boeing’s stock closed up slightly for the day at $50.91.
Boeing will report its fourth-quarter and full-year 2004 results on Feb. 2.
Dominic Gates: 206-464-2963 or email@example.com