For the second straight year, Boeing [BA] on Friday said it will take a hefty charge in the second quarter on the KC-46 Pegasus aerial refueling tanker it is developing for the Air Force, this time a $536 million gouge to the bottom line.
Boeing said that the charge, which equates to 77 cents earnings per share (EPS), is related to work on the tanker’s integrated fuel system that arose when the company was preparing for and conducting test and verification of the system during the second quarter. The additional funds Boeing is pouring into the engineering and manufacturing development (EMD) phase of the program will support engineering redesign, manufacturing retrofit, and qualification and certification of the fuel system changes, and completion of program ground and flight testing.
The Air Force is supposed to take delivery of the first 18 tankers by August 2017 and the remainder of the total 179 aircraft acquisition by 2027. Dennis Muilenburg, Boeing’s president and CEO, said the company is investing the additional resources to keep this schedule.
The fuel system is the final major system to be qualified on the KC-46 and Boeing said it has the problem in hand.
“We have a clear understanding of the work to be done, and believe strongly that the long-term financial value of the KC-46 program will reward our additional investment,” Muilenburg said in a statement.
The fuel system provides fuel to the aircraft’s engines and allows it to refuel other aircraft in flight.
A company spokesman told Defense Daily that there are no management changes being taken as a result of the charge.
In the second quarter of 2014, Boeing took a $272 million (37 cents EPS) after-tax charge on the program related to wire harness issues as part of the EMD contract (Defense Daily, July 23, 2014). Boeing said then that those issues were also well understood.
The KC-46 is currently in ground and flight-testing using four test aircraft. Boeing said initial air worthiness flight tests were successfully completed during the second quarter. It also said that non-fuel system-related qualification testing is more than 90 percent complete.
Boeing will report its second quarter results on July 22. The company will update its earnings guidance to reflect the new charge but said sales and cash flow guidance for 2015 are unchanged. The company currently projects annual sales of between $94.5 billion and $96.5 billion with earnings per share between $8.10 and $8.30, excluding the impact of the pending charge. The company expects operating cash flow to exceed $9 billion.
Boeing said it continues to foresee that the KC-46 program will become profitable during the production phase. It also continues to forecast an $80 billion global market for refueling tankers.
Loren Thompson, a defense analyst and consultant with the Lexington Institute, which receives funding from a number of defense contractors, including Boeing, said in an online column for Forbes on Friday that the charge to Boeing is “relatively modest.” He points out that the company bid the development program at zero margin because it believed it may also win orders to replace all of the Air Force’s fleet of 400-plus refueling tankers, which “could more than double the long-term acquisition value of the tanker program,” not to mention more sales from service contract and foreign purchases.
“In other words, a franchise worth losing some money on in the near term to secure for the next 50 years,” Thompson said.