Boeing [BA] on Wednesday said that its net income in the second quarter climbed more than 50 percent with the help of some favorable tax resolutions, although the company disclosed a steep charge related to engineering issues with the development of a new aerial refueling tanker for the Air Force.

Jim McNerney, Boeing’s chairman and CEO, stated that the issues on the KC-46A Tanker aircraft are “well understood” and have to deal with wiring but that “challenges resolving engineering and systems installation issues on our tanker test aircraft are resulting in higher spending to maintain schedule.”

Boeing Chairman and CEO Jim McNerney. Photo: Boeing
Boeing Chairman and CEO Jim McNerney. Photo: Boeing

The after-tax cost of the KC-46A charge was $272 million, 37 cents earnings per share (EPS).

Greg Smith, Boeing’s chief financial officer, said during the Wednesday’s earnings call that the company understands the “scope of work” left on the first four aircraft, which is “giving us confidence on how to get to completion.” He said the wire harness issue has nothing to do with the development of new technology and comes down do “blocking and tackling on redesign of the engineering effort.” The first flight test is set for late in the third quarter, he added.

The long-term profitability of the tanker program is “unchanged as we work into the production phase of the contract,” Smith said.

Joseph Nadol, J.P. Morgan

’s aerospace and defense analyst, said in a note to clients ahead of Boeing’s earnings call that overall the quarter was “solid” for the company but that the issue of the tanker charge, which he expected, “is whether this is the first charge on this program of several given its fixed price nature and highly competitive pricing.”

McNerney said the company bid the tanker aggressively and at zero margins through development, adding that company expects the program to generate good profits in production for years.

Net income jumped 52 percent to $1.7 billion ($2.24 EPS), from $1.1 billion ($1.41 EPS) a year ago, driven by the tax settlements, which amounted to $524 million. Excluding certain pension items, Boeing’s core earnings slipped 2 percent to just under $2 billion ($2.42 EPS) from just over $2 billion ($1.67 EPS), still walloping consensus estimates of $1.98 EPS. Per share results benefited from strong repurchase activity that lowered the company’s overall stock count.

Sales increased slightly in the quarter to $22 billion, up a percent from $21.8 billion a year ago.

Boeing’s Commercial Airplanes segment led the way, increasing sales 5 percent to $14.3 billion and operating income 7 percent to $1.6 billion on increased aircraft deliveries and service work. The charge from the tanker program had a $238 million pre-tax impact on the segment. Operating margins were up 10 basis points to 10.8 percent.

At the Defense, Space & Security segment, sales fell 5 percent to $7.7 billion while operating income dropped 25 percent to $582 million, in part related to the Tanker charge which had a $187 million pre-tax impact. Operating margins fell 2 percent to 7.5 percent.

Sales in the defense business were hampered by lower deliveries of C-17 transport and P-8 maritime patrol aircraft, lower commercial satellite volume, and less work in maintenance, modifications and upgrades. McNerney said nearly 30 percent of defense sales were to international customers.

Boeing raised its core earnings guidance for 2014 by 75 cents EPS to between $7.90 and $8.10, with 50 cents of the gain due to the tax settlements, and strong operating performance in the first half of the year. Sales guidance is unchanged at between $87.5 billion and $90.5 billion.

Boeing’s total backlog at the end of the quarter stood at $440.3 billion, down $600 million since the end of 2013. The aircraft segment made up $376.3 billion of the backlog, up $3.3 billion in the past six months, while the defense business accounted for $49.7 billion, up $100 million since the end of last year. The company’s unobligated backlog was down $4 billion.

The company’s free cash flow in the quarter was $1.4 billion, and it repurchased $1.5 billion worth of its shares.