Higher tax and pension expenses hit Boeing’s [BA] bottom line in the third quarter and the company said it took another over $300 million in unexpected charges related to its program to manufacture a new aerial refueling aircraft for the U.S. Air Force.

The cost growth on the KC-46A tanker is due to changes being incorporated into the early production planes, and was split between the commercial aircraft division, $256 million, and the defense division, $73 million.

Dennis Muilenburg, Boeing’s chairman, president and CEO, said the changes to the initial production aircraft stem from issues found in the late stages of testing and the aircraft certification process. He said none of the issues have been major.

Boeing Chairman, President and CEO Dennis Muilenburg. Photo: Boeing
Boeing Chairman, President and CEO Dennis Muilenburg. Photo: Boeing

“We have not experienced any new significant technical discoveries and we continue to make steady progress, closing out technical risk on the path to final certification and to delivering the first 18 tankers next year,” he said on the company’s investor call. “We remain very confident in the long-term value of this franchise.”

Muilenburg highlighted that so far the KC-46 test aircraft have flown more than 2,000 hours.

Net income plunged 18 percent to $1.9 billion, $3.06 earnings per share (EPS), from $2.3 billion ($3.60 EPS) a year ago. Excluding pension expenses, core earnings rose 9 percent to $2.4 billion ($2.72 EPS), topping analysts’ expectations by six cents per share.

Sales were 2 percent to $24.3 billion from $23.9 billion a year ago.

The top line driver was Boeing’s services business, which as planned appeared for the first time as a separate operating segment for the company as it hones its focus on a potential $2.6 trillion market opportunity over the next 10 years. Global Services posted $3.6 billion in sales, up 2 percent.

Boeing’s largest segment, Commercial Aircraft, saw sales down a percent despite a record 202 airplane deliveries. The company said the decline was due to product mix.

The Defense, Space & Security Segment posted a 5 percent drop in sales on lower planned deliveries and product mix.

On the earnings front, the commercial plane business reported handsome returns, up 15 percent on higher margins for its 787 Dreamliner aircraft and performance elsewhere, partially offset by the KC-46A charge.

Operating income in the defense segment dipped a percent on the tanker charge although operating margin increased 40 basis points to 10.2 percent.

At Global Services, operating income fell 3 percent due to lower margins on products and services.

Based on results so far this year, Boeing raised its earnings guidance by a dime to between $11.20 and $11.40 EPS, and cash flow guidance by $250 million to around $12.5 billion. Sales are still expected to fall between $90.5 billion and $92.5 billion.

Muilenburg said that the commercial aircraft outlook remains healthy and that demand remains strong in the U.S. and internationally for the company’s defense products. Total backlog at the end of the quarter stood at $474.3 billion, up more than $200 million since the start of the year, driven by increases in the defense and services segments.

Boeing said that 35 percent of its defense backlog is from international customers.

Through the rest of the decade, Boeing expects “modest growth” in its defense business, Muilenburg said, although shortly after in response to an analyst’s question he said the top line defense growth would be “flat to moderate.”

Free cash flow in the quarter was $3 billion.