By Alwyn Scott
(Reuters) - Boeing Co (N:BA) shares plunged 11 percent on Thursday, hit by a report that regulators are probing the company's accounting and by mounting concerns about its slowing sales and production.
The U.S. Securities and Exchange Commission is investigating whether Boeing properly accounted for the costs and expected sales of two of its biggest jetliners, the 747 and 787, Bloomberg reported on Thursday, citing people with knowledge of the matter.
On Wednesday, Boeing said that competitive pressures from rival Airbus (PA:AIR) were prompting it to cut middle-management and executive ranks at its commercial airplane unit to reduce costs.
The twin issues, at a time when Boeing's order book is bursting, show the deep financial hole that the 787 has dug for the world's biggest plane maker. The high-tech jet has racked up more than $30 billion in deferred production costs that Boeing has not yet charged against its income statement.
Last month, Boeing announced an $885 million pre-tax charge in the fourth quarter to write off some of the deferred costs of the 747-8. Boeing has sold only two of the jumbo jets in the last two years and had acknowledged in SEC filings that sales would not be sufficient to recoup the deferred costs.
On Wednesday, Boeing warned in its annual earnings statement that it might face about $9.7 billion in charges for the 787 and 747 programs, if it cannot sell more of both aircraft.
While the 787 continues to log new orders, the 747 has garnered only two net sales in the last two years, prompting Boeing to take the fourth-quarter charge.
"If we are unable to mitigate risks associated with the 747 and 787 programs, or if we are required to change one or more of our pricing, cost or other assumptions related to these programs, we could be required to record additional reach-forward losses which could have a material effect on our reported results," Boeing's filing said.
Boeing's shares were at $104.63, down $11.73 in midday trading.
The company declined to comment on the Bloomberg report. "We typically do not comment on media inquiries of this nature," a spokesman said.
Boeing has long used an unusual accounting method, known as program accounting, that allows it to defer the costs of producing jetliners and spread them over a large block of airplanes.
The so-called deferred production cost balance on the 787 Dreamliner now tops $30 billion, including tooling and other one-time charges. But because the aircraft continues to attract sales, Boeing has said it does not need to take an accounting charge to write off any of that total.
"It is perhaps the eye-watering size of this 787 deferred balance that has drawn the SEC's interest," RBC analyst Robert Stallard wrote in a research note on Thursday.
The SEC probe, if confirmed, "is not good news," he added, and would compound what is already a tough year for Boeing as it cuts output to bring out a new 737 model. "A big adjustment to Boeing's accounting would probably not have a cash impact," he added, "but we think it would not be positive for investors' sentiment."
Boeing said the 787 had accumulated $32.4 billion in deferred production costs, including tooling and other one-time charges. It expected only $23.7 billion of that total to be recovered from jets it has currently sold, and the remaining $8.7 billion to come from future sales.
On the 747, Boeing said it still had $1.3 billion in deferred production costs and tooling expenses, even after taking the fourth-quarter charge of $885 million.
The company said it expected $342 million to be recovered from planes that it has already sold, and $977 million to be recovered from future orders.