By Doug Cameron and Jon Ostrower 

Boeing Co. shares fell sharply Thursday following a media report that the Securities and Exchange Commission is probing the aerospace group's accounting methods on two of its jetliner programs.

The SEC is investigating whether Boeing properly accounted for the long-term costs and expected sales of its 787 Dreamliner and the 747 aircraft, Bloomberg News reported, citing people with knowledge of the matter. SEC enforcement officials haven't reached any conclusions and could decide against bringing a case, the report said.

Boeing declined to comment on the Bloomberg report. "We typically do not comment on media inquiries of this nature," said John Dern, a Boeing spokesman. The SEC declined to comment.

Shares in Boeing, the world's largest aerospace company by sales, were down 9% in early afternoon trading Thursday. That put it on pace for possibly one of the biggest declines in the stock's history, exceeding an 8.9% drop late last month on the day Boeing issued disappointing financial guidance. That was the biggest single-day drop since 2001.

The report also fueled a selloff in other aerospace stocks at a time when investors in the sector have become increasingly nervous that a multiyear boom in aircraft orders could founder as Boeing and rival Airbus Group SE boost production to record levels.

Boeing uses a method called program accounting for its jetliners that enables it to spread the multibillion-dollar costs of developing new airliners over many years of the jet program's expected production. Under the method, which is compliant with Generally Accepted Accounting Principles, Boeing has been able to report consistent profits on the Dreamliner program even though it has cost more to build each plane than Boeing has gotten selling them.

Boeing says program accounting, which it has used for decades, is critical to enable projects that can stretch over decades but require huge outlays early on that would otherwise result in big swings in earnings. The method allows for booking expected future profits as a part of current earnings.

Boeing tallies the accumulated shortfall between unit costs and revenue as "deferred production costs." For the Dreamliner, that tally grew to $28.5 billion as of the fourth quarter after delivery of more than 350 of the aircraft since 2011. The sum doesn't include billions of dollars of research and other costs that went to bringing the Dreamliner to market.

Boeing expects to erase that deficit over time, because costs for making jets generally fall substantially as manufacturers scale up output and learn how to produce more efficiently. The company said last month that it expects to start making money on a unit basis on each 787 delivery later this year once it accelerates production to 12 Dreamliners a month from 10.

Program accounting requires Boeing to estimate cost levels, sales volumes, and anticipated pricing for jets that might be made years in the future. With the Dreamliner, it set the accounting block--the number of planes over which it averages those costs and revenue--far larger than it has for other programs, beginning with an estimate of 1,100 aircraft and raising that in 2013 to 1,300 aircraft, which amounts to about a decade of planned production. Boeing said those estimates were driven by forecast demand for the jet.

RBC analyst Rob Stallard said that while Boeing has long used program accounting, the scale of deferred losses on the 787 could have triggered a change in view by federal overseers. "It is perhaps the eye-watering size of this 787 deferred balance that has drawn the SEC's interest," he said.

Few other companies use program accounting. Rival Airbus accounts for its jet programs differently, using International Financial Reporting Standards, booking cost overruns as they occur rather than trying to amortize them over the life of future aircraft production.

Airbus took repeated hits to earnings during the development of the A380 superjumbo as the plane's development and production costs grew. Airbus last year began delivering the first A380 jets that no longer lose money.

The 787 and 747-8 programs both ran into costly technical and supply-chain problems that delayed their introduction and triggered big charges in recent years. However, while the upgrade of the 747 has also proved to be a slow seller over the last decade, Dreamliner sales have been strong, reinforcing investor expectation for future cash flow.

Still, Boeing's shares have fallen sharply this year on concerns its earnings and cash flow would fall short of expectations, and on the company's surprise announcement that it would deliver fewer planes this year.

The worries have spread to the broader aerospace sector, and Thursday's report triggered another selloff. Spirit AeroSystems Holdings Inc, one of Boeing's largest suppliers, fell 10% at one point, though the shares recovered partly and were down 5.6% at $42.41 in the early afternoon.

Robert Wall and Aruna Viswanatha contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com and Jon Ostrower at jon.ostrower@wsj.com

 

(END) Dow Jones Newswires

February 11, 2016 15:06 ET (20:06 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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