Boeing withheld bad news in 1997 - BusinessWeek

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SEATTLE, May 9 (Reuters) - Boeing Co. used accounting loopholes to hide production problems and looming losses in 1997 to protect a pending takeover of rival McDonnell Douglas, BusinessWeek magazine reported in its May 20 edition.

The allegations were confirmed, according to the magazine, in court documents filed during a shareholder lawsuit that Boeing, the world's largest plane maker, settled in February for $92.5 million.

Boeing on Thursday denied any cover-up and said the production problems were well known at the time.

BusinessWeek said production at Boeing's massive Seattle area jetliner factories got bogged down in the mid-1990s as it tried to double output while cutting jobs and rolling out a new parts tracking computer system that never lived up to its billing.

But Boeing Chairman Phil Condit chose not to disclose the ensuing parts shortages that contributed to a factory shutdown until the $16 billion McDonnell Douglas purchase was completed, using Boeing stock instead of cash, Business Week reported.

Boeing shares later plunged when the production problems came to light, prompting the shareholder suit.

Boeing spokesman Larry McCracken said the production problems had been well known in 1997 and that the company made no effort to hide them.

McCracken said Boeing's accounting practices met accepted standards and said Business Week had relied on selected bits of testimony from the trial to dig into an old story solely to generate headlines in the wake of the Enron financial scandal.

"The initial call from Business Week showed that they had missed the Enron story and this particular reporter was instructed, as we believe others were, to find things to advance the Enron story," McCracken said.

Calls to Business Week were not immediately returned.

The magazine quoted a Boeing official as saying the $92.5 million settlement reflected the company's desire to avoid having a jury of laypeople decide the complex case.

Furthermore, Boeing feared retribution from residents of Seattle, where the case would be tried, after moving its corporate headquarters to Chicago, the magazine reported.

Under current accounting rules, Boeing is allowed to spread the cost of developing a new airplane over several years, since sales can generate cash for years or even decades.

According to Business Week, Boeing extended the number of airplanes over which it spread the costs of its newest jetliner, the 777, to 600 from 400 in order to spread out the costs and avoid showing an embarrassing loss on the program.

Boeing also exaggerated cost savings and shifted cash reserves from the profitable 767 program to cover the 777's costs, the magazine reported.

McCracken said Boeing has no off-balance-sheet reserves that could be shifted around in that manner.

The 777 has proven very popular with airlines, but design and development costs ran almost 100 percent higher than Boeing's initial estimate of $5 billion to $7 billion, according to Business Week.