Update, 3:30 PM PST:
It’s been a busy day responding to media requests for comment about Boeing’s financial results and earnings call. This gives us a feel for how the media viewed the call and the issues they see.
Here are our thoughts after all that.
- Many media viewed Boeing as pointing the finger at the IAM strike for its 4Q loss. There’s no question that the shortfall of some 70 aircraft in 4Q deliveries caused a big hit to the revenue, and that the full year shortfall of some 100 aircraft hit the full year revenue. But don’t overlook the cost-base. Continuing costs for the delayed 747-8 and 787 programs were significant and costs hurt profitability. So did the legal costs. Pointing the finger at the IAM is simplistic.
- Is the 10,000 job reduction the result of the IAM strike and contract? We don’t think so. We think this is Boeing’s prudent response to a lousy global economy.
- We received media questions about whether Boeing is in serious trouble. Our answer is a resounding No. As we’ve previously written, we view 2009 as the year of recovery for Boeing’s airplane development programs. Production lines are returning to pre-strike levels. The one-off nutplate issues are largely resolved for the new airplanes and a program is likely in place for those faulty nutplates on delivered airplanes. Mature airplane programs are humming along.
- What about production this year and next? Boeing personnel meet at least weekly and perhaps more often to assess market conditions. We’re confident they have a good feel for what’s going on in the world and are prepared to take whatever steps are necessary to respond. The question is how quickly can a monolithic organization respond. It takes 18 months to ramp up production with the supply chain. How quickly can it be ramped down, should that become necessary? A key point in the earnings call is that for the first time, Boeing is sounding caution about production beyond this year. Officials refuse to give earnings and production guidance for 2010 at this time.
We remain cautious about Boeing due to the 747 and 787 programs–these need to get flying–and the general global economy, but there is no reason to worry about Boeing itself. The media questions on this score are totally without foundation.
Original Post follows:
Boeing posted a loss in the fourth quarter and ate through more cash than expected, all on the IAM strike, 747 development costs and legal expenses.
The full press release may be found here.
JP Morgan had this comment on the 747 costs:
The $685 million forward charge on the 747 amounts to $6 million for each of the 114 aircraft currently in backlog, the vast majority of which are 747-8s. The magnitude of the charge might give us some notion of what the 787 charge might eventually look like, which should be far larger but will remain unrecognized until Boeing sets the block size and starts to deliver the first aircraft in 2010.
Using JP Morgan’s math, this infers a potential charge well in excess of $5bn on the 787 program.
The earnings call begins:
Jim McNerney, CEO:
- On 747: We have to recover from our underestimation of engineering work, supply chain issues. Notwithstanding the challenges of the airplane, this will be a good airplane and worth the investment.
- On the 787: Fastener replacement activity is moving along and largely behind us on the first two airplanes. We continue to make progress on work, testing, and industrial partners. We still plan to increase production to 10/mo in 2012 and possibly go higher. We expect some puts and takes of orders in 2009. [Translation: more cancellations.] Last year we reorganized BCA to strengthen organization under Pat Shanahan, who will continue to “own” the 787 program. We consolidated supplier function under Ray Connor.All this will be critical to our success in 2009 and beyond.
- There were businesses that performed well: services, production, F-18 support systems. Many development programs performing well, including 777F.
- Fundamentals for 2009 are sound. We are of course facing a very challenging business environment.
- We have stepped up our drive to get higher productivity and lower costs.
BIG News item: McNerney reveals that Boeing expects to reduce work force by 10,000, well beyond the 4,500 previously announced, through attrition, layoffs and retirements. The 4,500 come from BCA, the balance from other divisions of the company.
James Bell, CFO:
- About 50% of the 747 charge is related to wing redesign. About 15% is about later than expected transition between suppliers. About 10% is related to design changes removing commonality between 747-400 and 747-8. (Our note: the 747-8 is now essentially a new airplane and no longer a derivative of the 747-400, according to our information from inside the company.)
- Boeing Capital is well positioned to re-enter the customer financing market in a prudent manner, having reduced the portfolio from $12bn to $6bn. Modest return expected this year.
- Cash declined by about half during 2008, through debt paydown, declining revenue due to IAM strike, >$2bn in share-buyback, pension fund payments. We have confidence in our abilities to handle cash requirements and expect stable cash levels in 2009. Having siad that, we also have access to cash through commercial paper program.
- Our baseline assumption is that baseline production remains stable throughout next several years but financial guidance for 2009 does allow for production cuts.
Customer financing: Bell says BCC requirements starts out small, grows throughout the year and still expects only $1bn but could do more. We’re pretty comfortable that what we see today and know today it will be a billion dollars.
- Program development: McNerney says that creating islands in program development was a very successful strategy in the past but we waited too long as the requirement for execution to move back to a model of integrated functions with disciplines, employee allocation and best practices. We need to move to an organization that is single-minded to do that. We have re-integrated engineering functions with supply chains. We have review processes that are more often and harder hitting.
- On 787 flight test program: [Boeing projects an 8 1/2 flight test program.] McNerney says getting the first two planes completed is key, rework is largely completed, software integration is moving normally. We’re feeling comfortable there. The next two airplanes are on schedule. It is a tight schedule on benefit. We have got a lot of the systems and some certification work done as a result of the delays. The schedule has all six of the airplanes being in the air within four months of first airplane, coming on line within a few weeks’ sequence. Flying concurrently with 747 is a lot better shape than we were in last 18 months when we had some pressure, but there is some more to go.
- On risk to production rates due to declining traffic: Bell says rates are expected to stay stable in 2009 but out-years are less certain and tried to provide in ’09 guidance that there is uncertainty. McNerney adds that it really is hard to predict and come up with a specific kind of assessment, so we made a general, modest provision in our guidance. We’re not at variance in a significant view from IATA with load factor predictions. We are overbooked significantly. There will some airlines that will defer or cancel, but the over-ordering and absorbtion of over-booking will account for this.
- On the all-in costs of the 787, considering penalties, zero-margin, discounts, etc. Bell dodges the question from Morgan Stanley. Bell says that with 1,000 airplanes sold, this airplane will deliver value to the company.
- How long will it take to get over impact of IAM strike?: Bell says production rates are pretty close to pre-strike levels now.
- On overbooking: McNerney said overbookings have a “pretty healthy” margin of 737 bookings, in the 15% range. [Our comment: at a production rate of 31/mo, that’s about 56 over-sales for the year.]
- On deferrals: McNerney says it’s hard to predict, but will be greater this year than last year, but we don’t think it will affect production rates this year. 50-100 deferrals on an average basis is very manageable. It depends on what they are and where they are. Deferrals on a timing basis are all over the place. Some push out a quarter and some [others] move up a quarter. McNerney predicts that deferrals will be a little more worldwide and less North American.
- On 747-8I: McNerney says there are a number of discussions underway on passenger version but can’t say when orders will come. He says the plane has a viable future.
- On orders forecast: book to bill will be less than one this year.