July 22, 2015: Dennis Muilenburg made his first appearance today on a Boeing earnings call as president and CEO.
Dennis Muilenburg, president and CEO of The Boeing Co. Photo via Google images.
Jim McNerney, who was chairman and CEO until June when he relinquished the CEO title to Muilenburg, began the call before a transition to Muilenburg for the balance of the call and future calls.
McNerney said Boeing’s growth has been organic and he expected Muilenburg to continue growth and performance of Boeing.
Muilenburg hit the KC-46A $835m (pre-tax) charge at the top, expressing disappointment in the charge and the technical issue with the fuel system that led to it. The first flight test aircraft will return to the air this month, and the second aircraft–the one equipped with the refueling system boom and drogues–will have its first flight “this summer.”
“Notwithstanding the tanker charge,” Boeing delivered a strong quarter and financial performance, Muilenburg said.
Summary points, paraphrased:
- Demand remains strong for the 777 and 777X. Orders YTD for the Classic is 44, within the 40-60 range needed to fill the production gap. Sold out in 2016, half sold out in 2017 and some slots sold in 2018.
- 290 787s delivered in the program, including 34 787-9s. Production is now balanced between the 787-8 and -9.
- Development of the MAX is on track for delivery in 2017. Upward pressure for production to exceed 52/mo, but no decision yet to go beyond this rate.
- We will sharpen our strategies to win, profitability execute our record backlog.
Greg Smith, CFO:
- We have added the necessary engineering and support staff to finish the tanker work on schedule.
- We continue to expect 787 program to be cash positive in 2015. We made further progress to reduce unit costs, by 35%.
- 787 deferred production costs will continue to increase through third quarter before a “healthy” decline in growth of the costs the fourth quarter.
- Returning cash to shareholders remains a top priority.
- GS: We had good performance across the board on margins. Having said that there are still a lot of productivity plans in progress.
- DM: We like the path we’re on and the direction we’re going. The challenge is to execute commercial program profitability and return cash to shareholders; this is the biggest opportunity. Tanker is a risk. Our cash from backlog gives us opportunity to invest in development programs in the future, commercial and military. Use of cash #1 priority is investment and development in the future, #2 is returning cash to shareholders, #3 acquisitions.
- GS: 787-9 learning curve is coming down nicely, costs down 30% over 34 deliveries. Lessons learned from -8 for produce-ability for -9 means -9 will be more profitable than -8. We’ve made good progress but we still have a lot of work to do going forward. As we get into next year we will see higher levels of profitability on the -9.
- DM: The tanker charge includes some anticipated costs of retrofitting the first two tankers that have already been loaded into the production system.
- GS: There is no fundamental change as to how we handle advances in our contracts. It will continue to grow, but not at the same rate. The bulk of the cash will come on delivery.
- GS: Still anticipate book:bill of around 1:1 this year.
- GS: Key thing on 777 Classic bridge is 44 firm and commitments [a clarification from earlier] this year. Feathering in 777X production in 2018, so decision on production rate for Classic will be net year. Derisking program by bringing some technologies from X into Classic.
- DM: Fuel system is the last major system to be qualified under the KC-46A program. We have found a way to execute the program and keep on schedule to deliver USAF.
- DM: ExIm reauthorization is in active discussion in Senate highway bill, we remain optimistic we will ultimately see reauthorization but remain mindful of political risk. From a company perspective this does not create a financial risk to Boeing. 15% of customers use ExIm as backstop financing. This is about long-term global competitiveness for US manufacturing jobs.
- DM: Fundamental to our business for 100 years is we’ve led with innovation and bringing disciplined innovation to the company for the future.
- DM: We remain resolute to meeting USAF schedule to deliver first 18 KC-46As by 2017.
- DM: It’s important to emphasize that we understand how important our people are [in reference to unions]. This idea of mutual respect, partnership and investing in our people is important to me. We’re equally pleased with progress in Charleston and the investments we’ve made in Charleston reflect the quality of our workforce there. The employee relationships are important.
787 deferred production will continue to increase through third quarter before a “healthy” decline in the fourth quarter.
What does “deferred production” mean?
That’s deferred production costs. This word, plus the healthy decline is the rate of growth for the 4Q costs, have been added for clarification.
“787 deferred production will continue to increase through third quarter before a “healthy” decline in the fourth quarter”
Translation for non-financial people: we’ll still be losing money on the 787-9’s we produce in Q4, just not as much as we lose in Q3.
Its $26.3 m per unit according to Wells Fargo, which is more than previous quarter.
But Boeings numbers , ever optimistic, are for a ‘big’ decrease for next quarter. Thats what new CEOs do, load up the expenses on the outgoing guys watch
it is even more. The do have $27.73 billion in deferred production cost and the program is laid out to 1,300 planes. So far they have delivered 292 planes. In Q3 they expect to again produce at higher cost than they account for, so the amount will increase even more and they will have less than 1,000 planes to recover it.
My thought, as a CPA, is that Muilenburg, the new guy, decided to take a ‘bath’ (a term of art) on the KC46A for two reasons.
First, he won’t be saddled as CEO with future expenses of fixing the program. The large size of the writeoff indicates he may have inflated it to blame even more on the prior CEO. Muilenburg and Boeing will try to downplay his personal role with the KC46A problems, as defense chief.
Second, Muilenburg could bury the writeoff against other very good earnings. So the writeoff doesn’t look so bad.
The accrual system is not supposed to let management subjectively decide to take a ‘bath’. That is supposed to be an objective decision. But it happens often, I suspect. It rarely comes to light, often as a result of other scandal, maybe discovery of massive fraud.
Me knows there is a glaring typo in the headline to this thread. Let’s see if anyone else can spot it…
And the typo has been caught.
…on Boeing’s earnings call?
There was a lot of talk that Boeing deliberately underbid Airbus on the tanker to stop them opening an A330 line in the USA, and trusting that the KC-46A will eventually win enough service contracts and KC-Y & Z orders to make a profit from the program as a whole. So no real surprise that there are losses to be written off at this stage, and I agree DM won´t want it on his record.
Some of the mistakes have been costly, but cant see that they were deliberate. Some of the wiring harnesses were all wrong and not up to the higher standards of a military plane.
It could be they are introducing advanced production processes to lower build costs , similar to what they have trumpeted about the B777, but with a build rate of 2 a month the improvement would have to be spectacular to make sense
What I mean is there was probably no margin for inevitable cost increases. So effectively they underbid and are hoping KC-Y & Z will turn a profit.
What is the X and Z KC46? Future batches?
If they can’t make money on the first 170 some odd then they have a grossly serious issue.
also jotting they lost the Korean deal which should have been a slam dunk (Japan is in the pocket I assume)
So a 28 billion hole and growing with the 787. And another hole with the pyrrhic tanker “victory”. No wonder Airbus did not contest the decision when they knew the price Boeing got.
Its not the price Boeing got, it was what they bid.
Wrong statement in that for the first 100 years (well call it 90) Boeing built really good stuff and then sold it.
Now its sell it and try to figure out how to make it work.
3 badly faulting programs in a row tells you there is a serious issue.
When you know what the specs are (wiring) and don’t get that, that’s an issue.
All the so called labs and iron birds setup and they did not get the fuel system right? Fuel systems are not rocket science.
Clearly indicates both faulty management and the lack of good resources to catch it early and stop it (or employees are now cowering and or just getting along rather than working with management to deal with that stuff)
What can you expect when you treat your own engineers like a burden instead of an asset?
So engineering must be bad around the world, because for the last 15 years, is there a single aircraft program that has executed flawlessly? It’s even a lot worse on the military side for all the involved parties. Basically no one is delivering on contracted specs.
“All the so called labs and iron birds setup and they did not get the fuel system right? Fuel systems are not rocket science.”
I assume that “fuel systems” refers to the boom and hose & drogue systems, its aerodynamics, stress, its control laws, fluid dynamics to achieve the required flow rates, etc…. It is indeed rocket science.
Hi Javier, what you say is true but I am afraid many of the problems come from “little things”. I say this based on informations discussed in a recent Aviation Week article.
Aviation Week: We identified a number of fuel system parts and components that did not meet specifications and needed to be redesigned,” says a Boeing spokeswoman, noting poor designs were found in pumps, valves, couplers and other equipment.
Thanks for the clarification, Normand.
I haven’t been able to read the AW article (I’m away on holidays); just read the first paragraph before the paywall. I will take a look at it when I am back.