Jan. 26, 2016, © Leeham Co. Boeing’s earnings call tomorrow could have additional revelations about the 777 production rate and how its cash flow is being enhanced by continued maneuvering of advances and accelerated pre-delivery deposits (PDPs).
Whether it will or not remains to be seen. Under former CEO Jim McNerney, Boeing’s penchant for obfuscation was legendary among the aerospace analysts.
Dennis Muilenburg, who took the CEO title last summer in addition to his Chief Operating Officer position, has already shown he’s different than McNerney, evidenced by the surprise, early contract agreement with the engineers union, SPEEA.
Boeing last week announced a further rate cut, effective in September, for the ailing 747-8 program. Along with this came a pre-tax charge of nearly $900m.
Major questions to be answered revolve around the future production rate for the 777 and the cash flow.
Boeing’s commitment to shareholder stock buybacks and healthy dividends is taking a prodigious amount of cash. Coupled with the cost of building the 777X wing production plant in Everett and tooling for the new airplane, and development programs for the 737 MAX, KC-46A, the 777X and 787-10, Boeing’s cash flow requirements are immense.
This became a worry to analysts in 2014, and one, from Buckingham Research, issued a Sell on Boeing’s stock on cash flow and production rate concerns.
Boeing took major heat on the 3Q2014 earnings call over cash flow. The company then flummoxed analysts with much higher than expected 4Q2014 cash flow. It took analysts a full quarter to figure out Boeing was accelerating PDPs and getting higher-than-usual “advances,” or deposits, for aircraft orders. The reason: the evidence was buried in the SEC filings and Boeing’s Investors Relations was not especially forthcoming, analysts told LNC then.
UBS analyst David Strauss last year did a deep dive research into the issue.
Yesterday, Wells Fargo aerospace analyst Sam Pearlstein issued a general research note that included the following:
LNC is aware of at least two and possibly more lessors that also provided large advances in 4Q2015.
We also believe the United 737-700 deal for 40 airplanes, announced this month, is connected to advances. We understand this order was negotiated by the Finance department rather than Fleet Planning. If correct, Bombardier stood no chance of winning this order.
With United leasing in 39 used Airbus A319s from AerCap as these come off lease at China Southern Airlines and Spirit Air, Airbus didn’t participate in the contest for new airplanes.
777 Production rate
We take a look at the 777 production rates and new order requirements behind our Paywall today.