By Scott Hamilton
Jan. 27, 2021, © Leeham News: “I’m sure glad 2020 is in the rear view mirror.”
This was Boeing CEO David Calhoun’s opening statement in his appearance today on CNBC’s Squawk Box.
Calhoun appeared on the financial news network following the release of its 2020 full year financial results.
“The one big charge was for the 777X program,” Calhoun said. Boeing took a forward pre-tax charge of $6.5bn for the program. Carter Copeland of Melius Research noted in a video this morning that this probably was related to an adjustment in the accounting block. Calhoun said on CNBC that Boeing adjusted the accounting block, which has not been publicly announced, as part of the charge.
“Based on everything we learned in the 737 MAX recertification effort, we put more time into the 777X effort. It’s going to be a little more costly and take more time to certify,” he said.
Calhoun expects the 777X will be a big money maker in the future.
He said Boeing hasn’t extended its forecast that the widebody travel will recover by 2023. The COVID pandemic hit international travel especially hard. Just this month, Germany, Israel, Holland, the US and the UK initiated additional international travel restrictions. Some countries banned it entirely.
With the 737 MAX now returning to service, Calhoun is optimistic about its future.
“Nobody is reticent to fly the MAX,” Calhoun said, without providing evidence.
“We’ve been progressing quite well” with recertifying the MAX in China, he said. Important trade issues must be resolved, he said.
Calhoun said Boeing has sufficient liquidity for 2021. “So far, so good. I think we are beginning to feel better than we did.” The 87 will begin delivering this year, adding to liquidity.
Here is the initial take on Boeing’s earnings by some Wall Street analysts.
This was a messy quarter for Boeing as the company appears to have decided to get all the bad news out in 2020, including the long awaited 777X reach-forward loss. There certainly does not appear to be any “good” news, though to the extent an investor wanted to paint a rosier picture they might say it was the kitchen-sink quarter the stock needed, helping to setup a cleaner story of more consistent improvement from here. While perhaps true from a narrative standpoint, there does not appear to be much here that can support upward estimate revisions or a true renewal of investor confidence that would warrant a higher multiple.
While end-market conditions remain challenged and cash generation remains pressured, currently, there are increasing signs of stabilization in both the aerospace end-market and BA financials. Boeing held production rates steady, MAX deliveries are ramping up and the aircraft just this morning received EASA recertification. Free cash flow usage improved sequentially. 787 deliveries do not appear to have resumed yet and the 777X has been pushed out, but neither of these are likely to have a material impact on mid-cycle / normalized free cash flow generation potential.
We do not believe investors saw the Q4 earnings report as an “all clear” for Boeing – despite the restart of MAX deliveries – and the release reinforces that, highlighting 777X as another challenge for the company with a $6.5b forward loss charge.
Boeing had ~$11bn of inventory on the balance sheet for the 777X as of 3Q20, and we will seek to better understand what this means for the program. With a low-single-digit margin on 787 and a future charge possible, this charge highlights the degree to which the 737 MAX will be almost the sole contributor to GAAP EBIT at BCA.
We expected ugly and we got it.
The Triple 7X charge is more about future accounting.