Boeing’s fourth-quarter performance beat analysts’ estimates, but the company’s 2016 outlook came in well below Wall Street’s expectations. Boeing announced another production-rate cut, this time for the 777 program, as well as a rate increase for the 737 in 2019.
Boeing spooked investors Wednesday by forecasting fewer plane deliveries and lower revenues and profits than expected this year and announcing it will trim production of its cash-cow 777 jet next year.
The surprise sent its shares plunging 8.9 percent Wednesday to a two-year low, in the stock’s biggest one-day drop since 2001.
Boeing Chief Executive Dennis Muilenburg said Boeing will build about 20 fewer airplanes this year than it did in 2015.
And he confirmed a Seattle Times report Tuesday night of a 777 production cut ahead: The rate will drop 16 percent in 2017 from 100 jets per year to 84 per year, or 7 jets per month.
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Furthermore, Chief Financial Officer Greg Smith indicated that in 2018, as Boeing begins to build the first 777X test airplanes, 777 deliveries will likely sink below that monthly rate of seven jets.
Boeing routinely beats Wall Street estimates quarter after quarter, and Muilenburg assured investors this year’s downward blip in production growth will be temporary.
“Stepping back from this year of transition and looking out to 2017, 2018, you’ll see revenue growth, earnings growth and cash growth,” he promised on a conference call with analysts and media.
On the positive side, Boeing in 2019 plans to further accelerate production of the single-aisle 737, he said. That means the Renton assembly plant has a better employment outlook than the widebody jet plant in Everett, where Boeing builds the 777 and the 747-8. Last week Boeing said the 747 would be reduced to a pace of one every two months.
Production of the 737 is now at 42 planes per month, and Boeing had earlier announced increases to 47 jets per month in 2017 and to 52 jets per month in 2018. Muilenburg said demand supports a further increase, so production will go to 57 jets per month in 2019.
On the conference call, Muilenburg’s tone toward labor contrasted with that of his predecessor Jim McNerney, now Boeing’s chairman, who famously quipped that employees would “still be cowering” while he was CEO.
Muilenburg welcomed the tentative contract agreement announced two weeks ago with Boeing’s white-collar union, the Society of Professional Engineering Employees in Aerospace (SPEEA), saying it would provide “labor stability and competitiveness for the company for the long term.”
“We place a very high value on our employees and their talent,” Muilenburg said. “It’s important to have a mutually respectful relationship.”
With the 737, 767 and 787 production rates all set to increase in the next few years while the 747 and 777 rates go down, the net impact on local employment is not expected to be dramatic.
On the 737 increase, Boeing spokesman Doug Alder said that “generally speaking, increased rates require some level of increased employment.”
“The planned rates and market demand mean that we see consistent levels of work for Boeing employees building the 737 in Renton for the foreseeable future,” he added.
On the other hand, Alder said Boeing expects some negative impact on employment from the 777 rate cut, adding that the company “will do our best to mitigate that by placing employees in other jobs across Boeing.”
“We are still studying how many roles may be impacted,” Alder said.
The 777 rate cut is necessary because Boeing currently doesn’t have enough sales to fill all delivery slots for the current 777 models between now and when production of the new 777X kicks into high gear after the turn of the decade.
Scott Hamilton, an Issaquah-based aviation analyst with Leeham.net, published an analysis Tuesday estimating that “Boeing needs to sell more than 200 777 Classics, all with delivery dates through 2021, to bridge the gap to full production of the 777X.”
Last year, Boeing sold just 38 of the present model 777s.
Most financial analysts believe the size of that 777 sales gap means the production rate will have to come down lower than seven per month.
Boeing did not book an accounting charge for Wednesday’s 777 rate cut, though last week it booked an $885 million pretax write-off when it announced that the 747 rate would be cut to six airplanes a year.
Chief Financial Officer Greg Smith said last week’s write-off was necessary because the low-profit-margin 747 — which seems to be approaching the end of its life — was at risk of an overall loss on the remainder of the program, whereas the highly profitable 777 program is not, even at the reduced production level.
Reduced jet deliveries in 2016
Boeing said it expects to deliver between 740 and 745 jets this year, compared to 762 delivered in 2015, with expected revenue and cash flow for the year dropping accordingly.
Muilenburg said about a dozen airplanes in that shortfall are due to the transition to building the 737 MAX in Renton.
Boeing will build several MAXs this year that will go into flight test and not be delivered to customers. Other production MAXs built this year cannot be delivered to customers until after the jet is certified by the Federal Aviation Administration (FAA) next year.
In addition, deliveries of the 747 will be down with the announced rate cut, as will deliveries of the 767 commercial jet because of a ramp-up of Air Force tanker production on the same line.
And although 787 production is due to increase from 10 jets per month to 12 per month midyear, Smith said, Dreamliner deliveries for the year will be roughly flat due to customer timing requests that pulled some deliveries forward into 2015 and will push others out into 2017.
Yet Muilenburg insisted that this decline in jet production and the consequent fall in revenue are temporary dips.
“If you look at the seven (planned) rate ramp-ups ahead over the next several years, you’ll see that revenue will grow and deliveries will grow,” he said.
Dreamliner costs declining
The news on the 787 Dreamliner was reasonably steady. Boeing deferred another $201 million in 787 production costs last quarter — a slowdown in the rate at which those costs are accumulating.
The total of 787 costs deferred into the future now stands at $28.5 billion.
Muilenburg said the 787 is set to begin eking out a profit around midyear, after which that running tally of outstanding sunk costs is supposed to fall each quarter.
Many analysts still question whether future 787 profits will ever completely cover that enormous total, but Boeing is not conceding that.
For the quarter ended Dec. 31, Boeing earned $1.03 billion, or $1.51 per share. That compares to $1.47 billion, or $2.02 per share, the previous year.
Taking into account the $885 million pretax charge for the 747 rate cut, the adjusted profit was $1.60 per share.
Revenue declined to $23.57 billion from $24.47 billion.
It was the outlook for the year ahead that most disappointed Wall Street. Boeing said it anticipates 2016 adjusted profit in a range of $8.15 to $8.35 per share on revenue between $93 billion and $95 billion.
Analysts surveyed by FactSet had estimated a profit of $9.41 per share on revenue of $97.26 billion, The Associated Press reported.
Investor sentiment on Boeing has been heavily influenced recently by the expectation that increased production will generate lots of cash in the years ahead.
Doug Harned of Bernstein Research issued a note to clients calling Boeing’s reported free cash flow — the net cash from operations minus capital spending — “a major disappointment.”
Boeing reported free cash flow for 2015 of $6.9 billion and forecast $7.2 billion for this year. Harned had projected $7.4 billion for 2015 and $9.1 billion for this year.
“The 2016 guidance is much weaker than our expectations,” Harned wrote. “Given that we see Boeing stock trading heavily on free cash flow, this outcome is clearly negative.”
Ken Herbert, an analyst with investment bank Canaccord Genuity, said Boeing’s fourth-quarter financial results were fine after allowing for the 84 cents per share hit from the 747 production rate cut.
The negative market reaction, he said, was “all about the weaker than expected guidance.”
He said the downbeat 2016 forecast increased a widespread investor fear that the aerospace cycle might have peaked in 2015 and that it’s going down from here.
When the market closed, Boeing shares were down $11.43 to $116.58.
Adding to the woes of Boeing’s Wednesday morning, it had to cut short the earnings teleconference callbecause of technical difficulties with the live webcast.
When the call restarted a couple of hours later, Muilenburg and Smith repeated their prepared remarks from the beginning, prompting some gallows humor from analyst Howard Rubel of Jefferies.
“I was hoping maybe we’d get a different outcome the second time we heard the call,” said Rubel.