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Boeing closed the books on one of the worst financial performances in its history, but investors breathed a sigh of relief that the damage wasn't worse - starting with a new estimate of $18.6 billion in total costs for the grounded 737 Max.
The planemaker is taking a new $2.6 billion pretax writedown to compensate airlines for ballooning losses from a flying ban that's expected to stretch to midyear. Deferred production costs grew by $2.6 billion, clipping the jet's long-term profit potential, Boeing said in a presentation Wednesday. That's on top of more than $9 billion in Max-related costs it had already disclosed.
Boeing reported its first annual loss since 1997, and the company expects "future abnormal costs" of about $4 billion as it halts and then slowly restarts Max production. But new CEO Dave Calhoun, speaking in early morning television appearances and a conference call with analysts, emphasized "realism" and transparency as he attempts to forge a recovery and restore the company's reputation.
"Everyone expected this to be a complete kitchen sink," Ken Herbert, analyst with Canaccord Genuity. Calhoun is "saying all the right things and that's feeding into a little bit of a relief on the stock."
Boeing rose 1.6% to $321.56 at 11:29 a.m. in New York, after climbing as much as 3.4%. The shares got an extra boost after Bloomberg News reported that Boeing has received about $14 billion in orders for a loan that would boost financial flexibility.
Through Tuesday, Boeing had plunged 25% since a 737 Max operated by Ethiopian Airlines slammed into a field March 10, killing all on board and sending Boeing into one of the worst crises of the modern jet era. That crash came less than five months after a Lion Air Max went down off the coast of Indonesia.
Writedown relief
In the company's latest earnings report, investors were relieved that Boeing "only called out $2.6 billion" as it expanded its reserve for payments and order discounts to help Max customers recover losses, Herbert said. Analysts had anticipated a much larger accounting charge after Boeing endorsed more rigorous training for Max pilots earlier this month and pushed its timeline for the plane’s return back by about six months.
"I'm as confident as a CEO can be" that Boeing won’t have more bad news about Max costs or its return, Calhoun said on CNBC. "Let's not talk about the specific bucket of the charges. The most important thing underlying is do we believe we can meet the certification timeline? And the answer is 'yes'."
Still, Boeing's troubles went well beyond the Max in a quarterly earnings report that showed profit declining at all three of the company's main businesses.
The planemaker burned through $4.28 billion in free cash flow last year, a $17.9 billion swing from the gush it had generated in 2018. Calhoun warned that Boeing would keep consuming cash this year and into 2021, and that as its coffers refilled, paying down debt would be a priority.
"I think he’s trying to grab all the bad news that he can, put it in the current period and then get on with life," Bloomberg Intelligence analyst George Ferguson said before earnings were announced.
The Chicago-based manufacturer said it plans a further cut in production of the 787 Dreamliner, to 10 a month early next year. And Boeing set aside $410 million for an additional orbital flight in case NASA requires the mission after the company’s Starliner spacecraft missed a rendezvous with the International Space Station last month.
Calhoun, a General Electric Co. veteran and longtime Boeing board member, stepped into the top job on January 13 after Dennis Muilenburg was ousted in December. The new CEO is working to shore up confidence in Boeing, which repeatedly missed estimates for the Max’s return last year.
The company suffered further embarrassment from internal messages, which sullied Boeing’s reputation for safety and engineering prowess. Calhoun said on CNBC that his “stomach turned” when he saw the communications.
Financial Losses
Boeing's results marked a dramatic reversal from a year earlier, when the company surpassed $100 billion in sales for the first time in its history. In 2019, revenue slid 24% to $76.6 billion.
In the fourth quarter, Boeing swung to an adjusted loss of $2.33 a share, while Wall Street had been expecting a $1.32 profit. Sales fell 37% to $17.9 billion, compared with the $21.7 billion predicted by analysts. The company’s advanced billings also dipped by $1.6 billion to $52 billion in the final quarter as uncertainty grew over when the Max would resume flying.
The new reduction in planned Dreamliner production further darkened the outlook for Boeing, which suspended its financial forecast last year because of the Max crisis. The company is managing its order backlog for the Dreamliner, another critical source of cash, more conservatively under Calhoun’s lead.
As announced last year, Boeing still plans to trim monthly output of the twin-aisle jet 14% to 12 by the end of this year. The planemaker said Wednesday that it will make another cut next year to 10 a month as it deals with slowing sales and lingering effects from U.S.-China trade tensions.
The production rate of the carbon-composite plane will return to 12 a month in 2023, Boeing said.
