By Valerie Insinna and Abhijith Ganapavaram
(Reuters) - Boeing (NYSE:BA) Co said on Wednesday that it planned to ramp up production of its 737 MAX jets to 38 per month by year-end and keep its annual cash-flow goal, offering some relief to investors after a new manufacturing snafu threatened to derail deliveries.
Boeing shares rose 2.5% in early afternoon trade after the company reaffirmed its plans to generate $3 billion to $5 billion in free cash flow this year, as well as deliver 400 to 450 737 MAXs and 70 to 80 787 Dreamliners.
Despite Boeing's confidence that it can achieve its targets, 737 deliveries will slow down in the second quarter, as about 75 percent of the 225 MAXs in the company's inventory have been found to have improperly installed brackets -- which connect the vertical tail with the fuselage made by Spirit AeroSystems (NYSE:SPR), Chief Financial Officer Brian West said during an earnings call.
Deliveries will increase to about 40 MAXs a month during the back half of the year, he said.
"We bounded the issue, we booked the non material financial impact in the quarter," West said. "We understand the rework steps required and we started repairs on several airplanes."
Boeing CEO Dave Calhoun called the production flaw a "gnarly defect" that is "impossible" to visibly assess once the brackets are installed and can only be identified by someone witnessing the installation process firsthand.
West said it only takes “days” to fix 737s that are not far into production cycle, but that rework becomes more extensive once the vertical fin is attached to the fuselage. Calhoun said that work could be measured in "weeks".
Calhoun said Spirit will begin shipping "clean" 737 fuselages "imminently."
Reuters reported earlier this month that Boeing's schedule called for suppliers to produce 38 737 MAXs a month from June. That is seven jets more than its current production rate. West said the timing of the production hike would be dictated by the availability of fuselages.
Production of the widebody 787 Dreamliner has stabilized at three, Boeing also announced Wednesday, adding that it would increase to five per month by year-end.
"Boeing doesn't really have much choice but to stay the course on its planned production ramp, even if the latest 737 MAX issues will hold up deliveries, add to working capital, and leave the company with a lot to do in the second half," Vertical Research Partners analyst Robert Stallard said in a note to investors.
GRAPHIC: Robust start to the year https://www.reuters.com/graphics/BOEING-RESULTS/mypmoxjzqpr/chart_eikon.jpg
Boeing's first-quarter cash burn slowed to $786 million from $3.57 billion a year earlier on higher jet deliveries. Planemakers usually receive a major portion of cash when they hand over aircraft.
The company reported an adjusted loss per share of $1.27, wider than analyst expectations of a loss of $1.07 per share, per Refinitiv data. Revenue of $17.92 billion beat analyst expectations of $17.57 billion.
GRAPHIC: Boeing's losses narrow, but slightly https://www.reuters.com/graphics/BOEING-RESULTS/klvygbmxnvg/chart_eikon.jpg
Margins at its defense unit were negative as it recorded a $245 million pre-tax charge on the KC-46 tanker program, putting total pre-tax losses on the program at about $7 billion.