Last week, Boeing (NYSE:BA) posted predictably subpar first-quarter results, including a 17% year-over-year decline in free cash flow to $2.3 billion, as the grounding of the 737 MAX starts to pinch the company's performance. (Boeing can't deliver any 737 MAX jets to customers until the jet is recertified for commercial service.)
The headwind from the grounding of Boeing's most popular jet is set to increase dramatically in the second quarter. As a result, Boeing made a prudent decision this week to issue more debt to shore up its liquidity.
The 737 MAX grounding will decimate cash flow
Entering 2019, Boeing was building 737-family jets at a rate of 52 per month. As a result, it probably built about 150 737s during the first quarter. (The official production rates aren't exact numbers.) However, it was able to deliver only 89 737s to customers, mainly because the company halted 737 MAX deliveries after that model was grounded worldwide. The resulting buildup in inventory drove Boeing's cash flow decline last quarter, as the aerospace giant receives the bulk of an airplane's purchase price upon delivery.
This will become an even more acute problem in the second quarter. Boeing 737 deliveries won't stop entirely: As of the end of March, the company still had 78 outstanding orders for prior-generation 737s. It appears to have delivered seven during the month of April. However, the number of monthly deliveries will decline rapidly until 737 MAX deliveries resume.
To address this problem, Boeing recently reduced the 737 production rate to 42 per month. Nevertheless, Boeing's inventory of completed 737 jets is likely to balloon by more than 100 this quarter, driving free cash flow even lower.
Boeing will also face one-time cash costs related to developing and installing a fix for the 737 MAX, compensating victims' families, and reimbursing customers' losses -- as well as potential government fines. It's already incurring some of these costs, although others may take years to hit its cash flow.
Boeing gets the extra cash it needs
At the end of the first quarter, Boeing had $7.7 billion of cash and investments on its balance sheet. That's a pretty good cushion, but it's not a huge amount in relation to the company's size, especially considering that cash flow is under pressure right now.
Furthermore, as of March 31, Boeing had $3.4 billion of debt maturing within the next 12 months, including short-term debt and commercial paper. Management also wants to maintain the dividend, which currently costs about $1.16 billion per quarter. This made it advisable for Boeing to raise some more cash to protect itself against any further setbacks.
Sure enough, Boeing locked down a new $1.5 billion credit line on Monday. The credit line has a scheduled termination date of Oct. 30, but Boeing has the option to extend it for a year. The company then sold $3.5 billion of unsecured debt on Tuesday, with maturity dates ranging from 2022 to 2049. Despite the current turmoil, Boeing was able to place this debt at very low yields, so the additional interest costs will be quite moderate.
With these two moves, Boeing has significantly increased its cash balance and given itself ample liquidity to get through the current rough patch.
Cash flow should recover soon
In the long run, the 737 MAX crashes and subsequent grounding could cost Boeing billions of dollars. However, as noted earlier, some of those expenses may show up years from now.
For now, the main cash flow headwind for Boeing is the buildup of inventory due to halting 737 MAX deliveries while continuing production. But at the moment, it looks like the 737 MAX will be recertified within a few months. That may allow Boeing to resume deliveries as soon as next quarter, leading to an improvement in free cash flow trends.
It may take a few quarters for Boeing to deliver all of the jets it is building this spring to buyers, depending on how airlines are coping with the 737 MAX grounding. However, by this time next year, Boeing will probably have recouped most of the cash flow it's missing out on now, putting it in position to start repaying excess debt. Boeing's recent moves to enhance its liquidity will ensure that it can bridge the brief gap until cash flow recovers.