Boeing (NYSE:BA) is set to report its second-quarter results next week. That was the first full quarter following the grounding of the Boeing 737 MAX, which has halted deliveries, but not production, of Boeing's top-selling aircraft family.
Boeing receives most of the purchase price of aircraft it sells upon delivery. As a result, the 737 MAX grounding will put significant pressure on the company's free cash flow and balance sheet. Recognizing this issue, Boeing issued new debt in late April to shore up its liquidity. However, with the 737 MAX grounding set to last longer than initially expected, the aircraft manufacturing giant may need to consider raising even more debt in the months ahead.
Deliveries plunge -- and free cash flow could turn negative
Earlier this month, Boeing reported that it delivered 90 commercial aircraft during the second quarter, down from 149 in the first quarter and 194 in Q2 2018. The company delivered just 24 737s last quarter, all prior-generation models, compared with 137 a year earlier.
However, Boeing has continued building 737s at a rate of 42 per month -- down from 52 per month at the beginning of 2019 -- to avoid long-term damage to its supply chain. That means 737 production likely exceeded deliveries by more than 100 units last quarter. That alone would represent a multibillion-dollar cash flow headwind for Boeing.
Boeing is also facing additional costs related to developing and testing various software fixes for the 737 MAX. Its 737 production line is overstaffed, because of the abrupt production cut. Storage costs for all of its undelivered 737 MAX jets are starting to add up, too.
Thus, whereas Boeing generated $4.3 billion of free cash flow in the year-ago period and $2.3 billion of free cash flow in Q1 2019, most analysts believe free cash flow turned negative last quarter. Combined with Boeing's dividend, which costs about $1.16 billion each quarter, any negative free cash flow would have started to burn through the company's cash stockpile.
The problems could get worse before they get better
Boeing and its customers had initially hoped that the 737 MAX would return to service over the summer. However, new issues discovered during extensive testing have pushed the Boeing 737 MAX's projected return to service well into the fourth quarter. Many industry officials fear that the timetable could slip even further.
With the 737 MAX grounded indefinitely, Boeing's free cash flow could sink even further into negative territory over the next quarter or two. First, Boeing ended last quarter with just 54 firm orders for 737 models other than the 737 MAX. Many of those are military variants that will be delivered in future years. As a result, the number of 737 deliveries will fall to near zero for the next couple of quarters, exacerbating the pressure on Boeing's cash flow.
Second, Boeing could reach a settlement with the families of victims of the first 737 MAX crash as soon as next month, according to The Wall Street Journal. The cost is likely to be substantial.
It will probably take longer to reach settlements with regulators, customers, and the families of victims from the second crash, but those represent even bigger liabilities that Boeing will have to deal with over the next few years. Boeing recently announced that it will take a $5.6 billion pre-tax charge in the second quarter, reflecting its current estimate of the extra costs it will incur.
Does Boeing need more cash?
As of the end of the first quarter, Boeing had $7.7 billion of cash and investments on hand. In late April, it fortified its war chest with an additional $3.5 billion of debt, plus a new $1.5 billion credit facility.
In theory, that should be plenty of cash to enable Boeing to get through the current crisis. After all, cash flow will rebound sharply once Boeing 737 MAX deliveries resume, given that there will be hundreds of completed 737 MAX jets waiting to be handed over.
That said, if there are any further setbacks, this return to positive cash flow might not come until early 2020. In the meantime, Boeing had $3.4 billion of debt due within a year as of the end of the first quarter. Three quarters of dividend payments, debt repayments, and negative free cash flow would use up all of the $5 billion in new liquidity that Boeing arranged last quarter and then some.
With interest rates currently sitting near a multiyear low, Boeing probably could issue additional debt relatively cheaply. Given the continued uncertainty about the timeline for restarting 737 MAX deliveries, locking up extra liquidity now looks like the prudent course.