Financial risks abound as Boeing tries to stabilize itself
Boeing is on track to stabilize its finances, but new leadership, a potential acquisition, labor negotiations and tougher regulatory oversight over its quality controls and production could add uncertainty to its efforts.
Boeing is on track to stabilize its finances, but new leadership, a potential major acquisition, labor negotiations and tougher regulatory oversight over its quality controls and production could add uncertainty to its efforts.
The aircraft manufacturer expects a cash hit of between $4 billion and $4.5 billion for the first quarter as a result of a production slowdown following a midair accident on an Alaska Airlines flight in January, Chief Financial Officer Brian West said at a conference last month. That won’t prevent the company from reaching its annual free-cash-flow target of about $10 billion sometime in the coming years, he said, a goal that coincides with continued efforts to pay down its debt load.
Boeing has been working to recover from the reputational and financial fallout over two plane crashes in 2018 and 2019 involving the 737 MAX jet, along with troubles during the pandemic as air travel plummeted. The company hasn’t paid a dividend since March 2020 or bought back shares since 2019.
For West, the CFO since 2021, that recovery is bringing continuing challenges. Boeing on March 25 said Chief Executive David Calhoun would step down at the end of the year, although he is expected to exit as soon as it names a successor. The company faces an expiring labor union contract in September, a proposed multibillion-dollar acquisition of troubled supplier Spirit AeroSystems and growing regulatory scrutiny amid ongoing efforts to increase cash flow and reduce its debt.
Boeing hasn’t booked an annual profit since 2018. The company’s net loss narrowed in 2023, to $2.24 billion from $5.05 billion the previous year.
Like other manufacturers, Boeing took on substantial debt during the pandemic and is still chipping away at reducing it. The company’s debt totaled $52.31 billion last year, nearly double the 2019 level. It expects to have paid down more than $5 billion in debt maturities this year through June.
The company had $12.69 billion in cash and cash equivalents last year, down from $14.61 billion in 2022 but otherwise higher than any year in at least the previous decade. Its free cash flow totaled $4.43 billion in 2023, up from $2.29 billion the previous year after three years of negative amounts.
Here’s where future cash could come from.
Boeing has hundreds of planes that are nearly done, which would represent almost pure cash flow once it can start delivering them, said Nicolas Owens, an industrials equity analyst at Morningstar’s research arm. If manufacturing of these 737 MAX planes remains slow this year, the company can deliver certified planes that it has already built, of which Boeing has hundreds, he said.
The company also could choose to refinance upcoming maturities if it doesn’t want to pay it, analysts said.
Boeing’s credit ratings have largely remained unchanged since the pandemic, but the agencies are watching its finances closely. Moody’s Investors Service on March 26 put its Baa2 rating, two notches above junk, on review for a downgrade, in part due to concerns it won’t be able to deliver enough 737 planes to boost its cash flow.
S&P Global in February said it would keep Boeing’s BBB- rating, one notch above junk, stable following the Alaska Airlines accident, adding the plane maker’s cash flow will likely be weaker than previously expected for at least the “next couple of years." Fitch Ratings last month affirmed its BBB- rating, also one notch above junk, for Boeing and revised the outlook from positive to stable.
Equity analysts are optimistic that Boeing will hit its goal of $10 billion in free cash flow by 2026. The first-quarter cash hit won’t make or break Boeing because the company has billions of dollars in cash and is deleveraging, Owens said. “I don’t think of them as a financially vulnerable company," he said.
Nevertheless, uncertainty in several corners of the business could pose risks to the perceived stability ahead.
New leadership raises questions about any potential shifts in strategy, particularly for the CFO, a key player in managing the finances. For example, a new CEO could pivot away from free cash flow as a short-term target so as not to incentivize employees, which in turn could affect a CFO’s approach, said Bert Subin, senior research analyst at investment bank Stifel Financial. Boeing recently moved totie more of employees’ incentive payto safety as opposed to financial metrics in response to production problems.
“The potential for a new strategic vision and plan can change how you manage cash and what a CFO ultimately targets," Subin said. Boeing declined to comment.
The Spirit deal
Boeing would take on the burden of another beleaguered company, Spirit AeroSystems, if it reaches an agreement to acquire it. The maker of 737 MAX fuselages and other airframe components has also grappled with production issues and quality lapses.
Spirit reported a net loss of $616 million last year, wider than its loss of roughly $546 million the previous year. Spirit would bring with it a debt balance of $4.08 billion in 2023, up 5.6% from a year earlier. Boeing provided Spirit with $100 million in cash last year so it could build up its equipment for 787 Dreamliner and 737 MAX production increases.
West has said that Boeing would fund a potential acquisition of Spirit with cash and debt on hand instead of an equity raise. The deal is aimed at helping Boeing regain control over its supply chain.
If Boeing acquired Spirit, the former likely could refinance Spirit’s debt at comparable or lower rates, which would help limit the hit to cash flow, said Cai von Rumohr, a managing director at investment bank TD Cowen. “Spirit is not in the best of financial shape," he said.
New labor contract negotiations
Uncertainty also hangs over Boeing’s negotiations with the International Association of Machinists and Aerospace Workers union. Boeing in March began its first full set of contract negotiations in 16 years.
The union has asked for wage increases of 40% over three to four years and the return of a defined-benefit pension, among other things.
The company will have to navigate avoiding a potential strike as well as committing to a contract that doesn’t include significant new costs, von Rumohr said. “There’s a chance that things could be worse if they hit a work stoppage," he said.
Boeing also faces restrictions from the Federal Aviation Administration, which has stepped up scrutiny as critics say that it has been too lenient on the manufacturer.
The regulator has capped Boeing’s production at 38 MAX jets a month. It also said it won’t sign off on an expansion of a fourth production line to a factory in Everett, Wash., until it sees improvement in the company’s quality-control system.
The production cap will likely be temporary, potentially lifted by year’s end, Stifel Financial’s Subin said. “Since that is a large portion of what generates cash, it’s really important to monitor," he said. “That’s driving this probably wider than usual range of potential outcomes for production of the MAX."
New production problems could spur more regulatory actions, which in turn would slow production and weigh on revenue. The biggest hurdle would be a prolonged stoppage of the 737 line, Owens said.
“The path to stable financials is a stable factory and that’s what we’re focused on right now," West said at the March 20 conference. “In regards to the longer term, the vision and the framework that we laid out in November of 2022 is still intact," he said, referring to when the company set a goal for $10 billion in free cash flow by 2025 or 2026. “It’s still intact. It’s going to take us longer to get there."
Write to Mark Maurer at mark.maurer@wsj.com
