Boeing Co. burned $1.01 billion in cash during the second quarter, a sign of the strain from a protracted grounding of the 737 Max jetliner following two fatal crashes.
Investors are studying the performance compared with last year’s $4.3 billion free-cash-flow gain to gauge how badly the company will be hurt if the Max crisis extends late into the year or beyond. Analysts had anticipated an even greater drain for the first full quarter of operations since commercial Max flights were halted in March: an average $2.02 billion outflow.
The total bill for Boeing stands at $8.3 billion, and counting, as the global grounding for its best-selling aircraft extends into a fifth month. The manufacturer continues to churn out 42 single-aisle 737 jets a month to dull the blow to suppliers. Since airlines and lessors can’t take delivery of Max planes with the flying ban in place, payments to Boeing have dropped while the company absorbs the expense of storing about 150 newly built aircraft.
The shares fell 1.5% to $367.55 at 9:37 a.m. in New York, the third-biggest drop on the Dow Jones Industrial Average. Through Tuesday, Boeing had slid 12% since an Ethiopian Airlines 737 Max 8 plunged into a field March 10, prompting regulators to ground the jet globally. That was the biggest decline on the Dow.
Boeing disclosed some bad news on another front: the 777X, the upgraded version of its behemoth wide-body jet.
“Engine challenges” are delaying the first flight to early next year, Boeing said in a statement as it reported earnings. And while the company said it’s still targeting late 2020 for the first delivery, it warned that “there is significant risk to this schedule” because of the engine issues.
The latest delay for Boeing’s first new jetliner since the 737 Max, “I don’t think is going to surprise a lot of people, but this means entry to service is pushed at least to 2021,” Ken Herbert, analyst with Canaccord Genuity, said by phone.
‘In Line’
Boeing revealed last week that it would record a $5.6 billion pretax charge to compensate airlines and lessors, outlining for the first time costs that could linger for years in the form of discounts on future jet orders, spare parts and services. The Chicago-based company also added another $1.7 billion in extra 737 production cost, bringing the total drag against future profit from disrupted Max output to $2.7 billion.
The accounting charge clipped $8.74 a share from earnings. Boeing swung to a core loss of $5.82 a share, according to a company statement. Analysts had expected a profit of $1.98 a share, according to the average of analyst estimates compiled by Bloomberg. The charge didn’t appear to be fully reflected in expectations.
The company’s second-quarter cash consumption “was pretty much in line” with expectations, Herbert said. “I don’t think anyone had great visibility.”
Sales plunged 35% to $15.8 billion. Analysts had predicted $20.4 billion. Inventory, already at a record $65.4 billion in the first quarter, soared to $68.5 billion.
Crucial Jet
There’s never been an indefinite halt to commercial flights ordered for an airplane as significant to airlines and Boeing as the 737 Max, which has a backlog of 4,415 unfilled orders. During an earnings conference call at 10:30 a.m. New York time, Boeing Chief Executive Officer Dennis Muilenburg is expected to discuss the company’s campaign to restore confidence in the plane and the levers it can pull to maintain liquidity.
Boeing’s best estimate is that aviation officials in the U.S. and elsewhere will begin to clear the plane for flight early in the fourth quarter, although the timing could slip. Regulators in U.S., Europe, Canada and other nations are reviewing an update for software linked to the crashes, as well as possible changes to pilot training and other aspects of the Max.
The industrial giant’s sprawling operations and low debt leverage have helped shield it from the grounding’s impact. Boeing was bolstered from improved profitability for another source of cash, the 787 Dreamliner. Deferred production costs for the Dreamliner fell $1.06 billion to $21 billion in the quarter, the company said on its website.
Defense, Services
While revenues and profit plunged for Boeing’s commercial airplane business due to the Max, the other divisions were solidly profitable with mid-teens profit margins targeted by Muilenburg.
Earnings from operations more than doubled to $975 million for Boeing’s defense unit, which reported an operating margin of almost 15%. Profit at the global-services business climbed 14% to $687 million while margins edged above 15%.
Boeing held $9.6 billion in cash and marketable securities at the end of the quarter, up from $7.7 billion a quarter earlier. The company’s consolidated debt jumped by $4.5 billion to $19.2 billion.
Ratings Pressure
In addition to its Max-related costs, Boeing also faces a $4.2 billion payment later this year to Embraer SA for a venture that gives it control of the Brazilian planemaker’s commercial operations. Boeing will also take over $3.5 billion of Embraer’s debt.
Moody’s Investors Service and Fitch Ratings revised Boeing’s credit outlook to negative on July 22 while affirming the company’s rating at the sixth-highest level of investment grade.
“Fitch believes Boeing’s credit profile can support the current 737 Max stresses due to substantial liquidity, financial flexibility, low leverage, access to the capital markets, and revenue diversification,” the ratings company said.