In a recent report, I looked at the bailout package that Boeing (NYSE:BA) requested to support the aerospace manufacturing industry, and mentioned that in a piece I had already written earlier, I found that Boeing returned $60B in recent in the past five non-crisis years and 2019. Earlier I had a look at what Boeingdid with the $25B it borrowed during the 2019 fiscal year. It turned out that Boeing spent a considerable amount of new borrowings to make debt repayments, while roughly 30% was used to return value to shareholders in the form of dividends and share repurchases. That’s a decision that, under current circumstances, cannot be supported by the operational performance of the company but can find some support if we consider Boeing’s risky move to fund the pension plans with its own shares a couple of years ago.
The big question that arises, however, is why a company such as Boeing booking significant profits in previous years needs to borrow money. That will be the subject of this report, where we show that even despite strong earnings in recent years, the way the company prioritizes their cash usage left it with extremely little flesh on the bones to deal with dire times. To show this, we look at the revenues, earnings and cash flow operations and financing activities.
While reading this report, take into account that this piece was written even before Boeing requested a support package to support the aerospace manufacturing industry. It makes the findings of this analysis even more chilling.
Boeing typically recognizes revenues when a delivery occurs, services are being rendered or milestones are completed.
Figure 1: Boeing revenues 2014-2019
Revenues increased from $90.8B in 2014 to $101.1B in 2018, a CAGR of ~3%. In 2019, revenues decreased to $76.6B, reflecting the absence of Boeing 737 MAX deliveries and charges. Absent of the Boeing 737 MAX crisis, the revenues would have been $110B in 2019, a CAGR of 4%.
Figure 2: Boeing earnings 2014-2019
What we see is that Boeing didn’t necessarily borrow money because its profits are slim. From 2014 to 2019, Boeing generated $20B in profits calculated via the unit cost accounting method. The five-year and six-year margins are far below the mid-teens margins that Boeing targeted, but it’s not the case that Boeing’s operational profits are too low that it would need to borrow money. It’s also not the case that the program accounting practice is turning losses into profits, though actual unit profits over the past five years are lower than the program accounting profits. To understand why Boeing borrowed money, we have to look a bit deeper at the actual cash performance.
Figure 4: Boeing operating cash flow and return to shareholders 2014-2019
The reason why Boeing needed to borrow cash becomes painfully clear when we look at the operating cash flow and the value returned to shareholders. Boeing spent roughly $60B ($59,994 million to be exact) in buybacks ($40.6B) and dividends ($19.4B) in the past years while it generated roughly $55B in cash flows. Boeing returns all of its cash flow from operations to shareholders. The $5B excess is caused by 2019, the year in which Boeing spent money on dividends and buybacks while operating cash flow fell. Excluding 2019, we found that Boeing returns 92% of its operating cash flow and 113% of its free cash flow to shareholders.
Net new borrowings between 2014 and 2019 were $14.7B, while the company used $9.4B for investing activities and $5.2B to address the $6.1B shortfall between the operating cash flow and the value returned to shareholders.
Boeing reserved the majority of the operating cash for shareholders. That goes well when business is good, but during times of crisis like Boeing is facing now it leaves the company with extremely little flesh on the bones and that’s how a company with over half a trillion in revenues in the past years and almost $60B in operating cash flow is left with a cash pile that grew by just $800 million since 2014, making Boeing heavily reliant on borrowings in times of crisis. You can’t possibly plan for a crisis as big as Boeing’s, but there’s no denying that Boeing relies heavily on borrowing money while it handed its cash to shareholders. In fact, the company handed shareholders more dollars than it generated in free cash flow. Boeing should change this business practice immediately. It’s important to understand that Boeing has borrowed so much money in a single year because it decided to almost hand all its cash to shareholders during better years and now expects government (backed) support as another crisis hits.