Boeing’s (BA) growth has come at a cost. Although increasing demand is good for the company, it has meant increasing capacity to cater to this demand, which BA has done by raising more debt. Also, technology obsolescence necessitates continuous investment in R&D (research and development) and the development of new aircraft.
At the end of 1Q16, Boeing’s leverage was ~$10 billion, similar to what it was at the end of 2015. In 4Q15, BA raised it by ~$1 billion. At the end of 2015, Boeing had a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 1.07x and a net debt-to-EBITDA ratio of -0.23x.
However, at the end of 1Q16, Boeing went from being net debt negative to net debt positive, meaning that the debt on its balance sheet now exceeds the cash on its balance sheet. BA’s total debt-to-EBITDA has increased from 1.07x at the end of 2015 to 1.10x at the end of 1Q16. Its net debt-to-EBITDA ratio has increased from -0.28x at the end of 2015 to 0.22x at the end of 1Q16.
By comparison, Airbus has a higher leverage, with a total debt-to-EBITDA ratio of 1.82x and a net debt-to-EBITDA ratio of -1.73x. Embraer (ERJ) is worse off, with a total debt-to-EBITDA ratio of 5.91x and a net debt-to-EBITDA ratio of 1.12x. At the end of 4Q15, defense peers like Lockheed Martin (LMT) had a net debt-to-EBITDA ratio of 2.19x, United Technologies (UTX) of 1.42x, and General Dynamics (GD) of 0.13x.
Cash flows provide respite
At the end of 2015, BA’s cash on the balance sheet stood at $7.9 billion. For 1Q16, Boeing generated strong operating cash flows of about $1.2 billion, as compared to $88 million in 1Q15. Free cash flow was $483 million.
Notably, BA makes up 9% of the iShares US Aerospace & Defense ETF (ITA).
For this year, Boeing expects its operating cash flow for 2016 to be ~$10 billion. It also plans to increase capacity to 65 aircraft per month by 2017, which will require additional investments.
BA’s major clients include airlines, which is a cyclical industry. Airlines have witnessed increased profitability in the last two years due to huge fuel savings. However, it’s just a matter of time before fuel prices rebound.
When that happens, companies with high leverage will be deemed riskier. And if industry fundamentals deteriorate, it may result in order cancellations for BA, bringing the company’s balance sheet under stress.
In the next part, we’ll look at Boeing’s dividend challenges after 1Q16.