Yves here. When we made grim prognostications about Boeing’s future, we were treated as nuts.
By Wolf Richter, editor at Wolf Street. Originally published at Wolf Street
Boeing’s shares [BA] came unglued, plunging 18.1% today, after having already plunged over the past four weeks. Since February 12, shares have crashed 46%, and since the peak on March 1, 2019, 57%:
Today’s plunge came after a flurry of disclosures and leaks in the morning about Boeing, including:
- Sources said that Boeing is planning to draw down entirely and much quicker than expected its new credit facility of $13.825 billion as early as Friday, apparently worried that banks might freeze the credit facility later, and banks did during the Financial Crisis.
- Boeing disclosed that it had negative net orders of -28 aircraft for the first two months of 2020, with cancellations of the 737 MAX exceeding orders for all models;
- It imposed a hiring freeze to “preserve cash”
Trying to forestall a liquidity crisis.
Of immediate concern is how much cash Boeing is burning to deal with the 737 MAX fiasco, and how much cash it can pile up to avoid a liquidity crisis.
Back in October 2019, Boeing obtained a new credit line of $9.5 billion, which about doubled the size of its existing credit line. Credit lines serve as liquidity backup that a company can draw down when it needs cash. Then in February, it obtained another loan facility, this time a two-year “delayed-draw term loan” for $13.825 billion from a consortium of banks, led by Citibank. This type of loan allows Boeing to wait drawing the money until it needs it.
Boeing initially drew $7.5 billion on this new credit line and was expected to draw any other amounts way down the road, as needed to deal with the 737 MAX fiasco. But the disruptions from the coronavirus have been thrown on top of its existing 737 MAX fiasco.
Now Boeing is expected to draw the remainder of the line as early as Friday, sources told Bloomberg. According to one of the sources, Boeing is drawing down the rest of the loan as a precaution due to market turmoil.
This means that Boeing is worried the banks might freeze the unused portion of the credit facility and make the cash unavailable, as banks had done during the Financial Crisis, when companies found that access to their credit lines was suddenly blocked just when they needed the cash most urgently.
The cash pressures on Boeing are enormous.
There is the plunge in revenues from stalled sales and deliveries of the grounded 737 MAX, and the cash drain from working with its suppliers for the 737 MAX program to keep them afloat.
Then there are the settlements with airlines, such as Southwest and American Airlines, over the grounded 737 MAX in their fleets, where Boeing pays the airlines. The amounts of the individual settlements have remained confidential, but in its annual report, released on January 31, Boeing spelled out its estimates for the combined amounts: $8.2 billion.
This came in two lumps. In Q2 2019, it “estimated potential concessions and other considerations to customers for disruptions and associated delivery delays related to the 737 MAX grounding, net of insurance recoveries,” at $5.61 billion. Then in Q4 2019, it estimated an additional $2.62 billion, for a total of $8.2 billion.
Negative new orders in 2020 so far.
Boeing also disclosed today just how awful its new orders look: During January and February, Boeing received net new orders of negative -43 orders for the 737 MAX, driven by a flood cancellations. It received only one order (from FedEx) for its 767, and 17 orders for its 787. This includes the conversion by Air Lease Corp of nine 737 MAX orders into three 787 orders; and the conversion by Oman Air of ten 737 MAX orders into four 787 orders.
This brought Boeings net total new orders for the first two months, net of cancellations and conversions, to a negative -28.
And Boeing delivered only 30 planes during those two months, down from 95 in the same period last year.
The hiring freeze to “preserve cash”
And now there’s a hiring freeze, pending a “review of priorities and critical needs,” the company announced in a letter to employees, reported by the Washington Post. This hiring freeze is likely related to the 737 MAX fiasco, and not the coronavirus, or at least not yet.
“We’re also taking steps to address the pressures on our business that result from the pain our customers and suppliers are feeling,” wrote CEO Dave Calhoun and CFO Greg Smith in the letter to employees. “It’s critical for any company to preserve cash in challenging periods. That’s why we’re implementing steps similar to what many companies are doing right now.”
If it hadn’t wasted $43 billion on share buybacks…
This mad scramble for cash and the existential urge to “preserve cash in challenging periods” comes after this master of financial engineering – instead of aircraft engineering – blew, wasted, and incinerated $43.4 billion on buying back its own shares, from June 2013 until the financial consequences of the two 737 MAX crashes finally forced the company to end the practice. That $43.3 billion would come in really handy right now:
The sole purpose of share buybacks is to inflate the stock price because they make the company itself the biggest buyer of its own shares. But those $43 billion of share buybacks cost the company $43 billion in cash. Now those buybacks have stopped because Boeing needs every dime of cash to stay liquid and alive, and shareholders, who’d been so fond of those share buybacks, are now getting crushed by the damage those share buybacks have done to Boeing’s financial position.
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IBGYBG — A core principle of neoliberal, free markets, shareholder value uber alles
I’ll be gone. You’ll be gone.
Jim McNerney, who ran Boeing from 2005 to 2016 learned this playbook at Harvard, P&G, McKinsey, General Electric and 3M before bringing it brilliantly to Boeing — at least according the his biography that is still posted on Boeing’s website:
“During his tenure, the company recaptured the global lead in commercial airplane deliveries with steady increases in production and a comprehensive update of its product line, maintained a strong position in defense markets despite a downturn in U.S. military spending, restored Boeing’s historic leadership in human spaceflight with major new program wins, and expanded its engineering and manufacturing footprint inside and outside the United States.
Also, with a relentless focus on internal productivity to fund investments in innovation and growth, Boeing’s financial performance steadily improved under McNerney, with revenue rising 73% to a record $90.8 billion in 2014 from $52.5 billion in 2004, the year before he became CEO. Backlog and earnings per share tripled over the period, also to record levels.
…. In addition, McNerney was named the 2015 CEO of the Year by Chief Executive magazine and the 2008 National Management Association’s Executive of the Year.”
Job well done Jim!
Comparing the two charts, it looks like most of the buybacks were done 2017 and later, which means the price per share paid was above the current price? They have lost money on each of those shares? Wow. And of course if they sold the shares now, that would crash the price even more. Maybe they have already been doing that, to generate cash.
Boeing might not have those shares anymore. When a company buys back its own shares, it has the option to retire them, which wipes them out of existence. So there’s nothing to sell. The $43 billion are gone, the shares are gone.
Too bad: Boeing could have used that money to build the plane right.
Can’t they issue new shares? Off course, not a very good option in a depressed market.
What is the point of doing a buyback in order to retire the shares? Is it just a transfer of the company’s cash to the pockets of executives, who hold N shares or options that become more valuable as the total # of shares decreases? Does the company’s value not decrease by the amount of cash paid out in tbe buyback?
Nailed it first guess, though the large shareholders and share-rich board members are also lining their pockets.
Companies were swimming in cash after 2008, and used this method to get that cash into the pockets of executives and power players.
The value of a share is roughly (value of the company)/(number of shares). so when you retire some shares, the value of the other shares go up.
If Boeing really retired the shares, does the value of each remaining-in-existence share increase by the erased-shares-worth as spread over the remaining shares?
If Boeing did this, then those particular shares really are “gone”. They died and went to Share Heaven. But the money spent to buy them isn’t “gone”. It is just “elsewhere”, in other hands and available to do something with. Right?
We really should start thinking about the symbolic and notional nature of money and how money is not the same thing as wealth. What puts the “oney” in money? What puts the “rofit” in profit?
What puts the “orth” in worth? and so on.
I smell an upcoming government bailout of Boeing. Especially now with the COVID-19 pandamic providing good cover for mismanagement.
Yet another example of privatizing gains and publicizing losses. It is a shame that the government won’t force all of those who profited from the share buybacks to return their money.
And you better believe a good chance their union workforce will help pay for a good share of the pain.
Share buybacks were illegal before Reagan and the Wreckers came to power. Financial parasitism at its most depraved. If I were an engineer at Boeing, I would be so angry at how a very small group of greedy overpaid idiots destroyed the fine company my and thousands of others work created.
McNerny a criminal, IMHO, should be deprived of all his ill-gotten gains and paraded in public daily as the worthless POS he is.
‘When we made grim prognostications about Boeing’s future, we were treated as nuts.’
Schadenfreude doesn’t quite cover it. There must be another German word that translates to ‘Suck on that suckers!’ I wonder if one of the consequences of the Second Great Flu Pandemic will be to finally bury this idea of share buy-backs. There may not be much suport to do so in New York and Washington but Boeing may end up in economic text-books on the hazards of buying back your shares to the point that you gut the ability of the underlying company to function at all. And it is a widespread problem. From Goldman Sachs-
‘Buybacks have been the single largest source of US equity demand each year since 2010, averaging $421 billion annually. In comparison, during this period, average annual equity demand from households, mutual funds, pension funds, and foreign investors was less than $10 billion each.’ In other words, the largest source of demand for stocks, by far, was not investors; it was corporate buybacks or acquisitions.
A ten to one ratio, stawk buyback to “organic” demand.
Still flying = Total Fail
Its groaf until you look down and notice that your wings have been ripped off . . .
Over 42.1 to 1 ratio …
The unlovely Glazer family, owners of the Tampa Bay Bucs and wreckers of erstwhile top soccer club Manchester United via a hostile leveraged takeover, announced a share buyback program for Manchester United shares today. Just as the sports world is going into meltdown at the prospect of cancelling games or playing behind closed doors due to coronavirus.
Also, with a relentless focus on internal productivity to fund investments in innovation and growth
oopsie, that’s …with a relentless focus on crushing workers and unions in order to fund lavish pay packages for execs and thrill wall street analysts with innovative grifts…
there, I almost fixed it…
Boeing is definitely a poster child for the long-run stupidity of using buybacks to manipulate their share price (among many other screw-ups well covered here and elsewhere).
And now, with the global disruption of supply chains, this article immediately reminded me of Apple doing the exact same thing. Admittedly they have not screwed up their products nearly as badly, but since they have off-shored all their production and also set some serious records for share buybacks, how soon before they will be begging for handouts?
Is there any excuse for stock buybacks? They seem to have no other real purpose than the manipulation of stock prices.
They are great for executives compensated with stock instead of cash.
I knew an exec for a regional airline whose official salary was $100,000 a year, but he made 5-10 million each year from stock compensation.
No excuse, that’s why they were illegal before Reagan. A core element of neoliberalism is de-criminalising anti-social activity. Why? Because it is very profitable when one part of society gets all the profits while the rest of society gets all the costs and losses of “criminal activity”. The problem in the long term is that you end up with no society, as trust goes away and cooperation ceases. When your societies business plan is to loot everybody else, markets die, and wealth goes away.
Can but hope. One half of Boeing is dedicated to weaponry, the other to global warming. But I expect, like Noel Nospamington above, the poor things’ll get bailed out, in the name of jobs, which we all love so much, don’t we.
I beg to differ:
One half to weaponry
It and the other half to Global Warming.
Basically 100% focused on Killing.
I concur.
It looks like Boeing spent about $20 billion buying back stock since Trump took office and their shares are now trading at around where they were in Feb 2017. I’m all but certain there will be a push for them to get bailed out. It would be nice if maybe some of their egregious performance before, during, and after the 737 MAX crashes would be discussed beforehand, though I’m sure they’ll find a way to make it regular people’s fault just like when the housing market collapsed.
Don’t forget the $4B/yr Boeing is paying out in dividends, to date.
Is Boeing drawing on credit to weather the storm, or to pay their shareholders?
From my reading of it, they’re just plain grabbing the cash while it’s still there, other justifications to follow.
Master of Financial (not Aeronautical) Engineering is correct! Boeing’s so called “income statement” is a 100% “actuarially” smoothed income statement. Good luck making heads or tails out of it’s use of program accounting for batches of 1000s of planes at a time.
This is criminal greed. Stock buybacks are pushed to increase C-Suite Bonuses. The corruption is so pervasive, corporations and government are incapable of functioning. The realization of this is tanking the equities market. Boeing Executives need to be jailed for manslaughter of 346 crew and passengers. The botched response to the Wuhan coronavirus pandemic is predicted to kill a million Americans. The only way the USA can stay United is if there is a restoration of democracy and the Constitution. The jailing of those responsible for the deaths.
As Karl Denninger always says, Leverage cuts both ways, and share buybacks are leverage.
This is a prime example.
It’s even worse than what Richter writes. Apparently in 2008, Boeing’s pension plan was overfunded by $4.7B. As of 2017 it became underfunded by $15B. All that money was dumped into stock buybacks. $20B. McNerney and his crew of financial geniuses should all be in jail. And then Muilenburg and the board did McNerney one better by having the plan buy $3.5B of Boeing stock. If any irate Boeing retiree goes berserk and takes out any of these people, I’m sure all the other retirees will gladly contribute to his widow’s support.
What an amazing site NC is. There are five fundamentally important articles today and none of them appear in the MSM with only a couple in the reliable alternatives. Congratulations to Yves, Lambert and the rest of the team – this is service above and beyond the call of duty. Paypal will be in touch later.
Time to bring back an expression from the 2008 era, “hoocoodanode”. Seems to apply too to Biden and his Forrest Gump simulation of leadership on incarceration and “not wanting” the Iraq War, etc.
Gawd, get off the hobby horse of stock buybacks already. They’re not evil. If the money doesn’t go there, it goes to dividends or acquisitions or some pet project. Wall Street won’t stand for the company to hoard cash and hurt its ROE. It’s going out the door one way or the other.
And no, buybacks occurred before they were legalized in 1982 or whatever. They were done via tender offer, so that all shareholders knew exactly when the company was buying. The big innovation was letting the company do them without informing shareholders exactly when it was buying. Typically they’re done now with the company announcing an authorization that it may then complete at any time. Guys like Henry Singleton made his shareholders an absolute fortune while buying back ~90% of his stock over a period of 20 years or something. John Malone has done similarly for his investors.
Ideally, that money would be reinvested into the corporation, rather than used as dividends, acquisitions (especially if it’s just for the sake of making acquisitions), bonuses, and stock buybacks. You are deliberately ignoring how companies siphoned low-interest loans into the pockets of executives over the past decade.
Stock buybacks don’t have to be a bad thing, but the way corporations have used them lately, they are very bad.
Yeah, it would have been terrible if Boeing had spent some of that buyback money on say, designing a new airliner, hiring more competent engineers and programmers, increasing quality control at the plants and generally paying the people who actually design and build the aircraft a better wage.
Wall Street has the same relationship with companies (and the economy in general) as a vampire has with its victims.
Exactly. Maybe without all those buybacks they could have invested more in software engineering and testing. Oops. Looks like hindsight is 2020…
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How sad is it that for the past 15 to 20 years or so, whenever I’ve heard that a company is going public, I internally resign myself to that company going to shit? I can still remember the moment and the thought process going through my head when I heard Google was going public. Such a shame, this economic system we’ve made for ourselves.
hindsight is so 2020
You speak of a public company’s primary purpose as being to serve its shareholders as if it were some natural law. It isn’t.