GE's 737 MAX Problem Just Got Bigger
December 17 2019 - 8:23AM
Dow Jones News
By Thomas Gryta
General Electric Co. will likely take a significant hit to its
cash flow from Boeing Co.'s decision to halt production of the 737
MAX jetliner, which has already dented the conglomerate's
finances.
GE makes all of the MAX's engines through a joint venture with
France's Safran SA. When Boeing in April cut monthly production of
the plane to 42 from 52, it created a $400 million quarterly
reduction in GE's cash flow. The suspension of production Boeing
announced Monday, if prolonged, could reduce cash flow by much more
as analysts warn that GE won't receive payments made as the planes
are being built.
GE's management has flagged the problems around the MAX in
regulatory filings and public comments, but it also has said the
impact is temporary and cash flow would rebound as production ramps
up.
"It is going to create a significant cash drag for GE," said
John Inch, an analyst at Gordon Haskett. He added that "one engine
program cannot make or break the fortunes of this company."
GE is expecting to get $21 billion in cash from selling
biopharmaceutical assets and it intends to use proceeds to
deleverage a stretched balance sheet. GE also has a safety net from
$20 billion in credit lines syndicated through 36 banks that expire
in 2021.
GE said it is working with customers and suppliers "to mitigate
the impact of the temporary shutdown of the 737 MAX, while
protecting the company's ability to accelerate production as needed
in the future."
Nick Heymann, a William Blair & Co. analyst, projected that
the suspension could cut GE's quarterly cash flow by more than $2
billion.
The final cost to GE is difficult to determine, according to
analysts and people close to the company. GE makes other systems
used on the MAX, and likely will negotiate with Boeing on the final
outcome. There are also costs and other offsetting factors
associated with its engine production.
"GE discloses insufficient financial information to be able to
model any of this," Mr. Inch said.
Aviation is GE's largest business by revenue and its health is
vital to the conglomerate's overall turnaround. GE struggled in
recent years after deep losses in its core power division and
finance arm forced the company to slash its dividend and pursue
plans to sell off major business units.
As production of the LEAP engine that powers the MAX increases,
sales and margins in the divisions are projected to rise in coming
years. The LEAP is an option for customers buying Airbus SA's A320
NEO airliner but it is the only engine used on the 737 MAX. GE also
has military programs and other engines in production, meaning it
may temporarily shift resources to other programs. Meanwhile, it
has a lucrative business servicing the thousands of GE engines
already in use around the world.
Melius Research recently projected the commercial engines
business would bring in almost $26 billion in revenue next year, or
28% of GE's total revenue. The firm predicts GE Aviation's total
revenue to approach $35 billion for 2020.
The extended grounding has already strained GE finances, cutting
cash flow by as much as $1.4 billion this year as factories produce
fewer engines and GE can't get fully paid for them. The LEAP engine
is a major growth driver for the company's aviation unit, which
accounted for $4.8 billion of GE's roughly $7 billion in industrial
profits in the first nine months of 2019. GE has more than 17,000
orders for the engine.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
December 17, 2019 08:08 ET (13:08 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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