Boeing Co. (BA) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing describes the combined effects of the COVID-19 pandemic and the ongoing 737 MAX grounding as materially adverse. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $16.9 billion | $22.9 billion; down $6.0 billion |
| Operating loss and margin (GAAP) | $1.35 billion loss; (8.0)% | $2.35 billion income; 10.3% |
| Net loss attributable to Boeing shareholders | $628 million | $2.15 billion income |
| Diluted EPS | $(1.11) | $3.75 |
| Core operating loss and margin (non-GAAP) | $1.70 billion loss; (10.1)% | $1.99 billion income; 8.7% |
| Operating cash flow | $4.30 billion used | $2.79 billion provided |
| Cash and cash equivalents at March 31 | $15.0 billion | $9.5 billion at December 31, 2019 |
| Total debt | $38.9 billion | $27.3 billion at December 31, 2019 |
| Total backlog | $438.6 billion | $463.4 billion at December 31, 2019 |
Cash and short-term investments totaled $15.5 billion at quarter-end; unused revolving credit capacity was $9.6 billion. Total equity was negative $9.4 billion. Cost of sales was 99.2% of revenue, versus 81.4% a year earlier. The effective tax rate was 57.4%, including benefits from the CARES Act net operating loss carryback provisions.
Segment results and changes
- Commercial Airplanes (BCA): Revenue was $6.2 billion, down from $11.8 billion; operating loss was $2.07 billion versus $1.17 billion income. Deliveries fell to 50 from 149. Results reflected the MAX grounding, reduced widebody deliveries, COVID-19 disruptions and program costs.
- Defense, Space & Security (BDS): Revenue was $6.0 billion, down from $6.6 billion; operating loss was $191 million versus $852 million income. The quarter included an $827 million KC-46A Tanker reach-forward loss and a $168 million VC-25B charge.
- Global Services (BGS): Revenue was $4.6 billion, broadly unchanged; operating earnings increased to $708 million from $653 million. Management expected commercial services to weaken, while government services demand was described as stable.
- Boeing Capital: Revenue was $65 million and operating earnings were $24 million, both broadly consistent with the prior year.
The backlog decrease was primarily attributed to aircraft cancellations, reductions for customers facing liquidity problems and changes in projected price escalation. Boeing expected about 30% of total backlog to convert to revenue through 2021 and 72% through 2024, subject to delivery timing and COVID-19 impacts.
Liquidity, outlook and material risks
- Operating cash use reflected the grounding and production suspension, lower deliveries, increased inventory, and lower advances and progress payments. Boeing expected negative operating cash flow in future quarters and negative operating cash flows for 2020, and said it would need additional financing. It planned to raise additional liquidity in Q2 and stated it believed available and prospective sources would fund operations for the foreseeable future, conditional on its assumptions and successful execution.
- Boeing drew a $13.825 billion, two-year delayed-draw term loan during the quarter. Credit ratings were downgraded, with risk of further downgrades and potentially reduced access to commercial paper, capital markets and supply-chain financing.
- Management estimated travel could take 2–3 years to return to 2019 levels, with industry recovery to long-term trend growth taking several more years. The filing cited an IATA forecast for passenger traffic to fall 48% in 2020. These were expectations, not assured outcomes.
- Boeing assumed MAX deliveries would resume in Q3 2020 and production in Q2 2020, with production gradually rising to 31 per month during 2021. It expected 777/777X combined production to average about 2.5 per month in 2020 and fall to 3 per month in 2021; 787 production was to decline from 14 to 10 per month in 2020 and to 7 by 2022. These assumptions were subject to regulatory, market and operational uncertainty.
- MAX inventory was approximately 450 aircraft. Boeing recorded $797 million of abnormal MAX production costs and expected approximately $5 billion of abnormal costs over about two years; it also estimated about $1 billion of additional abnormal production costs from the extended low-rate environment. MAX customer concessions and other considerations liability was $6.7 billion at quarter-end.
- A $336 million Q1 charge increased the product warranty reserve, primarily for 737NG “pickle fork” repairs. Boeing said it could not estimate potential losses beyond amounts recognized for this matter.
- Boeing terminated its proposed Embraer partnership after asserting Embraer failed to meet closing conditions. Boeing did not expect to owe the $100 million termination fee, but the parties planned to arbitrate the dispute.
- Legal actions and government investigations related to the two MAX accidents remained ongoing; Boeing could not reasonably estimate uninsured losses. Other risks include airline and supplier distress, customer financing and collateral impairment, fixed-price development overruns, production and certification delays, and potential reductions in government program funding.
- In March, Boeing suspended dividends until further notice and its board terminated the share repurchase authorization. It also announced workforce reductions, spending controls and production-rate cuts.
Key facts for investors to verify
- Whether MAX regulatory approvals and deliveries resumed on the assumed schedule, and how inventory, customer concessions and production costs changed.
- Actual quarterly cash burn, additional financing raised, borrowing costs, credit ratings, and continued access to revolving facilities and other funding.
- Airline customer deferrals, cancellations, defaults and backlog changes, as well as recovery in commercial aircraft and services demand.
- Further cost estimates or charges on KC-46A, VC-25B, Commercial Crew, 737NG repairs and other fixed-price or development programs.
- Developments in MAX litigation and investigations, and the Embraer arbitration and any related financial consequences.
Non-GAAP core measures exclude specified pension and postretirement cost adjustments and should be considered alongside, not as substitutes for, GAAP results.