Boeing Co. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing attributes severe business and cash-flow pressure to the COVID-19 pandemic and the continued 737 MAX grounding.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $11.8B | $15.8B | $28.7B | $38.7B |
| Operating loss | $3.0B | $3.4B | $4.3B | $1.0B |
| Net loss attributable to Boeing shareholders | $2.4B | $2.9B | $3.0B | $0.8B |
| Diluted loss per share | $4.20 | $5.21 | $5.31 | $1.40 |
| Operating margin | (25.1)% | (21.5)% | (15.0)% | (2.7)% |
- Revenue fell 25% year over year in both the quarter and first half. Commercial Airplanes (BCA) was the main drag; Defense, Space & Security (BDS) revenue was comparatively steady, while Global Services (BGS) was hurt by lower commercial activity.
- Q2 BCA revenue was $1.6B and operating loss was $2.8B. BDS revenue was $6.6B and operating earnings $0.6B; BGS revenue was $3.5B and operating loss $0.7B, including substantial impairment, credit-loss, inventory and severance charges.
- First-half operating cash flow was negative $9.6B, versus positive $2.2B a year earlier. Investing cash use was $12.7B, largely reflecting investment purchases; financing provided $32.7B, principally from new borrowings.
- At June 30, cash and cash equivalents were $20.0B and short-term and other investments were $12.4B. Management reported cash and short-term investments of $32.4B. Debt was $61.4B, up from $27.3B at year-end 2019; shareholders’ equity was negative $11.7B.
- Backlog was $408.7B, down from $463.4B at December 31, 2019. Boeing said about 27% was expected to convert to revenue through 2021 and 70% through 2024, subject to delivery timing and market conditions.
Changes, outlook and material items
- Performance worsened year to date: the first-half operating loss widened to $4.3B from $1.0B, while revenue declined $10.0B. Q2’s operating loss was narrower than the prior-year quarter, largely because 2019 included a $5.6B charge for estimated 737 MAX customer considerations.
- Boeing assumed 737 MAX deliveries would resume in Q4 2020, subject to regulatory approval. It had about 450 MAX aircraft in inventory and expected most to be delivered in the first year after deliveries resume. MAX production was expected to increase gradually to 31 per month by early 2022.
- Boeing expected roughly $5B of abnormal production costs as it operated at unusually low production rates in 2020 and 2021; $1.5B was expensed in the first half. The MAX customer concessions and other considerations liability was $6.7B at June 30.
- Management estimated air travel would take approximately three years to return to 2019 levels, with a few additional years for the industry to return to long-term trend growth. Boeing anticipated negative operating cash flow in future quarters until deliveries ramped up.
- To support liquidity, Boeing drew a $13.8B term loan and issued $25B of senior notes in Q2. It had $9.6B of unused revolving credit capacity. Share repurchases were terminated and dividends suspended; spending, production and workforce were reduced. Management said it believed funding operations for the foreseeable future was probable based on its estimates and planned actions.
- Material charges included a $978M first-half KC-46A Tanker reach-forward loss, a $168M VC-25B charge, and a $336M first-quarter reserve increase for 737NG frame-fitting repairs. Q2 severance expense was $652M for approximately 19,000 employees expected to leave; Boeing said in July that further workforce reductions were under assessment.
Risks and contingencies
- MAX certification timing and conditions, customer cancellations or deferrals, and the pace of commercial aviation recovery could materially affect deliveries, margins, liquidity and cash flow. Boeing said it could not reasonably estimate potential additional MAX-related losses.
- Airline financial stress may lead to customer defaults, financing requests, aircraft remarketing, additional credit losses or refunds of customer pre-delivery payments. Supplier liquidity and operational disruptions also pose risks.
- Fixed-price development programs remain exposed to cost overruns and delays, particularly KC-46A and other complex defense programs. Future U.S. government budget or priority changes could affect contracts.
- Legal actions and government investigations related to the MAX accidents remain ongoing; Boeing could not estimate a range of uninsured losses. Boeing also terminated its proposed Embraer partnership and is arbitrating Embraer’s dispute over that termination.
- Other exposures include $560M of environmental remediation liabilities, $12.8B of aircraft financing commitments and possible future warranty costs. Credit rating agencies downgraded Boeing during the first half, with risk of further downgrades.
Important facts for investors to verify
- Progress and regulatory decisions on MAX certification, delivery resumption, inventory clearance and production-rate plans.
- Quarterly operating cash flow, cash and investment balances, debt maturities, credit ratings and access to revolving or commercial-paper financing.
- Airline order cancellations, backlog quality, customer payment deferrals and the assumptions behind the projected industry recovery.
- Updated cost estimates and potential further losses on KC-46A, 777X, 787 and other development or commercial programs.
- Changes in MAX customer concessions, warranty reserves, litigation exposure and workforce restructuring costs.