BOEING CO quarterly report, Q3 FY2020

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Boeing Co. (BA) — Q3 2020 Form 10-Q

Reporting period: Quarter ended September 30, 2020; comparisons are with the same 2019 periods unless noted. The interim financial statements were reviewed by Deloitte, not audited.

Financial results and liquidity

  • Q3 revenue: $14.1 billion, down 29% from $20.0 billion. Products revenue fell to $11.4 billion from $17.2 billion; services revenue was $2.7 billion versus $2.8 billion.
  • Q3 results: Operating loss was $401 million (2.8% negative margin), compared with operating earnings of $1.3 billion (6.3% margin). Net loss attributable to Boeing shareholders was $449 million, or $0.79 per diluted share, versus earnings of $1.17 billion, or $2.05 per diluted share.
  • First nine months: Revenue was $42.9 billion, down 27%; operating loss was $4.7 billion versus earnings of $229 million; net loss attributable to Boeing shareholders was $3.5 billion, or $6.10 per diluted share, versus earnings of $374 million, or $0.66 per share.
  • Cash flow: Operating cash use was $14.4 billion for the first nine months, versus $226 million used in 2019. Investing activities used $16.8 billion; financing activities provided $32.3 billion, primarily reflecting increased borrowing.
  • Liquidity and debt: At September 30, cash and cash equivalents were $10.6 billion and short-term and other investments were $16.6 billion, totaling $27.1 billion. Debt was $61.0 billion, up from $27.3 billion at year-end 2019. Unused revolving credit capacity was $9.6 billion. Shareholders’ equity was negative $11.8 billion.
  • Costs and charges: Cost of sales equaled 92.7% of Q3 revenue, up from 84.7%. The filing cites 737 MAX abnormal production costs, severance, 787 rework, customer-related costs and development-program charges among the factors weighing on results. Interest and debt expense rose to $643 million in Q3 from $203 million.

Material changes and segment performance

  • Commercial Airplanes (BCA): Q3 revenue was $3.6 billion versus $8.2 billion; operating loss was $1.4 billion versus $40 million. First-nine-month operating loss was $6.2 billion. Lower deliveries, the MAX grounding, pandemic-driven demand weakness, abnormal production costs and severance contributed.
  • Defense, Space & Security (BDS): Q3 revenue was $6.8 billion versus $7.0 billion and operating earnings were $628 million versus $754 million. First-nine-month earnings fell to $1.0 billion from $2.6 billion, including a $1.045 billion KC-46A reach-forward loss and a $168 million VC-25B charge.
  • Global Services (BGS): Q3 revenue was $3.7 billion versus $4.7 billion and operating earnings were $271 million versus $673 million. Pandemic-related customer credit losses, inventory and asset impairments, contract termination costs and severance weighed on year-to-date results.
  • Backlog: Total backlog was $393.1 billion, down from $463.4 billion at December 31, 2019. Boeing expected about 24% to convert to revenue through 2021 and 68% through 2024, while warning that timing was uncertain.

Outlook, risks and unusual items

  • Management said COVID-19 and the 737 MAX grounding were materially harming revenue, earnings, liquidity and operating cash flow; it expected negative operating cash flow in future quarters until commercial deliveries ramped up. Boeing estimated roughly three years for travel to return to 2019 levels, with additional time for the industry to regain long-term trend growth.
  • Boeing assumed MAX deliveries would resume in Q4 2020, subject to regulatory approvals. It had about 450 MAX aircraft in inventory and expected to deliver about half by the end of 2021. MAX production was expected to remain low through 2020, with a gradual ramp to 31 aircraft per month by early 2022. These are assumptions, not assured outcomes.
  • The company estimated approximately $5 billion of abnormal production costs while producing at unusually low rates in 2020 and 2021; $2.1 billion had been expensed in the first nine months. The MAX customer concessions and other considerations liability was $6.0 billion at September 30; the form and timing of some remaining consideration were still subject to negotiation.
  • Other material exposures include 737 MAX litigation and government investigations for which Boeing could not estimate a loss range; environmental remediation liabilities of $571 million; and financing commitments of $12.6 billion, all relating to customers Boeing believed had below-investment-grade credit. Boeing also warned of possible future program losses, customer cancellations, supplier disruption, customer financing defaults and further credit-rating downgrades.
  • Management described cost and liquidity measures including workforce reductions, suspended dividends and share repurchases, reduced spending, and plans to contribute company stock to pension and 401(k) plans. The filing stated management believed operations could be funded for the foreseeable future based on its estimates and access to liquidity.

Investor verification priorities

  1. Track FAA and other regulators’ MAX certification and return-to-service decisions, delivery timing, and the disposition of the roughly 450 stored aircraft.
  2. Verify actual cash burn, delivery recovery, debt maturities and refinancing access against management’s liquidity assumptions.
  3. Monitor commercial-aircraft demand, order cancellations, backlog conversion, customer concessions and potential refunds of customer advances.
  4. Assess further cost or loss exposure on the 737, 787, 777X, KC-46A and VC-25B programs, including quality, certification and production-rate risks.
  5. Follow customer and supplier credit conditions, credit-rating changes, litigation and government investigations, and the effect of any additional charges on equity and liquidity.