Boeing Company (BA) — Q3 2020 Earnings Call Transcript

Thank you, John, and good morning. Welcome to Boeing's Third Quarter 2020 Earnings Call. I'm Maurita Sutedja, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer, and Greg Smith, Boeing's Executive Vice President of Enterprise Operations and Chief Financial Officer. After management comments, we will conduct a question-and-answer session. We have provided detailed financial information in our press release issued earlier today. You can follow today's broadcast and slide presentation through our website at boeing.com. Before we begin, I need to remind you that any projections, estimates, and goals we include in our discussion this morning are likely to involve risks, which are detailed in our news release, in our various SEC filings, and in the forward-looking statement disclaimer at the end of this web presentation. We refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun.

Thank you, Maurita, and good morning, everyone. Before I get started today, I want to take a moment to remember those who lost their lives on Lion Air flight 610 and Ethiopian Airlines flight 302. Tomorrow will mark the 2-year anniversary of the Lion Air accident. Not a day goes by that we don't remember, reflect, and rededicate ourselves to ensuring accidents like these never happen again. Our deepest sympathies are with the family members and their loved ones today and every day. It's been about 9 months since the onset of the COVID-19 pandemic. I hope you are all continuing to stay safe and healthy during these very challenging times. Let's turn to our business update on Slide 2. The pandemic is having broad and deep impacts across the globe on health, on the economy, on global trade and, of course, our travel industry. We're focused on the health and safety of our employees and our communities, while closely working with our customers and suppliers to navigate through this global pandemic to rebuild stronger on the other side. There's no doubt that this moment is among the most difficult in our more than 100-year history. Through it all, I remain confident in Boeing's long-term future. Let me start today by providing some key updates from across the business. As you know, the COVID-19 impacts on our commercial customers continue to be devastating, and airlines have cut back operations dramatically. We are engaged with our customers every day to understand their short-term, medium-term, and long-term fleet needs so that we can align our supply and demand. We're also working together across the industry to enhance the safety and well-being of passengers and crews during the COVID-19 pandemic. Through our Confident Travel initiative, we are collaborating industry-wide to develop multiple layers of protection to minimize health risks for passengers and crew throughout the travel journey. Boeing aircraft are designed to maximize cabin air quality using high-efficiency particulate air or HEPA filters that trap 99.9% of particulates. And the air in an airplane is exchanged a minimum of 20 to 30 times per hour. That compares to 2 to 5 times per hour in a typical building environment. As we further enhance health measures, we have also entered into patent and technology licenses with partners in this field to manufacture an ultraviolet, or UV wand, to better sanitize airplane interiors. Of course, in-cabin technologies like the HEPA filter and this UV wand also have to be combined with the personal responsibility of passengers and crews, including wearing face masks and taking other precautions, all of which are critical to creating a safe travel experience. We're seeing encouraging industry data validating the safety of air travel. Recently, IATA published data outlining that of the over 1 billion people who have traveled by air this year, there have been fewer than 50 documented cases of transmission. This research was reinforced by a recent study by the U.S. Transportation Command and United Airlines that found the risk of contracting COVID-19 while flying is very low. We know this will be top of mind for anyone traveling, and we're here to support our customers every step of the way. This period of reduced air travel underscores how fundamentally the aerospace industry is to the global economy, to global trade and to global cooperation. Our airline customers and suppliers not only employ millions of workers, they also serve as a connecting and driving force to the entire global economy. That's why we fully support our airline customers in their continued discussions with the U.S. and global governments on potential additional support during this pandemic. I'm certain leaders at every level of government understand the important role airlines serve in our country. We're also doing everything we can to support our global suppliers, and their stability remains a very key watch item. It only takes one part of our one part to delay production of an aircraft or delay service delivery, so we have to work together as an industry to get through these difficult times. Internally, we're also taking tough but necessary action to adapt to the new market reality and transform our business to be sharper and more resilient for the long term. As we shared last quarter, we continue to resize and reshape our business to align with our smaller market. COVID-19's continued impacts have had a more prolonged and deeper impact on our industry, and we'll have to further reduce our workforce. Each of our business units and functions will carefully make staffing decisions that prioritize natural attrition and stability in order to limit the impact on our people and our business. With this approach, we expect additional voluntary and involuntary reductions. Combined with natural attrition, these reductions will bring the size of our workforce to around 130,000 employees by the end of next year. We will continue to assess our market and adjust our plans as appropriate. These decisions are not easy. They represent critical actions to ensure we're able to navigate through this global pandemic and be in a position to deliver for our customers on the other side. As we work through these challenging times, our focus on our values and our priorities has not and will not waver. We are working tirelessly to strengthen our culture, to improve our transparency, rebuild trust, and ensure we are always delivering the highest safety and quality standards. We continue to implement a series of meaningful changes announced 1 year ago to strengthen the safety practices and culture of our company. As we've shared, we stood up our new product and services safety organization and brought together over 50,000 teammates into a single engineering organization. We're also making significant progress on our enhanced enterprise safety management system, with an initial focus on our Commercial Airplanes business. We are working to ensure our system meets the regulators' tougher standards and reflects industry best practices as well as lessons learned from a number of independent reviews that have taken place over the past 18 months. We've also developed a racial equity and inclusion action plan. This will raise the bar for progress on key measures of equity and inclusion for our people and hold us accountable for clearing that bar. We also remain focused on sustaining critical investments in our business, innovating, and operating to help make the world a better place for future generations. This quarter, we appointed a Chief Sustainability Officer, a leadership position dedicated to galvanizing and advancing our environmental, social, and governance priorities. This is an important step as we continue to elevate our focus on sustainability in partnership with our customers, our suppliers, and our communities. In the face of tremendous challenges we are all confronting, I am incredibly proud of how our teams have remained focused on meeting our customers' commitments. Working closely with the FAA and other global regulators, we're continuing to make steady progress toward the safe return to service of our 737. Over the past 1.5 years, there have been around 1,400 test and check flights and over 3,000 flight hours completed on the airplane. While we still have work ahead of us, we're encouraged by the rigorous certification and validation flights conducted by the FAA, by Transport Canada and the European Union Aviation Safety Agency, EASA. The joint operational evaluation board featuring civil aviation authorities from the United States, Canada, Brazil, and the European Union also conducted its evaluations of updating the certification process. We also continue to work closely with other global regulators, including the Civil Aviation Administration of China, among others. These are important milestones in the certification process as our global regulators progress through a comprehensive, robust, and transparent process, and we will continue to follow their lead in the steps ahead. Our assumption has not changed from last quarter. We continue to expect the necessary regulatory approvals to be obtained in time to support resumption of deliveries during the fourth quarter of this year. Of course, the actual timing will ultimately be determined by the global regulators. In addition to the 737, we're making progress across our commercial, defense, space, and services businesses, and I'll highlight a few. Our 777-9 flight test program progressed through this quarter as the final test airplane joined the fleet. The U.S. Air Force and Boeing team were awarded the Collier Trophy for aerospace excellence for the X-37B autonomous spaceplane. Our Boeing defense systems team secured an important contract for 8 F-15EX advanced fighter jets for the U.S. Air Force. And also in the quarter, our T-7A Red Hawk advanced trainer earned the first eSeries designator from the U.S. Air Force, given to an aircraft that is designed, engineered, built, and tested along a digital thread. And our Global Services team signed an agreement with GE Capital Aviation Services for 11 Boeing converted freighters and secured a 6-year support contract for Australian P-8As. On the 777X, we continue to work with the regulators on certification work scope, including reflecting the learnings from the 737 certification process. As with any development program, there are inherent risks that can affect schedule. While we continue to drive towards entry into service in 2022, this timing will ultimately be influenced by certification requirements defined by the regulators. In addition to making progress across our programs, we're also taking action across the enterprise to transform our business and create additional competitive advantage. Greg will provide more details in his remarks. With that update in mind, let's turn to the next slide to discuss the industry environment. Earlier this month, we released our 2020 Boeing market outlook, which forecasts a total market value of $8.5 trillion over the next decade, down from $8.7 trillion a year ago due to the impact of the pandemic, with most of the adjustment in the near term. Overall, the defense and space market remains significant and relatively stable, and we continue to see solid global demand for our major programs. Nonetheless, the scale of government spending on COVID-19 response has the potential to add pressure on global defense spending in the future. Broad support for our defense portfolio was underscored by the $5 billion of orders that BDS booked in the third quarter across key franchise programs. The market outlook for our government services business also remains stable, driven by both domestic and international military aircraft fleet expansions. Our global government services, defense, and space programs will help provide critical stability for us moving forward. Turning to the commercial market. While many of our key long-term fundamentals remain intact, we project near-term market pressure due to COVID-19. Airlines globally have begun to recover from the trough of greater than 90% decline in passenger traffic and revenue earlier this year. In fact, earlier this month, the TSA screened over 1 million passengers for the first time since mid-March. However, the overall recovery has been at a slower pace than we originally anticipated. As the domestic market recovery continues, the international markets remain at all-time lows. August domestic passenger traffic was 49% of 2019 levels, which is a 51% decline, whereas international passenger traffic was only 12% of the prior year, an 88% decline. International passenger traffic recovery remains challenged by the absence of a coordinated global policy on cross-border entry protocols. IATA recently lowered its 2020 passenger traffic forecast to a 66% decline versus prior forecast of 63% based on lower fourth-quarter expectations and less international traffic. Regional dynamics continue to evolve with bright spots in China, where domestic traffic has returned to around 2019 levels, while recovery in other regions has pulled back as COVID cases reemerge and government travel restrictions remain fluid. Airlines are incrementally returning their parked fleet to service, with approximately three-fourths of their pre-crisis fleet now active. At the same time, the active fleets are only seeing about 60% to 70% of their normal utilization rates, keeping global operations around half of pre-crisis levels. These mix trends will continue to drive an uneven recovery. The path ahead will be heavily dependent upon not only the virus but also wide-scale progress on rapid testing, coordinated policies to alleviate travel restrictions, and the timing and availability of a vaccine. As we look to the medium and long term, we see our original prognosis, more or less, still holds. Consistent with IATA and other industry groups, we still expect it will take around three years for travel to return to 2019 levels and a few years beyond that to return to long-term growth trends. Demand for narrow-body aircraft is expected to recover faster than wide-body demand as domestic and regional markets outpace longer-haul international routes. Availability and wide distribution of a vaccine may help accelerate the demand improvement. However, in the near term, we expect continued uncertainties as the situation remains very dynamic with many variables. Our 10-year commercial airplane market outlook is approximately 11% lower than what we assumed a year ago, with wide-bodies being more significantly impacted than narrow bodies. From a 20-year perspective, we still see the impact of COVID but to a lesser extent as traffic reverts to long-term trends over time. Near term, we also anticipate accelerated retirements, driving replacement demand up to approximately 48% of deliveries over the next 20 years, which compares to 44% as previously projected. As our customers focus on retiring their oldest and least efficient airplanes, new airplanes will allow the industry to reduce emissions and make future flying even more environmentally sustainable. Airplanes that we plan to deliver this year will be as much as 25% to 40% more fuel-efficient than the airplanes they're replacing. As we see airlines adapt to these market realities, price differentiation and versatility will be key. Our market-leading product line remains well positioned to meet our customers' needs and supports airline plans to gain efficiencies as they reach for their emission goals. Our attractive portfolio and the diversity of our backlog provide a strong foundation for long-term success. In the commercial services market, although we believe we've seen the low watermark in terms of demand, the recovery has been slow, and we continue to anticipate that it will take multiple years to reach previous demand levels. Accelerated retirements will also result in a newer fleet as we emerge from the pandemic impacts, which will reduce services demand and prolong its market recovery. Digital solutions are emerging as a critical enabler as customers focus on leaner operations. Life cycle services and support will help customers scale their operations to meet efficiency and cost objectives aligned with market recovery trends. Our broad services portfolio and deep customer knowledge position us well to support these customer needs. Now let's turn to commercial airplane production rates on Slide 4. We've maintained our prior assumptions regarding our production rate plans across all commercial airplane programs. However, the market continues to be dynamic, and we will monitor as we prudently balance supply and demand. We're closely watching the international passenger traffic recovery, which, so far, has been weak, to assess downside risks to our wide-body program production rates, in particular, the 787. We still expect to produce the 737 at very low rates for the remainder of 2020 and gradually increase the rate to 31 by the beginning of 2022, and expect further gradual increases to correspond with market demand. We will continue to assess the delivery profile for 2021, as it will help inform if we need to adjust our 737 production rate ramp-up. We will continue to keep our supply chain apprised of our plan. At the end of the third quarter, we have 3,400 aircraft in our 737 backlog. Although this remains an unprecedented and uncertain time, we are confident air travel will return. And when it does, we will be positioned to support our customers. And with that, let me turn it over to Greg.

Great. Thanks, Dave, and good morning, everyone. Let's please turn to Slide 5. As Dave mentioned, this moment is among the most difficult in our company's 100-plus year history. Since the beginning of the pandemic, we have taken prudent and decisive action in an attempt to get ahead of this to preserve cash so that we can navigate this crisis and also reshape our business so that we can emerge as a sharper, more resilient, and more competitive company. We are being and will continue to be proactive and look around corners to assess risk factors and take appropriate action. We've been focused on derisking our business and disciplined cash management for some time, and COVID-19 has accelerated these efforts further. I'll go through a quick timeline of our early actions we've taken in 2020 and then provide you with an update on our transformation efforts. Starting back in the middle of March, as the potential risk of the virus escalated, we took a proactive step to fully draw down on our $13.8 billion delayed draw term loan. Given the uncertainty of the markets at that time, we understood that this was a prudent step to bring that cash on our balance sheet. Almost immediately thereafter, we suspended our dividend and terminated our share repurchase authorization. Even then, at the early stage, it was clear to us that liquidity would be critical through this pandemic. These early decisive actions were critical and important. Next, in early April, we rolled out our first voluntary layoff program. We recognized the need to reduce our staffing levels, given the sharp reduction in commercial aircraft demand. And we took action to limit the impact on our teams as much as possible through voluntary opportunities first. This was followed by involuntary layoff programs. By the first quarter earnings, we announced additional actions, including reducing our commercial production rates, limiting discretionary spending, and lowering overall staffing levels by about 10%. While difficult, all these steps were critical in the early days of this global crisis. Shortly thereafter, we went to the bond market and raised $25 billion, which has proven to be instrumental in helping us navigate this crisis. The strong investor response reflected the confidence the overall market has in our future as well as the swift action that the U.S. government took to support the credit markets. Throughout the spring and summer, we stayed very closely engaged with our customers and suppliers, working to understand the impacts of the pandemic so that we could recalibrate our industry while maintaining as much stability as possible. And by the second-quarter earnings, with a deeper understanding of the prolonged impact, we further reduced our commercial production rates and announced that we would further reduce our staffing levels. As you'll also recall at that point, we formally rolled out our business transformation efforts to assess every aspect of our business across five key pillars: infrastructure, overhead and organization, portfolio and investments, supply chain health, and operational excellence. I'll share more updates on these shortly. In August, we moved forward with our second voluntary layoff program, which was much broader than our initial program and included our executives, which was then followed by another involuntary layoff program. We managed this process very closely to ensure continuity where necessary, and to maintain confidence in our ability to deliver on our commitments to our customers. Next, we rolled out a series of organizational realignments to streamline and simplify how we operate. Also, through our 787 study, it became evident that the consolidation to a single production location in South Carolina will make us more efficient and lower production costs, positioning us better for the future. As a result, earlier this month, we made the decision to consolidate the 787 production in South Carolina by mid-2021. We are approaching these business transformation efforts with rigor and thoughtful evaluation at each step. We have made notable progress across all five pillars of our business transformation efforts. We will utilize this time when we are at the lower production rate environment to reinvent and improve our business processes. First, regarding our infrastructure pillar. We're assessing our overall facility and site footprint in light of the reduced demand. The consolidation of the 787 production is an example of this. At the same time, we're also taking into account new flexible and virtual work opportunities. If you asked us eight to nine months ago if we thought a large portion of our workforce could work virtually while still being productive, you might have heard skepticism. But these last several months have shown us that we can be more flexible. Building on the lessons of our experiences, we're studying an enterprise footprint optimization effort, utilizing flexible and virtual workplace planning. We're starting with a few pilot programs over the coming months, which will help determine our best path forward. At the same time, we're also looking to make more efficient use of our square footage, and in some cases, reduce the overall footprint. Through staffing reductions and our flexible workplace program, we anticipate a reduction of approximately 30% in office space needs compared to our current capacity. We're reviewing every piece of real estate, every building, every lease, every warehouse, and every site to look at how we can be more efficient, and we'll share our decisions as we make them. Turning to our overhead and organizational pillar. This is where we've been looking critically at our cost structure, at how Boeing operates and how we're organized, benchmarked to top-quartile standards so we can simplify, reduce layers, and reduce bureaucracy while ensuring we strengthen connections vital to safety, quality, and performance. As an example, we're studying how we organize our production and development programs better by reducing the layers between program leadership and the factory floor, increasing our management spans and control, and improving direct and indirect ratios. These actions are aimed at enhancing communication, empowering our teams, and creating lasting efficiencies in how we do our work. Moving to our portfolio and investment pillar. We're shaping our portfolio and aligning our investments to focus on the core business, market opportunities, and sustainability efforts. In addition to the impact of demand near term, COVID-19 will also impact the timing of new market opportunities. Prior to the pandemic, we were investing in growth markets and growing business. But as the market conditions have changed, we have made swift decisions to adapt. You've seen us start to reprioritize our investments, and we will continue to do so and make prudent decisions going forward. We originally planned to invest over $6 billion this year. Through prioritization, we have pared back these investments by approximately $2 billion. That said, we have and we will continue to invest in all lines of our business. In fact, we've invested more than $60 billion over the last 10 years in key strategic areas of our business. As we take action in this pillar, we will not lose sight of our future and the exciting technologies that will reshape the future of air travel. Our guiding principle here is that every decision we make must help us navigate through this difficult period while also not diminishing our future competitiveness. Moving to supply chain pillars, Dave mentioned our suppliers are experiencing the same pressure that we are. Many of them are small businesses without our portfolio of diversity and scale. Our teams are actively talking to our suppliers every day. We have to work together as an industry to get through this difficult time so that we can come out of this healthy on the other side. We have made enhancements of our supply chain risk assessments and are closely monitoring each supplier, mitigating issues, exploring financing solutions, and getting creative in supporting them in the best way we can. The reality is that our industry as a whole will simply build less over the coming years. And we have to help our industry partners recalibrate to that lower demand in the near term, while maintaining stability as much as possible and positioning to return to growth in the medium to long term. We're also transforming our transportation, warehouse, and logistics approach to streamline our warehousing network, set enterprise standards, and improve efficiencies. We're targeting a greater than 20% improvement to our internal material management costs while driving down our freight transportation spend and optimizing our warehousing operations. And we're also reducing our indirect and overhead spending on things like capital equipment, facility support, and enterprise services. We have an opportunity to significantly reduce our overall indirect spending, and we will be closely managing this process to ensure we continue to drive the highest levels of safety and quality. Lastly, we're working diligently to accelerate operational excellence across the enterprise so that we can improve performance, enhance quality, and safety, and reduce rework and associated costs. The enterprise operations team successfully launched the formation of four company-wide process councils around supply chain, program management, quality, and manufacturing. These councils are already driving integration and accelerating efforts to enhance program performance. We have simplified our structure to allow the process councils to lead in driving accountability and decision-making closer to the work that's being performed. When and where we identify issues at a program level, we're implementing thorough corrections, transparency, sharing information with our customers, and strengthening processes across the enterprise to enhance first-time quality in every program. These are just a few underway across the business. And over the coming weeks, months, and years, we'll keep you up-to-date on the transformation journey. Our focus here is clear. We're taking comprehensive action to preserve liquidity, navigate the pandemic, adapt to our new markets, improve performance, and position our company for the future. As we take these actions, we're ensuring that every step only furthers our drive for key efforts in safety, quality, and delivering on our commitments. These efforts are meant to create meaningful and lasting change to how we operate and our cost structure. The financial objectives we've established are measured in billions of dollars, and we expect them to be executed over a multi-year period. In the current environment, we must take these actions to adapt to lower demand. What we're trying to achieve here are sustainable, structural, lasting improvements in our performance that lay the foundation for future margin expansion and cash flow generation as the market recovers. So with that, let's turn to Slide 6 for our third-quarter results. Our financial results continue to be significantly impacted by COVID-19 and the 737 MAX grounding. Third-quarter revenue of $14.1 billion reflects lower Commercial Airplane deliveries and commercial services volume, primarily, again, due to COVID-19. Earnings in the quarter were also impacted by charges for BCA abnormal costs related to the 737 program and severance costs for the additional approximate 7,000 employees leaving the company through the end of 2021. These impacts were partially offset by an income tax benefit related to the NOL carryback provision in the CARES Act, as well as the impact of pretax losses. Let's now move to Commercial Airplanes on Slide 7. Revenue was $3.6 billion, reflecting lower Commercial Airplane deliveries due to the significant impacts of the pandemic, as well as 787 quality issues and associated rework. BCA third-quarter operating margins declined primarily due to lower delivery volume and a $590 million of abnormal costs related to the 737 program. Similar to prior periods, in preparation for our third-quarter financial statements, we have made certain assumptions on production rates across all programs, as well as the 737 MAX delivery profile. As Dave mentioned, we've assumed that the timing of the regulatory approvals will enable 737 deliveries to resume during the fourth quarter of 2020. We currently have approximately 450 737 MAX aircraft built and stored in inventory. We expect to have to remarket some of these aircraft and potentially reconfigure them, which will extend the delivery time frame. We now expect delivery of about half of the aircraft currently in storage by the end of next year and the majority of the remaining in the following year. Delivery from storage will continue to be our priority after assisting our customers with their return to service. We expect the 737 MAX delivery timing, along with the production rate ramp-up profile to continue to be dynamic, as they will ultimately be dictated by the pace of the commercial market recovery, which has been slow and remains uncertain. There is no material change in the estimate for the total abnormal cost of $5 billion, and we expect these costs will be expenses incurred over this year and next year. During the third quarter, we expensed $590 million of abnormal production costs, which brought the cumulative abnormal cost expense to date to $2.1 billion. Our assessment of the liability for the estimated potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays did not change significantly in the third quarter. Cumulatively, we've accrued a $9.1 billion liability for the estimated potential concessions and other considerations. To date, we've made $3.1 billion of payments to customers in cash and other forms of compensation, including $500 million we paid this quarter. We have settlement agreements covering approximately $2.6 billion of the remaining liability balance of $6 billion. We continue to address the impact individually customer by customer, including assessing the efforts that the MAX disruption is having on their operations in light of the COVID impact. We also continue to expect any concessions or other considerations to be provided over a number of years, with the cash impact to be more front-end loaded in the first few years. Any changes to these assumptions could require us to recognize additional financial impacts. The Commercial Airplanes backlog includes more than 4,300 aircraft valued at $313 billion. The decline in backlog in the third quarter reflected the aircraft order cancellations and the removal of aircraft orders from our backlog due to ASC 606 accounting standards. As you saw in the second and third quarters, our production has outpaced our delivery rate, and we expect this to continue in the near term, resulting in higher finished goods inventory. We have a large number of undelivered 787 aircraft in inventory, and we are working with our customers to facilitate their deliveries. The burn down of 787 inventory over the next few months will largely be influenced by the pace of delivery activities, which has been and is expected to remain relatively slow due to the additional time we're taking to inspect and ensure each of our 787s are delivered to our highest quality standards. We're also closely watching the international passenger traffic recovery, which so far has been weak and is more challenging than what we anticipated last quarter. The trend going forward is heavily dependent on the virus, testing, coordinated policies to alleviate travel restrictions, and the timing and availability of a vaccine. We will continue to assess the downside risk of our production rates going forward. Let's now move to Defense, Space & Security on Slide 8. Third-quarter revenue decreased slightly to $6.8 billion, reflecting derivative aircraft award timing, partially offset by higher fighter volume. Third-quarter operating margin decreased to 9.2%, primarily reflecting less favorable performance, including a $67 million KC-46A tanker charge due to continued COVID-19 disruptions and productivity inefficiencies. During the quarter, BDS won key contract awards worth $5 billion, including a contract extension for the International Space Station for NASA and a contract for 9 additional Chinook Block II helicopters for the United States Army Special Ops. Our backlog now stands at $62 billion, with 30% from outside of the United States. Let's now turn to Boeing Global Services results on Slide 9. In the third quarter, Global Services revenue declined to $3.7 billion, driven by lower commercial services volume due to COVID-19. This was partially offset by higher government services volume. Operating margin in the quarter reflected lower commercial services volume and an additional 7 truck costs. During the quarter, BGS won key contracts worth approximately $3 billion, which brings its backlog now to $17 billion. Although we saw a slight uptick in service demand in the third quarter, we predict the recovery would take multiple years, and we continue to take action to position our services business for the future. This includes not only employment actions and inventory rightsizing, but also making sure we have the right product, right service solutions to help our customers and industry navigate the downturn and scale their operations as near-term demand trends upward. Let's now turn to cash flow on Slide 10. The disruption caused by COVID-19 on our airlines and the global economy continues to put significant pressure on our cash receipts. Operating cash flow for the third quarter was negative $4.8 billion driven by lower Commercial Airplane delivery volume, advanced payment timing, and commercial services volume. We achieved solid cash generation from our government programs and continue to expect future cash flow to be roughly in line with earnings from our government side of the business. The continued slow and uneven commercial market recovery is significantly impacting our cash flow and increasing pressure in the near term. We currently expect 2021 cash flow to be much improved from 2020, driven mainly by deliveries and inventory burn down associated with 737 and 787 programs. And we anticipate the cash profile to continue to improve further from 2021 to 2022. While we're still aiming to turn cash positive in late 2021, the recovery and the continued elevated virus cases make the path much more challenging. Based on what we know today, it's looking more likely that we will be cash flow positive in the 2022 timeframe. Our cash flow trajectory will clearly be dependent on the pace of commercial market recovery and how customer deliveries progress moving forward. Progress on testing protocols, government travel restrictions, and vaccines will be the pacing items. And we will continue to diligently work opportunities and monitor risk factors, given the dynamic nature of this current environment. Let's move now to Slide 11, and we'll discuss our liquidity position. We continue to proactively manage our cash and assess our liquidity daily through this challenging time. We ended the third quarter with strong liquidity, including $27.1 billion of cash and marketable securities on our balance sheet and access to our $9.5 billion bank credit facility, which remains undrawn as well as continuing to assess the capital markets. Our debt balance at the end of the quarter was $61 billion. And through the end of the year, we have just under $4 billion of debt maturing. To further bolster our liquidity as we work through the impacts of this pandemic, we may seek to refinance that maturing debt in the fourth quarter this year. In addition, we've decided to use Boeing's stock rather than cash to fund our company contribution to employees' 401(k) plans for the foreseeable future. This will preserve approximately $1 billion of cash gradually over the next 12 months. We also plan to make a discretionary contribution to our defined benefit pension plan in the fourth quarter, totaling $3 billion, which will also be funded by Boeing's stock. This move will further strengthen the funded status of our retirement plans to benefit our employees and retirees while improving our balance sheet position and minimizing future cash outflows. As we mentioned previously, we expect our use of cash due to COVID-19 to continue for the remainder of this year and into 2021. Therefore, proactively managing our liquidity and balance sheet leverage will continue to be top priorities as we navigate this challenging environment. Once cash flow generation returns to more normal levels, reducing our debt levels will be our key focus area. These actions reflect our continued derisking strategy and as part of our balanced approach to ensuring we proactively meet future obligations. We worked hard in the past to maintain disciplined cash management while seeking opportunities to strengthen our balance sheet, and we will continue these efforts. Let's just now turn to the last slide to summarize. We covered a lot today, but I want to provide you further clarity on our approach and our actions in addressing the profound impact the pandemic has had on our company and our industry. Through this tough time, we have focused on the health and safety of our employees and communities while working closely with our customers and suppliers to navigate this global pandemic and rebuild stronger on the other side. We also remain focused on achieving our priorities in transforming our business to adapt to this new market reality. As we've outlined today, we took decisive early actions to adapt, and we will continue to do so going forward. We've got the right team in place. They are focused. And we will continue to transform our business across the five pillars. As challenging as this situation has been and currently is, we continue to be confident in our long-term market outlook. The mission today is clear: Stay laser-focused on the market dynamics, take proactive action across all aspects of our business with all eyes on liquidity, and emerge stronger and more resilient. We're committed to executing on actions that position our company and our industry for the future.

Yes. Greg, thanks. This has been a year unlike any other, and we're facing unprecedented challenges in our company, our industry, and our communities. I'm proud of our team, and I thank them for the tremendous work they've done through these difficult circumstances. The long-term industry fundamentals remain strong. Air travel will recover. Our portfolio of products and technology is well positioned, and I'm confident in our future. With that, Greg and I will be happy to take your questions, and I'll turn it back to Maurita. Thank you.

John, we're ready for the analyst questions now.

I would like to learn more about the timeline for MAX deliveries once the ungrounding occurs, which we hope will happen soon. Currently, there are about 450 airplanes parked and production is gradually increasing. However, there are several factors to consider, such as modifications needed for recertification and the FAA inspection process, which we believe could impact delivery timelines. Additionally, many of these parked airplanes will require reconfiguration for other customers. How do you envision the resumption of deliveries once ungrounding takes place, considering these challenges? Finally, in light of the demand difficulties from COVID, what will be the key factors that influence the timing of your delivery ramp in the upcoming year?

Yes. So there's a lot embedded, of course, in answering that question. But remember, this RTS, return to service, we've been working on this for a very, very long time. So we're confident airplanes are ready, and they will be delivered. And the cert process itself, as in ticketing each airplane, while that's somewhat new, that's a process that has been rehearsed between us and our regulator. It doesn't mean it's going to fly through. On the other hand, I don't actually expect much delay in that process. I think we've provisioned for that. And our guess about how quickly we return these deliveries here in December, I think it's going to be fairly conservatively planned. And I think we can do better than that. But with respect to midterm, all of the early deliveries of 737s will be, of course, to the customers who are on contract and where we will not have to do modifications. And then as we begin to think about the longer stream of inventoried airplanes which do not yet have homes, we think we're going to be able to do, within cycle times, all of the reconfigurations that are going to be required. And we have to be ready for that, and our teams have positioned themselves to be ready for that. And then the final thing I would just suggest is that what will be hostage to the movement of those airplanes will be our production rate. We're determined not to create a bigger problem than we started with. And so that production rate will stay low until the movement of those airplanes and then those that need modifications are scheduled and work scope is in place such that we can predict their delivery and then, therefore, begin to inch up our production rates again. So that's going to be pretty fluid. Your question suggests that, and my answer suggests that. But I am confident that, that all happens. And then there is a moment, honestly, somewhere in the middle of next year when maybe we're over the second wave, and maybe there's a vaccine being distributed. And then all of a sudden, everyone's waking up to renewed schedules, and the psychology will lend itself, in my opinion, to a little bit of a run on the bank with respect to narrow-body airplanes. And we'll see about that. I may be dead wrong. But frankly, that's as much of my worry as just moving the airplanes we've got; it's going to be the response when the recovery really does come. I want to make sure we're stable and ready for that.

I wanted to ask, I guess, first of all, on the MAX, the 450 or so that you have in storage, what proportion of your customers have actually reaffirmed that they want to take aircraft in either '21 or '22? Because it seems like pretty much everyone's come out and said that they want very few airplanes. And then on the 787, why not take the rate down earlier, given how much inventory you've already built on that aircraft? I think you have somewhere around 50 airplanes in storage.

Yes. Look, on the 787, David, most of the inventory that we have is the result of the quality assessment that we've been doing and the rework associated with it. It's more heavily weighted there than it is customers not able to take the aircraft. So as I mentioned, we're going to have a big fourth quarter on deliveries here, and again, paced by our inspections and quality efforts. And then that will pick up in '21. But as Dave said and I think I reiterated, that we're continuing to assess the wide-body market on a day-to-day basis and particularly linked to how we're seeing international coming back. So we're being, I think, very clear-eyed around who we've got in the backlog, the probability of delivery, the timeframe, the potential movements of aircraft. And then where we've got unsold positions, what's the real probability there and risk assessing that. So that's going to continue to be our discipline, but we're, again, very diligently focused on it. And if we have to make further adjustments down, then we certainly will to match the demand. And maybe I'll just jump on the 737 and then hand it back to Dave. But look, on the profile around the 737s that we've got parked, really, three major kind of, I'd say, ways we look at it. Obviously, you've seen the cancellations and contractual changes, and sometimes, those contractual changes are recontracting the airplanes to move out to further time frames. We're assessing the financial conditions of every customer and assessing that health, and then just other, I'll say, potential delivery risks, which is really tied to the recovery and the challenges across the globe with the pandemic. So all those taken into account, we go through a pretty thorough risk assessment over that profile, including, obviously, day-to-day contact with our customers and their ability to take the aircraft in certain time frames. But look, I'll tell you, it's dynamic. It moves around. We've got a team that's dedicated to that skyline and engaging with those customers, and we're making adjustments real-time. But at the same time, doing our own risk assessment. And that is a clear eye towards liquidity. If we see more risk, how do we bolster our liquidity? If that risk does not materialize, then it's upside for us. But we're doing that to really kind of understand, I'll say, the band of risk from the baseline plan that we have in place. I don't know, Dave, if you had anything you want to add.

Yes, it's very fluid. I don't want to imply that we know everything. However, due to requirements from our accountants and for our own benefit, we tend to be more conservative than our customers regarding their plans. More than half of the adjustments have been made for customers, and we're prepared to proceed. Our caution stems from the need to be careful. It's not an ideal situation, but we will provide updates regularly and keep you informed about our current position.

Greg, I think you mentioned you're unlikely to be cash positive in 2021. Can you help us square that, especially in light of some of the MAX production comments on 31 a month in 2022, which would lead us to believe some inventory unwind? And you haven't really changed production rates quarter-over-quarter. So what are the biggest drags on 2021 cash, whether it's BCA profitability, inventory or PDPs or concessions?

Yes, it's probably a combination of several factors. It's definitely become more difficult as we've seen ongoing increases in the virus, which has affected our discussions with customers regarding delivery timing. All of this context has made 2021 more challenging. The key factors influencing the comparison between 2020 and 2021, which we still anticipate will be better than 2020, include the return to service of the 737 and the emphasis on the parked fleet in the near term. Additionally, the timing of the 787 inventory build will present some cash challenges as we transition from this year to the next. Overall, it has become a bit more complicated, particularly concerning product development programs and delivery schedules. We're still aiming for a positive cash flow, but based on what we know now, it seems more likely that we will achieve that in 2022. We'll keep working on it, but that's our current outlook.

Maybe a bigger picture question for both of you. It really does seem in the narrow-body market like Boeing is, I think it's been reported at this point, losing share to Airbus. I guess my question for both of you is, one, do you see it as a problem? And if you do, how can you address it given all the constraints that confront the company today?

Yes, let me address this. We have definitely lost some market share. When you don’t produce an airplane for a year while others do, it naturally affects your share. Regarding future competition, I am confident that our airplane will hold its ground against theirs. They do have a specific narrow-body aircraft, the 321, that is advantageous for certain routes. However, our aircraft offers benefits in terms of efficiency, environmental performance, and seat cost for many routes. I'm not concerned about the 737 family competing with the A320 family. As for wide-body aircraft, I believe we have a significant advantage that will persist, even though the market is facing challenges and will take some time to recover. I’m not discouraged by our product offerings; we are preparing for our next aircraft with excellent underlying technologies that will inform its design. We will evaluate the market based on recent developments and think we can identify a winning design. We remain committed to development and are not stepping back. The deferral of the NMA will actually help us refine our design in light of changing market conditions. We are continuing our investment in the necessary technologies. I believe our product line is highly competitive, and I am determined not to concede any ground to our competitors.

Greg, I wondered, could you speak to whether there were any changes in your program margin assumptions across the portfolio? Obviously, the big decision on the South Carolina consolidation, and that was a pretty low program margin for the last quarter Q. But just in general, all these cost-out actions and the impact of those and what that means for your assumptions around cost and profit, what not. Any color you could give us would be helpful.

Yes. I'd say not significant change within the quarter on the booking rates, Carter. 777 was up a little bit. 787 was up a little bit. And then we were down slightly on 737 and 47 a little bit on 67. Some of that is, as you said, customer mix. Some of it's cost, and some of it's escalation. So not a lot of movement within the quarter on the program.

Okay. And with respect to the comments you had on the skyline and managing the skyline, are there any kind of broader observations or themes in how that skyline is settling out from a customer type or regional standpoint, where those planes are going or how that process is evolving?

Yes. I can't sit here and say there's any specific themes. I know it's probably an overused term, but it's dynamic. So in each situation where the customer is different. It's different considering their own liquidity, access to liquidity, what their planned fleets are, what they were and what's happening within their region concerning any government restrictions on travel. So it really varies by customer and then within time frames because some customers want to remain and have remained committed to taking deliveries but needed to move them out to the right for a variety of reasons. So you can imagine, again, this is tail-by-tail, customer-by-customer weekly assessments by the teams that are engaging with customers. So we have a good line of sight, but recognizing we've got to be agile as it's dynamic. But then again, applying our own risk assessment to just look at it through a liquidity and cash lens to ensure that if we do see any risk building, how do we stay ahead of it? And that's the action, certainly, that we've been taking to date, and that relates to my comments around the debt maturing that we may seek to refinance in the fourth quarter as well as the actions we're taking with the pension and the 401(k). So I can't say if there's anything specific that comes to mind as a common thread throughout other than, obviously, the significant impact the pandemic's is having on everybody.

So just talking about defense for a moment, I think it's a pretty important part of the cash flow generation story here. But when you look at it, it doesn't seem to be growing much this year. The margins are a bit lumpy. Backlog's really kind of in the 1x, below 1x area. So what's going on there? And maybe you can give us a full picture, including BGS government. And how do you see the future of the total defense enterprise developing over the next few years? Everyone's is seeing decelerating growth next year. Can you guys sort of change that dynamic?

I’ll start by discussing the top line and margins before handing it over to Dave. This year is notable for steady production in both the fighter and rotorcraft sectors, but it's also a transition year, especially for the T-7A, MQ-25, and residential aircraft development programs. Once these programs move from development into production, we can expect modest growth. Domestically, we continue to receive solid support for our core programs, but we are actively competing to secure our position. This transformation effort isn't exclusive to commercial sectors; it builds on the extensive work we have been doing at BDS for quite some time. The portfolio mix on the development side is impacting margins in the short term. Additionally, COVID has disrupted parts of our defense business, particularly with the KC-46 and other programs this year. However, we anticipate that as we transition into production for the development programs, coupled with a necessary improvement in our development performance, we should see more stable and growing margins moving forward. Dave, do you have anything to add?

I feel very positive about the franchise overall. In our services business, government now represents the majority, and things are going well there, so I do anticipate some growth. Our resource planning has not restricted government in any way; in fact, the opposite is true. Most of the reductions we've implemented have been in our commercial sector, ensuring that our defense business isn't impacted by the challenges we're facing in commercial. Regarding the tanker, it has been a significant challenge for us over the past few years in multiple aspects from an investor's perspective. However, we are starting to resolve issues with our customer regarding its performance in their fleet and their need for the tanker. I believe this relationship will start to improve next year, shifting from being a burden to becoming a strength for us. I want to reinforce what Greg mentioned earlier; we are not expecting a significant increase in defense spending. In fact, we foresee pressure on defense budgets due to the extensive COVID-related expenditures by governments globally. Thus, we are not viewing the situation through overly optimistic lenses and expect real challenges in that market.

Kind of a two-part question on China, one kind of specific and one bigger picture. I mean, specifically, when you think about your production and delivery expectations for 737, what are you assuming in terms of when you get certification from Chinese authorities? And then second of all, when we look at the 20-year forecast, and we see China is such a big market for new aircraft, and we think about increasingly explicit strategic competition between the two countries and their efforts over that 20-year timeframe to break into the market, how do you plan for that over time? And how do you see it potentially eroding the market?

Yes, there are both specific and broader questions here. I'll start with the specific one regarding our narrow-body deliveries. Some time ago, we took steps to manage our delivery schedule for the inventory of airplanes by deferring the delivery of planes destined for China to a later date. Meanwhile, we've had a team working with the Civil Aviation Administration of China for nearly two months, navigating their certification process in a manner similar to what we experienced with the FAA and EASA in Europe. Progress has been positive and productive, with all necessary technical personnel engaged. I'm confident that we will move forward with this process, enabling us to resume deliveries. It's clear that China is reopening its market, and airlines in the region require our aircraft. We are one of only two companies capable of meeting this demand, which gives us a significant advantage that will persist for some time. We have established strong relationships in the market and will continue to foster them. We are aware that a competitive threat may emerge over time, but we are prepared to respond appropriately and prioritize our customers’ needs. I don't foresee this competitive challenge arising imminently, and I've been involved in these discussions since 2000. I hold a deep respect for China's ambitions, but I believe that a constructive outlook regarding Boeing's position in relation to China will remain essential as we move forward.

Greg, I wanted to ask you more about costs. You mentioned reducing the footprint and focusing on cost. I'm curious about the excess capacity that will arise in Everett with the 787 leaving and the 747 concluding. Do you see the possibility of moving the MAX up there at some point? Or will the next aircraft that Dave mentioned go to that location? How should we approach this situation?

Yes. Just to take a step back, as I mentioned earlier, we are examining all of our facilities around the world and searching for ways to improve our efficiency. While we are focused on current projects, as Dave highlighted in response to some of the BDS questions, we are also looking ahead. We are considering all factors and being strategic about our approach. However, it's important to note that our facilities are not fully utilized, and we need to change that. We must do this methodically and collaboratively as a company, contemplating how to enhance our utilization and overall efficiency. This isn't solely about one site; it involves every building, every lease, and every office space. We are assessing current near-term demands as well as future opportunities. Every decision we make will reflect these considerations. Ultimately, our goal is to become more efficient and improve utilization. Specifically, in office space, we are aiming for about a 30% reduction and will keep pursuing that. This effort extends to all areas of real estate, so there will be more updates on this in the future.

We're not ruling out big changes. But just by way of how we think about it, that Everett space that's freed up, I mean, we're going to line it off for quite a while because I don't want to move lines from one place to another just because it's available. And for the most part, our reinvigoration of all things lean in Boeing, and this is really related to workflow and the use of the capacity that we have, will suggest that we can actually produce a lot more in the same or even smaller footprint than we do today. So we're going to stay on that program, and we're going to line off the things that get freed up as a result of decisions like the 787 and the 747. And we're not going to just try to fill it. We also need the market to return. We need to see where all the demands really ultimately play out and where that next footprint really needs to sit. We know we have some great skills in that area, there's no doubt. And that matters a lot, and that will factor. But we're not just going to try to fill empty space. That would not be in our best interest.

I wanted to clarify a few points leading to my question. First, regarding the $1 billion equity sale related to the 401(k) on an annual basis moving forward, and the $3 billion allocation to the pension plan—will this $3 billion be a pre-fund for several years, making it a one-time action for a while? Is the 401(k) intended to be more of a continual commitment? Also, Greg, is there potential for a broader equity issuance to rebalance the balance sheet beyond this? What factors would lead you to consider that?

Yes. Firstly, your understanding of the 401(k) and pension is correct. The pension plan is designed to minimize outflows over the next several years. By contributing $3 billion in stock, we effectively alleviate that risk. This should enhance our cash flow moving forward. The 401(k) is more of a routine annual contribution. We're carefully examining our balance sheet, focusing on the interplay between debt and equity. Maintaining a strong credit rating and overall balance sheet health is vital for us. It's a constant balancing act. We believe our current actions, along with the debt and bank drawdown, represent a continuous strategy of finding the right balance across all areas. Additionally, we have $4 billion of debt maturing within the next year that we will also consider for refinancing. Our approach is balanced, recognizing the broader implications of our decisions. Our main goal is to effectively manage our liquidity continually while preparing for potential near-term challenges. We consider the 401(k) and pension as part of this strategy.

With your decision to fund the pension with Boeing stock, I guess, I would have thought that free cash flow in 2021 would have been incrementally positive. So first, were you initially expecting to fund the pension in 2021, and were you expecting to do that with stock? And then also second, can you provide a little bit more color on the moving parts and operating cash flow in 2021 and any one-time items so we can bridge to your positive outlook in 2022?

Yes. Kristine, pension funding is influenced by rates and the discount rate. As we modeled it, we began to see some additional funding requirements starting in 2022 and beyond. We decided to pull that funding forward since there wasn't much required in 2021, but the need emerged in the subsequent years. This was an opportunity to utilize our stock and enhance our cash profile going forward. Overall, we have experience with this and believe it was a wise decision. It’s part of our ongoing review of our capital structure strategy, specifically regarding how we fund the pension. Regarding 2020 to 2021, the main factors remain similar to what we discussed previously, but the contribution levels are evolving each year. As we anticipate improved cash flow, particularly in 2021 compared to 2020, the 737 MAX will be the largest contributor. Restoring it to service and ramping up deliveries, along with our production rates, will drive this recovery. Following that, the 787 will be the next significant contributor as we build up our inventory and align deliveries into 2021. These two product lines will be the primary focus, with the 737 being the most significant contributor year over year.

All right. John, we have time for one last question.

Greg, regarding the 787, with the decision to consolidate final assembly to one facility in South Carolina, could you explain how this will impact your outlook on the profitability of the overall program? Specifically, what productivity gains do you anticipate from operating out of a single location?

Yes. I think, as you know, Peter, it really kind of starts with the market outlook that we had, and then looking at efficiencies, and then, ultimately, how do we become more competitive. And this is certainly a key contributor to that. As far as a program margin perspective, not a significant impact on that, certainly near term. But as Dave said earlier, we're looking beyond the current rate and looking at rates beyond where the marketplace is today. And that's ultimately where we'll see much more efficiencies, and particularly around logistics, going from the mid and half body right over into final assembly and not having the transportation logistics associated with that, and having the dedicated crews and the cycling, again, we'll see the efficiencies. But really, we'll capture it more at the higher production rates.

All right. Thank you all. That completes the Boeing Company's Third Quarter 2020 Earnings Conference Call. Thank you for joining.

Thank you, everyone.