Q3 2020 Boeing Co Earnings Call
Thank you for standing by good day, everyone and welcome to the Boeing Company's third quarter 2020 earnings Conference call. Today's call is being recorded the management discussion and slide presentation plus the analyst.
Question and answer session are being broadcast live over the Internet to ask a question on todays conference. Please press the digit one followed by the digit zero on your Touchtone telephone again. It is one zero for questions. After pressing one zero you will hear that you have been placed in the queue pressing ones.
Zero again, well take you out of Q. It may prevent you from being able to ask a question.
At this time for opening remarks, and introductions I'm, turning the call over to Ms. Marina suit Asia, Vice President of Investor Relations for the Boeing Company. What's your teacher. Please go ahead.
Thank you John and good morning, welcome to Boeing third quarter 20, <unk> earnings call I'm worried as a teenager and with me today are Dave Calhoun borrowings, President and Chief Executive Officer, and Greg Smith Executive Vice President of Enterprise operations, and Chief Financial Officer.
After management comments, we will conduct a question and answer session in fairness to others on the call. We ask that you. Please limit yourself to one question as always we have provided detailed financial information in our press release issued earlier today and that's a reminder, you can follow today's broadcast and slide presentation.
Through our website at Boeing Dotcom before we begin I need to remind you that any projections estimate and go. We include in our discussion. This morning are likely to involve risks.
Which are detailed in our news release in our various FCC filing and in the forward looking statement disclaimer at the end of this web presentation.
Additionally, 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 Marina 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 Shan and Ethiopian Airlines flight trio too.
Tomorrow will mark the two year anniversary of the Lion Air actually.
Not a day goes by that we don't remember I would like to read.
Rededicate ourselves to ensuring accidents like he's never happen again.
Our deepest shooties are with the family members and loved ones today and every day.
It's been about nine months since the onset of the COVID-19 pandemic.
I hope, you're all continuing to stay safe and healthy during these very challenging times.
It's kinda indoor business update on slide two.
[noise] Genvec 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 well closely while working closely 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 nor 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.
I know the COVID-19 impacts on our commercial customers continued to be devastating in.
In airlines have cut back operations dramatically.
We are engaged with our customers every day to understand their short term their medium term and their long term fleet age. 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 cold with 19 pandemic.
You are confident travel initiative, we are collaborating industry wide could 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, particularly yeah, we're happy filters the truck, 99.9% for chicken, which.
And even on an airplane is exchanged a minimum of 20 to 30 times per hour.
That compares to two to five times per hour in a typical building environment.
As we further enhance health measures. We've also entered into patent and technology licenses with partners in this field the manufacturer and ultraviolet or you he want to better sanitize airplane interiors.
Of course in cabin technologies like to have a filter and if you want.
Also have to be combined with personal responsibility passengers incruse, including wearing face masks and taking other precautions all of which are critical to creating a shave travel experience.
We're seeing encouraging industry data validating the safety of air travel.
We should we I don't publish data outlining that well be over 1 billion people, who have travelled 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 and 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 fundamental the aerospace industry is for the global economy.
The global trade into global cooperation.
Our airline customers and suppliers not only employ millions of workers. They also serve as a connecting and driving force 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.
There's one part of our one park to delay production on an aircraft or delayed 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 actions to adapt to the new market reality.
Transform our business to be sharper and more resilient to the long term.
As we shared last quarter, we continue to lease size and reshape our business to align with our smaller market.
Oh mid Nineteens continue impacts have had a more prolonged deeper impact on our industry will have to further reduce our workforce.
Each of our business units and functions were carefully make staffing decisions to 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 130000 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.
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 have not and will not waiver.
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 standard.
We continue to implement a series of meaningful changes announced one year ago to strengthen the safety practices and culture of our company.
As we've shared we stood up our new products and services shaky organization and brought together over 50000 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 needs to 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.
And operating to help make the world a better place for future generations.
This quarter, we appointed a chief sustainability Officer Elisa.
Leadership position dedicated to galvanizing in advancing our environmental social and our governor 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 FDA and other global regulators, we're continuing to make steady progress toward the shape return to service of our 737.
Over the past year and a half there have been around 1400, cath and checkpoints.
Over 3000 flight hours completed on the airplane.
While we still have work ahead of US we're encouraged by the rigorous certification and validation flight conducted by the FAA I Transport, Canada, and the European Union Aviation Safety Agency.
The joint operational evaluation Board featuring civil Aviation authorities from the United States from Canada, Brazil, and the European Union also conducted its evaluations.
Updating.
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 and the steps ahead.
Our assumption is 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 time will ultimately be determined by the global regulators.
In addition to the 737 were making progress across our commercial defense space and services businesses.
Hi, I'll highlight a few.
Our triple seven Dash nine flight test program progressed through this quarter as the final test airplane join the fleet.
The U.S. Air Force and Boeing team were awarded the Collier Trophy for Aerospace excellence for the next 37 be autonomous Spaceclaim.
Our Boeing defense systems team secured an important contract for Efifteen E X advanced fighter jet for the US Air Force.
And also in the quarter or T. Seven a red Hot advanced trainer earned the first E series designate of from the US Air Force given to an aircraft that is designed engineered.
And tested along a digital thread.
And our global services side team signed an agreement with GE capital Aviation services for 11, Boeing converted freighters and secured a six year support contract for Australian P. Eight eight.
On the Triple Sevenx, we continue to work with the regulators on certification work scope.
Alluding, reflecting the learnings from 737 search process.
As with any development program. These are in 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 were 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 eight and a half trillion over the next decade down.
Down from 8.7 trillion, a year ago due to the impact of the pandemic.
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 Cove at 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.
Yes booked in the third quarter across key franchise program 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 with COVID-19.
Airlines globally have begun to recover from the trough of greater than 90% decline in passenger traffic and revenue earlier this year.
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.
International markets remain at all time lows.
August domestic passenger traffic was 49% of 2019 levels.
51% decline, whereas international passenger traffic was only 12% of the prior year and an 8% decline.
International passenger traffic recovery remains challenged by the absence of a coordinated global policy on cross border entry protocol.
I recently lowered its 2020 passenger traffic forecast to a 66% decline versus prior forecast of 63 basis.
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 cold cases reemerge in government travel restrictions remain fluid.
Airlines are incrementally returning their part fleets to service would.
With approximately three quarters 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 mixed trends will continue to drive an uneven recovery.
Has the path ahead will be heavily dependent upon not only the virus, but also why its going on progress on rapid testing coordinated policies to alleviate travel restrictions and timing and availability of the vaccine.
As we look to the medium and long term, we see our original prognosis more or less still holds.
Consistent with.
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 will outpace longer haul international routes.
Availability in wide distribution of the 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 was wide bodies more significantly impacted the narrow bodies.
From a 20 year perspective, we still see the impact of coated 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 28 years 20 years.
That compares to 44% as previously projected.
As our customers focus on retiring your 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 airline to adapt to these market realities product 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.
Alright attractive portfolio and the diversity of our backlog provides 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 will take multiple years to reach previous demand.
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.
Lifecycle services and support will help customers scale their operations to need efficiency and cost objectives aligned to 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 four.
We've maintained our prior assumptions regarding our production rate plans across all commercial airplane programs. However.
However, the market continues to be dynamic and we will monitor as we prudently balance supply and demand.
We are closely watching the international passenger traffic recovery, which so far has been weak.
To assess downside risk to our wide body program production rates in particular the 77.
We still expect to produce to 737 at very low rates for the remainder of 2020 and gradually increase the rate of 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.
We will continue to keep our supply chain apprised of our plan.
At the end of third quarter, we have 3400 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 five.
As Dave mentioned this moment is among the most difficult in our Companys 100, plus year history.
Since the beginning of the pandemic, we have taken prudent and decisive action and attempt to get ahead of this to preserve cash 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 de risking our business in a disciplined cash management for some time and COVID-19 has accelerated these efforts further.
I'll go through a quick timeline of early actions we've taken in 2020, and then provide you with an update of 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 in 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 recognize 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.
Mike by the first quarter earnings, we announced additional actions, including reducing our commercial production rate limiting discretionary spending and lower 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 raise $25 billion, which has proven to be instrumental and helping us navigate this crisis.
The strong investor response reflected the confidence in the overall market has in our future as well as the shift Swift action of 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 big 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.
Had 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 of infrastructure overhead organization portfolio and investments supply chain health and operational excellence.
I'll share more updates on these shortly.
In August we move forward with our second voluntary layoff program, which was much broader than our initial program and included our executives, which then followed by another involuntary lay up program. We manage 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 77 study it became evident that the consolidation to a single production location in South Carolina will make us more efficient and lower production and better positioned for the future. As a result earlier. This month, we made the decision to consolidate to 77 production in South Carolina by mid 21.
Okay.
Can 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 to 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 77 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, we thought a large portion of our workforce could work virtually well still be in productive you might have heard skepticism.
But these last several months have shown us that we can be more flexible but.
Building on the lessons of our experiences, we're studying and enterprise footprint optimization effort utilizing flexible and virtual workplace planning we're.
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.
Through staffing reductions and our flexible workplace program, we anticipate a reduction of approximately 30% in office space needs compared to our current capacity.
Reviewing every piece of real estate every building every lease every warehouse every site.
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 have been looking critically at our cost structure and how Boeing operates.
And how were organized.
Benchmark to top quartile standards. So we can simplify reduce layers reduce bureaucracy, while ensuring we strengthen connection vital to safety quality and performance.
As an example, we're studying how we organize our production and development programs better by reducing layers between program leadership and the factory floor.
Increasing our management spans of control and improving direct and indirect ratios. These.
These actions are aimed at enhancing communication empowering our teams in creating lasting efficiencies and 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 impacting demand near term on near term co that 19 will also impact the timing of new market opportunities.
Prior to the pandemic, we were investing for in growth markets and growing business.
Market conditions have changed have we've 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.
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 the 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 the supply chain pillar as 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 have actively talking to our suppliers everyday.
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 getting creative and supporting them in the best way we can.
The reality is that 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 said 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 operation.
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 enterprise operational excellence across the enterprise.
Improved performance enhance quality safety reduce rework and associated costs.
The enterprise operations team successfully launched the formation of four companywide process councils around supply chain program management quality and manufacturing. These councils are already driving integration accelerating efforts to enhance program performance.
We have simplified our structure to allow the process councils to lead on driving accountability and decision, making closer to the work is 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.
Improved performance and position our company for the future.
As we take these actions, we're ensuring that every step only furthers our drive 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 established our measured in billions of dollars and we expect them to be executed over a multiyear 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.
Lay the foundation for future margin expansion.
And cash flow generation as the market recovers.
So with that let's turn to slide six for our third quarter results.
Our financial results continue to be significantly impacted by Cobi 19, and the 737 Maxs grounded.
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 BDCA abnormal costs related to the 737 program and severance costs for the additional approximate 7000 employees, leaving the company through the end of 21.
These impacts were partially offset by an income tax benefit related to the NOL carry back provision in the cares act as well as the impact of pre tax losses.
Let's now move to commercial airplanes on slide seven.
Revenue was 3.6 billion, reflecting lower commercial airplane deliveries due to the significant impact on the at the pandemic as well as 787 quality issues and associated rework.
Third quarter operating margins declined primarily due to lower delivery volumes and a $590 million of abnormal costs related to the 737 program.
Similar to prior period and 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, which will extend the delivery timeframe.
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 or priority after assisting our customers with their returned to service.
We expect to 737, Max delivery timing, along with the production rate ramp up profile that 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 costs of $5 billion and we expect these costs will be expensed as 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, maxs 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 consent.
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 of the Max disruption is having on their operations in light of the cobot 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.
Commercial airplanes backlog includes more than 4300 aircraft valued at 313 billion the decline in the backlog in the third quarter reflected the aircraft order cancellations and the removal of aircraft orders from our backlog due to a SC six so six accounting standards.
As you saw in the second and third quarter. 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 77 inventory over the next few months will largely be influenced by the pace of delivery activities, which has been and expected to remain relatively slow due to the additional time, we're taking to inspect and ensure each of our 70 sevens 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 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 and security on slide eight.
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 case.
46, a tanker charge due to continued co bid 19 disruptions and productivity and efficiencies.
During the quarter Bgs, one key contracts awards were $5 billion, including a contract extension for the international space station for NASA and a contract for nine additional Sheena block two helicopters, the United States Army Special ops.
Our backlog now stands at $62 billion with 30% from outside the United States.
Let's now turn to Boeing Global services results on slide nine.
In the third quarter Global services revenue declined to $3.7 billion, driven by lower commercial services volume due to co bid 19. This was partially offset by higher government service volume opt.
Operating margin in the quarter reflected lower commercial services volume and an additional seven truck costs.
During the quarter Bgs, one 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 will take multiple years and we continue to take action to position our services business for the future. This.
This includes not only employment actions in 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 receipt.
Operating cash flow for the third quarter was negative $4.8 billion, driven by commercial lower commercial airplane delivery volume advance 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 21 to two times.
2022.
While we're still aiming to turn cash positive in late 21, 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 our customer delivery progress moving forward.
Progress on testing protocols government travel restrictions and vaccine will be the pacing items and we will continue to diligently work opportunities and monitor risk factors given that 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 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 have decided to use Boeing stock rather than cash to fund our company contribution to employees oral one K plans for the foreseeable future. This will preserve approximately a billion dollars 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 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 21, therefore proactively managing our liquidity and balance sheet leverage will continue to be top priorities as we navigate this challenging environment.
Cash flow generation returns to more normal levels, reducing our debt levels will be our key focus area. These.
These actions reflect our continued de risking strategy and as part of our balanced approach to ensuring we proactively meet.
Teacher 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.
Lets just now turn to the last slide to summarize.
We covered a lot today, but I want to provide further clarity on our approach and our actions in addressing the profound impact the band Demick 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 supplier to navigate this global pandemic and rebuild stronger on the other side.
We also remain focused on achieving our priorities and 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.
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.
And emerged stronger and more resilient work.
We are committed to executing our actions that position our company and our industry for the future.
So with that I will turn it over to Dave for some closing comments.
Yeah, great. Thanks.
Hey, this is 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.
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 Maria Thank you.
Hey, John we're ready for the analysts question now.
Certainly and ladies and gentlemen in order that your question be clearly heard we ask that you not using a speaker phone cell phone or phone headset. Please use your handset to ask a question.
You're on a speakerphone. Please be sure your mute function is switched off so your signal can reach our equipment as a reminder, in the interest of time, we are asking that you limit yourself to one single part question.
First question comes from Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you on Doug.
Hi, Doug.
Hi, I would like to understand more about the path back on Max deliveries once we've got on grounding, which hopefully will not being too long and.
As we look at it you've got some number about 450 airplanes park with production on a slow ramp so but there are a number of issues modifications will be needed for to these airplanes for recertification.
Do you have an essay inspection process.
Okay.
We would think would affect delivery timing and many of these parts airplanes will need to be reconfigured for other customers. So how.
How do you think about the startup of deliveries once and grounding happens.
Given these issues.
And then lastly, given the demand challenges out there due to cove it.
What will ultimately be the governing factors for the timing of your ramp and deliveries over the next year or so.
Yes. So that's there is a lot imbedded of course in answering that question, but remember.
This Rts returning to service we have been working on this for a very very long time so.
We're confident airplanes are ready and they will be delivered and the search process its shelf as in ticketing each airplane.
Well that's somewhat new.
That's a process that has been rehearsed and rehearsed and rehearse 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 I think we've provisioned for that and our our gas about how how quickly. We return. These deliveries here in December I think is going to be fairly conservatively.
Plant and I think we can do better than that but with respect to mid term.
All of the early deliveries of 73 cents will be of course to the customers who are on contract and where we will not have to do model et cetera.
And then as we begin to think about longer.
Or the end of that stream of inventory at airplanes, which do not yet have homes.
Yeah, we think we're going to be out on.
Due 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 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 are determined not to create a bigger problem than we started with and so that production rates will stay low until the movement of those airplanes and then those that need much 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 thats going to be pretty fluid. Your question suggests that in my answer to suggest that but I, but I am confident that that all happens and then.
There is a moment on.
Lastly, somewhere in the middle of next year, when maybe were only the second wave and maybe there's a vaccine and maybe it's 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 is much of my.
Worry as as as just moving the airplanes, we've got it's going to be the response when the when the recovery really does Tom I want to make sure were stable and ready for that.
Our next questions from David Strauss with Barclays. Please go ahead.
Thanks, Good morning, everyone. Good morning.
Good morning.
Yes, I wanted to ask I guess first of all on the Max the 400 per year. So that you have in store.
What proportion of your customers have actually reaffirmed that they want to take.
Aircraft in either 21 or 22 here because it seems like pretty much everyone has come out and said that they they won very few airplanes and then on the on the seven.
Why why not take the write down earlier, given how much inventory you've already built on that on that aircraft I think somewhere around the 50 airplanes in storage. Thanks.
Yes look on the on the 787, David most of the inventory that we have is the result of.
The the quality assessment than we've been doing in 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 in quality effort and then that will pick up in 21, but as as well 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 we're being I think very clear eyed around who we've got in the backlog.
The probability of delivery that time frame the potential movements of aircraft.
And then where we've got.
Sold positions, what's the real probability there and risk assessing that so thats going to continue to be our disciplined 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 match that demand.
And maybe I'll just jump on the three seven then hand, it back to Dave but look on on the profile around around the three sevens.
At that we've got parked and really three major tenant I'd say kind of ways. We look at it obviously, you've seen the cancellations and contractual changes and sometimes those contractual changes are re contracting 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 and the challenges across the globe with the 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.
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 that is clear eye towards liquidity. If if we see more risk how do we bolster our liquidity.
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 know, Dave you had anything you want to add.
No I mean, it's I mean, it's just fluid is anything you can imagine so again I'm not I don't want to suggest that we know everything about everything I will suggest in light of what we have to do through for the accountants and for ourselves we tend to be more conservative than our customer customers are with respect to their intentions. So yes.
Probably more than half are in fact play.
Planned for customers have already been through adjustments and we are ready to go do what we're going to do but we tend to be more conservative than that Dave and Dave.
On this front because we have to be.
Anyway, it's not a it's not a perfect world will continue to update it each and every week and month.
And we'll keep you informed but we are we are where we are now.
Our next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.
Thank you and good morning, Devin Greg Good morning, Greg.
Greg I think you mentioned you are unlikely to be cash positive in 2021 can you help us square that especially in light up in our net production comments on 31, a month and 2022, which lead us to believe some inventory online and you haven't really changed production rates quarter over quarter. So one of the biggest drags on 2021 cash whether it. Thanks.
Stability inventory or people or or concessions.
Yes, probably a little bit of everything Sheila around that I mean, certainly you know it's become more challenging just as we've seen continued elevation of the virus and then therefore, the customer dialogues around the specific timing around.
In particular particular delivery so all of that backdrop has.
May 21, more challenging I'd say the key drivers from 20 to 21, which we expect again 21 to be better than 20. It's the same elements. It's certainly the 737 returned to service and that ramp up in particular near term focus on the on the parked fleet and.
On the 787 inventory build as you as you mentioned the timing of the transition between this year and next year will give us some cash headwind, but overall, it's just gotten a little more challenging specifically around whether its pdps or actually delivery slots that may 21, again, we're still shooting for it but having said.
That based.
Based on everything we know today. It really is looking more likely that cash flow positive is going to be in the 22 time frame, but like I said, we'll we'll continue to work at but Thats, how we see it today.
Thank you.
You're welcome.
And next we'll go to Ron Epstein with Bank of America. Please go ahead.
Hey, Good morning, guys are on for all the detail and color on the call.
Maybe a bigger picture question for for both of you.
It really does seem in the narrow body market like Boeing is and it has been considerable factor at this point is losing share to the Airbus.
Yes. My question for both of you is when you see it as a problem and.
And if you do how can you address it given all the constraints that confront the company today.
Yes so.
Let me take this one.
Market share was without a doubt we've lost some share.
When you don't produce an airplane for a year.
And the other Guy does Mike.
Definition, if you take a big hit with respect to share.
With respect to future competitions.
And our airplane.
Competing against their airplane.
No I don't I am not going to give up any ground and I don't believe we will and I don't think our airplane will.
Yes.
Particular part of their narrow body fleet. The 321, that's got advantages for certain routes without a doubt.
Our airplane in the metals middle part of that route with respect to efficiency and environmental performance frankly, and seed costs gives us an advantage and I.
Im not sure how the mix of the market is going to ultimately.
Play out with respect to the number of routes in each but I'm not I'm not worried about.
737 family competing against the Athree hundred 20 family.
And then with respect to wide bodies course, I think we enjoy a big advantage and I think we will continue that advantage. Despite the fact, the market's going to going to have a rough time.
And it's going to take a while to get back. So yes, no I'm not sitting around a second my phone that were that were disadvantaged with respect to our product offerings.
And then the next product is going to come along.
We have some incredible underlying technologies that are going to support the point design in that next airplane, we're going to assess this market.
Based on everything that's happened in the last year and probably the next year.
And I think we'll be able to call out that point design and.
Paul are these underlying technologies that we think will create a winning airplane. So what we're not out of the development business were still in it.
This time.
Or I will call a deferral of the M&A or whatever whatever that slot was this is actually going to advantage us in determining the point design based on what I think are some changing market conditions, but we never let up on the underlying technologies and we will not let up in our and our spending today covers those things so yes I am.
I believe we've got a very competitive product line.
Im not.
In any way going to give up any room with respect to our competitor on that front.
Thank you.
Our next question from Carter Copeland with Smelliest Research. Please go ahead.
Hey, good morning, gentlemen.
Morning Curt.
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 per the the last quarter Q, but just in general all these cost out action.
Ends and the impact of those and what that means for.
Your assumptions around cost and profit and what not any color you could give us would be helpful. Thanks.
I'd say not significant change within the quarter on the booking rates Carter at Triple seven was up a little bit eight seven was up a little bit and then we were down slightly on 3747, a little bit on.
On six seven.
Some of that is as you said customer mix some of its cost in some of its escalation so not a lot of movement within the quarter on program.
Okay and with respect to the comments you had on the skyline and managing the skyline.
Are there any kind of broad.
Broader.
Observations are themes and how that skyline is settling out from a.
Customer type or regional standpoint.
Where those planes are going or how that's how that process is evolving thanks.
Yeah, I can't sit here and say there is 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 liquidity what their planned fleets are what they were.
And whats happening within their region with regards to any government restrictions on travel so it really varies by customer and then within timeframe 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 the customers. So we have.
Good line of sight, but recognizing we've got to be agile and and it's dynamic, but then again apply in our own risk assessment to just look at it through a liquidity and cash lens to ensure that if we do see any risks building how do we stay ahead of it and and Thats the actions.
Certainly that we have been taken to date and that relates to my comments around that the debt maturing debt that we may seek to refinance in the fourth quarter as well as the actions we are taking with the pension and the four one k. So.
I can't say that Theres anything specific that comes to mind is.
Common thread throughout other than obviously, the the significant impact of Pandemics, having on everybody.
Great. Thanks for the color. Thank.
Thank you.
And next we'll go to Jon Raviv with Citi. Please go ahead.
Hey, Thanks, Good morning, everyone. So just talk about the fence terminals I think thats, a pretty important part of the capital generation story here.
If you look at it doesn't seem to be growing much. This year are the margins are a bit lumpy backlogs not really kind of a one times below one times area. So what's going on there and maybe you give us a full picture including.
Governments.
How do you see the future of the total defense enterprise developing over the next few years everyone's seen decelerating growth next year.
Can you guys sort of change that change that dynamic.
[music].
Maybe I'll take a shot on the on the top line and the margin and then I'll hand, it over to Dave but.
No. This is a year certainly if you take the production programs steady production across.
Whether it's it's the fighter business or.
In the rotorcraft business, but this is a year of transition in particular for the development programs on the T. 70, and the MQ 25, and residential aircrafts. So obviously once those get out of development and start to move their way into production you will see the I'll say the modest growth.
Associated with that I think John domestically, we're continuing to see good support.
For our core programs, but at the same time I mean, we're we're competing to win there. So were you know all this transformation effort Doesnt just apply to commercial it's really coming off the heels of of what a lot of the effort, we do Annette Bts for some time.
But that mix of portfolio John on the development side is certainly impacting the margin here in the term.
And then as we've seen we've we've had cobot impact on the defense business and it's been disruptive.
With that we're experiencing on KC 46, and we have experienced in a couple of other programs. This year, but outside of that I think again once we move into production on the development programs and and there is no question that we've got to improve our performance on development overall development programs.
We expect to see a more stable growing margin there as well.
David do you have anything to add.
Yes, I don't only thing I would comment on is.
One I feel great about the franchise broadly in our in our services business broadly government now is the majority of that business.
And it continues to go quite well so I do expect some growth in that.
To our resource planning has not in any way tried to strangle government in fact, it's been the opposite so.
Almost all of the reductions net that we've described across the company have had been applied against our commercial franchise. So that we're not starving something in our defense business.
As a result of the difficulties we are having in our commercial business.
And finally, the tanker the tanker has been a drag on us for like three or four years. In every way you can think of with respect to investors but.
But we are beginning to clear the hurdle with our customer with it with respect to its performance in their fleet and then their their their need for that tanker. So that whole relationship I believe will begin to transition next year and as opposed to being a drag on our franchise, which is Japan.
Believe it will become a strength in our franchise. So I just I think in combination with what Greg said I think thats.
That's the situation I will say.
And I said it this morning.
We're not planning on.
Defense spending due to go up in any appreciable way in fact, we believe there will be pressure on defense spending as a result of all the coated related spending thats been that of course governments around the world have been experiencing so.
I don't think were.
Looking at that world through rose colored glasses, I expect real pressure on that market.
Yes.
Okay.
Our next question from Seth Seifman with Jpmorgan. Please go ahead.
Okay, Thanks, very much and good.
Good morning.
Under.
A two part question on.
No 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 it.
We look at the.
20 year forecast and we see China.
China has such a big market for new aircraft and we think about the.
Increasingly explicit strategic competition between the two countries in their effort.
Efforts over that 20 year timeframe to break into the market.
How do you how do you plan for that over time and how to.
Yes, potentially running the market.
Yes. So there is there is a narrow question in a giant question together. So let me start start with a narrow one with respect to our narrow body.
Deliveries.
We attempted quite a while ago to de risk our delivery stream on the inventory to airplanes, such that we push out the Chinese.
Airplanes for later delivery.
And at the same time, we've had a team on the field with the CAC. This certification body in China.
For probably the better part of two months and they are working through.
Through that process, just like the FAA on the Aastra did here in Europe, and it's been going quite well and productively and all the technical people are lined up et cetera. So I'm confident that that process will happen and that ultimately we can get back to our deliveries.
And as everyone knows China is back in business and.
Airlines need this kind of lift and we happen to be one or two people in the world that can can deliver it and that will be that way for quite a while so.
We've had great relationships, we continue to have them, we're going to continue to manage it and we know that there is going to be over time.
Our our competitive threat there.
We're not afraid of it.
We're going to continue to do what's right for our customers.
When that threat shows up what form it takes ultimately out wants to compete around the world. We will will be up for that not round of competition I don't think that is for quite a while.
I've been around that discussion since the year 2000.
So.
Anyway I have.
Great respect for China, and what they want to accomplish here, but I'm a long view is still going to have to remain a constructive view with respect to following in China, and that's where we're positioned.
Thank you.
Next we'll go to Rob Spingarn with credit Suisse. Please go ahead.
Hi, good morning.
Hi, Robert I wanted to ask you a little further on cost you talked about reducing the footprint is laser focused on cost, yes, I wanted to.
To just explore how we think about the excess capacity that.
Gets created into Everett with the 787, leaving in the 747 concluding.
I mean.
Would you think about moving Macs up there at some point where does this next aircraft that Dave alluded to go there how do we think about that.
Yes, I think just maybe just stepping back.
As as I mentioned in remarks, I mean, we're looking at all of our space around the globe, Rob and looking for ways to be more efficient.
And Thats certainly as we see it today with the work that's in there but.
As Dave said.
And his response to some of the Bts question, but we're not we're looking forward as well. So we're trying to take all that into into consideration and be strategic about it but but the fact is that our all of our facilities are not fully utilized and we need to get him fully utilized and.
And we got to do that in a very methodical way and do it as a company and do it together about how do we think about strategically how do we get our utilization improving overall efficiency. So it doesn't really just centering on one site I mean, that's certainly an important part of it but it's every building ever.
The lease every office space looking at current near term demand, but also kind of future potential opportunities and so on.
And every one of our decisions is going to be looking through all those lenses the before we make it but.
Make no mistake about it it's all about being more efficient and having improved utilization as I mentioned just in office space alone.
We are targeting something like a 30% reduction there.
And.
And we will continue to do so and like I said, it's across all all aspects of the of real estate so more to come on right. We're rolling.
Rolling up big changes.
Well, we're not ruling out no we're not really helping changes I've been just just by way of how we think about it.
That average space Thats treat up I mean, we will we'll sort of align 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 the all things lean in Boeing and this is really related to work flow 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 are in a line off.
The things to get freed up as a result of decisions like 77 in the four seven et cetera, and we're not going to just go 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.
Shit, we know we have some great skills in that area. There is no doubt and that matters, a lot and that will factor.
But we're not just going to try to fill empty space thats that would be that would not be in our best interest.
Thank you.
Our next question is from Myles Walton with GBM. Please go ahead.
Thanks, Good morning, almost afternoon the.
The question I have is really a clarification, leading to a questions and a clarification on the billion dollars.
Equity sale stock towards four one k. sort of on an annual basis I guess on a go forward basis, and then the 3 billion to the pension plan is that 3 billion pre fund for a number of years such that it's sort of a one and done for a few years and then as far one k. more of an ongoing and then Greg is this open.
The question, obviously to a broader equity issuance to rebalance the portfolio the balance sheet rather.
Above and beyond that this is what would make you consider that.
Yes, no I mean, well first of all the way you're thinking about the floral NK and pension is right. So.
The pension will be really is like I said it's.
It's an attempt to really mid.
Minimize the outflow over the next several years, so as we see it today.
Contributing the stock.
At an amount of $3 billion really takes that risk off the table. So ultimately should help our cash flow profile going forward and like I said four one k. is yes, it's more of kind of an annual.
Approach to that but the whole idea on the balance sheet between debt and equity and so on I mean, we're again diligently.
Locust on what levers we have how do we de risk.
Certainly our credit rating is significantly important to us and our overall balance sheet health. So it's a balance it's a continuous balance of the two and we think between what we've done and what we are doing internally combined with the debt and the bank drawdown and now with this think of that again is it just a continuous ballot.
First approach of looking through each one of these areas and trying to find the right the right mix.
As I did mentioned too we've got $4 billion of debt maturing over the next year or so.
We'll we'll again look at that and in and look at potentially refinancing that so again, it's a very balanced approach in understanding the second third order effect of each of them.
But the objective here again is just to try to stay ahead.
And manage our liquidity as we have on a day to day basis, but but again looking looking beyond our baseline plan around the possibilities with.
With some of the near term challenges and pulling the appropriate levels at the appropriate time.
This four one k. and pension we believe is.
Fits right into that category.
Thank you yes.
And next we'll go to Christine link with Morgan Stanley. Please go ahead.
Hi, Good morning, Dave and Gregg good morning.
Isn't it.
Hi.
With me to present on the pension with Boeing stock I guess I would have bought some cash flow in 2021 would have been incrementally positive.
So first.
Well you initially expecting to fund.
21, and where you expect me to do that with stock and then also said Dan can you provide a little bit more color on the moving parts from operating cash flow in 2021, and any one time items. So we can bridge to your positive outlook in 2022.
Yes, so christine the pension funding or as you know it all depends on the rates and the discount rate, but as we kind of model that we started to see.
In 22 timeframe and beyond some incremental.
Funding requirements so.
We essentially like I said pulled that four we didnt see a significant amount of funding required in 21, but we did start to see some of it in the years years beyond that so this was again an opportunity to pull that forward and and utilize utilize our stock and improve the cash profile.
Going forward. So net net as you know we have done it before and we know how to do it and and we think it was again a prudent thing to do all part of it.
Just consistently review in the capital structure strategy and balance in the funding.
Approach.
To to the pension and in particular as far as.
The 20, Allstate kind of 20 to 20 to 21 again I'd say the key elements are very similar to what we talked last time, but the level of contribution is is evolving and changing year over year. So as you bridge to an improved cash flow, which it will be as we see it today in 21 over time.
Many 737 Max is the single biggest contributor.
So getting return to service starting to deliver.
Off the ramp and then as Dave said in forming our production.
Right and.
And then ultimately the marketplace and what the recovery looks like that's going to be the single biggest driver.
Side of that is the next one is the 787 as I said, we're building inventory and we'll have that inventory and delivery profile aligned into 21 and that will be our second largest contributor to 20 over 21 is as it sits today those are the two single biggest if you look at.
Year over year as we see it today with services or defense, it's pretty much in line with how we think we're going to finish this year. So it really got does narrow down to those two product lines in particular with the 737 being the biggest contributor.
Thank you very much.
All right John we have time for one last question.
Great and that will be from Peter Arment with Baird. Please go ahead.
Yes, thanks, Thanks, Susan and good morning, Dave Gregg.
Great Hey, Greg just on the 77, the consolidation move final Assembly to one facility in South Carolina, and maybe just.
Can you just talk through how you're thinking about does that change any kind of outlook on the times and the profitability. The overall program or how you're thinking about the kind of the productivity gains that you'll be able to achieve.
Facility. Thanks.
Yes, I think.
As you know Peter really kind of starts with the market outlook that we had and and then looking at efficiencies and then ultimately how do we beat become more competitive and this is certainly a key contributor to that as far as a program margin perspective, not not not to not to have us and we'll have 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 where where the marketplaces today and that's ultimately where we'll see much more efficiencies in particularly around logistics.
Going from the mid to NAF body rate over into final assembly and not having the transportation logistics associated with that and having that dedicated crews and the cycling.
Again, we'll see the efficiencies but real.
Really well captured more at the at the higher production rates.
As you know all the details thanks guys.
Yes.
All right. Thank you all that complete the Boeing company third quarter 2020 earnings conference call and thank you for joining.
Thank you everyone.
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