The Boeing Company (BA) Q3 2020 Earnings Call Transcript

The Boeing Company (NYSE: BA) Q3 2020 earnings call dated Oct. 28, 2020

Presentation:

Operator

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. [Operator Instructions]

At this time for opening remarks and introductions, I’m turning the call over to Ms. Maurita Sutedja, Vice President of Investor Relations for The Boeing Company. Ms. Sutedja, please go ahead.

Maurita Sutedja — Vice President of Investor Relations

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.

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 as a reminder, 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 discussions this morning are likely to involve risks which are detailed in our news release, in our various SEC filing and in the forward-looking statement disclaimer at the end of this web presentation. In addition, 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.

David L. Calhoun — President and Chief Executive Officer

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 two-year anniversary of the Lion Air accident. Not a day goes by that we don’t remember, reflect, re-dedicate ourselves to ensuring accidents like these never happen again. Our deepest sympathies are with the family members and the 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. 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 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 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, their medium term and their 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 industrywide 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 the trap 99.9% of particulars and the air in 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 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 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 US 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 fundamental 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 US 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 are 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 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 standards.

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 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 our governance priorities. This is an important step as we continue to elevate our focus on sustainability and 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 towards a safe return to service of our 737. Over the past year and a half, there have been around 1,400 test and check flights, over 3,000 flight hours completed on the airplane. While we still have work ahead of us, we encouraged by the rigorous certification and validation flight 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, from Canada, Brazil and the European Union also conducted its evaluations of updating [Technical Issues]. 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. 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 time 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 US Air Force and Boeing team were awarded the Collier Trophy for Aerospace Excellence for the X-37B autonomous space plane. Our Boeing defense systems team secured an important contract for eight F-15EX advanced fighter jets for the US Air Force. And also in the quarter our T-7A Red Hawk Advanced Trainer earned the first eSeries designator from the US 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 six-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 cert process. As with any development program these are — there are inherent risks that can affect schedules. 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 advantages. 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 forecast 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, 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 — our 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. 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, 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 part fleets to service 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. 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 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 widebody demand as domestic and regional markets will 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 widebodies more significantly impacted than narrowbodies. 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. That 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, 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. 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 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 it’s 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 meet efficiency and cost objectives aligned to market recovery trends. Our broad services portfolio with 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. We assess downside risk to our widebody 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 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.

Greg Smith — Executive Vice President, Enterprise Operations

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 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 and a 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 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 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 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.

By the first quarter earnings we announced additional actions, including reducing our commercial production rates, 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 and raised $25 billion which has proven to be instrumental to 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 of the US 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 of 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 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 few 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 and better positioned for the future. As a result earlier this month we made the decision to consolidate the 787 production in South Carolina by mid ’21. 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 787 production is an example of this. At the same time, we’re also taking into account new flexible and virtual work opportunities. If they 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, every site to look at how we can be more efficient and we will 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 and how Boeing operates and how we are organized, benchmarked to top quartile standards so we can simplify, reduce layers, 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 of control and improving direct and indirect ratios. These actions are aimed at enhancing communication and powering our teams and creating lasting efficiencies in how we do our work.

Moving to our portfolio and investment pillar. We’re shaping our portfolio on aligning our investments to focus on the core business, market opportunities and sustainability efforts. In addition to the impacting demand on near term, COVID-19 will also impact the timing of new market opportunities. Prior to the pandemic, we were investing for — 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 re-prioritize our investments and we will continue to do so and make prudent decisions going forward.

We originally plan 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 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 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 and 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 are 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 our operational excellence across the enterprise so that we can improve performance, enhance quality, safety, 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 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, improve 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’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.

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 ’21. 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 pre-tax 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 impact of the pandemic as well as 787 quality issues and associated rework. BCA’s third quarter operating margins declined primarily due to lower delivery volume and $590 million of abnormal costs related to the 737 program. Similar to prior period 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 re-market 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 of 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.

Commercial airplanes backlog includes more than 4,300 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 ASC 606 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 burndown of 787 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 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 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 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 contracts awards worth $5 billion, including a contract extension for the International Space Station for NASA and a contract for nine additional Chinook Block II helicopters to 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 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 service volume. Operating margin in the quarter reflected lower commercial services volume and an additional severance truck [Phonetic] cost.

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 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 receipts. Operating cash flow for the third quarter was negative $4.8 billion, driven by commercial — 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 burndown associated with 737 and 787 programs. And we anticipate the cash profile to continue to improve further from ’21 to 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 time frame.

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 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 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 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.

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 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 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’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 our actions that position our Company and our industry for the future.

So with that, I’ll turn it over to Dave for some closing comments.

David L. Calhoun — President and Chief Executive Officer

Yeah, Greg. Thanks. This has been a year unlike any others 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.

Maurita Sutedja — Vice President of Investor Relations

Hey, John, we’re ready for the analyst question now.

We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.