Three months ago, Boeing (NYSE:BA) reported a massive core operating loss of $3.3 billion for the second quarter as the COVID-19 pandemic crushed its commercial airplanes and services business lines. The ongoing 737 MAX grounding didn't help matters, either. Boeing's core loss per share of $4.79 was nearly double what analysts had expected.
On Wednesday, Boeing posted a much smaller loss for the third quarter. It even beat the analyst consensus by a considerable margin. Nevertheless, the results were quite terrible, and the aerospace giant remains many years away from returning to health.
Q3 by the numbers
Boeing generated $14.1 billion of revenue last quarter: down 29% year over year. This came on top of a 21% revenue decline in the third quarter of 2019, which was driven by the 737 MAX delivery halt. Analysts had expected revenue of $14.5 billion.
The company swung to a core operating loss of $754 million, compared to core operating earnings of $895 million a year earlier. Earnings declined in all three of Boeing's business segments. However, the bulk of the damage came in the commercial airplanes unit, which recorded a $1.4 billion operating loss, compared to a modest $40 million operating loss in Q3 2019.
Boeing's core loss per share came in at $1.39, beating the average analyst estimate of $2.32. That said, the main source of sequential improvement was a reduction in one-time charges.
Rapid cash burn continues
Free cash flow provides a more telling window into the health of Boeing's business right now. The news was not good. Boeing burned $5.1 billion of cash last quarter, roughly in line with its cash usage in the first half of the year. Year to date, the company has now burned an astonishing $15.4 billion.
This cash burn has already taken a toll on the balance sheet. Boeing ended the third quarter with $61 billion of debt, offset by $27.1 billion of cash and investments. A mere two years ago, the company had just $11.9 billion of debt, offset by $10 billion of cash and investments.
Boeing's cash flow woes will soon have an even bigger impact on long-term investors. During the company's earnings call, CFO Greg Smith said that Boeing will contribute approximately $4 billion of stock to its 401(k) and defined benefit plans over the next 12 months to preserve cash. Based on Boeing stock's Wednesday closing price of $148.14, this would dilute shareholders by nearly 5%.
Smith also warned that free cash flow probably won't turn positive again until 2022. A quarter ago, he was still claiming that Boeing had a path to positive free cash flow next year. In short, Boeing's balance sheet will get worse before it starts getting better.
The long-term outlook remains shaky
CEO David Calhoun indicated that he remains confident in the long-term demand for Boeing's products. However, while the company is finally acknowledging the depth of its near-term challenges, it still appears to have an overly rosy view of future aircraft demand. Furthermore, its backlog continues to shrink relative to that of Airbus, which will likely lower its market share significantly over the next decade.
A return to the peak annual revenue of $101 billion reached in 2018 is unlikely over the next five years. Even a decade from now, Boeing's revenue might not be fully recovered. That will naturally put pressure on earnings and cash flow relative to 2018 levels.
Boeing is looking to offset these headwinds through aggressive cost cuts. Several weeks ago, it announced plans to consolidate all production of its 787 Dreamliner wide-body aircraft in North Charleston, South Carolina, by mid-2021. On Wednesday, management revealed further job cuts. By the end of 2021, Boeing will have 130,000 employees, down from approximately 161,100 at the beginning of 2020.
Despite these measures, without a revenue recovery in its commercial jet business or robust demand that would support strong pricing, Boeing's earnings and cash flow will remain lower for longer. As a result, investors should continue to avoid Boeing stock for the foreseeable future.