Boeing Aktie

Okay. I guess we're ready to go here. I'm Doug Harned, Bernstein's Global Aerospace and defense analyst. And I'm thrilled to have with us again, Kelly Ortberg, Chairman and CEO of Boeing.

Good to be here, Doug. You, doing well?

I am. It's good to have you here. Nothing is boring me...

Time has flown since we were here last year.

No, I know. A lot has happened.

I mean maybe to start, we can start right there, is if you look over the last year and what you've been able to do with the company in terms of the progress you've made and some of the challenges you may be looking at right now, maybe you can give us an overview?

Yes. So look, I feel really good about where we are. Looking back in the last year, we've accomplished a whole heck of a lot production on our commercial -- in our commercial business, ramping up, continuing to ramp up. But we've had some really good success.

As you know, we finished last year with over 1,000 new orders. So the market is super strong for all of our commercial products. So really pleased there. We've done really nice work on our Defense portfolio in realigning that portfolio with our customers around successful programs, particularly focused on our -- some of our problem development programs and getting those back in shape.

And so I feel really good about what Steve Parker and his team are doing there. And again, we finished with record backlog in our defense portfolio. And our services business has continued to do what it does, keep our airplanes flying and our customers supported with really good margin performance there, which has been important given the status of the rest of the company. So really good progress.

The one area I guess I'd highlight where I haven't met my goals, was getting the certifications complete on the new commercial airplanes. And we're -- I'm sure we'll talk a little bit about that. But getting through the 737-7, -10 certifications and the 777-9 are big goals here for us yet to go in the year. Then we're always managing the day in, day out things, whether it's supply chain challenges, things pop up, we manage them. I think that will be ongoing, labor agreements. We've got our SPEEA labor agreement with our engineers in Puget Sound coming up at the end of the summer. So those are all things that are ahead of us that we just got to continue to work.

I'm really pleased with the culture work across the company. We did a lot of focus on training our people, rolled out new values and behaviors, aligned our goals and objectives to a single One Boeing set of goals and objectives. So everybody's focused on success of the company. And I'm seeing major, major turnaround with that. And it's not just me. I'm hearing it from the employees. I'm hearing it from the customers. Our commercial customers are saying these are the best airplanes they've received from Boeing. So it's a great accolade. The team is really doing a good job.

You mentioned the orders you've had and your backlog is huge right now. Can you give us a sense of how far out that backlog extends? If customer wants to come in, and place a significant order today for 737, 787, what time frame are you looking at?

Well, it's well into the next decade. So it somewhat is a little bit different Doug, depending on the customer, if it's a customer who has options, firm options, then we give them a window and will protect the slots, if you will, production slots for firm options. But if it's a new customer coming in for new demand, they're going to be in the 2030s before they're going to be able to get either a 787 or a 737 airplane.

And I put that in the context if we just -- you just came back from this trip to China with the President, and you got an order for 200 airplanes, a lot of us were expecting a 500 airplane order. But does -- when you look at China, does that matter in terms of when we'll see deliveries actually?

Yes. The China trip was super successful. My primary objective was to reopen that market to our narrowbody airplanes. As you know, we haven't had an order in nearly a decade. And we accomplished that, which is a major, major accomplishment. And I think people focus a little bit too much on the initial quantity. This is opening the market. They need well over 500 aircraft a year to support their GDP growth. And so there's a great market opportunity for us.

And the initial order of -- the initial commitment of 200 will turn into an order later on in the year. The way the process works is once the government decides a batch of narrowbody aircraft, they then allocate them to the Chinese airlines. And then we go work with the airlines to actually get a firm order. And that's -- you'll see us book those orders on an individual airline-by-airline basis. So look, I never had a plan to go to China and return with the packet full of 500 orders.

Having said that, 200 is a huge number of airplanes. So. It's a good start, and I'm very confident that keeping that market open, that's an initial tranche of aircraft, and there will be more to come.

Now with the large backlog you have and been sold out for a long time, we're currently in a situation with very high fuel prices, that's putting a lot of pressure on many airlines around the world. Our assumption would be, as we saw during the global financial crisis you're going to have some movement in slots. Some airlines could find it difficult to take deliveries at certain times. How do you approach that process of managing your skyline with some airlines who may have a more difficult time than in the past?

Yes. So just to be clear, so far, just like I said in the earnings call, we have not seen anybody request a movement or a delay of the deliveries. Now I think everybody, because of the high fuel prices, will want to take the more fuel-efficient new airplanes. And if they have to park an airplane, it's probably an older inefficient until they get cash strapped and then they get to a point where I can't take the airplanes. We'll work with the customer if that happens. We've done that before. I've had more customers call me saying, if you have that situation, I'll take the airplanes. And then I have had customers saying I want to give up any slots.

Generally, Doug, if it's a 737, as long as we have about 12 months of advanced notice, we can refire that to a different airline. Probably 18 months from a 787 perspective or even a larger wide body, it's a little longer. So we just have to get in front of that and talk to the customers, make sure we know in advance that if they're thinking about it, we try to get ahead of that, so it doesn't become an issue where we've got an airplane we can't make a delivery.

Now on 737, so you've gotten production up to 42. You're still looking at 47 rate in the summer. Can you take us through how that process is going and maybe update us on your expectations for 47?

Yes. So we went to 42 last fall. And the good news is we've continued to roll out at 42 a month. And all of our key performance indicators have been very positive. They've stayed green through that. So that production ramp has gone very, very well.

We just recently had our capstone review with the FAA, new news here. We've passed the capstone review for rate 47. So we are now in the process of running the line at the 47 a month rate. It will probably take us a few months of stabilization there. But I'll say when we went from 38 to 42, that stabilization didn't take too long. My guess is we continue to go up in rate, it may take a little bit longer, but we're off and rolling now for the 47 a month rate, and we should be there in the next couple of months.

And so how you think about that is you start working at 47, you'll have blanks on the line and then you start to fill that in as the rate gets stabilized?

Yes. What we do is before we go to the capstone review with the FAA, we want to make sure that we're ready to actually go to that rate. So what we do is we actually bump the rate up to 47 a month before we go actually to the capstone review. And then we put some blanks as you point out, in the production system. So that if we go to 47 and one of our commodities as it gets too many jobs behind schedule. We use that blank month to catch them up and then we go figure out what is it we needed to do to get to 47. And we try to get that all done before we actually make the rate increase. So we're highly confident that we pulse the system to make sure we're ready to go to that rate.

And when you look at the 737, the -- what we've heard from some suppliers is that the inventories that you had built up during the periods of low production rates, those have been worked through pretty far from at least, that's anecdotally. Where do you stand on kind of bringing down the inventory levels?

Yes. So it is a little bit of a commodity by commodity answer, but I would tell you, we're still at high inventory levels, higher than we want for sustained production. And I think we won't get to that more balance or equilibrium until we're at 52 a month rate. So 47 we're still going to benefit by high levels of inventory. And at 52, we'll see that balance out. That's why I've said that the rate increase at 52, we'll have to watch that because I think that's more -- going to be more of a strain than going to 47 because of the inventory.

The other thing I'll point out is that rate 52, we're bringing on a fourth production line for the 737 in our Everett facility, which is north of our Renton facility. That production line is in place. We'll be firing an airplane through that to qualify the production system. It is a lift and stick of the Renton production line. And we're hiring people. We're going to flow them through Renton and then move them up to the Everett line. We need the Everett line active to move 52 and beyond, not for 47. But while we're at 47, stabilizing at 47, we'll be bringing the north -- we call it the North Line -- the North Line on -- at low rate production.

Now at one time, I mean for a very short amount of time, you were at 57 a month back in the kind of pre-grounding period. And now it's all being done in the Renton facility. Can you talk about what's changed? I think it has to do some with the FAA processes, but can you still do 57 in Renton?

No, we don't think we can sustainably with our current safety and quality processes. We don't think we can sustainably do that in Renton and that's why we brought the additional line on. It will give us, obviously, the capacity of an additional line, also gives us flexibility. If we have one line that has a problem, we can use the other lines to help offset what that -- the problem line is dealing with.

I wasn't there back when we were doing that. I would just say that we are ensuring that this is a stable production, not an unstable production. We're not going to push airplanes down the production line and end up with traveled work and some of the challenges we've had in the past. And so that's why we've invested in the north line to make sure we've got sufficient capacity here.

Now it's not just a 52. We'd like to get some day to 63 a month rate. And so we're looking forward to that. The market will support those higher rates. We just got to get ourselves in our supply chain in a position to do that.

So when you look at going to 52 what's the time frame you're thinking about now assuming that 47 happens this summer, July, August?

Yes. Historically, I've said no earlier than 6 months. And if you look at the -- maybe the 42 to 47 is probably close to that 6 months. I didn't look at it exactly, but it will be closer to that. I think it will be a little longer. I actually don't know. We're going to move when the system is ready and when the supply chain is ready knowing that we're going to stabilize this inventory a little bit.

I just think we should assume it might take us a little bit longer, but we'll see. We'll see how everybody performs. Each rate is a new rate to deal with, and we'll get good feedback once we get to 47. If that's going smoothly like it did at 42, then we'll move at -- move to the next 52 as soon as we can.

Now are there certain parts of the supply chain that are more of a concern for you to make sure they come through smoothly?

Not -- for 737, not really. Not right now. I think for 47 a month and 52 a month, there's no particular commodity that I'd point out to you and say, we need that one to double or we're going to be in trouble. Part of that is our inventory. We always are dealing with day in, day out supply chain challenges, and we address those burn them down, and keep going. But there's nothing I'd point out to you that I'm overly concerned about with these next rate increases.

Now if I go back to the previous time when Boeing went from 47 to 52. One of the big problems was at Spirit. Spirit did a great job going 42 to 47, but things sort of broke down for a while there. Now that you have ownership of Spirit, how have you looked at that kind of a channel?

Yes. Well, first of all, they've made great progress in streamlining their production process and building a higher quality with less defects, so they're not repairing and doing a lot of rework, which is allowing them to flow fuselages better. I was just in -- at a big event in Wichita about a week ago. We announced a $1 billion investment over the next 3 years, which is in our plan, but we announced it publicly where we're going to invest in the facilities as well as people and training to make sure that our team in Wichita is ready for the next production rate.

So look, now that we own them, they're under our control. We know there's pockets of either capital equipment or training that have not been invested in to the level they need to be, particularly focusing on our safety and quality plan that we've worked with the FAA, put in place in Renton, we really want to replicate that and get that solidified down in our Wichita facility.

So yes, I think -- I do think that having control of it, we can make sure that we're making the investments needed to make the rate increases. I will say that Spirit is one of those -- the former Spirit is one of those areas where we have a lot of inventory on 737 fuselages. So again, for the next -- these next rate increases, the Wichita performance is not a big concern right now.

No, that's good. But I look back when they -- on the same footprint, they went from 28 to 47, which was pretty amazing. Now there have been changes there over that time. But -- my assumption would be, if they have to go up to a 63 level eventually, you're probably looking at some expansion in those facilities? Is that correct?

Yes. Yes. I would say, across -- I've been talking about 47 and 52. I think across the supply chain to go to 63, we've got work to do. I think many commodities, we've got work to do yet to get to that. But we're not there right now. We've got to get through these near-term rate increases. We are doing the advanced planning to make sure that everybody is doing the advanced planning around these future rates. I think the whole world is watching to make sure we make 47 and 52.

And when you get back up to those rates back -- let's say, 52. Given the process changes that have happened, the fact that you're going to be using the North Line, how do you think about margins for those programs compared to where they were the previous time around?

Well, certainly, margins will be improving as we go forward at the higher rates. Now there's a lot of dynamics in that. The -- and I think Jay has laid these out in the earnings call. We have headwinds associated with late penalties with current deliveries that will burn off over the next couple of years. We have larger, more -10s in the mix going forward. Those are higher-priced airplanes. We have generally higher pricing or improved pricing that will help us. But the North Line initially will be at a low rate. So the North Line will actually be a drag on us initially here once we get it up to the same rate performance as Renton, then it will be a contributor to the margins.

So yes, whether we get back to the exact level of margin on the program, we'll see, but there definitely will be improving the margin here over the next 3 years on the 737 program.

And the -- do you still think of that North Line is focusing more on the MAX 10?

Yes. So the North Line because it's in Everett, and if you've been to Everett, it's a huge facility. We can actually do a -10 nose to tail in the facility. In Renton, we actually have to space, the -8s and -7s and -10s because it's not long enough to actually fill the factory with all -10s. So we do think that, that provides us the ability to get to a point where we can do primarily -10s.

Having said that, we've put the facility in place to do everything except for -7s. So we won't do 737-7 in the North Line, but it will be capable of doing every other one because we want the flexibility, like I said before, if we have issues with one or another, we can use these multiple lines to help us reduce risk.

So I know a lot of people really want their -10s delivered now. So how does the certification process look at this stage?

Yes, the 737-10 and -7 cert programs, we're clearly getting to the final stages. It's clearly light at the end of the tunnel here, and we're going to get these certification programs done. We're roughly 80%, a little better than 80% done with the certification flight test program, so the certification flights are done, scored or both the -7 and the -10.

And we have authority from the FAA for the entire test regime now -- flight test regime. So we don't need any more TIA approvals from the FAA. So it's just a matter of getting through that flight test program and we're clicking them off as we speak. So I got to know from our team that we were flying 3, 777s, and 2, 737s simultaneously for certification score. So we're really banging this down. And that -- it will get to the end of the year where we'll get the certification so we can really support next year's deliveries. You know we're building -10s. So we need to get that cert done so that we can start those deliveries.

So when you look at this is -- is there a major difference -- what I'm trying to think through here is I mean, the inlet design has been -- was a big issue here to...

The anti-ice...

Through anti-ice thing. But is the testing you're doing now primarily that, or is it broader because...

Yes. Good question. So the engine anti-ice while it was being done as a part of the certification program, it will actually be cut into the -8 program first. And so we've made -- we're through all the testing of the engine anti-ice, and that's all kind of behind us. So we feel really good about that. And then the remainder are just -- I'll just say, just the normal -- these are the things you do at the end of the flight test program. We've dry run everything. We're pretty confident that we're not going to see any hiccups here in the remaining regime of flight testing.

No added complexity in the MAX 10. I mean you have a different landing gear, you have -- I mean there are some different aspects to that...

No. There's -- the -10 work is much higher than the -7 but we're doing those concurrently. We'll probably get type cert for the -7 before we get type cert for the -10, but it kind of doesn't matter. They'll be in pretty close proximity. But there's no question the -10 cert work is a bigger package than -7.

So on the 787, you're 8 a month, you want to be a 10 a month production by the end of the year. Can you talk about what has to happen to get there?

Yes. The 787, we've done a pretty good job as we've moved to rate 8 rolling at rate 8. But we've got some instability still that we're still working through. I'd point out that the -- and we've talked about this, the seating configurations have been very complex and getting the certifications done on the seats have actually -- they've not impacted production as much as they've impacted deliveries. And you've seen our deliveries a little bit lumpier than what I'd like to see because we've got airplanes done, ready to be shipped, that we don't have cert paperwork.

So these are sitting in Charleston...

We have airplanes sitting for customers, completely done, waiting for seat certifications. So we're working to get that process done. But every new type airline, new type goes through the new certification process. And we just have quite a few of those yet to go through here this year. So I think from a delivery perspective, we'll be fighting seats throughout the year. Just getting through the seat certification. We're working with the FAA and EASA and the seat manufacturers to try to improve that.

But we've got a lot of work yet to do on that. So that's an important stability item for us to go to 10 a month rate. And then we've fallen behind in delivery on engines here in the first quarter. So we've got a recovery plan that we're working with GE on. And so we'll need to see the engine recovery plan come to fruition before we can get to rate 10, and that will be late in the year.

And on the seats, so how -- I mean how many airplanes can you have parked out? In other words, if you have a mismatch between production and deliveries, when do you hit the wall there where you can't...

So we can fly the airplanes to other locations, and we have. So it's not just storage location at our Charleston facility.

So you'll continue to produce, you wont' slow down because...

No. So for us to slow down would cost us way more than pushing through. And quite frankly, in some of these cases, we thought we were going to have to seat design done a lot earlier than what we've been able to accomplish. So we've just got to get that stabilized. But I don't think we're going to do anything to slow production down, but we may not go to the rate 10 as early as we could have, had we not had the challenges.

And the problem here, I guess, is more about the certification than it is about supply chain overlap or something...

That's right. It's not -- it's typically not supply of seats. The seats are in the airplane. They're built. The airplanes are built. We just don't have the paperwork allowing us to make the delivery. And this isn't every airplane. This is when an airline has selected a new configuration that they're rolling out. Typically, they have doors. These are very complex. It's typically -- it's the business class configuration that are just more complex than we've had before and the certification has taken more time than we thought or they thought. So...

You have some MAX10s hat like also like United has been fairly exotic interior. And that -- could you run into some delays there, too?

Yes. So we're taking our lessons learned and applying it across -- it's not just MAX 10s, but it's also beyond 777X. -- in a big way because they'll have a bigger cabin. So we've done some things like pushed back some of our new entries, seat entries. We're also putting constraints on the system to make sure that we're not flowing an airplane into the production line with an uncertified seat configuration. So we're becoming more disciplined, which I think will help us, and we're going to apply that particularly on the MAX 10 line. Because you're right. Some of those seats are pretty close to the same kind of challenges here.

And on -- can you just -- I don't know if there's anything new here on 777X and the time line?

So 777X, we continue the flight test program, that will go through the end of the year. So we'll be done with the MAX well before we're done with the 777 flight test program. Our flight test organization is common. So it's the same team who supports all the airplanes. So once we get done with the -7 and the -10 flight test program, we will be able to apply more resources to the 777-9. But you should expect that will hopefully be done with our flight test program by the end of the year.

With the exception of ETOPS. ETOPS is the final test that you go through with the twin engine aircraft -- wide-body aircraft. And that ETOPS is going to extend into next year. But we're building the airplanes and getting ready to start the deliveries next year.

You can deliver before -- you can't operate it you can deliver before...

Yes. But the -- it depends. It depends on...

Depends on the customer...

Yes, yes depneds on the customer. I would say, for the most part, the customers are going to want our ETOPS testing done.

Then when will the freighter follow?

So we just built -- you've probably seen that in the press. We've just built our first 8F freighter. And it will be about 2 years behind the PACs version.

Switching over to BDS. So if you look at kind of the historical programs here KC-46, T-7, I mean you've had a lot of issues on these. Some from just the contract structures. Where do you stand on getting past all of the cash impacts from these charges that you've had to take?

Yes. So the cash impacts, depending on the contract, some of these contracts have firm fixed price production options. So let me use the KC-46 as an example. That's been a loss program. It's been a challenging program for us. We have one more lot of the existing firm fixed price KC-46 production that will happen at the end of this year. Then the follow-on quantity will all be repriced. So in that case, we have no ability to improve margins with the existing contracts. We just need to manage the risk. So there's no further nonrecurring write-downs.

And then where we improve the margin is in the new option opportunity. T-7 is a similar program where we've got a significant amount of the production under contract. So that will take a while to turn that to profitability. MQ-25, we just have LRIP under contract. So production will be a new contract option. So I would just say, in general, the road to profitability on those programs is get them behind us. Go to the next phase, either another contract option, in some cases, just be done. VC-25B, the President's airplanes, we just -- we'll celebrate the day we hand the key to the President and that's done.

And so we don't know where the $1.5 trillion budget is actually going to end up. However, there's more money in there for T-7, for MQ-25, presumably, those will be under new contracts. They're going to be...

Some of that will be existing just funding for existing contracts, some of it will be new contract. And it really is a contract-by-contract case. But there's no question. The budget is bigger than we expected it was going to be last year. Irrespective of where it finally settles, I'm pretty confident that it's going to be a pretty robust budget. The other thing is our programs are really, really well us protected in that budget. So I feel really good things like F-15EX additional quantities there...

Wedgetail.

Wedgetail, we've got the E-7 variant back into the budget environment. So look, we're -- we've got good opportunities. I do think that, as I sat here last year, I think the outlook for our growth in our military business is stronger this year than what I would have said it was last year.

F-47 is huge part of that, right?

Big part, we're off to a really good start. The programs well staffed. Our customer is super pleased, and we're going to keep them that way. And so we're really focused on doing things differently and having a successful development program. As you know, that's -- the contracting type is appropriate for the work we're doing.

One of the things that we've done that the team has done a really good job is focusing on making sure that we underwrite all these new contracts with the right baseline, whether that's contract type or the right pricing structure. We've got a lot more discipline. In fact, we've walked away from some jobs that we historically would have taken on and said we can probably get this done.

And we've looked at it and said there's too much risk for the fixed price contract type. So we're not going to do it. Having said that, we've got a record backlog in our defense businesses last year. So we're able to still win and be disciplined in the market. And one of the things that's really key as we returned that defense business to this high single-digit profitability is we don't enter into new loser contracts. And so we're really focused on making sure the team is disciplined around that.

And on the F-47, I don't know how much you can say about it. But is there a way to describe what that growth path would look like?

You know what, I can't really say.

That's what I expected. But one thing it does do, which maybe you can say is -- I've spent a fair amount of time in the St. Louis facility. This does build a base there that I would expect to be good both for your cost structure and for new work?

Yes. I mean it sets the future of our St. Louis operation for decades to come. As you know, we're investing heavily in new facilities to support the production of the airplane and potential future opportunities as well. But having not been the prime for either the prior generation fighters still having the F-15, but the F-18 is essentially wrapping up production. This was super important for us to secure that, what I call transformational win for us.

Can you talk about space, Starliner clearly has had challenges. But what are you looking at now in terms of opportunities, maybe with Golden Dome?

Yes. So when I think a space, I kind of break it into 2, there's human space exploration. This is the NASA work Starliner, falls in that category. And then there's national security space where we're doing evolved strategic SATCOM satellites, a lot of classified work, our X-Plane space plane is in that category. That business is many aspects of that business have application to the Golden Dome, but broadly have good support, good budget support. And it's good business. We're performing well on that side.

Where we've struggled have been again where we've signed up to fixed-price contracts on the space exploration. So the Starliner is a good example of that. We have -- with the Starliner, we have 2 launches. NASA has just determined that they're probably going to push the second launch out of the year. So we'll only have one more launch this year and then one next year on that program. And so we're working with NASA to fix the deficiencies that came out of the prior program, get the aircraft certified. And then we'll see where the NASA -- the NASA budget is an interesting one. We'll see where that budget lands going forward. That's a little bit up and down.

I mean on Golden Dome and we struggled a little bit with getting a tight definition of what the actual programs will be in there. And I know Congress has had some questions as well. I mean, for you, are there some well-defined things? Or still you're working through with the opportunity set...

I think we're still working through -- as the customer is still working through a little bit of the architecture and the opportunity set. I think there are some areas where we know what our contribution will be. And then there's areas where there's still some trade studies being there. But from a Boeing perspective, I think you should look at Golden Dome probably as more of a capability of our assets as opposed to a program we're going to go win a big specific Golden Dome program.

So I mean I think back several years ago when BDS was a really good, reliable source of free cash flow. That clearly disappeared for a while. When you look at 2027, do you think -- can we expect positive cash coming out of BDS at that point?

Yes. Yes, but not to the level it should be. So I think we'll get to where we're generating some cash flow. But as we just talked about, we've got to get through these programs that we're underwater on and get those behind us. There's no reason this business doesn't deserve to perform at a high single-digit margin business and return back to those classic cash flow rates that we've seen in the past.

And we have a nice mix of domestic and international. And international generally has more upfront payments and higher cash -- better cash terms than the DoD contracts or DOW contracts. So we just have to -- again, I think we have to get these programs that, challenge programs executed and behind us, and you'll see better performance out of that business.

Can you update us on what that mix is in the backlog of U.S. versus international?

I don't think I know exactly what the backlog I'd have to follow up with you. I don't want to quote a number that's not right.

Okay. The last one I remember was pretty sizable. I mean, pretty significant percentage.

Yes.

So if we go over to BGS. This business has performed really well for quite a while and 17% plus margins, which always seem to be higher than what you guys are guiding to. Now we're in this situation with 2 things going on with the war in Iran. One is it increased optempo, which I would think could add to your performance on the defense side. And then risk potentially on the commercial aftermarket. How do you look at that?

Yes. So the risk to the -- let's start with the commercial aftermarket. The risk to the commercial aftermarket will first be on the transactional -- the in and out kind of business. We're looking at it on a weekly basis. We have seen some of that transactional business decline from carriers in the Middle East. But in fact, we've seen a higher level of transactional business in elsewhere, which is totally offset.

So from a main perspective, we haven't seen any impact right now in our business. Now we don't have a lot of flight hour service business. Other companies probably do. And that's going to be impacted just by the number of flight hours. And flight hours are coming down in the region.

So -- but we don't have a lot of that. So it's not really material to us. So, so far -- I just don't see any significant or material impact. We are seeing uptick from the DLA from the in and out business associated with optempo and Defense. And I think that will continue, both just in parts, but our platforms are very much in the fight. The optempo is very high. And so there's either going to be replacement, replenishment. We're working the big PAC-3 production contract to replace all the Patriot Seekers that have been shot.

But even our aircraft platforms that have been either damaged or used in excessive amounts, so we'll see some maintenance cycles, which will, over the next -- that won't all happen at once, but over the next year or so, we're expecting to see some upside. I think back to the commercial, it depends on how long this lasts. If this lasts -- the longer it lasts, obviously, the more strain is going to be on the system. And the only thing I could say is we're monitoring it weekly to see what's going on and we're talking to the customers.

Well, and I didn't mention, but I guess, when we were on the -- back on going to BDS, but you've also got sort of JDAM, Small Diameter Bomb that...

Yes. Our Weapons business is -- the demand is through the roof. So that's another area where we're going to quickly be talking about how many can we build, not -- how many can we get under order. So we're working on expanding our production there. I was just at the Pentagon meeting with the Department of War yesterday on things like it ramping up production. And that's important all the way up to POTUS. We've met with them on -- the CEOs have all met with POTUS on the need to ramp up our capability in the weapons market.

So this year, you're guiding to $1 billion to $3 billion in free cash flow. And what will determine where you end up in that range?

How many airplanes we deliver probably will be the -- in the end, that will be the determining factor. So we'll see. There's some risk and opportunity around airplane deliveries. We'll just see how we do here.

Well, and one of the things I know you had said previously that the assumption of predelivery payment from China on an order would be included in that cash flow. Is that material one way or another?

First of all, we do have some PDPs from China. I don't think -- if, for example, the China orders wouldn't happen by the end of the year, we probably would fill that with other PDPs. Those slots would go to someone else. So I don't see the China situation really having a major impact on our -- where we end up on cash flow. It's not going to swing us over or under, I don't think.

You and Jay have talked about heading toward a goal of at least $10 billion in free cash flow. Is there any sense you can give us on timing and the trajectory for that now?

Well, I don't have anything new. I think Jay did a good job at -- during our earnings call of kind of laying out the puts and takes associated with that. And in general, we've got to get through these headwinds that we've got, where we've got consideration on -- in the price of the airplanes because we're late. Those will abate as we ramp up in production. So we've got the -10 coming in, which is a higher-priced airplane.

So the mix helps us well, better pricing in general will help us. We've got headwinds associated with supply chain costs that we're managing. So all those in a bucket, we're expecting to see kind of a continued cadence towards that $10 billion and beyond cash flow. But we're not going to put a specific time line yet on that.

We've just got to focus on these activities that will yield improved cash flow.

Well, going into '27, at least, I mean, you should have some work down on that -- the cash flow penalties on the 777X, I would assume, because that's like $2 billion or so this year, I think...

So is your question...

Yes, does that -- what's the trajectory, I guess, on the 777X cash out?

So 777X cash out is big this year, will be big next year, and then you'll start to see that kind of turn in the '28 time frame.

Okay. So you've been on a pretty positive trajectory here for the last 18 months or so. But I have to say that many investors I talk to still have concerns of the problems of the past. And how can you give us more confidence that those risks are much lower today? And you can look forward at these progressions in rate and that looks very...

What I've told the team and the only way, Doug, I see to do that is execute, execute, execute, and build confidence back. We've done a lot of work on the culture in the company to restore trust, and we're getting very good feedback from all of our stakeholders about how Boeing showing up, more transparent, working collaboratively with the customers, delivering on commitments.

That's also allowing us to be in an environment where we can find win-wins with the customers and work through some of these challenged programs. But look, the development programs until they're done, they're not done. And so we just -- I just need to keep focusing the team on every day, execute every day is an opportunity to meet our commitments.

And I would just say, so far its working. I feel confident that we've got the right team. We're focused on the right things. Yes, we'll have a risk that we'll have to deal with along the way, but we're getting in front of those now and managing them and burning them down and I think that will lead to great success. The thing that The Boeing Company has is a huge backlog. I mean we don't have to think about what airplanes do we want to build tomorrow. We know what airplanes we want to build. This is an execution story. So just focus on execution.

Any milestones you'd highlight we should be looking for over the next...

Well, the cert programs are big -- those are big for me personally. So getting through the certification, the MAX certification, watching the production ramp back from up here to 47 and how does that look? And then probably the other one to watch is the North Line. How are we doing on the North Line? Is that maturing the way we want because that will be an important decision point for when we do the rate 52. So those are the, I'll say, the near-term proof points that you can look to.

The government looks like they're going to make a decision on the F/A-XX program yet this year. And so we're in the fray there. So if we're successful there, that would be another big milestone for us. So we'll see how that all plays out.

Okay. Well, great. Well, Kelly, thank you very much.

Thank you. Good seeing you Doug.

Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that 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, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations for opening remarks and introductions. Mr. Hill, please go ahead.

Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website.

Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg.

Thank you, Eric, and good morning, everyone. Thanks for joining in today's call. As we reflect on our first quarter performance today, we're off to a really good start and headed in the right direction. We remain on plan and are building momentum from solid performance across all 3 of our businesses.

Our commercial airplanes team continues to integrate our safety and quality plan into its operations, which has enabled us to increase production rates and deliver high-quality airplanes to customers around the world. Our defensive space team continues to stabilize operations. And after 2 years of hard work and development, we're starting to achieve inspiring milestones like the recent Artemis II launch that carried NASA astronauts to space on the Boeing build [ quarter stage ] rocket. The launch and landing were truly profound moment as humans reached farther into space than ever before and serves as a great reminder of what Boeing, our industry partners and our country can do.

In Boeing Global Services, our team is off a strong start adding further orders to its record backlog, meeting customer demand and continuing to deliver solid operating results. While we are seeing some regional instability as a function of the Iran war, we remain confident in the long-term future of our industry.

ABH has seen moments like this before, whether it be recession, pandemic or conflict. The resilience of our industry has always led to a recovery and return to growth trends. Our market remains robust and the Boeing portfolio of versatile fuel-efficient airplanes, defense platforms and services is built for the dynamic environment of our time.

So far, we have not seen any impact on our airplane deliveries. As always, we stay close to our commercial customers if they make adjustments to their plans. And in which case, I think the strength and diversity of our backlog gives us a lot of flexibility. And I should note, we're already seeing higher demand in our defense business, given the increased operational tempo, which over time will be a good offset to any potential commercial MRO weakness that results from these higher fuel prices.

We are confident in our business, customers and markets, and our team remains squarely focused on safety and quality, disciplined execution and elevating operational performance so we can profitably deliver on our record backlog of nearly [ $700 billion ].

As I mentioned last quarter, one of the biggest focus areas for our team in 2026 is completing the certification work on our development programs. This is where I'll spend a few moments before discussing our first quarter accomplishments. In BDA, we continue to move forward on certification work for the 737-7 and the 737-10. In the quarter, we began the final phases of the certification and flight test for the 737-10, which includes autothrottle, autopilot, enhanced angle of attack as well as engine [ anti ] solution. We are pleased with the progress so far and remain on plan for the newest members of the 737 MAX family to be certified later this year, with deliveries expected to start in 2027.

On the 777-9, we continue to advance our certification testing. Last month, we received approval from the FAA for the next phase of testing called [ TIA-4A. ] While it's a smaller package focused on natural ICE testing, it's an important step in moving this development program forward.

You'll recall last quarter, we discussed a potential durability issue on the 777X engine that was discovered during an inspection. Since then, we work closely with our supplier, as they've said yesterday, they believe they have identified root cause and they're working on finalizing their modification. We are working together with Aspire and the FAA to fold this into our certification plan, and we remain on track for schedule of first delivery in 2027.

In the quarter, we also achieved an important milestone on the 787 program. We obtained FAA certification for an increased maximum takeoff weight for the 787-9 and the 787-10, enabling those models to fly further or carry more cargo creating additional value and revenue-generating opportunities for our 787 operators.

In BDS, work to reduce risk across our development programs using active management is leading win-win outcomes for our customers and Boeing. This means we're proactively working challenging programs by looking more closely at risk, requirements, schedules and customer needs. Combined with stronger focus on program management Riker, we're seeing good progress here. For example, on KC-46 Tanker, we recently approached our best-ever factory performance going back to pre-pandemic levels of productivity. And we remain on track this year to deliver the most tanker aircraft since 2019.

We also achieved an important milestone on MQ-25 with completion of high-speed taxi tests and the first flight is imminent. [indiscernible] is our first unmanned aerial refueler for the U.S. Navy. We are now one step closer to providing this first-of-its-kind capability to further enable the U.S. to project power worldwide. Overall, I'm pleased with the progress our BDS development programs are making and there are no major EAC adjustments.

Let's turn now to the first quarter accomplishments. As we start the year, we continue to drive stable operations across our factories, enabled by a focus on safety, quality and performance. Our team is more engaged in embracing our values and behaviors, which we first shared with our team around this time last year. That increased commitment is helping drive process improvement ideas. As an example, I just reviewed 1 from [indiscernible] where the team developed a new drill jig, resulting in more than 30% reduction in defects for 737 wing tip.

In BCA, Stephanie and her team are methodically increasing production rates across our key commercial programs. The 737 program has stabilized at a rate of 42 airplanes per month. And in the quarter, we also delivered the final 737 MAX from storage. As previously discussed, some first quarter 737 deliveries slid into the second quarter, due to a recent nonconformance finding on aircraft wiring.

As part of our root cause corrective action process, we fully understand the issue, and we have reworked all of the 25 airplanes affected and most of these have already been delivered. Importantly, this is evidence of our safety management system, working to identify issues early and drive continuous improvement and avoid these issues in the future.

To be clear, the wiring issue will not affect our full year delivery goals or plans to increase production to 47 per month this summer. We believe our internal and external supply chains are well positioned for this next rate increase.

To support further planned rate ramps above 47 per month, we are readying the new Ever North line. I recently walked the factory where I saw construction complete and tooling in place. Our team setting up the line are eager to get started, and we started hiring and training. Employees for the North Line will complete structured on-the-job training, which will pair new mechanics with experienced teammates from our existing rent in line.

On the 787 program, we did see some impacted deliveries in the quarter due to delays of premium seat certification, but we still expect to meet our full year delivery range of 90 to 100 airplanes. We're staying close to our customers, suppliers and regulators to work through these seating issues, and Jay will talk a little bit more about the actions we're taking to better manage these impacts going forward.

On production, the program continues to stabilize at 8 per month as we work through selected supply chain delays, including the interiors and engines. Overall, the factory is performing well, and the program continues preparations to increase production to 10 airplanes per month later this year.

Like the 737 program, the 787 will use the same disciplined process guided by our safety and quality plan with aided from the 6 key performance indicators to assess readiness ahead of planned rate increases.

Turning now to BDS, where our defense platform are providing unique value and capability to our customers, particularly in the current threat environment. Over the past 2 months, we've seen much of our defense portfolio support key missions [indiscernible]. For example, the AH-64 Apache has proven its potent anti-drone capabilities, and the Patriot Advanced Capability-3 interceptor with this Boeing [indiscernible] has intercepted ballistic missiles and drone threatening civilians and military forces. Boeing Systems remain central to air superiority, precision stripes and electronic warfare, while long-range strike and airborne command and control extend reach and situational awareness.

Our aerial refueling reconnaissance and strategic airlift sustained high-tempo operations, and we're proud that our Comat Survivor [indiscernible] located system and the little bird in helicopter played a key part in the heroic mission that safely returned down pilots.

We continue to make investments in our people and facilities to meet the evolving needs of the United States and our allies. Those investments helped secure wins like the recently announced agreement to expand PAC-3 seeker production in our Huntsville factory. The framework agreement with the Department of War enables a massive increase in the supply of seekers, needed to expand the protection provided by the world's most advanced air defense system. The current demand environment for defense extends into services as well, and BGS has had several notable wins, including Boeing Defense U.K.'s largest ever maintenance and support contract for the U.K.'s Rotary Wing enterprise, which was announced last week.

Our global services team also signed the largest landing gear exchange contract in Boeing's history with Singapore Airlines. That agreement will provide lag year exchanges for more than 75 airplanes across Singapore 737 MAX and 787 fleets. With these recent program wins and operational improvements in all of our segments, we're well on our way to fully putting the recovery behind us.

So before I wrap up my prepared remarks, I want to thank all of our employees for delivering another quarter of improved performance as we continue to turn the corner. Their dedication to safety and quality, embracing our values and behaviors and continuous improvement have enabled a solid start to the year. While there's more to do in 2026, we're making measurable progress. We're restoring trust with our customers. We're increasing production rates and we're on track to generate full year of positive cash flow. And our commercial defense and service portfolios are well positioned to meet the market demands and restore Boeing to the iconic company we all know.

So now I'll turn it over to Jay to discuss our operating results before we move on to questions.

Thanks, Kelly, and good morning, everyone. As Kelly mentioned, a good start to the year and a clean quarter. Consolidated revenue was up 14% to $22.2 billion, driven by solid growth across all 3 segments. Of note, the revenue impacts from last year's Spirit acquisition and Digital Aviation Solutions divestiture largely offset each other in the quarter. Operating margin was 2%, down primarily from lower FAS/CAS pension adjustment as compared to last year, partially offset by higher segment earnings.

The core loss per share of $0.20 improved from last year on segment growth and other nonoperating earnings improvements. Free cash flow was a usage of $1.5 billion in the quarter, driven by seasonal corporate expenditures in addition to planned CapEx increases as we continue to make progress on our growth investments in St. Louis and Charleston. Cash flow was notably better than expectations I shared last month, largely driven by the solid recovery from the 737 warring issue and favorable collection timing late in the quarter.

Turning to BCA in the next page. BCA delivered 143 airplanes in the quarter. Revenue of $9.2 billion was up 13% as Stephanie and her team continuously drive quality improvements while increasing delivery volume. Operating margin of negative 6.1% improved compared to last year, primarily driven by higher delivery volume and a favorable accounting adjustment, partially offset by the dilutive impact of the Spirit AeroSystems acquisition that we highlighted last quarter.

Regarding our customers in the Middle East. As Kelly noted, at this time, we have not seen any request for delivery deferrals nor have we encountered material to supply chain disruptions that would impact our delivery or production rate plans. In fact, we delivered 4 airplanes as planned to customers in that region since the conflict began. That said, we will continue to monitor the situation.

Importantly, backlog continued to grow and remains at an all-time high of $576 billion, including over 6,100 airplanes.

Now clicking down to the commercial programs. Starting with the 737 program where we delivered 114 airplanes in the quarter, which included the final [indiscernible] airplane built prior to 2023. As Kelly mentioned, we completed the rework on all 25 airplanes attacked by the wiring NOE, and we remain on track to deliver 500 airplanes this year.

In the quarter, function stabilized at a rate of 42 per month, and the team drove a nearly 20% reduction in final assembly rework hours as compared to the first quarter of 2025. We continue to expect a production increase to 47 per month in rent in this summer and will benefit from buffer inventory during this transition.

As we discussed previously, production rate increases above 47 per month will be enabled by activating the 737 North Line in Everett. But North Line is expected to begin operations later this year at a low rate of initial production to demonstrate conformity to the FAA that will allow operations under our current production certificate.

Final completion of these initial units, we will be led by our safety and quality plan to increase rate to 52 per month when the entire production system is ready. On the 787, we delivered 15 airplanes in the quarter, in line with expectations shared last month and remain on track to deliver 90 to 100 airplanes in the year. Although seat certifications impacted deliveries in the quarter, we are working with the FAA and our customers to address these risks by partnering earlier in the development process and creating contractual off ramps to avoid delivery delays in the future.

In Charleston, the factory is performing well and continuing to make progress at stabilizing the production rate at 8 per month. In the quarter, our rework hours improved by more than 25% as compared to the first quarter of 2025. These gains in the factory come even as their stability is being paced by the supply chain, where we don't enjoy the same bucket we have on 737. We are closely working with our suppliers including forward deploying resources to support their recovery plans. We continue to expect an increase to 10 per month later year.

Finally, on 777X, Kelly highlighted TIA 4A approval as well as progress made with GE on a solution for the engine and durability issue we highlighted last quarter. During the quarter, we successfully completed flight testing associated with handling qualities, lighting and stability and control. We remain on track for first delivery in 2027 and continue to focus on managing the production system for increased rates. We also have a dedicated team performing the change in corporation statement of work for built airplanes, which will be completed over a number of years.

Let's shift over to BDS on the next page. BDS delivered 29 aircraft and 1 satellite in the quarter. Revenue grew 21% to $7.6 billion, primarily driven by higher volume on KC-46 tanker, missiles and weapons and classified programs. Spirit contributed approximately $150 million of sales in the quarter. Operating margin increased 60 basis points in the quarter to 3.1% on improving operational performance. BDS booked $9 billion in orders through a quarter, including notable awards to continue E7 Westeel development and additional international demand for KC-46 aircraft. Backlog grew to a record $86 billion.

As I mentioned last month, I've continued my reviews of BDS and have come away impressed with the teams leading these programs. I have also generally found reasonable assumptions in our EACs. They're not without risk and many assume improvements in front of us, but the estimates have a solid basis. On many of these legacy challenge programs, the teams have made excellent progress in retiring risk and moving these programs forward. Steve Parker and her team are building on this progress, utilizing active management and increased program management river to drive continued gains and improved financial stability.

As Kelly has previously said, you were never done until you were done, and the team has a great progress here. As I also mentioned, a key part of our ongoing reviews of the BDS portfolio is focused on strategy and growth, it's clear to me that our defense portfolio is well positioned to capture upside from increased operational tempo and rising defense budgets among the U.S. and our allies. We see incremental growth opportunities from our missiles and weapon systems including PAC-3, small diameter bomb and [indiscernible] as well as exquisite capability offered by platforms such as P8, F-15Ex and other proven solutions where we are investing to ramp up production.

While we pursue additional growth, new opportunities are now subject to tighter underwriting to account for risk and our ability to deliver on our commitments. This approach, combined with continued operational improvements, supports steady progress towards high single-digit operating margins as we execute against a record $86 billion backlog.

Moving to Global Services on the next page. BGS continued to perform well and again delivered strong financial results in the quarter. Revenue was up 6% to $5.4 billion, primarily reflecting increased government volume. Excluding the impact of the Digital Aviation Solutions divestiture, revenue was up 13%. Operating margin of 18.1% was down from prior year primarily related to the impact of the Digital Aviation Solutions divestiture and less favorable mix. Both commercial and government businesses delivered double-digit margins in the quarter.

Also in the quarter, BGS received FAA and EASA qualification for 777-9 training devices, an important step forward in support of the airplanes entry into service next year. Chris Raymond and the BGS team remain focused on continuous improvement. For example, the business has implemented automation and AI to reduce proposal cycle time by approximately 25% year-to-date, enabling faster response times to our customers. BGS received $8 billion of orders for a book-to-bill of [ 1.6 ] in the quarter, led by a strong intake from its government business.

BGS ended the quarter PAUSE with record backlog now at nearly $33 billion and remains a high-performing business focused on profitable, capital efficient, service offerings and continues to execute very well.

Okay. Let's shift over to cash and debt. Cash and marketable securities ended at $20.9 billion, primarily reflecting debt repayments and free cash flow usage in the quarter. Debt balance ended at $47.2 billion, down $6.9 million during the quarter on the pay down of maturing debt, consistent with our debt reduction plans. There are $1.4 billion of maturities left a year. We also maintained access to creditor facilities of $10 billion, all of which remain undrawn, and we remain committed to strengthening the balance sheet and supporting our investment-grade rating.

Regarding our cash flow outlook, we continue to expect positive free cash flow of $1 billion to $3 billion this year, aligned with the expectations I shared last quarter. As I said previously, we benefited from order timing in the first quarter. We expect second quarter free cash flow to improve with the second half of the year turning positive. Of note, we assume the expected DOJ payment to occur in the second half of the year.

Beyond 2026 and consistent with what we've discussed previously, cash flow is expected to grow primarily driven by higher commercial deliveries, steady performance improvements at BDS and continued growth at BGS. We continue to view the $10 billion free cash flow figure as very attainable, significant growth beyond that into the next decade as we execute on our record backlog and benefit from continued strong market demand.

Okay. Let's sum it all off. A good start to the year as we continue to build on the momentum from 2025, and we're focused on steadily elevating our performance in 2026 to deliver on the long-term potential of this business. With that, let's open up the call for questions.

[Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu from Jefferies.

Congratulations on getting rates stable and looking up. I wanted to ask your thoughts on the conflict in the Middle East and potential impacts to deliveries your commercial services and weapons businesses and free cash flow and just how we think about scenario planning if the complex drags another 3 months, 6 months or 9 months?

Yes, Sheila, as we said in the prepared remarks, we have seen no impact so far. No customers are requesting changes in their deliveries. And as Jay said, we made deliveries in the first quarter into important customers there in the Middle East. I think the broader thing for us to watch is the overall impact of fuel prices and jet fuel price impact and whether that hits the aftermarket.

As you know, we're less susceptible to aftermarket. It's a less -- a smaller part of our overall portfolio going forward. But let me come back and give you a feel for how we're exposed on OE. So 14% of our unit backlog is in the Middle East for customers. But 2/3 of that backlog delivers out in 2030 and beyond. And we have pretty good ability to resequence airplanes in the 12- to 18-month time frame. So I think we'll be okay. We'll manage through that. If someone has some issues, we'll be able to resequence their airplanes.

I have received calls from airline customers letting me know that they're willing to pull forward if there's any opportunity. So I think the overall market dynamic will be okay for us in terms of OE deliveries. It's going to be very dynamic. I think we just need to watch, particularly the flight hour and the services business that's flight hour dependent. That will be the first indicator of any impact in our -- in our aftermarket. I'm encouraged with the near-term performance in our defense aftermarket. So hopefully, as I said in my remarks, we'll see some upside there, probably offset some of the downside if we see it in commercial. And we'll see the relative timing of those ups and downs.

I'm not too worried about it right now. Obviously, the big question is how long is the war last. And I can't answer that. We'll just have to watch it and manage as things happen.

Your next question comes from the line of Ron Epstein from Bank of America.

You both spent a fair amount of time on the call talking about the defense business. I was wondering if we could maybe dig down deeper on the defense portfolio, both in terms of new product sales and in the services business, what you're seeing there? And where are other potential areas of growth that you didn't highlight in your prepared remarks?

Yes, Ron. So I'd put it in 2 categories. One is our product lines and portfolio are very much being utilized in the current war environment. So anytime you see that kind of op tempo, we're going to see service uptick associated with servicing those platforms. And by the way, we're very proud of our platforms. We've got teams of people in the Middle East supporting our customers in very dynamic situation. So we're really proud of those folks as well.

And then you look at the overall -- just I'll say the defense budget increase and I look at our portfolio, and we're really well positioned for that. Let me give you a couple of examples of areas where I think this new defense budget is going to benefit as well. F-47, we see $5 billion in the budget for F-47. KC-46, increase in KC-46 production, $4 billion; F15Ex, $3 billion enhance -- the enhanced Satcom strategic Satcom of $2 billion. So massive increases in weapon systems as well.

And if you look at the backdrop of this, while it is funding new capability, it's really funding additional production of the existing systems, which should be low risk for us. So our focus is really making sure we underwrite this growth properly with the right contract structures. We have our supply chain costs under control so that we get an opportunity here as we see increased production to actually make money on these opportunities.

So that's our focus. I feel like the portfolios well positioned. And there's no doubt that as we look at our 5-year outlook for defense, we're going to see upside from what we had planned last year.

Yes, Ron, maybe just a couple of -- if you look at the first quarter results, the tanker program, the classified programs as well as missile weapons, we expect that to continue to drive growth this year. As a reminder, we're expecting to increase our deliveries on the tanker from around 14% last year to about 19% this year. And then, as you know, on the classified programs, you've got some pretty significant content there.

And going back to Kelly's comments, the beauty of our portfolio is that we participate and have exposure on shorter cycle defense platforms as well as longer term. And business of weapons would be -- we categorize as more shorter cycle and we certainly see some upside over the next few years in that area.

Your next question comes from the line of Myles Walton from Wolfe Research.

Jay, could you speak to the free cash flow profile for the rest of the year, particularly if the second quarter can get close to breakeven? And then is there any free cash flow downside risk on requests for progress payment deferrals, either from Middle East or other carriers? And is there upside free cash flow risk from the Chinese orders if those were to come to pass?

Sure. Let me just take you through the profile first part of your question there, Myles. Just to reiterate the guide in terms of $1 billion to $3 billion for the year, as I mentioned during the prepared remarks, we benefited from some timing as well as the good recovery at BCA. So it's just timing in the year. We are a little bit back-end loaded as you would expect. In the back half of the year, we'll expect to see through advances on the KC-46 program like we have seen in previous years, we'll see a little bit higher weighting towards aircraft BCA deliveries, which will come in with higher delivery payments in the back half of the year.

In the second quarter, specifically, somewhat similar to last year, an outflow but in the range of, say, low hundreds of millions of dollars. So as I mentioned in my prepared remarks, an improvement from where we landed here in the first quarter, continued to ramp throughout the year, and we still feel very confident in that guide.

As far as variability on the upside, we had a really good start at BDS and BGS. You look at the revenue growth there. To the extent that we could continue to have strong growth, have that convert into net income and we can keep a lid on working capital and there could be some upside in those businesses. As you know, we're highly dependent on the BCA delivery profile. So let's -- those are things that we're keeping our eye on. And those -- as Kelly mentioned in his prepared remarks that we're pretty much right on track on those.

As far as experiencing any specific requests, nothing meaningful. I had to get back to Kelly's comments as far as Middle East customers, nothing meaningful in terms of request that would cause right now any variability to our cash flow outlook. So I'm pretty much on track, and we'll monitor obviously throughout the rest of the year, but a very good start to the year.

Our next question comes from the line of Doug Harned from Bernstein.

Kelly, I wanted to go to the 737 and you stabilize production at 42 a month. But I'd like to see what you can say about the process and time line to get to 47 and 52. And I'm highlighting 52 because that had been a challenge in 2018 for Spirit. And now that you're integrating Spirit, what are your thoughts on the timing of these next 2 rate breaks? And where beyond Spirit do you see some potential supply chain challenges?

Yes. Thanks, Doug. So first of all, let me reiterate, we've done a really nice job of stabilizing F-42. That was our plan, and we've done a nice job of that. So the rate increase from 42 will be done by the summer. That's our current plan. And I feel pretty good about that. We still benefit, as you know, from high levels of inventory. So I kind of look at the rate 38 to 42 and then 42 to 47 kind of a similar rate increases. We'll go through the same process that we've gone through in the prior rate increases.

When we go from 47 to 52, there's a couple of important dynamics that are a little bit different. That's where we bring in the North Line, our fifth -- our fourth line of 737 production. We call it the North Line because it's in Everett as opposed to [indiscernible]. We're in the process now, as we talked about in the prepared remarks of bringing that online. The capital is all in place, the facility is ready to go. We're hiring people. We're going to bring those people through the rent in production system so that they get experience in a stable environment. And then we're going to be moving some folks from experienced folks from renting up to Everett.

So we've got to get that and all stabilize and also get the FAA authorization on that line. So that will be happening while we're producing here at 47 a month. And as I've also said, once we burn down inventory and we'll be burning that down, F52 and further rate increases beyond 52, that's where the supply chain needs to be more in line with our production rate. We won't have the levels of inventory that we had. And so continuing to watch the supply chain there. And we have areas that we continue to work will be a focus when we move to that next rate. So hey, let's get to from 42 to 47 here in front of us. And as we've done on this previous rate increases just continue to work the constraints where we see them to allow us to move to the next rate.

Can you say anything about Spirit on this as you integrate?

So Spirit has done fine. We're very pleased with the performance and the rate increases. We do still need to see some improvements in Spirit, but everything is tracking to our plan. And I would say the integration has gone well so far. So things are looking up with our Spirit integration.

Yes, Doug, just some of the quality improvements that I mentioned in my prepared remarks have been enabled by the better quality performance that we've seen coming out of Spirit. From an integration standpoint, we have biweekly meetings with the functional teams and go through the status of those teams and everything is progressing well.

Your next question comes from the line of Seth Seifman from JPMorgan.

I heard the comments earlier on 787. And I'm wondering if we could dig in a little bit deeper there. First on what gives you the confidence in kind of overcoming the supply chain challenges there. It seems like the line in Charleston is doing quite well, but waiting on some suppliers, particularly with seats. And then on the financial profile of the program and bringing in Spirit and we can see some increase in the [indiscernible] during the quarter. But how that moves from here and gets to the kind of healthy financial profile that we're looking for. And then lastly, maybe the long-term opportunity there with the new capacity [indiscernible]?

Okay. Seth, let me talk about production, and I'll have Jay talk about the financial performance. So as you commented, we've done a good job of stabilizing as we've moved from 5 to 7 to 8 per month. A good example in this case, rework has improved significantly in the final assembly line, 25% improvement year-on-year. We have, as we've talked about throughout the past year, we've been struggling with getting the seat certifications complete for the new cabin configuration. So if it's a new -- a new seating configuration typically with doors. This has been an area that we've struggled. It has less impact on our factory production because we can essentially build the airplanes, it's that we can't deliver them.

And so we've got a fair number of 787s that are held up that are actually built that are held up now to get seat certifications. So this is something we're just kind of getting the pig through the python. We've got to work to get this done. I don't see any showstoppers in these certifications, but it's just taking longer than we anticipated.

In terms of the supply chain, other supply chain performance, it's been a tough quarter in terms of engine deliveries for us. They've fallen behind a little bit. We do have a recovery plan on engines. So we've got to stay on that recovery plan to allow us to get to the next increase to attend later on in the year. So it is a little bit different scenario than on 737 because we don't have the inventory level. So we have resources for deployed in our supply chain where we have constraints. And that's not unusual. We'll continue to do that, help the suppliers where they have issues, resolve those issues to support our rate increases. So a lot of work yet ahead. I think getting these -- some of these near-term seats are behind us and will unlock our delivery.

And as Jay said in his prepared remarks, we're still -- there's no change in our forecast in terms of number of aircraft delivery in the full year. It's going to be -- I wish it was a little more linear than what it is, but we're working through those issues.

As far as the financial profile and deferred production, Seth, we had a cost base extension. So we added to the block, which is a good thing at higher margin additions to the block, it will take us maybe a year or so to stabilize that and start working it back down. But all good news in terms of improving financial profile in that profile -- in that program.

Your next question comes from the line of Peter Arment from Baird.

Kelly and Jay, a nice way to start the year. Kelly, on the 777X, you mentioned the FAA last month cleared Boeing to continue to kind of advance the program in this fourth phase out of the total 5. Can you maybe update us on your thinking on how this current certification phase and what is -- what milestones any investor should be kind of tracking? And then just related long term just given the complications that you've seen on seating and everything else, Any reason to think the production system here couldn't deliver at a much higher rate than what it's averaged in the last 8 years of [indiscernible] aircraft a month. Just trying to get a better handle on the long term, just given the program delays and kind of the wide-body replenishment cycle that you guys kind of see out there.

Okay. Well, let's talk about the certification first important. So we continue to make progress on the certification. I guess a couple of milestones. We got the TIA-4A authorization, which was not a super large package, but it was really an important package because it had the icing, and we want to get that de-icing done while there's still ice available in Alaska. So that was a really good important one for us to get so that we don't have to search for weather.

The next one will be TIA-4B. We're expecting that very soon and that's a pretty large package. So I think watch for that milestone, achieving 4B will be important for us to continue the flight test. As you -- as I've talked about, we had the engine issue that we identified. GE's got a fix that they're working for that. And so that's not impacting our flight test program now. We're having to do periodic inspection, but we're able to incorporate that and keep the airplanes flying.

So we just have a lot of work yet to do here with this program. This is going to be a big focus area for us in the balance of the year. GE is also working with this mid seal issue that we've identified, it will require an update to the engines before delivery. So to your production point, we're still working through the industrial plan to get those -- to get all the engines upgraded to support delivery. So no real change in our forecast.

And then the second part of his question was around...

Just long term on the production system, just the ability to deliver at a higher cadence than you currently have been running. That's all.

We're targeting 5 a month. And I think that's a reasonable with the overall market demand and our capacity. I think that's a reasonable goal and where we expect to be.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Jay, you made an interesting comment on longer-term free cash flow that you think you could have significant growth beyond the [ 10 ]. I wondered if you could just talk about that a little more. I mean, I think we hear skeptics say, can they get to the 10 and then the 10 is peak because there has to be a downturn at some point or there has to be new aircraft investment at some point? I think people who are more bullish would say, the production rates are still below demand, and there are some pieces in there that are moneymaking eventually that are still breakeven in the 10. The 787 math is interesting. I'd just be curious to hear you talk about what gives you the confidence to make that statement and what some of the key pieces are?

Sure. Again, Noah, first things first, let's get to 10. It's a bogey that's been out there for quite some time. And so we got to first get to that before we can go beyond it. But again, the building blocks, whether it's 10 or even beyond that are pretty much the same. A lot of it depends on the BCA recovery. And first things first, as Kelly mentioned during his prepared remarks, is achieving certifications on 737 variants as well as 777X program. And so we're on track to do that. That helps us enable the higher production rates. And Kelly just talked about what our path is for rates -- as an example, on the [indiscernible] 47 into 52. And so we have -- that is a significant enabler to these types of cash flows we're talking about.

When you think about that for a second, these delivery profiles, in the first -- or in January, on the fourth quarter call, I talked about these drags that we're bringing our cash flow down and weighing it down. With the increased production rates enable us to do is burn that off. At the same time, you get the compounding benefit of stepping into the higher-priced backlog. And a third compounding element to that is with the higher volumes, you're also going to see cost reduction through absorption and productivity. So all those elements together are really driven by our ability and the timing of which we drive to these higher production rates.

Beyond BCA, you've got BGS recovery, and they've done a good job. You see here in the quarter. They delivered 3.1% on the margins, so we're on the right track and our march towards high single digit. The way I look at that business, I spent a fair amount of time talking about what I've seen thus far. And to me, I kind of simplify it into 3 elements, which I refer to as the 3 Ps: performance, process and price discipline. And I think Steve Parker and his team are employing that exactly right now as they march up to this high single digit.

And then the last piece of it is BGS and their continued march up. They're performing exceptionally well through any environment and continue to drive growth there. So those are the 3. It's a question of timing, whether it's 10 and beyond that. But this is all underpinned by a nearly $700 billion backlog that Kelly mentioned. We talked about kind of perturbations that can occur, but it's such a strong backlog that we have the flexibility to manage these rates and still deliver on them. So it's up to us as a management team, obviously, to execute, but it's all sitting there in front of us, and we're confident that we can deliver that.

Do you see 1Q as the low watermark for the BDS margin for the year?

It's in that ballpark. I think for the year, it could -- yes, I mean it could be a little bit better kind of think about 3.5% for the year. So I would slight better from here on out.

Your next question comes from the line of John Godyn from Citi.

I wanted to maybe just ask about BCA margins, the trajectory from here. We've gotten a lot of interesting commentary on the call on 787, 737 delivery production outlook, certification trends. But intra-quarter, it felt like there was a couple of chances where you guys wanted to just level set people on BCA margins. So I wanted to just ask a question where perhaps we could kind of get it in one place. BCA margins this year or next year, kind of how do you see the play-by-play evolution with so much going on with the 737 and the 787?

Yes. Thanks, John. Let me just baseline you, again, in the quarter, BCA had 6.1% margin, a little bit better than what I talked about in March, and that was largely due to this onetime benefit that we received. Having said that, we still expect progressive improvement sequentially throughout the rest of the year. And that will, again, go carry over into next year where we expect the margins to turn positive mid next year.

So I think they're on the right track. That is basically dependent on the delivery volumes and us continue to increase deliveries. It's also dependent on cost base extensions. And again, we have such a strong backlog that's well priced, high confidence there. And so we've got, I think, over this time period over the next 18 months or less, a solid path to get back to positive booking margins on that program.

Your next question comes from the line of David Strauss from Wells Fargo.

Kelly, 2 quick questions. First, I guess on Spirit, I think, Jay, you've talked about a kind of cash drag from Spirit this year. How do you see that progressing in the '27. That's the first one. And then 777X changing corporation, I hear a change in corporation sounds a bit scary based on past history when we hear a change in corporation. What exactly -- what exactly is involved in terms of change in corporation and how many aircraft kind of built aircraft are we potentially looking at where there -- change in corporation is going to be necessary?

Let me start with the change in corp. So we've -- what change in corp is basically for the airplanes that we have built to incorporate all the changes that have happened since they've been built. So things that result from the certification program, things that happen as a result of productivity improvements or process improvements. So we go back in and we incorporate all those changes before we make the delivery. So it is a pretty massive activity that we have underway. We've got a dedicated team within BCA focused specifically on the change in corporation of the airplane.

So we've got roughly 30 777s that will go through this change in corp process over several years.

On your question on Spirit, this year, we talked about $1 billion of negative cash from Spirit partly due to just operating performance and the other part being related to CapEx. As we head into next year, probably similar types. And then beyond next year, we'll start to see that improve with the benefit of performance and productivity as well as synergy capture. So that's the way to think about it, David.

Okay. And Kelly, are there any major in terms of that change in corp? Is it structural, software, kind of any color on kind of the big things that need to be done?

Yes. The answer to that is yes. And actually, it depends on when the airplane was built. The older the airplane, the more change in corporation and in the more structural related changes that are needed and they'll take longer. The newer the airplane, the more it's likely more minor upgrades. And each -- actually, each airplane has a different change in corp work scope. So that's what the team is doing right now, is going through defining the statement of work. We're actually going to bring all those airplanes down to a common configuration level and then incorporate the changes, we think that's going to be the most efficient way.

Now this isn't new, David. This is something we've always planned. It's a part of the production process. Unfortunately, when you build the airplanes early to get all the learning, but then in order to make the final delivery, we do have to bring them all up to the latest configuration. So it's in our -- it's in our EAC. It's in our operating plan, and we're in the early stages of that change in corp effort.

Rob, we have time for 1 more analyst question.

Your final question comes from the line of Gautam Khanna from TD Cowen.

I wanted to just -- you touched a little bit about demand and no erosion in demand yet. I'm curious if you could just talk about the big order campaigns you're pursuing on the BCA side. I know we talked a little bit about the China order, but how big could that be? When did it happen? And what are your expectations for kind of airplane orders this year?

Well, let me specifically address the China order. I think that's 100% dependent on the U.S.-China negotiations and relations. As you know, there's a big summit coming up with between Trump and Xi. I'm highly confident that, that will result if there's an agreement at the country level, as I said in my comments, I'm highly confident that, that will include some aircraft orders. President Trump has been very focused on supporting us in international campaigns, and he's been very successful in doing that. So I think that's a meaningful opportunity for us. I'm not going to give you the number of airplanes, but it's a big number.

And that completes The Boeing Company's First Quarter 2026 Earnings Conference Call. Thank you for joining.

Malave with us today, CFO, Executive Vice President of The Boeing Company. So Jay, thank you for coming.

Thank you Ron. Thanks for having me here. Happy to be here.

Yes. That's great having you here. So maybe to quickly start off this sort of a big broad question I ask everybody, how's business?

The business, I think, is doing quite well. 2025, and it's just a big picture was a good year for The Boeing Company. It was one, I'd say, foundational, while at the same time, a year of pretty significant progress in the company's recovery.

And you take a step back and maybe you just go around the portfolio for a second. BCA coming off of 2024, we had a work stoppage and it was really unclear in terms of what we'd be able to achieve from a delivery standpoint, a production standpoint. And the company delivered -- BCA delivered 600 aircraft last year, which was the highest since 2018. So they also had, besides kind of just putting together a solid framework and production cadence, they actually were increasing rates at the same time last year, too.

And the company put together a pretty strong and followed it a quality and safety plan and was methodical about creating stability and maintaining stability in the production system, which enabled it to then increase the rates, which is what we saw. And it really put -- created a springboard for where we are in 2026 and where we're going and beyond. And so they had a very good year.

They also closed the Spirit acquisition, which was no small feat. As you know, integrations are difficult, and we closed that at the end of last year, and then they started in on the integration and have done quite well. We've seen defects come down by 40% here early 2026 relative to what we were performing at even in 2025. So really good performance there at Spirit as well.

We did have to fold in their accounting, which does cause a little bit of pressure on the BCA margins. So for those that have followed us closely, we were expecting to be at least flat or positive margins at BCA this year. That gets pushed out a year to about until 2027. This year will be negative. And in fact, in this quarter, will be negative around 7.5%, 8%.

But even so, the combined business of Spirit and BCA is positioned well to really deliver for the future demand that we have. I mean we think about our backlog, we've got $682 billion of backlog across the entire company, over $560 billion of backlog at BCA. So it's critical that, that part of the value chain works in a synchronized fashion and they're doing so. So really good progress at BCA.

BDS is the same thing. On the whole, BDS really made some good progress. Again, same thing, stability in their developed programs and some of the challenge of programs that have been challenged. Yes, in the fourth quarter, we did get nicked up a little bit on the Tanker program. But on the whole, they made a lot of progress. And again, position themselves to start putting us here a positive margin for 2026. And getting ourselves up that ramp to high single-digit margins that they should be at.

So they're in the right path, Steve Parker has done a nice job there, really stabilizing that business, focusing on the fundamentals, really just program management, integrated product teams and incorporating really across the company, not just BDS, but across the company, things like lean and continuous improvement. And so really seeing good progress there.

And finally, at BGS, they did a -- just clicking along quite nicely, high-teens margins ended the year last year at 18% delivering solid cash flow for us, which is critical given where we are in our recovery. And at the same time, they were part of the disclosed, the divestiture of Jeppeson, which is not easy to do keeping everything going on a day-to-day basis while at the same time executing a divestiture. So they did a nice job there and I give a boost to our cash balance, which is -- puts us in a good place in terms of a margin of safety.

And so all those things taken together, a pretty good -- pretty strong year and sets us up well. The one blemish, if you will, we had last year was on development programs at BCA. We had to reset the schedules on the 737-7 and -10. We had to reset the schedule in the third quarter on the 777-X. or -9 program. But the good thing there is that we put those now on the right schedule. The reset was while painful, now puts us in a position that we can execute, too, and perform, too, on that schedule, and we are performing exactly to those schedules today as we speak.

So '25 is a good set up into '26, and we're moving forward.

So maybe for lack of better expression, double click on Spirit for a moment. When you guys closed and brought it in, what did you find that was surprising? What had changed in the years when it was not part of Boeing anymore?

Yes. Well, the company had embarked on diversification. So it became a little less -- or tried to become a little bit less Boeing focused. In that there was an impact in performance there among a number of other issues. The good thing there is that our team, our production team and our supply chain team was able to get in there earlier than the close just as in a supplier and purchaser relationship. And so we were able to get, I think, an early start on quality performance. I think the team did a really, really good job there setting it up. And that's now resulted in the performance we're seeing today much, much better.

From a surprise standpoint, you don't get access to all the information until you actually close. And so there was cost that was -- they were -- their cost was higher than the price that they were getting from us. And so we had to reset the margins at BCA as a result. But again, that's a short-term headwind. I think that we'll be able to work through that.

When you think about longer-term cash flows, that really won't get in the way of us being able to generate the types of cash flows we've talked about in the past with both -- with you as well as with investors. And so I think those are the 2 primary things. Really focused on execution there for all of our customers, not just the Boeing commercial programs, but our defense customers as well as our aftermarket customers is important. And we're seeing some good trends there.

That's great. And then in 4Q, there was a lot of progress made throughout the year. As outsiders looking in, what should we be looking for to kind of give us confidence? What gives you confidence that, that performance is going to continue into this upcoming year?

Yes. For us, it's -- I'll take it maybe into different pieces on -- just in general, you're saying, right?

Yes.

On the production side, it's really following our production rollouts as well as our deliveries from time to time and how things shake out. And when you look at our production cadence, the deliveries may vary from month to month, but our production rollouts are -- have been pretty steady. And that's the important aspect of the production, particularly in the factory. And so we're seeing good performance there.

As we said, we're not going to increase rates before we're ready. And so we're going to stick to the safety and quality plan that we put in place. We need to see stability. We need to see the metrics perform, and we have -- those 6 KPIs. They haven't changed. We'll follow those KPIs and let the data follow our decision-making there. So I think that's one area that's how we're performing against the KPIs and how we're performing and the production system as in general.

As we -- on the development programs, it's really completing where we are on the 3 programs is just various levels of flight testing. And where do we stand on those? Are completing the flight testing on the time line that we had laid out? Are we in a position to be able to submit the information that the FFA requires so they can perform their analysis and provide the necessary approvals for that. So those are ongoing as well. Those are I think are going pretty well. We can talk about that in more detail.

But it's really monitoring those progress. I think quarter-to-quarter as we report results, we have been and we will continue to do, just to give you the color on where production is and where we are in our development programs, where we are on the programs in BDS from a recovery standpoint. And you'll get to see the BGS financials every quarter to see how they're tracking from a growth standpoint.

Got you. How is the about Everett 737 line...

It's going well, actually. Kelly and I were there last week. We did a tour of the line, the tooling and equipment is in place. We're going through training. Our employees are being trained in the Renton factory, and that's ongoing. That's been going -- happening for a few months now. So we expect that we'll start our first aircraft building here in the summer. And we're -- so everything is right on track there. The stands are in place. The line is ready to go. It's going to be an exact replica of Renton lines. So there'll be no change for those employees, and we have some employees that are going to be coming in from Renton. We have some employees that will be coming in from our Moses Lake factory and some new employees that we're training up today. So it will be a mix of experienced employees that will work in tandem with all the employees.

And so we're excited about that. It provides not only just the ability to increase our rate, but also provides resiliency in the production system because now we'll have 2 sites producing and delivering a 737. So very excited about that.

And as outsiders, when would we expect that line to be sort of at a normalized cadence, right?

Well, it will take us a few years. We'll start this year on our first build. It will take us a number of months because of it is kind of the first aircraft and we'll induct the second aircraft. So sometime next year, we'll bump up to a rate too, and it will go from there. But again, it's going to be no different than any other our factories, follow the metrics, make sure the performance is following the safety and quality plan. And whenever we're ready to increase rates in Everett we will.

The way it's set up is, Renton will be rate 47 capable and anything above 47 will be in Everett. So it will be a great enabler to these increasing rates.

Got you. Got you. And then just you think about the MAX 7 and MAX 10 certification targets and things seem to be in line. What remaining test items have to happen? And again, what should we be monitoring to kind of feel good that things are going the right way.

Yes. I mean, well, the good news on that program is that we have all of the flight testing envelope has been approved by the FAA. So it's a matter of completing the flight testing. There are remaining things, things like autopilot with the engine anti-ice solution that we implemented last year has to go through the flight testing program as well.

Advanced angle-of-attack. There's a number of aircraft systems and capabilities and functions that will have to be tested, but we expect to be complete with that sometime this summer. We'll be in a position, we'll be able to provide the appropriate documents and paperwork for the FAA for them to do their analysis upon. So that's tracking really well.

There'll also be some reviews related to what I call is the engineering process reviews to validate that your validation program ties all the way back to your original requirements. And that will take place later this year as well. So we're still on track to have these aircraft certified towards the second half of this year, and we'll start delivering next year.

That's great. And then, how is the 777X going? And what milestones should we be looking for? And how should we think about longer-term demand and build rates for that airplane?

Yes. It's a similar case. It's not as far along as 737, but it's still on the right pace. We discussed and disclosed in the fourth quarter call in January, that we had approval for the TIA 3 which was the next big phase of flight testing. There are 2 more that need we need to get approval for. And we're waiting for the next one very shortly here.

We -- flight testing is ongoing. So it's not like we're paused in any way. We have a number of flight test assets that can handle or configured for the different flight test program approvals that the FAA gives us so that we can run all of these programs concurrently.

So like I said, this is a little bit behind from a certification standpoint than 737, -7 and -10, but we're on the right path. And as we mentioned, when we reset the program in the third quarter of '25, we expect it to get certified and start delivering aircraft in 2027, we're still on that framework. So again, it's similar milestones to the 737. Where are you in your approvals for flight test program? And where are you actually on the flight test program? And again, we're pretty much on track there.

And then when we think about it, if you can, longer-term potential build rates for the program...

Yes. Longer term, we'll be running up to about 5 per month. There's discussion about potentially taking that higher, but for the time being, we're right around 5, and that's something that we've been able to demonstrate for the legacy 777 program. So there's a fair amount of demand. We've got over 500 aircraft in the backlog. There continues to be demand. We took a lot of significant orders last year. And it's excellent aircraft. So there still continues to be a lot of interest there. We expect there to be more orders.

Got you. Got you. And then in 2026, how should we think about aircraft coming out of inventory versus aircraft coming off the line? I guess from an outsider looking in, when will we -- there'll be a tighter correlation between actual rollouts of the line to deliveries versus things coming out of the second factory.

Yes, this year it gets a lot closer. And you think about last year, maybe take a step back last year, and I'll compare it to this year. Last year, on the 737, we delivered 447 aircraft. About 50 of those came from aircraft that have been built prior to 2023. So it's a fair amount that had to do some completion work. But that really bolstered the delivery framework because we weren't producing at that level.

On the 787, we delivered 88 aircraft and similar type of story at about 15 in that ballpark of aircraft that delivered out of inventory. So what was coming out of production wasn't at the rate of delivery. This year, for the most part, does catch up. When you look at 737, we expect around 500 aircraft this year, and that's supported by the 42 rate as well as we're expecting to go to 47 sometime midyear on that program.

In addition, we are building another 30, 737-10s for delivery in 2027 once that gets certified. So actually, build will exceed deliveries this year on the 737 program. Let me just stop here on that program for the moment. Because last week, I think it was reported that we had paused delivery on 737 due to a internal notice of escape related to wiring in our -- one of our facilities.

Since that time, our team went through the investigation to that analysis. They also presented that and worked with the FAA. And they -- what's come out of that is we've got about a population about 25 aircraft that are impacted by that. So they will have to go -- undergo some level of rework.

But you're talking around 3 days of rework, so not a significant amount of rework on those aircraft. We have resumed deliveries as of last week. So towards end of the last week, we're able to resume deliveries of aircraft. And so the impact here is really one of timing. We'll see about 10 aircraft. We are expecting about to deliver around 120, 737s in the first quarter. So we'll slip about 10 of those deliveries into the second quarter.

So fairly limited in the grand scheme of things, that will put a little bit of pressure on cash flow in the quarter. I talked about cash flow being similar to what it was last year, maybe a couple of hundred million dollars worse than last year as a result. But at the end of the day, we'll get those aircraft back delivered here in the second quarter. Really no change to our factory production really didn't change. It continued. It was not a safety of flight issue at all. And again, we worked out with the FAA. And we fully expect that will change rate to 47.

Like I said around this -- around midyear, the team is actually working through an earlier date than that. But we're kind of for purposes of conservatism, I'm around midyear. And we're still expecting to deliver over 500 aircraft. So really not much change at all. It's something that the team worked through.

And frankly, I'm proud in terms of how they approached it really using the lean and continuous improvement tools, go down root cause, corrective action, understand the population affected besides getting to the corrective action, determining what you can do to using continuous improvement parlance mistakeproof. So how can you prevent something like this happening? Do a read across on other types of systems and machines so that you don't see a reoccurrence of this.

So I think that the BCA did all the right things around this and the impact is fairly limited.

Can you speak to how it was just noticed in the first place? Like what in the quality system said, hey, you know what, we have an issue here...

Well, they observed some mix in some of the wiring. And that traced back to a machine that was -- that had -- just didn't have the right calibration settings. And so they have to go back and trace back the root cause of the setting changes. So -- but in the meantime, what they've done is really taking those machines offline and you're able to manually do this. And so they've been doing it manually.

Got it. And then maybe just while we're talking about production. In South Carolina, how are things going with 787?

Yes. Thank you for asking the question. 787, again it's -- the rollouts have been pretty good actually for January and February the deliveries have been a little bit lighter. We've delivered about aircraft quarter-to-date, which is lighter. We were expecting to deliver anywhere about 20 aircraft in the quarter. So we expect that to be closer to maybe 15, maybe one or two better or worse in that ballpark.

And that's mostly related to Seating certifications. Kelly talked about that in the fourth quarter call in January. And we're still paced by some of these certifications that we're working through. Again, the build is happening. So we're really not changing the production cadence. The factory has been really, for the most part, unaffected there. And so we continue to expect that we'll deliver 90 to 100 aircraft this year as well there. So for that program, it's a timing issue as well.

And a little bit lighter in the first quarter, but we'll catch that up.

Got it. And what we've heard is the front-end interior seats cert issue?

Yes, the premium seating has been challenging. Those are very strict, rigorous types of certifications and you wouldn't ordinarily think so, but they are. They're difficult to get through and airlines I'd like to have the specific unique configuration, which they view as a differentiating selling point to their customers. And so we have to work through those.

Maybe changing gears a little bit to the defense business. We're going to see potentially another large uplift in the U.S. defense spending in fiscal '27. How that look for you guys? I mean, what kind of opportunities are you looking for there?

Well, the business coming into this year was very strong. As I mentioned, we had record backlogs. They had a record backlog of $85 billion coming across a business that's generating about $27 billion of revenue. So you've got multiple years already in the backlog and you're looking at potentially more upside. The team recently announced that they had reached an agreement with the Department of War related to PAC-3 intercept, our seeker there. And I think the team is committed. And they got ahead of it. They have made some investments on the production system on that program earlier.

So that enables them to ramp up a little quicker than they otherwise would have on that program. So they're doing quite well. And the demand is pretty much robust. We're having a lot of dialogue with customers on our -- mainly the U.S. DOW customer on the platforms as well. Things like the tanker program. And yes, we have to kind of work through these lots in prior contracts. But we're in a position where we'll have much better contracts and much better demand on that tanker program as well.

So there's just quite a bit happening. There's demand on the helicopters. And as you know, Ron, a significant amount of activity in space. And our team has a very good business there. And so we're positioned quite well to participate in these higher budgets. For us, it's execution. We got a backlog now. Execute on that backlog. And make sure we earn the right to bring in additional business.

Any thoughts on F/A-XX, what could happen there?

I would be speculating, Ron. We're awaiting that. That's been on and off, on and off. You hear different things on that program. We got to follow the customer's lead on that. And look, we feel that we submitted a fabulous compelling proposal to the customer, both technically, commercially, while at the same time, protecting the Boeing shareholder. But that's ultimately a decision they got to make on a time line -- their time line. And that's not something that we necessarily have much of a say on.

Got you. Got you. And then one question that kind of comes up all the time. How should investors be thinking about potential incremental charges in the defense business?

Yes. That's been, I think, the running -- I don't know if it's a joke or running fear, Jay Malave is going to come in and do a bunch of EAC reviews and we're going to have whole bunch of charges pop out left and right. What I could say is that, starting in January, I was able to get access to the defense businesses and many of the programs. And I've had a number of reviews, and it's not just financials, it's strategy, it's capability. How is that capability relevant today? How will that capability relevant tomorrow? How can you enhance it? What type of modifications and what's the investments necessary for that?

So its much strategic as it is financial. But just on the financial, because I think that's really where your question is, is I've had a chance to review a number of the EACs. And while we do have improvement in those EACs, they're very achievable. I'm very comfortable the team has the right assumptions in there. They've got the right performance baselines. There's sound reasoning for the assumptions that they have in those EACs.

And so like Kelly said, you can never say never -- charges, but I don't see anything imminent. I think the team has done a good job of estimating and are doing a good job of staying on track to the estimates, the improvement plans that they have in those EACs. So I don't see anything imminent. We'll continue. Look, I do ongoing reviews on the commercial side, I'll be doing ongoing reviews on the defense side just to see how we're doing, but there's nothing that, that comes to mind that worries me.

That's great. How's supply chain? I mean are there pinch points? How are you managing that? And can the supply chain currently support the ramp that you have in front of you?

Yes. I think in the short term, the answer to that is yes. We're going from -- let's just start with BCA and the 737. We're going from 42 in our next rate change would be going to 47. I think that supply chain is very well positioned to support that change pretty much across the board. We have ample number of fuselages. We have an ample number of engines to support that.

As you start going beyond 47 to 52, it starts getting a little bit tighter. And there's areas that we have we're watching. I mean, engines is an obvious area where there's that tension between aftermarket and original equipment demand that with a limited supply. And ultimately, that's something that we watch, and we have a very good relationship with our engine provider, and they do a good job of keeping us informed.

And so I think that's -- they continue to make progress, and we'll just continue to monitor that. And so I think that's the primary one probably on narrowbody. On the wide-bodies, as you know we've talked about some of these seating certifications that we're dealing with on the 787. There's also been some issues here and there on just on some interiors and from a quality standpoint. So quality needs to get better so that we can improve the delivery and we're going to go from 8 to 10 on the 787 this year. That will be probably in the back half of the year is our expectation there.

And again, I think when we go from, say, 10 to 12 in future years, that will be something that we'll have to keep an eye on same thing. I think that we'll have to keep an eye on the interiors and probably engines as well.

And then maybe back on 78, should we be thinking about 78 freighter as a potential replacement for the 67?

It's possible. It's under consideration. The team considers it. I mean right now, look, we've got enough on our plate to deal with. And then the investment there is not insignificant. It's not -- it's not easy. So it's not something you can just do on a side. But yes, it's under consideration.

Yes. Interesting. What's the aircraft pricing environment look like?

The pricing environment, I'm going to take that question back to the question that you asked Kelly in the fourth quarter call. And you asked the question more in the context of just profitability pools and things like that in the industry. And would you change that on a future program. And I agree the way Kelly answered. And I think it's equally applicable to the pricing environment now. And what he said was that, a lot of it comes down to contracting. The risk that you take in your contracting, the terms that you agreed to, and you think about -- you take a step back and you think about The Boeing Company, what we are is we're an aircraft system integrator. And we take a lot of risk associated with being an aircraft system integrator.

And so the contract and the pricing as well as the terms that we agreed to should be commensurate with the risk of that. And so we need to protect ourselves probably better than we have from a risk perspective on the term side and the pricing should be reflective of the risk that we're taking as the integrator.

And so I think we are seeing a better pricing environment and it's reflective, I think, of a move towards that. It's not just being kind of opportunistic because there's minimal slots available. Yes, that's a factor. But I think that we need to be just more prudent in the way we price. And again, like I said, it's got to be more connected to -- correlated to the risk that we take as an integrator.

I mean just maybe double quick on that, because that was a question that I asked. Do you see the industry move in that direction? Because I would argue that I think most investors think that Boeing and your primary competitor don't price enough on the aircraft that you provide?

Well, I can't speak for others. I can only speak about what we're doing. And I really -- I believe -- I'm really again impressed with BCA, what Stephanie and her team and her sales team are doing in terms of just being more prudent with sales campaigns, being more disciplined, being just using sound reasoning for -- to the extent that we're incorporating changes that customers may or may not have seen in the past. And so just -- it's just logic-based. And so I think that there's just room for that. And so whether or not others are doing, I can't really say. All I can tell you is what we're doing. And I think discipline is an important part of our recovery plan.

Yes. That makes a ton of sense. What are the key building blocks to bridge '25 cash flow to the '26 targets when you think about deliveries, inventory drawdown, working capital?

Yes. I mean you look at a big picture, you go from '25 to '26 and BCA deliveries is just a big component. We are increasing deliveries pretty much across the board on the 2 major programs, the 737, 787. So that provides a cash flow boost. We're also getting a benefit from some excess inventory burn down in '26 relative to where we were in '25.

And then timing. I mean this year, we see some timing benefits in terms of new orders that varies from year-to-year, but we're expecting some benefits there, which will give us a little bit of a boost as well. And so some pretty solid contribution out of BCA. And then you've got BDS with the profitability improvement, we'll continue to see a contribution from them as well. So they're shifting from a business that over the past 3 years have been pretty much negative cash flow to a business that will be breakeven to positive cash flow fairly quickly here. So they're on the right path. Just the cash flow will follow the profitability path for them as well.

And then on BGS, just kind of clicking along. Just continue to grow and drive some cash flow. So those are all the positives that we'll see in cash flow. Some of the kind of headwinds or offsets that we'll see negatives, we do have negative cash flow, higher negative cash flow on the 777X program this year. We still are going through a certification program and we're building aircraft to start delivering next year. So that does have a pretty decent sized cash burn to it. We've got higher CapEx this year, about $4 billion of CapEx versus around 3 -- little bit $2.9-ish billion last year. And so we'll see that for this year and next year around those levels around $4 billion.

And so -- and then we have this kind of onetime payment that this DOJ payment that from our settlement and some additional corporate costs that we're dealing with, too. So those are all kind of things that are dragging it back down into this range of 1% to 3%, but I still feel comfortable in that range, given all those moving pieces. So yes, I mean there's a number of items there that are moving around.

When you look at it, and we talked about this on the fourth quarter call in January, when you put aside, and I know, look, actuals are actuals, so you can't necessarily ignore it. But when you put aside some of these temporary issues that we have that are impacting our cash flow, whether it be some of the pricing penalties that we've had, some of these excess advantages that we've got to work through and where we're going in terms of the aircraft build on 777.

Once we get ourselves, fully delivering get ourselves on the increasing rates, it's all temporary. That will all burn off and the types of cash flow that investors have come to expect from The Boeing Company, it's in front of us. It's right there. It's not tomorrow, it's not today, but it's there. And so I'm very confident that's going to happen as long as we execute.

Okay. How is it going with hiring and retaining employees? Is that stabilized, is it...

Absolutely. You think about that, Ron, maybe 2 to 3 years ago, there was just so much pressure on retaining talent. And it really was all types of skills. It wasn't just technical skills. It was technical, it was factory workers, it was other professionals. It was just difficult to retain talent. Our retention rates are very high this year last year and this year. Part of it is, I think -- I came into the company in August, and I just saw a change really, a level of enthusiasm because employees started to believe that we could recover. And I think that has just grown the momentum there. And I think that as a result, the retention has just been fantastic.

We've got like a 4% acceptance rate for applicants in the company, which you may ask, well then, how did I get in. Yes, it's a good question. We're working on that, but I did get in. But I think big picture, we're doing a good job of retaining our employees, particularly our technical employees on the engineering side as well as on the factory side, we've been able to increase the headcount. We pretty much have the employment levels that we need to deliver at these rate increases.

Now it's a matter of training for those that are new employees. And I think we're doing a very good job there as well. And so turnover -- high turnover has really hasn't been an issue for us for a little while now.

Got you. And how is the relationship with the union kind of now that we're past the...

Yes, everyone moves past that, we move on, and we're all one team. And a lot of our incentive structures and bonus structures across the company are tied to one company scores. And we've just -- everyone's moved past that. And it's all about making The Boeing Company a better company each and every day. And delivering to our customers' requirements.

I was in Renton maybe about 3 weeks ago, just talking to the team who's going through the training and the Executive was going to manage the Everett line, the North Line. The way she explained is like, look, I'm not your boss, this aircraft is your boss. And we need to do what it takes to make sure that we take care of that aircraft. It's a great way of articulating what we're trying to accomplish.

And the Boeing employee -- Boeing employees have bought into that. So we're seeing some really progress and -- like I said, better performance.

Maybe switching gears a little bit. You guys [ envisaged ] the portfolio some, would we expect any more portfolio management in terms of the assets you guys have?

Well, I think it's good corporate hygiene to always look at the portfolio and we will do that. We will continue to look at the portfolio and determine whether or not there's things that should be pruned or things that should be added. And so I think that will be an ongoing review. There's nothing imminent that we're looking at. But I think the Board expects the management to give them portfolio reviews, and we do that. So -- but I can't say there's anything to specifically to speak of at the moment.

And then kind of I always wonder about this, as you know, and I think this is a question in the back of people's minds. How are you thinking about new airplane development? And previous regimes around the company said, well, we're not doing that. How would you frame it now?

I would say that there will be a day where we have to enter into a new program. That day is not today, and it's not any time near. But we do think about the technology that's going to be required on a new program. We have dialogues with our suppliers in terms of technology, propulsion technologies is a great example on how something like that will look like, looking at things like new and different types of material properties that you can apply to aircraft. And what type of structures are you going to be looking at.

So there's -- what type of systems, there's so much to look at -- you just can't wake up one day and say, hey, we're going to develop a new aircraft. And all of a sudden, so we're just going to turn the engineering lights on for that. You have to think about the technology beforehand. You have to start technology development. But that in no way means that anything is imminent. So it's unrealistic to say that we'll never develop a new program, we will, at the right time.

But as Kelly has repeatedly say, I wholeheartedly agree with him, there's 3 conditions that need to take place. Number one, the market has to be ready. Number two, the technology has to be ready. And number three, The Boeing Company has to be ready. And none of those 3 are in a place that we believe that would come anywhere close to supporting a launch of a new aircraft.

If you look at the market, we've got overdue aircraft. The customers are just give us what you -- what we've already -- what you've sold to us. We've got a $560-plus billion backlog. We just have to deliver on that. As I mentioned, that technology, there's still just a lot of things, trade studies that have to take place. And there's just a lot -- a fair amount of time that's got pass before our engineers feel anywhere comfortable with settling on any type of configuration around that. So it's very, very kind of just really early.

And then The Boeing Company, I think we spent the last half hour plus talking about what we're doing today in here and now. We have to complete our certification programs to 737-7, 737-10. The 777-X program or 777X program we have to complete as well. And we have to get ourselves to these rates that we've talked about. And none of those conditions are anywhere near ready. We're still going up the recovery path here. So like I said, that day will come, but it's not any time soon.

And then the one business, in the couple of minutes we have left that we just didn't really talk about is the services business. How should we be thinking about that and the growth profile there and how you broadly think about that business?

Yes, it's a good business. It has various aspects to it. It has commercial aftermarket to it and the parts business. It has a defense sustainment to it, both kind of modification work, parts work, some level of even some level of MRO to it there. And there's also distribution businesses where we're providing parts to our suppliers who are then turning those and putting those into a subsystem or a system that supply to us. So it's a pretty diverse business. It's -- in the commercial world its not MRO heavy.

I'm not sure. I think we've dipped our toe in that. And didn't really like it. So I'm not sure that that's something that we would pursue significantly. But it's got a very good place in the marketplace. It even sells third-party proprietary parts and make some margin on that as well. Because it's kind of a one-stop shop, it's easy to come to The Boeing Company and get a bunch of things for -- to fulfill your needs and if you're a commercial airline or an MRO shop.

So we look at it. They're on a great growth project. If you think of where their trajectory, they've got enjoying the commercial supporting OE, commercial aftermarket, a lot happening in military sustainment on a lot of our platforms. And as you know, Ron, these military platforms they get modernized a lot often, and they have to continue to work on those. So it's a good business. And you see it reflected in the growth rates and in the margins.

I think with that, that's pretty much everything I had, Jay.

Well, thank you for your time, Ron. I really appreciate you being up here.

Great. All right. Pleasure.

Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that 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, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations for opening remarks and introductions. Mr. Hill, please go ahead.

Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer.

This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions.

With that, I will turn the call over to Kelly Ortberg.

Thanks, Eric. Good morning, everyone. Thanks for joining in today's call. As we start this year, we've set the foundation for our turnaround with stronger performance and record-breaking backlogs across our businesses. We haven't fully turned the corner, but we're making real progress in getting back to the Boeing everyone expects of us.

When we spoke a year ago, we were just in the early stages of our 4-point plan to stabilize our business execute on our development programs, change our culture and build a new future for Boeing. Today, our customers and stakeholders are seeing the difference in how we work together to uphold our commitments and deliver high-quality products and services. Before discussing the work ahead of us and our plan to meet the 2026 goals, I'll first touch on some important accomplishments in the quarter and the year that position us well for moving forward.

In 2025, we methodically increased commercial production guided by our safety and quality plan. This enabled our team to deliver the most commercial airplane since 2018. We delivered 600 airplanes and won more than 1,100 commercial orders for the year, making this 1 of our highest order totals ever, as our portfolio continues to win in the market.

Earlier this month, I joined Alaska Airlines as they announced their largest order ever. This was a clear reminder that our customers place their trust in us with every order, and we must keep earning that trust by delivering safe, high-quality airplanes on time. To do this, the fundamental changes we've made this past year will serve as a base for continuous improvement as we look to increase commercial production.

For example, we've simplified more than 5,100 work instruction documents. These are the instructions that the mechanics and inspectors use each day to do their jobs. These type of activities reduce complexity, support consistent performance and strengthen factory health.

On 737, production is stabilizing at 42 airplanes per month and we're continuing to see improvement in the program as its on-time delivery performance has improved threefold compared with the previous year. We also continued to get positive customer feedback on the quality of the airplane. As we look to move to higher rates, we use the same process as previous rate breaks, monitoring factory health and following our safety and quality plan. For production above 47, we'll add our new North line in Everett, where facility and tooling investments are now complete, and we're executing a deliberate staffing plan to support production there.

In Charleston, the 787 program continues to progress well and is stabilizing at rate 8. I'm pleased with the operational metrics we're seeing in the factory. As an example, during the 2025, the program reduced average rework hours nearly 30% and going forward, as with the 737, we use the same disciplined processes, including monitoring our KPIs to assess readiness for the next planned rate increase to 10 airplanes per month, which is targeted for later this year. As previously announced, we're also investing in the future, breaking ground on our factory expansion to support higher rates and meet the exceptional demand for the 787.

We also made progress in our defense business and scored a transformational win to build the U.S. Air Force sixth generation fighter. Over the past year, we've also focused on reducing the risk profile of our BDS development programs by driving improved performance and leveraging active management to deliver better outcomes for our customer.

In the quarter, our defense business also hit several key milestones. The U.S. Navy's MQ-25 successfully completed its inaugural engine run, moving it closer to first life. We also delivered the first operational T-7A Red Hawk to the U.S. Air Force at Joint Base San Antonio Randolph. These milestones are just a few where our programs are progressing and meeting our customer commitment. Importantly, we also ratified a new 5-year labor agreement with our IAM representative workforce in St. Louis during this past quarter. Our team there is back to work, focusing on delivering and supporting our customers.

Before the year-end, we took another important step forward, supporting our production stability by completing the acquisition of Spirit AeroSystems. Bringing together our companies reinforces our efforts to improve safety and quality throughout our factories, operations and supply chain. There's a lot of work ahead of us with an integration of this magnitude, and we have thoughtful, detailed plans in place to help enable a smooth transition for our new teammates while maintaining continuity for our customers and suppliers.

We also successfully completed the $10.6 billion Jeppesen sale, solidifying our balance sheet while retaining essential digital capabilities for our customers. With the streamlined portfolio, our service business is well positioned to support our global commercial and defense customers.

BGS secured Boeing's largest ever commercial component services deal and our Government Services business received its highest orders ever in 2025, including a contract with the U.S. government in the quarter to support C-17 modernization. BGS also launched a new unified e-commerce platform, which brings together Boeing's distribution portfolios of products and services into 1 streamlined digital destination simplifying how customers and suppliers connect, transact and grow with the company.

Across commercial, defense and services, we've built a strong foundation for the year ahead. And while I'm proud of what we accomplished in 2025, we also know expectations are rising, and we must continue to elevate the performance that we've demonstrated over this past 12 months.

As important, I am pleased with the progress we're making on culture that will ensure these improvements become a critical part of our success and further strengthen trust with our stakeholders. I remain confident in our team and our plan to deliver on the opportunities and address the challenges in front of us in the year ahead, particularly on our development programs.

Past delays to the certification time lines for the new 737 MAX derivative and the 7779 have been challenging, but we are making steady progress in performing than our revised schedule. The 737-10 recently gained Type Inspection [ Authority ] 2 or TIA 2 to expand flight testing. This final TIA opens up the majority of the certification flight testing which is focused on validating the airplane's avionics, propulsion, auto flight capabilities and other airplane function. In addition, as we previously shared, we have a final set of design changes to permanently address the engine NII issues on the 737-7 and -10. We're following the lead of the FAA as we work to certify the suite of design changes. We still anticipate certification for both the 737-7 and -10 in 2026.

On 777-9 in the quarter, we received approval for TIA 3 and continue to perform certification flight test. TIA 3 is a major phase of testing focus on avionics, environmental control systems and the auxiliary power unit. And as I've said before, overall, the aircraft and engine continued to perform well. We have identified a potential durability issue during a recent inspection on the 777X engine, and we're working with GE to better understand that issue and finalize root cause and corrective action. Importantly, as we work through this issue, we continue our certification flight testing, and we don't expect this to impact our delivery in 2027. Demand for the airplane remains strong, and we remain confident that the 777X will be the next flagship airplane for our global customers.

Moving now to KC-46 Tanker. As we came through our quarterly process, we revised cost estimates for elements, including the production support and supply chain, which Jay will cover in more detail. While it's disappointing to recognize another impact on this program, we are seeing encouraging operational performance trends, which, if sustained, shouldn't enable us to meet our customer delivery commitments and set us up well for the next tanker order beyond the current program of record.

You've heard me say you're never done until you're done on any of the development programs, but across defense and commercial, we are making progress, clear eyed on the work remaining and committed to delivering better performance in the year ahead.

As I finished my prepared remarks this morning, I want to thank all of our employees, including our newest teammates from the former Spirit AeroSystems. From our frontline mechanics to our engineers and our management team were all committed to continuous improvement guided by our culture with a sharp focus on safety, quality and performance to deliver for our customers and other stakeholders. We know there's more work ahead in 2026, but the strong foundation we're building by stabilizing the business, executing these development programs building our future and changing our culture will position us to put our recovery behind us and restore Boeing to the company we all know it can be.

With that, I'll now turn it over to Jay to discuss the results in more detail.

Thanks, Kelly, and good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was $23.9 billion, the highest quarterly total reported since 2018. And Revenue was up 57%, primarily driven by improved operational performance across the business, including higher commercial deliveries and defense volume. Core earnings per share of $9.92 in primarily reflects the $11.83 gain associated with closing the digital aviation solutions divestiture. Free cash flow was positive $375 million, slightly higher than the expectations I shared last month, driven by higher commercial deliveries and working capital that improved compared to both the prior year and the prior quarter.

Turning to BCA on the next page. BCA delivered 160 airplanes in the quarter and 600 for the year, the highest annual total since 2018. Revenue of $11.4 billion and operating margin of negative 5.6% and both improved materially and primarily reflect better operational performance and higher deliveries compared to last year's results that were impacted by the work stoppage. Results also include impacts associated with acquiring Spirit AeroSystems, which impacted segment margins by roughly 1.5 points in the quarter.

BCA booked 336 net orders in the quarter, including 105 737-10 and 5 787-9 airplanes for Alaska Airlines and 65 777-9 airplanes for Emirates. Importantly, BCA booked 1,173 net orders for the year and backlog ended at a record-setting $567 billion that includes over 6,100 airplanes with the 737 and 787 both sold firm into the next decade.

Now let's click down to the commercial programs. Starting with the 737 program, BCA delivered 117 airplanes in the quarter and 447 for the year, in line with expectations shared last month. The factory increased the production rate to 42 per month in the quarter and the program is on course to increase production to 47 later this year. The year ended with 1 737-8 bill prior to 2023, down 5 from the prior quarter. and we expect to deliver this final shadow factory airplane in the first quarter. On the -7 and -10, inventory levels were stable at approximately 35 airplanes. As Kelly said, we received approval from the FAA in the quarter to begin the final phase of 737-10 certification flight testing and continue to partner closely on a certification path for these programs including the engine anti-ice solution set.

On the 787, we delivered 27 airplanes in the quarter and 88% for the year. During the quarter, the program completed a successful Capstone review and is continuing to make good progress, stabilizing at the new production rate of 8 per month. The year ended with approximately 5 airplanes in inventory that were built prior to 2023, down 5% from last quarter. We still expect to deliver the remaining airplanes in 2026 and which is aligned with our customers' fleet plans. Importantly, the 787 recorded 395 net orders in 2025, the program's highest annual order total which highlights the market-leading capabilities that the Dreamliner will continue to deliver to our customers for decades to come.

Finally, on the 777X, as Kelly mentioned, we continue to make progress on 777-9 certification flight testing. 777X inventory spend in 2025 finished at nearly $3.5 billion, in line with expectations. 777X booked 202 orders in 2025 and the second highest annual total since the program's launch, underscoring the trust that our customers have placed in this game-changing widebody family as well as our team that's building it.

All right, let's shift over to BDS on the next page. PDS delivered 37 aircraft in the quarter, and revenue grew 37% to $7.4 billion on improved operational performance and higher volume. Operating margin of negative 6.8% improved significantly compared to last year and also reflects the better operating performance across the business. This improvement was tempered by $565 million loss on the KC-46A tanker, which I'll address further in a moment.

BDS booked $15 million in orders during the quarter, including awards for 15 KC-46A Tankers from the U.S. Air Force and 96 Apaches from Poland both contributing to backlog that grew to a record $85 billion. Overall, we continue to make progress stabilizing our fixed price development programs, even with the cost updates on a few programs this quarter, including the tanker adjustment.

As Kelly mentioned, the tanker adjustment was driven by higher BCA production support and other allocated costs in the Everett facility as well as higher estimated supply chain costs, including Spirit. The added production support costs include keeping higher levels of quality and engineering support in the factory, which are a key part of driving improvement. For example, as compared to the first half of the year, we saw average factory rework levels decrease by 20% in the fourth quarter. So while these investments are starting to evidence progress, we need to sustain them for longer than previously planned should promote stability.

Across these fixed-price development programs, we continue to see benefits from our active management approach in retiring risk and developing win-win opportunities with our customers. We remain focused on delivering these important capabilities and achieved several important milestones in the quarter. In addition to the highlights Kelly referenced on T7A and MQ-25, we also partnered with NASA to modify the commercial crew contract to better align our long-term objectives. The remainder of the portfolio continues to benefit from increased demand supported by the global threat environment.

Performance on these programs continue to reflect the operational improvement that began earlier this year. For example, on the PAC-3 seeker program, over the course of 2025, the team was able to increase output by 33%, enabled by prior investments in capacity and a focus on lean to drive more efficient production. Overall, the defense portfolio is well positioned for the future, as evidenced by our record backlog, and we still expect the business to return to historical performance levels as we continue to drive execution and transition to new contracts with tighter underwriting standards.

Moving to Global Services on the next page. PGS continued to perform well, again delivering strong financial results in the quarter. Revenue was up 2% to $5.2 billion, primarily reflecting improved government volume. Operating margin was abnormally high due to the digital aviation solutions gain. Adjusting the fourth quarter of 2025 and 2024, for digital aviation solutions, adjusted revenue of $5.1 billion grew 6% and adjusted operating margin was 18.6%. On the same basis, both our commercial and government businesses again delivered double-digit margins in the quarter.

BGS is driving a keen focus on continuous improvement. For example, on the C-17 sustainment program, the team achieved an 18% flow reduction over the course of 2025 as a result of nearly 200 discrete projects generated by the team, a key enabler of improved customer satisfaction. PGS also received $10 billion of orders in the quarter, and an annual high of $28 billion in 2025, and the business ended the year with a record backlog of $30 billion.

Shifting over to cash and debt. Cash and marketable securities grew to $29.4 billion, primarily due to $10.6 billion in proceeds associated with closing the digital aviation solutions transaction, partially offset by debt repayment of $3 billion associated with the acquisition of Spirit AeroSystems. The debt balance ended at $54.1 billion, slightly up from last quarter, primarily reflecting the retained Spirit debt. The company also maintains access to $10 billion of revolving credit facilities, all of which remain undrawn. And we remain committed to strengthening the balance sheet and supporting our investment-grade rating.

Okay. Let's shift to full year performance on the next page. Full year revenue was up 34% to $89.5 billion, primarily reflecting the improved operational performance across the business. Core earnings per share of $1.19 was up significantly primarily driven by the $12.47 gain on the Digital Aviation Solutions sale and improved performance. Excluding the impact of the gain, EPS was up $9.10 year-over-year.

Free cash flow was $1.9 billion usage for the year. This was slightly better than expectations shared last month and improved significantly year-on-year, primarily driven by higher commercial deliveries and improved working capital. Our improving cash flow performance in 2025 provides a solid setup to deliver positive free cash flow for the full year in 2026. Let me provide some additional context on our free cash flow outlook.

As we continue turning the corner in 2026, we expect positive free cash flow of $1 billion to $3 billion, aligned with the expectations I shared last month. For clarity, this outlook contemplates an unfavorable impact of roughly $1 billion in 2026 associated with incorporating Spirit. Consistent with the profile we have discussed previously, cash flow is expected to grow year-over-year primarily on higher commercial deliveries, better performance at BDS as that business continues to stabilize and continued steady growth at BGS.

This outlook continues to assume significant capital expenditures for future products and growth, particularly in St. Louis and Charleston. CapEx ramped up over the second half as we expected with nearly $3 billion invested in the business in 2025. These higher investment levels will continue into 2026, and we expect to spend closer to $4 billion this year, including the incorporation of Spirit.

Within 2026, we expect first quarter free cash flow will be a usage similar to first quarter of 2025, driven by normal seasonality. We expect the first half of 2026 to be a use of cash with the second half turning positive and accelerating sequentially. As we have discussed, there are a number of impacts to 2026 free cash flow that we expect to be temporary in nature and improve over time. Let me add a bit of color on each category and highlight the actions required to work through them.

As I just covered, we expect 2026 free cash flow to be between $1 billion and $3 billion. part of where we end up in that range may be influenced by the realized impact of these issues. The most significant impacts are related to the delayed certification and first delivery on the 777X program, as well as the prior delivery delays on the 737 and 787 programs.

On 777X, regarding net cash burn. With first delivery planned for 2027, our production system expenditures will be much higher than the predelivery payments we expect. PDPs for 777X are lower than they otherwise would be, given customers have been paying into a schedule that previously assumed first delivery in 2026. 2026 is planned to be a higher use than 2025 and but we expect the net cash used to improve over the next few years before turning positive in 2029.

Our focus here remains on progressing through flight testing with the FAA. Additionally, and just as importantly, we are making sure the production and delivery system is ready to ramp up to include working through built airplanes that will undergo a systematic change in corporation program.

Regarding the 737 and 787, there are 2 issues both driven by previous delivery delays. The first is customer considerations and the second is excess advances. To be clear, customer considerations for prior delays are not diminishing the pricing levels we are applying to new business Indeed, we are seeking to better manage delay exposure in new contracts with tighter underwriting standards. We expect the impact of these items to improve over the next few years and our path to resolve the impacts of both customer considerations and excess advances is all about production stability and continuous improvement in on-time delivery for our BCA customers.

Partially offsetting these negative impacts on 737 and 787 is the plan to methodically work down selected excess part inventory and complete the final deliveries of previously built 737s and 787s. As we have said, with 737 moving to higher rates, we will address excess inventory on a commodity-by-commodity basis, in order to preserve stability across the supply chain and production system. The next category of legacy issues we have discussed is the cash impact of running off prior BDS charges.

Since 2022, there have been significant charges across the 5 fixed price development programs. We expect sequential improvement from 2025 to 2026 and gradual improvements thereafter. Obviously, this is predicated on successfully completing these programs without taking additional charges and leveraging the active management playbook to continue to derisk these programs.

As a tanker charge this quarter highlights, there remains risk on these programs even if the envelope of risk has been significantly reduced over the last year. Rounding it out, we have the in-year impact of the expected DOJ payment sliding from 2025 to 2026. In addition, to the 2-year spike in CapEx in 2026 and 2027, supporting growth in a stable production system. Our focus as a leadership team will be on closely managing these investments to drive budget and schedule performance.

Adjusting for these impacts would result in high single-digits 2026 free cash flow and highlights the strong underlying cash generation potential of our business. Accordingly, we continue to believe the $10 billion free cash flow mark is very attainable, including impacts of the Spirit acquisition, which aligns with my remarks last month.

Okay, summing it all up. A strong foundation was set in 2025, and we're focused on elevating our performance in 2026 and delivering on the long-term potential of this business.

With that, let's open up the call for questions.

[Operator Instructions] Our first question comes from the line of Myles Walton from Wolf Research.

A lot of detail there today within the context of the cash flow. So maybe I'll start there.

Miles, I'm afraid we lost you.

Can you hear me now?

Yes, I can hear you now.

Please start over the question.

Yes. Apologies. So Jay, a lot of color on the cash flow building blocks to get to that high single-digit x bad guy. Could you just clarify the excess advances in customer considerations, the quantum of those and then the duration by which they normalize? Is that '27, '28 or further out?

Okay. As I mentioned, Myles, again, the total overall quantum goes from low single digit to high single digits. So we know that in the total. I'm not going to give individual breakout on each specific impact, but I'll give you a little bit more of a directional color. What I can tell you is the excess advances coming in from '25 to '26 as well as the considerations at least in 2026, they're generally close to each other, so almost the same impacts. The excess advances over time actually will burn down quicker than what we expect on the consideration. So that will take a little bit longer to burn down on the 737 and 787 considerations.

Again, when you think about this and take a step back, it's pretty much what I said on the prepared remarks, burning this down all is bought the production rates and getting us to the higher production rates over time. One other thing on 777X, even though you didn't ask me, I colored that as well. And again, that will take us a few years. Key thing there is, while it is a higher cash burn this year, it will improve over time with turning positive in 2029.

Similarly with BDS, that -- that's actually coming down and improving from '26 over '25, and that will burn down over time as well. So again, it's all predicated our improvement plan is predicated upon our delivery plans. We've got a very good line of sight, which is why I walked you through this detail. But as things potentially change, these could change as well. And so we'll give you more color.

2026 is a big, big year for us. As Kelly mentioned, we had to get through our certification programs. We also have rate ramp increases as well. as we get the learnings and get informed by those events, that will give us a little bit more ability to really zone in a specific quantification as well as the timing of these. But hopefully, this works for you for now, and then we'll give you more color in the future.

Your next question comes from the line of John Godyn from Citi.

I also wanted to follow up on free cash flow. The conversation, I think, is really focused on normalized free cash flow a few years out. The $10 billion number, Jay, that's not one that you created. And I just wanted to -- as you spend more and more time thinking about this, I wanted to just give you a chance to kind of revisit that. You mentioned a lot of moving parts at the end of the prepared remarks.

But needless to say, if high single digit is like an adjusted starting point at the end with the benefit of substantially higher production rates at the FAA allows, it stands to reason that the normalized free cash flow of years out could be much higher, many billions higher than $10 billion. I know there's a lot there, but I'd love your take.

Thanks, John. Well, let me just start, say first things first. And the first order of business is getting ourselves to this $10 billion, which I believe we are absolutely on the right track. You're right, John. I mentioned -- I think the term I actually used was very attainable in December, and I'm repeating that again today. I went through this in the fourth quarter. I'm very comfortable with our ability to achieve $10 billion.

Again, it's a little bit of a repeatable sequence of events, but we have to get through the certification programs, we have to ramp up on our BCA production rates, we need to see the improving performance at BDS related to our margin profile as well as burning off the prior charges and then continued performance at BGS.

Again, on an adjusted basis, when you look at BGS this past year, they delivered 6% organic growth. as well as 18% plus margins. We expect that to continue as well and be a contributor to cash flow. So if you're asking me, can we be above 10%, I think the potential of our cash flow at supports to be above 10%. The first things first, let's get to 10%, and we'll talk about how we go from there.

Your next question comes from the line of Doug Harned from Bernstein.

When you look at the production ramps that you're focused on, I'd like to understand a little bit more about where you see the bottlenecks when you're going to 47 to 52 on 737 when you're getting to 10 and then ultimately to 12 and 14, I mean what are the hardest breaks to get to? And what are the biggest challenges? And I wanted to highlight 1 because if I look at back in 2018, when the rate increase was going to 52, Spirit had some very significant issues getting there. And so perhaps we could also address what you may be doing to ensure you don't have those kinds of issues again with Spirit?

Yes, Doug, let me start and break that down. Let's start with the 737 MAX program. As you know, we've gone from rate 38 to 42 as we said. Just to give you a little bit of color, that's actually gone really well. The KPIs look really good. We achieved that effective rate in November and December on the 737 line. Now recognize that November and December heavy holiday months. So now we'll be coming into a more wholesome full months and we need to continue to see stability. But so far, so good.

And as I said, the good news is the KPI still look good. So no deterioration there. Supply chain on that ramp, not a big issue for us right now. and we projected that. As you know, we've got a lot of inventory there. And I actually don't think supply chain is going to be a big challenge for us in the next rate ramp from 42 to 47. But that's where we start to normalize with the supply base in terms of burning off the excess inventory. And as we've said, going from 47 then to 52, that will be where we'll have to see improved performance from the supply chain. And we've got time we're working that diligently with the supply chain.

Right now, nothing says we can't do that, but a lot of work yet ahead of us. And again, I think the will be a tougher rate ramp to go from 47 to 52 than say it was to go from 38 to 42 because of that inventory level.

You mentioned Spirit, so I'll address that right now. You're right in that spirit. We're going to need to continue to invest in the capacity growth from Spirit. I think this is one of the big thesis and underwrites why we made the acquisition so that we can guide that ramp and help them move forward. I think if they had continued in a distressed environment, I think that risk would have been significantly higher than our ability to go manage that. But that, like the rest of the supply chain moving to that rate, Spirit has some work to do, and we've got a plan to go accomplish that.

If I switch to 787, as you know, we don't have the large inventory levels there on 87. That is more normalized with the supply chain. And we're working to stabilize at this rate 8 now. And our plan, as we said, is to go to rate 10 here in the next year. There's no particular supply chain constraint that I see there. We still are dealing with and seat issues, that's less of a constraint to our production output, but more of an issue with deliveries. And so particularly for airlines that are taking a new seat configuration that requires a new certification baseline. Those have typically been tough to get through the certain programs, both with the and the FAA.

And so we're still working through that, but that's no change from what we said before. I think that's going to be with us for a little while going forward. So I think the top-level story here is that we've got these rate increases in front of us, the 42 to 47 will stabilize here at 42. We'll use the same process we use to move to 42 to move to 47%. We'll have a rate review with the FAA and then we'll go ahead and increase that rate. And the same is true on 87 as we go to 10.

Now longer term, as you know, we've invested both in the expansion of another line on the 737 MAX up in Everett, and I commented on that in my prepared remarks. So capital is all in place. We're going through the process of training up the people and that's really important as we move past the 47 rate that we have that line up and running. And then likewise, to move past 10 a month rate on we believe we need to have additional capacity in Charleston, and we've made a major capital investment and kicked that off a groundbreaking here last year.

So our plans in place. We're working it. I think in general, we're going to see supply chain Harmony has to happen in that 47 to 52 rate, and we'll continue to work that with the suppliers.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Maybe if you could just talk about the momentum in Renton is very clear. How do we think about BCA margins? Jay, you mentioned Spirit is about $1 billion, and the comment about delays not affecting pricing going forward potentially as much and the $10 billion future free cash flow state. So I guess, how do we think about 37 and 87 cash margins in the near term? How much they're depressed longer term as well? And then relative to history?

Thank you, Sheila. And you're right. Right now, 737, 787 cash margins are depressed, and that's reflected in our free cash flow. We do assume and expect and given what's in the backlog that those will improve over time to support these cash flow types of numbers that we're talking about. The Spirit impact itself, you correct in terms of the cash flow impact of $1 billion negative this year. And we've looked at that and we played out their impact and their contribution to our cash margins in 737, 787 program and forecasted that out. And we don't believe over time, that, that's going to materially impact what we believe and what we need to deliver on these types of cash flows.

So over time, their spirits performance will get better that will be reflected in the financials through just productivity through synergies in higher quality and delivery performance, as Kelly mentioned. We do have what we would expect over that time period as well as a boost from pricing. And so we haven't really focused on that as much, but that will provide a boost to our margins in the out years as well. And so that is what gives us the confidence that what we've seen here at Spirit, what we're absorbing at Spirit, it doesn't really alter what we're expecting in these out years.

Your next question comes from the line of Peter Arment from Baird.

Jay, just maybe sticking with BCA. The BCA team had a really strong delivery year in '25. I think you mentioned 47 MAXs and you had 88 787 deliveries. And with the break that we're seeing this year, maybe you could just level set us on kind of 2026 delivery expectations for both the MAX and the 787 programs and also just maybe any cadence that we should expect first half versus second half.

Sure. Thanks, Peter. So let me start with the 737. Our expectation for deliveries on that program is around 500 aircraft. And if you look at it kind of if you compare this year to last year, last year in the 47 that we delivered, we delivered around 55 aircraft out of inventory. So our production rollouts are going to significantly improve this year as I mentioned in my prepared remarks, we've only got one left carryover going in. So our production performance and rollouts is going to increase substantially.

When you do the math, as you indicated, Peter, in terms of just taking a look at the assumption for rate breaks, you might get into around kind of, call it, 530 aircraft or so. What we're going to be doing in this production build is building around 30 aircraft on the 737-10, those will not be delivered in 2026. They'll be delivered in 2027 upon certification. And so that would bridge between higher expectation and 500.

As far as the 787, a little bit simpler there, we're expecting around anywhere between 90 to 100 aircraft, and that will be dependent upon real production rollouts. Again, just like 737, we had about 20 aircraft that came out of inventory that we delivered in 2026 and so the production rollout system will be the primary source of our deliveries, again here in 2026. So a very similar type of approach there. Overall, we expect BCA delivers to be up -- deliveries to be up close to or approximately 10% all in. And so again, that will be driven, I mean, led by the 737 and 787 program. I hope that gives you the clarity you need.

Yes. That was very clear.

Our next question comes from the line of Seth Seifman from JPMorgan.

Maybe if you could talk a little bit more about defense. We saw a charge there for the first time in 2025. A but it sounds like it's something that can perhaps help in the future. Maybe you could talk a little bit about how KC-46 to the extent that you see it turning the quarter, how is it turning the corner?

And then moving beyond that, the state of BDS and maybe how you prepare for some of these production increases that the Defense Department is looking for? Should we think about a multiyear contract for Boeing on PAC-3 seekers? And how do we think about the investment associated with that?

Yes. Good question. So first of all, let me just say that the charge we took on the tanker in this quarter doesn't really reflect at all on any of the other BDS programs. It's a discrete charge against that particular program. And in fact, it's -- the predominance of the charge is increased cost on the actual 767 commercial airplane production as Jay outlined.

And look, we took a look at the program. It is taking us more resources to make the deliveries. We delivered 14 tankers in 2025, and we are planning to deliver 19 in 2026. And we made the conscious decision that we needed to keep resources at a higher level to ensure that we make those deliveries on time. As you know, the Department of War is super focused on us, first of all, making investments to support growth and also ensuring that we're delivering on time. And so we took that decision, albeit a big gulp to have to take a charge here on the tanker program. I think it will pay off in dividends with us in terms of allowing us to make sure we meet deliveries -- the '19 deliveries next year.

The other thing I'll just lay out is, as you know, the Air Force has made a decision to the sole source for the follow-on tanker contracts. We will be pricing that in the fall time frame according to the current schedule. So we are laser-focused on making sure we understand the cost base of that airplane. Obviously, this has been a bad contract for the last decade, the existing contract. And as we enter into a new opportunity where we get to reprice we want to make sure that we, as Jay has said, underwrite that contract to ensure it's a fair contract and we can make money on that.

As I look at the broader question about increasing in rate or increasing an investment from the executive order and the Department of War, look, we've invested ahead of contract on F-47. I think it was a key part of our win strategy, and I think the department clearly recognizes that we went out at risk and made significant investments. We have also invested in the PAC-3 capital to increase the PAC-3 production line. I suspect we will get to a multiyear similar to what you've seen elsewhere with the government on the PAC-3 contracts. So we're in discussions now with the Air Force on that.

So I don't see a big step-up in CapEx relative to that multiyear PAC-3 because, for the most part, we've made the major investments already going forward in terms of of CapEx. The rest of finishing the F-4 7 investment is probably our major capital investment here going forward in our defense portfolio.

Your next question comes from the line of Ron Epstein from Bank of America.

A broader, bigger picture question for that. We can just nail that on some of the financial details with Eric after the call. But -- so you've been at the company now for well over a year doing God's work running around picking things. But here's the question. It's an effective duopoly with you guys in Airbus. I mean there's some folks on the fringe, but it's really the 2 year [indiscernible]. And it seems like on a very fundamental level that -- it's just not a very profitable industry. It seems like everybody else is making money on planes from the guys doing seats, facets, engines, aftermarket parts even nowadays, even airlines.

But it just seems like building airplanes isn't that profitable. And you've been on both sides of this, right? So you don't know now and you were in the supply side. Can that change and like on a future airplane, can that change? Like what has to change to like really make this industry shy?

Well, look, I think as you point out, I have been on both sides of this. So I know how you can make really good margin in this aerospace market. And I see how you cannot make a very good margin in the aerospace market. And I think the fundamental is we have to get a handle on what risks we're taking and understand the risks. And I think building an airplane is not an easy task. There's significant risk. And we'll continue to take the risk.

The issue that I think we've got to improve upon is how we manage ourselves through those risks and how we enter into contracts associated with knowing that we've got these risks out there. So concurrency, how we price things, what damages we accept, how we do that, I think, are all opportunities for us to improve. And I think a new airplane program gives us that opportunity. For the most part, there's not much we can do about what we've got at hand other than fix our performance, and that's what we're doing day in, day out. I really can't change the structure of the aftermarket and OE construct. It kind of is what it is.

I think this is a big part of the discussion and our strategy going forward for next airplane where is the value? Where is the value chain, what do we do, what do we partner to do? And how do we assure that we're participating, there's a lot of value in this commercial aerospace market, you're right, we should participate in that -- in the value.

So that's a lot of work for us to do strategically. I don't see any impediment to do it, but we've got to understand the risk we're taking when we take them and make sure we've got plans to manage those risks. And if they go unmitigated, then you end up with situations like we're in, where we don't -- we're not sharing in the profitability of the overall market. That would be my take.

Your next question comes from the line of Robert Stallard from Vertical Research.

Kelly, again, a strategic sort of question for you. Given the recent geopolitical volatility, are you worried about a return of tariff risk at BCA this year? And similarly on the defense side of the business, a longer-term shift in Europe to more local procurement.

Yes, Rob, I wouldn't say worried is something I have to -- we have to continue to watch. As we saw last year, this is super dynamic, right? It could change tomorrow. But I think if you step back from all the dynamics day in, day out, Look, I think the -- at least the U.S. administration fully understands the importance of commercial aerospace to the economy, to the U.S. economy. They've been very supportive. And we've worked through what initially looked like some pretty hairy tariff environments to resulting in pretty good outcomes.

So I think we'll be able to continue to focus on that. And again, I think this administration is fully supportive of this industry. It's not going to do things that caused us a major harm. Having said that, as we saw last year, we were shut down for a little while and deliveries into China that got resolved and we got the deliveries [indiscernible] it's done. We do have about the same number of deliveries this year into China as we had last year. So we got to watch these trade barriers. Certainly, we have a lot of deliveries into Europe. So what [indiscernible] how that whole negotiation plays out to ensure that [indiscernible] our concerns when we've had them. And I think we've ended up with pretty good outcome so far.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Thanks, everyone. Jay, I know you don't want to -- I know you're not quantifying the pieces of the free cash spread you just gave back to normalized. But I guess I wanted to try to ask is the total of those pieces greater or less than $7 billion because you have your net out some positives or if I'm just missing something? And then what is BCA cash if you exclude the abnormalities and you were just basically just 737 and 787 price cost, is that generating cash in your 2026? Or is that closer to breakeven?

So no, let me just go back to your first question here on these items. Again, you're talking in that range going from low single to high single, kind of, call it, $6 billion to $7 billion in the aggregate. Don't forget in my prepared remarks, what I talked about was the benefit of excess inventory coming down over time. So that is a mitigator.

The only thing I'd say is the DOJ payment is a onetime event that occurred here in occurring here in 2026, and that just doesn't repeat. It's not something that draws down in any way. So that's the best way to look at it in the aggregate between that 6% and 7%. As far as BCA cash [indiscernible] as it becomes necessary or we have the visibility. We'll give you more there. But I think I'm going to stop here giving you the directional what it needs to be.

[indiscernible] question today comes from the line of Gavin Parsons from UBS.

Jay, I think you're restricted from looking at all of BDS previously. So have you been able to get under the hood of all those programs at this point?

Let me just talk about -- I mean, as you're right, I was restricted through the end of the year, and I started here in January, doing reviews with BDS. And I think I need to put some context in here because again, I think there's some expectation that I'm doing some kind of an outside the process, EAC kind of deep dives to kind of circumvent the processes that we have already in place. And I'm not doing that.

What I am doing is really reviews with our programs as well as my first reviews were just with the BDS business in the aggregate. And it's really focused on 3 things. One is there's just a strategic element to it. One is an operational element and then third is the financial element. And just kind of give you a little color about that is, as I look at program to program, it's I'm sure I understand the capabilities being delivered, developed for our customer, understanding the relevance of that capability today and what that means in the future, just strategically.

Looking at our current backlog and our delivery profile and how that fits our customers' capability requirements and whether or not we're meeting that mark. Operationally, looking at program status, things that -- are we on track schedule-wise, things that don't necessarily translate into directly into our financial, but think about earned value type metrics. And just so understanding get myself baselined on the programs, where they are strategically, where they are operationally and of course, a review of EACs, but more in the context of, again, baselining what needs to happen? What are our key assumptions in those? What are the risks? What are the opportunities? How do we realize the opportunities and how do we mitigate the risk.

So I'd call it a little bit higher level than some type of EAC deep dive. To the extent that something pops up in a review, then we'll follow up with that. And I would expect that to occur -- continue to occur throughout this quarter as well as the rest of the year. And that will basically convert and transition over to the normal reviews that we do, the team does with Kelly and the rest of the leadership team. So it's more of a holistic view. If there's anything on a specific EAC or anything like that, that will be handled through the regular EHC process. and go up from there.

So just to give you a little bit of color in terms of how I'm approaching this. And so far, it's been a great experience. The team is doing a great job. As Kelly mentioned in his remarks, they're improving each and every day. And again, they're heavily focused on driving to the customer requirements and meeting their schedule and budget requirements. So a good start on my [indiscernible].

And that completes The Boeing Company's Fourth Quarter 2025 Earnings Conference Call. Thank you for joining.

Thanks, everybody, for joining. We have Jay Malave from Boeing, helping kick us off at the UBS Industrials Conference. Jay, thanks for coming.

Well, thank you, Gavin. Thank you for having me here and giving me the opportunity to represent the Boeing Company. It's a pleasure to be here and look forward to a good discussion this morning with you. Appreciate it.

So you've been at the company for 3 months now. How are you spending your time across the businesses?

Yes. So I joined the company in mid-August and immediately moved to the Seattle area. We were talking about before. I'm actually in Bellevue. And that gives me an opportunity to spend a lot of time in our factories in Washington, Renton, Everett. A couple of weeks ago, I was in our Auburn, Washington facility. And it gives me the opportunity through repetition to really understand what's happening day-to-day in our operations, which is important to me and really be in the center of gravity in terms of what's happening in the company.

So it's been an exciting time to be there. So I spend most of my time there in Washington State. Kind of first impressions of the company since it's been almost 4 months, about 3.5 months, first, think about the culture, and there's been a lot of discussion on the culture and Kelly talked about the improvements that he was embarked on one of the 4 priorities that he mentioned when he first joined the company.

And I think when I came in, I got the benefit of the progress that had already been made by the time I joined. Kelly had been in the company for, by that time, over a year, in that ballpark. And there were a lot of, I think, advancements made during that time period. So what I've seen is really pretty engaged workforce, a very strong management team, one that has a can-do attitude, one that is focused on improvement and focused on making Boeing better every single day, which to me is incredibly important because that's a sign of a performance culture. And that's one of the things you look for when you join a company.

You can never really tell from the outside looking in what's actually like working in the company. But I've seen really an organization, including a management team that's really focused on can-do, action orientation. We've talked about active management. And we talk about active management in the context of working win-win solutions with the customer and the BDS environment.

But I take a little bit of a broader view than that. And when I view active management as a team, a leadership team that's willing to roll up its sleeves, get its hands dirty to help solve problems, help be part of the solutions. And that's exactly what I see here at Boeing. And so it's exciting to be part of that. I'm that type of person who likes to get into the detail, likes to get into how do we solve a problem rather than just observing it.

And so from my perspective, I've been able to transition pretty easily to an environment like that. I'm very impressed with the team that we have in our facilities. They're very good, very experienced, very capable. They know what good looks like, and they've done a good job, I think, getting us to where we've been today over the past year. If you think about the progress that we've made, already 2 -- pretty much 2 rate breaks on the 737, a couple of rate breaks on the 787, really on plan to what we said we would do this year in 2025.

So when you think about you roll it back where we were a year ago to where we are today, the progress has been, in my view, pretty exceptional. The other thing I would say is the -- what I'm also impressed by is the operational embrace of lean practices and processes. And so I see continuous improvement throughout the factories. Every time I do go to the factory, the team wants to take me into their obeya room to see the projects -- the continuous improvement projects that they're working on.

And again, I see that as views as a sign of a performance culture that's pretty much already embedded. When you think about what else can we do, I think that lean practices can be spread across the entire company, including the functions. Right now, it's pretty focused on operations, as you would expect, given where we are in our recovery. But I think we have opportunity to really spread it across all of the functions. So I think a great start so far. I'm coming and joining the company at a great time, and the recovery is in full force.

Great. Maybe diving in there then on MAX. On the 3Q call, you were at 38 per month and cycling at 42. How is that going as you stabilize it?

Yes, it's going according to plan, as you would expect. It takes a few months to take the production cadence and move that into output. November here is going to probably be a little bit light on deliveries, but our production rollouts are pretty much exactly where we expected. And it's just a shorter workday month because of the holiday.

But overall, we're cycling where we expect to be. And when I look at deliveries in terms of what we generally have guided to for 737, including -- as well as 787, we expect to be pretty much where we were for the year. So I think it's also so far, so good there. It will take us, like I said, a few months to turn this into output. And I would expect that to occur starting probably in the first quarter of next year.

And the minimum 6 months between rate breaks, that's after you stabilize or that's after you've broken from 38 to 42?

Yes, it's stabilization. We'll go through it. And as the production system stabilizes at the current rate, the team starts thinking about how they're going to break to the next rate and they start positioning for that next rate break. And so before the rate break, they really are positioned for it through the production cadence that they have, the amount of days that are expected in terms of the cycle time for final assembly there.

And so again, when we say no less than 6 months, it gets harder as you increase rates. And so 6 months is probably the best performance we're going to see, but our history tells us it takes a little bit longer than that.

And I guess same question on 787, going from 7 to 8. How is that going?

Yes. Same thing there. We're cycling at 8. We're rolling out. I think the improvement in rollout is starting to take hold there. And so we're just kind of monitoring progress as they go. It's going to be the same thing. It's going to take a little while before this turns into output. And I would expect that to occur sometime next year as well. And as we evaluate and stabilize, we'll start thinking about when the next rate break will be. But first things first, we got to get stabilized at 42 [ on ] 37 and get stabilized at 8, and that's what we're in the process of doing.

So how do you think about deliveries next year? I think you said volume up, but I assume there will be lower inventory deliveries.

Yes, that's right. So we expect absolutely deliveries to be up in both cases, both 737 and both 787. When you look at this year, and we've talked about in the range of 440 to 450 deliveries for the 737 in that range, there's upwards around 50 aircraft in that ballpark of aircraft that we're delivering that came from inventory. When you now fast forward to 2026, we're going to be increasing our deliveries, but there won't be hardly any aircraft, if any at all, that will be coming out of inventory.

So it will be really through the production rollout system that will be the source of the deliveries. The one other item I'd say, which is a little -- will create a little bit of a difference between deliveries and production builds is that for the 737-10, we'll be building aircraft next year. We're expecting certification of that aircraft to be later in the year. So we are unlikely to deliver all the aircraft that we build just because of the timing of the certification process. But again, big picture, we expect deliveries both on the 737 and the 787 to grow in spite of the fact that we have less aircraft coming out of inventory to be delivered.

And presumably, 737 -10 and 7 rework will push those inventory aircraft into '27?

Yes. Some of those will be -- yes, will be pushed into '27, which will position us for continued growth in '27 and beyond. We continue to expect -- and I'm sure we'll talk about cash flow, but BCA deliveries growth year-over-year, we continue to expect that. That will be a big driver of the cash flow.

Working our way up to the cash flow question.

There we go. Yes.

777X?

777X.

So you're in Phase III now. What do you need to do to get that done? And what are the next milestones?

Yes. So we are starting the testing now. I mean that is a big package that we got the TIA3 approval in November. And so we've been positioning aircraft for flight testing there. This represents this approval of about 30% of the entire flight test program. And so that was a pretty big approval that gives us kind of momentum to move forward.

If you think about some of the systems that are part of that package, avionics, environmental control systems, auxiliary power units. So there's pretty substantive systems will be tested as part of this flight test program, and we're well on our way there. And we're also positioning ourselves for the next batch of approval for TIA as well.

Once we get there, we'll talk about that. But I think we're pretty well positioned per the schedule that we laid out in the earnings call, which we said getting this approval anywhere between late fourth quarter, early first quarter of '26. We've got it here in the fourth quarter, and so we're pretty much on schedule.

What has been kind of the main bottleneck on the slower certification process there?

It was new requirements. And these new requirements required essentially learning, both on the part of Boeing as well as the FAA. And as we learned what it took to comply really on both sides, unfortunately, we had these delays in these TIA approvals because we just weren't entirely clear on how to satisfy those requirements. We believe that we have a sort of much better understanding of what it takes going forward. And so we think the process for future approvals will be a lot more smoother with that understanding.

Moving to defense. I know you're restricted from looking at that business in full detail until January, but that seems to be performing better with no charges this year. So any thoughts on progress would be great.

That's right. So just kind of for the record, I've been spending my time pretty much on the BCA business in BGS. I've been restricted from BDS until the end of this year, which now is weeks away. So come January, I'll be able to dive a little bit deeper into BDS. And what I would say there is that Steve Parker and his team have done a great job, I think, stabilizing that business. That was another area that Kelly had highlighted in terms of stabilization.

We're starting to see the benefits of that stabilization in the programs there. And we've got these big 5 programs. And I think, again, I'm talking to it from afar because I haven't been able to dive in. But by all means, he's doing a great job there and his leadership team is doing a great job there. So I would expect them to be -- continue to improve year-over-year, not just from '26 over to '25, it will be '27 over '26, '28 over '27 as well.

The margin profile will improve. We've talked about high single-digit margins in that business. And I think that they're on track to be able to go march up that margin trajectory. So I think that the team is doing a nice job. One thing I'll say is I think there's been some investor angst in terms of once Jay Malave gets access to the BDS program, there's going to be a bunch of grinades that go off on all these programs.

And look, I'm there to learn. I'll be going into the business to learn to help understand. In any program, there's going to be risk, there's going to be opportunities. My job will be how can I help them mitigate risk and how can I help them realize opportunities. I'm not going in there with a mandate or an agenda to throw grinades at different programs. It's kind of how can I help be a support to this business and to Steve and his team.

That's not how it works, right? If you identify a cost overrun, you book it in the quarter, you identified it. You don't wait for Jay to look at it.

That's right. And so -- that's exactly right. We've got, I think, a pretty robust EAC process. The team has gone through. They've recorded their charges in the past. I don't think we need to relive what we've seen in the past, but they do that with the benefit of information that they have real time. And so to the extent there's changes, it's based on new information that arises in that period. And so it's not -- the new information isn't Jay Malave getting access to the program. The new information or facts relate to either the schedule or the cost profile in a program.

Now that we've built up to free cash flow, I realize there are a lot of moving pieces on the 3Q call, you weren't ready to kind of commit to a '26 guide, but how are you thinking about framing that? And any initial thoughts on '26?

Yes. If you rewind the clock a little bit, on the earnings call, I've been in the job for a little bit over 2 months, and it just wasn't enough time to really get a good grounding. We were in the process of a multiyear forecasting process. And for me, I would say probably the beginning third of that. And so I'm a data hog. I like to understand the data. I like to beat it up. I like to pressure test it. And I was nowhere near ready to make any type of declaration proclamation based on just the progress that I have made to date as of then.

Since that time, we've made a lot of progress. Unfortunately, my FP&A team probably is not loving me right now. But we've gone through a lot of data, a lot of information, and I'm just much more grounded now than I was there, and I feel a lot more comfortable with where we are. And so what I can tell you is for next year, we absolutely expect to grow year-over-year in cash flow.

And I would say that, that will result what we expect anyway is in the low single digits in terms of positive free cash flow, which I think is pretty substantial growth year-over-year. And let me kind of rewind the clock before I get to '26. '25, we have to reset a little bit. If you recall when we provided the guide for '25, we talked about negative $2.5 billion for the year. Premised in there was this DOJ payment that we anticipated making. That payment is slipping out of '25. And right now, it looks like it's going into 2026. And so where I would expect us to be now in 2025 is closer to about $2 billion of an outflow.

Now you'd say, okay, you just put a headwind now into 2026 in the range of $700 million. But even with that, I expect free cash flow to grow. And as I mentioned before, I expect right now anyway, free cash flow to be in the low positive single digits. So in spite of that, we know CapEx is growing next year. CapEx is growing really on the back of 2 projects. One is our growth driver in Charleston on the 787, which is a good thing. That's going to be an enabler for us to drive up our rates up to around 14 over time per month as well as the investment that we're making in St. Louis for the new F-47 program, again, a good multi-decade growth driver for the company.

So those are -- while they create some short-term pressure on CapEx and free cash flow, those are great long-term projects for us. The other thing I would say in terms of pressure would be this whole thing about legacy deliveries, delayed aircraft deliveries. It's causing kind of 2 effects. One is the elongated cash collection cycle for -- related to advances, and we were sitting on some excess advances and also puts pressure on the price per aircraft because we're paying penalties on these aircraft that are delayed.

But even with those challenges, it comes back to BCA deliveries. We expect deliveries to grow next year. So that will be a large driver of positive cash flow. Embedded in that with increasing deliveries at BCA is the benefit of excess inventory burn down. So that will come along with that. So we'll get some working capital benefit there. And we will start seeing cash margins improve as well next year.

You couple that with improvements at BDS that we expect, and they're on the right track, as I mentioned before, and continued growth in BGS, and that formula creates success for positive free cash flow of low single digits for next year. So I think that we've got a pretty good formula to drive that. And I think that will be a recurring formula over the next few years.

So low single-digit billion, including the DOJ payment next year?

Yes.

That's great visibility. The 777X impact, can you kind of break down how much of that charge is cash near term versus long term, the advances, the...

Yes. You look at next year, and again, that created some pressure. We talked about that in the third quarter call. It's about $2 billion of pressure in 2026, which is mostly related to the aircraft deliveries. That's why I didn't mention it specifically here because it's part of these excess advances and also lower delivery payments that we receive next year.

The charge itself, the cost associated and the cash burn associated with that, $4.9 billion, that will be over a number of years as we deliver -- predominantly as we deliver aircraft through the end of the decade. So after we get through 2026, it's not a huge number in any given year after that will kind of -- I want to say pro rata. It's not necessarily pro rata, but it will carry out through the end of the decade and into the early 2030s as well.

And then touching on the advances kind of overcollection you mentioned, I mean, backlog is up a lot. Orders are extremely strong. Deliveries are growing and you have milestone payments on delivery growth. When do you expect to lap that overcollection of advances?

That will take us a few years. I mean it's really dependent on the BCA delivery profile. To the extent that we're able to meet or beat our BCA delivery profile, then that will be able to burn that off quick. I think the key thing there is that it's temporary. We just have to burn off the aircraft that are burdened by that. Once we do, then that will be out of the way and the BCA delivery profile will get back into the normal cycle that we do from a cash collection standpoint. And so there's a little bit of a tail to it, but I think that over time, it does get better.

And then the final piece on inventory that you mentioned, you don't have any more [ delivered ] aircraft...

That's right.

Is that working down work in process and destocking the supply chain?

I think that some of -- with the increasing rates, some of that will happen naturally. When you look at one of the lessons learned for us is that we probably need to carry a little bit higher inventory than we may have in the past when we were at these kind of higher rates. But again, there's still a significant, I would call it, multibillion-dollar opportunity to burn down that excess inventory.

And the beauty of increasing our delivery rates is that the working capital cycle will move faster. So your holding period, just your cycle time will be lower. You'll be moving inventory faster, which frees up cash. So there are just multiple benefits to the increasing delivery rates.

And then the unit cash margins, is that just a combination of higher volume, workforce productivity, what other pieces layer into that?

Well, yes. We'll see -- absolutely, as you're delivering higher at higher rates, the productivity gets better, so your cost per unit gets better. As I mentioned before, we're dealing with some of these aircraft with penalties that burns off as well. So the cash margins will actually get a pretty significant boost between now and the end of the decade.

And I guess looking further out, it seems like you weren't ready to explicitly endorse the previous $10 billion framework, but you did mention Boeing getting back to historical levels. So where are you in your planning review...

Yes, it's right. It's the same planning process that I looked at in kind of multiyear. And again, I feel very confident after having gone through that in our outlook. And yes, $10 billion for the Boeing Company is very attainable for us to achieve. And I think that you look at it -- you look at kind of some of the benchmarks that we had in the past and you look at '27, [ 2018 ] sic [ 2028 ] and $10 billion is just no reason why we can't get to that once we get to these higher rates on the aircraft.

And so yes, I'm very comfortable saying that we can absolutely deliver $10 billion. It's going to be dependent -- a big dependency is on these rates. When you think about how we get from here to there, it's -- we got to complete the certification programs on time. And we'll have some pretty big milestones in 2026 that we'll be able to evaluate. We have to go up the ramp on the deliveries at BCA. We need to see the improving margins and cash flow profile at BDS. We need to see continued growth at BGS. All of those taken together will be the drivers and enablers of this $10 billion cash flow generation mark that we've talked about in the past. And it's all very doable.

And then as I think about deploying that cash, is the priority deleveraging and paying down debt?

That is. Between now, we've got -- if you think about our profile, we've got a big maturity in 2026, about $8 billion. A lot of that will be in the first half of '26. We've got about a little bit over $4 billion in 2027. We'll keep bringing that down, pay down the maturities to a level that we think is appropriate for the business, which gives us the flexibility. Also have a cash balance that gives us also the flexibility to be kind of a shock absorber to the extent that anything occurs in the industry.

But I think that we'll be generating free cash flow that gives us optionality. And so I think that will be between the balance that we have today, the cash flow that we're going to be generating, that will give us plenty of optionality to pay down the debt, to invest in the future and start thinking at the right time about investor returns. We're not there. We need to turn the corner, but the cash flow profile and the cash flow potential and visibility of the company puts us on the right track for that.

How do you think about the right level of cash balance? I mean you mentioned having some buffer. You're obviously sitting on a lot of cash, but you also have an elevated interest.

Yes. I mean we historically have talked about a $10 billion minimum balance. That's something that for the time being that I kind of adhere to and agree with. I'll do my own analysis and kind of over a longer period of time to determine whether or not that should be a little bit higher, a little bit lower. But I think $10 billion minimum cash balance is a pretty good benchmark.

You just finished the Jeppesen divestiture.

That's correct.

Thoughts on proceeds there. And then separately, in terms of M&A, do you still expect Spirit to close this year?

Yes. On Jeppesen, it's been a big boost to our cash balance as we talked about. And I may have caused a little bit of confusion on the third quarter call, and let me just maybe clarify that related to the Spirit that -- so let me just talk about Spirit. Yes, we do expect to close out. We made a lot of progress over the last month there. We're in the final strokes, and we are awaiting the approval. We think that we've satisfied what we need to satisfy. And we're just waiting for kind of sign-off on that.

So we think that we still expect that to happen before the end of the year. As far as their debt and our cash balance, including Jeppesen, we expect to pay down about $3 billion immediately of the Spirit debt upon close. There's $2 billion of high-yield debt that we think that we're just going to take out. And then there's about $1 billion of bank notes that we want to take out as well.

So that will leave kind of their legacy debt maybe about $1 billion that we'll retain. What that means to our cash balance is that we've got the proceeds from Jeppesen. You've got the -- we couple that with what we're going to pay down on Spirit, and I expect our cash balance at the end of the year to be around $29 billion.

Spirit's financials have been a little messy. Any thoughts on how that incorporates into the Boeing financials?

Well, we've got -- for that business, we're doing some -- we've done some prework. There, you can't get too far into the financials because you can't gun jump. So we've been, I think, at the appropriate level of arm's length there. We do have some ideas, but we follow some of the external financials that you do. Our access is somewhat limited because they are a public company as well.

So I think upon close, we'll be able to get to dig deeper into their financials and understand whether or not there's any impacts to our EACs, particularly in the commercial programs. And we'll deal with that accordingly as we close. But there's nothing there that we've seen that's just something that's just going to cause any large disruption to us.

There's been a lot of discussion on a potential new single-aisle aircraft. Anything that's involved in your thinking on the milestones?

No, not really. You think about -- there's been kind of a speculation that's been out there for certain events. And look, we're focused on execution. We just spent a lot of time in our discussion here talking about our BCA delivery rates, our certification programs, the improvement program at BDS and continued growth at BGS. So there's a lot on our plate from an execution standpoint.

And at the end of the day, I think Kelly has talked about this, and I agree wholeheartedly with what he said, is there's kind of 3 things that need to happen before you talk about kind of a next-generation aircraft. One, the market has to be ready. Two, the technology has got to be ready, and we -- the Boeing Company has to be ready. We don't believe any of those factors have been met in any way.

And so we're ways off from that. That doesn't mean that we don't invest in technology development. You'd be -- you just don't put your head in the sand and not invest in technology, talk to suppliers and think about what next-generation technologies can be and how do you think about the framework of that technology in the future. But that in no way means that we're ready to embark in any way on a new platform. That's a ways out. First things first, we need to deal with what's at hand, and that's what we're laser-focused on.

When you think about the cash profile of the new aircraft, is that more weighted towards actually building out the production capacity and then the deferred? Or is that more in the R&D phase?

Well, I think historically, and I think that it's -- whether or not the business model remains is a question to be determined, I think, at that point in time. But you look at history and you have development programs start and a lot of the cash burn upfront is on R&D. As you make progress in R&D, then you start capitalizing for production. You're building assets that are going to be in flight test.

And so there's a number of things that go on there. That's again, historically, I think how you've seen the cash profile. And as you certify and get into delivery, start recovering that investment. But again, for us, let me just be clear, that's not something that we're contemplating anytime soon.

Got a few minutes left. Anything that we missed, any closing remarks?

No. I mean we covered a lot of ground, Gavin. I think we provided some clarity in terms of next year. I appreciate you giving me the opportunity to talk about what I've been able to go through over the past month plus versus where I was during the earnings call. So hopefully, that gives people -- investors a little bit more clarity on how we're thinking about next year and beyond.

Okay. Thank you very much for being here.

Thank you, Gavin. Appreciate it.

Thanks, Jay.

All right.

Good day, everyone, and welcome to The Boeing Company's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised this 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, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations for opening remarks and introductions. Mr. Hill, please go ahead.

Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website.

Today's discussion includes forward-looking statements that are subject to risks and uncertainties. We including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg.

Thanks, Eric, and good morning, everyone. Thank you for joining today's call. I'd like to take a moment to welcome our new CFO, Jay Malave. It's been great to have Jay on board and officially welcome him to his first quarterly earnings call for Boeing.

So now let's take a closer look at our business as we enter the final quarter of the year. Our sustained focus on safety and quality is driving better performance across the enterprise, and we are reearning the trust of our stakeholders, including customers, regulators and employees. Our focus on culture change continues to energize our teams and improve how we work together. By August of this year, we have delivered more commercial airplanes than all of last year. Our defense business is well positioned in the current geopolitical environment, and our service business continues to deliver in a robust aftermarket. Across all of our market segments, we continue to see strong demand, which is reflected in our growing backlog. We marked important milestones in our recovery as the operations generated positive free cash flow in the quarter for the first time since 2023. And earlier this month, we jointly agreed with the FAA to increase 737 production to 42 airplanes per month.

While returning the corner, we're well aware of the work ahead of us to fully recover our performance, particularly on our commercial development and certification programs. We'll talk more about our status but I want to emphasize that we're exploring every lever to deliver better performance on all of our programs. Now turning to the businesses. Let me start with Boeing Commercial Airplanes. We're making meaningful progress in line with our safety and quality plan and our investments here continue to improve the health of our factories. Notably, we've seen 75% reduction in traveled work on our 737 and and a reduction of 60% across all airplane programs. Supported by greater stability, we successfully ramped up the 737 production to 38 airplanes per month as we had planned. We then focused on enablers such as improved quality, training and workplace coaches to help stabilize at that rate and demonstrate that all of our key performance indicators are healthy. Once we are satisfied with the sustained health and stability of the production system, we then presented our disciplined plan to the FAA to increase production to 42 airplanes a month.

We continue to be guided by our safety and quality plan and we'll monitor our performance against these 6 KPIs as we methodically move to higher rates. As a reminder, we expect rate increases beyond 42 per month will go in increments of 5. And while rate increased breaks won't be earlier than 6 months apart, we will remain disciplined and we won't move to higher rates until we achieve stability and readiness. Also in the quarter, the FAA announced it will allow delegation to Boeing to issue airworthiness certificates for some 737 MAX and 787 airplanes. Our team continues to work under the oversight of the FAA in building safe, high-quality commercial airplanes that comply with all airworthiness certification requirements, and we appreciate the FAA's confidence in Boeing and earning limited delegation authority is a responsibility we take very seriously. On the 787, the team is performing well, and the program continues to work towards demonstrating stability at rate 7.

As we previously shared, we'll be guided by our KPIs before we transition to planned higher rates and aim to move to 8 per month in the near future, having recently completed a successful rate Capstone review with the FAA. At the same time, we're investing in the expansion of our South Carolina site to ensure we're prepared to meet exceptional market demand, and we look forward to an exciting future for the 787 program. Turning now to our development programs. On 777X, as we announced earlier this morning, we have delayed our expectations for certification and first delivery, resulting in a $4.9 billion noncash charge during the quarter. As we've previously said in the third quarter, completion of our certification program is taking longer than expected. We have worked to understand the implications to our go-forward plan and now we anticipate first delivery of the 777-9 will occur in 2027. Jay will provide further details on this in his prepared remarks. We've accumulated more than 4,000 flight hours, more than double a typical flight test program. And so far, there are no major technical issues on the airplane or on the engine.

In the quarter, we completed critical testing of the airplanes brakes, engines, takeoff performance and aerodynamic performance. However, we still have a significant portion of the slight test certification program to go and our team is executing plans to complete this certification as part of the schedule we shared today. The airplane in the engine are performing well Demand for the airplane remains strong, and we remain confident that the 777X will be the next flagship airplane for our global customers. This is obviously a disappointment, but we just need more time to complete the certification process. With this charge, we now have a higher confidence that we'll complete the certification within the financial estimate. Other news on the 737-7 and 10 programs. With more than 3,000 hours of lab testing and analysis, we now have a final depth of design changes to permanently address the engine anti-ice issue. This effort remains on the critical path, and we're now following the lead of the FAA as we work to certify the suite of design updates.

As we previously shared, we anticipate certification for the 737-7 and the -10 to happen in 2026. Looking now at our defense business. We continue our active management approach, and we're making progress to derisk our development programs. We again demonstrated stability on our EACs in the quarter, and our BDS team is working hard every day to earn trust of our customers. We also continue to proactively engage with our customers and suppliers. In many cases, we've been able to revise contract baselines to lower execution risk and create win-win outcomes for the customer and for Boeing. We still have work to get these programs through the development phase. And as I've said before, you're never done until you're done, but we clearly are making progress. In the quarter, BDS had several notable milestones, including delivery of the 100th KC-46 tanker across our combined U.S. Air Force and global customer base. We're proud our platform continues to provide unique value and capability to our customers. We also secured key contract awards in the quarter.

The U.S. Space Force awarded Boeing a $2.8 billion contract for the Evolved Strategic Satcom program, solidifying our position as a leader in the national security space. More recently, we signed multiyear contracts valued at $2.7 billion to produce additional PAC-3 seekers, leveraging the advanced investments we've made to ramp up quickly and meet the demand. In St. Louis, we are executing our contingency plan as our IAM representative workforce remains on strike. While of course, we prefer not to be in this position, the team continues to work in support of our customers. We are building JDAMs without IAM workforce at about the same production rate as before the work stoppage and the team is progressing on our MQ-25 and T7 development programs. We'll continue to manage through this with focus on supporting our customers.

Now moving on to Global Services. BGS had another strong quarter, delivering exceptional performance for our company as they support our defense and commercial customers. The U.S. Navy awarded Boeing contracts totaling more than $400 million for the repair of the F-18 landing gear and outer wing panels. We're still on track to close the sale of Jefferson and the other portions of our digital business later in this quarter. At the same time, BGS team continues to secure deals for the digital capabilities that we'll retain related to fleet maintenance, operations and repair. A good example, we recently announced an agreement with Eva Air that includes digital diagnostic tools and advanced analytics to improve efficiency and maintenance operations. Now lastly, I'll share another update on our company's culture change. This remains a topic of interest and conversations with many of our stakeholders. I'm pleased with how the employees have embraced culture change. You'll recall that we use feedback and direct employee input to help shape our new values and behaviors earlier this year. Since then, as I've traveled around the company, I'm excited to see how many teams are using the values and behaviors to effect change in their daily work.

For example, I have come across production teams that are using their daily tier meetings to call out which values and behaviors help them work better with each other. And during my recent visits in Miami and are some of our global sites, teams told me how championing our values around safety and quality is strengthening our relationships with our customers. I'm confident that with our new values, behaviors and the processes we're putting in place with performance management, leadership development and new training opportunities will continue to see positive culture change. Before we close out the year, we're also going to do another voice of employee survey like we did back in February. We'll get a feel for how we're doing on the culture change and get feedback on the areas that are working and where we still need to improve. All this work is going to take time to really take hold. And while I don't expect overnight improvement, we'll continue to listen to our people and use the values and behaviors.

Now before I finish my prepared remarks, I'd like to say thank you to our employees for their dedication to safety and quality and enabling another quarter of improved performance. While we're all disappointed with the 777X delays, it shouldn't overshadow the progress we're making. Our customers are giving us great feedback on the quality and delivery performance. We're increasing production rates. We turned cash positive in the quarter, and we're winning in the market. We're well positioned to build on the momentum, delivering on our more than $600 billion backlog and restore Boeing to the company, we all know it can be. Now let me hand it over to Jay to further discuss our operating results. Jay?

Thanks, Kelly, and good morning, everyone. Let me start by saying that it has been an honor to join Boeing at such an important time in the company's history, and I'd like to thank the team here for the warm welcome these last few months. Throughout my career, I've always been impressed with Boeing's people, products and services and iconic legacy. I'm very excited to partner with Kelly in support of our continued recovery and delivering for our global customers and stakeholders. Boeing is in a much stronger position than it was a year ago, and it's my job to help Kelly and the leadership team build on that progress. I'd also like to thank Brian West for his role in getting us to where we are and for his support throughout this transition. Now let's start with the total company financial performance for the quarter. Revenue was up 30% to $23.3 billion, primarily driven by improved operational performance across the business. including higher commercial deliveries and defense volume. The core loss per share of $7.47 primarily reflects the $6.45 impact of the $4.9 billion charge on the 777X program. which I'll discuss in more detail shortly.

Free cash flow was positive $238 million in the quarter, primarily reflecting higher commercial deliveries and working capital that improved compared to both the prior year and the prior quarter. Importantly, this was the first positive free cash flow quarter since the fourth quarter of 2023 and serves as an important progress point in our company's recovery. These free cash flow results were better than expectations in July, driven by higher commercial deliveries as well as the potential DOJ payment shifting to the fourth quarter. Turning to BCA on the next page. BCA delivered 160 airplanes in the quarter, the highest quarterly delivery total since 2018. Revenue was up nearly 50% to $11.1 billion primarily reflecting higher deliveries compared to last year. Operating margin of negative 48.3% was impacted by the charge on the 777X program. BCA booked 161 net orders in the quarter, including 50787 airplanes for Turkish Airlines and 30 737-8 airplanes for the Norwegian group. Backlog in the quarter ended at $535 billion and includes more than 5,900 airplanes with the 737 and 787 both sold firm into the next decade.

Now let's click down to the commercial programs. The 737 program delivered 121 airplanes in the quarter, including 41 in September. On production, the factory stabilized at 38 per month in the quarter. Importantly, we jointly agreed with the FAA in October to increase to 42 per month and the program is now focused on continuing to drive a stable production system as they transition to this new rate. Spirit continues to deliver fuselages with improved quality and flow, which sets us up well for both our future production ramp and the planned reintegration. That transaction is still expected to close this year. The quarter ended with approximately 5 737-8 built prior to 2023, down 15% from the second quarter. Importantly, we completed the rework on the last of these airplanes and shut down the shadow factory in the third quarter. On the -7 and -10, inventory levels were stable at approximately 35 airplanes. As Kelly said, we have made good progress on the suite of engine anti ICE design updates over the past few months and continue to work with the FAA on the certification path for these programs.

On the 787, we delivered 24 airplanes in the third quarter and ended with approximately 10787 airplanes in inventory that were built prior to 2023, down 5 from last quarter. We still expect to deliver these airplanes through 2026, which is aligned with our customers' fleet planning requirements. Finally, on 777X, during the quarter, we recorded a $4.9 billion loss provision net of a cost-based extension benefit to reset the development and production schedule on the program with first delivery now expected in 2027 versus the prior expectation of 2026. To provide more background and color. We received approval to begin the second phase of certification flight testing in early 2025 and had anticipated authorization to start the next major phase of certification play testing in the third quarter. However, this authorization has been delayed as Boeing and the FAA work through the supporting analysis that enables the next phase of certification flight testing. Given this delay and our assessment of the time line to enter future certification phases, we have shifted a flight test and production schedules to reflect these learnings. We now expect the next major phase to start later this year or early 2026.

The certification program delay, coupled with our reassessment of production costs constitute the basis of the incremental loss provision this quarter. The charge amount includes additional customer concessions, the cost of incremental rework on build aircraft, learning curve adjustments and the carrying cost of production operations spread out over a longer period of time. On a comparable basis to last year's total charges on the program, the costs are higher due to rework on build aircraft, incremental production disruption and learning curve adjustments. As far as the cash profile, we see 2 impacts. The first is related to delivery timing, where we expect headwinds of about $2 billion in 2026 as deliveries move to the right. This converts to a tailwind later in the decade as we deliver delay units. Second, the cash roll off of the $4.9 billion accounting charge is expected to be spread into the next decade. While disappointing, the reset allows us to operate to a higher confidence plan and allows our customers to manage their operations accordingly.

As Kelly mentioned, this confidence also stems from our completion of dry run flight tests. While we have not received certification credit with the FAA for those flights, we have obtained important verification data to support technical risk burned down. Okay. Let's shift over to BDS on the next page. BDS delivered 30 aircraft and 2 satellites in the quarter. and revenue grew 25% to $6.9 billion on improved operational performance and higher volume. Operating margin of 1.7% was up significantly compared to last year, also reflecting the better operating performance in the third quarter. These results also included immaterial impacts associated with the IAM work stoppage as we continue to execute our contingency plans. BDS booked $9 billion in order during the quarter and backlog grew to a record $76 billion. Overall, we continue to make progress stabilizing our fixed price development programs even with minor cost updates on a few programs, such as for the tanker, which absorbed additional average shared costs from the 777X update. We have seen benefits from our active management approach and retiring risk and developing win-win opportunities for both us and our customers.

We remain focused on delivering these important capabilities to our customers and met several important milestones in the quarter. For example, on a T-7A program, we achieved 4 additional customer milestones under the MOA and started assembly on the first production representative test aircraft. The remainder of the portfolio continues to benefit from exceptional demand supported by the global threat environment constructing our nation and allies. Performance on these programs also continue to stabilize and build on the improved operational performance that began earlier this year. Overall, the defense portfolio is well positioned for the future as evidenced by our record backlog, and we still expect the business to return to historical performance levels as we continue to drive execution and transition to new contracts with tighter underwriting standards.

Moving to Global Services on the next page. BGS continued to perform well, again delivering strong financial results in the quarter. Revenue was up 10% to $5.4 billion, primarily reflecting improved commercial and government volume. Operating margin was 17.5% in the quarter, up 50 basis points compared to last year, unfavorable commercial volume and mix. Both our commercial and government businesses again delivered double-digit margins. The business also received $8 billion in orders with a year-to-date book-to-bill of 1.2. Okay. Shifting to cash and debt. Cash and marketable securities ended at $23 billion and the debt balance ended at $53.4 billion. The company also maintains access to $10 billion of revolving credit facilities, all of which remain undrawn. We remain committed to strengthening the balance sheet and supporting our investment-grade rating. Regarding cash flow, we still expect the fourth quarter to be positive before any impact from a potential DOJ payment. This outlook continues to assume significant capital expenditures for future products and growth, particularly in St. Louis and Charleston. This ramp-up was seen in our third quarter CapEx spend, which we now expect to be closer to $3 billion for the year.

Net-net, even with the higher CapEx, our better-than-expected performance year-to-date supports updating our 2025 outlook to a free cash flow usage of about $2.5 billion, barring the impact of a prolonged government shutdown. Okay. Let's sum it all up. Another quarter of progress in our recovery. While the 777 reset was disappointing, our overall performance continues to trend favorably. This includes receiving limited FAA delegation to issue 737 and 787 airworthiness certificates, transitioning to higher 737 and 787 production rates delivering improved performance across the company as well as generating positive free cash flow in the quarter. Broadly speaking, the markets we serve continue to be significant in our backlog of more than $600 billion demonstrates the strength of our portfolio. Long term, these fundamentals underpin our confidence in managing the business with a long-term view built on safety, quality and delivering for our customers. With that, let's open up the call for questions.

[Operator Instructions] Our first question comes from the line of Myles Walton from Wolfe Research.

Jay, what is the negative cash flow in 2026 on the 777X in totality or versus this year? And as you look out, how soon after first delivery can that program get to a neutral position from a cash perspective?

Sure. Thanks for the question. So as I mentioned before, it's a headwind relative to our prior expectations of $2 billion. So I'd expect the overall absolute cash flow to be usage. It's a little bit higher than that. As far as how we get to call it, say, breakeven neutrality type of free cash flow. We've talked about this a little bit in the past. So next year will be a heavy use year. The year after that will be better in 2027. And then we would expect ourselves to get closer to neutral in 2028. And that's all on the back of improving payments from aircraft deliveries and advances. So again, next year, we'll build up inventory. There'll be limited advances and delivery payments. But in 2027, we'll start to see those benefits and those will continue to ramp up in '20 and beyond. So I would expect, starting in 2029, neutrality will go to a benefit of positive free cash flow for the program. And so look, all told, next year is going to be a little bit heavy, but it will continue to improve from year-over-year from that point.

Okay. And sorry, just to clarify 1 thing. Is that 2026 usage of cash on 777X, so it's about similar to 2025 usage when all is said done?

Yes, that's a good way of looking at it, but perhaps maybe a little bit higher, but in that zone.

Your next question comes from the line of Ron Epstein from Bank of America.

So maybe back on the 777, I'm certainly bombarded with these, so apologies for that. But what's driving this now? Like what changed from like just 2, 3 months ago to reevaluate what's going on with the program. Yes. I guess that's the question. Like what changed to really make the focus on this now?

Yes. So Ron, first of all, let me reiterate what I said in the prepared remarks. There's no new issues with the airplane itself or the engines -- the test program. Ironically, we have more hours in the maturity of this airplane is probably higher than any other airplane we've been through the test program. The issue is solely around getting the certification work complete. We had anticipated getting TIA approval. That's what's needed to actually get certain credit when we fly those particular tests. We have not been able to achieve the certification credit. And and that's because we haven't gotten the TIA approval. So look, we've taken a step back. We very much underestimated how much work it was going to take for us to get the TIA approvals and for the FAA to have the opportunity to review all the data submissions that are required. So we stepped back and we've rebaselined this program to incorporate those learnings as Jay said.

And the philosophy I want here is I don't want this to be a continuous quarterly issue for us to make sure we have a solid financial estimate here that we have a high level of confidence that we can get this certification work done. Now recognize that some of this is still not in our control. We're working very closely with the FAA I'm hopeful that there's opportunities for us to improve upon some of this. I think I've talked to the administrator Bedford. And I think he also agrees that we need to look for ways to streamline the process. But in effect, this is a result of us realizing that the plan we had in place to get the certification approvals just was not realistic going forward.

And just one clarification, if I may. On the TIA, what's really slowing that down? Is it on the FAA side? Or is it that there was something that you guys didn't understand about What would be...

It's a little of both, Ron. I would say it's that this is the first airplane that we've gone through this incremental TIA process like this. And I think there was learning in what analysis and data we had to have complete and submitted to get the TIA approval. So some of that's for us. And I think it's taken longer as well for the to go through those submittals and get the approval. So I'm certainly not throwing the FAA under the bus with this. This is a learning collectively for the both of us in terms of what it takes to get through the new process. And again, as I said, we've tried to do our best to put a conservative estimate here in place that accommodates us continuing having a slower process than what we had originally planned. for these TIA approvals. Now I don't anticipate because of the maturity of the airplane. Once we get the approvals, I think the flight testing should go reasonably quickly. But again, it's the analysis, the paperwork to submittal and the approval process is really the big learning here.

Your next question comes from the line of Robert Stallard from Vertical Research.

Welcome back, Jay. I hate to do follow-up on the 777X here. The charges of EUR 4.9 billion is perhaps larger than was anticipated. So wondering if you could maybe work through some of the moving parts here. And then probably for Kelly, in conjunction with that, how are you expecting to manage the 777X supply chain given this delay?

All right. Let me start with the magnitude of the charges, build upon the comments that I made during the prepared remarks. With the delay in the certification, we had to revise our production plans on the program with a focus on mitigating additional precertification airplane builds and provisioning for a higher confidence long-term production plan, the primary driver of the charge. And when you kind of break that down, the schedule to lay simply had a broad impact through the elements of the production system. The longer period of performance or holding period, however you want to describe it, combined with a slower ramp rate it adds substantial carrying cost to the program. It also affected the learning curve with the slower ramp. And even the aircraft that are going to be reworked are so going to be held for a longer period of time, adding cost to them. So as we mentioned, we have a higher confidence plan from a schedule and cost perspective on here so that we've got ourselves protected. If you compare this to other charges, particularly those that we had last year, as I mentioned during my prepared remarks, we are carrying higher provisions for the built aircraft require work the production disruption and the learning curve, all of which are simply better informed by current experience.

So as you would expect, the team is just not going to sit here and take this lightly and hasn't taken it likely going to our focus, we are all focused on doing everything we can to improve the long-term productivity on this program, while also working to mitigate the total delay impact to our customers the best we can. But this baseline puts us in that position to be able to not only beat it, but potentially beat it.

Yes. And Rob, let me just talk a little bit about the supply chain. I think the answer is we just have to flow the new revised schedule out to our suppliers. And then we're going to have to negotiate on a case-by-case basis the impact that has to the various suppliers. And depending on the commodity, the impact might be significant or might be fairly insignificant. So we're going to have to work through that. I'll just say that the revised estimate and the charge here contemplated the impact of the supply chain as well.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Kelly, Jay, could you speak a little bit more about the 737 ramp from here? And I guess, do the remaining months of this year have 42 production units? Or is there some spacing before we actually see that for any reason? And then as you go higher, on the one hand, it's not easy and supply chain is still tough, but on the other hand, I think you're intentionally holding inventory for that reason. And it seems like you have a lot of buffer in the stations at 42 to break to 47. Then I think beyond that, you start to layer in a new line. So I guess, that 6 months you've spoken to you, Kelly, should we all be assuming that for the 42 to 47 to 52 or is each of those breaks? Or is that too aggressive of an assumption?

Okay. So let me start with the first part of the question, which is just when do we get to 42 here for the balance of the year? So recognized No, when we say we're at a 42 rate, that's a rate that we flow in the factory. Not every month, depending on the number of days in the month, the number of workdays in the month, would that necessarily equate to a rollout of 42. And just recognize that for the we've got the holidays coming up in both November and December. We are, as we speak, rolling at the 42 rate. So we've, as you know, we test our supply and our own processes before we actually go to that rate, we do some pretesting. So we've gone ahead and we're loading now at the 42 rate. So I'm planning that we will exit the year very soundly at the 42 a month rate. So that's our plan, and I think we're in good shape to do that. As you mentioned then, we'll go to the next would be the 47. I mentioned in the prepared remarks, not earlier than 6 months because we need time to go to the new rate, demonstrate stability. And then as we did this time, test ourselves at a higher rate.

And in many cases, when you test yourselves at the higher rate, there's actions you have to take to go improve and ensure that we're ready to go. So we don't think we can do that faster than 6 months. And I will just reiterate what I said when we started this campaign here a year ago is it's way more impactful for us to move when we're not ready then to hold off and wait until we're ready. And we will not go to the next rate until we show the maturity in the system. I'd much rather be a month late, then go a month early in this process. And I think we've clearly demonstrated that if we deliver do the right thing, make sure we're meeting our key metrics, we can actually move faster than we planned. So in terms of the follow-on cadence I think you're right now in that we've got a significant inventory right now, and that's clearly boosting us from going from 38% to 42%. We'll also still help us when we go for to 47.

But at that point, I think we start to get more, I'll say, aligned with the supply chain in terms of inventory balances and their expectations. So we'll have to watch that. That will be -- the rates above 47, I think will be as much on how is our maturity looking, but also how is the supply chain ramping up. We've got time to work those things. I don't see anything right now that tells me we can't do that. But that's how I kind of look at that. So if you were doing -- if you were pegging these all in 6-month increments, I'd say the first 6 months are going to be easier than the following rate increases in terms of hitting that 6 months exactly.

Okay. And how will the process with the FAA compare going to 47 and 52 compared to when you did getting to 40.

Yes, we're going to use the exact same process. In fact, when we did the 5 to 7 on the 787, we use the same metrics and the same Capstone review process that we use just now moving from 38 to 42. I think both sides will understand the process and think it's a good process. So we just use that same 1 as well on this mini break up rate 8 on the 787. So I feel pretty good that the process is in place. I don't think getting through that. It might have taken a little bit longer with this first approval with the FAA, but they did a good job in moving pretty quickly. They have to coordinate with a lot of stakeholders as well. So I think -- I don't think the process is going to be an impediment in the future. I think it's more are we ready? Is the supply chain ready? And when that happens, then I think we have a good process to go get approval.

Your next question comes from the line of Peter Arment from Baird.

Welcome, Jay. Kelly, maybe could you talk a little bit more about the -- what's left for certification on the -7 and 10. It sounds like you've got a lot of confidence around it. But what are the milestones or the way we should be thinking about what's left here just given the enormous amount of testing hours and things that you've done here.

Yes. So we've got -- as I mentioned, we've got a significant number of hours of testing on this NII design. So what we've got to do is go make modifications to the test aircraft and they're both hardware and software modifications and then we go through the process, the certification of those steps with the FAA. It's pretty straightforward. And the anti-ice is still the critical path -- is still the critical path for both certifications -- now if you take the engine anti-ice out of it, there is still work to be done to complete the certification. Probably a little more work on the 10 than but not near the magnitude of what we're experiencing with the 777X program. So we think it's pretty straightforward to get through the certification of the design. We've got a lot of test data, a lot of analysis that will help us move quickly through that. And as I said, we're still planning on getting that done here in '26.

Your next question comes from the line of Seth Sipan from JPMorgan.

I wanted to ask about the 87. You mentioned the recent Capstone review and how we can think about kind of the way you went through the 37, the flow of rate increase is coming on the 87 and what some of the kind of key things you're watching are there, whether it's internal or whether it's in the supply chain, having to do with structures or engines or anything like that? And then also, whether you've kind of burned through some of the concessions there and starting to get to a better place of cash profitability on that program?

Yes. So the cadence of production increase is a little bit different story than on MAX. Obviously, the -- we weren't shut down on MAX. And so we didn't -- on 787 through the strike. So we didn't -- we don't have the level of inventory that we have on the MAX program. So our next rate increase will be from this 8%, which we should be at 8 by the end of the year and then we'll move to 10 next year. I do think on 787, the move from 8 to 10 in will be more challenging for us with the supply chain, particularly seats. We're continuing, as I've mentioned in previous calls, we're continuing to struggle with seat certifications. I think that's going to be with us for a little bit longer. We are making progress on that.

But I think seats will continue to be a constraining item for us. And then just the general supply chain on 787 because we don't have the buffer. We want to make sure that we're stable here at 8 a month rate before we go to 10. So we're planning to do that sometime next year. I'm not going to put a month on the on that yet. Maybe as we get to some stability at rate 8, we'll fine-tune that.

Your next question comes from the line of Sheila Kahyaoglu Jefferies.

The Q3 free cash flow number was solid. And Jay, you mentioned positive core free cash flow in Q4 pre the DOJ payment. So curious what BCA rates are underpinning that positive free cash flow. And just all bet a modest Q4 free cash flow exit rate, just a modest number. How do we think about 2026? Is it breakeven? Is it some low to mid-single-digit inflow of cash? Is that still doable?

Okay. Thanks, Sheila. Let me just kind of baseline you on our discussions and our update for 2025. If you recall last quarter, we talked about a usage of $3 billion for the full year. As I mentioned in my prepared remarks and would you just indicated as well, Sheila, is that better by $500 million to about $2.5 billion based on the better performance year-to-date. Let me -- what I'll do is I'll bridge you from the third quarter into the fourth quarter, so $200 million. When you go from that number, we expect a nice inflow based on seasonality, particularly with the Tanker award. And so we'd expect an uptick there about in excess of $1 billion from BDS. Partially offsetting that is BCA volumes. Right now, we're holding anywhere to slightly down from the third quarter in terms of deliveries to maybe flat. But more importantly, in there, even if we're flat, we will see lower receipts because we've got a kind of just a mix headwind where we're expecting lower 777 deliveries in the fourth quarter. So that will be somewhat of a headwind.

The next is interest expense or interest payments. Again, we have a seasonality aspect to it. So the payments in the fourth quarter will be more similar to what we saw in the second quarter. So it's about $900 million plus in the fourth quarter, and that's a step up in outflow of about $600 million. And then finally, we've got the DOJ payment. We've talked about that in the past, which is about 700. So when you reconcile all those items before the potential DOJ payment, you're in the range of positive $500 million. With the payment, that would swing into a negative net-net. But again, operationally, we'll see better performance in the fourth quarter relative to the third and a pretty good exit rate as we think about next year. As I think about next year, look, it's encouraging what we've seen so far. The performance has improved throughout the year. We see that particularly in the free cash flow on an operating basis. But it's early for me to really make a strong kind of call on that right now. I'm still going through the planning process. There's a lot more that I need to get into in terms of the puts and takes on the full year basis for next year. And I'll give you just a lot more color on that. in January. But as I mentioned, things are trending favorably, and we're bullish on our outlook.

Your next question comes from the line of Scott Deuschle from Deutsche Bank.

Just a follow-up on that last question, Jay, I was wondering if you could share your perspective on this $10 billion free cash flow target, the company set out there for a while. And just more specifically, is that a target that you're willing to endorse? And if so, do you think the business is on the trajectory to achieve it in the next handful of years?

Thanks, Scott, for the question. Just maybe taking a step back in the 2.5 months that I've been here. Overall, as I mentioned in the prior question, we've made great progress this year. We still have plenty of runway to go as we stabilize the business and complete the development programs. Right now, my observation is the foundation is in place, and that will lead to steady and gradual improvement over the upcoming years. and I expect the financials to flow. Again, just like for next year, it's really a little early for me to comment on a specific long-term framework, but I'm confident in the underlying cash generation capability for us to return historical levels that you've seen before. You've got a great backlog and operational excellence will be the key to unlocking our cash flow potential. Over the coming months, I plan on assessing our operating plans and the cash flow of the drivers to develop the framework I look forward to presenting that to you at the appropriate time. But it's just a little early for me to do that right now.

Your next question comes from the line of Kristine Liwag from Morgan Stanley.

Again, Jay. Kelly, you mentioned that the Jefferson deal is closing next quarter. You also received approval from the EU for the Spirit deal 2 weeks ago. Taking a step back, can you share your thoughts on how you think about the Boeing portfolio today, your priorities for M&A? And also any color on the effect of these 2 items and free cash flow next year?

Well, look, I think the 2 items here that we've got imminently in front of us our focus from an M&A perspective here right now getting through the Jefferson close pretty close on that. I think that's likely going to close a little bit before the Spirit transaction. And as you said, we've got EU approval on Spirit, but we're still waiting for the U.S. approval with Spirit. We don't see any showstoppers here, but we expect to get that done. And then we're on to the integration phase. We have to de-integrate the Jefferson business from our digital of business. We've got great plans to do that and then the reintegration of our Spirit business, and that will come over the next couple of months after we get into the close. So look, that's our focus right now. I don't have any other areas to point you to in terms of M&A for us right now.

Your next question comes from the line of Doug Harned from Bernstein.

Kelly, at the beginning, you talked a little bit about investment in Charleston. And on the 787, though, our understanding had been that you can really go from 7 to 10 a month in Charleston without that much material CapEx adds but going to 12 and 14 will require more and an expansion of the facility. So when you're looking at Charleston right now, what needs to be done to go to 12 to 14 a month? And then the investment you're discussing today is that related to the 10 a month or are you already making steps toward going to those higher rates?

Yes. We're already making steps for the higher rates. You're right, we could probably -- if we thought capping at 10 was as far as we go, we would not be investing in expanding Charles. So we're going to have a formal groundbreaking. But essentially, what you're going to see if you've been to Charleston, we're going to double the footprint manufacturing footprint. Now we don't need double, but it also gives us a lot more flexibility for some storage space as well. So a major expansion of the Charleston facility, and it's all around getting to rates higher than 10%. We think that the market demand will allow us to get to rates in the teens and that's what we're focused on putting the capital in place, getting the facilities in place. Obviously, if the facilities come online, they'll help us at rate 10, but we don't need that. And I think we're looking at really 2028 before we're really utilizing that expanded facility.

Can you mention at all the CapEx trajectory you're talking about for this?

We expect that to increase next year, Doug. Again, I think in the -- when we kind of gave you the '26 framework in January, we can provide more color, but there will be some higher CapEx in 2016 related to both this as well as the growth in expansion in St. Louis.

Your next question comes from the line of Gautam Khanna from TD Cowen.

Welcome, Jay. Kelly and Jay, I know you touched on seat certification as a potential constraint on 87 production hikes. I was just wondering more broadly, if you can talk about where you see the pinch points in the supply chain today and kind of across the programs as you move forward in rate, where are you most concerned that bottlenecks may emerge?

Yes. So again, I made a few comments on this already. I think you do need to break down between the 737 supply chain and the 787 or the widebody supply chain because we have this excessive amount of inventory. So look, I think in general, I would just comment that the supply chain is doing well. We do have constraints still around seating, but we know what those are. We've got specific actions with the suppliers. And some of that is on Boeing to get the actual seat installations certified on the aircraft. So we're working through those. There's nothing else I would highlight. I mean we have to watch the continued demand on the engines in both the forward fit and the aftermarket and the durability upgrades that are going on in the market. So that will be an area that we'll continue to work with GE and CFM on. But there's nothing I would particularly focus on. But this really is one of these things where that could change tomorrow. We have to keep tabs on all of our supply chain we need all the parts.

But I think in general, we're doing well. I think people also are gaining confidence in our ability to meet our production output. So the fear of people discounting our production in the supply chain, I think, is diminishing going forward as well.

Rob, time for 1 more question here.

Certainly, your final question comes from the line of Scott Mikus from Melius Research.

Kelly and Jay. Jay, you've been at the company for 2.5 months now. Just curious, what are your early observations? What are your priorities? And given that the company will end the year with about $33 billion of cash after Jesus sold, how are you thinking about the balance sheet and what you want to do with that cash balance?

Yes. Let me then Scott kind of work maybe backwards here. On the cash balance sheet, I think with the completion of both transactions, we'd expect the cash balance to be closer to probably in that 28% range, so high 20s, not as high as 33%. As far as observations, look, I've come in here, there's been a lot of enthusiasm. As I mentioned in my prepared remarks, the team has embraced me with open arms. It's made my transition as seamless as it can be. This fair amount that I need to get up to speed on in the company. And again, everyone is helping me do that. As far as some of the culture changes that we've seen, as Kelly mentioned, I see a lot of enthusiasm. I see a lot of excitement about the recovery that the company has embarked on. People are committed. They're dedicated and they want to be part of the improvement. So it's easy to walk in, at least easier for someone like me to walk in cold to an environment like this. where everyone is really operating and working on the same direction. Overall, in terms of what I need to focus on and my priorities in the short term, it's really getting up to speed and to put myself in a position to be a valued contributor, it's maintaining the focus on fully restoring the health of our balance sheet.

It's enabling and driving the planned improvements of our recovery and ensuring that they are sustainable. And finally, it's keeping an eye on the future while maintaining the focus on the short-term and medium-term recovery. So again, first things first, get up to speed and then contribute and drive us and be a participant in this recovery. And again, we're on a good path here. So I'm very excited to be here.

That completes the Boeing Company's Third Quarter 2025 Earnings Conference Call. Thank you for joining. You may now disconnect.

Well, great. Hi. Good morning, everyone. I'm Morgan Stanley's Aerospace Defense Analyst, Kristine Liwag. Thank you for joining us for this panel on the Boeing Company, and I'm very excited to have on stage with me, Kelly Ortberg, CEO.

Great to be here. Thank you.

So Kelly, I mean, you've now been CEO of Boeing for a little more than a year.

Yes, August 8. I was counting.

I mean in some sense, it felt like probably the longest year. So looking back in hindsight, what's been the biggest surprise, either positive or negative that you've seen in your role now?

Everybody asked me that question is like what surprised you? And I would say, in the main, not much. I worked very closely with Boeing in my previous life. So I kind of knew what challenges we had.

Certainly, the macro dynamics were a little bit different. Getting right into right after I started having the workforce stop in Puget Sound was a big challenge, going through the equity raise, then the tariff environment. So we've had a few things to deal with.

But I feel pretty good about where we are a year in. While we dealt with all those macro dynamics, we've also been working and improving and changing the company. And I think we've made good progress, and we'll talk a little bit more about how we're doing there today.

I think that's a great segue. Culture has been a discussion point for Boeing. How would you assess where you are in culture today? And what still needs to get done?

Yes. So one of the first things I did when I joined was focused on getting our leadership closer to the people building and designing their products. I think we got too far away. We got distant. I moved to Seattle. My office is right on the Seattle Delivery Center. I can -- every morning and I do every morning, look out and see what airplanes are where and are they moving? And if not, why? And trying to get people close to the organization.

We also immediately changed our incentive program to a One Boeing incentive program. Prior, we had -- each business unit had a separate incentive. In some cases that caused people not to work together very well. They worked for their own success and not for the overall success of the Boeing.

And then we've worked really hard this year. We did -- rolled out new values and behaviors within the company. We just did a new performance management system where we're going to be giving people ratings on not just what they did, but how they've accomplished that to make sure that people are living the values and the behaviors that we want that are so critical to the success of our turnaround.

We've done our first voice of the employee survey that we hadn't done one in over 4 years, got some really good feedback from our employees about the things that we need to change. And so we're off working on that. In fact, we'll do a refresher survey here this fall and measure how we're doing.

But I think we put some building blocks in place. I'm seeing a major change. Our customers are talking about it. If you talk to our DoD customers, many of them will say, hey, this is a different Boeing showing up. A little bit of the arrogance knocking it down. A little bit of humility. Get up, let our technical people do the talking and not forcing things. And I think we're being effective. Our organization is rallying around these new values. And so we just got to keep that going.

Having said that, this is a multiyear. You don't change your culture overnight, and we're 170,000 people. So it's a big shift to get turned, but I feel like we are turning. I don't think we've fully turned, but I think we're turning.

And that's really great to hear that there's progress being made.

Yes.

Maybe switching gears. I mean Boeing has been a beneficiary of the U.S. administration's recent trade agreements, right? We have a few examples of large aircraft orders from Qatar, British Airways, Korean Air. There's also a rumor of a large China order swirling in the background.

Now these orders have come on already strong Boeing backlog. Demand has never been a problem. But can you talk about the pricing environment of these incremental aircraft orders? Are you getting better predelivery payment terms? Are you getting better escalation embedded in the contracts? And how are you protecting profits for the future, especially the duration of these deliveries won't be for a few more years out?

Yes. So let me talk about, first of all, before I get into pricing, just the overall demand environment. You're right, the balance of trade activity and the tariff activity has certainly put a keen focus on airlines and on our aircraft. There's no better way to correct the balance of trade than to buy a large number of aircraft. And certainly, we're the beneficiary of that.

The administration has been very helpful. I would say that in many of these announcements, they aren't yet contracts, they're intention to buy aircraft. And so we'll go through the normal process of firming those up into a firm contract.

Pricing, I would say, is almost independent of the trade demand activity right now. We've been in this, a supply-constrained environment for quite a while. We do have inflationary pressure coming from the supply chain. And certainly, we're taking that into account in how we're pricing the new product.

The other thing is that in many cases, we're seeing upgauging of demand, so like a 787 moving to a larger variant or a MAX moving to a larger variant, which also gives us some opportunity for higher pricing. So yes, we're certainly taking the environment into account in how we're dealing with the pricing of our products.

Shifting gears to production. You've -- production and deliveries for the MAX have rapidly improved this year. You got to 38 per month in May. And you talked about stability in the second quarter at maintaining 38. So I guess, how has stability at 38 progressed? Where do you stand in your major KPIs? And ultimately, when should we expect the first step up to -- for the FAA to remove the cap and you get to the 42 per month?

Yes. So you're right. We are producing at the 38 a month, which is where we have the cap from the FAA. The BCA team has done a really nice job of implementing the Safety & Quality Plan that is a part of our commitment to improve the product and the safety of our systems, and it's the commitment we have to the FAA. That plan is on track. They're implementing it on schedule. So I feel real good about that.

We do, as a part of that plan, have 6 major key performance indicators that we use to track the stability of the production system. And the FAA is using those to also be a factor in the determination of our rate increase. We got one KPI that we've been balancing between green and a little bit below green, which is rework. I've talked about that in the past.

We see that progressing well. So I feel pretty confident that we'll be in a position here pretty soon to sit down with the FAA and go through what we call a capstone review, which is the process we go through to not just go through these KPIs, but to look at our entire supply chain readiness, our continued production readiness and move forward with that.

Now I will say that we just did that capstone review on 787 this past quarter to move from 5 a month to 7 a month. We used the exact same process with the FAA and successfully went through that. So I feel pretty good that we've got the process.

Administrator Bedford is now in place. You probably heard him say things like we're going to be doing some tabletop reviews, and we have been doing some tabletop reviews with them. So I think we're pretty aligned. We've got to get this final metric stabilized. And then we're certainly still planning to be producing at 42 a month by the end of the year.

It's great to hear the progress. On the 2Q '25 earnings, the focus on the supply chain. What we've heard is different suppliers are producing at different rates. How would you characterize the health of the supply chain today and what's their ability to support your rate increases?

And also, how do you balance having physical inventory of what you need and also liquidating some of the physical inventory you've already built over these past few years?

Yes. So we have -- clearly have excessive inventories, particularly on our MAX production. And we'll be utilizing that inventory. And that's why you see some of the suppliers are producing at a higher rate than others. We've kept those suppliers that were either concerned about their ability to meet our demand or they need financial support. We've kept those higher and many of our suppliers are at a higher rate than 38 a month. So they're already at the 42 in many cases.

Some of the bigger suppliers who can manage things and we think they can manage that, they're burning off some inventory. So they may be producing at a lower rate. I think some of our suppliers have talked about that.

I feel really good about where we are for this next rate increase. So going from 38 to 42, we've got a lot of inventory. Inventory is going to buffer even if we do have any supply chain challenges, which right now, I don't see the supply chain challenges for us, any major ones, going from to 38 to 42.

Then as you know, we've got more rate increases in our plan. So we'll go from 42 and then we'll go up another 5, and we'll go up another 5. I think where we'll get to where that inventory is more balanced with the supply chain, probably around the 47 a month production rate. And we'll see how well the supply chain aligns there, and that will determine how fast we can move beyond that rate.

And when you're looking at the rate increases, how long do you want to stay at that rate before pursuing the next rate break? Is it the 6 months that you've kind of highlighted before? Or does that change as things start flowing better?

So we said no sooner than 6 months because we need to go through the process of getting the right rate, demonstrating stability at that rate, then sitting down with the FAA and going through this capstone review process I've talked about.

My guess is that it will get more challenging as we go to a higher rate. But I think these next couple of rate increases, if the KPIs are showing that we are stable in the production system, will we go into the FAA and planning to move to the next production rate. Obviously, there's strong demand for our portfolio. And the more we can accelerate the production rate, the better off it's going to be. However, I've said this all along, and it's super important is we got to do this right, and we are not going to push. If we're not ready, we'll wait a month.

A month will not matter in the big scheme of things and losing stability will matter. And so we're going to make sure we're governing ourselves and doing the right thing and build good quality airplanes. And the customers are giving us great feedback. So we want to continue to hear that.

Shifting gears to the 737 MAX 7 and the MAX 10, you've previously said that the design team is still working on the anti-icing solutions. Can you provide any color on the progress of this pursuit? And when would we expect the earliest certification of these aircraft programs?

Yes. Both those, Dash 10 and the Dash 7, the critical path to cert is the engine anti-ice. And at the last earnings call, we slipped the completion of the certification from the end of the year into next year.

The good news is we've made really good progress on the design of the engine anti-ice since that time. I feel pretty good that we're nailing that design. We're in the process right now of working with the FAA on the certification of that design, what tasks need to be done.

So we're still planning on getting that cert done next year, getting aircraft delivered next year. And I think incrementally, we've made some good progress on the design part. So I'm pleased with that. It's frustrating that it took -- it's taken us this long. But I think we've got a solid design now to base our plan going forward.

Now on the 787, you talked about getting to the stability for 7 per month, and congratulations on getting into that rate. But as you know, we always want to see production rates go up. So 10 per month. What would you have to see to get to 10 per month?

And also looking at the order book and what's on the MOU environment, especially with additional potential trade orders -- trade-related orders? You have a path, it seems like 12 per month and even 14 per month. How should we think about the progress of this program over the next few years? And what are the key milestones we should be watching for?

Yes. So we've got -- we'll do a mini rate increase from -- we're currently at 7. We're going to go to 8, and we're planning to do that in the near future. And then from 8, we'll go to 10 and we're hopeful to be at 10 next year. So -- but you're right, there's strong demand for the airplane. There's demand to support teens kind of production rate. That's why we're investing in Charleston to expand our capacity.

We can do probably around 10-ish, maybe a little bit more in our existing footprint. But beyond that, if we're going to go higher than that and sustain it, we're going to need additional capacity, and we're building that out.

We're targeting that facility investment completion in the '28 time frame. So that gives you a feel for where we are today and where we could go. Strong demand for the airplane. There's no question about that. So it's selling quite well. If we could build more, we could sell more.

It is a beautiful aircraft to fly on. Very comfortable.

Yes.

On the 777X, can you provide an update on the certification. You were on CNBC lately and you called it mountain of work. And when you look at the certification progress, it's still entering to service in 2026?

Yes. So the mountain of work is still there. So the 777 -- on the 777X program, the good news is we've got 5 aircraft now into the test program. We're flying a lot of sorties and there are no new technical issues on the airplane or the engine. So both the airplane and the engine are really performing quite well.

But we are getting to a point in the certification program where we need to be burning down the certification. Think of it as for score, completion of the test. And we are falling behind on the certification. In order to actually get the completion, we can go fly, but we can't actually get the certification credit until we get this thing called a TIA.

And you've probably seen where these TIAs were getting incremental TIAs, which give us some limited capability of being able to get the certification credit done. But we still don't have authorization from the FAA for a good portion of the certification program. So we're working through that right now with the FAA, but we're clearly behind our plan in getting the certification done.

It's something that I've asked Jay Malave, who's our new CFO, to spend some time as we come through this quarter, really looking at the schedule slip and understanding what the implications are and our go-forward plan. And this is really important because, as you know, even a minor schedule delay on the 777 program has a pretty big financial impact because we're in a reach-forward loss situation.

So we're looking at that real hard. I will say the demand for the aircraft is fantastic. It's going to be a great airplane. We've just got to get ourselves through the certification program, and the amount of work is still in front of us.

Thanks, Kelly. Now shifting gears to Boeing Defense. You've had leadership changes there. We now have Steve Parker leading BDS. He's been leading it since July 2025. Can you talk about specific changes you've implemented in order to stabilize operations, improve margins and stop some of those loss-making programs from having additional charges?

Yes. So we put Steve in that role full-time permanently here recently, but he actually has been acting in that role since last fall and doing a fantastic job.

Steve has been focusing on the team on getting more discipline down to the end on the -- on these -- particularly these large fixed-price programs, getting people, managing the risk, focusing on what we need to do.

And he's also been engaging with our customers. And in many cases, we've been able to sit down with the customers and revisit the contract baselines and make changes to those contract baselines that allow us to progress and be successful but also allow them to be successful. We kind of started that on the T-7 program. We're making progress on VC-25B as well.

And so he's done a really, really nice job. And the objective here is to get that portfolio back to where we don't see these multibillion dollar kind of EAC problems. We still have normal development. We've got a lot of risk yet to manage in all these development programs, and we need to get through -- get the fixed price programs done and move to the next phase where the risks are retired and the profitability is higher.

I don't see anything that keeps us from getting to that -- back to a high single-digit kind of margin performance with the portfolio. Get rid of some of these -- get done with some of these fixed price EACs will help.

I will also say Steve has done a really nice job of making sure that all the new business we're bringing in, we're bringing that in with the right contract structure. So we don't get into more of these big programs that create big challenges for us.

So Steve's got a lot of work to do. A lot of these programs still are in the development phase. T-7, for example, we're in the flight-test program right now, going through the high angle of attack testing, and that's a critical level of testing. I'm sure we'll have some discoveries along the way. But again, I want to get that to a more normal performing portfolio. So I'm pleased with how the team is doing.

Thanks, Kelly. And you spoke a bit about the strike at St. Louis at the 2Q earnings call. It sounds like there's progress with your discussion with the union. Can you give us an update regarding where we stand and how you're thinking about the potential impact on the defense business?

Yes. So you've probably seen it was announced yesterday that we've come to a tentative agreement with union leadership. They vote on Friday. I'm super hopeful that that's a positive vote and we get everybody back to work.

Having said that, we did implement our contingency plan while they were out and in many cases, we were able to continue to keep our programs moving along pretty well.

We built JDAMs at the same production rate, for example, and delivered JDAMs at the same production rate. So we're going to manage through that in terms of impact to the financial performance of the company. I wouldn't worry about that being too impactful.

The strike impacted our fighter production, so F-15, F-18 mods as well as some of our munitions work. But again, we've reached a tentative agreement. I think the employees, I hope they come back to -- they vote to come back to work, and we'll get everybody back and I think we'll manage through this.

Thanks. And now on cash. So a two-part question here. On free cash flow for 2025, you mentioned a free cash flow usage of about $3 billion. But there's been continued very strong commercial order activity and hopefully, that comes with some PDPs. Is this negative $3 billion still you're thinking for this year?

And then, look, the second part question to that is for 2026. As we look out to 2026, and these are not your numbers, these are consensus numbers, $5.5 billion. But is that the ballpark of how we should think about '26 free cash flow?

Yes. So let me talk about the balance of this year first. Look, it's primarily driven by the production delivery. So good production deliveries means improved cash flow. I think the numbers that we've put out there are about right.

Remember that we've got a potential large payment here in the third quarter, $700 million associated with the DOJ settlement. That payment will be made when the judge finally rules on the case. I don't know when that's going to be. If it -- we've got that plan to be in the third quarter and how we've kind of guided you on cash. If that slips out, obviously, the third quarter will be better and that impact will be in the fourth quarter.

But you set that one kind of lumpy payment aside, I do feel very good about our ability to be in positive cash in the fourth quarter, get into next year with the right focus and the right trajectory on cash, and I'm not going to tell you exactly what that's going to be.

Let me get through our planning process. Let's get through this first rate increase. We know that generating cash is very important to investors in the company, and we're very keen on doing that. But it really is -- and I've said this all along, it's all about deliveries. We ramp up successfully, the financials will follow. And so that's what we're super focused on doing.

I was hoping you would be a little bit more specific.

Well, maybe next time.

But still on the free cash flow topic, it's been about 3 years from your last Investor Day when you talked about the $10 billion free cash flow predicated on certain production rates, 50 for the 737, 10 for the 787 and a few defense expectations.

Now that we're seeing more progress on these programs, has this thinking changed for the positive, for the negative? Are there puts and takes that we should consider when thinking about that $10 billion number?

Well, Kristine, we -- what I've said is that and I still hold to this is, I don't see anything structurally that keeps us from doing that. The question is when. And that -- the key components to making that happen are ramping up the production, both 787 and 737, getting the 777 and the 2 MAX variants out of the engineering process and ramping those into production and then getting this defense business back to that low single-digit. I mean those are kind of the major components.

And so our ability -- the timing is dependent on our ability to achieve those rate increases and achieve that stability in defense. We have plans to do that. And we'll put a finer touch on that once we get through some of these rate increases. But look, I think we've turned -- we're turning the corner, but we haven't fully turned the corner. We got to get through this development that we just talked about, and we do need to get through the -- successfully get through the production rate increases and keep the quality of the product very, very high. So that's what we're focused on doing. If we do that, again, I think the financials will follow.

Shifting gears to the portfolio. Earlier this year, you sold your Digital Aviation Solutions business. Is there more to do on a portfolio standpoint, either in terms of divestitures or potential tuck-ins?

Yes. There's -- we're looking at a couple of additional things, but I don't think they're going to be as material as the Digital business, the Jeppesen divestiture. So we'll continue to do those.

And I'm trying to make sure we stay focused on our core business, and we continue to be successful there. So that may mean we stopped doing some things. We maybe pruned the portfolio a little bit. But again, I would think of that as on the margin versus a major structural change in the company.

And how should we think about balance sheet priorities?

Far and away, our priority is debt. Through this crisis we've been through, we've taken on way too much debt. And so as we come back and we start generating cash, we want to be solidly investment grade. And we need to be there for the next-generation airplane as we start to think about that. And so we're going to be servicing our debt here as a key priority for us as we return to positive cash.

Great. And Kelly, you've highlighted really well, a lot of the work that's ahead. So what gets you excited to go to work every day? What gets you excited to do your day-to-day and watch those tail numbers and making sure they get out the door. Where you're getting this actually from?

It's kind of what I do. I ask my wife that she goes, yes, you are having fun. I go, am I having fun? She goes, yes, you are having fun.

It's what I do. I love to work with the team. We're building a very, very strong team at Boeing, and that's been bringing some new people in, and we're working together.

I'd just love to see the progress. This is a national asset, and this company needs to be successful. And that's why I'm here. The country needs it. The industry needs Boeing to be successful. And it just jazzes me to come every day and fight the fight and make progress. We do big challenging things. So not everything is going to be easy. But I feel really good 1 year in that my plan is working that we put together, people are getting excited, customers are feeling better. The negative rhetoric around what's wrong with Boeing is moving on. And we're going to get back to that Boeing you expect, building the best airplanes in the world and solving some of our military's most complex problems. And that's our goal. And I think we can get there.

And my job is just to organize everybody in a way. Focus everybody, start rowing. Everybody rowing that boat in the same direction, and it's amazing what we'll do.

And by the way, like hearing all these progress on the culture, the production plan, the supply chain, it's great to see that because we do need Boeing to be successful. It's a national security asset, and it's wonderful to see.

And now with these things improving, what are your key concern points? Where are you spending most of your time, either things you can control or things that you can't that kind of keep you up at night?

Yes. So I'd say the one area is moving maybe from a real focus on the production. And Stephanie and her team are going to continue to stay focused.

But for me personally, it's now focusing a little bit more on the development. Thinking about the certification process, it's way too slow. We've got to work with the FAA in swinging the pendulum back and making that process that will work. I can't imagine that we can do a new airplane without having that process refined. And so that's where I'm going to start spending more of my energy.

And of course, as we get these development programs done, that will also free up a lot of capital for us to focus on what's next. And that's very, very exciting work for -- not just for me but for all the employees at the Boeing Company.

So that's where I'd say I'm going to be shifting my focus. But it's -- this equation all fits together. If we don't perform, we don't deliver, we don't have the cash to generate the opportunities for our future. So we've got to do it all.

Great. So in the next 12 to 24 months, what are you most excited about?

The rate increases. That's going to be great, getting back there. Hey, we almost -- we are almost at parity on deliveries with Airbus this last month. So it's like we're getting there. We're getting there. And yes, so we got a plan. The plan is working. It's not a 1-year plan. It's a multiyear plan. So we're just going to stay on it, stay after it. And I think you'll see better and better and better performance out of the Boeing Company.

Well, thank you very much, Kelly. This concludes our presentation on the Boeing Company.

Thank you.

Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that 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, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations, for opening remarks and introductions. Mr. Hill, please go ahead.

Thank you and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer.

This quarter's webcast, earnings release and presentation which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions.

With that, I will turn the call over to Kelly Ortberg.

Well, thanks, Eric, and it's great to have you onboard. And thanks to everyone for joining in today's call.

First, I want to express our sincere condolences to the loved ones of everyone onboard Air India Flight 171 as well as those affected on the ground. Our team continues to provide technical assistance to the ongoing investigation, led by India's Aircraft Accident Investigation Bureau, or AAIB. And we're supporting our customers in any way we can.

So now let's shift our focus to the quarter. It's clear our recovery plan is taking hold. We're making steady progress to stabilize our business, strengthen development program execution, and change our culture to set up for the future. In May, we announced our largest wide-body order ever for up to 210 commercial airplanes, which adds to the momentum from recent wins in our defense business like the F-47. Our market demand remains strong.

We're just over halfway through 2025, and I'm pleased with our progress. We're starting to see real momentum. And the nice thing is that we're seeing it across the business.

At the same time, we also have to acknowledge the remaining work ahead of us on this recovery. And while we continue to manage through a dynamic environment, we're certainly encouraged with the very recent trade deals.

Turning now to BCA. We're seeing the benefit of our ongoing investments to stabilize our production system as we continue to remain on track with the safety and quality plan that we established and submitted to the FAA.

A few highlights are we've reduced traveled work at rollup by 50%. We've addressed employee feedback from our safety and quality standdowns. We've employed structured on-the-job training, and we simplified more than 1,500 work instruction documents. This is critical to our performance to deliver safe and high-quality aircraft on time to our customers and steadily execute our planned production increases.

With more stability in operations, we delivered 150 commercial jets in the quarter and 280 in the first half of the year. That makes it the most deliveries in the second quarter and first 6 months of the year since 2018. More importantly, almost every customer I talk to has said they're seeing higher quality airplane deliveries.

On 737, you'll recall our plan was to methodically ramp up to 38 per month, stabilize at that rate and then request an approval from the FAA for the next rate increase to 42 aircraft a month. In the quarter, we achieved a rate of 38 airplanes per month, and we're now focused on demonstrating stability at that rate. We'll continue to use key performance indicators that have been agreed to with the FAA to measure the health of the production system. Those KPIs continue to steadily progress in line with our expectations we set at the beginning of the year. We expect to be in a position to request approval from the FAA in the coming months to increase to 42 aircraft per month.

On 787, we successfully completed a Capstone review in the quarter and the program is now at a production rate of 7 airplanes per month. Like our team in Renton, our team in Charleston is now focused on stabilized the new production rate and using KPIs that we're tracking and they still look good they're all green. We'll continue to track those over the near term before preparing for the next rate increase.

Turning now to our commercial development programs. We continue to progress with our 777X flight test program and remain focused on the work ahead to get the airplane certified and delivered to our customers. With our full test fleet activated, including 4 dedicated airplanes, the program has completed more than 1,400 flights and 4,000 flight hours. Flight testing continues with no new technical issues to report. So good progress so far, but we still have a lot of work to do.

Production of the first 777X-8 freighter is underway with the first hole drilled in the wing spar this month, and work on major assemblies at Boeing and key suppliers is in progress.

On 737-7 and -10, we continue to mature the technical solutions for engine anti-ice and certification path for the 737 MAX family derivatives. Work on the solution is taking longer than expected, and we now are expecting certification in 2026. As we've previously said, we don't expect a material impact to our production plans, and we're prepared to build other 737 models for our customers.

Switching now to Boeing Defense and Space. As you know, we recently named Steve Parker as our permanent Defense business CEO. Steve is a terrific leader and has guided the team in our recovery, helping to stabilize our defense business, improve our customer relationships, while developing his people with a focus on building a strong culture. And I look forward to his continued leadership in this [ turnaround ].

We had another good quarter on our fixed-price development programs and held our EACs for the second consecutive quarter. Our renewed efforts around baseline and risk management on these programs are producing early results. Again, like in commercial, we have a lot of work to get these programs through the development phase, but I do like the direction we're headed.

On MQ-25, the team began ground testing and successfully worked through the production move to our new facility, bringing the program closer to first flight for the U.S. Navy.

On T7, we finalized the MOA with U.S. Air Force to build 4 production representative aircraft and now have completed 5 milestones associated with the original agreement. As we've said, active management is a win-win for both us and our customers and show us how this approach works to derisk some of our development programs while delivering capability to our customer.

On KC-46, we delivered 5 tanker aircraft in the quarter. Recent global events remind us this platform continues to deliver unparalleled capability, versatility and operational flexibility for the war fighter no matter where we are. As the customer gains confidence in our stability and operations, U.S. Air Force recently shared its sole source approach for the next batch KC-46 tankers beyond the current program of record.

Turning now to our Space portfolio. We recently captured an important win with U.S. Space Force awarding Boeing a $2.8 billion contract for the development and production of 2 satellites to deliver resilient, space-based nuclear command and control and communications for the United States. This contract is consistent with our strategy to ensure we enter into the appropriate contract type for the appropriate type of work. Furthermore, this award is a testament to our role as a leader in national security space, and we stand ready to support future programs like the Golden Dome.

Looking forward, the recently enacted Reconciliation Bill also increases national defense spending by $150 billion through fiscal year 2029, providing funding for Boeing defense programs like the F-15X, the MQ-25, the E7 and proprietary programs, among others. Our portfolio is well positioned to meet the priorities of our customers and the current global threat environment.

Next, we'll discuss Boeing Global Services. BGS had another strong quarter, continued to deliver great performance for our company as they support our Defense and Commercial customers. In the quarter, we delivered the first PA with enhanced anti-submarine warfare technology to the U.S. Navy, marking a major milestone for our team in Jacksonville, Florida. BGS also secured a contract to provide P-8A aircraft training systems and support to the Republic of Korean Navy.

And in Commercial Services, we opened our third parts distribution center in Germany and our ninth global location dedicated to shipping spares. Our network of distribution centers enables quicker repairs as well as maintenance and overhaul work to keep airplanes in service, all focused at serving a growing aftermarket.

Turning now to global trade where the environment has been dynamic. We continue to simultaneously monitor policy developments while mitigating the potential impacts of tariffs as trade negotiations continue. As a reminder, about 80% of our commercial supply chain spending goes to U.S. suppliers and about 80% of our commercial deliveries are to customers outside the U.S. As a leading U.S. exporter, ongoing free trade is important to our business. Our top priority is promoting continuity of supply, and we're working across the supply chain to ensure suppliers are focused on meeting the strong market demand.

You'll recall that we framed the risk of higher input costs in our first quarterly call, and our team is doing it well to manage within that framework. We are seeing some of these input tariffs resolved through negotiation agreements, like the one announced over the weekend between the U.S. and the EU, and the bilateral with the U.K. So overall, we're probably feeling better today, but we still need to actively manage through this dynamic environment.

We appreciate the administration and Congress for championing the U.S. aerospace industry around the world and applaud President Trump and the EU Commission President Ursula von der Leyen for reaching a negotiated agreement that will be good for the aerospace industry in the U.S. and Europe. The administration understands the role of our sector in strengthening the U.S. trade balance, and we're optimistic that future agreements will address aircraft and parts as we work through our diverse backlog of more than $600 billion for our global customers.

During the past several quarters, you've heard me talk about 4 key areas that will enable our recovery. This morning, we've touched on the progress to stabilize our business, improve program execution and build on our future with key wins. I'd like to now spend a few moments going through our progress on our culture change.

You may recall earlier this year, employees helped create a new set of values and behaviors that we shared across the company. I'm very excited about how the employees have embraced this. It's simple, it's straightforward, and it's helping people rally around change. This month, we took our next step in rebuilding our culture by introducing our new performance management approach to strengthen accountability, develop careers and measure what they accomplished and how they achieve their goals through our values and behaviors. These measures will be important because they determine how we reward, develop and promote our people.

I'm confident as we continue to change our culture, work to rebuild trust and strengthen accountability, we'll continue to move going forward. We have an incredible opportunity ahead.

Now before I conclude my prepared remarks, I'd like to give special thanks to our employees for their dedicated and hard work throughout the quarter. The energy that they're creating here and the focus on delivering to our customers, meeting commitments and execution is really paying off.

And I also want to extend my deep appreciation of Brian West for his outstanding work over the last 4 years to stabilize our business and navigate the recovery, all while continuing to position the company for our future. And I particularly want to thank him for the support he's given me this past year.

As you know, we recently announced Jay Malave will join Boeing in a couple of weeks as our new CFO, as Brian transitions into a senior advisory role. I look forward to welcoming Jay to Boeing and Brian's continued counsel in his new role.

Thanks, Brian. Now I'll hand it over to you to discuss the operating results before we move to questions.

Thanks, Kelly, and good morning, everyone. Let's start with the total company financial performance for the quarter.

Revenue was $22.7 billion, up 35%, primarily driven by higher commercial delivery volume. The core loss per share of $1.24 was a significant improvement compared to last year, driven by higher commercial deliveries and improved operational performance across the business.

Free cash flow was a usage of $200 million in the quarter, reflecting higher commercial deliveries and working capital that improved compared to both the prior year and the prior quarter. Our free cash flow was better than expectations shared in April driven by higher commercial delivery volume and better wide-body mix as well as favorable timing of CapEx.

Turning to the next page, I'll cover BCA. BCA delivered 150 airplanes in the quarter. Revenue was $10.9 billion and operating margin was minus 5.1%. BCA booked 455 net orders in the quarter, including 127 A7 and 30 777-9 airplanes for Qatar Airways and 32 787-10 airplanes for British Airways.

Backlog in the quarter ended at $522 billion, which was up more than $60 billion sequentially. This includes more than 5,900 airplanes that translate to over 7 years of production. And the 737 and the 787 are both sold firm into the next decade.

Now I'll give more color on the key programs. The 737 program delivered 104 airplanes in 2Q, including 42 in June. On production, the factory steadily increased rate during the quarter, with monthly production reaching 38 per month in May. And the team remains intent on stabilizing at that level. Importantly, the operational KPIs continue to progress, and we still expect to be in a position to request approval to go above 38 per month in the coming months.

Spirit continues to deliver fuselages with improved quality and flow, which sets us up well for both the production ramp and the reintegration. Closing on this transaction is expected later in the year.

More broadly, on the master schedule, we continue to make adjustments as needed and manage supplier by supplier based on inventory levels. Over the past year, our buffer inventory has grown to promote stability across our production system. As production continues to stabilize and rates increase over time, we plan to deliberately return buffer inventory to more normal levels.

The quarter ended with about 20 737-8s built prior to 2023, down 15 from 1Q, which are for customers in China. We now expect to complete the rework on these airplanes and shut down the shadow factory in the third quarter.

On the 7 and 10, inventory levels were stable at approximately 35 airplanes. As Kelly said, we continue to mature the certification path for these programs. The engine anti-ice solution has taken us longer and we now expect certification next year. As we said, we will build other MAX models for affected customers and don't expect an impact on our planned production rates, with the financial impact of this revised time line reflected in the program margins this quarter.

On the 787, we delivered 24 airplanes in the quarter as the program continued to demonstrate improved stability. After stabilizing at 5 per month and completing a successful Capstone review in the quarter the production rate is now at 7 per month, and the program is focused on stabilizing the production system prior to future rate increases.

2Q ended with about 15 airplanes in inventory built prior to 2023, down 5 from 1Q. The rework on these remaining airplanes is complete, and we expect to deliver about half of these units this year and the other half in 2026, in line with our customers' fleet planning requirements.

Finally, on 777X, flight testing activities with the FAA continue to progress, and we remain focused on the work ahead to deliver the airplane next year. 777X inventory was up about $900 million in the quarter and will continue to grow as we move towards entry [ into ] service as we've previously shared.

Moving on to the next page and BDS. BDS booked $19 billion in orders during the quarter, and the backlog grew to $74 billion. Revenue was $6.6 billion, up 10% on improved operational performance, and BDS delivered 34 aircraft and 2 satellites in the quarter.

Operating margin of 1.7% was up significantly compared to last year, also reflecting the better operating performance in 2Q. The business continued to make important progress in its recovery, and the game plan to get BDS back to high single-digit margins remains a key focus.

Our core business remains solid, representing approximately 60% of our revenue and performing in the mid- to high single-digit margin range. The demand for these products remains very strong, supported by the global threat environment confronting our nation and allies.

On the roughly 25% of the portfolio that's primarily comprised of fighter and satellite programs, operations continue to reflect the stabilizing performance trends that began in the first quarter, which drove relatively consistent sequential margins.

Lastly, on our fixed price development programs that represent the remaining 15% of revenue, we continue to work to stabilize maturities programs. This quarter's results reflect improved operational performance, and we remain focused on retiring risk and ultimately delivering these important capabilities to our customers.

In the quarter, we made progress on the MQ-25 program, which started ground testing, as well as the T-7A program, which achieved 3 additional customer milestones.

Overall, the [indiscernible] portfolio is well positioned for the future, and we still expect the business to return to historical performance levels as we continue to stabilize production, execute on development programs and transition to new contracts with tighter underwriting standards.

Moving on to the next page, in Boeing Global Services. BGS continued to perform well, delivering very strong financial results in the quarter. The business received $5 billion in orders and the backlog ended at $22 billion. Revenue was $5.3 billion, up 8% year-over-year, primarily reflecting improved commercial and government volume.

Operating margin was 19.9% in the quarter, up 210 basis points compared to last year, on favorable performance and mix, including a onetime gain. Both our Commercial and Government businesses again delivered double-digit margins. In the quarter, BGS completed the sale of its maintenance repair and overhaul facility at Gatwick Airport and secured a contract to provide P-8A aircraft training systems support to the Republic of Korean Navy. BGS remains a terrific long-term franchise that is focused on profitable, long-term efficient offerings, and the team continues to execute very well.

Turning to the page, I'll cover cash and debt. Cash and marketable securities ended at $23 billion, primarily reflecting the debt repayment and free cash flow usage in the quarter. Debt balance ended at $53.3 billion, down $300 million in the quarter on the pay down of maturing debt, with $300 million of maturities left in the year. The company maintains access to $10 billion of revolving credit facilities, all of which remain undrawn.

We remain committed to managing the balance sheet in a prudent manner with 2 main objectives: first, continue to prioritize the investment-grade rating; and second, allow the factory and supply chain to stabilize.

Let me provide some additional context on the macro backdrop before getting into the free cash flow outlook. We continue to closely monitor ongoing policy developments and work to promote our industry's importance to the long-term economic and trade objectives of the administration. And we were encouraged by certain bilateral trade deals that were announced in the quarter, including the recent agreement with the EU. Given our position as a top U.S. exporter, free trade policy across commercial aerospace continues to be very important to us.

On the input cost side, we continue to work closely with our suppliers to promote continuity of supply and pursue options to mitigate tariff cost pressures. And as we said, any financial impact is not significant.

Regarding free cash flow, we expect third quarter free cash flow to be more or less in line with the second quarter usage before any impact from a potential onetime DOJ payment. That sets us up for positive free cash flow in the fourth quarter so long as the global trade environment continues to remain favorable for the industry and our commercial delivery forecast remains intact. Broadly, the markets we serve continue to be significant, and our backlog demonstrates the strength of our product portfolio. Long term, these fundamentals underpin our confidence in managing the business with a long-term view built on safety, quality and delivering for our customers.

With that, let's open up for questions.

[Operator Instructions] Our first question comes from the line of Myles Walton from Wolfe Research.

Brian, thanks for all the help for the last 4 years. You've always been straightforward in assessing these ups and downs. It's good to see we're on the upside. Can you -- and on that point, can you lay out for us the $2 billion better performance here on free cash flow in the second quarter? How much of that should we translate to the prior $4 billion to $5 billion target? Are we comfortable, say, around $3 billion or so? And then what might be upside risks for the year?

Well, thank you, Myles. That number you threw out there in terms of $3 billion, that's probably a pretty good assumption. And let me just walk you through some of the pieces.

The first half free cash flow usage of $2.5 billion exceeded our expectations, and the second quarter use of $200 million was quite a bit better. And it's primarily driven by better BCA delivery performance as well as some timing items. And let me highlight one important one on the 777 program.

Usually, we see 6 to 7 777 deliveries in a given quarter. We had 13 in the second quarter, which drove an incremental $700 million of positive free cash flow. Now as we think about the third quarter, before we adjust for a potential onetime item, free cash flow, as I mentioned, is going to look a little bit more like the 2Q usage more or less.

And here are the things that are driving it. The benefit of lower interest payments will be offset by this 777 2Q reversal that I just outlined. On volume, 737 could be a bit better, and I think the 787 is going to be pretty steady. And there's a few hundred million dollars of unfavorable timing shift from 2Q to 3Q, mainly CapEx spend.

On top of this, in the third quarter, there's a potential for a $700 million onetime payment related to the DOJ nonprosecution case.

So that's the third quarter, which then sets us up for the fourth quarter to be positive. And as long as the global trade environment remains favorable and we make progress on the rate increases, we expect the fourth quarter to turn free cash flow positive and set us up to exit the year with a very nice positive momentum heading into 2026. So when I put all that together, I think your number there of $3 billion is pretty reasonable for the full year.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Brian, congratulations on ending on a high note, and thank you. Kelly, maybe one for you on tariffs. We've seen a number of trade agreements announced since April, with lower tariffs -- with the tariff agreements benefiting Boeing orders potentially year-to-date. How do you think about the 0 for 0 with EU? How do you think of the order momentum builds from here? And given the 7-year backlog, how does that factor into pricing and deal negotiations and any potential impact on supply chain? .

Yes, Sheila. Well, there's obviously been -- some of these deals have been a good boost for us here in the last quarter. Let me start a little bit with input tariffs because I think that's still important. As you recall, we outlined a less than $500 million impact on the input tariffs. One of the key areas for us is the equipment we import from Japan. So getting this Japan agreement in place, and we understand that to include 0 for 0, no input tariffs, will be helpful for us going forward. So that was one of the big ones.

We still need to see what happens with Italy. As you know, we import some fuselage components from Alenia in Italy. So hopefully, that will also result in 0 for 0. My understanding is that is the kind of the baseline negotiation strategy as they go through these bilaterals, that we will end up in a 0 for 0, but still yet work yet to do.

In terms of the demand side, yes, I mean everybody is looking at their trade imbalance and saying, how do I address that? And no better way than to make a big aircraft order. So the order environment is going to be very good.

In terms of pricing, irrespective of the tariff-driven demand, this has been a constrained environment. And so we've been managing our pricing to also reflect that environment going forward. So I think that will also give us an opportunity particularly to offset some of the cost growth, inflationary cost growth, that we are going to see going forward.

So the landscape is pretty good right now. A couple of areas I just think we got to keep watching. One is making sure that we don't end up back in retaliatory tariffs with China. So we are making deliveries, as you know, right now, and hopefully, that comes to a resolution.

And then the USMCA agreement is still very important because of the amount we import from Mexico and Canada. So as they revisit that USMCA, hopefully, that stays in the same trade situation that we're in today. So we don't see additional tariffs there going forward. But look, if we continue to see this 0 for 0, I think we'll be able to beat that $500 million bogey that we've established here.

Our next question comes from the line of Peter Arment from Baird.

Thanks again, Brian, for all your support over the last 4 years. Really appreciate it. Kelly, maybe we could talk a little bit about maybe the longer-term framework, how you're thinking on rates. When you think about the progress you're seeing on the 737 MAX and the 787, and I guess specifically on the 787, it seems like the demand continues to be really strong with obviously the orders that you're seeing, and there's a widebody replacement cycle, seems to be heating up. How are you thinking about where the long-term rates could go there?

Well, first of all, Peter, one step at a time. We just moved from 5 to 7 a month, very successfully. And as I said in the prepared remarks, our KPIs are green after we've done that rate increase. So we'll stabilize at that rate, and then we'll consider moving to the next rate. We have a series of rate increases in our plan. And as you know, we're investing in expansion in Charleston as well so that we can continue to grow beyond the current capacity of our facilities there. So the market demand is strong for 87 and increasing rates as part of our plan to address that market.

On the MAX, we're at the 38 a month rate, and like we said, we're stabilizing right now. I expect to be going to the FA soon to start the negotiation or discussions on the rate increases. We do still have 1 KPI that is below threshold that we're still working. Not surprising. We know it's -- the amount of rework hours we have on the airplane. So we're working that down. And once we get that KPI where we need it, then we'll be having those discussions with the FAA.

We said rate increases beyond that will go in increments of 5, no earlier than 6 months. That doesn't mean it's on 6 months. It's no earlier than 6 months. We'll continue to do what we're doing right now. As we go to the new rate, ensure we're stable and can prove that the production system has the right metrics before we go request an increase in rate. And if they aren't, then we'll stay at that rate until we get the stability to where we want it. But we've kind of said no earlier than 6-month increments and they'll be in 5 per month steps.

Your next question comes from the line of David Strauss from Barclays.

Brian, thanks for the help, and best of luck. Following up there, I wanted to ask about MAX delivery guidance for this year, and 787 as well. I think previously, Brian, you talked about 400 deliveries, it looks like you're, on the MAX, it looks like you're tracking ahead of that, maybe in the 425-plus range, and 787 still looking around 80. And then if you could just also, Brian, quickly touch on the movement in inventory in the quarter given that you absorbed a pretty big hit on the 777X, but the inventory balance came down.

Yes. On the inventory one. Yes, we did have an [ uptick ] as expected on the 777X. But we also liquidated a lot of wide-bodies as I mentioned. So all that kind of was in the right net-net trajectory for inventory. And that 777X, we still expect that, as we move towards EIS, that is going to go up as we expected. So don't get too concerned about that movement as we move into the back half of the year.

In terms of deliveries, so on 787, we've delivered 37 airplanes in the first half, and we're focused on stabilizing at 7 per month. And we had always thought the range was 70 to 80 for the year. So we're at the high end of that range.

And on the 737, as you mentioned, we target, circled around 400. We've delivered 209 airplanes in the first half, including 37 out of inventory. And as we continue to have good performance, we're poised to do a little better than the 400 for the full year, as you mentioned. So we feel like we're in pretty good shape heading into the second half.

Your next question comes from the line of Ron Epstein from Bank of America.

So maybe, Kelly, if you could dig down a little bit more on the engine anti-icing issue with the -7 and -10. What's going on there? You mentioned in some of your remarks on CNBC before that it's taking longer. What about it is taking longer? And how should we think about that?

Yes. So we've got several different design paths that we've been going down for solutions on the -- to correct the problem. The latest delay is driven by we just haven't closed the design. We went through some testing and this is a very delicate area that we're dealing with around the inlet of the engines and [ can't cause ] any perturbation to the air flow into the engines. And we found some issues with the design implementation we had. So we're going to have to back up and make some additional design changes to get through that de-icing requirement.

So basically the engineering designs have not yielded in the time frame that we were anticipating, and so we still have work to do.

Our next question comes from the line of Doug Harned from Bernstein.

Brian, thank you for all the help over the years, and good luck. On the rate increases that you were talking about before, you've had this goal in the future rate increases to 47, 52 on the MAX, at 6-month intervals. And I appreciate that you'll see how that goes and make a call if it needs to be longer. But that seems like a very ambitious target given Boeing hasn't really done that in the past, it's been more 9- to 12-month type intervals.

What has given you the confidence that you can move to those levels potentially? And where do you see the biggest bottlenecks in getting there? And I'd say including the supply chain. And I'll just throw in, how are you thinking of using the fourth line in Everett in conjunction with this?

Yes. So let me start with the fourth line in Everett. So predominantly, that will be focused at the -10 variant. The -10 variant is has the most change from all the other variants. So it will naturally flow through the factory at a slower pace. So by isolating or providing that fourth line in Everett, it will allow us to let the 3 lines in Renton flow faster. So that is a big change from what we've done in the past, having that many lines flowing. So that's one of the areas that gives us additional confidence. We've invested in the capacity.

Another thing from a supply chain, remember, we've got, as Brian outlined, we've got a tremendous amount of inventory in place. So I think in the near term, as we ramp the MAX up, supply chain is not going to be a challenge for us because of the inventory levels. As we get to those higher rates that you talk about, yes, we'll be balancing, getting more to a balanced inventory level. And ensuring that the supply chain can achieve those rates is work yet for us to do with the supply chain.

Now keep in mind, we generally have them at a higher rate than we are at. And so we'll be able to see where those supply chain constraints are in advance, and we go work them and beat them down. This is one of these processes where the constraints tomorrow get resolved and then there's new constraints, and you just constantly are working each one of those down because we're in a perpetual rate increase kind of environment.

So we've got a huge market demand and we need to satisfy that demand. And the only way we're going to do that is through these methodical rate increases. But I will say we're going to do the same thing we've done here as we've gotten to 38 a month. The priority is to keep it stable, build high-quality airplanes. And if we start to wobble, then we're going to stay at that rate until we get the of production process stable.

Your next question comes from the line of Seth Seifman from JPMorgan.

Brian, thanks for everything. Best of luck. Maybe since it's your last call, we could do an accounting question. And if you could talk a little bit about the progression in BCA margins from here, both as the different programs ramp up and also, I think you mentioned, maybe some margin consequences of the change in certification timing for the 7 and 10?

Yes. I'll get that last one. So any kind of adjustments are really modest given the size of the program. So you're not really going to see -- have you worry about that.

I would say overall, BCA margins are expected to be negative for the year, as we've said before, although less so as we go quarter by quarter. So if you remember, first quarter was negative 6.6; second quarter, we just posted negative 5.1. And we expect to get better as we move into the second half of each quarter, but still negative. And if you step back, BCA margins will be better in 2026, but it's way too early to characterize that any further.

And then as Kelly and I have both said consistently, that long term, there's nothing that we see that would suggest that we can't get back to historical margin levels performance. So we just got to keep working the recovery plan, get back to these rates, get the productivity. And then this should be something that is in much better shape as we move forward.

Your next question comes from the line of Ken Herbert from RBC Capital Markets.

Kelly and Brian, I wanted to maybe pivot over to BDS, if we could. You've got some good momentum in that business, good budget backdrop, some leadership now on a permanent basis there. You're obviously facing some work stoppage issue or strike risk. But how do we think about that with the opportunity and the pace of margin improvement in BDS, as you seem to be -- have turned a corner from a risk standpoint? But when do we think about that business getting back to the mid- to high single digits? And what's the pace in the second half of the year?

Yes. Let me address the strike question first. So just to put in context, it's about 3,200 employees. They build the fighters -- mechanics, they build the fighters and our munitions business in St. Louis and St. Charles. So the order of magnitude of this is much, much less than what we saw last fall. That was roughly 30,000 machinists. So we'll manage through this. I wouldn't worry too much about the implications of the strike. We'll manage our way through that.

Look, we've said that -- and Brian said in his prepared remarks, we want to get our BDS business back to high single-digit margins. So nothing that's going to keep us from doing that.

A couple of points, is we are -- as we're entering into these new contracts, we're following our process to make sure that we only enter into the appropriate contracting type. So these recent big wins we have, the development parts of those programs have all been cost plus. So we're not making the errors of the past and signing up for fixed price development, high risk programs.

So we do have this pig in the python that we've just got to push through relative to these big development programs. But Parker is doing a great job and working with his customers to derisk those programs and help us get those through the development phase. So we're just going to have to keep doing that. This active management that we started with the T7 is a great example of how we can go change the outcome of this that's beneficial to both us and the customer and we're playing that playbook in other areas as well.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

And let me add my thanks, Brian, for the work with us over the recent years. Clarification on the free cash discussion for this year. If 3Q looks like 2Q and then I put the $700 million on top of that, 4Q would have to be kind of barely positive to be minus 3% for the year. And given the historical seasonality there, I think that would maybe be a little better. If I'm missing something there.

And then beyond '25, the consensus is around the $10 billion framework you used to have in 2027 and 2028. And I just wanted to ask, without putting a year on it, is -- with the demand you have and the profitability and working capital picture you see, is the $10 billion still the right framework and it's just a matter of time? Or is that kind of number very far in the future?

Let me have Kelly respond to the last part. Let me take the first part in terms of your question this year. So we have a global trade environment that's stabilizing and get more favorable each day that goes by. We've got some nice rate increases that we're anxious to get to stable as we head into the second half. So fourth quarter, it will be positive. How positive is going to be a function of how our delivery performance or rate performance goes. And a lot of that is uncertain because we've got to do things like get above the 38%.

So I would just be a little -- just give us a little bit of time. It will be positive. I think the $3 billion net is the right, reasonable assumption right now. And as we move through the rest of the year, we'll have plenty of time to update you on progress. And Kelly, maybe take the other part.

Yes. No, look, I see nothing structural that says we can't get to that $10 billion. So I think you framed it perfectly. It's not if but when. And I'm not ready to yet to say when. We got a lot of work to do here as we've talked through all the production rates and see how we're doing in these rate increases, how long does it take us between rate increases, how is the supply chain doing.

But I think that's certainly a target out there that still looks reasonable to me. I don't see anything that knocks us off that. We just have to look real long and hard at when are we going to get to that level.

Your next question comes from the line of Scott Deuschle from Deutsche Bank.

Kelly, it seems that Airbus will be making some architecture decisions on this next-generation single-aisle within the next few years. I think potentially selecting the engine architecture by around 2027. So in that context, do you have a sense for when BCA will need to begin making these types of design decisions in order to have a competitive entry into service date for its own next-generation single-aisle?

Yes, we're working through that. I'm not in a position where I want to announce any decision dates at this particular time. I've said this in the past, we've got 3 work streams here that we've got to mature. One is the readiness of the market for the new airplane, and that needs more work. I don't think the market is ready yet for a new airplane. When are we ready? And this whole discussion around turning the company around and generating cash flow is really important when we're ready to launch it, as well as when is the technology ready. And engine technology is a part of it, but it's beyond just engine technology.

So we're maturing all of those and we'll do that when those 3 work streams all kind of converge. That's not today and probably not tomorrow.

Rob, we have time for one more question. .

Certainly. Your final question comes from the line of Kristine Liwag from Morgan Stanley.

Brian, echoing everyone's thanks. Thank you for all your help. Kelly, congrats on your first full year at Boeing. It's great to see stability in aircraft production. I guess looking back, what surprised you most in your year 1 at Boeing? And where do your priorities lie for 2026?

Well, thanks, Kristine. First of all, it's not a year yet. It's August 8 when [indiscernible] here, so I still have some work to do. But I'm pretty pleased with where we are through the first half and through my first year.

Clearly, the surprises have been just a lot of the macro dynamics that we've been through. I mean we've been through quite a bit. I'm not surprised with the performance of the company and the recovery. We've got great people in the company. We've got great market positions. My role here is just to help everybody get organized and headed in the right direction.

It's turning a big ship around. I think that we're turning it. I don't think it's turned. We still have a lot of work to do.

But I haven't been overly surprised with what I learned. As you know, I spent a lot of my career working very closely with Boeing. So not a lot of surprises with what we're dealing with. It's just one day at a time, improve our performance, address the issues that we have. Restore trust and build confidence with our customer base and our end users of our products. And I think you're seeing that. So like I said, I feel pretty good with the first half, but we've got a lot of work yet to do in the second half.

And that completes the Boeing Company's Second Quarter 2025 Earnings Conference Call. Thank you for joining.

Okay. Good morning. Let's get started. I'm Doug Harned, Bernstein's Senior Global Aerospace and Defense analyst. And I'm really happy today to have with us Kelly Ortberg, CEO of Boeing. Kelly, I don't know -- you may have a couple of words you want to say and then we'll get into the fireside chat.

Well, just welcome, everybody. Thanks for joining us here. Doug, I look forward to it. I don't have any opening comments. I'll -- we'll get right into the Q&A.

Okay. Great. Well, you've been CEO now for a little over a year.

No, August 8.

So August 8, less than a year.

Almost a year.

That's -- okay. You've done a lot. So it seems long.. So -- but you've known Boeing for a long time. And in that time, as in the role, what surprised you? What are the hardest challenges you faced? And maybe you can give us a few comments just on how you see the progress going now.

Yes. So I spent most of my career as a supplier to Boeing. So as you point out, I knew Boeing quite well from the outside. And I would say in the main, not a lot of surprises. I think I knew the situation is pretty well publicized. We had a lot of near-term challenges as I started in August. We went through the strike, getting through that, getting our balance sheet restored was a critical priority for me. And I think we're making good progress. We put together a recovery plan. First focus is on stabilizing the business and that includes ramping back up our production lines, which we'll talk about, I'm sure. And so far, so good. I'm pretty pleased with the progress we're making. We got a lot of work yet to do but I think the mantra of getting the company turned around, restoring Boeing back to the iconic brand that we all know and want is underway. And our team is committed to making the necessary changes to continue with the momentum. .

Well, you were just on the trip with the President in the Middle East. And perhaps you could comment a little bit about -- certainly, you got some very big orders there on the commercial side. But if you think about both commercial and defense opportunities because some very big defense numbers were put out there but we don't have a lot of detail on it. How do you think about opportunities in the Middle East after that trip?

Look, the Middle East is a very big market for us, both defense and commercial. You're right. We announced the single largest widebody order in the history of Boeing and -- with Qatar and that was a great order to continue to fill our backlog. And I think demonstrates the strength of the product line, particularly the widebody product line that we have. But also our defense products with tankers going into the region, F-15 fighters and upgrades to the F-15 fighters are also great opportunities for us in the Middle East. So that will continue to be a strong market for us, orders Etihad in as well in widebody.

So feel pretty good about that. And as you look at this tariff environment, as people look to try to rebalance trade with the U.S., where there's a trade imbalance, there's no better way to do that than through the purchase of aircraft if you want to do that quickly. So we're excited about the future here. We're excited about the opportunities. Backlog is not our challenge. We have a very, very strong backlog. Our challenge is ramping up production and delivering on that backlog and making sure that we have slots available for the customers who want the aircraft.

Well, actually, one aspect of that is there is a -- is this point about slots available. When you're getting the orders like this, when you're effectively sold out into the 2030s, how do you manage new orders? I mean, are you actively thinking about higher rates a few years out? How do you manage the skyline?

Yes. So we commit to a planned skyline in terms of our orders and then essentially customers get in line as we go do that. And as you point out, we are essentially sold out through the end of the decade. We are going to increase production rates on virtually all of our aircraft. We're in the process of doing that now on the 737 MAX, as you know, we're capped at 38 a month with the FAA but we're very quickly approaching that rate and we'll be going through a rate increase there. We're in the process of increasing 787 production from 5 a month to 7 a month. And then the 777X is getting through the certification process and then we'll be ramping that up. But we would expect to have continued ramp-up in all those programs here over the next several years to support the market demand.

Well, one of the topics that we talked about on the last earnings call was tariffs because you've I know been actively engaged with the administration on this topic. I'm guessing it came up on your Middle East trip. You had said that for Boeing this year, the impact should be less than $500 million. But a lot's happened and continues to happen. We've had new news in the last 24 hours with respect to technology exports to China, a legal opinion against the tariffs this morning. How do you think about that now? And what has the dialogue been like over the last several weeks?

Yes. So I'll just say, it's been very dynamic. It's a dynamic environment. I think we're going to be in a dynamic environment for a while here until some of these unilateral or bilateral agreements are put in place. Having said that, as you point out, we identified from an input tariff perspective about less than $500 million of impact. It's primarily in a product we're importing from Japan and from Italy and also primarily on the 787. We are paying duties today, tariff duties on those imports. But in many cases, those airplanes get reexported and there's a duty drawback process. So we're able to recover the duties we pay. The only duties that we would have to cover would be the duties for a delivery, say, to a U.S. airline. So we're going to manage through that. I personally don't think these will be there in the permanent in the long term.

If you look at the agreement that was reached with the U.K., that doesn't include tariff in -- on our aircraft and so -- or the components we would buy there. So we're going to just have to manage through the input tariff side. The more impactful and the thing we watch more closely is any retaliatory tariffs. And we saw that in China where there was an increase in tariff. And sure enough, the Chinese airlines immediately said, I can't take delivery of the airplanes. And that's way more impactful to us. Now that's been reversed. China has now indicated -- the airlines have indicated they're going to take deliveries. The first deliveries will be next month. So we're yet to accomplish that task but they're planning and they're telling us they're going to take delivery.

So we have to watch that and make sure we don't have other regions of the world where we get retaliatory tariffs and we're unable to deliver aircraft that we have produced for those areas. I would say in the main, though, since we talked at the earnings call, it's not a lot different. It is a dynamic environment but I don't see the impact a lot differently than what we saw then.

No. An important topic clearly is the 737 MAX ramp. You've talked about getting up to 38 a month in production, fairly soon. But perhaps you can give us some more insight on to where you stand right now?

Yes. So we're ramping up to the 38 a month, as you point out. And that's happening as we speak. We're very close, getting very close to achieving that 38 per month rate, which is what we've been planning. We will produce at that rate for a period of time to make sure our production system is stable. And that stability is measured with key performance indicators that have been agreed to with the FAA. And then once we get through that stability and the performance indicators look good, which they do right now, then we'll go have a review with the FAA and move to 42 a month from that production. An important milestone we had in this last month is, we completed our milestone review with the FAA on the 787 to move from 5 to 7 a month.

So the good news with that is that was successful. It's the exact same process we're going to use for the 737 MAX increase. So I feel pretty good. And we've talked with the FAA extensively to make sure we're aligned on what are going to be the criteria that we need to demonstrate to move to the next rate. The performance indicators look good. Supply chain is stable. So I feel pretty good here in the next period of time, we'll be through that first rate increase, which is critically important because the -- if you think about the overall cash flow performance of the company, moving from negative to positive cash flow, as we've said in the second half of this year, it's important that we get to a higher production rate on the 737 MAX.

And you've talked about getting to 38, stable, meet all the KPIs, work with the FAA and then you could go to 42. How should we think about the size of that interval going from 38 to 42, once you're comfortable that you can go to the FAA and say, we're producing repeatedly at 38 a month.

Well, I think this first rate increase, we actually go [indiscernible] parts of our production line at a higher rate to ensure that when we do move to the 42 a month rate that we can actually achieve the stability. So we're pretty confident in our ability to move from 38 to 42. Now after that, we do have subsequent rate increases in our plan and they would typically be in that 5 per month rate. So that feels like a good increment. So the next one would be to 47. I would not expect those to be any earlier than 6 months apart. And so that could get us to where we'd like to get to 47 here by the end of the calendar year. But we're not going to move to the...

47 by the end of next...

By the end of -- no, by the end of this calendar year. If we could do to 42 here midyear, then by the end of the calendar year, 6 months later, we'd be doing the next increment to go to 47 a month. So we'll continue that process. Having said that, if we're not ready, we won't do it. So the production system has to be stable. The key performance indicators have to be there for us to move to the next rate. And you don't know where you are until you move there. So we'll see how things progress. What I will say is moving from essentially a stop production poststrike up through 38 a month, the improvements we've made to our safety and quality plan, to our production processes, have really paid big dividends. And we are seeing the improvement. In fact, we're producing a little higher than I even expected.

So in some cases, going slow and deliver has allowed us to actually go faster. So we're going to keep disciplined here and we'll move to the next rate when the indicators say we're ready to go there. We're in pretty good shape from the supply chain, too. I'll say that supply chain stability has improved. And we're, of course, sitting on a tremendous amount of inventory with -- particularly on the 737 MAX. So that's helping us also with the buffer any supply chain issues with the rate increase that were upon us.

I mean as we've kind of looked at this, you've got a lot of engines, a lot of fuselages, 38 to 42, our expectation was there's not a lot of supply chain issues there. When you start to go to 47 and then 52, that's when I would expect you may have another set of challenges. How do you look at that?

So you're right. I think as we move up and as the buffer inventory comes down, then the supply chain performance gets much more important that they're right on schedule. But we're -- and many of our suppliers are also producing at a higher production rate. So -- and they've been there before. So I think we'll be able to ramp this up. Having said that, we're always working with the supply chain. We had the Precision Cast Parts fire here in the last quarter and we're managing through a supply of those parts. We'll always have those kind of challenges when you've got over 1 million parts in some of these aircraft, it's -- we need all of them. So supply chain management continues to be a focus item for us. But we don't have anything right now that I'd point out as chronic concerns relative to the rate increases. Once we get to those higher rates, we'll see.

And when I think about that, if you were to look at 6-month intervals, if you look historically at Boeing sort of pregrounding of the MAX, we didn't see a 6-month cadence of rate increases. And in fact, 52 was a very problematic one, particularly with Spirit. I mean do you feel when you look at the system today, that you're in a much better place than the company was even sort of pre-COVID on the ability to make at these rate.

Yes, there's no question the production system is way more stable. So that's one thing. And the other thing I'd just point out is remember that we're returning to rates we've been at before. So in some of the cases, historically, we're achieving a rate that we've never achieved. So all the way through the supply chain, we're doing things at higher rates than they've ever been achieved. That's not the case here. We're kind of recovering. So in many cases, our supply chain has the capacity, has the capital in place. They're ready to go at a much higher rate. We're the ones what's holding them back. So I do think we have a more stable production system. We've made massive changes in our safety and quality plan and how we're building the airplanes. I think that's going to pay dividends for us as well.

But I'll just say again, if we aren't ready to move to the rate and I think this is the big learning is, we're not going to go to a 50 a month rate and have an unstable production system. We're just not going to do it. We'll stay at the lower production rate until we demonstrate the performance and then we'll move to the next rate. And that performance includes the supply chain. So several of the 6 KPIs that we have are clearly flowing through the supply chain. So if we're being shorted of the supply chain and we've got a lot of escapes coming out of the supply chain, then we're going to have to stabilize that before we move to a higher rate.

So if you look at this now after all of the scrutiny that's gone on over the last sort of 18 months with respect to the 737. You had issues like the junction box problem last year, things like that. Are you more comfortable now that escapes, those types of escapes are less likely to occur?

Yes. I mean, Notice of Escape is 1 of the 6 KPIs and that KPI is green right now. So we have made significant improvements. Now I would also say we were stopped with production during the strike. I do think that we and our supply chain worked hard during that period to improve where we had supply chain constraints. We're further away from the COVID recovery that everybody's had to manage with workforce. And so I think we are seeing a much more stable supply chain and production system. We're not seeing the level of quality defects that we've seen before. I think our quality defects are down over -- approximately 30% on the 737 MAX line. So we are seeing significant improvement in the quality.

The fuselages, I'll point out specifically from Spirit, the quality of fuselages is much, much better than what we were seeing beforehand. We worked closely with Spirit to drive some of those quality defect issues back into their build process, so they're eliminating those defects. And the fuselages are flowing through the factory much faster than what they were. Prior, we were bringing in fuselages that had no defects on them and then we were fixing the defects while were building the airplane. And that was just kind of a recipe for quality issues, delays, inefficiencies. So I think we've got that significantly improved and that will help us here going forward.

So when you look longer term, talked about it before being sold out into the 2030s. There's clearly more demand. And I know that you once got to, like maybe for a very short period of time to 57 a month with the 3 lines in Renton. You've got a fourth line now for the 737 in Everett. If you look longer term, do you -- can you envision this program going above 60 a month because you would have at least internally the capacity to do it if you wanted to do.

Well, look, we are gearing up so that we both have the capacity and the agility in our production system. As you point out, we were producing at a pretty high rate with just the Renton line. So we've added a fourth line or we're adding a fourth line in Everett. What we're going to do with that fourth line is primarily focus it on the Dash 10 variant of the 737. It's the most different from the other. It has the most complexity, meaning it will probably flow through the factory at a slower rate. And that will allow us to keep the Renton -- the 3 lines in Renton flowing much more efficiently. So yes, we have plans to increase rates. We'll see how the production system and the supply chain performs as we get to those much higher rates. That's ways ahead of us right now.

That would be a good problem...

That would be a good problem -- maybe next year, we'll talk a little bit about that problem. Right now, our focus is getting the production system through the first rate increase. I will also say, which I think is important, virtually every one of our customers is reporting a higher quality of airplane at delivery. So we're doing this and we're not sacrificing the quality of the airplane. And we're going to continue to do that. I think the financial performance will follow the production performance of the company. And I think we need to think about it that way.

So you mentioned the Dash 10. Where do you stand now on the MAX 7 and the 10 with respect to certification given that you're working through, I know the inlet design has been the biggest issue here?

Yes. So both the 737-7 and 737-10 are slated to complete the certification this year. And the critical path right now for us is the anti-icing design for the inlet. And we're in the process of finalizing that design. We've got some testing underway, critical path testing that should complete in the June, July time frame to move forward with that. So that's important that we get through that deicing, It has taken a little longer than what I expected. But the team is working through. We've got multiple solutions that we're working and trying to select the right and best solution going forward. Having said that, if there are any delays in getting the -- through the certification, which we're not anticipating right now, we will just continue to build the Dash 8. So I don't think it's like a production output concern. But many customers are waiting on the Dash 10 and Dash 7. So we want to get those through the certification process. The Dash 7s essentially there, except for the de-icing work that we have to do.

So switching over to the 787. As you said, you've got the okay, to go to 7 a month now. Here's the heat exchanger supply problem is, I guess, largely resolved to be at 7.

Yes. Yes. So we made great progress there. That's an example of where the supply chain has stabilized. That problem was a result of the Russian invasion situation and having to move the production line. It took them a while to get back on plan but right now, the heat exchanger production output is meeting our demand and allowing us to go to 7 a month. If it wouldn't have been, we wouldn't have moved. It was quite impactful to build a 787 and put this air conditioning pack in out of cycle. So getting that back to where we've got the product, so that that's not, traveled work is really important for us.

So when you look at the rates now, can you give us a sense of when you think you'll actually be at 7 in production and then I know 10 is that soon on 7.

Yes, soon on 787. So the way these work is, we have a capstone review, which is, think of it as a rate readiness review with the FAA. And we're -- at that review, we basically have everything laid in place to be at that rate. So provided we go and get approval on that rate, then we start cycling most of the components right away at that 7 a month rate. So you should think that on 787, we're cycling at that rate right now, which will lead to deliveries in the coming months at that rate. So production goes pretty quick to the new rate.

One of the issues, though, in deliveries has been interiors. So you've had a lot of airplanes that are essentially produced but not ready to deliver. How do you see your ability to close that gap with your interior suppliers and certification?

So, yes. It's primarily the seating interiors where we've had problems and it's specifically focused where we have a new configuration of seating that we have to go through a new certification. That's still a problem for us. We're still working through that with all the seating manufacturers. Where we have a customer who's taking a new seat that's not certified, that's where we're seeing the delays. If it's a customer who's taking an existing seat configuration that is certified, there are -- there's no delays. So it's more of a certification than it is a production output problem for us and we're working through that. My guess is that it's going to be with us through the end of the year as I look.

And it's with all the seating manufacturers. It's just taken us a lot longer to get through certification. And it's primarily these new larger first class, business class configurations with doors. And so the whole certification process has gone much slower than anybody anticipated with that. But we're working it. We do have some airplanes on ground that are done, for certain aircraft that we're waiting on the seats. And once we get the certs of the seats, we'll be able to deliver.

And is there any parallel issue? I know they're -- I know some airlines have some fairly exotic configurations on the MAX 10 too. Is there any -- do you foresee any issues with certification -- interior certification?

Well, we're watching it real -- yes, we're watching that real closely to make sure that we aren't overcommitting in terms of how many different seat configurations we can get certified in a certain period of time and the complexity. So it will -- it's something that we've got to watch on. As you point out, on these -- particularly the Dash 10s that have these types of complex seat configurations. It's going to be with us also on the 777-9 as we bring that into service, making sure we incorporate lessons learned here so that we don't have seating delays on those aircraft because those aircraft will have most complex configurations in the front of the airplane.

And when you look at production going to 7 soon on the 787 in Charleston, my understanding is that without a lot of capital investment, you could get to 10 there. And -- but now with the demand, particularly with these new orders, it looks like there is potentially demand pressure to go higher. Can you give us a sense of perhaps when you might end up going to 10? And then what has to happen should you later want to invest to go higher?

Yes. I haven't put a specific date on the move to 10. We'll move there as soon as we can. The demand, to you point, the demand is there. So once we get to 7, we can get to that 10 within the existing production generally within the existing production footprint. I think to go beyond that is going to require some additional investment in our facilities there. We've authorized that. So we are investing in expansion so that we can go to rates beyond 10 a month rate. And the beauty is, as you point out, there's tremendous demand for the airplane. So I have no concern about our ability to sell into a higher production rate there. It's an execution performance challenge for us.

So jumping over to the 777X, how does that look? Can you update us now on what you're seeing as the entry into service time line and the production [indiscernible]?

Yes. So we want to get most of the certification work done by the end of the year on the 777-9. We have 4 flight test aircraft now, all in flight tests. So the flight test program is progressing and it's progressing well. We don't have major -- any major technical issues coming out of the flight test program. So I'm hopeful that we'll get through the certification flight tests by the end of the year. We may still be doing some ETOPS testing going into next year. But no real change to our forecast of getting that certification done so that we can start deliveries next year.

Obviously, again, a part of the Middle East order that we just talked about included 777-9s too, there's strong demand for that aircraft. It will be the largest twin in the market and there's a lot of folks who really are looking forward to bringing that airplane along. I will also say it's an airplane that has had the most flight testing done than any other aircraft we've ever done in terms of hours. So we feel pretty good about the stability and our entry into service for the airplane that we've done enough flight testing on that, that it's going to be a great airplane.

Now another airplane there's still very good demand for is the current 777 Freighter. But 2027, I think that's supposed to stop delivering.

Yes, that's our current plan. Yes. We'll wrap the 777, we call it the metal wing, the existing configuration. We'll wrap up that freighter configuration, expecting a Dash 9 freighter configuration the year after that. So we'll be transitioning from the existing 777 Freighter to a 777X Freighter configuration.

When you look farther out, how are you thinking about a next-generation airplane we had both GE and RTX here yesterday talking about thoughts on next-gen engines. From a Boeing standpoint, what are you looking at here?

Yes. I look at that really kind of in 3 work streams. One is, when is the market ready? And two, when are we ready, both financially and from a capacity perspective? And third is, when is the technology ready? And I would say the answer is not now on all 3 of those work streams. As you point out, engine technology is going to be important element of that. If you talk to our airline customers today, I think universally, they would say, we still have work to do and the durability of the existing newer engines that are there. And we'd like to make sure that we don't see the type of durability issues in the future.

So I think ensuring we get through that step. And I want to be ready when the time is right. So we're working all 3 of those work streams but that time is not here today. We've got time to get ourselves prepared and do that right. I'll also say that the backlog is fantastic for our current product line and getting the Dash 10 into the market, I think, is going to be an important step for us as well. So there's no hurry here. We will do a new airplane when the market and the technology and we're ready. And I don't know when that's going to be right now.

Yes.

[Audio Gap]

Yes, 38 to 42 will be the milestone review.

Not the -- so the 40 -- not the 40. Yes. Okay. That's what. Okay.

Yes, we would -- let me just clarify, so what I meant, we'll go through the milestone review from 38 to 42, then we'll move to 42. What I was -- meant to say is, at the end of the year, I would expect we'd be doing the milestone review from 42 to 47, so that we can move with that, so we won't be outputting at 47, to be clear.

Okay. Good. Okay. That -- yes. So go over to BDS. So this was the first quarter in quite some time that you had no charges. How are you thinking about BDS today, some of the programs, KC-46, T-7A, Air Force One, you've got a number of these fixed-price programs that have been problematic. Do you think that risk is behind you now?

Not totally. On a price development program, the risk is not behind you until you're done and we still have a lot of work to do. Having said that, I think we're making good progress on how those contracts. In some cases, it's a better baseline management, better program management, working with our customers on the requirements to make sure that we have an achievable path forward. We've done some things differently like on the T-7 program. We've worked with the Air Force to restructure that program kind of in a win-win way that they get things that they needed but we also derisked some of the risks that we had in the program. And I think that's kind of the methodology that we have to use for working together with our customers going forward.

So we've got a lot of work yet to do but I do believe we're managing those risks better. We're working with our customers better and we just got to get the programs through the development phase. We still have flight testing on several of these platforms, which is always a risky phase to go through and make sure that the aircraft meets the performance. So we'll continue to manage those. I don't think one quarter is a good quarter. I think we're doing a better job of baseline management. But again, we're not done until we're done on these projects.

And one of the other issues that we've seen in BDS is that even on the mature programs, they hadn't really been delivering at margins that one might have had hoped for because I think back in kind of the pre-COVID times, this used to be just a great free cash flow generator. And so you had a lot of mature programs, which you still have a good number of those that draw off cash. How are you thinking about, aside from these fixed-price development programs, the rest of BDS and what it needs to meet the goals you have?

Yes. Look, I think we get those back to the historic margin performance. You're right in some of the legacy programs have been underperforming as we've made changes to the EX, for example, on the F-15. We've been slow in the ramp up in production. But I don't see anything that keeps us from restoring that business back to the historical performance margins. So we did have a lot of post-COVID challenges there. We also had supply chain challenges in our -- in those legacy defense programs, all that's getting a lot better. So I feel pretty confident that we'll be able to restore those programs back to legacy margins. The defense program -- or the fixed price development programs, it's important that we stabilize and just keep those from being a headwind here for the portfolio going forward.

Now a big win was the F-47. Can you comment at all about what you think led to that win?

Well, first of all, it is a huge win for us and very important for our St. Louis operations. As you know, we do the F-15 and F-18 there and be a part of the next generation -- the first sixth-generation fighter really sets the stage for decades to come for our St. Louis operation. We did a very, very good -- the team did a very good job on pursuing that program. We invested in this area more than any investment we've ever made in our defense business and that investment paid off. We had a -- we have a superior product, very mature and where we are in terms of the design of the product. I can't talk a lot more about it but we're excited to have that program. And again, I think it puts a boost to energy in our defense portfolio and our team to go win such an important program and prove that we still have the technology capability to go do that.

Well, as you look at this investment profile, knowing that you did invest a fair amount, how does that look still? I mean, is there still significant investment from your standpoint?

Less investment on the R&D but more investment in the CapEx. So there will be a step-up in some CapEx investment associated with that. And there's another big program out there as well. So we'll see where that plays out.

The [indiscernible], right?

Yes. Right. And if that program moves forward and we're lucky enough to be selected there, then that will also require some additional CapEx investment.

And we had expected an announcement on that about a month ago and it seems like -- I mean, headlines we've seen sort of put on hold by the Navy. I mean, do you have any insight into how this is proceeding?

I do not. So I'm hopeful that this goes forward. But I'll just say the F-47 kind of went through the same phase as well as that wasn't sure when the decisions were going to be made. But once they were made, they went pretty quickly to source selection. So I think we're in the same boat here and we'll see.

Yes, that's a good point. 6 months ago, NGAD looked like it may be dead.

Yes, Nobody knew when NGAD -- yes, right. So again, I think that the proposals are in, they have all the information they need to make a source selection. This is more of a when do we want to launch the program? Are we going to launch the program decision? And so we're waiting on that.

So this work will be presumably centered in St. Louis. And that's a facility. I haven't been in it in a little while but I would imagine pretty underutilized heading into this program.

Well, I think you'd be surprised if you came to St. Louis. We'll have to bring you to St. Louis. There's a dramatic change in our facilities there. We've just recently torn down the legacy McDonnell Douglas headquarters building and we're building new facilities to support the production of the new aircraft. So the airplanes actually won't be built in the existing facility for security and other reasons. But a pretty big transformation in the overall footprint in St. Louis. We have the land and the facilities in the field to do the job but we're investing heavily in the infrastructure.

Well, my assumption to be also, as you put F-47 work in there, this should be helpful on margin. That's initially cost plus but helpful on margin overall from an operational standpoint. Is that...

Well, from an overall absorption perspective, obviously, any big contract is beneficial to the overall absorption. The margin rate on the program like any new program or development program will be lower than the overall production margins.

And something that I know you have done in the past, certainly it was true with the 787 development is, there has been some transfer sort of things like virtual tooling, things like that, that have come across defense to commercial. Do you expect to see any benefits from the engineering talent you get and the things you're doing on F-47 more broadly for the company?

Yes, not directly. They're different widgets but I think indirectly for sure. We've -- that's one of -- been one of the big advantages between the commercial and government portfolio, is our ability to take technology from one to the other and move that across, particularly in how we build the manufacturing processes, material science areas. So yes, I would expect that we'll get significant benefit from that across our entire portfolio.

Now just stepping over to BGS. This has been a great performing business for some time and you've been getting at least 17% margins there, even though it seems like every year, it's guided to lower. Can you talk about what that profile looks like now? I mean, you've -- you're divesting Jeppesen. I don't know if that changes much in your outlook.

Well, the divestiture of Jeppesen would happen probably towards the end of the year. And initially, there may be some slight deterioration in the overall BGS margins as we divest of that. But as we incrementally grow the services business, I think we'll be able to cover that, that deterioration. Look, I think everybody in the industry has seen stronger demand in the aftermarket than anticipated. And that's the result of -- I don't think we're sandbagging. I think the market performance has been a little bit better in the aftermarket. The BGS business is critical and critically core to the company. So selling those -- the proprietary critical parts to support our customers and the demand just looks very good going forward, demand signal. So I think our BGS business is set very well to continue to deliver the profitability we need.

So when you look at BGS today, you've certainly got things like Aviall and KLX in there. Is the portfolio you have really core at this point? How do you think of core and noncore in that business?

Yes. Look, the BGS, the core parts business into our core, either it's defense or -- and all the services that go around that, either defense or commercial is super core to us. It's what allows our customers to operate platforms and we'll always keep that. Now Jeppesen was in our BGS portfolio and we determined that, that was something that wasn't core to us. But if you look at a portfolio level, certainly, BGS is very important to our future.

Now when you take all this together, you're guiding to free cash flow positive H2. Can you describe what goes into that and what gives you confidence in that guide?

It's all around production rates. Moving the MAX production up is really the story. Obviously, there are other things that impact it. But if we get through the production increase, get through the rate readiness review, that's what will allow us to drive higher levels of cash flow. And I think you've seen that in our performance to date that the cash performance for the company is very much driven by the MAX production rates.

And so when you go forward, knowing that it's quite difficult because the movement of advances and inventories are hard to project. But can you give us any sense into how you see that free cash flow profile going beyond 2025?

Not yet. Let me get through the first production rate increase. Let's get to a positive cash flow and then we can start looking at how does the cadence look going forward. I'll just tell you, it's going to follow the performance of the production. As I said before, the financials will follow our production performance. So the faster we ramp up, the better our cash performance will be.

Now something that a lot of investors have been concerned about, given a lot of the missteps over the last several years is, how can I be comfortable investing now and have more confidence that those aren't going to happen again. And I'd say both on the BCA and on the BDS side. I mean, how do you get confident that -- we've talked about that a little bit but just.

Well, look, we've put together a plan on what we need to do and we're tracking to the plan and measure into the plan. There's still risk that we have to manage. I don't want to imply that we're done here. Restoring the company and stabilizing the company is our first step. We're not through that yet. I'll maybe claim victory on that when we get to a positive cash flow and we're through our first rate increase and we've got the certifications complete. We still have a lot of work to do. The only thing I will say is we're tracking to our plan. I feel good about our plan. Our team is focused on this plan. It's achievable and we're committed to bringing this home. We haven't done it yet. So we've got to still focus on being humble and let our performance do the talking and that's what we're going to try to do.

Well, one of the things that you've stressed has been culture and thinking about the culture back at Rockwell Collins. From my standpoint, having been pretty deeply involved in Boeing, 20 years ago or so, as I was constantly told in Boeing, everything is about configuration control, making sure everything is absolutely perfect on timing, quality. And that, at the time, did a lot of that but it had a lot of financial cost at the same time with people kind of checking checkers. Today, it seems like the company has sort of swung back and forth in there. When you think about the company going forward, how do you balance ensuring that you do have all of these details related to quality and performance and at the same time do that in a way that's financially successful?

Look, I think you've just got to focus on the performance first. We have to deliver. It's fundamental to us to deliver safe, high-quality products, whether that's a product going into our government customer, our commercial customer, it doesn't matter. We've got to focus on the -- ensuring that we've got a great product going into the market. So I don't know what it was like 20 years ago. I can't speak to when you're referencing but the fact that people were focused on safety and quality sounds good to me. That's what we want to get back to. Then we do need to focus on efficiency. I think there's areas where we can be more efficient. We just got to be extremely careful as we do these efficiency initiatives that we don't take away value, particularly if it's value to the safety or quality of the product. So we'll take that on.

But I think just keeping that focus -- and look, we've been through trying times here. I think we know cutting corners can't be an answer for our recovery. We've got to do this right. And we keep saying, we got to do this right, focus on the right things and good things will come from it. And that's what we're doing as an organization. We're making large changes to the culture in the company to make sure everybody in the company is focused on doing the right thing and delivering a high-quality product to our customers. The good news is, I'm hearing good feedback so far. We're early innings, I will say. So there's work to be done. But we have a plan. We're making progress against that plan. Customers are feeling better about the products that we're getting. The metrics are showing the quality of the airplanes are better. So we're just going to keep marching on that.

Well, just to finish, got lot going on. What are you going to be focused on the next 12 months?

Yes. Well, like I said, the stability of the company is kind of the first thing. And so we got to -- I don't -- we're still not in a positive cash-generating situation and we definitely have to get through all the milestones to achieve that. I think my energy in the next year is going to be focused on probably less on the production ramp-up and more on getting through the certification and the development programs and getting those things behind us. So we're going to spend a lot of energy in that. Also a lot of energy in the culture change within the company because I think the culture change is important not only to enable the improvements but to ensure the stability and sustainability of the improvements we've made to make sure we don't -- we never digress as we go forward.

So those are the areas of focus. And obviously, the -- managing the supply chain here as we ramp up is going to be continually be a focus area for the company and the team is doing a great job. I'm really pleased with the performance to date. We're focused on the right things. We've got the right people in the right places to make this happen. So we just got to stay focused, stay disciplined and good things will come.

Very good. Well, Kelly, thank you very much for joining us.

Okay. Thank you.