Boeing Company (BA) — Q3 2022 Earnings Call Transcript

Thank you, John, and good morning, everyone. Welcome to Boeing’s third quarter 2022 earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing’s President and Chief Executive Officer; and Brian West, Boeing’s Executive Vice President and Chief Financial Officer. As a reminder, you can follow today’s broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates, and goals we include in our discussions this morning involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciling certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Matt, thank you. Welcome to everyone, and thank you for joining us. I want to note that we are looking forward to our investor conference next week, where we aim to provide guidance on the future of The Boeing Company. Therefore, many of my comments today will be shorter and focused specifically on this quarter. This quarter was a significant milestone for us as we achieved positive free cash flow for the first time since we began our turnaround efforts in early 2020, generating $2.9 billion. This puts us on the positive trajectory we projected for 2022, marking an essential accomplishment and a turning point for the Company. However, we did take a charge on our fixed-price development contracts, which we have discussed in previous calls. We believe this charge is necessary to complete these contracts and deliver them to our customers in the Air Force and other armed forces. We stand by our commitment to these contracts and our customers. The challenges posed by the supply chain, inflation, labor shortages, and macroeconomic issues are affecting everyone, as reflected in this quarter's calls. The charges related to our fixed-price development contracts highlight these challenges, and we do not expect significant improvements in the supply chain in the near future. Demand remains robust across our product portfolio and globally, with the exception of China, where concerns over supply constraints have prompted customers to place orders to ensure they can meet future needs. Our focus in this supply-constrained environment is to manage production carefully, avoiding any compounding of supply chain issues. We’ve hired over 10,000 people this year and are investing in their training and development to improve our productivity. We're also working on stabilizing the supply chain, implementing new technologies and adding personnel to address challenges. While normalization will take time, our goal at the upcoming investor conference is to provide insights on when we expect this to happen. Overall, I am pleased with our progress. We have returned to delivering 87 units, demonstrating our commitment to our manufacturing processes. Our approach to the 737 MAX return to service has been methodical, focusing on reliability, which has encouraged continued order placements. During the quarter, we received 227 aircraft orders from various airlines, showcasing strong demand. Alaska Airlines has increased their commitment to the MAX, and we are grateful for their support. In this supply-constrained environment, our finished goods inventory serves as an asset, helping us manage delivery expectations. Regarding China, we aim to de-risk our operations while preparing to deliver more airplanes, although COVID restrictions have dampened demand. We remain aware of geopolitical risks and strive to minimize any additional risks for our investors. Our development programs, including the -7, -10, 777-9, and -8 freighter, are on track, and we are optimistic about meeting crucial deadlines with the FAA's support. This will enhance our narrow-body offerings against competitors like Airbus. In Boeing Defense, despite the challenges with fixed-price contracts, we continue to have a strong portfolio, recently delivering test aircraft to the Air Force and securing additional contracts. Boeing Services had an impressive quarter, striving to keep up with demand and achieving significant milestones. We are actively investing in our foundational capabilities, including advanced facilities and collaborations, such as our recent partnership with MIT on autonomy. The future looks promising, and our advancements in certification and autonomous technology are critical to our strategy. I'm proud of our turnaround, and the cash flow results this quarter are a key indicator of our progress. We will keep focusing on cash economics to support our investors. Now, I’ll turn it over to Brian for further details on the quarter.

Thanks, Dave, and good morning, everyone. Let’s jump right in. Cash flow, as Dave mentioned, is our primary financial metric and it was positive in the quarter. Operating cash flow was $3.2 billion and free cash flow was $2.9 billion, both up pretty significantly versus both prior year and prior quarter, essentially driven by higher deliveries and some receipt timing. Revenue and earnings were both impacted by charges in our defense business, where we took a $2.8 billion hit across five fixed price development programs, which I’ll go into. The macro environment challenges that Dave described required us to make certain adjustments, including a reassessment of future period cost forecasts. These adjustments are important to our go-forward momentum as we de-risk our defense portfolio and move to more predictable performance. And we still think about our performance in three parts and are positioning ourselves for an improving trajectory. First, we have reached important milestones across the business and made progress on commercial deliveries with the resumption of the 787 in August. Also, the 737 MAX return to service is largely complete, and we’re derisking the near-term delivery skyline for China. Next, we started to see improvement in our primary financial metric of free cash flow. This third quarter performance puts us on track to be positive for both the second half and the full year of 2022. And finally, as we look to 2023, our operational and financial performance should continue to improve. Now, the acceleration will not be as significant as previously anticipated, and our path to recovery is taking a bit longer than expected, driven by the challenging macro environment. Longer term, there is a significant opportunity for our company to return to sustainable growth. As we liquidate the 737 and the 787 inventory, we improve execution on a de-risked BDS portfolio and achieve certification on the MAX, -7, -10 and the 777X development programs. We look forward to sharing our plans at our investor conference next week. Before getting into the financials, I want to make a few points on the current business environment. Slide 3. While the turnaround is taking a bit longer, one thing that remains strong is demand for airplanes, as the commercial market recovery is playing out better than expected. We still see overall passenger traffic returning to 2019 levels in the 2023 to 2024 timeframe. And although the economic indicators point to challenges ahead, this demand has proven resilient. In August, domestic traffic was at 85% of 2019 levels, led by the U.S., Europe, and Latin America. Going forward, the recovery will be driven by China domestic and international traffic, which remain below 2019 levels at 62% and 67%, respectively. In aggregate, commercial passenger traffic was at 74% of 2019 levels. So, even with economic headwinds, we see the strength of demand continuing as air traffic recovers to its historic levels. In Defense and Space, we see solid long-term markets, both domestically and internationally. In the U.S., there’s broad support for increased defense spending in Congress to meet current challenges. And internationally, ongoing global tensions are driving our partners and our allies to announce plans for increased spending and additional capabilities for national defense, and we’re working hard to support their needs. In services, our business is well positioned with a broad set of offerings and will continue to benefit from the growing commercial fleet, a robust cargo market, and increasing defense budgets. Turning to the supply chain. Constraints continue to impact production in both our commercial and defense businesses. On the commercial side, we’re focused on a few key areas, namely engine deliveries, which is the primary constraint to 737 production rate stabilization and subsequent increases. Customers are counting on us to resolve the situation with our supply chain partners, and we will. We’re taking actions to mitigate these impacts and support the supply chain. And as Dave described, we’ve increased our on-site presence at first-tier and sub-tier suppliers to support work movement and address industry-wide shortages. And we’re utilizing our own internal fabrication for surge capacity and managing safety stock inventory levels and increasing where necessary to protect risk. With overall healthy demand, finished goods inventory and a diverse backlog, we feel well positioned to navigate the current environment and are confident that our product lineup is well suited to meet our customer needs. With that backdrop, let’s turn to the financials on slide 4. Third quarter revenue of $16 billion increased 4%. Core operating earnings were negative $3.1 billion, resulting in a loss per share of $6.18, largely driven by the $2.8 billion of defense charges. We generated $3.2 billion of operating cash flow, a significant improvement from the same period last year, primarily due to higher commercial airplane deliveries and favorable receipt timing. Also, similar to the same period last year, we benefited from a tax refund of $1.5 billion in the quarter. Let’s move to Commercial Airplanes on slide 5. Third quarter revenue was $6.3 billion, up 40% primarily driven by the resumption of the 787 and higher 737 deliveries. Operating losses of $0.6 billion and the resulting negative margin rate reflect abnormal costs and period expenses. On the 787 program, we delivered 9 airplanes in the quarter and have 115 airplanes in inventory. The pace of deliveries from inventory going forward will be based on finishing rework as well as customer fleet planning requirements. We expect most of these airplanes to be delivered over the next two years. We continue to produce at a low rate and will gradually return to five airplanes per month over time. Near term, the supply chain remains a key watch item for 787 production and deliveries. Longer term, with more than 400 airplanes in backlog, we anticipate higher production rates due to the expected wide-body market recovery. As customers return to medium-term fleet planning, we continue to have positive discussions with our customers on the 787. We recorded $330 million of 787 abnormal costs in the quarter, in line with expectations, and we still anticipate a total of about $2 billion, the most to be incurred by the end of 2023. These costs are driven by rework and production rates below five per month. Moving on to the 737 program. We delivered 88 airplanes in the quarter, below our previous expectations, primarily due to supply chain disruptions, which impacted factory flow time. We continue to work towards stabilizing deliveries. However, given our deliveries to date, we now estimate about 375 737 airplanes this year. The monthly delivery trend is expected to remain in the low-30s into next year. We ended the quarter with 270 MAX airplanes in inventory, down 20 versus last quarter. There were 35 deliveries out of storage, largely in line with our plan, but we also began positioning for MAX 7 deliveries and built 13 airplanes in the quarter. Of the inventoried airplanes, 138 are for customers in China. We continue to explore options to remarket some of these airplanes as we derisk our near-term delivery plan. Based on our latest assessment of China and the -7, -10 certification timelines, we now expect most of the inventoried airplanes to deliver in 2023 and 2024 with some moving into 2025. Moving on to the 777-9 program. Development efforts are ongoing; the program timeline is unchanged from what we shared last quarter. We still anticipate delivery of the first 777-9 airplane in 2025 and continue to coordinate with the FAA to prioritize resources across our development programs. We booked $111 million of 777X abnormal costs in the third quarter, in line with our expectations, and we still expect to record about $1.5 billion of these costs through 2023, while 777-9 production remains paused. During the quarter, we booked 227 commercial airplane orders. As Dave mentioned, the customers we are proud to serve. In September alone, we received orders for each of our programs, including the 737 MAX, the 767, 787, 777, 777X. And at the end of the third quarter, we had over 4,300 airplanes in backlog valued at $307 billion. Let’s now move to Defense, Space and Security on slide 6. Third quarter revenue was $5.3 billion, down 20%, and operating margin was negative 52.7%. Results were driven by approximately $2.8 billion of losses on certain fixed price development programs. KC-46A and VC-25B made up the bulk of these charges at $1.2 billion and $766 million, respectively. We also recorded losses on T-7A, MQ-25 and commercial crude programs and saw pressures across other programs. These losses reflect a comprehensive review of program financial estimates. While some changes resulted from new information or developments during the quarter, others were the result of our most recent assessment of estimated future performance. Adjustments were primarily due to higher estimated manufacturing and supply chain costs as well as technical challenges, which are expected to continue longer than anticipated. The cash impact of the losses we recorded year-to-date are now heavily weighted in the near term, resulting in cash flow usage at BDS for both 2022 and 2023. While current performance doesn’t reflect where we’d like to be, for sure, we’re focused on driving execution stability. These programs have an outsized impact on BDS margins and will be key to margin recovery in future periods. On the demand side, we received $5 billion in orders during the quarter, including tanker awards from both, the U.S. and Israel, resulting in BDS backlog of $55 billion. Additionally, the Apache helicopter has been selected by the Polish military. Now, let’s turn to Global Services results on slide 7. The Global Services business had another strong quarter, primarily driven by our parts and distribution business. Third quarter revenue was $4.4 billion, up 5%, and operating margin was 16.5%. Results were driven by higher commercial volume and favorable mix, partially offset by lower government volume. We received $5 billion in orders during the quarter, including a tanker support contract for the Italian Air Force and an F/A-18 depot expansion contract. The BGS backlog is $19 billion. With highly valued commercial capabilities and support for our defense portfolio, our service business is positioned to see continued growth. Based on what we’ve seen so far this year, we anticipate healthy total services top line growth for 2022 and similar growth in 2023. Now, let’s turn to slide 8 and cover cash and debt. We ended the third quarter with strong liquidity with $14.3 billion of cash and marketable securities on the balance sheet, an improvement of $2.9 billion since the end of the second quarter driven by free cash flow generation. During the quarter, due to our improving cash flow and business outlook, we chose to reduce the size of our revolving credit facility capacity from $14.7 billion to $12 billion, which remains undrawn. Year-to-date operating cash flow was a generation of $55 million, and free cash flow usage year-to-date was $841 million. We expect our primary financial metric, free cash flow, to be positive for the fourth quarter and the full year, driven by commercial deliveries. Our debt balance is consistent with the end of the last quarter at $57.2 billion. Our investment-grade credit rating is a priority, and we remain committed to reducing debt levels through strong cash flow generation over time. In conclusion, while we have more work to do, we’re executing on our turnaround, and we’ve come quite a long way over the last three years. We remain focused on our own performance and taking the right actions to drive stability and growth for the future. We also continue to invest in key capabilities that will lay the foundation for the future. And through it all, our team is demonstrating exceptional resilience and dedication. More work ahead, but we’re confident that we’re on the right path. With that, over to Dave for closing comments.

Yes. I’ll keep it short and sweet. We’re on a turnaround. We’ve been on a turnaround. We’ve made very important progress with our regulators. We’ve made very important progress with our customers and even more importantly, the flying public. And now, we’re wrestling with supply chain constraints. And when we get through it all, we’ll get back to normal and ultimately deliver what our shareholders are expecting. So, I’ll leave it at that and open up to questions.

Good morning, Dave and Brian. You started the call with comments around the supply chain challenges that you’re seeing, and you talked about it lasting through 2023. And it doesn’t seem inventory is the issue, and it’s mostly engine. So, what sort of steps is the team taking to work with suppliers to resolve these risks? And how do you expect it to impact the output and, ultimately, deliveries? I think you mentioned low-30s through next year on the Max. Historically, you’ve said 8 to 10 out of inventory. So, how do we think about the production pipeline there?

Let me start by outlining the steps we're taking. I'll let Brian provide more specifics, but the steps are quite clear. We've been discussing this for some time, and we have regular calls with our engine suppliers, mainly CFM and GE for our wide-body fleet. We methodically review all schedules, and it ultimately hinges on castings and the support from the two major casting suppliers. The key takeaway is that we are aligned with our suppliers. We are incrementally and carefully increasing rates concerning castings and subsequently engines. I won't speculate on specific outcomes, but the crucial point is that we are experiencing fewer surprises than before, and I believe the engine suppliers have a better grasp of the situation now. This is our current status. I am optimistic about the industry's ability to respond, but I think it will take longer than I initially anticipated. I suspect we won't see significant rate increases related to this constraint until the end of next year. Brian?

And what I would say is that my comment on being in the low-30s, year-to-date, we’ve been in the low-30s. And as we turn the quarter into next year, that all of a sudden is going to snap up to a 40-type number. So, going into the year, we’re going to be constrained, as Dave mentioned, largely by the engines, and will be that low-30s. But as we get through next year, that rate will go up. And we’ll talk a lot more about that next week.

I’m curious about the defense charge. We've encountered several of these, but they continue to increase in scale. Was there anything specific that triggered the magnitude of this charge? I understand you've provided more details regarding the slip-out of the tanker, which appears to be ongoing. But was there a specific trigger for this? Additionally, could you provide insights on the forward losses that have accumulated on the balance sheet and compare the headwind expected in 2023 to what you experienced in 2022? Thank you.

Thank you, Myles. Regarding the last part of your question, the headwind will be similar. Our BDS portfolio, which makes up 85% of our business, is performing well overall. However, we are currently navigating through some fixed-price development programs. We had to adjust for recent performance and reevaluate our cost forecast for completion. The primary impact came from the tanker program, which amounts to $1.2 billion. This is mainly due to ongoing supply chain issues and specific part shortages that are likely to last longer than we initially expected, along with labor instability. As you know, all aircraft programs anticipate improvements over time as the workforce gains experience. We had to revise our assumptions since labor stability will continue to be a challenge. While we can hire, the focus has been on training the workforce effectively during this period. We applied a similar approach to the VC-25B, where labor stability has a greater impact due to the need for security clearances, which has also caused schedule delays. These are the two significant factors influencing our current situation, and the provision reflects our expectations moving forward. Additionally, there's a category I refer to as true development, which includes the MQ-25, T-7, and Commercial Crew programs. We adjusted for similar macro constraints as necessary, but we also recognize that there are technical challenges that we need to address, which can sometimes affect the schedule. Overall, we remain very confident about the long-term prospects of these programs and the benefits we will achieve once they are brought to market. We have undoubtedly mitigated risks associated with these programs. Looking ahead to the next two years, while I am not claiming perfection, we have significantly lowered the risk profile. For the smaller programs, we have, in some cases, reduced risks even further. It’s important to remember that our priority is to stabilize and deliver crucial products to our customers who need them.

Okay. And then, just clarification on the tax refund, you’ve had one last year this year. Do you anticipate another one next year, no?

No.

Okay. Thank you.

Brian, you made the comment that I believe the recovery is not accelerating as fast as you expected. I’m sure you’ll give us a lot more on this next week, but maybe some broad strokes as to what that means in terms of the trajectory of free cash flow generation from here in your ability to delever as you have a fair amount of maturities coming due in the first half of next year?

So, I’d answer that question. We’re confident that we will be able to satisfy the maturities in front of us. We’ll talk a lot more about that. But, given the fact that where we ended the quarter with our cash balance, $14-plus billion, plus being able to be cash flow positive in the fourth quarter, that’s not a concern. In terms of the rate of change, we have a supply chain, as Dave mentioned that we’ve been dealing with, and that’s been reflected in our commercial deliveries through the course of the year. And we’re working our best to stabilize and get more predictable. But, while it may not be quite the rate of acceleration going forward, momentum is going to improve. It just could take a little bit longer, and we’re going to share a lot more about that with you next week. But, in terms of our liquidity position, what’s in front of us, high degree of confidence.

Okay. Quick follow-up. The airplanes that you have in inventory for China, how many of those have you remarketed at this point?

Well, there’s active discussions with customers about that topic. More to come in terms of things getting finalized, but it’s an active discussion, so that we can no longer defer that decision and actually start to think about how we liquidate that in terms of working capital improvement and cash flow. More to come, and we’ll keep you updated.

Hey Dave, maybe I could just circle back on the China question that David was just talking about. Have you seen any kind of positive movement from customers over there regarding wanting the MAX? And right now, you’re up to 51% of the store fleet is tied to China with 138 aircraft. And just, how you’re thinking about that, because that obviously that percentage is going to continue to grow? Thanks.

Yes. So, I’ll start with my hope. My hope is that these two big geopolitical forces get together and endorse free trade again and COVID policy ultimately lightens sometime in the future in China so that they can take more deliveries of airplanes. So, we’re going to keep supporting our customers, keep supporting their regulator every step of the way. But, we are also going to take steps to derisk. I have not gotten a single signal. And I’m surprised by it. They’re going to take deliveries in the near term. So, we are going to continue. We’ve begun and we’re going to continue to remarket these airplanes as we move forward, and we’re confident that there’s a market for it, not a little market but a big market. In some ways, there are a lot of ways we could take advantage of it. I would prefer not to take advantage of it. I’d prefer to just reinstate deliveries with our China customers. But anyway, that’s the course we’re on. It hasn’t really changed much, but it is really hard for me to find signals that things are going to change in China and move in our direction. So, hopefully, that will give you everything you need here in terms of the way we’re likely to move.

And just as a follow-up, Brian, just the 8 to 10 out of storage, is that still a good number on a monthly basis? Thanks.

Yes.

You noted that your main focus metric will be free cash flow. In the past, prioritizing free cash flow led the company to where it is now, and the outcome wasn't very favorable. How do you plan to approach this focus differently than it has been approached in the past? Dave, you were on the Board during many past decisions. How will your perspective on cash focus differ this time around?

Yes. Ron, I’m not going to comment on the past. I’m not sure that’s helpful to anybody. Our need to focus on free cash flow is a result of having taken a significant amount of debt on in light of the crisis that we had, some self-inflicted; some definitely COVID related as it relates to the marketplace and all the things that we’ve had to contend with. So, we took on a lot of debt. Shareholders told us it would be great if you got rid of that debt sooner rather than later. And so, we’ve been focused on free cash flow. It is a great metric, period, in terms of how we measure all of our people and the work that we’re doing. It does not suggest that we have stopped investing in new capabilities that will ultimately differentiate this company and bring it right back to the leadership role that’s always enjoyed. So, I’m probably not going to take the bait. I do have confidence that we are doing exactly what we need to be doing, and the free cash flow metric is a very clear indicator of performance, not just in the near term but also the medium and long term. So, I’m sorry, but that’s the answer.

No, that’s fine. And if I may, just a quick follow-on. Of the 787s you have in inventory, can you give us a sense of how many are like ready to be delivered, how many have to be depickled, how complicated a process that is?

Well, thanks, Ron. They all have to go through a prescribed set of rework. We’ve been very clear on that. And we’ve contemplated what that is going to take. And now it’s up to our great team in Charleston and in Everett to get that work done. And it’s going well. It’s early innings, but it’s going well. And we have high confidence that they will get done what they need to do to get those inventoried airplanes in the customers’ hands over the next two years.

I just wanted to dig in a little bit more on this issue of engines and castings. LEAP deliveries were up significantly in the third quarter. And it sounds like they see things getting better. I haven’t gotten the impression from Airbus that they’re expecting quite the pressures next year that you are. It seems like they expect that things are getting better. Is that because most of the LEAPs are going there and you guys have to wait longer, or is there more to it, or are these increasing CFM deliveries, is that not really enough to help you guys?

Yes. Things are improving. We're starting to gain better control and forecasting looks more positive. The main challenge we face is the tremendous demand for our airplanes; we wish we could double our production rates. This is why we refer to it as a constraint and a challenge. The comparison of engine deliveries between Airbus and us is straightforward, and we're fully aware of the situation. There’s no indication that one is being prioritized over the other. Regarding any claims that Airbus isn’t facing challenges, that’s not what the industry is telling us. It's their responsibility to clarify that to everyone, and I’m confident they will. I’m not concerned about any favoritism in the industry since it’s easy for both sides to assess and hold each other accountable. While things are getting better, we are still not where we would like to be due to the strong demand for our airplanes.

Okay. And just to be clear then, it is the engines though that is preventing Boeing from delivering 737s off the line between, let’s say, the expected pace of 20 a month to be at a total delivery pace of low-30s versus the nominal production rate of 31 a month. So, they’re only able to get you engines to deliver at roughly 20 planes per month or so.

Yes. We’re short of engines. We have a clear picture of what it’s going to take to make it up, and we’ll get back on rate. But yes, the answer is yes.

A lot to work through, but it seems like what underpins some large portion of your challenges is labor availability, both for yourself and for the supply chain. It seems like it’s behind a decent amount of the defense charges. Can you put some numbers on it? How many people do you need to hire? How far into that have you broken? When you say it takes time to get somebody trained and seasoned, how long does that take? And do you have those numbers in the castings part of the supply chain? I mean how many people do they need to hire? And how far along are they? And where are these people going to come from given the macro level openings versus workers’ gap?

That’s a complex question. First, we have added 10,000 people to our team and believe our current headcount can manage rate increases and our operational needs. We are making significant investments in training and development to ensure that these new employees are productive. I don’t have specific numbers regarding the supply chain constraints and labor shortages that affect our suppliers. Many of the challenges we face are related to labor. In areas like casting, there are additional complexities because the process requires time and experience. There is a steep learning curve involved in ramping up capacity. While I can’t provide a specific number, it's clear that everyone in the industry is dealing with these constraints. We are sharing information and supporting our suppliers both with contracts and by helping them find workers. We have even sent our own staff to assist them. I believe it will likely take all of next year for things to begin to stabilize, especially as we see layoffs in other industries. In the software sector, however, we are not facing challenges in recruiting engineering talent, as competition has softened significantly. I wish I had a clear number and a straightforward resolution, but unfortunately, that’s not the case. We will continue to face these challenges throughout next year.

Dave, a couple for you. You’ve said numerous times today that demand is not the issue. So, I was going to ask if you could talk about the developing wide-body cycle and the environment for that. And could it mitigate some of the narrow-body issues in China, in other words, selling wide-bodies into China? And how might that influence your rate plan for the 787 and 777 freighter?

That's a great question. Firstly, we're seeing increased activity in the wide-body market with significant orders that we are all competing for. This indicates a recovery in the markets, particularly internationally, but also among domestic airlines. Regarding China, as you've suggested, that’s the aircraft type they are likely to need from us the most since they lack a domestic alternative. I don’t believe that a sole provider from France can fulfill those needs. We do receive some orders from China, but I categorize them as incremental for large wide-body freighters. Whether this demand increases is uncertain, but it’s a possibility. If it does materialize, it will add to an already competitive market. Furthermore, if China does rebound and we can resolve some geopolitical tensions, it could pose additional challenges for us in terms of demand and supply; however, we would welcome it, potentially leading to positive adjustments to our guidance next week.

Okay. And just to clarify, a slightly different topic. How does this BDS review differ from prior reviews? How confident are you that you’ve captured everything here?

I’ll start and then I’ll let Brian in to talk. The key point is that we’re approaching the end of these programs. We’re making progress and gaining more insights, but we’re also short on time concerning learning curves, which typically take a couple of years to develop. We don’t have that kind of time anymore, and we no longer have established learning curves. We are simply stating that the supply constraints we are facing will persist until we complete these programs. We are working to assess these programs with clear and realistic expectations based on our current experiences, without anticipating significant improvements in the future. That’s the overall context. Brian has been involved in all the details, so I’ll let him elaborate.

I don’t have much to add other than we sit in this environment and you can’t ignore these macro constraints and how they impact these programs. And that just is what happened this quarter. But the thing that we’ve done our best to do is derisk, and derisk, as Dave mentioned, some of these assumptions and future cost forecasts. So, we like where we closed the quarter of our position. We do it every quarter, and we feel confident. This particular quarter, it really was the recognition of the very rapidly changing environment that is persistent, and can’t assume it’s going to get better anytime soon.

So, I guess, I kind of get the $2.8 billion on the development program, although that seems large. What confuses me is that excluding the $2.8 billion all those mature programs, F-18, F-15, Apache, et cetera, look like they’re at breakeven. They’re making no money when Lockheed and GV have their issues, but basically the mature stuff is doing okay, how come?

Brian, you probably want to grab that one.

We saw across some of these other programs, similar disruptions in terms of both, factory stability, parts shortages, labor. So, those weren’t immune at all. It’s just that they’re not magnified in the sense that there are these big fixed price development programs that have these reach forward losses embedded in them.

We initially anticipated $900 million in the first quarter, but now we are looking at $2.8 billion. What indicators should we look for to feel assured that BDS is truly past its challenges?

Better numbers, better performance, better everything. So, I don’t want to tell you anything other than that. Our objective is to make sure these tankers are doing the job for our military customer. That is it. That’s all we’re focused on. And they are doing that. And they are now permitted to do all the missions that are required. So, we are knocking down risk and we are implementing these programs. And so, I am confident we’re going to get where we need to get, and you’ll be confident when you see the numbers play out the way I expect them to play out.

Yes.

As you know, better than anyone, these are complicated programs, lots of assumptions, lots of moving parts, backdrop of a volatile environment. We did our very best to derisk.

Operator, we have time for one last question.

I wanted to revisit the MAX rate and engines because earlier there was a question about the LEAP engines, and GE just reported 347 LEAP deliveries for the quarter. We are finally seeing progress with Airbus, which had been struggling, as the LEAP-powered A320 seems to be performing better. When I consider the target production rate of 31 a month and compare it to what Airbus is doing, it appears that CFM is making headway. Additionally, we know that over 100 LEAPs were delivered ahead of production before. I'm trying to understand how engines can be the primary constraint here. Is there another issue that is also affecting the delivery or production rate?

Doug, I can reconcile the numbers. I personally witnessed, alongside my counterpart, the reconciliation of the engines we need to deliver the airplanes and the engines being produced on a weekly basis. We have a gap to fill and we need to make up for it. We’ll get there, but it will be at a constrained rate, and we’re aware of that. This is what we’re considering in our forward projections, which you will see when we meet next week. There are no other constraints related to our rate projections. There are many weekly constraints affecting the stability of the line, but they won’t limit our rates in the short or long term. Ultimately, it comes down to engines and the competition for castings between Pratt and CFM.

And then, if I can just follow up with one more thing, which when you guided early in the year to positive free cash flow for the year, was that including the assumption of this tax benefit that we saw this quarter? Because just wondering if you’re thinking about positive free cash flow still in the absence of that sort of $1.6 billion additional benefit here.

It was contemplated, Doug.

Okay. So, that’s part of the outlook you had. Okay.

Sure.

All right. That completes The Boeing Company’s third quarter 2022 earnings conference call. Thank you all for joining.