Boeing Company (BA) — Q1 2025 Earnings Call Transcript

Thank you and good morning, everyone. 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 uncertainty, 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, Matt, and thanks to everyone for joining today's call. Let me start by saying that we had a really solid quarter of performance across the business and I'm pleased to report that our recovery plan is in full swing and showing signs that it's being effective. In BCA, we continue to implement our safety management system and remain on schedule with our safety and quality plan that we've established with the FAA. The key performance indicators that we're using to measure our production stability continue to progress and we delivered 130 airplanes in the quarter, which was better than our internal plan. I want to remind you that we planned the ramp up conservatively so that we had some capacity to deal with unknown challenges. In BDS, we had improved performance on our fixed-price development programs and held our EACs for the quarter. We continue to make progress on our active management approach on the programs to improve performance and reduce our future EAC risks. Winning the F-47 program was a transformational accomplishment. To be selected as the contractor for the world's first sixth-generation fighter is a testament to our focused investment during these challenging times and to our dedicated team. This will secure our fighter franchise for decades to come. Our BGS business continued to deliver strong results and we reached a milestone event by delivering our 10767 freighter conversion. So let me dig a little deeper into our four-point plan for our recovery. Recall from previous calls that I highlighted four key areas. The first, stabilizing our business. Second, improving the development program execution. Third, changing our culture. And fourth, building our future. For stabilizing our business, our balance sheet has been an important focus. The equity raised at the end of last year was sized to provide us the ability to restore our production system to health. With the better-than-expected delivery performance, we naturally had less drain on cash in the first quarter, so we continue to be on solid footing here. As we announced yesterday, the expected divestiture of portions of our digital aviation solutions business will also provide a significant cash infusion. The key to cash generation will be continued progress on the 737 MAX ramp. We are currently producing in the low 30s per month and expect that we'll get to the 38 per month cap over the next few months. We'll ensure that the KPIs are showing a stable production system and then request an increase to 42 per month with the FAA later this year. We've stayed very close to the new Department of Transportation and FAA leadership, and we remain aligned on the criteria to move to the next rate. If you look back before the strike last fall, we've seen about a 50% reduction in traveled work and a 25% reduction in rework hours on the 737 line. So the changes we've made to strengthen our quality system are delivering results. Even more importantly, almost every customer I talk with reports an improvement to the quality of the airplane. On 787, we continue to produce at five per month, and I'm pleased to report that we've completed the work on the last joint verification airplane in Everett, which now allows us to close our shadow factory and redeploy the people and facilities dedicated to that work. We're poised to move to seven per month this year provided our KPIs indicate a stable production system, and they're currently looking very good. As we highlighted last quarter, we continue to work through seat certification issues affecting some deliveries, and I expect this will be a challenge for us for the balance of the year. With the current cash balance and the production ramp status, I feel we are well on our way to stabilizing the business even in the face of the tariff situation, which I'll address in a moment. Now let me switch to the next priority, which is improving the development program execution. As I mentioned, a quarter with EAC stability in defense is a good start, but our efforts run deeper than that. During the last quarter, I mentioned that we had reached an MOA with the customer on the T7 program for which we termed active management, and we've since completed our first two incentive milestones associated with that agreement. On VC-25B, we continue to work with the customer to revise the program plan to allow for an earlier first delivery while maintaining our focus on safety and quality. We recently transferred our MQ-25 aircraft to our new production facility in Illinois to begin final assembly, which is the last production step before we move to ground and flight test later this year. This next quarter will be an important one for us as we begin to baseline the performance of our F-47 plan. On commercial development programs, we reached authorization from the FAA to expand the 777X flight test activities to include additional aerodynamics, brakes, and engines. The aircraft are flying daily and performing well in flight testing. Along with the 777X, the 737-7 and the 737-10 continue with their certification programs, and there is no change to our previously shared certification timeline on any of the commercial programs. While there's still a tremendous amount of work to do across all of our development programs, I am seeing an improved sense of urgency around the baseline management and risk management on these programs. The third area of focus is changing the culture at Boeing, and we've made good progress there as well. In the quarter, we had a series of employee meetings talking specifically about culture change. We formed an enterprise working group to help us refresh our values and behaviors and we've recently completed an all-employee survey, the first in five years, and received very constructive feedback on what's needed to improve the future of our company. We've introduced the new values and behaviors to the organization, and we'll be incorporating those into our new performance management system, our leadership training, and leadership selection criteria. Our people are passionate about the culture change, so I really want to seize the moment to make the necessary changes within the company. Now the last area to discuss is building our future. The planned divestiture of portions of our digital aviation solutions business is an example of the portfolio streamlining that I highlighted on earlier calls. There are a couple more steps that we are considering in this regard to help us keep focused on the right products and capabilities for Boeing's future. Obviously, the F-47 win is a key step for building our future, cementing our franchise in the fighter business. That brings me to the current tariff environment and the impact on our plan. I would break this down into two categories: input tariffs that affect our cost to manufacture our products and the potential impact of retaliatory tariffs, like those we're seeing in China. Brian will walk you through the financials, but the input tariffs incurred in the first quarter were immaterial, and we really didn't see any impact on deliveries in the first quarter. Much of our supply chain is based in the United States, and many of our imports from Canada and Mexico are exempt under the USMCA agreement. We do have suppliers in countries subject to the new U.S. tariffs, most notably in Japan and Italy, where our suppliers do significant structures work on our wide-body airplanes. We are currently paying the 10% tariff on those components, but we should recover tariff costs for those aircraft that are subsequently exported, which is a large portion of our wide-body. I hope over time that these tariffs can be resolved through negotiated agreements, but until that happens, we will have to manage our way through these increased input costs. The other issue is the impact of potential retaliatory tariffs from other countries, which could affect our ability to deliver aircraft. The only region that we have an issue with aircraft delivery today is China, and due to the tariffs, many of our customers in China have indicated they will not take delivery. Given the uncertainty, we're taking a straightforward approach to dealing with these deliveries. We have approximately 50 China deliveries in our plan for the balance of the year. We're in close communication with our China customers and we're actively assessing options for remarketing already built or in-process airplanes. For the nine airplanes not yet in the production system, we're engaged with our customers to understand their intentions for taking delivery, and if necessary, we have the ability to assign those positions to other customers. It's an unfortunate situation, but we have many customers who want near-term deliveries, so we plan to redirect the supply to stable demand and we're not going to continue to build aircraft for customers who will not take them. We've bounded our exposure, and until we get more clarity, we're going to do our best to keep the China situation from impacting our production flow. We put in place a conservative recovery plan this year, anticipating some perturbations or risks, so I feel really good about our overall plan for the year, even though I expect the China situation will take away some of the headroom we've built with our strong first quarter deliveries at BCA. We continue to work this situation proactively with the administration, and it's clear that they understand the importance of the aerospace industry to the U.S. economy and the role that Boeing plays as a top U.S. exporter. Before I wrap up my prepared remarks, I want to recognize and thank our employees for their work in the quarter. We've really had a good start to the year, and I'm glad we put a conservative plan together that allows us to deal with the tariffs. Let me also give a special shout-out to Matt Welch, who is moving on to his new role as BCA CFO. He's done a great job for us, so congratulations and thanks, Matt, for all you've done. Now let me hand it over to Brian to detail the operating results before we take your questions.

Thanks, Kelly. Good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was $19.5 billion, up 18% primarily driven by higher commercial delivery volume. The core loss per share of $0.49 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 $2.3 billion in the quarter reflecting higher commercial deliveries and a working capital usage that improved compared to both the prior year and quarter. Our free cash flow was better than expectations shared last month driven by volume and favorable working capital timing. These financial results reflect only tariffs enacted as of March 31, which was not material. Turning to the next page, I'll cover BCA. BCA delivered 130 airplanes in the quarter. Revenue was $8.1 billion and operating margin was minus 6.6%, primarily reflecting higher 737 and 777 deliveries, as well as lower period costs. BCA booked 221 net orders in the quarter: 777-9s and 2787-10 airplanes for Korean Air and 50 737-8 airplanes for BOCA. Backlog in the quarter ended at $460 billion, which was up more than $25 billion sequentially. This includes more than 5,600 airplanes, translating over seven years of production, and importantly the 737 and 787 are sold far into the next decade. I'll give more color on the key programs. The 737 program delivered 105 airplanes in the quarter, including 33 in March. On production, the factory gradually increased the rate during the quarter, and monthly production was in the low 30s in March. Importantly, the operational KPIs continue to progress, and we still expect to be in a position to go to 38 per month over the next few months. Spirit continues to improve the quality and flow of fuselages, which sets us up well for the reintegration, and the deal is expected to close around mid-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 stabilizes and rates increase over time, we plan to deliberately return buffer inventory to more normal levels. Today we have about 37 737-8s built prior to 2023, which is down 25 from year-end and includes 25 airplanes for customers in China. We still expect to complete the rework on these airplanes and shut down the shadow factory by mid-year. On the 7 and 10, inventory levels were stable at approximately 35 airplanes, and certification timelines are unchanged. On 787, we delivered 13 airplanes in the quarter generally in line with expectations outlined in our last earnings call. The program continued to stabilize production at five per month in the quarter and we remain intent on demonstrating stability in the production system and supply chain prior to making the next rate increase to seven over the next few months. Today we have about 20 airplanes in inventory built prior to 2023 that required rework, down five from year-end. Four of these 20 are for customers in China. Importantly, we finished the rework and shut down the shadow factory in the quarter and expect to deliver about half of the remaining airplanes this year. Finally, on the 777X, the program took another important step in its certification timeline as it received approval from the FAA to expand flight testing activities. We'll continue to follow the lead of the FAA as we progress through the certification process and still expect first delivery in 2026. 777X inventory was up approximately $800 million in the quarter and will continue to grow as we move towards entering service as we've previously shared. Moving on to the next page and BDS. BDS booked $4 billion in orders during the quarter and the backlog ended at $62 billion. Importantly, in the quarter BDS was selected by the U.S. Air Force to design, build, and deliver its next-generation fighter aircraft F-47. This order was not included in our first-quarter backlog pending the completion of the source selection and evaluation review process. Revenue was $6.3 billion, down 9% on planned lower volume including the impact from commercial derivatives associated with the production restart. BDS delivered 26 aircraft in the quarter. Operating margin was plus 2.5%, up 30 basis points compared to last year and reflected stabilizing operational performance in the quarter. We made important progress in Q1, and the game plan is to get BDS back to high-single-digit margins over time. 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 threat environment confronting our nation and our allies. The roughly 25% of the portfolio that's primarily comprised of fighter and satellite programs operationally improved in the quarter, which drove favorable margin trends. Lastly, on our fixed-price development programs that represent the remaining 15% of revenue, we continue to work to stabilize and mature these programs. This quarter's results reflected stabilizing operational performance, and we remain focused on retiring risk each quarter and ultimately delivering these mission-critical capabilities to our customers. During the quarter, the MQ-25 program successfully transported the first engineering development model aircraft to the new production facility in Illinois, where it began final assembly, the last production step before ground and flight testing begin later this year. On the T-7A, we achieved the first two EMD performance milestones outlined in the MOA that was finalized with the U.S. Air Force in January. This continues to be an important example of how we are working with our customers to find better overall outcomes for both parties. Overall, the defense 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 and BGS. 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 $5.1 billion, stable year-over-year. Operating margin was 18.6% in the quarter, up 40 basis points compared to last year on favorable performance and mix with both our commercial and government businesses delivering double-digit margins. In the quarter, BGS delivered the 100 767-300 Boeing converted freighter to SF Airlines and received a modification contract from the U.S. Air Force to integrate electronic warfare systems for the F-15 Eagle. It remains a terrific long-term franchise focused on profitable, capital-efficient service offerings and continues to execute very well. Turning to cash and debt. Cash and marketable securities ended at $23.7 billion, primarily reflecting the free cash flow usage in the quarter. Debt balance ended at $53.6 billion, down $300 million due to the paydown of maturing debt, leaving $550 million of debt maturities remaining 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 two main objectives: first, prioritize the investment grade rating, and second, allow the factory supply chain to stabilize. As you saw yesterday, we entered into an agreement to sell portions of our digital aviation solutions business for $10.55 billion, which is an important component of our strategy to focus on our core businesses and strengthen the balance sheet. Stepping back, let me provide some additional context on the macro backdrop before getting into the free cash flow outlook. We continue to closely monitor recent policy developments and believe that the administration understands the aerospace industry's importance to our economy broadly and U.S. manufacturing jobs specifically and is focused on keeping our U.S. industrial base globally competitive for the long term. Given our position as a significant U.S. exporter, free trade policy across commercial aerospace remains very important to us. As noted recently on the supply side, roughly 80% of our annual commercial supply chain spend goes directly to U.S.-based suppliers, and we'll work closely with all our suppliers to ensure continuity of supply and pursue options to mitigate cost pressures. Conversely, on the demand side, about 70% of our commercial deliveries this year are planned for customers outside the U.S., and importantly the company has a large and diverse backlog of over $0.5 trillion with our key commercial programs sold out into the next decade. Specifically on China, it represents approximately 10% of our commercial backlog, and if we need to redirect supply to more stable demand, the strong market backdrop across the rest of the world still supports our planned production rate increases. Regarding free cash flow, we set a conservative plan for the year and had a strong start operationally, which we believe puts us in a position to largely offset any potential cash flow impact of China deliveries this year as well as higher expected input costs due to tariffs. Regarding deliveries, our plan for the rest of the year was to deliver roughly 50 airplanes to customers in China. There is strong demand for these airplanes and we are actively assessing options should we need to redirect the 41 China airplanes that are already built or currently in production. We will continue to monitor the demand situation, and if tariff-related impacts expand beyond China, we would expect to see additional pressure. Broadly, the markets we serve continue to be significant, and our backlog of more than $0.5 trillion demonstrates the strength of our core 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. Before I open it up for questions, I too would like to thank Matt Welch for his partnership over almost four years, and we all know they weren't easy four years. He's a terrific Boeing leader, and we wish him all the best in his new promotion, and we welcome Eric Hill into the IR role. With that, we'll open it for questions.

If we go back to the first Trump administration, your negotiations on subsidies across the Atlantic led effectively to a zero-tariff environment for aviation. When you look at the recent tariffs announced and under consideration, they do nothing positive for the industry. I expect if Guillaume Faury were on this call, the two of you would probably be in violent agreement on this. You commented earlier that the administration understands the importance of the industry, but can you describe how you and others are interacting with Washington to get out of this tariff environment and what you are hearing back? What's your sense on how this might evolve in the U.S. and even in Europe and China based on your interactions there?

Yes, Doug. Well, obviously, it's an important topic right now and a very dynamic topic. I don't think a day goes by where we aren't engaged with someone in the administration, including cabinet secretaries and up to POTUS himself. This is a dynamic environment. As you point out, we've had the luxury of operating for decades, actually since the 1979 civil aircraft aviation agreement on large aircraft in a tariff-free environment. So we're spending a lot of time making sure the administration understands the implications of either short-term or long-term tariffs on not just our company but the overall aviation industry here in the U.S. They understand; they know this is extremely important to our trade and the trade balance. Aircraft are such a significant part of our trade surplus and if we see markets closing, that’s going to be a big challenge for us. So look, I'm very hopeful that we get to some negotiated agreements here and that we can move forward. Right now China is our only problem, and as we said in the prepared remarks, we're going to work our tail off to make sure that the China issue doesn't impact our recovery and particularly our stability in our production system. Customers are calling asking for additional airplanes so this is really going to be just a short-term challenge for us to either have China reverse course and take the airplanes or get us in a position to re-market those airplanes. As you know, to re-market them we will have to do some things like painting them and things like that. But having said that, look, I can't predict where this is going to go. I don't know any better than anybody reporting. We do hear signs that indicate there may be opportunities for negotiated settlements, but I just don't know the timing. Again, we're going to take the actions we need to make sure if this takes a while we don't get into a situation where it impacts our recovery. The one thing that we have to watch is to ensure we don't see more countries in a similar boat as where we are with China. We're watching the EU. You made the comment about our competitor, and I think you would agree with me wholeheartedly that both Guillaume and I would welcome a non-tariff environment for both of us. This isn't good for either company or the industry. We're working through it, but I can't tell you the timing of when this is going to get resolved, but I can tell you we're going to take proactive action and manage our way through it.

Congrats on the move, Matt. You survived a lot. So Brian, I think in January you were expecting deliveries on the 737 in the low 400s and maybe 80 or so on the 787. Does that still hold with the 50 aircraft from not going to China specifically as Kelly mentioned?

Thanks, Myles. On the 737, yes, we still think that's the right ballpark of 400. You had a nice strong start to the year operationally and that should allow us to offset most of any delivery pressure that would come from the 25 airplanes already built in inventory and around six that are in production airplanes that we plan to deliver this year. For the second quarter specifically, we expect to deliver in the high 20s for April, and the quarter should be more or less in line with 1QX China, which is in the low to mid-90s. On the 787, you're also in the right ballpark. We also are having a nice start to the year and we expect to ramp to seven per month in the next few months, with China impacting only a handful of airplanes. So we like the ballpark that you mentioned, and for 2Q we've already delivered five so far in April, and we expect 2Q to be a bit higher than where we were at in Q4 '24 delivery. So things are going pretty well. I think what's important is that any delivery timing won't disrupt our production rate increases on these programs, and we're making really good progress operationally and we're tracking to achieve the right milestones that Kelly mentioned in both programs in the coming months.

Congratulations, Matt. Just wanted to ask a follow-up question on tariffs on the cost side. If there's anything you could say to size the two impacts being the China impact and the cost impact, and then talking about the drawback process on the cost side. Do you need to manage the supply chain a little bit on the cost side if there are suppliers down in the chain who can't handle this as well as some of the larger and more well-capitalized suppliers? Also, how do you deal with I gather you're going to get a push from certain suppliers to push through tariffs that they have with different surcharges, anything you can say about that process?

Yes, Seth. Let me start with the kind of the process and I'll let Brian quantify it. As you point out, we do have the duty drawback opportunity and as you know about 80% of our airplanes are delivered outside of the U.S. So we have the opportunity to recover those duties that we pay, those tariffs when we deliver the aircraft. Now, you know, it creates a cash flow timing issue that we'll have to work through. We are actively working with the supply chain because they don't have that opportunity. Their point of delivery is to us and we deliver the product outside of the U.S. So, we are working to see if we can't allow them to piggyback on our duty drawback and that requires accounting processes to make sure we can track things. We do have some suppliers who've indicated they're going to have pricing increases associated with that, but it's not overly material, and we're working through that. The key focus is ensuring that an argument over a 10% tariff, who's going to pay, doesn't turn into continuity of supply issues. We need to make sure that people are buying and bringing in the parts that we're going to need, and then we'll work through the financial implications. I'll let Brian quantify that for you.

Sure. On the supply chain input costs, the net annual impact of higher tariffs on our input cost is manageable and within our plan—it's less than $500 million annually. Here’s how to think about some pieces in addition to what Kelly described: We have elevated inventory levels that are all pre-tariff. Aluminum and steel are typically one to two percent of the average cost of the airplane which is virtually all U.S. sourced. With higher inventory levels and hedging strategies, that one to two percent is even lower in the current environment. We do bullet buys on behalf of our supply chain partners and those could be subject to price increases as tariffs move higher that we can't pass along, but that’s a very small amount of money, nothing to worry about. We have this duty drawback opportunity to help offset those impacts. I would point out that we have a global trade and supply chain team that has decades of experience with tariffs and duty recovery. When you're one of the world's biggest exporters, we have a good handle on this. We feel confident in how we're managing through this. Keep in mind that over time any input-related costs will work their way through price escalators. They should mostly neutralize over time. Many suppliers are on fixed price life of program contracts where the contract does pay the tariff. We are doing what we can to help them through this situation. Regarding China specifically, the deliveries there could be north of a billion dollars, but as I said, it's all contemplated within a conservative plan that we put together. So we feel pretty good.

Brian, on the last call you references that the free cash flow usage for the year will be somewhere in the $4 billion to $5 billion range. Can you give us an update on how you’re thinking about that specific range and also some further characterization of the free cash flow cadence as we move through the year? Thank you.

Sure. Thanks, Scott. We expect the second quarter to be roughly in line with the first quarter usage. As we’ve said, we expect the second half free cash flow to turn positive and then accelerate as we exit the year driven by a few really important levers: the 737 production ramp to 38 per month and potentially higher as we exit the year; higher 737 delivery volume; the 787 production ramp to seven per month and also potentially higher as we exit the year; and customer receipts will be favorable. These are offset by a couple of things: higher investment levels including the 777X, and the potential impact of both China and the net impact from higher input costs from tariffs that we've discussed. In terms of the range you mentioned, we're not going to adjust that full-year range right now; we're good with where it's at. We had a really good start to the year. We need to execute on the production rate increases and we need more clarity on China and tariffs more broadly. So give us a little bit of time to see how things play out. The good news is that as Kelly said, we deliberately built the year to account for some unknowns, and we’re still comfortable with the plan outlined.

Good morning, Kelly, Brian and thank you Matt so much. Assuming the skyline is largely intact outside of China and there is no demand impact with tariffs, how are we thinking about production ramps outside 2025 with the 737 and 787 rates? What are the biggest risks in the supply chain in the master schedule, and how does that correlate to cash flow expectations as you continue to benefit from volume ramps and also on-time deliveries?

Actually, let me take the demand side now. Let Brian comment. We don't see any change in the overall demand here. Our backlog is well over $0.5 trillion; everybody wants the aircraft. We're going to work through this China situation, maybe have to redeploy some aircraft, but we don't see any pullback whatsoever in demand for the aircraft. Our rate increase plan remains unchanged. We'll go to 38 per month here, we'll get to stability, and then our first rate increase will be from 38 to 42, and then we'll do five per month increments after that—42 to 47, 47 to 52. Those rate increases would be no earlier than probably six months apart. It depends on each one; each will require stable KPIs, and the more you move up the rate, the more difficult it is to maintain stable KPIs. If we go to one of those rates and we need to stay there for a little longer to mature, that's what we'll do. The KPIs on 787 right now are all green and looking good, so we'll make this next rate increase in the coming months on 787. We invested additional capital—a billion dollars here in our Charleston facility—to expand our production capacity. We definitely want to get the 787 back up to double-digit production rates and none of what we're seeing right now is knocking us off those plans.

And on the supply chain side, as I mentioned, we have a lot of inventory—enough inventory for us to achieve the rate that Kelly's mentioning, and we've got really good alignment with our key suppliers. Fuselages, engines—everything looks pretty good. Yes, we have to get through some discreet moments around this tariff and ensure the continuity of delivery, which we'll work through as Kelly mentioned. But looking further out, we feel confident about the supply chains.

Kelly, congrats on the F-47 win. I have a quick question there. There was a comment from the administration about the EMD phase being cost-plus, but there were some competitively priced options for LREP. Are those options fixed price? Do they have inflation escalators built into them? How should we think about the risk from those options?

Yes, hey Scott. On the F-47, we're not at liberty to disclose anything relative to the contract structure beyond what the Air Force has said. The only thing I can say is, is what you've read there is the extent of our disclosure. We haven't come off our strategy of ensuring we're entering into the appropriate contract type for the appropriate type of work. I wouldn't worry that we've signed up to undo risks like we've done in some of our past fixed-price programs. That's about all I can say on that right now.

Hey Kelly. Could you dig in a little bit more on the status of the six KPIs specifically the progress you're seeing there? I guess maybe three months ago, both on the MAX and 787, there was one on the 787 that was out of line. If you could touch on that. How you've gone about mitigating risk around the Jenkintown fire, and how you feel like you have that captured in the guidance as well. Thanks.

On the KPIs, as I mentioned on 787 when we talked at the last earnings call, we had one of the KPIs that was below the threshold and that was in final ticketing—the number of snags of final ticketing. That's all gone green, so we're looking really good. The team has done a really nice job of focusing on that. We are still burning down some rework associated with pre-strike level inventory aircraft, but we're getting close to that. I switched to the 737 now. We still have a little bit of work on one KPI, and that's on rework relative to the 737 MAX. However, it's coming down as per our plan. I feel pretty good that as we continue to go from the low 30s to 38 and we get the cleaner airplanes flowing through the factory, we will actually be green on all of our metrics. Things look really good. We had Secretary Duffy and the Acting Administrator Chris Rocheleau here in Seattle. They spent time off the floor talking to FAA people and our machinists, and things look pretty good. I think we are really aligned on what we need to do to get to the rate increases. We can't claim victory; we have to get to 38 and show stable performance there. Our plan seems to be working, and we'll make any adjustments we need to. Regarding the SPS fire, the team has done an excellent job reacting and addressing that issue. A combination of finding alternate sources, requalifying, finding inventory, and getting it in the right place has been critical. I don't see that any aircraft program is going to be held up over these fasteners. While it's going to take a while to get capacity back into the system, we need to stay diligent as we manage this, particularly as we ramp up in rates.

Kelly, how did you reduce traveled work by 50% in a few months? How did you have a positive defense margin despite the tanker news in the quarter? Overall, how much of these improvements were inevitable with time, or how much have you changed specifically since you came on board with the blocking and tackling of the operational performance of the business? You laid out how you're going to turn the battleship, but can you talk about the shorter-term, simpler blocking and tackling improvements you've made? Those would be helpful to hear more about.

Let me address the traveled work first, Noah. First of all, I don't build any airplanes, so the team's doing a great job. We've put in a major new process for how we build aircraft. Before we move the aircraft and these are moving lines, we now have what we call a travel-ready process. It requires that any work not done on station, any traveled work, has to be evaluated or safety risk assessments done against that. If it induces safety risk, like we saw with the door blowout, we're not going to move the airplane. We have implemented that process on 800 airplane moves and stopped the airplanes 200 of those times. Long-winded, that’s how we're not getting the traveled work; we're holding the airplanes and getting the work done. Our supply chain is in much better shape than it was pre-strike. We’re not dealing with near the number of shortages that we were previously. On the defense side, it's about our focus on working with our customers to get these contracts so that there's a win-win. We've made real good progress as I've talked about, particularly on the T-7, VC-25, and Starliner programs. I think we've got all of these programs now well contained in terms of what our ETC is. I'm not claiming victory here yet; we've got a lot of work to do, but I do think our disciplined cost risk management and active management with our customers to get to a win-win on these programs is helping. Our goal is to get our defense business back up to high single-digit performing business, and there's no reason I see why we can't do that.

And on the tanker specifically, Noah. That crack on the leading edge was identified very quickly. The team determined it wasn't a safety-of-flight issue. The population that they had to address was small, and the rework they could get to very quickly. So it didn’t disrupt the quarter at all.

Congrats, Matt. Hey, Kelly. Just to wrap up a bit on the rate breaks. When you get to 38, and obviously the FAA is reviewing the KPIs with you, how should we think about that when you're moving beyond rate 42 or rate 47? Is that something you're doing in concert with the FAA? I know you mentioned to Sheila that you're looking for stability first. Is it just keeping them in the loop, or are they more involved in the process? Appreciate it.

Our current plan is that unless the plans change, we will go through the same process with each rate break. They have access to the metrics; we have a digital dashboard they look at daily. They're regularly looking at this—not just at one point in time. When we go from 42 to 47, if we're not stable for a couple of months, we'll stay at that rate until we get the stability. The fastest we'd want to go would be about six months in between rate breaks, but we must have a stable production system. They will review the same KPIs we use for the initial rate break. We've had a process with the FAA we call capstone reviews where we do a major FAA review before we go higher in a rate increase. This isn't really a new thing; we just have a new process to do it.

Congrats, Matt, on the move. Quick question on the sale you announced yesterday. Brian, I was wondering if you could give us some idea of what the impact could be on future EBIT and free cash flow dilution as this exits the business. What do you expect your net cash proceeds to be after tax from the sale?

Thanks, Rob. On the margin question, this is not going to disrupt our long-term view to be in the mid-double-digit margins for the business; it's just not a very big impact. So I’m not worried about that at all, and the service business will continue to perform and grow in the mid-single digits of revenue, delivering nice mid-teen margins. In terms of the deal itself, there's not a lot of leakage on this. You can think about it being $10 billion net, so it's going to be close to the full purchase price. Also, the way that this deal got done is that it’s all cash. We won't take any risk between signing and closing, which is good for the company.

And Rob, we have time for one final question.

Matt, congrats. You’ve talked several times about your portfolio shaping. I thought maybe you'd update us on where the Jeppesen sale leads you as you look forward. Is there anything else that you're considering on any other items on the list? On Jeppesen specifically, I think it's a pretty important digital asset, so I was wondering how you think about where to set the perimeter of the deal. Did you keep what you needed to ensure you have a strong digital capability going forward?

Yes. That's a good question. We spent an extraordinarily long time looking at the boundary of this and ensuring that we're retaining access to everything we need for the future of our aircraft. You're right, it's a great digital asset. We'll continue to do business with Jeppesen even post-divestiture. It's a great asset. All the things that we need for the success of our cockpits and our future aircraft support and maintenance; we've retained either access to that or it was outside of the perimeter of what we're talking about in the divestiture. We do have a couple more, Rich, that we're looking at. I would say that they're probably not going to be as big as Jeppesen, but we've got a couple more things that I'd like to address in the portfolio. I am done with the review, so I have our mind on what we need to do here. I think a couple more smaller activities are probably in the cards, and we'll just have to see how those play out over time.