Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's 3rd Quarter 2018 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst immediate question and answer sessions are being broadcast live over the Internet. At this time, for opening remarks and introductions, I'm turning the call over to Ms.
Marita Suttasia, Vice President of Investor Relations for the Boeing Company. Ms. Suttasia, please go ahead.
Thank you, and good morning. Welcome to Boeing's Q3 2018 earnings call. I'm Marita Stajah, and with me today is Dennis Muilenburg, Boeing's Chairman, President and Chief Executive Officer and Greg Smith, Boeing's Chief Financial Officer and Executive Vice President of Enterprise Performance and Strategy. After management comments, we will take your questions. In fairness to others on the call, we ask that you limit yourself to one question.
We have provided detailed financial information in today's press release, and you can follow the broadcast and presentation through our website atboeing.com. Before we begin, I need to remind you that any projections and goals in our discussion today are likely to involve risks, which is detailed in our news release, various SEC filings and the forward looking statement disclaimer in the presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non GAAP measures that we use when discussing our results and outlook. Now, I will turn the call over to Dennis Muilenburg.
Thank you, Marita, and good morning. Let me begin today with a brief overview of our Q3 operating performance, followed by an update of the business environment Slide 2. Thanks to the dedicated efforts of our teams across the company, Boeing delivered Q3 2018 financial results that include higher revenue, earnings per share and operating cash flow, driven by solid execution across the company. During the quarter, we generated 4 point $6,000,000,000 of operating cash and repurchased $2,500,000,000 of Boeing stock. We also paid $1,000,000,000 in dividends, reflecting a 20% increase in dividends per share from last year.
We continue to deliver on our commitments to returning cash to shareholders, while investing in our people, innovation and future growth. Revenue in the 3rd quarter was $25,100,000,000 reflecting higher services and defense contract volume. Core earnings per share of $3.58 was driven by strong commercial airplane performance and a lower tax rate, primarily related to federal income tax audit settlements, partially offset by charges related to planned investments in the newly awarded TX Trainer and MQ-twenty five unmanned aircraft and cost growth on the KC-forty six tanker. For the full year, we are raising guidance for revenue and earnings per share and reaffirming operating cash flow. We're also raising BCA segment operating margin while reducing BDS margin guidance.
Greg will discuss these in more detail in his section. With that, let's take a look at Commercial Airplanes. For the quarter, Commercial Airplanes generated revenue of $15,300,000,000 reflecting 190 deliveries with operating margins of 13.2%. Continued healthy sales activities contributed to 171 net new airplane orders worth $13,000,000,000 during the quarter, adding to our robust backlog that stands at more than 5,800 airplanes and is worth $413,000,000,000 Year to date, we have captured more than 630 net new orders. The 7 37 program continues to make good progress on its recovery plans to overcome supply chain challenges with 61 aircraft delivered in September, an improvement from July August.
In the Q3, we delivered 138 737s. We expect to recover the 737 line by the end of the year with 4th quarter deliveries expected to be above the production rate. The MAX production ramp up continues. To date, we have delivered 219 MAXs, 57 of them in the quarter. We continue to expect MAX to account for between 40% 45% of total 7 37 deliveries in 2018.
The 787 program further matured its rate readiness for 14 per month next year. The program's ongoing quality and productivity strides helped position us for a successful ramp up. We continue to see improvements in first pass quality and champion times being set across the board. As for the 777X program, in the quarter, we completed the static test airplane and moved it into test setup. We have also started building flight test delivery in 2020.
Now over to Defense, Space and delivery in 2020. Now over to Defense, Space and Security. BDS reported 3rd quarter revenue of 5 $700,000,000 reflecting higher volume across its business, including government satellites, tanker, F-eighteen and weapons. Operating margins were negative 4.3 percent, primarily due to charges related to TX and the MQ-twenty five programs, which I will touch on shortly. BDS booked $12,000,000,000 of new orders during the quarter, demonstrating the value we bring to our customers across our defense, space and security portfolio.
Those orders include wins on important future franchise opportunities, the TX Trainer, the MQ-twenty five unmanned aircraft and the MH-one hundred and thirty nine helicopter. We also received the 4th KC-forty six tanker production lot for 18 additional tankers in the quarter. T X is the next generation trainer providing the U. S. Air Force with advanced training capabilities to replace the T-38C talent.
We anticipate the T X to be a franchise program for much of this century. Beyond the current U. S. Air Force contract with potential global market opportunities for both trainer and light attack platforms of up to 2,600 aircraft plus ground based trainers and advanced simulation technologies, representing a $40,000,000,000 multi decade platform and services opportunity. The MQ-twenty 5 is the U.
S. Navy's 1st operational carrier based unmanned aircraft. Unmanned aircraft systems are proving critical in every aspect of air combat, with MQ-twenty five autonomy and artificial intelligence technologies applicable to a market opportunity of greater than $20,000,000,000 for more than 200 production and derivative aircraft. The MQ-twenty 5 and TX wins are the culmination of years of unwavering focus improving our technology and derisking the programs. We have developed and flight tested 2 all new production ready TX jets with 71 flight tests having been completed to date.
We have demonstrated deck handling and engine trials in MQ-twenty 5. We currently have an MQ-twenty 5 prototype aircraft in ground testing that is being prepared for 1st flight. Our planned investments in these two programs will further mature technologies to address the sizable market potential as well as meet current customer commitments. Boeing will recognize the investments through an after tax charge of $541,000,000 in the quarter. This strategy reflects a commercial investment mindset, a deliberate and purposeful decision position ourselves to capture significant future market opportunities in services, support, training and platforms in the autonomous systems, trainer and light attack markets.
To give you a sense of the multi decade return on investment, the initial TX contract represents less than 20% of the full production run opportunity and less than 10% of the total life cycle services support and upgrades opportunity. These investments are in line with our balanced cash deployment strategy and leverage the strength of Boeing's business portfolio and financial performance to create sustained leading edge capability for our customers in the U. S. And globally and the foundation of growth and valuable long term franchises for all of our stakeholders. Key operational milestones for BDS in the quarter included achieving first flights for Apache and Chinook for the Indian Air Force.
And on the commercial satellite side, we successfully completed the acquisition of Millennium Space Systems, provider of agile flight proven small satellite solutions, complementing our existing satellite portfolio. We continue to make steady progress towards final certification of the KC-forty six tanker. And in September, we received the supplemental type certificate verifying that the refueling and mission avionics systems meet all FAA requirements. The milestone marked completion of KC-forty six FAA certification. We are working with our U.
S. Air Force customer towards completing all the steps required to deliver the 1st tanker aircraft this quarter. In the 3rd quarter, the program booked cost growth of $140,000,000 after tax due to higher than expected effort to meet customer requirements to support delivery of the initial aircraft, as well as incremental delays in certification and testing. And while there's still work ahead of us, we're moving closer to delivering these highly mission capable aircraft to our customer. Currently, 4 aircraft have completed the FAA ticketing process and have moved to the Boeing Military Delivery Center.
We remain very confident in the long term value of this franchise, a program that is going to have a production run measured in 100 of airplanes and decades of follow on support and training. Now turning to Global Services. BGS reported 3rd quarter revenue of $4,100,000,000 representing a 12% growth year to date. Operating margins of 13.3% reflected higher parts and supply chain solutions volume, product and services mix and higher period costs driven by investments to grow our portfolio offerings. During the quarter, BGS won new business totaling approximately $4,000,000,000 This included an order from GECAS for 20seven-thirty seven-eight 100 converted freighters, an F-eighteen spares contract for the U.
S. Defense Logistics Agency, service contract for KC-forty six tanker for Lots 34, P8A training contracts for the U. S. Navy and the Royal Australian Air Force, and a service support contract for the newly awarded MH-one hundred and thirty nine helicopter for the U. S.
Air Force. These orders highlight the strength of our 1 Boeing offerings. Additionally, BGS completed the 1st heavy maintenance check on P-eight for the U. S. Navy.
Earlier this month, we completed the acquisition of KLX, a major global provider of aviation parts and services, part of our growth strategy of complementing organic investments with targeted strategic acquisitions. This transaction brings together the talent and product offerings of Boeing and KLX to provide a one stop shop that will allow us to create significant value for our customers. The resulting boost in supply chain capability enables us to better serve our customers while profitably and purposefully growing our business. Our integration activities are well underway and progressing smoothly. Separately, we are finalizing the definitive agreements for our proposed partnership with Embraer.
In the coming months, we'll continue to work with Embraer and its shareholders, the Brazilian government and regulators among others to complete the transaction and create the most important strategic partnership in the aerospace industry. In summary, we delivered another quarter of strong operating performance, captured noteworthy additions to our large and diverse backlog, including key future defense franchises, returned significant cash to our shareholders and complemented our organic growth with planned strategic inorganic investments. With that, let's turn to the business environment on Slide 3. We continue to see healthy global demand in our commercial defense space and services markets, markets that are growing and sizable at $8,100,000,000,000 over the next 10 years. In the commercial airplane market, airline profitability remains strong and passenger traffic continues to outpace global GDP.
Passenger traffic in 2018 grew 6.8% through August. Meanwhile, cargo traffic maintained its upward momentum, growing by 4% in 2018 through August. Our global customers continue to recognize the compelling value proposition that our new more fuel efficient product family brings to the market, as reflected in the healthy new order intake we've seen year to date. We continue to see the trend of diverse and balanced demand from a geographical perspective, as well as across the spectrum of airline business models. The changing nature of travel with the expansion of network city pairs and rising middle class population in emerging markets has fundamentally expanded traffic patterns and underpinned sustained growth.
There also is more balanced demand between fleet growth and replacement of older aircraft, and we are seeing more consistent and stable customer purchasing patterns. We believe the evolution in key market dynamics in the aggregate continues to drive greater stability and far less cyclicality for our industry. Over the long term, we remain highly confident in our commercial market outlook, which forecasts demand for nearly 43,000 new airplanes over the next 20 years. These deliveries, of which 44% will be driven by replacement demand, will double the size of the global fleet. This long term demand combined with healthy market conditions and a robust backlog provides a solid foundation for our planned production rates.
Turning to our product segments, starting with the narrow body. Our current production rate of 52 per month and planned increase to 57 in 2019 is based on our backlog of nearly 4,700 aircraft and a production skyline that is sold out into early next decade. We continue to assess the upward market pressure on the 737 production rate. In the wide body segment, we've seen steady orders for the 787 and the 777 and have high confidence in a meaningful increase in widebody replacement demand early next decade. For the current generation 777, the renewed strength in the air cargo sector has provided support for the 777 bridge as highlighted by recent orders, bringing the backlog to 87 aircraft.
As we transition production to the 777X, we expect 777 deliveries of approximately 3.5 per month through 2019 as previously announced. While we still have some work to do in filling the remaining 777 production slots, in particular for 2020 and beyond, we feel confident about the 777 Bridge progress. As we look forward to the 777X, we have a strong foundation of 3 40 orders and commitments that support our plan for ramping up production and delivery of this new aircraft. We are focused on further bolstering the 777X skyline. We also captured 21 orders for the 787 Dreamliner family in the quarter, bringing the total year to date orders to more than 100.
With nearly 1400 firm orders since its launch and more than 600 in the backlog, our plan to increase Dreamliner production to 14 airplanes a month in 2019 is well supported. We continue to see repeat orders for the 787 Dreamliner, including the recent order from United for 9 additional 787-9s, highlighting the strong market preference for the 787 and its superior value. Turning to our 747 and 767 programs. With our unmatched freighter product lines, we are well positioned to capture the increased cargo demand. This supports our 767 production rate increase from 2.5 per month to 3 per month in 2020.
We remain focused on the strong long term aerospace industry fundamentals. It's important to have this in perspective as we navigate through global trade discussions. Boeing maintains strong relationships with our customers, suppliers and other stakeholders around the world. We continue to engage with leaders in these countries urge a productive dialogue to resolve trade differences, highlighting the mutual economic benefits of a strong and prosperous aerospace industry. Turning to Defense, Space and Security.
We continue to see solid demands for our major platforms and programs. The BDS portfolio is well positioned with mature world class platforms to address current needs and new franchise programs to build the future. Boeing continues to see strong support for our key products from the Pentagon and in Congress. The fiscal year 2019 defense policy bill authorized a 4th multiyear procurement for the F-eighteen and supported increases in munitions production and the Pentagon's aviation readiness efforts. The final appropriations bill for fiscal year 2019 U.
S. Defense budget added funding for additional rotorcraft, funded the requested quantities of our key programs across our fixed wing and commercial derivative aircraft portfolios and funded our missile, space and satellite products. Demand from outside of the U. S. For our defense and space offerings also remains high, in particular for rotorcraft, commercial derivatives, fighters and satellites.
Our investment in future growth and new sales continues in areas that are priorities for our customers. We will continue to leverage capabilities and technologies from across our enterprise to win important opportunities such as the ground based strategic deterrent. Turning to the services sector. We see the $2,800,000,000,000 services market over the next 10 years as a significant growth opportunity for our company. BGS provides agile, cost competitive services to our customers worldwide.
We aim to grow faster than the average services market growth rate of 3.5% as we further expand our broad portfolio of services offerings and continue to gain market share. Strong orders of $4,000,000,000 in the quarter reflect our customers' recognition of our value proposition and helping them optimize the performance of their fleets and reduce operational costs through the lifecycle. These activities stretch across BGS' 4 capability areas, including supply chain, engineering modifications and maintenance, digital aviation and analytics and training and professional services. Our focus for BGS remains on optimizing the businesses and expanding our portfolio offerings. Through organic growth investments such as strengthening our vertical capabilities, complemented by strategic acquisitions, position BGS for sustained long term and profitable growth.
Our expertise, the global reach of our business and our strong customer partnerships have us well positioned to compete and win in this important sector. On the digital analytics front, we will begin integrating a new data analytics tool into all Boeing Defense Australia support contracts, enhancing its position as a leading fleet services provider in the region. The Boeing analytics systems featuring new technologies developed by Boeing in Australia will give the Australian Defense Force access to more platform data than ever before, enabling Boeing to increase fleet readiness, safety and reliability, while reducing maintenance costs. In summary, with growing markets and opportunities ahead, our team remains intensely focused on growth, innovation and accelerating productivity improvement to fuel our investments in the future. With that, Greg, over to you for our financial results.
Thanks, Dennis, and good morning, everyone. Let's turn to Slide 4 and we'll discuss our Q3 results. Revenue for the quarter increased to $25,100,000,000 reflecting solid BCA deliveries and higher volume Defense, Space and Security as well as Global Services. Core earnings per share of $3.58 reflects strong commercial airplane performance, higher global services earnings and a $412,000,000 tax benefit related to the settlement of federal income tax audits for the year 2013 2014. These were partially offset by after tax charges of $541,000,000 related to the planned investment on TX and MQ-twenty five programs and $140,000,000 after tax charge on the KC-forty six tanker.
Now let's discuss Commercial Airplanes on Slide 5. Our Commercial Airplane business revenue of $15,300,000,000 during the quarter reflected lower deliveries, largely offset by favorable mix. BCA operating margins increased to 13.2% driven by strong operating performance on production programs, higher 787 margins and timing of period costs. This was partially offset by $112,000,000 pre tax charge on the KC-forty six tanker program. BCA captured $13,000,000,000 of net orders during the quarter and backlog remains strong at 413,000,000,000 more than 5,800 aircraft equating to approximately 7 years of production.
On the 787 program, we delivered 34 supplier step down pricing and our team supplier step down pricing and our team's day to day focus on improving 787 unit costs and overall cash generation. Let's now turn to Defense, Space and Security results on Slide 6. 3rd quarter revenue increased to $5,700,000,000 driven by higher volume across the BDS business, including government satellites, tanker, FA-eighteen and weapons. BDS margins of negative 4.3 percent reflected the $691,000,000 pre tax charge on the planned investments related to TX and MQ-twenty five programs and cost growth on KC-forty six tanker program of $64,000,000 pre tax. As Dennis mentioned, our TX and MQ25 investments are based on deliberate and intentional decisions to create long term valuable products and services franchises.
In selective key market opportunities such as these, we are taking into account the considerable market potential in our business cases and not just the initial order quantity with the current contracts. For accounting purposes, we have to assess the anticipated costs and expected revenue over the life of the initial contract without taking into account the potential additional future market opportunities. Our planned long term investments translate into earnings charges against these programs in the quarter. The charges do not impact cash flow in the quarter and our cash flow guidance for the year. These investments leverage the strength of Boeing's business portfolio and financial performance and provide a foundation of growth and valuable long term franchises for all of our stakeholders.
These investments are consistent with our strategy of capital deployment priorities of investing in organic growth. And finally, along with the TX and MQ25, BDS won a number of additional key contract awards, bringing its total orders in the quarter to $12,000,000,000 BDS backlog increased to $58,000,000,000 with now 31% from outside the United States. Turning now to Boeing Global Services results on Slide 7. In the 3rd quarter, Global Services revenue increased to $4,100,000,000 reflecting higher volume, predominantly driven by increased sales of parts and supply chain solutions. Year over year growth of 14% for the quarter and 12% year to date more than meet our objective to outpace the average annual service market growth rate of 3.5%.
BGS operating margins were solid at 13.3%, reflecting ongoing productivity efforts as well as mix of products and services in the quarter, offset by higher period awards worth approximately $4,000,000,000 bringing our backlog to $20,000,000,000 The key wins this year underscore the strength of our 1 Boeing offerings to our customers. Let's now turn to cash flow on Slide 8. Operating cash flow for the Q3 was strong at $4,600,000,000 primarily driven by timing of receipt and expenditures, planned higher commercial production rates and strong core operating performance across the business. We remain focused and on track with our balanced cash deployment strategy. In the 3rd quarter, we repurchased $2,500,000,000 of Boeing stock and paid $1,000,000,000 in dividends, reflecting a 20% increase in dividend per share from last year.
And we continue to anticipate completing the remaining 9 point $6,000,000,000 of repurchase authorization over the next 12 to 18 months. Since the end of 2012, we've repurchased approximately 230,000,000 shares and increased our dividend more than 2 50%. At the same time, we've invested more than $30,000,000,000 in key strategic areas to support long term sustainable growth for Boeing, our customers and our shareholders. And we remain committed to returning approximately 100% of our free cash flow to shareholders while continuing to invest in future growth opportunities. Let's now move to cash and debt balances on Slide 9.
We ended the quarter with $10,000,000,000 of cash and marketable securities, stable debt levels and credit ratings. Our cash position continues to provide us with flexibility to invest in innovation and profitable growth opportunities, while again returning value to shareholders. Let's now turn to Slide 10 to discuss our outlook for 2018. For full year, we're raising our revenue guidance by $1,000,000,000 to now be between $98,000,000,000 $100,000,000,000 This increase in revenue primarily reflects the higher BDS and BGS volume inclusive of the KLX acquisition. As a result, we're increasing revenue guidance to now be between $16,000,000,000 $16,500,000,000 for BGS and between $22,000,000,000 $23,000,000,000 for BDS.
We're also updating our full year BCA and BDS segment operating margin guidance to reflect BCA's strong performance and investments in TX and MQ25 this quarter. DCA margin guidance is increased to now be between 12% 12.5% from our prior guidance of greater than 11.5%, again reflecting strong performance and timing of some period expenses. BDS margin guidance is reduced to be greater than 6.5% from our prior guidance of between 10% and 10.5%, again, primarily reflecting the investments in the TX and MQ25 programs. We are increasing our full year core earnings per share guidance by $0.60 to be between $14.90 $15.10 on net improvements after accounting for lower than expected tax rate, performance and charges. We're reducing our full year guidance for capital expenditures to now be approximately $2,000,000,000 a $200,000,000 decrease from our prior guidance of $2,200,000,000 again reflecting timing of spending as well as performance.
As we look towards the remainder of
the year, our key focus areas include continuing to manage the 7 37 recovery progress within our factories and throughout our supply chain, starting the delivery of KC-forty six tanker and continued healthy order momentum as well as continued strong execution across the portfolio. So in summary, our core operating engine continues to deliver strong results. We will continue to use our 3 business unit as a key differentiator to win in the marketplace, make prudent strategic investments and leverage the talent and innovation across the company. At the same time, we will set challenging goals and objectives around elements of operations and support functions tied to profitability and efficiency to generate cash and improve working capital while delivering value to our customers. All of these will help us achieve our goal to grow year over year revenue, cash flow and margins.
So with that, I'll turn it back to Dennis for some closing comments.
All right. Thank you, Greg. With a strong three quarters behind us, our team remains focused on further driving both growth and productivity. These results were achieved through the hard work and dedication of our employees and the great partnership we have with our customers and our suppliers. In addition to the strong commercial airplane market dynamics I mentioned earlier in my remarks, we have taken our own actions to reduce cyclicality in our business.
This includes remaining disciplined in our production rate decisions, derisking our pension liabilities, strategically phasing our research and development spending, creating labor stability with long term contracts and expanding our services business, which is also less cyclical. We've executed in our long term strategy of robust and continuing organic growth investment and returning value to our shareholders, complemented by strategic acquisitions and partnerships that enhance and accelerate our growth plans. The planned strategic partnerships with Embraer, Saffron the recent KLX acquisition and Adient joint venture are entirely consistent with this strategy. Our priorities going forward are to leverage our unique One Boeing advantages, continue building strength on strength to deliver and improve on our commitments and to stretch beyond those plans and sharpen and accelerate our pace of progress on key enterprise growth and productivity efforts. Achieving these objectives will require a clear and consistent focus on the profitable ramp up in commercial airplane production, continuing to strengthen our Defense, Space and Security business, growing our integrated services business and leveraging the power of our 3 business unit strategy, delivering on our development programs, driving world class levels of productivity and performance throughout the enterprise to fund our investments in innovation and growth, disciplined leading edge investments and balanced value creating cash deployment and continuing to develop and maintain the best team and talent in the industry, all of which position Boeing for continued market leadership, sustained top and bottom line growth and increasing value for our customers, shareholders, employees and other stakeholders.
With that, we'd be happy to take your questions.
And first, in line of Doug Harned with Bernstein. Please go ahead, sir.
Thank you. Good morning.
Hey, good morning, Doug.
This will probably this will exceed the one part. I'd like to just discuss the approach you're taking on defense. You'll be working on fixed price development contracts for MQ-twenty five and T X. And there's no question those will be big programs. But the history of fixed price development, as you know, has not been good and Boeing's been part of that history.
And you took this approach on the tanker. Been continually more difficult than expectations. So can you describe how long it will be before you expect these new programs to generate returns and what the cash profile should be over time? And then how do we get comfortable that you're accurately measuring the risk on these? And I'm just curious, do you see these kinds of competitions as the future here?
I mean, this is aggressive bids and bring back a history to all of us?
Yes. Doug, let me take a shot at your macro question. Then Greg, I'll ask you to add in on the cash flow profile as well. Now, first of all, Doug, this is a targeted and very deliberate strategy focused on some key defense franchises that we believe have life cycles that are measured in decades. And between TX and MQ25, those two programs combined have roughly a $60,000,000,000 opportunity space connected with them.
So one, big targeted franchises. We have taken a look at these in a very careful, diligent way and have invested upfront with a business case that is very strong. And the return to our shareholders as a result is going to be very strong. So think of applying a commercial mindset to franchises that are measured in decades. These capabilities are also going to bring immediate leading edge benefit to our customers and our men and women in uniform.
So there's customer benefit and shareholder benefit. So first point is that key strategic focus. And to give you a sense of it on T X, the initial contract here represents less than 20% of the total production run and less than 10% of the total services volume available in that contract space. So we have a tremendous investment capability here. Secondly, to your point on risk, we have purposely with these investments significantly derisk these programs and they are fundamentally different than tanker.
On TX, for example, we have 2 production ready jets flying today. We've done 71 test flights already. We are highly confident in this program. These are small development programs leading to rapid production. So as you recall, when we started tanker, we still had a tanker design on the drawing board.
In contrast, today, we have 2 flying production units for TX. Same thing on MQ-twenty five. We made purposeful investments over the last few years to build a prototype aircraft that will be going into flight test in the coming year. So again, the idea here is to accelerate capability for our customers and move swiftly to production. As a result, the risk profile of these programs are dramatically different than tanker.
So a solid business case, a significantly derisked program, all looked at through the lens of making a good business case investment that is going to be good for our customers and our shareholders. And frankly, with the strong cash performance of our company, our strong financial performance, overall, we have the fuel to do this. This is an excellent use of cash and organic investment. So I'll just provide those overarching comments. And Greg, if you want to add on in terms of cash profiles and expectations.
Yes. I guess I'd start at the highest level that our view of growing cash flow going forward doesn't change as a result of these wins. We've taken all that into consideration. If you kind of look at from a time frame perspective on each of the programs, the MQ 25 through that EMD phase ends in about 2024. And then on Tx, the options start to begin in 20 22.
So it kind of gives you a sense of the, I'll say, the breadth and timeframe along that development phase and then entering into production. So again, I think at the highest level, the cash flow profile that we are expecting for us to generate isn't going to change at all as a result of these. And I think as Dennis said, we've made investments that are behind us as well that really try to de risk both of these programs moving through the EMD phase and then ultimately moving into production.
Okay.
Next question is from Ron Epstein with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning guys. Hey, Ron. It seems like the quarter went actually pretty well in terms of getting the 7 37 supply chain back on track. I was wondering if you could just kind of talk about that a little bit more. And then when you think about what happened with the supply chain in this quarter, how do you think about like the next rate up and then potentially getting working towards 70% and how the supply chain can handle that?
Yes. Hey, Ron, great question. And we have been and continue to be very focused on 7 37 production program execution and recovery. We are seeing our supply chain return to a healthy condition, but we're continuing to monitor that on a daily basis. As you've seen, we've had to work through some risk issues, in particular, on fuselages and engines with Spirit and CFM.
And we now have fuselages being delivered to our purchase order plans. And we're also seeing engine recovery. And while we still have some work to do there, we're anticipating engine recovery towards the end of the year. You can see that reflected in deliveries as well. The strong September deliveries give us building confidence on the recovery.
And as you've noticed, we have not changed our year end guidance for deliveries. So we remain confident that we'll hit our total delivery target for the year. As a result, in the Q4, as a composite, you should expect to see deliveries exceeding the 52 a month production rate. Again, those deliveries will be more back loaded in the quarter as always, But we're seeing good signs on a recovery across the board. And we're going to continue to stay very, very focused on executing that.
Now as we look to next year, as you know, we're planning to step up to 57 a month. We are taking some lessons learned from the recent 52 a month step and applying those. That includes ramping up staffing earlier. So some of the additional staffing we brought on board for 52 a month is staying in place to help us with the 57 a month step. Supply chain hope and in-depth monitoring of that has also been turned up.
And I think what you'll also see is that the nature of the next step is a little different. This year was especially challenging as we stepped to 52 a month and we also had major model mix changes. Roughly half of the airplanes this year are NGs and half are MAXs. As we get to next year and towards the 57 a month rate break, we'll be almost entirely MAXs by that point. So the model mix challenge will not be as difficult as we step to 57 a month next year.
So we're also factoring that into our planning. But I'll say bottom line here is we're staying very, very focused on this. It's very important that we continue to hit deliveries for our customers. And in general, we're seeing positive signs in our supply chain recovery and remain confident on the overall 737 production profile and ramp up plans.
Great. Thank you. Our next question is from Seth Seifman with JPMorgan. Please go ahead.
Thanks very much and good morning. I wanted to follow-up with another 737 question, this time on the demand side. You've talked about the upward pressure on demand and the potential to move higher than 57 a month. Is it possible to make a decision on that, while there are still a lot of outstanding trade questions with regard to China? Or does that stuff have to kind of get settled before you can move forward with thinking about that investment?
Yes. Seth, when we take a look at the trade environment, we maintain a long term view on that. Certainly, something that's very important to us. We're very engaged in the dialogue and conversations with the U. S.
Government and with other governments around the world. In particular, on the U. S.-China relationship, we're very engaged with our Chinese airline customers and leadership in China along with the U. S. Government.
And both countries are interested in a healthy aerospace industry. In China, from a macro standpoint, one of the fastest growing commercial aviation markets in the world. Over the next 20 years, we said a world that needs 43,000 new airplanes, about 7,700 of those are in China. Traffic growth patterns are very strong in China and the rising middle class population is a tremendous driver there, well beyond normal, I'll say, GDP metrics. So, about 150,000,000 new passengers every year in Asia are fueling that growth.
So, China is very interested in a healthy growing aerospace industry. Same thing in the U. S. When you take a look at trade and trade surplus, the greatest trade surplus generator in the U. S.
Is aerospace. And within that sector, Boeing and our supply chain are by far the biggest component. And that all leads to American manufacturing jobs. So there's strong reasons in both U. S.
And China to have a healthy, prosperous aerospace industry. You combine that with backlogs and as we said earlier, with more than 5,700 aircraft, 5,800 aircraft in backlog today and in particular for narrow body 737s strong backlog, we're filling skyline in the 2023 timeframe, right? So this is a long term view. While we pay attention to trade and we're very engaged in it, it's very important to us, it's not something that changes our near term modeling and analysis. Our decisions around stepping up to 57 a month are strongly supported by the backlog that we have in position and the commitments we have with customers.
And really our decision drivers around stepping to 57 a month will be both of the production system, the supply chain, our ability to execute that in a way that's smooth for our customers and profitable for our company. And so it's very much focused on that internal operational productivity and a healthy production line. And we're going to step to 57 a month when we're ready to step. And we remain confident that that step will take next year and we're going to continue to do our diligent work to make sure that's done in a smooth manner.
Great. Thank you. Next, we'll go to Peter Arment with Baird. Please go ahead.
Yes. Good morning, Dennis, Craig.
Good morning, Peter.
A question on BDS, just looking at the growth profile, going forward, you've had a tremendous amount of wins with TXMQ 25, you've got the tanker with the KC-forty six, obviously the helicopter franchise is P8. How do we think about the growth in the budget backdrop when we think over the
next couple of years? Thanks.
Yes. Peter, I think there are a couple of factors there. One is, as you said, the macro environment, the budget is healthy and strong. We've seen good positive signs on strengthening U. S.
Defense budget, not without risk. As we look to future defense budgets and Budget Control Act profiles and that's a year to year battle as you know, but we're seeing more International defense budgets continue to strengthen as well. As International defense budgets continue to strengthen as well. As Greg said earlier, about a third of our backlog is in international defense. So the macro budget environment for defense is strong right now.
Within that funding for our programs has been very good. And as you noted with our recent TX and MQ25 wins, our MH-139 win, all of those will fuel growth. As we step the tanker program into production, that will fuel growth as well. And if you look at that in a composite, we still see our defense business as a modest growth business. It's healthy and the recent wins are going to make it even more healthy.
Our next question is from Carter Copeland with Melius Research. Please go ahead.
Hey, good morning, gentlemen. Good morning, Carter. I just want
to go back
to this, the BDS charges and about bidding this way, what do you target? Are you thinking about risk adjusted ROIs? How do you square that with your current incentives on near term earnings per share? And then secondly, was there something different about your offerings in this case? I mean, you had a competitor you took a $700,000,000 charge.
You had a competitor say they would have lost $5,000,000,000 on it. Do you think that there are differences in cost or product capabilities versus the KPPs or assessments of the overall risk? If you could help me with those two things, I'd appreciate it. Yes. Carter, I'll take the first cut and then Greg, feel free to add in here.
First of all, again, our mindset around this is to focus on those key defense franchises that create long term value, sustained decades of opportunity. So these are a few very select, very targeted areas. And as we've mentioned over several years now, TX and MQ-twenty five are in that category. We've made purposeful investments to derisk the programs to build flying hardware to provide capability for our customers and our men and women in uniform to accelerate capabilities for them and to invest in a smart way that creates value for our customers in the long term. To your point on incentive targets for our team, our incentive targets are balanced set of targets, both annual and long term.
And what you see here is an exact reflection of that philosophy of making the right short term investments to produce long term value. And the fact that we were able to make these investments and in a single quarter, in essence, pay for those investments because of the great performance of the company shows our ability to fuel smart investments for the future. That is the balance and I think unique capability that this company brings to our customers. That's really our mindset around these kind of investments and we remain very confident that the investments we make here have great business cases, will create great value for our shareholders as well as value for our servicemen and women. So that's an important parameter for us.
Now in terms of your comment about the competitive environment, I can't really comment on our competitors' bid positions. But what I can comment on is the fact that we're able to bring very affordable solutions to our customers because of the investments we've been making in productivity. I think as you're well aware, as we've had as we've shown many of our investor partners, the fact that we're investing in things like our 2nd century design and manufacturing capabilities, advanced digital designs, All of these next generation design production and support capabilities are being reflected in these new products that we're bringing to our defense customers. So they are affordable, they are extremely capable, they provide great capability for our customers and they create value for our shareholders. Greg, anything you want to add on that?
Yes. I guess just your question specifically on the business case. NPV, return on invested capital, I'd say a very traditional way to look at a business case. But as Dennis said, not just looking at the contract quantity, but looking at the broader market opportunities and what it would take to win and obviously stressing that and looking at that through various lenses to ensure that we have what we would what we expect from a net present value perspective and a return on invested capital. So I'd say kind of multidimensional about how we're looking at it and then how we look at the risk associated with it.
But look, as far as the two platforms go, it's obvious that we have been spending a lot of time and energy and expertise from under its belt. And then MQ25, under its belt. And then MQ25, at the same time, things like doing an engine run-in 2017. So we've really tried to work hard to leverage the enterprise, the model based engineering that Dennis talked about and the productivity and try to derisk these the best we can and bring purpose built and purpose designed platforms to the Warfighter that are clearly game changing and are going to add value to our customer and
to our Warfighter and to our shareholders. And further to Greg's point, you see our unique ability across our commercial and defense businesses to share and replicate and build these technologies. So these advanced design and manufacturing capabilities that we're maturing on programs like the 777X, We're able to apply the new defense programs. Those lessons learned applied back to our commercial business. So there's tremendous synergy there that I think is unique to our company.
Thanks for the color, guys. You're welcome.
Next question will go to Rob Spingarn with Credit Suisse. Please go ahead.
Hey, good morning. Good morning, Rob. At the risk of staying on the topic, I want to just ask for clarification. So Dennis, you said you've already made these investments in the quarter and you have the 2 prototype T X aircraft. But I took from Greg's comments that most of these investments are planned, and I'm taking that as from a cash perspective.
And so I wanted to ask you if they're truly ring fenced or is there potential for investment creep, kind of like with Tanker? And then the last part of this question is, since you clearly saw these opportunities differently than your competitor, can you elaborate more specifically a bit about the commercial market or foreign military market opportunity? Who's going to take up the other 80% of the targeted production, for example, and 90% of the sustainment?
Yes. I'll answer the second part of that, Rob. But Greg, why don't you take cut at the first part and in particular how we've ring fences and how the investments play out? Yes. Absolutely.
Yes. And you had it right, Rob. I mean, obviously, from an accounting perspective, we've recognized the cost associated with
this effort. But from a cash flow perspective, as I was talking a
over that between the 2 of them, that kind of 2022 to 2024 timeframe. So all of that kind of modeled through that period. And obviously, I'll let Dennis talk a little more on the de risking, but we've really tried get out in front of that and that's the investments we have made to get these products to the state that they're in today. And there's a big differentiator there obviously. When you got 2 airplanes flying that have been flying since 2016 and have 71 test flights, it's not coming off a piece of paper to move into development and then production.
So it certainly minimizes the risk profile going forward. And MQ, again, we've done a lot of between engine runs and ground test, ground taxi tests and deck handling trials, things like that and invest in some labs and tried to again derisk it. So it's a different risk profile than you've seen in some of the other development programs. And I'll try not to repeat too much of what Dennis said, but we're leveraging the best of Boeing, bring it in a selective way to these campaigns. So this is the approach we took on these because we saw the long term value proposition here and strategically fit into what we had laid out as far as where we want to play today and going forward.
And we selectively lean forward into these 2 and we think they're going to be very valuable franchises for all of our stakeholders.
And then Rob further to that value point, so that the broader marketplace here certainly initially with the U. S. Air Force and training capabilities, take a look at today's T-thirty eight Talend fleet that will be replaced by this airplane. So the opportunity for growth in the U. S.
Training fleet is substantial. And as you know, our Air Force's training needs are significant. And so TX Trainer is well placed to meet that capability. We've also purpose built, purpose designed the airplane so that it can also be applied to other international customers who also have training needs. And as you well know, the U.
S. Air Force tends to lead the globe in terms of training capabilities. And so international customers and allies around the globe on the backside of the TX award. Further to that, we purpose designed this airplane to also be able to be modified to be a light attack fighter aircraft again to support global markets. And if you look at the cumulative market space in the U.
S. And around the globe, we see TX as a market for about 2,600 aircraft in addition to ground based trainers and other support and services. And if you look at all of that as a composite across TX and MQ-twenty five, very realistically, this is a $60,000,000,000 sized marketplace. So that gives you a sense of why this is a good investment.
Yes. That's very helpful market size. Thank you.
You bet.
Our next question is from David Strauss with Barclays. Please go ahead.
Thanks. Good morning.
Good morning. Hey, good morning.
Want to follow-up on the 7 37, looking for some additional color there. Dennis, can you give any sort of quantification on the number of unfinished jobs today versus a month or so ago or the progress you're making there? And are the airplanes rolling off the line today? Do they have any unfinished jobs? Or are they rolling off the line clean at this point?
Yes. David, we're continuing to ramp up on our recovery plan. If I look at every element of the recovery factors, flow through the factories, jobs that are completed in position. If I take a look at jobs that travel between stations, jobs behind schedule, airplanes on the ramp, supply chain health, we're watching things like part shortages in the factory. Across that entire set of metrics.
They're all trending in the right direction. And while we're not complete with the recovery yet, we have made substantial progress over the last couple of months. And the best indicator of that frankly is airplane deliveries. And you saw the 61 aircraft delivered in September. And as I said, we expect for the Q4 deliveries in total will be above the 50 2 a month production rate that we're at.
So we're continuing to work off the inventory of aircraft that have been on the ramp outside of the factory. More and more, we're seeing airplanes being completed in place in the factory. And while we're not done, all of the trends are headed in the right direction, just to give you a sense of how it's going. And we're going to stay very, very focused on it and get that wrapped up, get the production line back to full health. And as I said, we're committed to meeting our year end overall delivery guidance.
Next question is from Cai von Rumohr with Cowen and Company. Please go ahead.
Yes. Thank you very much. So, you took your R and D guide down by $200,000,000 and yet R and D was a lot lower than I think most of us expected in the Q3. And to get to even your lower number, R and D has to ramp up sequentially by close to $300,000,000 First, is that a conservative estimate so that that has some more opportunity? And what does that imply for the R and D run rate corporate wide next year given you're considering the NMA?
Yes. No, the run rate expectations going into next year, Cai, haven't changed. But there's certainly some timing from quarter to quarter, just between the transition of 777X and some of the MAX spending and then just some of the other projects we have in place. So I wouldn't read too much more into that other than some timing. As far as kind of broader, I'll say kind of at a high level R and D spend to revenue, still kind of that 3.8%, 3.9% is still what we see going forward, taking all of what we talked about into consideration.
So think of quarter over quarter here, just more timing between programs.
Thank you.
You're welcome. Thanks, Guy.
Next question is from Myles Walton with UBS. Please go ahead.
Thanks. Good morning. Hi, Myles. Wondering if we can talk about the BCA margins and the kind of underlying margins you've seen over the last couple of quarters, what you're looking for in the 4th quarter. And Dennis, it looks like that mid teens margin target is going to rise a year early in 2019.
Greg, is there any pushback you're going to give me as a conservative CFO to tell me that's not going to happen?
Hey, Myles, first of all, thank you for the feedback there. You do see the progress in our margin performance. And as we said, we're very intent and focused on that. And strong performance by our commercial airplane team in the quarter. There are a number of items behind that, but it reflects the overall drive on productivity and performance across our product lines and the investments we're making there are showing results.
And we laid in a long term plan to make this a mid teens margin business. We are making great progress on that journey and we remain very committed to that. As we said before, not only and year over year cash growth and margin growth business. Greg, do you want to add some color to Miles' point there?
Yes.
Talk me up to lunch, Greg?
I'm sorry?
You want to talk me down?
Well, I'm going to give you the facts. Look, there's been a lot of effort been going on program to program, in particular on the 87 of improving the margin profile. And we talked a lot about it, the mix, buyer step down and then just our own productivity and sharing those best practices across the company. And everybody is on one score in the company and that's one of the big enablers. So it's 1st and foremost on everybody's mind of how do you leverage these best practices and bring to the program.
So you're seeing some of that. You're seeing a lot of discipline on the spending, across the board that is obviously very cash focused, just like the program margins are. But you are seeing some ebbs and flows quarter to quarter. So you're going to see a little more period expense in the Q4. So we had some favorable timing in Q3 and you'll see some of that come back in the Q4.
And obviously, we're keeping a mindful eye on some of the things that Dennis talked about and I did as far as what we're watching between now and the end of the year, in particular, 7 37 delivery profile. So that recovery plan is something that we're focused on daily and in particular around our engine recovery. And so we're taking that into consideration as well. So lots of moving pieces, but net net, the objective hasn't changed. You're seeing progress towards that objective and you're going to see that continue.
Thanks.
Next, we'll go to Sheila Kahyaoglu with Jefferies. Please go ahead.
Good morning and thank you for the time.
Hi Sheila.
Hi. Just on services, the margins compressed a little bit. Can we talk about the implied recovery in Q4 and maybe what some of the period costs were associated with that and how we think about the profitability profile of that business as KLX plays into it?
Yes. Sheila, first of all, overall services business, we're very focused on growing profitably, so growing both top and bottom line. You'll see that year to date, as we said, about 12% growth in our services top line. So our growth strategy is working. You do see some variability on bottom line performance and margin quarter to quarter.
We did make some targeted investments in the Q3 that you see in the local margins there. But you can see we haven't changed our year end guidance for BGS margin. So we still expect this to be a robust growing business both top and bottom line. And Craig, do you have any?
Yes. A lot of initiatives in place here as well, obviously bringing the 2 together and really looking for efficiencies across the board, a lot of effort going on there and obviously the go to market. But there's thousands and thousands of contracts obviously in this business. So as I think I've mentioned on prior calls, you're going to see some ebb and flow from quarter over quarter just by mix alone. But the overall objective long term get outside of quarters here and look kind of year over year is to continue to grow the margins and deliver something to our customers that's really differentiating.
And that's why we brought these businesses together. And I think you're seeing some of that starting in our order book and in our backlog. And it's bringing the best of Boeing to the services elements just like we do on the platform. So but again, that objective of being the most efficient delivering those services in the most efficient way delivers value back to us to reinvest and to our shareholder and back to our customers. So that objective has not changed at all.
Ladies and gentlemen, that will conclude the analyst question and answer session. I will now return you to the Boeing Company for
We will continue the call with media questions for Dennis and Greg. If you have any questions following this part of the session, please call our media relations team at 312 544-2002. Operator, we are now ready for that first question. In the interest of time, we ask that you limit everyone to just one
Thank you. And we'll go to Julie Johnson with Bloomberg. Please go ahead.
Hi, good morning everyone.
Good morning, Julie.
Greg, you'd mentioned that Boeing now selectively is taking sort of longer term market opportunity into account when it looks at its business case for products like TX and MQ25. Does that mindset and that sort of strategic outlook carry over to the NMA? And just sort of curious also if it does, how you go about ring fencing risk and costs?
Yes. No, I'd actually say the MQ and Tx are really more looking at it like we typically do on you would on a commercial type opportunity. So it's really the reverse of that. Having said that, there's a lot of things that we're doing on these programs that Dennis indicated that we're looking at about how does that make us more efficient and more productive on the NMA and how does it derisk the NMA leveraging our investments and our lessons learned, leveraging our investments and our lessons learned across the portfolio. So as we've had NMA teams, we've had 787 teams over on TX.
We've had TX teams over on NMA and on 787. And we've had people like Mark Jenks, who was obviously a key element on the 787 reviewing TX. So it's really more again looking through that commercial, I'd say pretty, I'd say, kind of standard business case over that total market opportunity and what's it take to win in that market and how do you competitively differentiate yourself and bring value back to all the stakeholders and really look for any opportunities to derisk and leverage again some of the lessons learned from across the company.
Our next question is from Andrew Tanjal with The Wall Street Journal. Please go ahead.
Hi, there. Good morning.
Good morning, Andrew.
You all talked about the strong state of the airline business and industry overall, strong profits in passenger and cargo growth. Recently, some low cost airlines have ceased operations and there are some predictions that some other carriers may not make it through the winter as they face higher fuel bills and labor costs. How concerning is that to Boeing given how much new demand for commercial planes you've all been seeing from low cost carriers around the world? And how much exposure do you have to the order book? And how much exposure do you see to demand for commercial aircraft at least in the short term?
Andrew, to your point, while we do see some variability amongst the broad range of airline customers that we have, I would say as a composite, we're continuing to see airline profitability trending in a good direction. The airline industry is very healthy overall across all of the different types of business models, including low cost carriers. And so while there have been some selective challenges within the industry as a composite, it's a strong and healthy airline industry. It's being well managed. And part of it is the fact that we're able to provide our airline customers with advanced capability technologies that are helping them drive profitability and further growth.
So we keep an eye on that, but we feel very confident in the overall health of the airline industry, but more broadly the health of the macro passenger traffic market. Again, year to date 6.8% growth in passenger traffic. It continues to significantly outpace global GDP. That is a fundamental difference from almost any other big industrial sector. And the growing middle class population around the world is really the driving factor behind that.
So I said 150,000,000 new passengers every year in Asia, people that fly for the first time. Less than 20% of the world's population has yet taken a single flight. So when you think about the macro population trends around the world, that's fueling growth. And that's going to be good for the airlines. It's going to be good for us as airplane producers.
And if you look at the overall strength of our current market outlook that 43,000 new airplanes over the next 20 years, we remain very confident in that. In fact, we continue to see upward pressure on our market assessment.
Next question is from Eric Johnson with Reuters News. Please go ahead.
Thank you guys. I appreciate the opportunity. Dennis, I wanted to ask about the charge on Tx and if it is in some way an effort to sort of front load the pain and anticipate a situation similar to what is happening with KC-forty six? In other words, is it inevitable that it may go off course?
No, Eric, it's dramatically different than that. These as Greg said, these are planned purposeful investments upfront with a commercial business case wrapped around them. And in particular on TX, we have 1, derisked the program with investments that are behind us, having built those 2 production ready flying aircraft. That reduces risk in the development program, which makes it significantly different than tanker. But if you look at the forward investments where we're taking the charges in this quarter, those apply to the future production program and the business case around those because we see a production opportunity that is well beyond the current contract, the initial contract.
So think of these as investments that enable a production run that begins in the early 2020s and will extend literally for decades. So it's fundamentally a different approach. It's making a commercial like investment in a defense program where we have confidence that it will run for decades, both in terms of production line and support and services. Investments behind us are the ones that have derisked the program and also make it dramatically different than tanker.
Operator, we have time for one last question.
That will be from Marcus Weisgerber with Defense 1. Please go ahead.
Hi, good morning and thanks for taking my question. Earlier this month, the White House released an assessment of the defense industrial base, which warns of excessive Chinese made content in American weapons. And in light of that, the Pentagon is planning a legislative package and they're saying they plan to invest in U. S. Areas of the supply chain to reduce that Chinese dependence.
So my question is, does the report make you look differently or reassess any of your suppliers? And do you have any indication if Boeing supply chain will be getting any of those Pentagon investments?
Yes. We are very much connected into the defense base policies and plans, working hand in hand with the Pentagon and our U. S. Customers. We, as a matter of normal business, have great visibility into our supply chain and all of the export import rules and regulations that get applied to that are built in and are something that's built into how we do business every day.
So as we look at deep supply chain capabilities and supply sources, this is not new to us. In fact, these are things that we completely understand and govern our business today. And we'll be continuing to work jointly with the Defense Department as we define sources for the future and ensuring that we have I'll say, the diversity of supplier sources that we need here in the U. S. To satisfy our defense customer needs.
I don't see this as anything that's going to substantially change our business model or our supply chain going forward. It will just add additional discipline to ensure the security of that supply chain.
Okay. That concludes our earnings call. Again, for members of the media, if you have further questions, please call our media relations team at 3125 442002. Thank you.