“Regarding free cash flow, we remain on track to achieve our outlook of $1 billion to $3 billion.”

In context

“Jay Malave (Executive Vice President and Chief Financial Officer): Thanks, Kelly, and good morning, everyone. Starting with consolidated financial results for the quarter. Revenue of $24.6 billion was up 8%, driven by solid growth across all three segments, including higher Commercial deliveries and strong Defense volume. The revenue impacts from the Spirit acquisition and Digital Aviation Solutions divestiture in 2025 largely offset each other. Operating margin increased to 0.6%. Core earnings per share improved to a loss of $0.76, primarily reflecting higher segment earnings and lower corporate expense, partially offset by the VC-25B program loss. Free cash flow was positive $631 million, higher than expectations I shared last quarter based on favorable receipt timing. Compared to prior year, free cash flow improved due to higher commercial deliveries and customer receipts, partially offset by planned CapEx increases as we continue to make progress on our growth investments in St. Louis and Charleston. Turning to BCA on the next page. BCA again made solid progress in its production performance by delivering 171 airplanes in the quarter, the highest quarterly total since 2018. Revenue of $11.8 billion was up 8% on the higher deliveries and favorable mix. Operating margin of negative 2.7% improved compared to last year, primarily driven by increased delivery volume and mix. In the quarter, we also recognized other favorable adjustments of about 150 basis points. Excluding those adjustments, profitability improvement was in line with our expectations. Backlog continued to grow and remains at a record level of $597 billion, including over 6,200 airplanes. Clicking down on Commercial program performance and starting with the 737. We delivered 129 airplanes in the quarter and remain on track to deliver 500 airplanes this year. Kelly highlighted the certification progress we have made on the -10, and we will continue to ramp up -10 production in the second half of the year. Turning to the 787. We delivered 25 airplanes, including 13 in June and remain on track to deliver 90 to 100 airplanes this year. As Kelly mentioned, during the quarter, we stabilized production at eight per month. At the end of the quarter, we also made important progress on seat certification. In June, Riyadh Air took delivery of its first 787 Dreamliners, airplanes that were previously built but awaiting seat certification. Finally, on 777X, we continue to make steady progress on certification, as Kelly noted, and we remain on track for first delivery in 2027. Regarding the previously discussed engine durability issue, GE is finalizing the modifications with the FAA and remains confident in their root cause analysis and solution. They have already incorporated the change into their production system and engine deliveries are expected to resume in the third quarter. We continue to manage the entire production system for increased rates. Supply chain readiness, including engines, remains a key factor in our production and delivery plans next year. Shifting over to BDS on the next page. BDS delivered 35 aircraft in the quarter. Revenue increased 13% to $7.5 billion, primarily driven by higher volume, including growth on classified programs, missiles and weapons and KC-46A Tanker. Spirit contributed approximately $130 million to sales in the quarter or about 2 points of growth. Operating margin was negative 0.2%, which reflects the $280 million loss on the VC-25B program. BDS booked $7 billion in orders during the quarter and backlog remained strong at $85 billion. Excluding the impact of the VC-25B adjustment, BDS operating margin was 3.5% in the quarter, reflecting better operating performance across the rest of the business and in line with our expectations for steady margin improvement. Further progress will come from completing fixed-price development programs that currently dilute margins and from executing our sizable backlog, which carries attractive margins that will accelerate improvement. I'm confident that the BDS team is on the right track, and we remain confident in the path to return to high single-digit operating margins by the end of the decade. Now moving to Global Services on the next page. BGS continued to perform well and again delivered strong financial results in the quarter. Revenue was up 1% to $5.3 billion. Excluding the impact of Digital Aviation Solutions divestiture, revenue was up 8% year-over-year. Operating margin of 18.1% was down from the prior year, primarily related to the impacts of the Digital Aviation Solutions divestiture as well as higher costs and less favorable mix. Both commercial and government businesses delivered double-digit margins in the quarter. Operationally, the BGS team continues to drive process improvement across the business. For example, on the P-8 modification program in Jacksonville, we have reduced flow time by 44%, demonstrating the impact of our process and training initiatives. BGS received $5 billion of orders and ended the quarter with a backlog of $33 billion. Shifting over to cash and debt. Cash and marketable securities ended at $20 billion, primarily reflecting debt repayments, partially offset by cash flow generated in the quarter. The debt balance ended at $45.9 billion, down $1.3 billion in the quarter and $8.2 billion year-to-date on the paydown of maturing debt, consistent with our debt reduction plans. We also maintained access to credit facilities of $10 billion, all of which remain undrawn, and we remain committed to strengthening the balance sheet and supporting our investment-grade rating. Regarding free cash flow, we remain on track to achieve our outlook of $1 billion to $3 billion. First half performance came in better than expected, driven by favorable receipt timing within the year. Note that the $700 million DOJ payment planned for the second half of 2026 is expected to be paid in the third quarter. Factoring in that impact, we expect third quarter free cash flow to be positive and in the low hundreds of millions of dollars. Overall, the improved cash profile gives us confidence in the outlook for the year. Beyond 2026 and consistent with what we have discussed previously, free cash flow is expected to grow, primarily driven by higher commercial deliveries, steady improvements at BDS and continued growth at BGS. We continue to view the $10 billion free cash flow figure as very attainable with significant growth beyond that into the next decade as we execute on our record backlog and benefit from continued strong market demand. Okay. Summing it all up, a strong first half with steady progress against our plan, resulting in a more balanced cash flow profile. We remain focused on continuing that momentum and building sustained free cash flow growth. With that, let's open up the line for questions.”