Brian West
Chief Financial Officer and Executive Vice President, Finance at Boeing
Thanks, Dave, and good morning, everyone. Let's go to the next slide and start with total company financial performance. Third quarter revenue was $18.1 billion. That's up 13% year over year. Growth was driven by higher commercial volume, primarily on higher 787 deliveries. Core operating margin in the quarter was minus 6% and the core loss per share was $3.26. Margins and EPS were negatively impacted by: unfavorable defense performance, which I'll cover in a moment; lower 737 deliveries that were in line with expectations set last month; and expected abnormal costs and period expenses. Free cash flow was a usage of $310 million in the quarter. This reflects the lower 737 deliveries and in line with our expectations.
With that, I'll turn to the next page and cover Boeing Commercial Airplanes. BCA booked 398 net orders in the quarter, including 150 MAX-10s for Ryanair, 50 87s for United, and 39 87s for Saudi Arabian Airlines. BCA now has over 5,100 airplanes in the backlog, valued at $392 billion. BCA delivered 105 airplanes in the quarter and revenue was $7.9 billion. That's up 25% year over year, driven by the higher 787 deliveries. Operating margin was minus 8.6%. We saw the impact of the lower 737 deliveries as well as expected abnormal costs and period expenses, including higher R&D spending primarily on the 777X investment.
Now, I'll give a little more color on the key programs. On the 737, we delivered 70 airplanes in the quarter, reflecting the impact of the recent supplier fuselage nonconformance. Since our early September update, additional areas of the aft pressure bulkhead were identified that require further inspection and rework, which you likely read about.
This additional scope impacts units that had already gone through the initial rework, and it will take us more time to stabilize production and deliveries. We've bounded the issue, understand the rework steps required, and booked a non-material financial impact in the quarter. Considering these latest facts, we expect October deliveries to be in line with September and now expect to deliver between 375 and 400 airplanes for the year. Performance ultimately will be dictated by the pace of the fuselage recovery.
The quarter ended with approximately 250 MAX airplanes in inventory, 85 of which are being held for customers in China. We still expect most of the MAX inventory aircraft to be delivered by the end of 2024, but more are likely to slip into 2025 tied to the fuselage recovery. To support stability, suppliers are continuing with planned rate increases and we are selectively managing inventory levels on certain parts where prudent. We expect to complete the 737 transition to 38 per month by year end, and we are maintaining plans increase to 50 per month in the '25-'26 time frame.
On the 787 program, we had 19 deliveries in the quarter and 50 year to date. We still expect 70 to 80 deliveries this year. We started transitioning production to five per month in October and still plan to reach 10 per month in the '25-'26 time frame. We ended the quarter with 75 airplanes in inventory. Rework is progressing nicely, and we still expect most to be delivered by the end of 2024. We booked $244 million of abnormal cost in line with expectations. The total estimate is now $3 billion, up a bit, and we still expect to be largely done by year end.
Moving to the 777X program, efforts are ongoing. The program timeline is unchanged, and we plan to resume production later this year. We booked $180 million of abnormal cost in the quarter in line with expectations. The total estimate is unchanged at $1 billion, and we expect to be done this quarter.
Importantly, as Dave mentioned, we recently reached an agreement with Spirit on commercial terms associated with the 737 and 787 programs. We believe this agreement is a win-win for both companies and directly promotes our goal to drive stability and support our airline customers.
Moving on to the next page, Boeing Defense and Space. BDS booked $6 billion in orders during the quarter and the backlog now stands at $58 billion. Revenue was $5.5 billion, essentially flat year over year, and we delivered 28 aircraft. Operating margin was minus 16.9% in the quarter. In early September, we indicated that margins would be around minus 9%, the driver being a $482 million charge on the VC-25B fixed price development program due to higher estimated manufacturing costs related to engineering changes, labor instability, and the resolution of supplier negotiations.
As we closed the books at quarter end, we saw another 8 points of margin erosion, driven by, first, a $315 million loss tied to customer considerations and higher estimated costs to deliver a highly innovative satellite constellation contract that we signed several years ago; and second, we had smaller, less material cost pressures across a couple programs, totaling $136 million, primarily driven by the MQ-25 program. These are disappointing results in the quarter and year to date. This performance is below our expectations, and we acknowledge that we aren't as far along in this recovery as we expected to be at this stage.
I'd like to point out that the team is executing a game plan to get BDS back to the high single-digit margins by the '25-'26 time frame, as you can see on the right hand side of the slide. We are driving lean manufacturing, program management rigor and cost productivity consistently across the division. We've invested in new training programs to accelerate performance on the factory floor, and we've deployed resources at our suppliers to support their recovery.
Perhaps most importantly, we instituted much tighter underwriting standards. As you know, part of the challenge we are dealing with are legacy contracts that we need to get out from under. Rest assured, we haven't signed any fixed price development contracts nor intend to. These moves are all fundamental to accelerating the recovery by the '25-'26 time frame.
We have detailed metrics and milestones to evaluate our performance and progress across the three areas that we've previously highlighted. First, we have a solid core business representing about 60% of our revenue that performs in the mid-to-high single-digit margin range. The demand for these products is strong. In particular, volume for our missile and weapons products as well as the Apache are very robust given the current threat environment, and we need to keep executing, competing and growing these offerings. Then, we have the 25% of the portfolio representing specific fighter and satellite programs that have negatively impacted margins the past several quarters.
In these areas, we took on fixed price production contracts in a pre-pandemic environment with real technical innovation that we're working our way through. We fully expect to see recovery in these areas as we improve execution, deliver next-generation capabilities and roll into new contracts with stronger underwriting disciplines that more accurately reflect the prevailing economic conditions. We expect to return to the strong performance levels that we've demonstrated historically on these programs as we move into the '25-'26 time frame.
Lastly, we have our large fixed price development programs that represent the remaining 15% of the portfolio, and we continue to be focused on maturing and retiring these risks. Specifically, on the KC-46A program, we are stabilizing the production system. We've seen signs of progress and improved productivity. And as of this month, we have delivered 77 tankers to the customer.
For the VC-25B, we are now maturing through the build process and the key milestones ahead are power on and first flight, both of which will essentially be behind us as we move through the '25-'26 time frame and represent a significant derisking of the program.
For commercial crew, while it has been a long road, we are preparing to execute a successful crewed flight test next year and then fulfill operational launch commitments, all of which will be completed as we exit '25-'26.
On T-7A, we just delivered the first aircraft to the Air Force this quarter and have begun critical phases of the flight task program. On MQ-25, we'll get through key build and flight test milestones and transition out of the development phase as we move through the '25-'26 time frame. We remain very confident in the T-7A and MQ-25 investments that will deliver innovative performance to the customer with a strong long-term demand profile.
So for BDS, this recovery is challenging at the moment, but we believe the actions we are taking will begin to gain traction and then accelerate. Fast forward to that '25-'26 time frame, fixed price development contracts will be substantially derisked. We'll have a healthy order book unwritten with much better economics and underwriting disciplines and a resilient employee base and supply chain that's executing at a much higher level.
Moving on to the next slide, Boeing Global Services. BGS had another strong quarter. They received $5 billion in orders during the quarter, and the backlog sits at $18 billion. Revenue was $4.8 billion, up 9% year over year, primarily on favorable commercial volume and mix. Operating margins were a strong 16.3%, in line with our expectations. Importantly, our commercial and government businesses continued to deliver double-digit margins.
With that, we'll turn to the next page and cover cash and debt. On cash and marketable securities, we ended the quarter at $13.4 billion and, on debt, the balance remained flat at $52.3 billion. We had access to $10 billion of revolving credit facilities at the end of the quarter, all of which was undrawn. Our liquidity position is strong, the investment grade credit rating continues to be a priority, and we are deploying capital in line with the priorities that we've shared, invest in the business and pay down debt through strong cash flow generation.
And flipping to the last page on our outlook. The overall financial outlook for 2023 is unchanged from what we've previously shared, including $3 billion to $5 billion of free cash flow generation, although the updated 737 deliveries now point more toward the low end of the free cash flow range, we also expect R&D to come in slightly above our original guide, tied to the higher 777X investments that I touched on earlier.
Stepping back to address the state of the market. Commercial demand remains strong across our key programs and services. Global passenger traffic was up nearly 30% year on year in August and is at 96% of pre-pandemic levels, 109% domestic and 89% international. Cargo remains healthy, and August was the first month with annual cargo growth since early 2022.
Defense demand is also robust, and the FY '24 budget continues to be in line with our expectations. Our portfolio and capabilities are well positioned to support the needs of the nation and of our allies. With demand strong, we still find ourselves in a supply constrained environment, and our focus continues to be on execution both within our factories and the supply chain as we steadily increase production.
We are squarely focused on a meaningful step-up in operating performance, including deliveries, revenue, margins and cash flow, all of which we expect to improve as we finish out the year. On 4Q, specifically, we expect BCA margins to improve sequentially, but remain negative, more in line with 2Q, and we are still not anticipating much in terms of BDS profitability. On the tax expense side, we still expect full year tax expense of approximately $250 million.
As we look into early 2024, we see a number of key milestones that give us confidence in building momentum across the business. The 737 factory should be recovered from the current nonconformance and will be stabilizing production at 38 per month with step-ups as we move to 50 per month by '25-'26. 787 will be stabilizing production at five per month with a focus on stepping up to 10 per month by '25-'26.
We'll be further along in our inventory unwind, with better line of sight to the elimination of the 737 and 787 dual factories. Keep in mind that correcting nonconformances gets exponentially easier when this inventory has been delivered to our customers. BDS will be further along in recovery, as I described earlier. BGS will still be generating mid-teen margins, executing on its high cash conversion, capital-efficient, disciplined growth model. And all of this will underwrite our continued strong liquidity position and enable us to further delever the balance sheet early next year.
With that, back over to Dave for closing comments.
