波音 (BA) 2002 Q1 法說會逐字稿

Good day, everyone, and welcome to Boeing Company's first quarter results conference call. Today's call is being recorded. The management discussion and slide presentation, plus the analysts' and media question-and-answer sessions are being broadcast live over the Internet.

At this time, for opening remarks and introductions, I'm going to turn the call over to Mr. Paul Kinscherff, Vice President of Investment Relations for the Boeing Company. Mr. Kinscherff, please go ahead, sir.

Welcome to the Boeing first quarter 2002 earnings conference call. We are pleased to review our quarterly earnings and outlook with you today. You can follow our company broadcast at our Web site at www.boeing.com. The charts we present today will be available for downloading from our Web site through May first. If for any reason you are currently unable to reach us through the Internet, please access our site later today, when all information will be posted.

With me today are Phil Condit, Chairman and CEO; and Mike Sears, our Senior Vice President and CFO. After comments by Phil and Mike, we will then open it up to your questions. Before we start, as usual, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks and uncertainties. The assumptions behind our projections and the factors that could cause actual results to vary, are detailed in the news releases we issued early this morning, and in our various filings with the Securities and Exchange Commission, and in our forward-looking statement at the end of the Web presentation.

I urge you to read them thoroughly.

At this point, I would like to turn the meeting over to Phil.

Thank you, Paul, and good morning. Today, I will review the Q1 performance and give you my perspectives on our outlook. Mike will provide financial details, and then we both will take your questions.

Let me go to Slide Two. Overall, Q1 financials reflect solid performance across almost all of our aerospace and finance businesses. Our balance sheet remains very strong. We did have a performance issue in Q1 with Boeing Satellite Systems, and I will discuss that later. We increased our committed backlog in Q1, captured key new business, and made good progress on growth opportunities during the quarter. All of this positions us very well for the future.

Now let's turn to the financial highlights on Slide Three. Revenues for Q1 were $13.8 billion, against $13.3 billion for the year-ago period. This reflects increased revenues primarily from our Military Aircraft and Missile Systems Group.

Our earnings for the quarter were impacted by the adoption of FAS 142, the accounting standard related to goodwill. It was also impacted by several nonrecurring items, higher stock compensation expense, and increased satellite production costs.

Let me deal with these briefly. The earnings shown here exclude the one-time adjustment for the adoption of FAS 142, and result in EPS for Q1 of 72 cents compared to $1.45 for the year-ago period. However, we booked three nonrecurring events during the quarter, and if we exclude these nonrecurring items and the accounting change, net income was $602 million, or 75 cents a share, compared with

one million, or 89 cents a share in the year-ago period.

As I think you all know, we report results, including the impact of 123 for stock compensation expenses. If we exclude the impact of stock compensation expenses, our adjusted EPS was 88 cents, against 91 cents for the previous year's quarter.

but this is the result of timing, not business performance. As Mike will show you, we expect to meet our guidance of 2.5 to

cash flow for the year.

Now let's look at our businesses and start with Commercial Airplanes. This unit has aggressively managed its business in a very altered marketplace following September 11th. Commercial turned in an outstanding quarter. Revenues remained

billion, with segment options up significantly to over twelve percent.

Commercial delivered 110 airplanes this quarter, compared to 122 deliveries in the year-ago period. They also recorded 120 gross orders in Q1, including the largest-ever single firm order in the next-generation 737. As planned, in response to its altered marketplace, Commercial unit continues to lower production rates sharply and reduce employment on a disciplined schedule.

Commercial continued its intense efforts in Q1 to streamline assets and implement lean processes, including conversion of its 737 program to a full moving-line production. This is a significant improvement in manufacturing process and related supply-chain management.

Finally, in Q1, Commercial Airplanes worked closely with airline customers to say abreast of evolving market conditions. Demand for single-aisle airplanes appears to be recovering, with the potential for upward pressure on planned production. However, the twin-aisle market may not be returning as quickly. This market remains a near-term watch item for us.

Going forward, Commercial is on track to execute its plan to achieve strong performance and solid profitability in a lower production rate environment.

Slide Five shows Military Aircraft and Missile Systems. Once again, this business continued to deliver consistent strong performance in double-digit margins, and increasing revenues by 22 percent. Military Aircraft and Missile Systems made great progress towards securing new business in Q1. They were selected by the U.S. Air Force to negotiate the lease of up to 100 767 tanker transports, and expects to complete negotiations this summer.

They also were selected to proceed to the second phase of competition for the Korean Ministry of National Defense for the F-15-K.

They expect U.S. Congressional Approval for a 60-airplane, C17, multi-year contract that would deliver through 2008, and A and M. expects to finalize this contract in Q2.

They also accelerated deliveries of (Jade) ammunitions and support of increasing national security needs. A. and M. remains well-positioned to continue growing profitably and to deliver significant value.

Now let's turn to Slide Six, Space and Communications. Space and Communications performed well on the majority of its programs and had a key program win. However, production issues at Boeing Satellite Systems impacted S. and C.'s operating margins for the quarter. They fell to 1.8 percent, compared to 3.7 percent in the first quarter of 2001.

Revenues were $2.3 billion, up slightly from Q1 of 01. This is primarily to growth in missile defense and integrated battle space activities, partially offset by lower commercial satellite revenues. S. and C. is aggressively acting to resolve commercial satellite program issues.

A significant reorganization of Boeing Satellite Systems is underway. S. and C. is applying proven Boeing lean manufacturing and quality processes, and is streamlining the organization. S. and C. expects to improve B.S.S. performance by year-end, despite the current market downturn in commercial satellites.

In Q1, this position has successfully completed its eighth integrated flight test to continue its excellent performance as prime contractor on the ground-based midcourse defense program. S. and C. was also chosen for a key role in the transformation of the U.S. Army, with the capture of the future combat system program.

Intellectual capital at B.S.S. was critical to the S. and C. program win. This business unit also remains a leader in government communications, and will provide improved military connectivity with a option-exercise for the first two wide-band gap-filler satellites. S. and C. will continue to be a key growth element in Boeing's future strategy.

Now let's look at Slide Seven and our progress against milestones for future growth. Q1 revenues for Boeing Capital Corp. increased 42 percent, to $228 million, from $161 million in the first quarter of '01. This reflects its continuing growth over the last several quarters. B.C.C. has maintained its prudent financial approach and equipment standards in a challenging commercial aerospace environment. It is on track to continue performing well.

Connexion by Boeing completed its first system installation on board a Lufthansa commercial airliner, in Q1. Following technical tests, the airline will begin consumer service trials on board the 747-400 later this year. Connexion also signed a contract to equip four aircraft used by senior U.S. Government officials.

Air traffic management continues to generate interest worldwide, on its approach to developing the next-generation air traffic management system. During Q1 it worked closely with other U.S. stakeholders to

jointly proposed performance requirements for a future air traffic management system.

growth potential for both Connexion by Boeing and Air Traffic Management remain promising. Our long-term vision remains unchanged.

Now, let me close with Slide Eight. First, overall, our business continues to perform well, and we are addressing the issues at B.S.S. This unit has, and will continue to play, a key role in achieving profitable long-term growth with Space and Com.

Second, our Boeing transformation includes a strong focus delivering solid profitability in a dynamic market environment. We intend to deliver, as our business units become leaner, continued business and grow new markets. It is a that is working well.

Third and finally, in preparation for the upcoming retirements of Harry Stonecipher as Vice Chairman, and the retirement of two other senior officers, I have expanded the Office of the Chairman to help

strategy with agility, speed and decisiveness, and to drive financial performance and deliver shareholder value.

Now, Mike will give you more details for the quarter, and our outlook. Mike.

Thanks, Phil, and good morning, everyone.

I'll start, today, with some general comments on Slide Ten, and then move into the numbers. Our financial results for the quarter reflect continued strong operating performance across the vast majority of our businesses, offset by the issue Phil mentioned in our commercial satellite area.

Commercial Airplanes, Military Aircraft and Missile Systems, and Boeing Capital Corporation all delivered strong operating results. Space and Communications continued to improve its performance on its satellite programs.

As Phil noted, actions to improve Commercial's performance, including a reorganization of Boeing Satellite Systems, are underway.

Two of the keys to our performance, going forward, are the orderly production of commercial airplanes and continued growth in our government businesses. During the quarter, we made significant progress in each of these areas.

We closed the first quarter with a strong balance sheet, and are on track to generate substantial free cash flow and earnings for the year.

Now, to the numbers on Slide 11. Let me begin with a reminder, the results shown here from the first quarter of '01 include the favorable impact of a tax settlement that resulted in a reported EPS benefit of 56 cents per share.

Revenues for the first quarter of '02 were $13.8 billion. This is up slightly from the same period last year, due primarily to increased deliveries at Military Aircraft and Missile Systems. Operating earnings were $992 million, down $226 million. This decrease in part reflects the quarter's nonrecurring items at Boeing Satellite Systems.

Also contributing to the decrease was higher expenses associated with our stock-based compensation plans. These expenses, which fluctuate with our share price, accounted for $139 million of earnings decrease, quarter-over-quarter.

Excluding nonrecurring items and the change in accounting, which I'll cover on the next slide, net earnings for the period totaled $602 million, of 75 cents a share. Although we're disappointed with the performance of our commercial satellite programs, you will see in our segment results that we continued to perform well across the vast majority of our business. More on this when we get to the segment details.

Moving to Slide 12, we have our three nonrecurring items for the quarter. Commercial Airplanes recorded a $24 million after-tax charge for decreased aircraft valuations resulting from the events of September 11th. You may recall that year-end, we took a substantial charge against earnings related to the impact of September 11th on our business. This current charge reflects follow-on impacts related to aircraft trading.

Military Aircraft and Missile Systems recognized a $15 million after-tax benefit as a result of the favorable settlement of termination liability with F-15 suppliers. This relates to third quarter 1999 charge against earnings associated with the production line break on the F-15 program. We expect this to be the last substantive nonrecurring item related to the F-15 line termination, and subsequent restart of production.

And, during the first quarter, we also took a $15 million after-tax charge associated with a long-held equity investment. The net effect of these three nonrecurring items was a one-time charge of $24 million, or three cents to reported earnings-per-share.

At the bottom of the slide, it identifies the impact of the new FAS 142 accounting change, an item with which I know most of you are familiar. This required change in accounting for goodwill amortization resulted in a $1.8 billion after-tax noncash charge during the quarter. This total is within the estimated range we provided you in our March announcement.

Moving to Slide 13, you can see that we generated free cash flow of $174 million for the quarter. Some cash flow we expected to see during the first quarter moved into Q2. This is primarily due to payment timing on some government programs.

Free cash use was modest, and primarily for dividends and to support customer financing. Free cash flow will continue to be a strength for the company. We expect variation in our quarterly cash profiles, with significant cash being generated in the second half of the year, and we remain on-target to achieve our year-end guidance of over two-and-a-half to $3 billion of free cash.

Slide 14 shows our balance sheet, which remains strong. We ended the quarter with a cash balance of $541 million, down slightly from year-end. Boeing Capital debt increased just over $600 million to fund new additions. Boeing Capital's debt-to-equity ratio at the end of the period was 5.21, a conservative level well within the new target range established late last year.

Debt of the Boeing Company was essentially flat for the quarter, $4.4 billion. The reduction of equity reflects the $1.8 billion charge resulting from the change of accounting, and excluding this charge, the company's debt ratio declined slightly, to approximately 30 percent.

Our credit ratings remain at solid investment-grade levels, despite a one notch downgrade by Standard and Poors, which was driven by commercial airplane market factors. Both rating agencies have assigned a stable outlook for our ratings. A strong balance sheet and solid credit ratings remain priorities for our.

Now, to our core businesses, starting with Commercial Airplanes, on Slide 15. Commercial Airplanes turned in strong operating earnings and higher double-digit segment margins, reflecting its focus on profitability and operating efficiency. Revenues of $8.3 billion were essentially level with the same period last year, as the mix of airplanes delivered offset lower volume. First quarter deliveries totaled 110 airplanes, compared to 122 in the same period last year.

For the quarter, operating earnings and margins were impacted by a nonrecurring charge related to the impact of September 11th events on asset valuations.

As I described earlier, on a pretax basis, the charge totaled $34 million. Excluding this charge, operating earnings for the quarter increased 17 percent to $1 billion, and segment operating margins were a very healthy 12.1 percent.

During the quarter, Commercial Airplanes was able to recognize a segment margin pickup as it completed an accounting block on the 737 program. This reflects better-than-anticipated cost performance during the lowering of our production rates.

The Commercial Airplanes continues to turn in outstanding performance in a challenging environment, with continued strong leadership and an intense focus on controlling costs, implementing lean manufacturing, and managing risks, we expect Commercial Airplanes will continue to perform profitably during the downturn, and be well-positioned when the market recovers.

Turning to Slide 16, Military Aircraft and Missile Systems continued its outstanding financial performance during the quarter. Revenues were up 22 percent, to $3 billion, compared with $2.4 billion of a year ago. This was primarily due to increased delivery rates on the F. and A. team and Apache helicopter programs, and an additional C-17 delivery during this year's first quarter.

Earnings also increase significantly, to $363 million, primarily due to the higher delivery volume, and continued program performance improvements.

Margins for the quarter were again in double digits, at a healthy 12.2 percent. Recorded operating earnings and margins for the quarter included a $24 million pretax benefit from the termination liability settlement on the F-15 program. Adjusting for this item, which

margins remained solid at a 11.4 percent. Overall, Military Aircraft and Missile Systems is on track for strong profitability throughout 2002.

Turning to Slide 17, Space and Communications, revenues during the quarter were up slightly from the previous year. This was primarily due to increases in missile defense and integrated battle space activities, which were partially offset by lower revenues in commercial satellites. The Majority of Space and Communications programs are performing well, and showed margin improvement compared to the prior period.

However, operating earnings were well below first quarter 2001 levels, at $42 million. This primarily affects the cost performance issues at Boeing Satellite Systems.

The Space and Communications team is aggressively addressing Boeing Satellite System performance issues and expects the corrective actions we've mentioned today to improve performance by year-end.

Boeing Satellite Systems remains an integral part of our long-term strategic vision for Space and Communications. The capability and intellectual capital of this team was a major factor in our Future Combat Systems contract win during the quarter, and B.S.S. will play an equally important role in future competitions such as GPS III, and others. We expect the remainder of our Space and Communications business, including key missile defense and integrated battle space programs to continue to perform well.

Turning to Slide 18, we are reaffirming our financial guidance for 2002 and 2003. Our outlook reflects our expectation for continued solid operating and financial performance from our aerospace and financing businesses. We will see some variability from quarter-to-quarter, but remain on track with the guidance we gave you in January.

Commercial Airplanes is well-poised to deliver strong profitable performance, despite the unprecedented challenges of the current environment. You may recall that production rates are expected to drop to about one half of 2000 levels by midsummer this year. As a result, Commercial Airplanes margins are expected to moderate from levels achieved during the first quarter, but continues to support the outlook for the year.

Our Commercial Airplanes delivery forecast is unchanged as follows: In 2002, we expect to deliver approximately 380 airplanes, which are essentially sold out. We expect deliveries during the second quarter to be about what we delivered in the first. Forecasted deliveries during the last two quarters of 2002 are substantially lower.

In 2003, we're holding on delivery estimates, at 275 to 300 airplanes. This estimate is now over 80 percent sold, at the lower end of the range. However, it is still noted, although single-aisle demand is holding up, we are closely following twin-aisle demand as a near-term watch item which could impact the anticipated mix of airplane deliveries in '03. This should become clearer over the next few months.

Military Aircraft and Missile Systems is expected to realize steady, moderate revenue growth from increased deliveries under multi-year contracts, and aerospace support programs. We anticipate the continued strong program performance will allow the unit to maintain margins in the low double-digit range, including the start-up investment in the 767 tanker program.

Space and Communications is expected to see revenue growth from its missile defense and integrated battle space activities, with some offset from softness in commercial satellites. Key to achieving full year-over-year earnings and margin improvement, is improved Boeing Satellite Systems performance and successful first-flight and market acceptance of the Delta Four.

Boeing Capital Corporation is expected to continue to grow, although at a more moderate rate during upcoming quarters, as deliveries decrease and airline funding requirements subside.

And, on the nonoperating side, as we discussed, at year-end, we also expect pension income to be down, due to general weakness in the financial markets.

Revenue guidance remains at plus-or-minus $54 billion for 2002, and plus-or-minus $52 billion for 2003.

Operating margin guidance remains at plus-or-minus eight-and-one-quarter percent, for both 2002 and 2003.

And, free cash flow guidance for 2002 remains at two-and-a-half to $3 billion, with significant cash being generated in the second half of the year.

In 2003, the outlook for free cash flow is unchanged, at greater than $3 billion. For both 2002 and 2003, we'll continue to balance our near-term performance objectives through prudent investment, in the future. That includes an R&D plan at the lower end of three, to three-and-a-half percent of revenues.

And with that, it's back to Phil, and we're ready for your questions.

OK, we'll take your questions.

Our question-and-answer session is conducted electronically. If you would like to ask a question, please press star, one on your touchtone phone. Again, that's star, one to signal for a question. And, we'll pause for a moment to give everyone a chance to signal.

Our first question will come from (Steve Binder). He's at Bear Stearns.

Yes, good morning. Can you maybe just touch on, up at (B.C.) issue, were there any, in the unit cost margins, were there any cancellation payments or any type of one-time pickup you've got from the deferrals you experienced with your customers base?

Nothing significant, there (Steve) on the one-time pickup.

And, what was the, you know, were there any block changes at all, under the program method in the quarter?

No, this quarter we had no block changes.

We did close a three seven block, and recognized the income on that block, but there were no additions.

The 737 block change that you referred to the pickup, the one-time pickup from completion of the block, was that under the program method with that pickup, or are you referring to the unit cost method?

Actually, it flows sort of into both, but at different levels.

Yes, the accounting difference line is pretty dramatic in the quarter. Was that -- was it due to that factor?

Yes, in fact, what we mentioned we closed the accounting block, and that really does reflect some outstanding performance, because in the process of coming down in the production rate, the disruption factor was not as great as we'd anticipated, and so there was good performance, and when you make the accounting change, there was more in there to be reconciled out, (Steve), why that number is larger.

As he touched, Mike, on Boeing Satellite Systems, as far as, I mean, you talked about production issues, but could you, actually two things. One, relative to your initial plan, original plan for the first quarter, I mean, how much of a shortfall was there from the profitability of that business.

And, two, can you maybe touch on specifically the issues that you're experiencing right now?

the magnitude is about what's reflected in the difference, quarter-over-quarter, and the principal issues there have to do with getting the Boeing best practices of systems engineering and program management processes into that company, which we've been pleased with the opportunity to acquire, but we need to take advantage of all the lessons learned across the rest of the Boeing corporation, and get them institutionalized into that business unit.

Thank you. Our next question comes from (George Shapiro), who's at Salomon Brothers.

Yes, good morning.

Hi, George.

On the commercial being sold out at 80 percent for '03, the difference from what you previously said, at 75, is about 15 airplanes. Is that primarily the (Ryan Air) order, or is there something else that happened, to give you a pickup of 15 deliveries in '03?

I don't have those numbers right at my fingertips. I believe there are some (Ryan Air) airplanes in the '03 number, and we have firmed up some other airplanes as well.

And, Phil, how long do you need to -- can you wait, to firm up the '03? I guess, in theory, with 12 -- nine to 12 month lead times, you probably could wait pretty much the whole year to fill up the rest?

You've got it, and you hit the numbers. We're trying to work as long as nine months on lead time, with a nominal 12, so we're working in between those two numbers. So, for part of '03, we'll have

of this year to work on, all of them.

OK. And, Mike, if you looked at, you know, kind of following up on (Steve's) question, if you looked at the GAPP earnings at Commercial, it dropped from like 8.9 percent last year, to 8.1, reflecting the huge 335 million of accounting, the bulk of which was at the seven three seven, so the block size stayed the same; you're just running somewhat, a lot ahead of plan, at this point? Is that's what's going on?

Yes, there are two, as is normally the case, George, with program accounting, there's two issues that kind of those numbers, and they tend to drive them in different directions. The fact that we had a good performance on the, as we closed that accounting lot, drove the segment margins higher than you might have anticipated, and therefore, as you consolidate and roll that back out, that tends to be a big number.

On the other hand, the 9/11 impact has caused the extension of the current blocks over time, which also has a tendency to pull down those GAPP numbers to some extent.

So, what you did in the quarter, though, you basically made an upward adjustment in terms of the profit that you'll wind up seeing some of that, that picks up all this quarter, and as you go through the subsequent quarters, if you hold at that new rate, you're not going to get the same degree of pickup?

That's essentially correct.

OK, and just in the satellite, something, you deduced from your comment that maybe about $40 million swing is from the Boeing Satellite Systems?

Well, most of the difference we show there is in that particular sector of the business.

Can you share, Mike, how many deliveries were made in Commercial Satellite this year, versus last year, and what the current backlog of Commercial Satellite is?

People are turning pages, George. Paul, do you have that in front of you? We're going to give Paul ten seconds to find it. Have you got it?

Satellite deliveries first quarter of this year -- shoot. No, I don't have that.

Well, we delivered one satellite in the quarter, George.

OK, and you have last year, by any chance, Paul?

Check, check. We delivered three satellites in the quarter, versus one last year.

And the current backlog?

I think we had said at the end of the prior quarter, for the backlog, we identified for you, in the mid-thirties.

And, is that changed much?

Well, we've only delivered a few satellites.

Well, I just wondered whether you might have had some canceled, though, in addition?

No.

OK. OK, thanks very much.

Thanks, George.

Our next question will come from (Howard Rubell), he's at Goldman Sachs.

Thank you. I have a couple questions. Cash and equivalents of 540 million, was that all at the parent, or was that, again, largely at the credit corp.?

Howard, we can't hear you very well. Can you repeat that question?

I'm sorry. First, cash and equivalents: At the end of the year, most of the cash was at the credit corp.? Is it again, or is it at the parent?

Well, we've kind of got that split. It's in both places.

It's a balanced mix.

OK, fine. Second thing is, to go back to the seven three seven accounting change, going forward, though, even though you had an (accume pickup) going forward you would expect the profitability of the business to be higher than it had been in quarters prior to the first?

Well, let me -- let me say that the performance, the operating performance of the Commercial Group is really terrific, and it's showing through, as we look forward in the guidance we've given you. It has a particular impact on Q1's segment, because of the accounting lot closeout on this one lot. But, the performance is really good, and we expect good operating performance.

But Howard, you're right that there's a graded segment; there will be lower segments going forward because of the (cume pickup).

Right, but it also indicates that, I think we're sort of repeating -- I'm repeating other points, but just to make sure I'm clear, is that you're saying that the overall transition to the moving line has generated results that you're very pleased with?

Yes.

That's one of the elements that have contributed to the success; yes sir.

And then, you've indicated that Boeing -- I'll pick on Boeing Satellite again, you've indicated that the problems are going to persist. Why is it that you indemnize all of the costs associated with this problem in the current quarter?

Why don't we -- we have closed out the quarter in a forward-looking fashion, so we have taken all of our programs and looked at the estimates are complete, and have reflected all the numbers we've provided.

All right. So, so if you were...

So maybe, to let me continue for a moment, Howard...

Thank you.

So, we expect that we understand the issues; we have the corrective actions identified, and the numbers that we have projected in support of our guidance will be a part of that conclusion for the year.

But, at what point do you then go back to Hughes and complete your recovery of what you believe is appropriate?

Oh, I'm sorry -- we -- we're continuing to work that problem. We have worked the claim amount down from short of a billion, to, in the 650 to 700 million category, and expect that we have an opportunity do to that before the year is out.

Thank you very much.

Yes, sir.

Our next question will come from (Heidi Wood), at Morgan Stanley.

Hi, a couple of questions. With respect to your discussion on the 2003 deliveries being 80 percent full, can you give us a little more granularity, and characterize the percentage of wide-bodies that the skyline is full for 2003 for wide-bodies?

I do not have those numbers right at my fingertips, (Heidi), but what we are seeing, I think, as a percentage, is not much different. It is just a read of the market that there is less demand for the wide-body aircraft than what we are seeing for the single-aisle aircraft. If anything, there is upward pressure on our current production plans in the single-aisle, and we are watching what's going to happen on the double-aisle, so it may very well be that the unit count doesn't change, but the mix does.

And relative to that, though, can you characterize how confident are you that you can keep the 747 rate at -- at a two a month, through next year?

Well, that's exactly what we're talking about, and to be very honest with you, that varies day-to-day.

We look at it yearly. Right now, I'm comfortable that it is there. We're going to watch it really carefully.

OK, and then, again, to get to the space and com issue, I had sort of been looking at sort of expectations that you could do higher margins this year in space and com than last year, but given sort of the glitches taking place at -- on the commercial side, do you think you can still get a 50 to a 100 basis points increase in the margin, or is -- or is that maybe a tad aggressive now?

(Heidi), we -- as we close out the quarter and make our estimates, we think we can indeed improve margins year-over-year at space and com.

OK, and, Mike, with respect to the comments you made about the higher pension income, just so I'm clear, you talk in the annual report about a benefit per pension of 920 million, but 785 went to the operating earnings line, so that 400 million delta lower in 2002, is that off of the 920, or off of the 785?

It's off the 920, (Heidi).

OK, great; thanks very much, guys.

You bet.

Thank you. Our next question will come from (Kai Von Reumer). He's with S.G. Cowen.

Yes. You've talked about the seven three seven (NG) lot closeout benefit. How big was that benefit? How did it impact the change in deferred production for the seven three seven, and how many more lot closeout opportunities should we have over the remainder of the year?

Can I in general, in a really generalized statement, they close a lot about once a year. So, to your statement about more this year: not.

The reason that there was a significant amount of money in there, was because the team was doing a great job at coming down in the production rate across their business, and being able to hold the gross margins that go with that. And truthfully, I think this is a great example of the work that has paid off in the last several years, to simplify the product, lean-up the factory, and has somebody said a minute ago, go to things like moving line.

And, therefore, what happens is, as we take -- as (Alan) and his team takes 30,000 people out of the business, the disruption is not as disruptive as it traditionally had been. So, it's a very, very positive performance story that bodes well as we look into the future, and produce airplanes in the next several years.

But ideally, what you're obviously trying to do, is that there is no unique pickup at the end of a block because you're estimating forward. In this case, the estimates included disruption, or the coming down, and it was significantly less than estimated, but...

You've mentioned several times the word "significant." Can you put any kind of quantitative, you know, parameters on that, because obviously, the margin-free R&D was, you know, 14-and-a-half percent, roughly?

I think -- I think -- and I have to go back and look my comments. I think we said that the twelve one that was in there, drops into the mid tens kind of number. And, a large part of that is reflective of the lot closeout.

OK. OK, thank you very much. Going over to space and com, could you talk a little bit about EELV, when you expect the first launch and you know, how you feel about how that program is going?

The launch vehicle is ready now. The only real delay is the getting the

ready for flight, and that's what is setting the timing. Our estimate is that that will be in August, and probably late August of this year.

OK, great. Thanks an awful lot.

You bet.

Thank you. Our next question comes from (Sam Pearlstein). He's with Wachovia Securities.

Hi, this (Gary Leibowitz) for Sam. Can you just clarify if the quarterly results that you just put out includes the ongoing benefit of FAS 142? I would estimate it would be about a nickel per share? Is that included in the segment results?

Yes, we've got the -- we've got the impact of FAS 142 in all the numbers.

OK, also, could you -- I think you mentioned there would be start-up costs for the 767 Tanker program. Could you quantify those?

That number is going to be in the several hundred million dollar category as a total program of R&D startups costs, to get that tanker business going. And, just a reminder, we have an Italian customer, we have a Japanese customer, and we have a USAF customer.

Thank you.

You bet.

We'll now go to (Joe Nidall). He's with J.P. Morgan.

Thanks, good morning. My question relates to used aircraft adjustment you made in BCAG, and what, I guess, reconciling that with your Boeing Capital results? My guess is that the adjustment was for A340s, but you -- it looks like your margins in B.C.C. are pretty much in the high 60s, where they've been. How do you, I guess, the Airbus planes, value coming down, but the Boeing Aircraft maintaining their value?

I think we need to raise the level of response to you, here, (Joe). And that is, when we had response from our customers, who said, in this quarter, as a result of 9/11, we're going to put -- move some airplanes back to you that we wouldn't have done previously, and that has an impact on the write-off that we talked about, at B.C.A.

At B.C.C., which is in a long-term business, the short-term implication of these valuations from 9/11 doesn't have nearly the impact on our long-term business. And, in fact, as we've mentioned, I think, in the last couple of quarters, the -- not the health -- the age -- the age of the assets at B.C.C. is a very young age of assets. And therefore, the expectation is that over the next year or two, we'll be right back in the swing of things, so to speak, with B.C.C. and their assets, and the income that comes from them. So, we don't see the same kind of one-term charge on the B.C.C. assets as we saw on the B.C.A. assets.

Understood. OK, and also on B.C.C., you were about 750 million of net financings for the quarter, which is kind of right on target with what you'd been saying. Do you still think you're going to be between three and four billion for the year?

Yes, we're kind of watching that carefully, but yes, somewhere in three billion-plus is a good number for us to think about.

OK, so that's a good run rate? And then finally, can you give an color on the twin-aisle issue you're talking about a bit for next year? Are there are any particular models, you know, the triple-seven a little bit stronger? And maybe, the six seven and four seven a little weaker? Or, can you give any color there?

I think that's not bad color, right there. Seven remains relatively good, although, you know, we have it in the plan at a higher production rate, so we'll have to watch that as well. But, I think you've nailed it pretty closely.

OK. Thanks, guys.

Thanks, (Joe).

Next question will come from (Joe Campbell). He's at Lehman Brothers.

Good morning. I wanted to ask a little bit about how the 767 tanker thing is going, and how the rollout of that program will go. We have, as you mentioned, I guess, Italy, Japan, and the USAF. When do we think we'll start delivering tankers, and when do you expect to have the USAF deal kind of nailed down?

I think we should have the USAF deal nailed down this summer. Both they and we are driving toward that kind of timing...

For orders in the '04 to '05 timeframe, (Joe).

Yes.

And, with regard to the first USAF tankers, when do they kick in?

They're right in that timeframe. First part of '05, I believe, is right.

For delivery.

And then, just lastly, you commented on the cash flow had, in the quarter, was related to timing of items on the military side, but can you give us some color on, you know, sort of the puts and takes and the pressures that were observed in the commercial business in the quarter?

Let's see, I described cash for commercial in the quarter as pretty normal, associated with the tough environment that we're in, so as you would expect, deliveries coming down is a little positive influence on cash, and orders not coming in is a negative influence on cash, and we're kind of seeing what we expect to see.

Terrific, thank you very much.

Thanks, (Joe).

We'll now to (Peter Jacobs), of (Reagan McKinsey).

Yes, good morning, gentlemen. I'm still trying to get a better understanding of the issues at Boeing Satellite Systems. If I -- I'm trying to understand the change, from the fourth quarter to the first quarter. I think, in the fourth quarter, you had one satellite delivery, too, as opposed to three in the first quarter. Can you just tell me what -- is there a change of pricing there? Did costs just spiral out of control? Or, so-forth?

Yes, Peter, there is no pricing impact, so it is, in fact, profitability and cost estimates at completion that are the difference.

It wasn't pertaining to a specific satellite product? It was just things got out of control? I mean, I'm still just not quite clear on that, Mike.

It is not unique to one particular product, program, or component. It is, in fact, as I tried to describe a while ago, maybe not near as well as I should have, the business systems, the best practices that we know work in the other parts of our business, are what we didn't have in the acquisition of Hughes, and we're in the process of putting those in place, so that in fact, if we do get better visibility, better management and are able to bring in numbers closer to our estimates.

And, based on a previous comment that I think you made during the Q&A, is it fair to surmise that you basically recognize some expected expenses, going forward , as you looked at the different programs?

We have made our forward-looking estimates, and have included those when we say we believe that year-over-year, margins will be improved, and we are holding our guidance for the year; yes sir.

Very good. And, just lastly, the equity investment, the charge for the equity investment, what -- can you give a little more color on that, and what line item that that is reflected in, in the P&L?

Paul, have you got that one?

Yes, it is a long held passive equity investment that we -- that Boeing got years ago, in fairly illiquid stock, and there was a change of ownership outside of the Boeing side. There was a trade, and basically we had to run it through the P&L.

Where -- where would -- where would I back that out of?

I think it's in unallocated.

Unallocated? OK, thanks, and that's all I have.

OK, we'll take one more question, if we can, right now.

Yes sir. And that question will come from (Brian Eisenbarth). He's with Davidson Investment Advisors.

Yes, good morning. Looking at the increase in SG&A, or G&A expense, of about 150 million, I assume that's mostly due to the stock compensation expense, and was wondering what triggered that stock compensation number? Was it the run-up in the stock that we saw in Q1 that brought more options into the money, or is it something else? And, related to that, what SG&A run rate should we be modeling for the rest of the year?

(Brian), you're right on target, and the difference is driven in a positive -- excuse me, in a negative way in this quarter, and a positive way in the quarter of '01. So, in fact, we had a share price run down in the first quarter of last year, from 62 to 55, and we had a share price run up in the first quarter of this year, from 38 to 48, and those obviously all go in different directions and contributed, but both of that difference between those two. So, I think if I were modeling this, I'd take the midpoint of that and continue to run it out.

OK, thank you.

You bet.

Thank you very much. that concludes the questions from analysts, and at this point, we're ready to go to the media.

Thank you very much. For members of the media, I'll return you to the Boeing Company for introductory remarks by (Judith Muelberg), Vice President of Communications. Miss Muelberg, please go ahead, ma'am.

Thank you very much. I would just like to remind everybody from the media that if you have questions in follow-up, or actually, this call, please give us a call in our Media Relations Department at 312-544-2002. And I think, now, Phil and Mike would be happy to take your questions.

Thank you. And, once again, that is star, one if you would like to signal for questions. Star, one. Again, we'll pause for a moment to give everyone a chance to signal.

Our first question is going to from (Paul Marion). He's at Craine's Chicago Business Journal.

Good morning. I wanted to ask you about the Future Combat System award. Is that big enough to have an impact on your earnings this year, or are you looking at that more as a long-term reward?

That is primarily long-term, in it's character. The initial contract is relatively small, but it is a transformational contract for the U.S. Army, and as it runs out over its life, it will be a big program, and so we see that as one for this decade, but it will not have big impact this year.

Anything else for you, sir?

Does that imply that you would be in a position to supply a lot of the hardware that this program would lead to, or that the integration itself would become much bigger?

It is primarily the integration job that we seek. It is a very complex, very forward-looking system of systems approach. there is obviously hardware in there, but it's primarily the integration task that will be Boeing's.

OK, thanks.

Next question will comes from (James Wallace). He's with the Seattle Newspaper.

Yes, Phil, can you elaborate a bit on why the more optimistic outlook for single-aisles, and maybe a less optimistic outlook for twin aisles? What's happening in the market that reflects that?

I think there are several things that drive that particular outlook. One of them is that international traffic was hit harder than domestic traffic, worldwide. So, the biggest downturn in traffic was Transatlantic and Transpacific. That tends to be the bigger airplanes.

The other is that in the post-9/11 period, the low-cost carriers, both in the U.S. and in Europe, have had the best results and the best traffic increases, so airlines like Southwest or (Ryan Air) or EasyJet are the ones that are buying airplanes right now, and they tend to be 737 users.

What's that mean for the production rate, say, in Renton versus Everett? Might you not go down as far, for example, on the 737 as you had anticipated, but perhaps drop rates even further up in Everett?

Right now, I think the view is, we will go to the rates that we anticipated. We're now trying to look out further and say "What happens next?" And, there is potential for increase in the three seven line. There is potential for decrease in some of the wide-body lines, but none of that is firm at this point, as we will go to the rates that we projected.

One final question Phil. How concerned are you about the 747 program going forward, particularly with some of the new models coming on?

I think, you know, 747 is going to be a good long-term program, and it has some very unique demand characteristics, particularly in freighters. The four seven freighter is sort of the international standard. One of the reasons for bringing new models on is to make sure that it continues to be a modern airplane and meets market requirements. And that's what we're working on.

Thank you.

Next question will come from (Brian Corliss), who's at the "Everett Herald."

You know, my friend, Mr. Wallace, asked all the questions I was going to ask you, so I will just shut up and let somebody else talk.

OK, (Brian), thank you.

Thank you. To remove yourself from the queue, it is the pound sign. If you would like to remove yourself from the queue, it is the pound sign.

David Bowermaster, from the "Seattle Times."

Hi, good morning. I have a couple of follow-up questions along those same lines. One is, that you mentioned that you expect to hit 30,000 employment reductions by mid-year. Is that -- does that mean that the warning-notice cycle will be ending in June, and is 30,000 going to be the cap on the reductions?

The 30,000 goes with the current production plan. So, given the current production plan, the answer is yes. Now, what happens beyond there, obviously, will change that answer. If the market picks back up, it's positive. If it slows down, that's negative, and then there's going to be balancing as we go forward.

OK, and on the efficiencies you talked about on the three seven line, I'm curious if that is -- you know, there's been talk about, and people have mentioned that you've studied the possibility of consolidating three seven and five seven production on one line. How is that thinking progressing, given these you're getting?

That continues to be an option that is under consideration. We're getting the same kind of efficiencies on the other programs as well. Three seven happens to be leading, and it happens to be the highest unit production rate, so you can there a little bit faster. But, the BCA team has done an extremely good job of driving lean performance, and that's going to be critical for us to be competitive in the future.

OK, so, but at this point you haven't made any set plans to do that consolidation?

no.

OK. Last question, I was just wondering, again, on that twin aisle demand, if that weakness you're seeing, if that is in all regions, or if it's centered in Asia, versus Europe, et cetera?

No. It tends to be both Transatlantic and Transpacific flying, so any airline that is operating in either one of those areas, is dealing with dramatic reductions in traffic.

OK, thanks very much.

We'll now go to (Jonathon Block), who's with "Inside the Air Force."

Good morning, gentlemen. This question is going to deal with the 767 tanker. Recently Senators Levin, Warner and McCain sent a letter to the general accounting office requesting some analyses in regard to the costs of the tanker -- of a potential tanker deal, I should say. What sort of concern is this for your company? And, do you believe this might have an impact on specifically negotiating a lease by the summer, as you have previously stated you would like to do?

I think the question is, is the most efficient way to procure assets that are needed -- and I don't think anybody has a question that tanker capability is needed by the Air Force -- is the most efficient way to get that, direct-purchase or a lease. And, you know, just to sort of broaden than discussion, one of the things that airlines have done is mix. They typically lease some of their fleet, and they purchase some of their fleet. It gives them more flexibility, and it is better use of capital.

I think that's going to be the discussion that occurs here. I think, in the end, it will be advantageous to lease the aircraft, and I think that's going to be the conclusion.

Great. Thank you very much.

We'll go (Chris Steinquitz). He's with Reuters.

(Chris Stenkavicz), thanks.

Sorry.

That's OK. I'm curious, on the goodwill write-down today, can you say anything about where that breaks down. Or, you know, how much of that is for Hughes, or for other acquisitions?

No, what happened with FAS 142, and it's a whole bunch of companies are doing exactly the same thing, is that you take, in our case the stock price, as of January First, and reconcile all of your assets against that stock price. You use the market to provide the indicators. And so, you then write down to that level, your goodwill, and go forward from there, rather than dealing with goodwill over a long period of time. This recognizes a number of different acquisitions in a number of different businesses.

Yes, (Chris), all of the -- all of the goodwill for the Rockwell, the Jefferson, the Hughes -- all that stuff is in there, and as Phil mentioned, on an annual basis, we will do an impairment analysis, again, using the fair market valuation for the corporation at that time.

Thank you.

We'll now go to (John Schmelzer). He's with the "Chicago Tribune."

All right, how are you this morning. I have a question regarding the F-18 program. There's some indication that the Navy was going to reduce their orders. And then, could you also talk a little bit about the unmanned aircraft test that's scheduled for later this, I think, in May?

Yes, I think the one comment was that maybe there would be some rebalancing of fighter orders. At this point, there is no change to our production. That may roll out over the future, but at this point we do not see it. We are constantly improving the cost effectiveness of the F-18, to try to make it as attractive to our customer as we can make it.

On the unmanned side, we have set up an organization to focus specifically on unmanned aircraft, and we will fly the first (Ucalve) airplane this summer, and we think that is a very critical future performance area.

When is that scheduled for, Phil?

It's early in the summer.

OK, thanks.

Once again, if you would like to ask a question, it's star, one on your touchtone phone. Star, one if you would like to signal to ask a question.

We'll now go to (Kevin Dunn). He's at "Financial Times."

Good morning, or good afternoon. Hi. I didn't catch the date for the Delta Four launch, first of all?

August.

August.

Late August.

Thanks. And then, what is that state of negotiations with (EasyJet) on the new orders there?

BCA is working that very intensely.

And, when do you expect a decision on that?

I don't know. When they decide to make it.

OK. And, tell me about the Boeing Satellite Systems; how many jobs are you cutting out there, and what percentage of the workforce is it? And, what is the level of forecast losses in that operation -- of operating losses in BSS for this year?

Let's see, Kevin, the -- we've included the forward-looking estimate in our numbers, and we don't expect losses for the business for BSS.

In terms of headcount, I believe that there's been a couple of thousand so far, and another couple of thousand to go, kind of number that we're looking there.

Well, can you put some figures on the scale of the problem what you're facing? That hasn't really come out to me, yet this morning?

The figures on what we're facing on the?

BSS, in terms of the scale of the financial problems there. I mean, you talk about costs not meeting your estimates. What are we talking about as a scale of problem?

I think, and I apologize for being repetitive; if you look at the change in the quarter-over-quarter from last year, that's about the size of the problem that we've got.

So, about $42 million?

Yes.

Right.

Anything else for you, sir?

No, I think that will do it for now. Thanks very much.

Thanks, Kevin.

Gentlemen, we have no other questions at this time. I'll turn it back. Wait, my mistake. We do have one. This is a follow-up from (Paul Marion) from Craine's.

Hi, thanks, sorry. In regard to the Boeing Satellite Systems and instituting your best practices there, would there be any management changes as a result?

There have been significant management changes. There have also been and are continuing to be organizational changes, aimed primarily at making sure that the person leading a program has full responsibility for that program, both financial and program management responsibility, so that we control the costs aggressively. We think the technology there is superb, and what we want to do is make sure that superb technology gets matched up with great profits.

OK, thanks.

And, on that note, we thank you for joining us this morning, and please feel free, if you have any follow-up questions, to give us a call.

Thank you, that does conclude our conference call. We do appreciate your participation. At this time you may disconnect. Thank you.