波音 (BA) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the Boeing Company's second 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 will turn the call over to Mr. Paul Kinscherff, Vice President of Investor Relations for the Boeing Company.

Mr. Kinscherff, please go ahead, sir.

Thank you.

Welcome to the Boeing second quarter 2002 earnings conference call.

I'm Paul Kinscherff, Vice President of Investor Relations and we are pleased to review our second quarter earnings and outloook with you today.

You can follow our company broadcast at our website at www.Boeing.com.

The charts we present today will be available for downloading from our website through July 31st, 2002.

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 the projections and factors that could cause actual results to vary are detailed in the news releases we issued earlier this morning and in our various filings with the Securities and Exchange Commission and in the forward-looking statement at the end of this web presentation.

I urge you to read them thoroughly.

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

Good morning.

As usual I will start with an overview of the quarter.

Mike will take you through the financials and then we'll take your questions.

We have a lot to tell you about, so let's get started with slide two.

We had a strong quarter.

Our core businesses performed very well.

Our results reflect this intense focus on production efficiencies and strong program performance.

We did have favorable market conditions in our defense businesses, partially balancing the negative market conditions for commercial airplanes.

As a result, total company operating margins were 8.9% which compares to 8.4% in Q2 of '01.

At that point, of course, the environment was radically different.

We also had some really key strategic wins that reaffirmed our view of the direction that modern defense systems are taking.

I'll talk a little bit more about that later.

We made good progress in the quarter and we continued to improve our ability to perform well in a very dynamic environment.

Revenues for Q2 shown on slide three, were $13.9 billion compared to $15.5 billion for the year ago period.

Those revenues reflect 29 fewer commercial airplane deliveries, partially offset by growth in our government and finance businesses.

We booked one non-recurring item, the sale of an ordinance operation and military and aircraft missile systems.

That added 4 cents per share at net.

EPS for Q2 excluding this non-recurring item was 92 cents per share.

With net income of $751 million.

This compares with net income of $804 million or 95 cents per share in the year earlier period.

Stock based compensation expenses reduced reported EPS by 7 cents during the quarter.

That compares to an 8 cent per share reduction in the second quarter of '01.

Free cash flow was strong at $651 million.

Now, let's look briefly at each of the businesses starting with Commercial Airplanes on slide four.

This unit, a great management team, again turned in very strong results.

They reported segment margins of 10.3% equal to the second quarter of last year with operating earnings of $790 million.

They delivered 112 airplanes in Q2, against 141 in the prior year period.

They received 166 gross orders the first half of '02 compared with 180 in the year earlier period.

And they continued to streamline assets, implement lean processes and most important reduced production rates and employments on a disciplined schedule in line with market demand.

Boeing Commercial Airplanes continues to operate superbly in a very challenging market.

Demand for single aisle airplanes remains solid.

The twin aisle market remains challenging.

BCA is also positioning for the future.

During Q2 they rolled out a longer range 747 and began assembly on a very long-range 777-300 airplane and continued technical development work on the Sonic Cruiser.

BCA started negotiations for the IAM labor contract that expires in --at September 1st of this year.

Commercial is actively working with our airline customers to restore healthy operations.

They are also working with industry stake holders to improve overall air transportation safety and security.

Looking forward, Commercial will continue to manage their business aggressively and perform profitably during this significant downturn.

I believe that this will position them extremely well when the market begins to recover.

As you all know, last week we combined Space and Communications and Military Aircraft and Missile Systems to form Integrated Defense Systems.

I'm going to talk first about the separate units and then our plans for the integrated unit.

Let me turn to slide 5 showing Military Aircraft and Missile Systems.

This business continued to deliver strong performance.

It again posted solid double digit adjusted margins with 11.9% in Q2 compared to a 10.7% operating margin in the year earlier period.

Revenues increased by 5% from the earlier period.

In Q2, they signed a contract with Korean Ministry of National Defense for 40 F-15 aircraft and associated support.

They received congressional approval for 60 C-17 airplane buy under a multi-year procurement which will deliver through the year 2008.

They completed the first two flights of the X45 A unmanned combat aerial vehicle and they continued to make progress on negotiations with the U.S.

Air Force for the lease of 100, 767 tanker transports.

Slide 6 shows Space and Communications.

This business had solid performance in Q2 and had some key strategic wins in integrated battle space and homeland security.

Revenues were $2.7 billion, up 6.4% from the year earlier period.

Operating margins improved to 6.8% which compares with 5.2% for the same period a year ago.

Q2 highlighted the ongoing changes in S&C's business.

They saw increased revenue from missile defense and integrated battle space programs.

With launch in satellite volume lower than in the second quarter of last year.

S&C also had lower R&D expenses related to the Delta 4 program and the transition of Airbourne early warning activity from CSR&D to contract expense.

They aggressively managed commercial satellite programs.

Mike will give you more detail on that effort later.

Also in the quarter S&C enhanced their position in the integrated battle space market by winning the joint tactical radio system contract and a key subcontractor role for the command and control system on the U.S.

Navy's DDX program.

They won the explosive detection system contract from the transportation security administration and also secured agreement with the Turkish government for four 747 based AEW and C systems.

They supported several launch missions and shuttle flights as well, and prepare for the Delta 4's inaugural flight which is now scheduled for early October due to testing and launch pad and range availability.

Slide 7 highlights our new Integrated Defense Systems business announced July 10th.

This merged business unit, based in St. Louis will be led by Jim Albaugh.

This $23 billion a year business units brings together our space, defense, government, intelligence and communication capabilities in a powerful new way.

This change allows us to align ourselves with our government customers and leverage our capabilities.

The platforms that the government is buying today will be increasingly integrated in the future.

As we go through our transition period, our first priority is to support our customers, our government programs with strong performance.

Jerry Daniels who has ably led A&M will have a key role in this transition.

I want to thank Jerry for all of his help.

We will continue to report on our two former business units separately throughout this year.

As we go forward, we will give you the detail to allow you to understand how this business is running, and I will tell you I expect strong performance from Integrated Defense System organization.

Now, let's go to slide 8.

Revenues for Boeing Capital Corporation were in line with our portfolio growth.

At $254 million in Q2 compared with $233 million in Q2 of '01.

They continued to maintain a prudent financial approach and solid equipment standards in a challenging commercial aerospace environment.

They remain on track and they are performing well.

Connection by Boeing was certified by the FAA for broadband service.

British Airways announced plans for an Airbourne system demonstration early in 2003, and Lufthansas' customer service trial remains on track for the end of this year.

Air traffic management continues to build solid support both domestically and internationally for the next generation of air traffic system.

Now, let me close with slide 9.

Our transformation strategy continues to be validated as our businesses continue to execute and our people continue to perform in a very dynamic environment.

We will continue to manage our enterprise resources strategically, we will streamline and grow leaner.

We will capture growth opportunities and we will perform both now and in the future.

We have a robust strategy that is working, and we will deliver shareholder value.

Now Mike will give you the financial details and our outlook.

Mike?

Thank you, Phil.

Good morning, everyone.

I'll start today with some general comments on slide 11 and then move into the numbers.

Our financial results for the quarter reflect excellent operating performance and results across our core businesses in a very dynamic environment.

Commercial airplanes delivered excellent results.

Cross performance was outstanding and better than expected.

This unit is positioning itself well for the near term delivery downturn and for strong long-term profitability.

Our defense and space and finance businesses also delivered strong results reflecting good performance in growth.

We completed a thorough review of our commercial satellite programs and continue to implement corrective actions.

Finally we closed the second quarter with a strong balance sheet and on track to generate strong free cash flow and earnings for the year.

Now to the numbers on slide 12.

Revenues for the second quarter of '02 were $13.9 billion, down 11% from the same period last year, as decreased deliveries of commercial airplanes were partially offset by defense, space and financing growth.

Due to the revenue reduction reported operating earnings were $1.3 billion, down 7% from the previous year.

Reported operating margins rose to 9.2% from 8.8% last year, again reflecting strong performance.

We recognize the non-recurring gain in the second quarter of '02 which I'll talk about in just a moment.

Excluding non-recurring items, adjusted operating margins for the second quarter were 8.9%, up from 8.4% last year.

Adjusted net earnings for the period totalled $751 million or 92 cents a share.

This compares with a net earnings of $804 million or 95 cents per share in the second quarter of '01.

Turning to slide 13, you can see we had one non-recurring item this quarter as we sold our non-core ordinance business to Alliance Tech Systems.

The gain from sale increased our reported earnings by 4 cents per share during the quarter.

You may recall that in the second quarter of '01 we also had a non-recurring gain.

This was related to our F-15 E program and also increased earnings by 4 cents per share in that period.

Turning to slide 14, I would like to quickly review where we are through the first half of this year.

Revenues for the first half of '02 totalled nearly $28 billion.

Which is down 4% from the first half of '01.

Decreased deliveries of commercial airplanes have been largely offset by revenue growth in our defense, space and finance businesses.

Excluding non-recurring items, operating margins for the first half of '02 totalled 8.2%.

Strong operating efficiency at commercial airplanes and solid margins on our government programs have significantly offset the impact of lower commercial airplane production rates.

Net earnings for the first half of '02 excluding the non-recurring items totalled $1.4 billion or $1.67 a share.

Comparisons of reported net earnings including non-recurring items for the first six months are less meaningful as details in our press release, non-recurring items contributed 67 cents per share to reported net earnings for the first six months of '01 and 1 cent per share during the first half of '02.

Moving to slide 15, you can see that we generated strong free cash flow of $651 million during the quarter.

This includes the unfavorable impact of contributing $325 million into three of the company's defined benefit plans.

You may recall that on our last earnings call, we told you that payments on some government programs had moved into the second quarter.

These have occurred, and we are now back on plan.

Our free cash flow for the first six months is $927 million.

Use of free cash included dividend payments, paying down of maturing Boeing Company debt and support of growth in customer financing.

Free cash flow will continue to be a strength for the company.

Slide 16 shows our balance sheet which remains strong.

We ended the quarter with a cash balance of $816 million compared with $643 million in the first quarter of '02.

Boeing Capital debt increased approximately $500 million this quarter to fund portfolio growth.

Their debt to equity ratio for the second quarter was 5.21 within the conservative target range established late last year.

Debt of the Boeing Company decreased to $4.2 billion from $4.4 billion at the end of the first quarter.

And Boeing's debt ratio decreased to 32%.

Our credit ratings which now include a rating from Fitch remain at solid investment grade levels with stable outlooks.

A strong balance sheet and solid credit ratings remain priorities for us.

Now to our core businesses starting on slide 17.

As Phil noted, Commercial Airplanes turned in another excellent quarter of operating performance.

Revenues for the quarter were $7.7 billion, down from $9.3 last year, primarily due to lower delivery volume.

Operating earnings were $790 million, down from the $955 million during the same quarter of last year.

Operating margins were at 10.3% for the quarter, despite the 18% decline in revenues.

The strong results reflect Commercial Airplane's ability to achieve operating efficiencies during the market downturn.

Looking forward, Commercial Airplanes will continue to deliver strong performance as a result of its intense focus on controlling costs, managing risks, and implementing lien processes.

Turning to slide 18.

Military Aircraft and Missile Systems had another outstanding quarter.

Revenues rose 5% to $3.5 billion compared to $3.3 billion of a year ago.

This increase is primarily due to additional deliveries of joint direct attack munitions and Apache helicopters.

Earnings increased 12% to $458 million reflecting high revenues and continued program performance improvements.

Reported operating margins were a strong 13.2% compared with 12.5% last year.

Second quarter results also include the proceeds from the sale of the unit's ordinance business.

Adjusting for this non-recurring items tem 11.9% compared with 10.7% in the second quarter last year.

Military Aircraft and Missile System continues to deliver strong performance and profitability across its' production programs.

Turning to slide 19, Space and Communications.

Revenues total of $2.7 billion for the quarter, an increase of more than 6% from the previous year.

Operating earnings of $181 million and margins of 6.8% compare favorably with $130 million and 5.2% last year.

The results reflect strong program execution on growing missile defense and integrated battle space programs, and lower R&D expense.

R&D expenses are decreasing as Delta 4 nears first launch and as the Australia [INAUDIBLE] air born early warning program transitions to contract specific development.

Offsets included two fewer launches and three fewer commercial satellite deliveries.

There were also updates to commercial satellite cost estimates.

As we told you at the end of the first quarter, space and communications was continuing to assess its commercial satellite programs and outlook.

This detailed review is now complete, and the results are reflected in our financials today.

As a result of the review, cost increases and related reserve positions on certain contracts were recognized during the quarter and totalled approximately a $100 million.

This cost increase was significantly offset by actions taken to reduce scope, risk and cost on other contracts.

These actions resulted in nearly $90 million favorable to earnings.

The net impact was approximately $15 million reduction in commercial satellite related operating earnings for the quarter.

While our satellite -- while our commercial satellite programs continue to face execution in market challenges, we believe the financials fairly represent the expected performance at completion of the contracts.

Turning to our outlook on slide 20.

Today we are reaffirming our guidance for '02 and '03.

We continue to expect that our aerospace and finance businesses will perform well.

Although there will be variability from quarter-to-quarter.

Commercial Airplanes remains on track to resize for lower airplane delivery levels starting in the second half of '02 you may recall that production rates are scheduled to drop to about one-half of pre September 11th levels this summer.

I would also like to remind you we expect to deliver fewer Commercial Airplanes in the third quarter than in any other quarter of 2002.

As a result Commercial Airplane segment margins are expected to moderate from the double digit levels achieved during the first half of the year.

Our commercial airplane delivery forecast remains unchanged.

In 2002 we expect to deliver approximately 380 airplanes.

This 2002 forecast is essentially sold out.

In 2003, we expect to deliver between 275 and 300 airplanes.

This estimate is now more than 90% sold at the lower end of the range.

Lower market demand for twin aisle airplanes will impact the mix of '03 deliveries, but demand for single aisle airplanes remains solid.

As a result, Commercial Airplanes has extended the 737 NG program accounting quantity during the quarter.

Military Aircraft and Missile Systems is expected to realize steady, moderate revenue growth from increased deliveries under multi-year contracts, from aerospace support and from weapons programs.

We anticipate the continued strong program performance will allow the unit to maintain low double digit margins, even as the development investment in the 767 tanker program ramps up during the second half of this year.

At Space and Communications, successful program execution across the business is key to achieving anticipated year-over-year growth in earnings and margins.

Near term focus items include commercial satellite performance, as well as successful first light and market acceptance of the Delta 4.

At Boeing Capital, portfolio growth is expected to continue, but at a more moderate pace in the second half of '02 as fewer commercial airplanes are delivered and financed.

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

Operating margin guidance is also unchanged at plus or minus 8.25% for both '02 and '03.

Free cash flow remains at 2.5 to $3 billion for 2002 and greater than $3 billion for 2003.

Expected spending on research and development remains unchanged and is likely to be near the lower end of 3 to 3.5% of revenues for both 2002 and 2003.

Finally, the formation of our new merged business unit Integrated Defense Systems, will require that we revise our financial reporting.

While the organizational change is effective this month, we will continue to report Military Aircraft and Missile Systems and Space and Communications as separate business units through the end of 2002.

Starting in 2003, Integrated Defense Systems will be reported in the company's financial statements.

We are considering alternatives on how best to report the results and outlook for Integrated Defense Systems while preserving current levels of transparency.

We expect to aprize you of our plan later this year.

With that, Phil, it's back to you and on to questions.

We are ready to take questions.

Thank you.

Today's question and answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit one on your touchtone telephone.

Again, that's star one if you would like to ask a question for today's call.

Also due to time constraints, we ask that you please limit yourself to one question.

And we'll pause for a moment to assemble the roster.

Our first question today comes from Howard Rubel with Goldman Sachs.

Good morning.

Morning, Howard.

Nice numbers, Phil.

Thank you.

To go back to Space and Comm for a minute.

I'm sure you want to hear this.

Could you elaborate a little bit on the risk reduction you took in that business, and what does that have -- what are the implications for that for profitability going forward?

Does that mean we should expect better profitability than what we saw in the current period?

Um -- Howard, we have, as I said, we have done a complete detailed estimate of complete review led by the corporate controller and in participation with the finance folks and the program folks at the satellite business.

And we are confident that we understand the issues.

We are confident that the actions that we have put in place that we kind of went through last time, are, in fact, beginning to take hold.

And we are confident, as we look at the completion of those contracts, that we have identified and taken into these financials sufficient reserves to give us confidence in that performance.

I think the only thing I would like to add is, obviously on all programs that we execute today there is some risk of performance.

Based on our current position, we believe our risks of completing these as we have currently accommodated them in the financials is not high risk.

Because of the closings that we have done and the position we have taken.

At the same time, it's not very low risk, low - low risk because we need to see continued execution with the corrective actions that we have put in place.

Relatively fair.

And the progress on recovering the money from Hughes, where does that stand?

It's -- it continues to be on track.

It continues to march towards the end of this year before it gets done, Howard.

So we are looking at $700 million?

Um -- I think you are probably a little high in terms of where the end item ends up, but it's certainly in the multi hundreds of millions of dollars is our expectation.

Thank you, Mike.

Our next question comes from Steve Binder with Bear Stearns.

Yes.

Good morning, Mike.

Can you maybe touch, with respect on allocated expense was very well.

I know that's where you had it the first stock benefit in the quarter, but still is relatively low compared to the last three years on balance.

Was there any, you know, other items that you can speak of that might account for that low level?

Stand by a second, Steve.

We are looking for some data here.

Where are we on this page right here?

Let's see, Steve a couple of items that are or are not in there.

I think, the biggest one is that is where we would normally have amortized goodwill.

So last year's previous period, obviously, we had some corporately held goodwill which came with the Rockwell acquisition that this year we don't have in there.

That's the biggest swing in those numbers that we have right now.

The other item that I think you know is in there is the deferred incentive comp piece is in there.

So as the share price swings, the swing shows up in that line item as well.

But there's nothing else that stands out?

No, sir, nothing major.

Second the DCHA you talked about the block extension of the 737 X,.

What do you attribute block to?

And secondly, I gather there weren't any cost estimate revisions from a program standpoint on the 777 program, but was there any other movement in blocks at all?

We had two block changes.

One was moving the NG from 1,800 to 2,000.

And the other was moving the 17 from 135 to 140 airplanes.

And that reflects the Midwest Express contract as well as the fact that the American 717s will be coming back into the market place.

Okay.

Thank you very much.

Yes, sir.

Our next question today comes from Byron Cowen with Merrill Lynch.

Please go ahead, sir.

Yes, nice quarter.

Quick question, Phil.

Any thoughts on your attitudes towards a share buy-back here?

Is the cash flow picture still on track that that's something we might consider before the balance of this year is done?

One cash flow, as Mike said, is on track.

Two, we do have authorization from the Board for share buy-back.

Obviously we'll look at our cash position, but I think the answer is yes before the end of the year that is a possibility.

Okay.

Just a quick follow-on, if I may.

When we were all in St. Louis, we talked about this mix issue with BCA and there would be some offsetting items.

Mike, I just wonder if we step back,what kinda came in a little bit better to offset the change in the BCA delivery mix for 2003 that allowed you guys to basically keep the plan intact?

Byron, we are seeing a couple items that are quite beneficial.

First and foremost is program performance at the commercial division.

The team continues to do outstandingly well in terms of producing the airplanes and, also, in terms of working on the infrastructure that is associated with the revenues that go with those airplanes.

So, as I said in my prepared remarks, the numbers are better than we expected, which is wonderful to be on that side of the curve.

So that certainly is one piece.

The other piece is, as Phil's also mentioned, the solid support for the 37 NG continues to be there, and hold those delivery quantities right where we expected them to be.

The other thing, of course, is that we continue to see strength on the defense and space side overall, so we continue to get growth in revenue there that is helping to offset what otherwise would be a down condition.

Great.

Thank you.

Thank you.

Our next question today will come from George Shapiro with Salomon, Smith Barney.

Yes, good morning.

I notice the GAAP margin at Commercial was down to like 7.3% versus 9.5% last year.

Is it going to hold it around that level in the second half or the GAAP margin will come down somewhat more?

George, we will continue to see pressure on GAAP margins as the delivery projections come down.

Without going into another long conversation on program accounting, in fact what we are going to see because program accounting has some inertia associated with it, we are just liable to see more dynamics on the segment margins than we are on the program accounting going forward.

Right.

You would expect that, right.

Right.

Um -- R&D in the quarter was particularly low.

I mean a lot of it from the drop in spice it was like 2.8% of sales in the quarterly.

I mean kind of below your 3 to 3.5% range.

Is it just going to hold at this level as revenues come down the rest of the year we'll get back into that range?

You have put your finger directly on the principle cost for this quarter.

We expect to be at low end of 3 to 3.5 for the year.

This quarter's current absolute R&D level is going to about hold for the rest of the year?

Pretty close.

Okay.

Early capital, in the first quarter I notice like you almost doubled your loans to United Airlines to about $1.2 billion.

Of the $500 million increase in the portfolio this quarter, was more to United, or was other airlines?

For this quarter, it was to other.

Okay.

Thank you very much.

Thanks, George.

Again, if you do have a question press star one or if you find that your question has been answered, you may remove yourself from the cue by pressing the pound key.

Up next we'll hear from [Cai Vamrumar] with SG Cowen.

Great quarter, guys.

Your commercial performance was considerably better than I think, you sounded like you were looking for earlier on.

Was any of that related to mix of deliveries in the quarter, or was that pure, unadulterated performance?

Pure unadulterated performance.

Terrific.

As we look forward you kind of had cautionary comments about mix in this quarter.

How is the kind of individual delivery mix look for the fourth quarter?

Book or not?

Um -- it's kind of looking like the picture that we tried to paint at the investor conference, which is solid support for single aisle and soft sport for twin aisle.

You talk of the soft support for twin aisle.

UPS was talking about their commercial spares orders actually improving a bit in Asia.

It sounds like things, in some reflects expects, certainly trafficwise, Asia is the strongest market globally.

Are you seeing any signs that the softening in the twin market might be reaching a bottom?

That's really hard to put your finger on.

I think you identified correctly the strongest market segment clearly is Asia at this point.

Offsetting that, in my view, is the fact that, you know there's still a lot of parked airplanes.

I can't add too much more color than that.

The twin aisle market is the toughest, though.

First question, you have come in about a dime above where most of us were for the quarter.

The R&D looks lower for the year.

And the defense area, the commercial performance is better.

How come the guidance isn't going up?

Well, you know, remember sort of where we are.

We shot high at the start of the year.

Consensus was fairly close, came down.

We have held our guidance.

We still are pretty comfortable with where we are.

And you might recall that there was a disconnect in the first quarter in the opposite direction.

Okay.

So we -- consensus was a bit higher than we ended up in Q1.

We have ended up a bit higher here than consensus was in Q2.

When we put the whole package together for the year, our outlook looks about where we are going to end up.

Thank you very much.

Thanks.

You bet.

Our next question today comes from Chris McCray with Deutsche Banc.

Hi, there.

I was wondering if you could comment on whether you are still planning on 3 billion used in cash for BCC?

Is it true you are running maybe a little behind that rate year-to-date?

Chris, we are looking for a nominally $3 billion of growth over there on the asset base for BCC.

But, since they leverage up at 5 to 5.5 to one, the amount of cash we'll end up putting in is about $500 million over the year.

We are right on track for that.

Okay.

Fair enough.

And one other thing.

Given the weakness on the twin aisle side if you were to take line rates down to a number below two a month, would there be consequences to the margin related to supplier agreements that we should consider when we plan our margin forecast?

Well, there are some programs that have minimum procurement quantities in them.

And as we look forward and address those production rates, we have accommodated that in the EACs that we have looked forward and present in the financials.

Okay.

Fair enough.

Thank you.

You bet.

Thanks for calling.

Again we do ask that if you would like to ask a question, please press star one and also if your question has been answered you may remove yourself from the cue by pressing the pound key.

Our next question today comes from Joseph Campbell with Lehman Brothers.

Please go ahead, sir.

Mr. Campbell, your line is open.

Did you have a question?

Hearing no response, we'll move to Joe Naidell with J.P. Morgan.

Good morning.

My first, I guess brief question is on the pension funding that you made in the second quarter.

Do you anticipate any other fundings this year or next year?

Um -- Joe, we do an annual assessment of the assumptions and the conditions that we have on the pension side, and that is a fall activity for us.

So we would be making those decisions as we hit the end of the year.

I think suffice it to say we all recognize the performance of the market place in general puts pressure on that.

We will be watching that carefully.

I don't think we have any answers specific to date for you on that subject.

I guess the answer is it's an annual event?

It is an annual analysis we go through and we make the assumption changes once a year.

Okay.

Then by the way there's a bad echo on this line.

But, on the Commercial Aircraft side, could you make any comments on the R&D pipeline?

I know numbers are coming in a little bit at the low end, anything you can give us on Sonic Cruiser, timing or potentially the conventional 757, 767 replacement?

Any thoughts as to what's going on there?

We are spending fairly aggressively on the technology around the Sonic Cruiser right now.

We have been, and we remain a company that wants to make sure we understand the market before we commit.

And given the current condition of airlines, I expect that will be a little later than it would be if things were in a relatively stable growing period.

We are trying to make sure we have the technology well in hand so that we can respond when the market begins to turn around.

That, as a result, will mean that we are going to be very careful on where we spend our money, but make sure that we are prepared to go when that time comes.

Is it fair to say that you potentially ramping up slightly the R&D you are spending on conventional aircraft in the 200 to 300 seat range?

No.

Not really because I think the alternative there is to use the same kind of technology that we are talking about in Sonic Cruiser in a different way.

Materials, so that if we do something in the 57, 67 range that is more conventional.

The airplane may look conventional but the materials and processes will be different so we take full advantage of the technology that's there.

So what we are doing on the technology side, we believe is dual use.

It will be attractive for a Sonic Cruiser.

It will also be attractive if we choose to do a more conventional looking airplane.

Thank you.

Our next question today will come from Sam Pearlstein with Wachovia Securities.

Good morning.

Back in May at the analyst conference, it seemed like a tanker contract for the 767s was weeks away.

Can you talk about what's changed sinks that point and really what your expectations are for that contract?

Sam, nothing has changed.

It's weeks away. [ LAUGHTER ].

Okay.

We can't do humor on this call.

We have made good progress in working Ts and Cs and working the financing and working the pricing.

I don't mean to be flip, but I think we are in the short strokes and I would expect by the end of the summer that we would have an agreement signed with the USA F.

Okay.

And can you explain what you were meaning in terms of the R&D change with regard to the wedge tail program and what that means in terms of margins, and then obviously we see the total R&D shows up closer to the low end of the range.

Yeah, we had begun -- we had begun the development of the wedge tail airplane on our own company sponsored R&D account, and with the signing of the contract in Australia, in participation with that customer, it was appropriate for those dollars to become contract charges.

So, in fact, with the signing those numbers have moved into a contract charge position and no longer show up in the R&D account.

But is it a cost plus type of a cost such that you actually earn a margin on it as well?

Um -- we have included all of that investment in our business case analysis as we decided to launch this particular configuration.

So on any one contract we would expect that to be a piece of the total number of airplanes we would sell in that mission regime.

So, for example we have the Australian contract, we have the Turkish contract, we have other customers with whom we are working for wedge tails solutions.

It is that total program we have run the business case on, and is a profitable program in its entirety.

But to your particular point it is not a cost based contract with Australia, it's a priced contract.

Okay.

And then the last question is, it sounds like the Korean F-15 contract was, in fact, signed.

Can you give us an order of magnitude in terms of the advance we might have seen in this quarter's booksings?

In terms of the advances?

Was there an advance on signing that order? a Contract advance?

Oh, no, I'm sorry.

There was not.

Okay.

Thank you.

You bet.

Our next question today will come from John Rogers with DA Davidson.

Please go ahead.

Good morning.

Great quarter.

Mike, just on the Space and Com side when you went through that section, I was wondering if you could give us a little more in terms of the margin improvement there.

Are you back at a point now where that business -- you can hold these margins?

Yeah.

If you will recall, John, program performance in that business has consistently been very good.

I think we have actually identified that it's in the very low double digit margins on a program basis.

Right.

And for a period of time, it was the R&D investment that pulled those margins down to where we had all seen them.

We were marching out of that path when, in fact we had a better performance as we talked about on the satellite business.

So where we are today, we think, in fact, reflects where we will end up as we complete those satellite contracts.

So we should hold or improve the margins we are looking at today.

Okay.

The margins for the second quarter, not the six months?

right.

Correct.

Okay.

Then one more question, if I could.

In terms of your negotiations with the aerospace workers, can you give us any update there, or any comments on that?

Negotiations on this -- in my view will be a classic negotiation, which is you work through a lot of detail, which is where we are right now, and that culminates with some pretty intense negotiations that occur in the last two weeks of August.

We are working very hard to try to make sure we reach an agreement, but you really don't know until you get into that set of negotiations right at the end of August.

Okay.

Thank you.

Our next question today comes from Pierre Chow with CS First Boston.

Please go ahead, sir.

Good morning, guys.

A quick question on sort of the mechanics of the pension fund and the funding that you put into it.

I know under government accounting some of your pension expenses are an allowable cost.

Is part of that funding reimbursable or was it related to more of the commercial aircraft side?

I'm looking at my controller, Pierre.

Um -- much of that is on old MDC pension funds, and so our controller is saying it is reimbursable.

Okay.

Great.

And now we'll move on to Heidi Wood with Morgan Stanley.

Please go ahead, ma'am.

Yes, thank you.

Good morning, guys, nice quarter.

Thank you, Heidi.

Mike a couple of questions for you.

The strength we saw in Military Aircraft and missiles.

You've done 12% in the first half.

Is there any reason why we would not expect the second half to be as good?

Well, I'll tell you the only thing I can tell you, Heidi, is everything has come together very well on the first set of revenues.

So you might -- I think we might expect to see more nominal margins as we expected to see coming into this thing.

So where we have 12-ish, I think it's more appropriate to think halfway town toward 10-ish.

The other thing to remember is that assuming we go ahead and get this contract signed on the tanker transport, which we expect to, that the development expense will begin to pick up and that's a R&D expense since this is a lease program.

Okay.

And then for George's question on the BCAG margins you did 7.7% in the first half.

Again, just to make sure, certainly the second half is going to be lighter with lower deliveries.

Can we still expect to be in the 7% range?

I think that's a reasonable expectation.

Okay.

Um -- Phil, a question for you -- one last question on BCAG.

Can you elaborate a little bit, Mike, on the mix issue that you refer to on the 2003 deliveries?

Is a 70/30 split [INAUDIBLE] a fair characterization?

What?

I don't think we have that demographics at our finger tips, Heidi.

We are scrambling.

We'll see if we can get it.

Go ahead and ask your other piece.

Heidi, this is Paul.

I guess what we want to tell you is the historic perc -if you look back the last several years we ranged between 25 and 30% in that kind of delivery profile.

We will probably stick pretty much with the historic delivery profiles we have seen over the last few years.

It's that everything is moving down together with a little more strength in terms of the downturn in the single aisle.

Okay.

Thanks.

Phil, a question for you.

Can you expand a little bit about your thoughts on use of cash?

You are going to be throwing off $2 to $3 billion even in a trough year for Boeing and clearly one might think '04 and '05 that could be a little bit higher.

I've also be thinking about the fact that you have been bringing the two defence divisions into one and you diversified quite successfully from being a pure commercial aerospace plate to adding this defense.

And given sort of the downturn in the rest of the commercial world, it sort of makes me wonder, do you have an appetite, or an interest in expanding beyond kind of the commercial aerospace and defense areas you are in?

How else are you looking at that?

Um -- broadly, we are pretty determined to stay with what we know.

Now, I think that does give us some opportunities.

I think our systems integration capability, the thing that allowed us to win future combat system and joint tactical radio system gives us some real expansion opportunities not totally confined to the military.

But obviously, one of the things we have said is we are going to operate on a X square philosophy which is either we will take technology we know well to a new customer set, or we will take new technology to customers we understand, but we are not going to take new technology to customers that are new as well.

That's been the negative for diversification in the aerospace industry.

Now, the win that we had on explosive detection system, you know, clearly moves us into a newer area.

But basically with a customer set that we know pretty well.

We think there are some opportunities there.

To go to your more general question, I think we will be significantly cash positive.

And as the commercial airplane market begins to turn around, that picture gets extremely good.

And I think that's going to give us a lot of opportunities.

Some of that's going to go directly back to shareholders.

Some of it will be share buy back.

And we will look for those opportunities where we can take on programs we think are going to increase shareholder value significantly.

Okay.

Great.

Fair enough.

Thank you.

Now we'll take our next question from Nick Fathergill with Bank of America.

Hello.

Good morning.

Most of my questions have been answered.

I have one final one.

On your combination of your Missiles division with your Space and Com division, how much of that is retrospective to deal with the future combat systems win and how much of that is looking forward to capture significant amount of network centric warfare business which may come through over the next couple of years?

Do you think there are contracts in network centric warfare beyond even the 5 billion scale we have seen for future combat systems?

That action was entirely forward-looking.

I think we could have performed fine on the programs we had.

We do believe that network centric capability is going to be an absolutely critical part of the future, and we believe that FCS is only the first step in that process.

That the same thing is going to happen on the Naval side, on the Air Force side, and that our ability to link space assets with airborne assets, with ground assets, gives us a unique capability.

And we wanted those all together so we could bring those capabilities into one place.

Phil, can you give us a rough timeframe for when these Air Force and Naval network centric opportunities may appear?

Um -- they are sort of moving their way through the pipeline.

The Navy one is Course Nelt.

The Air Force is MC2 --

MC2 A is the --

There's -- they are in the planning.

I think that there's going to clearly be a challenge of how do you fit all this into a budget, and what does that mean to procurement.

But, you know, as we are seeing successes in doing this integration, we think the process will accelerate.

Last question.

You mentioned at an earlier question that your 6.8% margins in Space and Com look reasonably sustainable.

I guess that includes the head wind of just, maybe just, now one Delta 4 launch this year and also, I guess, you must be resolving your 702 situation; is that correct? [pause]

Okay.

Can we take one more question?

And our final analyst question comes from Robert Tumainy with RBC Dane Rausher.

Yes.

Good morning.

Just a quick question on your classified business.

Have you stated previously how much of your total defense and space business is classified?

No.

Or could you?

No, and we can't.

No.

No.

No.

Not even in percentage terms?

No, we can't.

Because, obviously we say percentage terms, you can back to a number and we are not allowed to do that.

Can you qualify it?

Is it a lot?

Is it moderate?

You can't say anything on that?

No.

Ok.

My second question is can you comment the Airbus 380 picked up recently some additional freighter orders.

I'm wondering if you could comment on the outlook for the 747 versus the A380 and the freighter market?

I -- you know, I actually think the 47 is in a great position.

It's a long way from 777 or an A340 to an A380.

And an awful lot of people out there are operating 47s.

And so commonality, the fact that it is a good, efficient airplane I think is gonna leave it in pretty good stead.

I think some guys took advantage of some great offers and used that, but I think the 47 will stand up well.

Great.

Thanks very much.

You bet.

That finishes up on the analyst call.

Thank you very much for joining us.

And we'll see you next quarter.

Thank you.

Again that completes the analyst question and answer session.

For members of the media, I will now return you to the Boeing Company for introductory remarks by Judith Mul berg, Vice President of Communications.

Ms. Mulberg, please go ahead.

Thank you very much and let me add my good morning.

I -- we are prepared to take your questions now.

I just remind you if you have other questions or need information, our team is standing by to take your calls on 312-544-2002 and with that, we are ready to take questions.

Thank you.

Our first question will come from David Greesing with the Chicago Tribune.

Good morning.

Good morning, David.

Hi.

I had a question about the remarks you made right at the end of the presentation when you talked about the change in your financial reporting.

And can you give me a little information about how you are planning to do that transition?

In these days when everybody is looking so closely at financial transparency?

Um -- I think the most important thing we can say right now is we know it's important.

We intend to be at least as transparent in our new state as we are in this state, and we know that we need to report in a manner in which we run the business.

So, as we go through the transition period, and bring those two units together, we will have a comparable path to figure out how it is we are going to report those all to you downstream.

Our commitment is it will be at least as transparent as it is today.

David, let me sort of amplify.

One of the things we knew going in, this organization change was strategic, it was to get ourselves positioned in a way we thought was best to meet the market.

We did not want people to think that we were combining two units, and therefore decreasing the amount of visibility that was going to be given.

So we said two things.

One, for the rest of this year we will continue to report both units, even though we have combined them.

But that going forward, obviously that gets harder and harder because they get mixed up together.

But that we will do things to make sure the transparency is of a least equal level.

Thank you.

Thank you.

Now our next question will come from Mike Meachuam with Aviation Week.

You noted that -- terrible echo.

You noted that you have been strong in Asian sales.

Normally that's regarded as twin aisle territory, except in places like China, perhaps.

Can you.

Mr. Condit, look forward as to when you will start to see recovery in the wide bodied market out there?

I wish I could.

You know, this decline is significantly bigger than anything we have ever experienced.

And so to try to predict exactly where the turn around is, the best we can do is sort of say what we are seeing at this point.

I think it would be fool hearty to try to predict ahead.

Once again, if you would like to ask a question, please press star one on your telephone.

And now we'll move to Chris Stektowick with Reuters.

Good morning.

I just wanted to follow-up on the tanker comment.

Is it your understanding this is still a leasing plan?

Is there any possibility that it would be an outright purchase?

Do you have any updates on the price involved in that deal?

Our expectation is that it will continue to be a leasing deal.

And no, I'm not going to comment on the price.

Okay.

Thank you.

Our next question comes from Kai Yung Song with Seattle Times.

Thank you.

Phil, the job cuts that you've announced so far.

Would they be sufficient to match even the lower end of the projected deliveries for 2003?

Um -- the way the current numbers are, the answer is yes.

Obviously if that changes, that would change the numbers.

But, the job cuts we have announced is tailored to that level of deliveries.

On the issue of more conventional replacement aircraft, if you go with the more conventional airplane instead of the sonic cruiser, how well would that position Boeing's jetliner product line up for the next 20 years and beyond?

Obviously that is the decision we have to make.

Our goal is to build the best possible product line that positions us best in the market place.

And whatever decision we make will be made because we believe that that positions us best and solves our customers' problems in the best way.

Thank you.

Again that is star one on your telephone if you would like to ask a question.

We'll move on now to John Smeltser with the Chicago Tribune.

Hi, Phil, how are you today?

Good morning, John.

Sorry we can't have humor on this call. [ LAUGHTER ].

I think we can now.

The money part is really serious.

Mike is not allowed to, but I can.

Oh, alright.

Can you talk a little bit about where you see things moving?

As I'm' looking at these numbers, the Commercial Airplane unit and the new combined Military and Space and Com, you are approaching where you are almost going to be 50/50.

Is that the way you see the company going forward, or are you going to be seeing other changes?

Well, remember if you back up to sort of the fundamental strategy, the fundamental stratagy was we wanted a company with balance.

The reason when wanted a company with balance is we knew that commercial airplanes was cyclic.

Therefore if we really wanted to make sure we continued to produce well, that we needied some offsetting issues.

That's what led with the acquisition of Rockwell, the merger with McDonald Douglas and the acquisition of Hughes.

With that, we have built a very strong integrated defense business.

Now, come September 11th the validity of that strategy got demonstrated in spades because the events of September 11th dramatically impacted commercial airplanes, but, of course, also increased the need for defense activity.

So what we have seen is our defense activity pick up while commercial has gone down.

I don't have a target -- I don't want to try to get to 50/50, what I want is balance.

Now the goal will be to grow both of them and, I believe, commercial is going to turn around and it will grow.

Hopefully we will be growing military at the same time.

And we'll get a good, strong company as a result.

But, your observation is, I think, very accurate.

Next year we will be pretty close to balance.

Okay.

Alcoa is predicting '06 for revival of the manufacturing end of the market.

Is that what you are seeing, also?

Um -- as I said earlier I have been hesitant to say I know where that turn around is.

Do you think -- do you think ALCOA is way off?

My best guess is that the bottom is likely to be '03.

Now, the rate at which it picks up after that, I don't know.

But everything we are seeing says that '03 is liable to be the low year on commercial airplane production.

Okay.

Thanks.

Now we'll move on to our next question from Paul Marion with Crane Chicago Business.

Good morning.

Good morning.

On the eve of the [farm] air show, this is not a bad quarter to be going in there with.

But, people will be looking at the performance of Boeing in the context of their performance of Airbus.

In this downturn, would you say the competition has intensefied, or are both companies trying to contain the damage?

The competition has sort of gone dormant, or what?

No, it is a very competitive environment.

We have tried to respond quickly and aggressively to the change in the market.

When you take the kind of impact that we have seen, you know, from a global standpoint, we are back to traffic levels of late 1998.

That's pretty tremendous.

And that's why we have adjusted our production rates.

Airbus has not done the same thing.

I don't think that's in line with the market, but it has produced a very competitive market place.

Anything further Mr. Marion?

No, that's fine.

Thanks.

You bet.

Now we'll move on to Chris Nap with Orange County Register.

Good morning, guys.

Good morning.

I had a question about the 717 deliveries.

You had listed six -- I'm sorry eight in the last six months.

I thought Mike said something about some order cancellations or turn backs?

The event was the acquisition of TWA by American Airlines, and a decision by American in the wake of 9/11 to simplify their fleet and, therefore, not continue to operate the 717s that had been operated by TWA.

So we have a challenge to make sure those airplanes is get placed in the market.

At the same time, we have had real good success in that area.

And included getting some additional customers which is why we extended the order base on 717 program.

Have you had to slow down production in the meantime?

Oh, yes.

Remember every airplane program we've got slowed down in production. 717 slowed down. 37 slowed down.

In total we have taken our production down just about exactly in half.

From 48 airplanes a month down to 24 airplanes a month.

And -- so you still have a backlog of new planes that have not been forward on the 717 line?

We have a backlog of airplanes yet to be delivered that reaches out into the future.

We are being cautious in the way we extend that program.

But our intent is that we keep it going.

Okay.

Thank you, Phil.

You bet.

We'll take our next question now from August Coal with CBS Market watch.

Good morning.

Good morning.

You talked a bit about how you are going to articulate to wall street the growth of the defense business because a lot of those are very advanced and lucrative but they are loosely defined.

I mean, is this going to be something to a challenge to come up with numbers for models?

I think it's hard in a lot of ways.

As you move from hardware from specific airplane programs to these big integration programs, it's a little hard to grasp.

On the other hand the scale of them is huge, the impact is huge, and I think the market's beginning to recognize just how important those are.

You know, some of the analyst reports that have come out over the last two days have looked specifically at those wins that we have had in that space, and cited those as their reason for changing their rating on Boeing.

So I think the street's understanding exactly what's going on.

Okay.

Thanks.

At the same time, if I could add, you all and we all will see specific dollars in contracts, and referenced back to a previous question about how much is classified, except for those that are very classified, all of those numbers will be quite visible to all of us.

So for the most part, we will be able to report contract values and see the revenues and earnings that come from that.

As a final reminder today, if you have a question press star one on your telephone.

Up next we'll hear from Lynn Lundzford with the Wall Street Journal.

Good morning.

Good morning, Lynn.

I wanted to see if I could get you to elaborate a little more on -- you had mentioned that Boeing has taken its production rate down in response to what you perceive the market, yet Airbus hasn't.

I noted they were in the process of going up, and it looks like they basically just stayed still.

But, I mean, what is -- what does Airbus's lack of backing off mean in the context of the entire market?

Is it pricing?

Is it oversupply?

What are you seeing as kind of the, I guess, the negative here?

Well, I think the issue is how many aircraft does the market need?

And our estimate is it needs significantly fewer airplanes because traffic is down dramatically and we have an oversupply of airplanes.

You have 2,000 airplanes that are parked in the desert right now.

Now that number has stopped going up, but that's a fairly healthy oversupply.

We think we have responded correctly to the market, and recognized that downturn, and the scale of that downturn.

Not much more I can say that about that.

We think that that recognizes exactly what's going on.

Is this -- is this driving pricing pressures?

I know you have said that Boeing is not going to get into a position of essentially maintaining your market share by selling airplanes at a loss.

And you have the Easy Jet contract, or the Easy Jet sales here pending.

At some point can Airbus price you out of the market?

Well, but they have to, you know, they get to report what they did, too.

And, you know, if you want to sell at a loss, you can report that you will sold at a loss.

But what we have said is we've got a financial company to run, and we've got to run it well, and take that responsibility, and we believe we are doing it.

Anything further, Mr. Lundzford?

No, thank you.

Thank you.

And our final question today comes from Francine Noles with Chicago Sun Times.

Thank you.

Good morning, gentlemen.

Good morning.

Can you tell me where you are in terms of the previously announced 25 to 30,000 job cuts?

Where are you with that right now?

We are coming up pretty close on the 30,000.

Anybody got an exact number handy?

I don't.

I -- my memory is that we are in the 25,000 right now with about 5 to go.

Thank you, gentlemen.

Francine, we can help you with that, and it's also on our website.

Thank you.

Okay.

We thank you all for joining us.

And we'll see you next quarter.

Thank you.

That will concludes today's conference call.

Thank you everyone for your participation.