波音 (BA) 2002 Q3 法說會逐字稿

Good day, everyone and welcome to The Boeing Company's 3rd quarter results conference call.

Today's call is being recorded.

The management discussion and slide presentation plus the analyst and media question and answer sessions are being broadcast live over the internet.

At this time for opening remarks and introductions, I'd like to turn the conference over to Mr. Paul Kinscherff, Vice President of Investor Relations for The Boeing Company.

Go ahead, sir.

Thank you, Chris and welcome to the Boeing 3rd quarter 2002 earnings conference call.

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 October 30th, 2002.

If, for any reason you are currently able to reach us through the internet ,please access our site later today when all the information may be posted.

With me today are Philip Condit, Chairman and CEO and Michael Sears, our over Vice president and CFO.

After comments from Phil and Mike we will then open it up to your questions.

Before we start, as usual, I need to remind you that projections and goals included 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 our news releases we issued early this morning and in our various fillings with the Securities and Exchange commission, and in in the forward-looking statement statement at the end of this web presentation.

I urge you read them thoroughly.

Now I will turn it over to Phil.

Thank you, Paul and good morning. ,As usual, I will start with an overview of the quarter and comments on the market environment and then Mike will give you the financial details and our updated guidance.

We will then take your questions.

Let me start with slide 2.

Our markets remained dramatically altered, one year after the September 11th events and this is reflected in our results for the quarter.

Commercial aviation and commercial space markets are in the middle of prolonged downturns.

While defense and non-commercial space markets remain strong.

Key defense wins increased our total Q3 backlog to just under $137 billion compared with $134 billion at the year-end '01.

This reflects our balanced portfolio strategy and our competitive market strength.

The majority of our businesses performed very well during the quarter.

However, as you would expect, market conditions impacted results at Boeing Commercial Airplanes, at Boeing Capital Corporation and at Boeing Satellite Systems.

Q3 results were also impacted by increased investment in our Airborne Early Warning and Control Program and by additional cost growth and commercial satellites.

I will talk more about this later.

Now let's turn to our financial highlights on slide 3.

Given the market conditions, our businesses have delivered healthy revenues and strong free cash.

Revenues for Q3 were $12.7 billion compared to $13.7 billion for the year-ago period.

Q3 revenues reflect 47 fewer commercial airplane deliveries that are partially offset by growth in our defense programs.

We booked four non-recurring items this quarter.

When netted together, the impact was less than 1 cent in earnings per share.

EPS for Q3 was 46 cents on net income of $375 million, excluding non-recurring items.

This compares with $713 million or 88 cents per share in the year-earlier period.

Our previously-announced non-cash charge to strengthen reserve levels and revalue certain investments at BCC accounted for a 20-cent reduction in this quarter's EPS.

Stock-based compensation expenses decreased this quarter's EPS by 4 cents.

That compares to a 4-cent-per-share increase in 3rd quarter of '01.

We generated strong free cash flow of $1.2 billion this quarter, essentially the same as 3rd quarter '01.

Now let's look quickly at each of the business units.

First, Commercial Airplanes on slide 4.

This unit had strong performance, even as deliveries dropped by over a third in the quarter, reflecting a 50% drop in unit production rates from year-ago levels.

As planned, BCA delivered 73 airplanes in Q3 against 112 in Q2 and 120 in the prior year period.

Commercial reported segment margins of 8.5% and operated earnings of $518 million.

We had 184 gross orders in the first nine months compared to 232 in the year-earlier period.

In addition, Commercial continues to focus on building a lean enterprise by reducing costs and streamlining assets.

They aggressively continue to improve efficiency in Q3.

During the quarter, BCA ratified a new three-year contract with International Association of Machinists and began discussions on an engineering contract that expires in early December.

Going forward, we expect Commercial Airplanes to perform profitably through the downturn and be very well positioned when the market recovers.

Before moving to our next slide, I want to update you on our integrated defense systems unit announced in July.

First, our transition to merge our Military Aircraft and Missile Systems and our Space and Communications units into IDS is on-schedule and progressing very well.

Second, as stated before, we will continue to report A&M and SNC results separately through '02 and together as IDS with appropriate details starting in '03.

Mike will share how we plan to do that and how we plan to continue to maintain levels of transparency.

Now let's go to slide 5, which is IDS, Aircraft and Missile Systems.

A&M reported another outstanding quarter and turned in higher revenues and stronger profits.

This reflects strong markets and excellent program execution.

Segment earnings and operating margins, excluding a non-recurring item were a strong $423 million and 11% respectively.

Revenues grew 14% from the year-earlier period to $3.8 billion.

This reflects higher deliveries and higher aerospace support revenues.

In Q3, A&M also secured additional growth opportunities in domestic and international markets.

They were awarded a $9.7 billion follow-on contract for 60 C-17 Transports, which extend planned deliveries through 2008.

They added Kuwait as an international customer with a $900 million order.

They are significantly increasing JDAM production to meet customer demand and received a development contract to compete for the MMA or Multi-mission Maritime Aircraft, which is slated to replace a large-aging P3 fleet.

This quarter of the U.S.

Air Force also forwarded the 767 tanker lease recommendation to the Defense department for review and approval.

Going forward, we expect this portion of IDS to continue to deliver strong performance.

Slide 6 shows IDS Space and Communications unit.

The majority of the essence of businesses performed very well.

Particularly the Core Missile Defense and Integrated Battle Space programs, including propriety work.

Revenues were $2.7 billion, about the same as Q3 of '01.

Higher missile defense and integrated battle space revenues were offset by weakness in the commercial satellite and launch markets.

Segment margins were 2.3%, excluding a non-recurring item.

Margins were lower than expected primarily because of higher investment costs to develop the 737 AEW and C system.

We believe the market for this 737-based system is very strong and that our investment will create long-term value.

Other financial impacts include continued cost growth on commercial satellite programs.

SNC continues to vigorously address these issues and implement improved processes at boeing satellite systems.

SNC also took a non-recurring, non-cash charge.

It wrote down its equity investment in Teledesic which stopped work on the satellite constellation due to difficult conditions in the telecommunications market.

Mike will give you details on all of these items.

SNC solidified its position in Q3 as the leading industry partner in the U.S.

Military's transformation.

They won a key contract award for the U.S.

Air Force Family of Advanced Beyond Line of Site Terminals or FAB-T.

They passed a critical customer review for the future combat system of the army.

Missile Defense performance remained very strong during the quarter and new international partnerships were established.

SNC was also awarded a $700 million contract to continue space shuttle and expendable payload processing for NASA.

I expect this portion of IDS to be very competitive in the future and have a real focus on performance.

Now let's go to slide 7, our other businesses.

Boeing Capital's Q3 revenues were $242 million, compared with $169 million in Q3 of '01.

This reflects their portfolio growth.

BCC's portfolio at the end of Q3 was $11.5 billion compared to $8 billion last year.

Portfolio growth during Q3 was $400 million.

This reflects fewer aircraft deliveries and transaction timing.

As previously announced, a pre-tax non-cash charge totaling $250 million was taken during the quarter.

This strengthened our reserve levels and revalued some of our investments for BCC.

This reflects the ongoing downturn in the civil aviation marketplace and it very clearly was the right thing to do.

Going forward, BCC will continue to provide prudent financing that takes into consideration current market conditions.

Connection by Boeing signed a letter of intent with Japan Airlines with service to begin in early '04.

They also started their first revenue service on a U.S.

Government aircraft.

Air Traffic Management continues to generate broad global support for a next generation air traffic control system.

They were awarded a contract in the 3rd quarter from the FAA to evaluate integrating security and capacity enhancements into the current national airspace system.

Now let me close with slide 8 and the assessment of where we are and where we're headed.

We are in a dramatically-changed business environment.

Which began more than a year ago.

Our commercial markets remain impacted by the economy, by the financial markets and by the prospect of military action in Iraq.

The slow recovery of both air travel and airline profitability continues to dampen demand for new airlines and continued support.

Trends vary between regions and types of carriers.

But overall, the downturn is severe.

Particularly with U.S. major carriers.

European carriers are about flat.

Asia shows some growth and most of the low-cost carriers are in positive but reduced growth areas.

In '03, we expect about 3/4 of commercial airplanes to be delivered to non-U.S. customers and Boeing will continue to responsibly produce commercial airplanes consistent with market demand.

We currently expect our '04 deliveries to be in a similar range of those to '03.

In our other commercial market, the demand for commercial satellites and launches may be several years away from recovery.

As a result, those markets will remain highly competitive.

Boeing's defense, intelligence and non-commercial space markets, however, remain extremely strong.

We are very well positioned in these markets as a leading provider of both existing as well as emerging transformational systems.

Our programs are well-supported.

In the fiscal '03 Defense Appropriations Bill under consideration, Boeing's programs are either fully funded or received increases.

As a result, integrated defense systems, revenues in '03, will exceed 50% of total Boeing revenues.

IDS growth and performance will partially, but not completely, offset the significant cyclical downturn in Boeing's commercial markets.

We are revising our financial outlook to reflect the market realities and Mike will talk about those in detail.

Going forward, we will manage the near-term with strong leadership, focused on financial strength and continue to capture key strategic wins.

We will focus on performance, on cost management and on targeted investment for long-term competitiveness.

Our balanced aerospace portfolio and our strategy to run healthy core businesses will continue to provide opportunities for long-term growth and valued creation.

Now Mike will give you the details and then we will take your questions.

Mike?

Thank you, Phil and good morning, everyone.

I will start today with general comments on slide 10 and then move into the numbers.

As Phil noted, our financial results for the quarter reflect solid operating performance across the vast majority of our businesses.

Commercial Airplanes delivered solid results in a declining delivery environment.

Strong operating performance continued at Military Aircraft and Missile Systems and a majority of our space and communications programs also performed well.

Our results were impacted, however, by cost and investment growth in two areas at Space and Communications as well as by actions taken to strengthen reserves and revalue certain assets in Boeing Capital's portfolio.

We closed the 3rd quarter with a healthy balance sheet and on track to generate substantial free cash flow.

As usual, I will discuss the results for the quarter and then I will take you through our financial outlook that we're revising to reflect the continuing downturn in our commercial markets.

Now to the numbers on slide 11.

Revenues for the 3rd quarter of 2002 were $12.7 billion, down 7% from the same period last year.

Lower Commercial Airplane revenues were partially offset by higher revenues at Military Aircraft and Missile Systems and Boeing Capital.

Reported operating earnings were $562 million, compared with $1.1 billion a year ago.

About half of the year-over-year reduction is due to the previously-announced $215 million non-cash charge to strengthen financing reserves and revalue certain Boeing Capital investments.

Recurring and non-recurring charges at Space and Communications, which I will detail later, account for an additional $235 million of the decrease.

The remainder reflects lower commercial airplane volume, partially offset by higher earnings at Military Aircraft and Missile Systems.

Excluding non-recurring items, net earnings for the period totaled $375 million or 46 cents a share.

This compares with net earnings of $713 million or 88 cents per share in the 3rd quarter of 2001.

Reported operating margins declined to 4.4% from 7.8% last year and excluding non-recurring items, adjusted operating margins for the 3rd quarter were 5.2%, down from 8.5% last year.

Turning to slide 12, you can see that we had four non-recurring items this quarter.

Three of which resulted from actions we took on investments.

First, Space and Communications recognized a charge to write down its investment in Teledesic that we made several years ago.

The after-tax loss from the action totaled $63 million or 7 cents per share.

Second, Military Aircraft and Missile Systems sold a long-eld investment which resulted in a $12 million after-tax gain of 1 cent per share.

And third, the company recognized a $7 million or 1 cent per share charge from writing down a smaller, long-held equity investment.

The company also recognized a $55 million or 7 cents per share benefit from the favorable tax settlement.

The net effect of these items was a $3 million reduction in 3rd quarter net earnings or less than a 1 cent impact to earnings per share.

Moving to slide 13, we can see that we generated strong free cash flow of nearly $1.2 billion during the quarter.

A free cash flow for the first nine months was solid at $2.1 billion.

We used free cash for dividends and to pay down maturing Boeing company debt.

No free cash was used during the quarter to fund pension obligations.

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

Slide 14 shows our balance sheet which remains strong.

We ended the quarter with a cash balance of $1.7 billion compared with $816 million in the 2nd quarter of 2002.

Boeing Capital debt increased $700 million to $9.1 million and Boeing Capital's debt to equity ratio was 5.7 to 1, down from 5.9 to 1 at the end of the 3rd quarter 2001.

That, of The Boeing Company decreased to $3.9 billion from $4.2 billion at the end of the 2nd quarter.

Our debt ratio decreased to 30% and our credit ratings remain at solid investment-grade levels.

On the subject of equity, the company is reviewing the performance and expected assumptions associated with the pension plans using a September 30th measurement date.

Because of the significant time in the financial market and historically-low interest rates, preliminary indications are that the company is likely to recognize a significant non-cash, after-tax charge to equity could be as high as $4 billion in the 4th quarter.

This is at the higher end of our estimates and we remain in the midst of our calculations.

This charge would not impact reported earnings and would be reversible if interest rates increase or market performance improves.

Now, to our core businesses starting with Commercial Airplanes on slide 15.

Commercial Airplanes' financial results for the period reflect the impact of a commercial market downturn.

Despite the significant drop in revenues, they turned in another solid quarter of operating performance.

Revenues for the quarter were $6.1 billion, down from $8 billion in the same quarter 2001 due to lower delivery and volume.

Excluding non-recurring items, segment operating earnings were $518 million, down from $835 million during the same quarter last year.

Adjusted operating margins were 8.5% for the quarter, down from 10.5% a year ago.

And on a program accounting basis, operating margins excluding non-recurring items were 5.5% down from 6.7% last year.

This is in line with previously-reported expectations that margins would moderate as revenues and deliveries declined.

Commercial Airplanes is performing very well in a severe market downturn.

Moving forward, the leadership team will continue to focus on profitability with an emphasis on controlling costs, managing risks and continuing lean activities.

Turning to slide 16, Military Aircraft and Missile Systems turned in another strong quarter.

Revenues increased 14% to $3.8 billion compared to $3.3 billion of a year ago.

This is primarily due to additional C-17, F-15 and JM deliveries and well as increased military aerospace support volume.

Operating earnings rose 7% to $442 million primarily due to the additional deliveries and program performance improvements.

Margins remain healthy at 11.8%.

These results include a non-recurring gain associated with the sale of a long-held equity investment.

On a pre-tax basis, the gain added $19 million to operating earnings.

Excluding this item, 3rd quarter margins were 11.3%.

This compares to 12.5% for the same period last year, which included a favorable contract adjustment.

Military Aircraft and Missile Systems continues to show strong profitability across all of its programs and we anticipate margins continue in the low double digit range.

Now let's turn to Space and Communications on slide 17.

Revenues for the 3rd quarter were $2.7 billion.

This is up slightly from the same quarter in 2001 as higher missile defense revenues were offset by lower commercial satellite revenues.

Operating earnings and margins excluding non-recurring items were $64 million at 2.3% respectively.

This compares with $181 million and 6.7% of the year-ago.

3rd quarter results do include a non-cash, non-recurring pre-tax charge of $100 million to writedown an equity investment in Teledesic.

Including this nonrecurring item the unit reported a 3rd quarter operating loss of $36 million.

These results also include the impact of increased cost estimates to fully develop an airborne early warning and control system using the 737 aircraft.

The market is projected to exceed 30 aircraft.

Boeing has captured the first two opportunities totaling eight aircraft and is under contract for development and production of the first four.

This first production contract includes the entire development effort and is charged this quarter with the pre-tax development cost increase of $100 million.

Earnings were impacted by cost growth and satellite programs totaling approximately $75 million.

This cost growth was offset by actions to reduce contract scope and risk that resulted in approximately $40 million benefit to earnings.

The net result was a $35 million reduction in commercial satellite-related operating earnings.

Space and Communications continues work to aggressively improve processes and implement best practices on its commercial satellite programs.

The majority of its businesses are performing well and poised for continued growth.

Margin improvement and consistency remain top priorities.

Turning to slide 18, last July, Boeing announced the formation of Boeing Integrated Defense Systems.

At that time, we committed to maintain at least current levels of transparency when we report IDS results starting next year.

Today we wanted to provide you with a preview of how we plan to maintain and, in fact, enhance that transparency.

Beginning in 2003, we will report IDS in four groupings, which are in line with the key markets.

The largest will be Aircraft and Missile Systems, which is comprised mainly of Fighter, Rotorcraft Transport, Tanker and Weapons programs.

About 1/3 of IDS results will be reported as Network Systems, which includes Integrated Battle Space, Missile Defense, Homeland Security and Intelligence activities.

Launch and Orbital Systems will improve our Commercial Satellite Launch and NASA businesses.

And support will report the results of our growing aerospace activities.

We will be providing you more detailed information regarding IDS recording early next year, including pro forma results.

Turning to our outlook on slide 19, today we are revising our guidance for 2002 and 2003.

In general, it reflects the impact of difficult market conditions, both for Commercial Airplanes and Commercial Satellites and Launches.

It also reflects the impact of lower market returns on our pension income forecast.

Our Commercial Airplane delivery forecast for 2002 remains unchanged at approximately 380 airplanes.

For 2003, the delivery outlook has been narrowed from between 275 and 300 airplanes to between 275 and 285 airplanes.

The delivery forecast is essentially sold out for 2002 and is approximately 95% sold at the lower end of the range for 2003.

As Phil noted, Commercial Airplanes currently estimate 2004 deliveries to be in a range similar to 2003.

Commercial Airplanes continues to monitor market conditions and expects to provide initial delivery guidance for 2004 next January.

And at Boeing Capital, we expect portfolio and revenue growth to reflect Commercial Airplane delivery levels.

The impact to our financial results of the commercial downturn will be somewhat offset by continuing strength in our defense and non-commercial strength businesses.

Military Aircraft and Missile Systems is expected continue growing modestly as a result of increased program deliveries under multi-year contracts as well as higher aerospace support and weapons sales.

That's based in communications, missile defense, integrated battle space and propriety programs are also expected drive solid growth.

However, commercial launch and satellite revenues will be less robust than previously anticipated.

Now turning to the numbers, revenue guidance for 2002 remains unchanged at plus or minus $54 billion.

For 2003, revenue guidance is being revised from plus or minus $52 billion to plus or minus $50 billion.

The operating margin outlook for 2002 is being adjusted from plus or minus 8-1/4 percent to plus or minus 7-1/4 percent.

For 2003, the operating margin is being adjusted from plus or minus 8-1/4 percent to plus or minus 6.5%.

At this time, let me point out the beginning next quarter we intend to replace annual operating margin outlook with annual earnings per share outlook.

We feel this is more in line with industry practice and presents a more representative picture for Boeing given the increasing level of interest expense at Boeing Capital.

And finally, our free cash flow guidance remains at 2.5 to $3 billion for 2002.

For 2003, the outlook is being adjusted from greater than $3 billion to between 2 and $2.5 billion, largely driven by fewer aircraft, satellite and launch deliveries in 2004.

We provided you with a lot of information today and I'm certain you have questions, so, phil, it's back to you.

Okay, we're ready for your questions.

Thank you, sir.

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

If you would like to ask a question at this time, please press the star key followed by the digit 1 on your touch-tone phone.

If you are using a speaker phone for today's conference, please make sure to unmute your phone in order for your signal to reach our equipment.

Due to time constraints, we ask you limit yourself to one initial question.

If you have any further questions, you may resignal and we will take your additional questions as time permits.

Again, please press star 1 for questions.

We will pause for just a moment to give everyone a chance to signal.

We will go first to Byron Cowen with Merrill Lynch.

Yeah, good morning, gentlemen.

Good morning, Byron.

I'm -- just real quick, A-12, Mike; that factored at all into your cash flow guidance?

Where do we stand with that dispute?

Byron, we have no factor of that impact into the numbers.

I must start by telling you that we -- we believe as we always have that our legal case is exceptionally strong.

We are continuing to follow that process as required by the courts.

Also, I will tell you that we have conversations with the Pentagon about business solutions that might have both of us leaving it behind and moving forward.

Great.

I will turn it over to someone else.

Thanks.

Okay.

Next we go to Heidi Wood with Morgan Stanley.

Hi.

A couple of questions.

Phil, you talked about the Commercial Space suggesting a recovery in the next couple of years.

What contributes to your view that the downturn to commercial satellite market is cyclical and not secular?

I think that if we look at the overall long-term demand for GEO satellites, we continue to see it higher than our current run rate.

I think it -- it's cyclic, I don't think it's going to be a big swing, but I think it will come up, we do not -- we're not counting on anything in terms of major lower systems.

So, we're looking primarily at GEOs.

Can you -- you -- there was another, you know, another case of cost growth in this quarter and commercial satellites.

Can you discuss the fixes you're putting into place to stem further losses?

Yes, I think that is extremely important.

The biggest portion of that That is working through fundamental problems in terms of technology insertion that were there when we bought the unit and we're having to go through and really fix those.

What it resulted in initially were problems on orbit, we're catching those in the environmental test area, we're having to back up and fix them.

We think we understand them all now but we've had to work through and work through those.

The other part is to put direct line responsibility into the organizational structure.

It was not organized that way before.

It is now.

I think those two items will allow us to -- to build that to a healthy operation as we go forward.

We think we've captured the problem at this point.

And then on the commercial aircraft arena, can you talk to us a little bit about your plans for a future aircraft development?

When could we see a launch in that area?

Clearly we are continuing to look hard at what the market really is going to need.

We're doing that as carefully as we can.

We had been investing in the technology for that marketplace, obviously one of the possibilities is Sonic Cruiser, a faster airplane.

Another is to use that technology on a lower operating cost airplane in the 200 to 250-passenger region.

I expect that we will focus that effort toward the end of this year and then go forward from there.

I don't expect that we will see a launch certainly into the middle or maybe even late of next year at the earliest.

Just because of the airline financial situation.

Great.

And one last quick question on commercial, given the guidance on delivery that you've given us for the '03 and '04 period, did you think you can keep the BCG margins in at least the mid single digits on that delivery?

Yes, that's considerably better than we've done in the past.

They are working extremely hard to do that.

The progress so far has been good, so yes, mid single digits.

Thanks very much.

We will go next to Joseph Campbell with Leman Brothers.

Good morning.

I heard that you said that the 767 lease is now gone from the airforce up to DOD.

Historically, the enemy of these things has been the OMV who is not like these things.

How do you see the prospect and the timing for your - I mean the money is in the budget for getting this thing kind of nailed down.

I think by the end of the year every sign we are seeing is positive.

That doesn't mean we worked through all the issues, but we are working through them and I am very optimistic by the end of the year.

That we can have a contract so that we can start figuring out exactly how to phase the 767 into the build.

Exactly right.

With regard to the build, did we make any assumptions about - in this quarters results, did we change out in the '04, '05 - because of the accounting do we have any impact as a result in either change in block size or changing production rates which you don't disclose to us, but nevertheless change the way the accounting goes so that there is some impact this quarter as a result of assumptions about the future.

Ya Joe, this is Mike.

We have no block changes during this quarter, but as you would expect with the revised deliveries that we just went through, the time that we will take to complete those blocks will be longer, and that has been accommodated into the earnings picture that we presented.

So you have changed not just '03 but '04 and out there as well even though you are not ready to share them with us.

Everywhere there is an active block that extends into that period the answer is yes.

Does the guidance you have given us include the probable changes by American Continental.

Delta has, you know, pushed a bunch of '04 out and American and Continental are essentially going to do the same.

Is that something that is already in the numbers or is that you are waiting for the January guidance to incorporate.

It is in the numbers.

So as best we know, it includes all these in here.

Absolutely.

Terrific.

I will somebody else ask questions and thanks again.

Thank you.

We will go next to Nick Fonagil with Bank of America Securities.

Good morning from London, two quick questions, the first is on margin progression at the Military Aircraft and Missiles division, which looking good at the moment, but if we see a bunch of cost-plus R&D style programs coming in over the next couple of years, how might margins in that business progress?

May they hold steady or come down a little bit?

Go ahead, Mike.

We both jumped at the same time!

One -- one thing that's kind of been a [inaudible] over the past years has been that R&D is lousy business.

And, in fact, on major program work, the government recognizes how important it is that our shareholders are benefited by our doing the work and how important it is that we do it well.

So, the presumption is that we will execute it well and the contracts will be written so that those margins should be maintained.

And my guess what you do in -- in very good, what I call cost plus-plus margins in missiles defense and warfare may offset some of the other lower R&D margin businesses, is that right?

Those contracts are written that will allow our company and our shareholders to benefit for good program performance.

Okay.

And then, thank you, Mike.

And the second quick question is do you have any further cost unfinished production in aircraft contracts out there other than the AEW one we've seen in the space and COM division?

Could you ask that question again?

Well, what I'm asking is do very any other potential development overruns like we've experienced in the 737 Airborne Early Warning Control System Aircrafts?

On -- on major weapon system aircraft and vehicles, I can't think of it, I'm looking around the table, but I will say that many of the programs that we have are development kinds of programs and always offer risk in our value to perform.

I can't think of any that are fixed price development off the top of my head.

It sounds like risk is low, volume up and the actual margin that we generate will be a function of our performance.

Sounds good.

And last quick one, the magnitude of the drop that you're getting in guidance for operating margins from 8.25% in '03 down to 6.5%, can you quantify the major elements that get you down to that level?

There is a number of major elements that are in there, Nick.

We always start with the commercial marketplace because as you all know, the impact of reducing production rate and dropping those deliveries down as we described has a significant impact on GAAP margins and commercial.

So, we know that's one significant area we have to play.

And, by the way, with aircraft travel being down, fares are down and therefore those revenues and margins are down, as well.

We also have pension income that is reflective of the marketplace and so that's going to have an impact in the next several years as we watch the marketplace and look at pension income.

Then, on the other side, on the gross side, we have IDS performance which we've talked about, which should also add earnings on that case.

One other item, Nick that, I guess I should mention, in addition to the pressure that lower delivery rates create on GAAP margins, the fact that you have lower revenues in a particular period also puts pressure on the time-based expenses you have within the business.

So, the lower revenues also create pressure and push those margins in a southerly direction.

Thank you very much, Mike.

Okay, Nick.

Next we go Steve Binder with Bear Stearns.

Good morning.

Hey, Steve.

Mike, since you're just following through, do you know on that margin revision of '03, the 8 1/4 to 6 1/2, do you know offhand the swing from pension income -- the Delta with respect to higher retiring expense, do you know what that represented of the 175 basis-point revision?

I can't give you that off the top of my head, Steve, but we've been running under a billion on pension income, we're down heading toward half of that for this year and we're heading toward zero next year.

So, you're not factoring any of the revisions and assumptions and are you assuming a major step-up in contributions, you know, [inaudible] expense in '03, so it is an offset to the FAS number.

We don't see that at this point.

Is there a change in assumptions at all?

As I mentioned before, we're in the process of cranking that sausage right now, so that we have -- we closed out the period with September 30th and we have lots of plans to go through and calculations to take place.

So, by the time we see you all in January we will have those firmly identified.

Is the step-down in cash guidance for '03 reflecting additional pension contributions?

It is not.

That's primarily the biggest driver there, Steve, is prepayments on contracts for Commercial Airplanes and it reflects the fact that our expectations on order rate will result in those cash payments being down.

Okay.

And I have a couple of quick things, the tax rate, if you look at the recurring tax rate Was that in the 25% rate when you back out of special items in the quarter?

Carl is shaking his head yes.

That's about right, Steve.

Okay.

Do you know why it ran lower than the first half?

We had also had another -- we had a recurring settlement as well that positively impacted the results.

And a true-up on FSC.

Okay.

And last thing, if you look at BCG's volume and your assumptions more so for '04, basically a flattish outlook, you know, some of the troubled programs with respect to volume and probably the 6-7, 5-7 and 4-7, are you assuming now in your program rates volumes of one a month in those three programs that timeframe?

Order of magnitude, that's pretty close.

It is?

Okay.

Thanks very much.

Thanks, Steve.

Next we will go to Kai Vamrumar with SG Cowen.

Yes, following up on Steve's question on pension, you mentioned a potential charge of $4 billion.

Is that kind of -- how does that relate to kind of ongoing FAS 87 pension expense?

Kai, that $4 billion is in the other comprehensive income category and as we're all learning a lot about that it has to do with a triggering effect on any one of your particular plans and by the way, we have between 20 and 30 plans that have to get reviewed.

Such that if any one of those is below the certain value you have to -- you have to take as a liability, the entire value of that plan.

And so we -- we do see the potential for big swings in that number and as I tried to indicate in my remarks, the market performance and the interest rate, the discount rate, will have a big impact on that as we go forward.

So, that's definitely reversible should the two perimeters change.

Okay, so, how does that relate to what flows through on FAS 87 on the income statement?

If it is $4 billion, will that impact what the reported number is in '03 because you will have kind of pre-recognized some of that or is that a separate item?

It is a separate item and I apologize on the complex subject for not making that clear.

So, right now we don't project any need to fund in '03 for the -- for our pension situations and we will have to watch and see what happens to these two perimeters as we go forward.

Okay.

Last one, at SNC, kind of a 737 development write-off is kind of a little bit out of the blue.

You've won a number of new programs.

Why should we -- should we feel -- how do you feel about the risk in those programs in terms of kind of any other development issues like the 737?

Or is it all on a cost-plus basis so it is not to worry?

I think for the most part it is cost-plus.

Obviously we are going to worry anytime there are performance issues.

This particular one was driven off of a preliminary design review and then a new estimate at completion.

Obviously, then that, needs to be worked back in an attempt to drive that cost down and that will happen.

But we're trying to look at every single program very aggressively.

At this point, I am comfortable with what I'm seeing on each of those programs, but that always is an issue that deserves a lot of attention.

Okay.

Last one, your pension -- your higher pension income; is that and maybe you answered this, Steve, does that make any assumptions regarding changes in expected returns and discount rate?

Or is that still to be factored in and therefore that could be an additional negative on your GAAP earnings in '03?

No, we have dramatically reduced pension income in '03.

We are order of zero pension income for '03 and that is in the numbers.

Okay, but does that assume a change in your expected rate of -- expected return and your discount rate?

Or is that based on assumptions you've been using?

It reflects current market and changes in that condition.

Okay, thanks.

Next we go to George Shapiro with Salomon Smith Barney.

Yes, good morning.

Good morning, George.

A couple of things, in the pools this quarter, there was very little absorption taken for each of the programs.

I assume that's just reflecting the fact that the deliveries are now going to get stretched out over several more years?

That's correct.

Okay.

So it's not reflecting any weaker performance in the -- in the execution?

No, in fact the performance is better.

It is better, George.

Okay.

And second, you mention it about 75% of next year's deliveries are international.

Of the 25% that's domestic, which is maybe 70 or 75 airplanes, how many of those are going to ILFC and g-cast.

I don't think any of us sitting around the table have that answer, George.

We will have to get to you on terms of where they're going.

Okay.

And then if you looked at the likelihood of further charges at Boeing Capital, if United declares bankruptcy in the next month or so, what's the potential for more charges there?

Well, let's see, we have -- what do we have?

We have 1 point.

At the end of the 2nd quarter 1.3.

Yes, down 100.

But against our collateralized value, we're in good shape there, George.

The issue is where the airplanes end up going in terms of marketplace and demand?

The vast majority of those are triple-sevens.

That's the best airplane in terms of current market price out there.

So, from a collateralized value, we feel pretty good about those.

Okay, and last, Phil, I know you're talking about potentially launching maybe a year from now, a year and a half from now a new aircraft, yet the commercial R&D number keeps going -- keeps going down.

It was only like $170 million in the quarter, which is about the lowest number I can remember in a long, long time.

So, I mean what's going on there?

You're winding down some things or I mean how --

We're completing some development programs and we're being very aggressive in focusing our R&D on where we think it will create value.

We're doing that I think as you would expect given a downturn in revenue.

You better focus where you put your R&D and we're doing that.

Okay.

And last, then, on a satellite you've had delays with the Delta launch, I mean can you update us on where we stand at this point and when we might expect the first launch?

First launch of Delta 4 should be middle of November.

I think importantly, George, we've completed all the first five readiness tests and were dealing with launch pad scheduling.

Including a hot fire, we fired two days ago I think.

Two days ago.

Given that you've been late, is there any risk here that -- that the government shipped some orders to lockheed for their Atlas program?

Not on the late.

If we have a good successful launch in November, we're in good shape.

And obviously that's the reason we've been as careful as we have been.

We want a good, clean launch.

Okay.

And one last one.

Boeing Satellite Systems, you mentioned revenues were down there in the quarter.

I mean what kind of ballpark?

I assume that that business is somewhere around a $400 million business.

We're -- we're -- George, it's bigger than a $400 million business.

Just for commercial?

For commercial satellites annually?

Yeah.

I figured the quarter is about 400 maybe.

I just wondered how much it was down.

Don't have the numbers right here to tell you that, but we can get it for you.

Okay, thanks a lot.

Next we will go Chris McCray with Georgia Bank.

Hi, there.

Given the impact to the finance BCC margins in the 3rd quarter, what might we expect out of that business going forward over the next year or so?

Is there a sense that the margins would rebound after the charges in the quarter significantly?

Or are they going to be somewhere lower than where the trend has been?

Chris, BCC or BCA?

BCC Capital.

The interesting thing about Boeing Capital is as we've -- we've been very careful to be sure that we're addressing what the marketplace looks like, what the assets looks like, and what the loan to value ratios are so that, in fact, we have a pretty good handle on all of that making good sense for us.

The important thing here is that we match manufacturing capacity with demand.

And so that, in fact, even in the downturn, when customers need airplanes because there is demand, which is why we see the demand going down, we do good deals with BCC.

They're in a long-term business, our manufacturing is in a long-term business and over that long haul, these airplanes are going to be used and generate good revenues.

We obviously have a short-term lousy marketplace.

We're doing good deals in the process and matching capacity and demand, which is very important for all of us.

It will be a key factor in how we go forward.

So, in effect, unless you changed the terms materially for new contracts, your existing portfolio should generate a comparable margin where we get into the 4th quarter and going forward, any changes?

I think that's a fair statement.

And by that I mean comparable to where we were pre the charge in the 60s.

Yes.

Fair enough.

To ask the question about U.S. exposure differently, do you know what the off-hand exposure might be to the total U.S. majors marketplace for the '03 in the delivery mix?

Chris, this is Paul.

About 2/3 of that customer base is related to the North American markets, U.S.

And Canada.

So, I think that's a fair picture to kind of -- that was as of the end of the 2nd quarter, I don't think it's changed dramatically.

I think I heard that 3/4 of the backlog is international, so that would be a quarter in the U.S.

Market and I wonder, I guess, of that market, of that quarter, are we talking majority leasing versus U.S. majors direct?

It's going to be a mix of customers, primarily driven by -- let's talk about the types of airplanes they have, but obviously we have continuing deliveries that they finance and then there will be a variety of opportunities that they we will pursue.

Okay.

And lastly, just on the 737s and SNC, can you assess any risk in the Turkey contract given their established track record now of pushing for tech transfer that scuttled some deals.

I think there's always risk.

We think it is manageable at this point and we think it will go ahead.

Okay.

Super.

Thanks.

We'll go next to Joe Naidell with JP Morgan.

Good morning.

Good morning.

I'd like to dig into the 1 3/4 point differential in the '03 margin just a little bit more.

I'm coming up a change in your pension assumption counting for half a point.

So, of the remaining 1 1/4, is it fair to say that the majority of that comes from changes in your commercial program assumptions and the majority comes from essency?

That's a good assumption.

That's pretty good, Joe.

And on the $4 billion change in the balance sheet, do you anticipate any ratings agency impact?

Well, we have planned conversations with the rating agencies next week to make sure we'll review all of that.

But I think if we look at the cash position we have and the earnings outlook, we think we've got a very good financial outlook in this difficult marketplace.

Okay.

On -- on the Tanker, I guess very quickly, I guess this is the quarter where maybe this comes together for you.

If it goes through as currently construed, what would be the cash profile of this program?

Do you anticipate that you will have to fund this up front?

Or any kind of guidance on that?

Yes, it is refunded up front.

It is a lease program that is shared process.

So, we're not funding the whole thing.

Okay.

In your '03 cash guidance, I guess is that a part of it?

Yes, we've included that in there, joe.

And finally, on your longer term commercial guidance for '04, what is your underlying assumption for the global economy, for Iraq, for traffic?

Traffic is, I'm going to say relatively slow to recover.

We are assuming that -- and I'm not going to say whether it is specifically Iraq, but we're being, I'm going to say less optimistic on the international side than sort of current performance, which would reflect other disruptive impacts for the economy.

Relatively slow recovery so we -- we think we're being on the conservative side in trying to look forward.

We are not assuming any quick rebounds in traffic or the economy.

Okay.

Finally, just on that note, do you anticipate a difference in that 75/25 mix in '04?

Or -- I know it's early to tell, but...

No, my guess would be that it would not be different '04 given the fact that of the world situation, the U.S.

Airlines are in the worst condition and Asian airlines are in the best condition with Europe in between.

That's liable to lead to those numbers being very similar to that in '04.

Thank you very much.

We will go next to John Rogers with DA Davidson.

Good morning.

One follow-up question, on the commercial margins that you referred to coming down a point in the quarter, I think you indicated earlier a big part of that was a slowdown in the spares side of the business, but are you seeing any changes or making any changes in your assumptions for pricing?

For Commercial Aircraft.

No.

I think we've got -- got pretty good history, as you know.

We have said that we will be aggressive but we won't be stupid.

We won't take bad deals.

I think the events of the first part of this week bear that out.

We think we've got good margin basically in the kind of pricing that we've got.

We don't see it improving dramatically.

Okay.

Great.

Thank you.

Let's take two more questions.

Next we will go to Sam Pearlstein with Wachovia Securities.

Good morning.

With all the controversy surrounding the sales corps and the tax cut, what are your tax assumptions for the effective rate in the '03 in the guidance?

We're making the assumption that from an [inaudible] standpoint that goes forward, there is considerable work going on to try to figure out how do we do that?

You know, at the most fundamental level, we've got a direct tax refund in Europe because it is a value-added tax and therefore qualifies.

An indirect tax in the U.S., which therefore does not qualify.

And so I think there's intense effort to find a solution that, in fact, is WTO compliant, but still recognizes the value of exports.

And, Sam, outside of working to get -- work through this fisk and the ETI, there is modest pressure on the tax existing rate but in the future will be kind of where we are.

Okay.

And then can you just -- if I'm looking at the backlog, sequential changes, I'm kind of surprised to see that the Commercial Airplane group backlog increased since June given the weak orders and is there any other moving pieces in there that drive that?

Slower deliveries primarily.

Yeah, low delivery rate is the biggest item in there and, of course, we don't put numbers into backlog until firm contracts are assigned.

And all outs are relieved.

And without knowing the specific details there may be a little bit of that in there, as well.

Okay.

And -- and clearly with what's going on with deliveries and so far what we've seen in terms of the portfolio growth at BCC, what are your assumptions kind of in '02 and '03 about how much 245s going to grow.

In the past we talked about $300 billion a year and now it's under that clearly.

It looks less at BCC Joe -- excuse me, Sam, that we will have a modest decline and as I tried to make in my prepared remarks, it's going to be pretty consistent with the commercial deliveries because as you know, somewhere between 75, 76% of that portfolio will be our aviation products.

So, you're saying that the actual portfolio could shrink from the end of this year through the end of next year?

No, as we continue to -- to produce and deliver airplanes, BCC will get its share as it has in the past.

So, I think about the same ratio is a good thing for us to look at here.

Okay.

And then last question is the customer advances in the quarter, I would assume with the commercial orders declining that that also would have put pressure.

So, is there anything that caused a significant increase in advances during the quarter?

No.

Okay.

And then the last question is on the gross inventory number where we saw an increase in there.

Can you talk about what your unsold planes looked like at the end of the quarter given the low delivery rate you weren't producing at those levels.

The unsold delivery rate.

Do you have finished plans that weren't delivered?

It seems like your production rates were running much higher...

I think right now we have 11 of which half are now sold.

They are dominantly Boeing business jets and we expect those to all deliver.

Okay.

Thank you very much.

One last question.

We will take today's final analyst question from Robert Toomey with RBC Dain rauscher.

Yes, good morning.

I -- I don't want to bring up kind of a tough subject, but the Easy Jet order, I wondered if you're feeling as it relates to pricing in the industry, do you feel that it implies some lower margins long-term in the commercial business?

And secondly, can you comment on what you think the underlying growth of the space and communications business is in total?

No, I do not believe the Easy Jet reflects a decreased long-term pricing environment.

I think it was relatively unique.

It was a very -- it was a large order and one where our dominant position in low cost carriers I think caused our competitor to work aggressively to try to -- try to win that.

I think it's a tough pricing environment, but no, I don't see it getting worse.

You know, we clearly are working on our efficiency to make sure that we can maintain and improve margins.

Your second question, long-term growth in the commercial space market, was that correct?

Well, total Space and Communications, you've been indicating previously that you felt that that business could grow, you know, close to -- double dig or close to that.

Do you still feel in total that those businesses can grow at that kind of a rate?

Absolutely.

Just to give more clarity each it, I do not see growth -- significant growth rates in the space and launch side.

I think that will be relatively modest growth.

I think in the integrated battle space area, the networking area and the missile defense area, we're going to see substantial growth and overall that portion of the business should be double-digit growth.

Great, thanks very much.

Thank you very much and we appreciate your time and energy.

This completes the analyst portion of today's conference call.

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

Go ahead, ma'am. [ there will be a brief pause in realtime captioning ].

You're getting to the end of the first round, the 30,000.

Right.

And that will be what, by the end of the year?

About the end of the year.

When you say small changes are you talking -- could you -- any percentage or --

No.

You know, there will always be we small adjustments on production rate.

You may see an airplane go down a little bit, but those will be adjustments trying to match the market.

Okay.

Thank you.

Next web a question from Melissa Allison with the Chicago Tribune.

Hi there.

My question is very similar, about layoffs, do you, over the next couple of years, anticipate more layoffs than the 30,000 you've announced?

There have been a couple of stories lately insinuating that?

I don't see big numbers, but I do see the fact that we will go down some additional amount in total head count.

How much of that is natural attrition and how much is layoff, zillion. -- I don't know.

But I don't see the workforce growing in the next couple of years.

Thank you.

We will go next to Glen with the "Wall Street Journal".

Good morning.

Good morning, Lynn.

Got a couple of questions.

One is looking at your numbers and that shows the commercial is about 55% of your -- of your revenue now, which is way down from what it used to be and, you know, a lot of that is because of your diversed portfolio.

Do you have any goal or projection of what that ultimate number will be as -- as this kind of wears on?

No, not really, because the strategic direction was to build a strong broad-based aerospace portfolio, recognizing that the commercial business inherently was cyclic and would be going up and down and therefore to have a broader base of revenue was in the best interest of the company and our shareholders.

That decision was made in 1996, not anticipating the scale of what we're looking at right now.

But I'm delighted that we did what we did.

Now, given that statement, the fact that commercial is and will be cyclic, then it will change its percentage of the total as the cycle varies and at the bottom, I would expect they will be below 50% and they will be next year.

At higher production rates, they may very well be well north of 50%.

But it gives us much better balance.

Okay.

One other question, with the -- with Boeing Capital and -- and you said that it -- it is a percentage of loans, how -- how is the -- the pressure on -- on that as far as the whole idea of, you know, becoming lender of last resort that it is better to finance the plane to a questionable customer than to essentially have it sit around unsold?

I think the most fundamental is that we have tried to look at the total commercial aviation marketplace because one, these are in fact mobile assets.

And they can be redeployed if you are, in fact, holding a portfolio that is in line with overall demand.

That means you're going to want to make sure you're financing aircraft that have good resale value.

We mentioned earlier the fact that we have a significant amount of aircraft at United Airlines but they are dominated by triple-sevens that have a good, broad international market and therefore the collateral value of that asset remains good, even if something happens at united.

That's the way we try to run that -- that business.

You're looking at the value of the asset, its ability to be placed other places and so you may, in fact, be a lender of last resort to a particular airline but you're doing it on good, solid economic terms.

And I think also, Phil, and Lynn, matching long-term need for product and capacity is a real key metric here, so, over the long haul, we're all in this more the long haul and all know what the long-term outlook for growth looks like in this industry and making sure that those assets are matched gives us the confidence of short-term deals and as Phil said, their mobility allows to us put them with companies that are going to fly them for revenue.

Next we go to Kathy with Reuters.

Hi, how are you?

Good.

I enjoyed your video at Wings Club.

Thank you.

Clever.

I wanted to ask more about the UAL, the [inaudible], how many more triple-sevens are you talking about?

And would you expect to realize the full value of those planes then, remarketing them?

It -- as the -- as Mike said earlier, what you really look at is the loan to value ratio.

And you don't land that at full value so you're always checking the -- the market value of the asset against the loan value and -- and when those are not in line is when you take action like we did on some of the older aircraft in the portfolio.

So, I'm -- I'm extremely comfortable with the loan to value ratio there -- ratio there.

I don't remember the number off the top of my head, do you?

I don't think we disclosed the exact number of the triple-sevens, but of the billion two that remains in exposure of bcc, it is a substantial portion of that dollar amount.

Yeah.

And what happens in the eye and I'd like your [inaudible] on this in general, what it someone goes into bankruptcy, what does it mean for American and Delta and then for you guys?

Remember, the most fundamental issue, bankruptcy have a real financial event.

It is not something you do because you think you might want to do it.

I think there clearly has been a worry expressed that if, in fact, a bankruptcy event results in lowering of costs, that it then puts pressure on others in the marketplace.

I think that -- that worry continues to remain.

But how that will exactly play out, I don't know.

So, you haven't built in multiple bankruptcies?

No, I mean what we have built in is a view of the basic traffic levels and what they will be.

And we've been fairly conservative in that -- in that view of how fast this market will recover.

I think we've been conservative and pretty darn close to accurate over the last 13 months.

What that means is that if an airline were to go to bankruptcy, normally they continue to operate, even in bankruptcy.

Should an airline stop operating, that load will be picked up by somebody else.

Those seats are still required and it means the assets move.

But they don't become idle.

Okay.

So -- so you're not overly concerned then it sounds like, to me, about multiple bankruptcies?

No, I think that that is a financial action which is not going to change the basic demand for travel.

Okay.

Thanks.

Next we go to Peter Pay with the Los Angeles times.

Good morning.

Good morning, Peter.

Two questions for you.

Do you have any idea how much revenues dropped at boeing satellite systems?

And do you anticipate further restructuring there?

Let's see, further restructuring?

I'm not quite sure what that means --

Further job cuts, for instance.

Pardon me?

Further job cuts, [inaudible].

Oh, further job cuts, I'm sorry.

Let's see, we began the year, I believe at around 8,000 employees and expect to be down 20% by the end of the year.

Uh-huh.

And obviously our employee head count will move with the marketplace and demand.

So, if, in fact, that market continues to decline, there -- we'll need to address how many folks we have and how many folks we need.

Uh-huh.

And what kind of revenue drop do you see in the quarter?

Revenue drop in the quarter?

I can't tell you.

But we're looking at a couple hundred million dollars here in the next year.

So, it is kind of our forecast as the demand for launching satellites declines.

Right.

Second question is related to the 717.

I noticed deliveries dropped by close to 2/3 for the quarter.

What are the prospects for the 717?

Can they continue at that low production rate?

We actually are down to a stable albeit low production rate.

We do see that market holding.

The operators of the airplane are delighted with it.

And making money.

And making money.

Which is unique the airline industry.

So, we're relatively positive about the airplane.

Great. [ the remainder of this call will be tribed offline ]