波音 (BA) 2002 Q4 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to the Boeing Company's fourth quarter results conference call.

Today's call is being recorded.

The management discussion and slide presentation, plus the analysts and media and question and answer sessions are being broadcast live over the Internet.

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

Mr. Kinscherff, please go ahead.

Thank you, Tony.

Welcome to the Boeing Company fourth quarter and full-year 2002 earnings conference call.

I'm Paul Kinscherff, Vice President, Investor Relations.

We are pleased to review our quarterly and annual earnings and outlook with you today.

You can follow our company broadcast at our Web site, www.boeing.com.

If for any reason you are 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 Executive Vice President and CFO.

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

Before we start, as usual, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks and uncertainties.

The assumptions behind our projections and the factors that could cause actual results to vary are detailed in the news release we issued early this morning and in our various filings with the Securities and Exchange Commission, and in the forward-looking statements at the end of this Web presentation.

I urge to you read them thoroughly.

We have extensive prepared comments this morning, so at this point, I would like to turn the meeting over to Phil.

Thank you, Paul.

Good morning.

I'll begin by giving an overview of our results for '02 and our perspective on the business.

Mike will provide the financial details for the quarter and the year, and our updated outlook.

Then we will be glad to take your questions.

Let me start with slide two.

Financial results for '02 reflect good overall operating performance, given the different and sometimes difficult market conditions of our core businesses.

Our balanced portfolio of businesses continues to perform in an operating and economic environment that is both dynamic and challenging.

In '02, we had downturns in all our commercial segments, from airplanes to satellites to launches.

But we also had significant growth and strength in our defense businesses.

Our team continues to keep a tight focus on running healthy core businesses.

And they did a great job last year, which puts us in a great position for the future.

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

Revenues in '02 were $54 billion, down 7 percent from the $58.2 billion in '01.

This primarily reflects the expected revenue decrease in our commercial airplane market, partially offset by growth in integrated defense.

Reported net income was 2.3 billion, or $2.87 per share, down 16 percent over '01, reflecting the revenue drop increased stock-based compensation expense and decreased pension income.

Nonrecurring items for the year had modest impact, as described in our earnings release.

Cash flow was robust -- $3.4 billion, 25 percent higher than '01.

Total backlog increased $5 billion to $139 billion in '02 compared with the $134 billion in '01.

This reflects strong market growth in our integrated defense businesses.

Now let's review our portfolio of businesses and start with commercial airplanes on slide 4.

A year ago, our guidance reflected reduced revenue in this core unit because of fewer deliveries.

We also said that commercial would manage profitably during this downturn, and they have.

They delivered 381 airplanes, dramatically reduced employment, streamlined assets, implemented lean processes, and turned in excellent margin performance.

In 2002, they won 251 gross orders, including key wins at leading low-cost airlines Lyonair (ph) and Virgin Blue. (inaudible) also retained their focus on the future and continued to invest for the long-term.

They rolled out the extended-range version of the 777-300 and delivered the first 747-400ER.

After working together with our airline customers, they also announced plans to focus development on a new, super-efficient midsized airplane.

Commercial continues to focus on running a healthy core business.

They are dramatically leaner and very well prepared for market recovery.

Now let's go to Integrated Defense Systems, starting with slide 5.

We'll look at the two segments that formed IDS when we merged it midyear.

First, military aircraft and missile systems.

This portion of IDS turned in another outstanding year in '02.

They had strong top line growth, double-digit margins, and a 20 percent increase in contractual backlog.

This secured important new business, with orders for 60 C-17s and 40 F-15s for South Korea, and had significant wins for the initial development of an EA-18 and the Italian 767 tanker transport.

The unit also moved forward on the U.S.

Air Force's 767 tanker program to meet an important national need.

Working together with Boeing Capital they defined innovative financial package that creates value for U.S. taxpayers and value for Boeing.

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

Now let's look at our other IDS business, space and communications, on slide 6.

In '02 the majority of this unit continued to perform well, particularly in the integrated battle space, missile defense, and proprietary programs, all of them expanding markets.

They also achieved a significant milestone with a successful first launch of the Delta IV rocket.

This unit emerged last year as a leading industry partner in the U.S. military's transformation with three key wins -- Future Combat Systems, the Joint Tactical Radio System, and Fab-T (ph).

They also successfully executed the first major Homeland Security contract for airport baggage screening and met a very aggressive year-end deadline.

Commercial space markets, however, remain extremely difficult, and this unfavorably impact '02 results.

This unit is vigorously addressing commercial satellite performance issues and resizing our commercial space business to a new market reality.

Before I leave IDS, I want to remind you that, starting next quarter, we'll be enhancing how we report IDS, and Mike will talk a little bit more about that later.

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

Last year, Boeing Capital Corporation's revenues grew almost 22 percent, reflecting significant portfolio growth.

They're operating at a challenging aircraft financing environment which impacted their operating results for the year.

Going forward, we expect DCC's growth to moderate with commercial aircraft deliveries.

They will maintain an appropriately conservative approach to financing in these market conditions.

Connection by Boeing made great progress in '02.

They started revenue service on government aircraft, signed up new airline customers, and just two weeks ago began a very well received demonstration on transatlantic Lufthansa flights.

Air traffic management continues to refine its concepts for a global air traffic management system and to build support in the U.S. and around the rest of the world.

Now let me close with my perspective on slide 8.

As we go forward, we will continue to operate in a dynamic environment.

On the commercial side of our business, the slow recovery of air travel, and airline profitability, particularly for the U.S. full service carriers, continues to dampen demand for new airplanes and related support.

European full service airlines are in a little better shape, while Asian carriers are clearly the strongest.

Most low-cost carriers are healthier than their full-service counterparts.

Our airplane production has closely matched the global demand.

We think '04 is going to look a lot like '03, and then we expect to see production recover.

Now let me turn to our -- to the military side of our business, which has grown steadily over the last several years.

We expect it will continue growing during the guidance period.

In particular, our defense, intelligence, and noncommercial space markets will remain very strong.

We believe we are very well positioned in these markets as a leading provider of existing capabilities and emerging network-centric systems.

As a result of these different market environments we expect Integrated Defense Systems revenue to be greater than 50 percent of Boeing's revenues for at least the next several years.

Most importantly, we expect higher revenue, earning, and cash in '04 than in '03, as IDS growth and good overall operating performance offset increased pension expense.

Mike will provide you details of that guidance.

So, as we go forward, we will continue to drive for profitability by delivering strong operating performance and running healthy core businesses by managing the company with the highest standards of corporate governance and ethics and by continuously positioning ourselves to deliver long-term shareholder value.

Now Mike will give you the financial results - Mike.

Thank you, Phil, and good morning, everyone.

I'll start today with some comments on slide 10, and then move into the numbers.

As Phil noted, our financial results for 2002 reflect good overall operating performance and market conditions of our businesses.

During 2002, we delivered on our revenue guidance, as growth in our integrated defense systems and finance businesses partially offset the impact of delivering 146 fewer commercial airplanes than in 2001.

Our 2002 earnings results reflect strong performance across our businesses, offset by the downturn in commercial deliveries and modestly lower pension income.

Higher production costs at commercial satellites, as well as non-cash charges at Boeing Capital, also impact the results for the year.

Our cash flow was at the top end of our expectations, highlighting our overall operating and financial strength.

And as usual, I'll discuss the results for the quarter and the year, and then take you through the financial outlook.

Now to the fourth quarter financial results on slide 11.

Revenues for the period were $13.7 billion, down 13 percent from the fourth quarter of last year.

Operating earnings were just above $1 billion compared with $245 million for the same period in '01.

Our '01 results included $935 million of nonrecurring charges related to September 11th.

Reported operating margins were 7.6 percent compared to 1.6 percent last year.

When you exclude nonrecurring items, adjusted operating margins for the fourth quarter were 7.3 percent, down slightly from 7.5 percent in 2001.

The company earned 73 cents per diluted share in the fourth quarter compared with 12 cents in 2001.

Earnings per share, excluding nonrecurring items, were 71 cents per share in the fourth quarter 2002 and 90 cents per share the previous year.

The quarter over quarter change in earnings, excluding nonrecurring items, was due primarily to lower commercial airplane volume, contract termination of Boeing Satellite Systems, and market-driven non-cash charges at Boeing Capital.

Turning to slide 12, you can see our results for full year 2002.

Revenues declined 7 percent to $54 billion consistent with our guidance and reflecting market conditions.

Operating earnings for the 2002 were just under $3.9 billion, about the same as in 2001, including the September 11th-related charges I mentioned before.

Excluding nonrecurring charges, operating margins were 7.2 percent, down from 8.4 percent in 2001.

Net earnings for 2002 totaled $2.3 billion or $2.87 per share.

This includes a 3 cent favorable impact for nonrecurring items but is before the $1.8 billion non-cash charge related to the change in goodwill accounting we adopted in the first quarter.

Including this charge, the company earned 61 cents per share in 2002.

Nonrecurring items and the change in accounting are detailed in our press release.

Moving to slide 13, you can see that Boeing generated $3.4 billion of free cash flow during the year and $1.2 billion in the fourth quarter.

During the fourth quarter, we reclassified $360 million invested in financing instruments.

Reclassification was from operating cash flow to investments.

This cumulatively updates and corrects operating cash flow for 2002.

It does not impact cash balances.

Our free cash flow was reduced by $340 million of pension contributions and $949 million of capital as we invested in our people and in our infrastructure.

You can see that we used some of our cash to support Boeing Capital growth, repay debt, and pay dividends.

This marks the 61st consecutive year that Boeing has provided dividend returns to our shareholders.

Going forward, we will carefully deploy our strong cash flow to meet obligations, provide current returns to shareholders, and invest for long-term competitiveness.

Slide 14 shows our balance sheet and credit ratings, which reflect our fundamental financial strength.

We ended the year with a cash balance of $2.3 billion compared to $633 million at the end of the '01.

Boeing Capital debt increased $2.1 billion to $9.4 billion.

Boeing Capital's debt to equity ratio at year-end was a conservative 5.7/1.

Debt of the Boeing Company was unchanged at $4.4 billion.

In the fourth quarter, we reduced equity by $3.6 billion to reflect the market-driven changes to the value of our pension assets and liabilities using a September 30th measurement date.

This is consistent with the estimate we provided you last October.

This non-cash charge did not impact reported earnings and may be reversed if either interest rates increase or plan returns improve.

As I mentioned before, we reduced equity by $1.8 billion when we adopted the new accounting standard for goodwill.

Financial strength and solid credit ratings remain a priority for Boeing.

Now let's turn to our core businesses, starting with commercial airplanes on slide 15.

Revenues for the quarter were $6.4 billion, down from $9.3 billion last year due to fewer deliveries and lower spares volume.

Throughout 2002, revenues declined to $28 billion on deliveries of 381 airplanes compared with 527 in 2001.

Excluding nonrecurring items, fourth quarter margins on a unit cost basis were 8.3 percent, down from 9.5 percent a year ago.

For the year, despite a 19 percent reduction in revenue, operating margins were 10 percent, virtually the same as in 2001.

On a program accounting basis, 2002 adjusted operating margins were 7.1 percent compared with 8 percent last year.

This reflects lower deliveries in 2002 and the lower intermediate term delivery outlook.

Commercial airplanes again performed very well despite the unprecedented downturn in its markets.

The leadership team is focused on continuing to improve profitability by reducing costs while prudently investing for the future.

As you can see on slide 16, military aircraft and missile systems had another outstanding quarter and year.

Revenues in the fourth quarter and for the full year rose 10 percent and 12 percent respectively.

This is primarily due to additional aircraft and JDM (ph) deliveries, as well as continued growth in aerospace support.

Operating earnings, excluding nonrecurring items, rose to $389 million for the quarter and $1.7 billion for the year.

Excluding some nonrecurring gain, margins were a healthy 10.3 percent for the quarter, now 11.2 percent for the year.

Margins in the fourth quarter reflect our ongoing investment in the 767 tanker program.

Military aircraft and missile systems is on track for continued strong profitability across all of its programs.

Now let's turn to space and communications on slide 17.

In 2002, the majority of space and communications businesses posted strong results, comparable to those achieved in 2001.

But S&C's financial results reflect the market and program challenges Phil mentioned.

Revenues in 2002 increased to nearly $11 billion, driven by continued growth in missile defense, integrated battle space, and Homeland Security.

This is partially offset by lower volume in commercial satellites and launches.

Operating earnings and margins for 2002, excluding a nonrecurring item in the third quarter, were $457 million and 4.2 percent respectively.

Fourth quarter operating margins were 5.3 percent. (inaudible) results were unfavorably impact by the termination of commercial satellite contracts and fewer Delta launches.

The commercial satellite business also experienced cost growth.

However, this was offset by favorable contract settlements.

Space and communications continues to focus aggressively on improving processes and sizing its commercial satellite and launch businesses to market realities.

The majority of space and communications businesses are positioned for continued growth and profitability.

Turning to slide 18, I would like to share with you several improvements to our segment reporting that we'll implement starting next quarter.

First, we'll enhance transparency by reporting consolidated Integrated Defense System results and the results of our four new IDS reporting segments.

Second, we'll begin reporting operating earnings for the commercial airplanes on a program accounting basis and provide reconciling information to unit cost results on our Web site.

This will increase the visibility of commercial airplanes contribution to consolidated earnings and retain visibility of the unit cost results.

It will also enhance consistency in reporting across our businesses.

Third, we'll report Boeing Capital operating earnings net of interest costs to provide a clear matching of revenues and expenses.

To help you understand this transition, we'll provide pro forma 2002 statements with these changes over the next few months.

Now turning to chart 19, I'll discuss our pension outlook.

Over the next two years, pension income is expected to turn into pension expense.

We currently estimate pension income will provide $75 million of earnings from operations in 2003.

For 2004, our current estimate is that pension expense will reduce earnings from operations by approximately $200 million to $300 million.

During the guidance period, pension plans related to commercial airplanes drive most of the pension expense.

As a result, only a small amount of pension expense for Boeing would qualify for government reimbursement.

Our pension outlook reflects updated assumptions for the current planned year.

Expected rate of return has been lowered to 9 percent from 9.25 percent.

The discount rate has been adjusted to 6 1/2 percent from 7 percent.

For enhanced transparency, we have posted additional pension-related information on our investor relations Web site.

Now let's turn to our financial outlook on slide 20.

Today we are updating our guidance for 2003 and providing a first look at 2004.

Broadly speaking, the lower revenue and earnings outlook for 2003 compared with 2002 is driven by 100 fewer commercial airplane deliveries, partially offset by growth in Integrated Defense Systems and a significant drop in 2003 pension income I discussed before.

In 2004, we expect revenues to grow as a result of strength in our defense and government space businesses and a comparatively stable commercial delivery outlook.

This growth in revenues supports profitability increases that offset higher pension expense.

As a result, our current assessment is that financial performance in 2004 will be better than that in 2003.

Before wrapping up with the consolidated outlook, I'll make a few comments about the outlook for our larger businesses, starting with commercial airplanes.

The commercial airplanes delivery forecast for 2003 has been revised from a range of 275 to 285 airplanes to approximately 280 airplanes.

It is virtually sold out.

Deliveries in 2004 are expected to be similar to 2003, with an additional estimate of 275 to 300 airplanes.

Approximately 80 percent of the 2004 delivery forecast is sold at the lower end of the range.

Commercial airplanes estimates that about three quarters of its deliveries during the guidance period are for non-domestic customers, and that deliveries in the second and fourth quarters of 2003 will be higher than in the first and third.

Given this deliveries outlook, commercial airplanes revenues in 2003 are expected to be approximately $22 billion.

Revenues in 2004 are expected to be similar, although they will depend on the actual quantity and model types of airplanes delivered.

Commercial airplane margins in 2003 on a program accounting basis are expected to range from 4.5 percent to 5.5 percent.

In 2004, program accounting margins are expected to be at least as good as those achieved in 2003.

Commercial market conditions are impacting Boeing Capital's outlook as well.

Boeing Capital revenue guidance for 2003 ranges from $1.2 billion to $1.3 billion, with similar increases in 2004.

The portfolio is expected to grow by about $2 billion plus each year.

Boeing Capital's annual return on assets is expected to be approximately 1 percent.

This reflects both the lower delivery outlook and astringent focus on structuring transactions appropriate for current market conditions.

Integrated Defense Systems revenues for 2003 are expected to range from $26 billion to $27 billion and then increase by 10 percent or more in 2004.

This guidance is driven by continued growth in our integrated battle space, missile defense, and aerospace support markets.

Aircraft and weapons programs are anticipated to grow modestly, while satellite and launch markets are expected to remain difficult during the outlook period.

Integrated Defense Systems margins are forecast to be in the 8 percent to 9 percent range in 2003.

Margins are expected to continue improving in 2004, but remain in the high single digit range.

Putting it all together, Boeing's revenue guidance for 2003 is being revised to plus or minus $49 billion, down from plus or minus $50 billion.

This reduction primarily reflects a few less commercial deliveries and lower used airplane volumes.

For 2004, our revenue guidance is in the range of $52 billion to $54 billion.

Important drivers will be the rate of growth on key defense programs and the number and type of commercial airplanes we deliver.

Our earnings per share guidance for 2003 is $1.90 to $2.10 per share.

It is driven by lower commercial airplane deliveries, slower growth at Boeing Capital, a more conservative outlook for commercial space, and reduced pension income.

For 2004, our guidance is $2.10 to $2.30 per share.

Growth in Integrated Defense Systems offsets an estimated unfavorable 15 cents to 25 cents per share impact for pension expense.

Our free cash flow guidance for 2003 is unchanged at $2 billion to $2.5 billion.

The amount of cash the company may be required to contribute to its pension plans in 2003 is expected to be quite modest.

We will, however, evaluate making discretionary contributions during the year.

For 2004, the free cash flow outlook is greater than $2.5 billion.

This includes a required pension funding obligation of about $1 billion, which would reduce free cash flow $600 million to $700 million after tax.

The amount we actually fund in 2003 and 2004 will depend on cash flows and financial market conditions.

In closing, Boeing faces challenges and attractive opportunities.

We expect our balanced portfolio of businesses will perform well and generate substantial cash in the near term.

With that, Phil, back to you and our questions.

OK.

We're ready for questions.

Thank you, sir.

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

If you would like to signal to ask a question, we do ask that you please press the star key, followed by the digit one on your touch-tone telephone.

Once again, that is star one to signal to ask a question.

If you do find that your question has been answer and would like to remove yourself from the queue, please do so by pressing the pound key.

Again, that is star one to signal and pound to remove yourself.

Due to time constraints today, we do ask that you please limit yourself to one question.

We would also like to remind everyone that, if you are using a speakerphone, we do ask that you please disengage your mute function to ensure that your signal will reach our equipment.

Once again, that is star one to signal and pound to remove yourself.

We'll pause just a moment.

We go first to Cai Von Rumohr with SG Cowen.

Yes, thank you.

Your deferred tooling and deferred production and tooling for the 777 increased in the fourth quarter.

Could you tell us, did you increase the size of the 777 block, or change any of the block sizes, and were there any changes in accrual rates within the blocks on any of your commercial programs?

KAI, we have not made any block change sizes.

And as is normally our process when the group closes the books, they evaluate the earnings rate on each of the programs individually and make those -- make those closing as appropriate.

So why did the tooling and deferred production go up on the 777?

I do not have a good answer for you on that of and I'll ask that Paul follow-up with you on that after the call.

OK.

I'll get with you, Cai.

Thank you.

We go next to Sam Pearlstein with Wachovia Securities.

I think it's -- following up on that, in terms of the GAAP margins of 7 percent in the quarter, wondering if you can talk about why that's going to shift down by several hundred basis points into '03 if the production rates, I would think, would have been at similar rates in the fourth quarter as what we're going to see going to '03?

Yeah, in fact, Sammy, you're exactly on point in terms of what's happening.

As the production rate declines and the block extends over time, the amount of, I'll use the term fixed expense that ends up in those blocks, in fact, has increased.

And so, every quarter as we look out -- as we finish one quarter and look to the next, the impact of those lower production rates is reflected in the program accounting margins are provided.

OK.

And can I just follow up with that in terms of, as those production rates come down, why are we not seeing the gross inventories decline as well?

I would think that that's when we should start to see inventories generating cap (ph) cash.

Gross inventories are -- in fact, should generate cash as we build fewer products.

That is an absolute fact.

Paul, Cai, Paul thinks he has your answer right handy here.

Hey, Cai, so the answer is -- on the 777, the unamortized tooling balance increased as tooling expenditures on the 777-300ER for the quarter were basically higher than the tooling amortization for the program.

The amortization itself was low due to the low number of 777 deliveries in the fourth quarter, where there were only six deliveries, but going forward we expect the tooling balances to decrease quarter over quarter.

We'll take our next question from Steve Binder with Bear Stearns.

Yes, Mike, can you maybe just touch on the reclass in cash flow?

What is -- based on the reclass that you've made going back for three years now that you put in the release, what does it all mean for '03 and '04?

Does that actually boost the cash flows by a couple hundred million dollars in '03 and '04 just by reclassing?

Steve, is it doesn't.

It's a reclassification of some investments that we had had in the cost of goods sold.

And so we're now providing some additional clarity and better alignment with the literature on the accounting side.

But there is no impact in terms of overall free cash flow.

Right.

But it's going into investing activities, and your definition of cash flow is cash flow from operating activities plus cap ex, so that's why it helped out '02 and helped out '01 and '00.

I'm just wondering, what does that mean for '03 and '04 for your definition of free cash flow?

It won't have any impact on our definition of free cash flow.

OK.

Can I just touch on one other question on the commercial side?

Sure.

The delivery revision for '04, where you've taken it up to a range of 275 to 300, another 15 planes on the high end, is that mainly what you're seeing in the marketplace is the strength in the 37 line, and are you assuming potentially you'll go up to 17 a month from 14 a month on the 37 line?

One, yes, it does reflect market conditions, and your assumption is quite accurate.

Yeah, OK.

Thank you.

Once again, that is star one to signal.

We go next to Heidi Wood with Morgan Stanley.

Good morning.

The commercial margins that you reported on a pre-R&D level were actually pretty impressive, but can you talk about, given the likely launch of this midsized aircraft, where R&D is going to be heading for commercial?

Is it going to exceed $1 billion in 2003?

2003 will not see a big change because the front end of a program, you don't see big impacts on R&D.

Up slightly in '04, and then you get -- assuming the program goes ahead, then you begin to pick it up in '05, '06.

OK.

And space continues to be a disappointment.

Can you walk us through the steps that you're taking to control this in the 2003 period?

First, let me say -- I want to put one more word in your statement.

Commercial space continues to be a disappointment.

Overall, space is a pretty good business when you include the defense side.

So, what are we going to do about it?

We're going to make changes within that unit.

We're going to resize it.

We're going to get capital -- or assets out of that business.

Our intention is to drive it so it will be significantly profitable.

But we're going to be pretty aggressive about that over the next few months.

I mean, so your comment is quite right because a lot of other defense space businesses that you've got are -- some of them are running in the double digit margins, which suggests that the commercial space has been hemorrhaging considerably.

Do you think that the steps you can take can stop that?

And when do you think that's going to stop?

First half of the year or ...

Yes, I think we can get it to stop.

One of the things that we've done is we think we now have a good reliable process on estimates of completion.

So I think we've captured where we are.

Now the issue is to make it better, and I think that that's going to be really focused over the first six months and then also through the rest of the year.

Great.

And can you give us, Phil, your outlook for dollar and unit bookings for the 2003 in commercial, and what were they, Mike in (inaudible) orders for commercial?

You're talking about additions to backlog, Heidi?

Well, I mean, it looks like you might have had a net order of about $20 billion, $21 billion in 2002.

Is that right?

Yes, I think we've got net backlog here.

I mean, if I take ending backlog 2001 versus what you did in 2002 minus the sales, I get kind of an implied order of about 21 billion.

Yeah, that's about right.

All right.

So where do you think that goes, both in terms of dollars as well as in units in 2003?

You know, one, it's really hard, because of timing issues, to say where it will go.

Our best guess is that '03 looks a lot like '02 did from an order standpoint, which is reflected in the fact that our guidance in '04 deliveries would reflect about the same kind of rate, and then begin to pick up order rate in '04.

But '02 included a lot of orders from some low cost carriers.

Do you see similar type demand environment from low cost carriers this year, as well as last year?

Yes.

And I think there's some other areas.

You know, I think China is a possibility in '03.

So what you see there is sort of all of the pluses and minuses added up that says we think the order rate sort of sustains the current level of production and then begins to pick up orders in '04 and deliveries in '05.

OK.

Thank you very much.

We take our next question from Joe Nadol with JP Morgan.

Good morning.

I guess my question is, to what degree, Phil, does your guidance in commercial aircraft take into account the increasing likelihood of a war or any potential future Chapter 11 or 7 filings by any of the airlines?

We think we've got in our guidance is -- I'm going to say the best guess, which is in my view that there will be a war, but it will be relatively brief.

Now if there isn't one, that's -- I think that's an upside.

If it extends a longer period of time, I think that's a down.

And how about the airlines -- you know, if we do have a war, there's probably going to be incremental Chapter 11 or 7 filings.

I mean, does that -- what does that do, I guess, not only to near-term demand, but to longer-term look of the cycle?

Does it extend the downturn lower '04?

Unless that military action is dramatically extended, I think we've got a pretty good grasp (inaudible).

We know what happened in the Gulf War, what traffic looked like, we've got that factored in.

I think we've got a pretty good grasp on where the airlines are financially.

So I think we've got a pretty good picture, unless the situation changes fairly dramatically.

OK.

Just one quick follow-up for Mike.

There was a $50 million plus in the accounting differences in eliminations of the quarter.

That was a negative the first three quarter, just wondering what that was.

Paul?

Joe, we had a reclass of some prior accruals related to retiree medical.

So it's just a (inaudible) correct.

OK.

What was the -- was that over 50 million?

Yeah.

Yes, it was.

Thank you.

We go next to Howard Rubel with SoundView.

Thank you very much.

I hope you can hear me OK.

Speak up, Howard.

I'm sorry, Phil.

Thank you very much.

Just a couple of things.

First, if you look at the space business and Integrated Defense, it does look like there was a change in the level of profitability of that entire business.

Are you going forward using lower accrual rates or is it just the permanent or the near-term losses in civil that are what's going on?

I think it's primarily near term.

We think we know what we're going to do and how do get that to come back up again.

But we've got a pretty good grasp on the costs and the appropriate level of VACs.

... fairly substantial expense items in the first half of this year related to resizing that business that will hit the P&L. and so we should think about the business as sort of being stronger in the second half and weaker in the first half?

Of '03 you're talking about, Howard?

That's correct.

We have been pretty disappointed in moving through the process.

You've seen us do some consolidation and we have more to do.

I don't know that we have big expenses to address in that process.

And I would like to go back to your other question also.

The businesses that have been performing in the past well, we expect them to continue to perform well at about the same or slightly better margin levels.

So your comment about lower consolidated numbers reflect the performance we've been talking about in the satellite business.

And then, just to talk about commercials, the numbers have been really pretty good in terms of the way you've been able to capture production efficiencies.

Could you address what you're continuing to do to make the operation more efficient and also, at the same time, by not overproducing?

What are you seeing in the way of residual values for your aircraft?

On the production side, it is really careful attention to, you know, what should we be doing, and what is better done by somebody else?

So, for example, what you saw in the fourth quarter was our sale of the Spokane fabrication facility.

That will reduce our costs and it makes better use of that capability.

We're going to continue to look at the business in that regard and say, what is the most efficient way to run this business?

What are the things we should be doing?

And what are the things that other people ought to be doing?

We also are doing a lot of lean work inside the factory, reducing flow times, making the whole production process more efficient, more productive.

I think that will continue as well.

That's why we feel pretty strongly that, as we begin to get an up turn, we've made very fundamental changes to the cost structure of the company, not just belt tightening.

On the residual values, my guess is we will see some recovery in residual values.

Particularly strong will be 37 and 777, but as the market begins to come back, we also ought to see strengthening across the board.

Thank you very much.

We'll take our next question from Byron Callan with Merrill Lynch.

So, can you elaborate a little bit more on the timing of the 777 (ph) program?

I know you just announced a management team, but when would you expect to start showing things to clients, customers?

When would you expect to be in a position to formally launch the airplane program?

As part of the last year, one of the things -- and I want to compliment the BCA team, because I think they did it very well.

One of the things they were doing is they showed customers the sonic cruiser.

They were also showing them a baseline airplane using the same technology level, but in a more conventional form.

The simple answer is, what they were able to do with sonic cruiser was get an airplane that was faster and had operating costs that were as good as the 767.

The alternative then was an airplane which was faster than the 767 but about the same speed as 777, but much more efficient.

But the airline feedback was they were much more interested in the efficient airplane, and that's what led to the decision to go that direction.

So we have been showing them things.

This is not a start from scratch.

We will be showing them more detail trying to build up to a specification for that airplane over this year, which I think ought to lead to authority to offer, either late this year or early next year, and then, of course, the next step is, when is somebody ready to step up and make the final decision on a production go?

But I think affiliate offer is probably about a year away.

OK.

So your assumption here that orders could pick up in 2004 probably included a belief that 777 (ph) could be part of that order pick up?

Yes but you know, there's not a lot of granularity by the time you get to order rate in '04.

Understood.

One follow up, if I could.

Could we just talk a bit about the risk in some of the defense programs.

I know you guys have won a lot, and particularly in some of these network-centric warfare programs, but most, I believe, are cost plus contracts.

Are there any tough technical nuts you think you have to crack in any of these, or concerns that we might watch for and how they perform in the coming year or two?

There is no such thing as a high-tech transformational developmental program that doesn't have some tough nuts to crack.

We think we've got a pretty good grasp on those technologies.

The integration center in Anaheim has given us a great tool.

We've got that connected now into the Virtual Warfare Center in St. Louis.

So everything we're seeing says this is going pretty well.

My best judgment is you ought to ask that question on a fairly regular basis, and we'll try to be pretty straight if we run into bumps.

But we think it's pretty good right now.

Thanks a lot.

Byron, I think the other risk that we're all watching is, since it is transformation and since it is the DOD, there will be a lot of conversations in DC on, is this in fact the way we want to go, and how much money could (ph) be put against it?

So the actual amount of funding and how those programs proceed will also be of great interest for all of us.

Great.

We take our next question from George Shapiro with Salomon Smith Barney.

Good morning.

Phil, I would like to know, in terms of expecting that orders may pick up in '04, what is your traffic assumption growth for this year, and just for historical, if you had what world traffic turned out to be in '02?

I don't have the numbers on the top of my head on traffic for '02 on a global basis.

Do you have that, Paul?

I'm looking to see if I got it.

Paul is going to look and see if he's got that number.

One of the hard parts is that, year over year in this particular situation starts getting misleading, so what we're doing is looking back at '00 as the base, since '01 was down, and now, of course, '02 starts showing increases over '01, but you got to get back to '00 levels.

So I guess another way to ask it then is, so when are you looking to -- for traffic to get back to '00 levels?

In the U.S., we're looking at something like a total -- a total down period being about three years.

It is (inaudible) so we're back to '00 levels and above them in Asia now, and we're just about back in Europe now.

So U.S. is the slowest of those.

Global traffic, I think, we get back towards the end of this year to '00 levels.

OK.

So -- and then, the traffic growth that you're expecting this year implicit in expecting some improvement in '04, given how much excess capacity is out in the system right now?

Yes.

What we tried to do is look through the whole thing.

Of course, you've got to take traffic growth, you've got to take retirements from the fleet, you've got to take airplanes coming out of the desert.

You have to take airplanes scrapped in the desert and bring those all together.

And it's sort of the melding of all of those that says, we think that we ought to see a pickup in '04.

OK.

And then one other -- American said on their conference call that they were kind of being forced to take 19 deliveries of Boeing airplanes, and that Boeing would finance those planes.

My question is, given that American is certainly 50/50 whether it winds up going into Chapter 11, why would you want to take on added financing risk to American?

Obviously, those things will be judged as we -- as we go along.

And as Mike said, you know, we're going to make those financing decisions jointly and carefully and not dumbly.

So, you know, we'll look at it as the year goes along as traffic and what happens and make those decisions as we go.

I mean, does that mean that, if you can find somebody else to take those American deliveries, you'll do that?

You work with each one of your customers to try to reach the best possible agreement, and Alan (ph) and his team have been doing that on a very regular basis.

OK.

One quick one for Paul.

Just on following up on an earlier question, Paul.

The increase in the production amortization on a 777, that's just reflecting some inefficiencies associated with delivering only six airplanes in the quarter?

I think you answered the tooling part of it before.

The deferred production costs went up ...

Yes.

...

OK, as I think the big picture really is you're beginning to see the deferred move up -- largely as we see the overall -- you're beginning to see the overall collapse or convergence of the segment and the unit cost margins in the program.

I'll take you through that more offline, George.

OK.

Thanks very much.

Thanks, George.

We go next to Joseph Campbell with Lehman Brothers.

Good morning.

In response to a previous question about the margins, I guess it was (inaudible), we've got the program accounting guidance of 4.5 percent to 5.5 percent in commercial, and I wondered if you could just sort of step back and tell us sort of what's -- how much of the pension is causing the margin to go down, and maybe if you just talk about what would unit costs be doing, because we used to talk about unit costs, and now we're going to talk about program accounting, and maybe it's what Paul alluded to, they're coming together.

But just sort of in general, if we were to think of this as unit costs without pension, so that we could think about how Alan (ph) is doing with regard to his costs and revenues, how would the - what does the '03 guidance reflect versus '02?

Joe, the big picture is, as we said, much of the pension goes to BCA because of the individual pension plans and the way we account for those.

And in round, round numbers, that's worth about a point on the margin side.

Relative -- as Paul just said, we're starting to see a crossover of unit costs margins and program accounting margins and, in fact, next year, they're darn near close to each other.

So what we're seeing is a very significant decline in revenues and putting a lot of pressure on the costs that are there and necessary to run the business.

So again, in round terms, they're pretty much equal in '03.

But sometimes what happens in the programming accounting world is that we actually take the -- you know, for a few years, we've been taking the unit costs and subtracting numbers to get the program accounting, but sometimes it goes the other way and we take unit costs and we end up adding things to get the GAAP margin.

I'm wondering whether that's going to happen, or maybe that's an '04 affair and '03 is kind of the crossover where it's not positive or negative?

I'm sorry, I wasn't clear.

When I used the term crossover, that's exactly what you just described, where in fact we'll be beginning to be adding in order to get up to the program accounting margins.

Will that -- is that an '03 event?

It begins '03, yes, sir.

OK.

And then, on the pension for the rest of it, I presume the Boeing military is already reported, right, so we get the kind of military accounting and the military segments, and then in the cost and elimination stuff, you straighten out all the differences between what the government allows and what GAAP requires?

Yes.

So we've had a lot of conversations with the other big defense companies who are providing clarity around KAS (ph) and FAS (ph). and I think you're already doing it and have been.

I'm just asking for confirmation.

We are indeed.

We are absolutely compliant, as we should be, yes sir.

Terrific.

Thanks very much.

I'll let somebody else ask questions.

Thanks, Joe.

We'll go next to Nick Fothergill with Bank of America.

Hello.

Good afternoon.

Can you give us a flavor on what the U.S. airlines and leasing companies are saying right now?

Do you get the sense they're holding off decisions on '04 deliveries until about the March time frame, i.e., nine months ahead of early delivery in '04?

No, I think most of them have tried to work that problem over about a three-year period.

When we first started into the downturn, Alan (ph) and his team went out and talked to each of the airlines, tried to relook at the entire demand over the period.

They've done that again.

So you're not getting a sort of a last minute decision.

They've tried to tailor their delivery streams to what they believe the world looks like.

OK.

And then the second question would be, in commercial space, what is the risk of any more customer terminations?

Our other satellites in the near term backlog doesn't buy kind of similar contractual risk, or do you have any power to change this kind of contractual risk going forward?

Nick, our current situation is we do have other contracts that are in a similar situation.

And as you might expect, the overarching demand ultimately drives customer need for the satellite, our ability to get it out there with the kind of capability that's required.

So we are working -- much as Phil described, Alan (ph) is working with his customers, Jim and his team is working customer by customer in terms of real need dates (ph), real capabilities, and how we can satisfy those requirements.

Great.

And the last one is, you probably can't comment too detailed on this, but on certain contracts, and I mean Steer (ph) in particular, there seems to be a certain amount of cost overrun and a bit of delay going on.

Is that something that you can comment on as to how you might rectify that and how the government might look upon a little kind of negatively into next year?

I'm going to go to your opening comment, which is, you probably can't say much, and we can't.

What I would tell you is there is a lot of conversation and a lot of miscommunication on what's really happening.

I think where I would leave it is the customer and the contractors have good open dialogue on what's needed and what the risks are, how we're going to retire those risks, and what kind of funding is necessary to get there in a risk profile that's acceptable.

And those conversations are taking all of us in a path that's acceptable to both parties.

Great.

That's encouraging to hear.

Thank you very much, Mike.

Thanks, Nick.

We go next to Peter Jacobs with Ragen McKinsey.

Good morning, gentlemen.

Mike or Phil, could you talk about the status and outlook for the 75 program and 76 program, both in context of its -- of the relatively low backlogs those two airplane models have currently?

But as we move out into 2005 and 1006, you'd think that customers would be looking at the 7E7 (ph) program, if it is going to come to market in the '08 time frame.

And I don't see that there would be any motivation for any customers to order 757s or 767s at that time if they're going to have a much better airplane that could be available two years following that?

I think the big piece there is, what is the absolute demand level?

If you have real demand, then you buy airplanes to support that demand.

And if you have good demand in '05 and an E is not available until '08, and of course, they will be in limited numbers when you first start into production, then you got to look at how you meet your demand.

If demand stays relatively low and you can meet that with airplanes that are currently sitting in the desert, then you do it that way.

You know, we're going to continue to look at those programs.

We think we've got a great shot at the tanker program on 67, which I think means that that could be a very good program going on. 57 backlog is pretty low right now.

It will really depend on what the market does and how the market picks up.

OK, great.

And if I could just follow up with one other question, and that is, could you give us an outlook for the delivery mix in 2003 and 2004, even if it's just wide bodies versus narrow bodies?

Pause.

Paul is digging through his papers.

It's kind of comparable to what we're seeing right now.

I don't think mix changes very much from what we're seeing right now.

No, no, not on the wide versus narrow.

There are individual programs that have different mix adjustments, but in the big picture, it's not much different than what we're seeing.

OK.

Thank you.

We go next to Cai Von Rumohr with SG Cowen for a follow-up.

Yes.

I guess you mentioned in your release that R&D would stay within a range of three percent to 3.5 percent, and yet you also mentioned that you don't really hit the run rate on the new program until you get to 2005 and '06.

Is it realistic to expect that, if in fact you launch this program by early '04, that the run rate of commercial R&D spendings toward the end of '05 would be about double from the 750 to 800 you're currently doing?

It could get up in that range, Cai, but not for very long.

And a couple of things that are going to make this program different.

One is the work that's been done across the company in design manufacture efficiency and productivity where, as you know, we demonstrated on JSF (ph) half the design time, as in man hours, and half the calendar time to get the work done.

Frank Statcuss (ph) has been over working with Walt and the team, and those are the kinds of lessons that we'll be apply over there to minimize the R&D.

Secondly, we'll be work in a much more integrated fashion with our suppliers and in a different business model with our suppliers so that, in fact, we have a different opportunity on how we share those development costs.

So one of the things that this team is going to do -- this team that was announced yesterday -- is not only put the airplane together, but the entire package, including the business model, the supply relationships, and lay all that stuff out here as we present it to the board, as Phil mentioned, probably the end of this year, and get our authority to offer.

Thank you very much.

OK.

We can take one more question.

We'll take that as a follow-up from Steve Binder of Bear Stearns.

Yes.

Mike or Phil, with respect to the program margins at BCG, you talked about the cue (ph), obviously, that your current accounting quality includes some small amount of the 67 tanker program.

You know, has been any revision in that expectation as far as timing in light of the delays in signing that up?

And also, your program quantity right now from a program margin standpoint, what quarter does that actually extend out to?

I'm sorry, what quarter did you say?

Yes, how far out does that extent to, what period of time?

Because obviously, most of the 67 tanker program comes beyond that accounting quantity period.

Yes, it does.

First of all, Paul is looking up the answer to your second question.

Do you have that have at your fingertips?

Yes.

Typically, we have never discussed the length of the program block, Steve, but it does go out on the 67s, as it currently stands, a few years, that I would be willing to say.

And relative to the timing of the tanker program, while we all would have liked to have it signed up and it continues to be worked, I think all of the recent activities taking place in the Pentagon, as indicated, a first quarter objective on the part of our customer, which gives us pretty good confidence that that's a good timeline.

I asked this question on the third quarter conference call, but are you still assuming rates of roughly one a month in the '04 time frame on programs like the 67, 57, 17, and 47, maybe a little bit more than that on certain of those four programs, but in that range of one to 1.5?

I think you've kind of got the picture that the 37, the 777 are going to be the ones that take up most of the increases that Phil has been talking about, that there will be modest demand that will have low rates of production on those aircraft you talked about.

OK.

Thank you.

Thanks, Steve.

That does complete 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 Muhberg, Vice President of Communications.

Ms. Muhberg, please go ahead.

Thank you. we'd like to now invite members of the media to direct their questions to Phil and Mike.

If you have questions following this telcon, please feel free to call the media relations team on 312-544-2002.

All right.

We'll now entertain your questions.

And once again, to ask a question, we do ask that you please press the star key, followed by the digit one on your touch-tone telephone.

Again, that's star one to signal.

And also, if you do find your question has been answered and would like to remove yourself from the queue, please do so by pressing the pound key.

Again, star one to signal and pound to remove yourself.

We'll go first to David Bowermaster with "Seattle Times."

Hi.

A couple of quick questions on the commercial side.

One is, AVA (ph) of Taiwan, there's a report on Dow Jones saying that they are reviewing their 777 order based on some things they're hearing that Boeing may cancel one of the 777 programs.

I assume that's the 200LR.

Can you comment on that, and also, if there's been a decision out of Iberia, which I believe the board was supposed to decide yesterday?

I have zero information on either one of those items.

I can't give you a lot of clarity.

OK.

On the commercial satellite side, what are the details on the order cancellation that you mentioned in the release?

Who was that, and what was the value of that order?

In concert with our normal practice, we really keep that between ourselves and our customer.

So we haven't disclosed that in the past, and I don't think we're going to right now, David.

OK.

And lastly, on the commercial satellite side, can you comment on what the current backlog is, number of satellites, and the value on the commercial side?

I don't have that one in front of me, but we're currently looking at a handful of satellites for the '03 delivery cycle.

And that's kind of what it's been running, in terms of delivery quantity -- not in terms of dollars, but in terms of quantity.

OK.

I was just wondering, overall, in going back, you know, to when the Hughes acquisition was done, I believe the total backlog was 36 satellites valued at about 4.4 billion, and I'm wondering what the similar numbers would be now.

We're a little bit inside of that, Dave.

OK.

Thanks.

Not a lot, but a little.

OK.

And once again, that is star one to signal.

We go next to Aaron Karp with Air Transport Intelligence.

Yes.

Could you just speak a bit about, I guess generally your feelings on the commercial airplanes and how long this downturn may last and where you're looking for -- you talked about being well prepared for an upturn.

When do you think there's a chance that that upturn may come?

Our best guess right now is that the older upturn is likely to be '04.

The production upturn is likely to be '05.

And are you confident in that?

I got -- my crystal fog has fog in it, and I can see some things and not others.

So I'll tell you in '05.

OK.

Thank you.

Once again, that is star one to signal.

We go next to Darrell Hassel with Bloomberg News.

Hi, Phil and Mike.

I wanted to know if there's any indication from the airlines who may be trying to cut costs by outsourcing and such whether you're getting any indications or talking to airlines regarding more aviation services type of things, maintenance, or just kind of the -- that kind of thing that could relate to airlines trying to lower their costs in terms of maintenance, whether you're seeing any more activity along those lines?

Well, in the grand scheme of thing, I think what we're all saying is the business model that has evolved over the last 30 years being questioned, started with a low cost business model and now, as this downturn is hitting us, the majors -- the full service carriers are struggling in that business model.

One of the elements that's in there is in fact the economy of scale on servicing products, as you just described.

So, for sure, I think that's one of the issues that will be on the table as the industry moves forward.

How is it that we get real cost out of the value chain so that, in fact, the airline industry can start to return the cost of capital, which it hasn't done for the past 30 years.

Do you think that aviation services could benefit from that?

I think certainly it's an element where economies of scale are going to have to be discussed and figure out if that's not a place where we get real cost out of the system.

OK.

Thank you.

You bet.

We go next to Chris Isidore with CNN Money.

Hi.

I'm wondering what you see as the outlook for sales and deliveries throughout the industry this year, if there is a major liquidation of money .

Well, the best way to look at it is, on a global scale, there is a level of demand.

And if an airline were to go Chapter 7 and liquidate, that demand would have to be satisfied by some combination of other airlines.

So, you know, from a fundamental standpoint, a liquidation doesn't change the picture.

It moves assets around.

But one of the advantages of aircraft is they're mobile assets and they can move to a different carrier.

So, you wouldn't see having to significantly shake up your guidance even if there was a major liquidation?

Correct.

OK.

Thank you.

We take our next question from Kathy Fieweger with Reuters.

Hello.

How are you?

Hi, Kathy.

My question has to do with the numbers that you've given out now, the 280 for 2003.

How much -- I think we talked about this at the press briefing, but how much of that -- does that account for the Iraq invasion completely?

It accounts for it as best any of us know.

In other words, there is within the airlines and within our knowledge an estimate of what the impact of a military action in Iraq would be.

If that estimate is off -- in other words, if it takes a lot longer or doesn't occur, then obviously it can move the numbers around.

But we think we've got a pretty good grip on where things are for '03.

What's your sense of what's going on, just kind of in the U.S. airline environment in terms of what's going on at American, you know, some of the stuff that's starting to come out, their cash flow numbers et cetera.

Sounds eerily similar to what was going on at United, their attempts to get the unions in line, et cetera.

This is a really tough period.

You know, the simplest answer is, when you're running at traffic levels that are like 1997 or '98, and with an airline that was sized for 2000 or 2001, you're going to have a difficult situation.

Labor costs are a significant issue, and obviously all of the big airlines are struggling with that issue.

So as traffic returns and, depending on what yields are, that can be a more or less significant problem.

But, you know, there's nothing fundamentally different in that area than what we were all looking at a year ago.

I get into all sorts of trouble because early on I said we would see bankruptcies.

I think that's what you're looking at.

Any idea what kind of planes United is going to use on this low cost carrier?

No.

You know, they have not announced, other than the speculation of where they're going, what they're going to do.

So obviously until we see a business plan and whatever the reaction is by the bankruptcy judge and by their employees, doesn't help to speculate a lot.

Does this whole kind of new emerging mass market for low cost carriers bode well for you guys?

I think so.

You know, we've clearly done very well in that market.

We've gotten great share.

We understand it well.

So I look at it pretty positively.

All right.

Thank you.

Thank you.

Once again, that is star one to signal.

We go next to John Liang with InsideDefense.com.

(inaudible).

My question has to do with leasing of 100 Boeing 767 tankers.

I understand that the Air Force has sort of been exploring this option, but it's been met with a bit of skepticism by many in Congress.

What's your outlook on this?

Has it changed at all?

No, it hasn't.

It is not a usual thing.

Leasing has not been a primary tool that the U.S. government has used, although it has obviously been used very widely by airlines.

In this particular case, where there are a lot of very old tanker aircraft, every (inaudible) in that fleet is 42 years old, where there can be significant savings by getting the oldest airplanes that have very high maintenance costs out of operation, leasing looks like a great alternative to get the airplanes in sooner, save the taxpayers money, and get more capability into the airports.

That's the program we've been working on, obviously, because there's some new aspects.

There are going to be questions.

We think it's a great program.

OK.

That's the short-term.

What about the long-term?

Do you see them receiving money over the long-term by leasing these aircraft?

It depends on what else is going on.

We think that that retirement of the KC-135 fleet is going to be required.

I think what will happen is there will be continuing reviews of lease versus buy.

It is, by the way, precisely what happens in an airline.

They don't buy all their aircraft and they don't lease all their aircraft.

They usually have some kind of a mix.

I would expect that could happen here.

OK.

Thank you very much.

We'll go next to Lynn Lunsford with "Wall Street Journal."

Good morning.

Good morning, Lynn.

Two quick questions.

One is on the 767 tanker.

Do you have any kind of indication on when you might hear a decision that keeps kind of moving around?

Well, I think, as Mike said earlier, our best guess right now is first quarter.

It could happen more quickly.

We've got guys working hard to make that happen.

But, you know, trying to predict a timeline on something like that is pretty hard.

So I would use first quarter number.

OK.

And then secondly, could you elaborate a little bit more on the commercial satellites?

You had said that you were going to be -- let me go back to the notes - something about continuing to resize that and getting capital out of that business?

Yes.

You know, there are a couple of steps in this process.

One of them was to recognize that we had some technical issues that had to be addressed.

It was technology insertion and resulting problems with that technology.

We're still working our way through, but you've got to get all the way through and get it done.

So we know what those issues are and we know how to address them.

The second issue is, do you have good, reliable estimates at completion that recognize what your costs will be as you go through the build and test?

We think we now have pretty good methodology in place to have reliable estimates at completion.

The final piece is to make sure you're sizing the business to the business base to the market, and that's what we are going to have to be doing now is to recognize that production rates are going to be low for commercial satellites and get our workforce and our facility sized to match that demand.

OK.

Thanks.

We go next to Darrell Hassel with Bloomberg News.

I want to know if you could comment at all on the inventory for your trade-ins, whether you're pretty much able to get rid of whatever you're getting back and so forth, whether it's going up or down or staying about the same?

I think it's pretty much constant.

We've got some ins and outs.

But that inventory is not moving significantly.

And are there any particular weapons systems that, if we do go to war with Iraq, that you'll be looking at in particular for kind of battlefield performance, that kind of thing?

The only significant we have is the JDAM (ph), the CPS (ph) guided bomb, and in fact we have been increasing capacity in that capability to build at a higher rate and just brought a new factory online.

By the way, saying factory is a slight overstatement.

That is a very, very efficient production process, and it used to employ eight people; it now employs 16.

But are there any particular new weapons systems that are out there, maybe upgrades and such, that you'll get some feedback on if we go to war with Iraq?

You always learn.

You will always learn and we will learn here.

We have learned in Afghanistan.

You know, part of our job is to make sure we take lessons learned and incorporate those into our product.

You know, Darrell, one of the learnings that has shown up here just recently, as we noted, the electronic version of the F/A-18, which has come out of past experience knowing that you need to have jammers accompany flights of aircraft.

So that's the kind of thing I think you're referring to.

The timeline of the development of the revenues tends to be years after you learn it before it finally gets instituted.

OK.

Thank you.

You bet.

We go next to Francine Knowles with the "Chicago Sun Times."

Good morning, everyone.

I've just got a question regarding your forecast and how you factored in the possibility of war with Iraq.

You said that you have factored that in, and you're looking at the possibility of a short conflict.

What's your definition of short?

Trying to put that kind of granularity to it is really difficult.

Anything, in my view, under a month would be short.

If it went toward six, it would be getting toward long.

And also a follow-up question regarding your commercial satellite business and your discussion about resizing there.

Are you talking about the possibility of layoffs, and if so, how many?

Don't know that answer.

We're trying to make sure we get that business sized right, and by the way, a lot of what matters in there is the military business that is in there as well.

So we'll have to look at all those and put the pieces together and figure out where we go.

And the team has been aggressive so far in right-sizing facilities and head count and have identified consolidations and personnel reductions.

Right.

Thank you.

I think we have time for just one more question.

We go next to Brian Corless with "Everett Herald."

Well, if I'm the last, it will be a quick one.

If '04 is looking like '03 in terms of deliveries, does that mean workforce numbers on the commercial side are going to look similar next year to what they look this year?

I think as a general statement, the answer would be yes, but you now have to go down into the detail of where all those people are, but general statement, yes.

OK.

So similar numbers, possibility of moving some people around then?

Definitely possibility of moving people around.

How fast do you pick up on the design of a new airplane?

Those are all things that will impact the final answer.

Thank you very much.

This does conclude today's question and answer session.

I would like to turn the conference back for any closing or additional comments.

We appreciate everybody being online.

If you have any further detailed questions, you can either get back to the media relations folks or the investor relations folks, and we'll talk to you next quarter.

This does conclude today's Boeing Corporation fourth quarter earnings report conference.

You may disconnect at this time.