波音 (BA) 2003 Q3 法說會逐字稿

Good day, everyone.

Welcome to The Boeing Company third 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 am turning the call over to Mr. Paul Kinscherff, Vice President of Investor Relations for The Boeing Company.

Mr. Kinscherff, please go ahead.

Thank you, Diana.

This is Paul Kinscherff, welcome to The Boeing third quarter 2003 earnings conference call.

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

If for any reason you are unable to reach us through the Internet please access our Web site later today when all information will be posted.

With me today are Philip Condit, Boeing Chairman and Chief Executive Officer and Michael Sears, our Executive Vice President and Chief Financial Officer.

After comments by Phil and Mike, we will open it up for questions, which I would encourage you to please try to limit to one.

Before we start as usual I need to remind you 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 issue early this morning.

And in our various filing with the Securities and Exchange Commission and in the forward-looking statements at the end of the Web presentation.

I urge you to read them thoroughly.

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

Good morning, as usual I will begin with an overview of both our businesses and the quarter.

Then Mike will discuss our financial results and our updated outlook before we take questions.

All things considered, we had a very good quarter.

Revenues were on track with growth in our defense businesses offsetting the continued commercial market downturn.

We delivered solid earnings on good program performance and our programs, again, generated strong cash, which we chose to invest in our pension plans.

During the quarter, we continued to build a strong long-term future by building on the transformation of the military and by defining the future of commercial flight.

We remain intensely focused on running healthy core businesses that deliver value to our customers and our shareholders.

Now, let's go to commercial airplanes on slide 2.

BCA is performing very well in a challenging market.

During the quarter, BCA delivered 65 airplanes, down 11% from last year's quarter.

Q3 revenues totaled $5 billion, reflecting planned lower deliveries and product mix.

Q3 margins totaled 7/10 of 1%, which reflects low production volumes, higher pension costs, but most significantly the charges associated with completing the 757 production next year.

This decision on the 757 supports the long- term strategy to simplify the BCA product line matching airline industry trends and driving for even greater production efficiency.

BCA's ability to deliver profit in Q3 is a result of this focus on achieving tremendous improvements in operating efficiency.

Commercial airplanes received 51gross orders in Q3.

Orders for the quarter included 34 737s and 717s from Air Tran.

Further solidifying BCA's position as the preferred supplier to low-cost carriers.

Backlog at the end of the third quarter was more than $65 billion.

BCA continued to work with over 50 airlines on the 7E7 configuration.

As interest continues to build they remain on track to seek board approval to offer the airplane later this year.

I remain convinced that commercial airplanes is an outstanding long-term business for Boeing.

Now let's turn to Integrated Defense Systems on slide 3.

IDS results reflect continued strong performance on defense and intelligence programs and a growing market position.

Revenues increased 12% to $7.3 billion with growth in all four segments.

Q3 margins of 7.7% reflected strong performance in aircraft and weapons, networks, and support systems.

IDS enhanced its position in weapons and in the international market with key wins during the quarter, included were the small diameter bomb contracts and order for 12 Apache helicopters from the Greek government.

Greece is the 8th international customer for this product.

IDS also moved ahead on a key transformation program by completing partner selection for the U.S.

Army's future combat system.

The DOD's transformation strategy continues to gain momentum, IDS is the leading industry industry partner.

IDS also had five successful launches and again demonstrated excellent launch vehicle reliability.

At the end of the quarter, with contractual backlog of more than $34 billion while total backlog remained very strong at almost $79 the billion.

IDS has a significant portfolio of programs and tremendous growth opportunities.

Now let's turn to slide 4, our other businesses.

For the quarter, Boeing Capital turned in solid results in a challenging market.

As planned, their portfolio growth continued to slow.

BCC remains focused on preserving portfolio value and managing risks in a difficult environment.

Connection by Boeing continued to prepare for full scale launch of commercial service in '04.

They also signed an initial service agreement with SAS for 11 aircraft.

And a memorandum of understanding with All Nippon Airways, connection now has firm agreements for nearly 100 aircraft.

ATM continues to develop strong global support for a new efficient and safer air traffic management system.

Our Shared Services Group continues to deliver cost savings for the corporation, and phantom works continues to provide world class technical leadership.

Now, let me close with my perspective on slide 5.

I expect Integrated Defense Systems to show continued strength in defense markets, particularly airborne platforms, intelligence systems, support services and transformational Network-Centric Systems, commercial space systems will remain difficult at least for several years.

In this difficult market I expect IDS to turn the launch and satellite business to profitability while continuing to provide outstanding support to NASA.

With Disciplined Program Management, with strong revenue growth and with outstanding technology leadership, IDS is well positioned to deliver strong long-term performance.

Commercial airplanes is doing fantastic job in an incredibly difficult market.

Global airline traffic is about at year 2,000 levels with about 2100 airplanes currently parked.

Airline operating results are are beginning to improve.

In particular, low cost carriers are particularly profitable and ordering new airplanes.

While these signs are encouraging, the downturn in the civilization market remains severe, so I expect a gradual market recovery to occur no earlier than '05.

I remain convinced that the future of the airline industry will be characterized by point to point service, fleet simplicity and operational efficiency.

The 7E7 is aimed at the heart of this market and holds great promise.

With aggressive management, with strong operating performance and with a customer-driven strategy, BCA has an exciting long-term future.

We will continue to grow our new businesses, and provide technology leadership for aerospace.

And so, our strategy remains constant.

We will continue to deliver value to our customers and our shareholders, and we will do that by running healthy core businesses through disciplined program management, by capitalizing on opportunities and decisively addressing challenges and by managing with the highest standards of corporate governance and ethics.

Now Mike review the financial results.

Mike.

Thanks, Phil and good morning everyone.

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

Revenues for the quarter came in as expected and reflect planned lower commercial airplane deliveries offset by growth at Integrated Defense Systems.

Earnings for the quarter reflect good operating performance at our major businesses, which partially offset the charge to complete production of the 757 late next year.

During the quarter we generated over $1 billion in cash that we invested in our pension plans.

Finally, we are re revising our 2003 guidance to reflect IDS revenue strength and third quarter results.

I will review this in more detail later in the presentation.

Now, into the third quarter financial results on slide 8.

Revenues for the period were $12.2 billion, down 4% from the third quarter of last year.

As expected, lower commercial airplane deliveries were significantly offset by revenue growth at IDS.

Net earnings for the quarter totaled $256 million or 32 cents per share.

Strong overall program performance offset pretax charges totaling $184 million or 14 cents per share related to the 757 program decision.

IDS defense programs again performed well, while continuing advances in commercial airplanes, operating efficiency favorably impacted results.

BCC recognized a $45 million gain on the sale of a customer financing asset.

This positive development offset some revaluations in the customer financing portfolio.

As you know, Boeing expenses its equity compensation programs.

This quarter, stock compensation expenses totaled $115 million or 9 cents per share.

This primarily reflects the regular noncash period expense we recognize for our performance share program.

Moving to the discussion of cash on slide 9, as Phil noted our program generated significant cash in the third quarter, which we in turn invested in our pension plans, you may recall that in the second quarter, we contributed just under $500 million to our pension plans.

We also told you we were evaluating additional discretionary contributions.

In late September, based on the strength of our cash flows, the client interest rates and the benefit of significantly reducing future contributions and other comprehensive charges, we contributed an additional $1.2 billion to our plans.

These contributions, all discretionary, are accounted for as the use of working capital, and reduced our third quarter cash flow accordingly.

Including our $1.2 billion contribution, third quarter net cash used by operating activities totaled $168 million.

Our net cash outflow for the period was somewhat less at $146 million as proceeds from a settlement with Hughes and other investments offset dividends and slowing customer finance requirements.

Our net cash outflow for the period was somewhat less at $146 million as proceeds with our settlement with Hughes and other investments offset dividends and slowing customer finance requirements.

Going forward, cash flow will remain a significant strength for the company.

Slide 10 shows our balance sheet and strong credit ratings.

After funding $1.2 billion to pensions our cash balance decreased from $1.9 billion to $1.7 billion.

This reflects the strength of our program cash flows.

Debt balances at the end of the quarter rose to slightly $14.9 million.

This modest increase reflects the slower growth of our customer financing portfolio.

Continued financial strength and solid credit ratings are a priority for Boeing.

Turning to slide 11, I would like to discuss our pension outlook a bit more.

As you may recall, Boeing measured its pension plan using a September 30 year end for financial accounting purposes.

During the planned year that just ended our pension investments earned about 17%, significantly more than our assumed rate of return of 9%.

In addition, we contributed $1.7 billion to our pensions.

This includes the $1.2 billion contribution we made in the third quarter, and the nearly one half billion contribution made in the second.

These contributions are tax deductible and strengthen the funded status of the plans.

They also start to earn market returns immediately and along with good planned performance in 2003 are expected to meaningful reduce our pension funding requirements in 2004 and beyond.

For 2004, we estimate our pretax funding requirement will be decrease from up to a billion dollars to well below $500 million.

Of course, actual funding requirements will depend on market conditions and planned performance.

September 30 is also the date we used to set our discount rates.

The applicable rate at the end of last month was approximately 6%.

This is below the 6.5% discount rate previously factored into our forecast, and it impacts our pension income outlook.

We now estimate the unfavorable impact of noncash pension expense on 2004 earnings from operations to be between $350 and $400 million.

In the last three years our discount rate declined 175 base points as interest rates dropped to historic, an increase in interested rates back toward long-term averages would positively impact our discount rates and our financials.

We continue to refine our assumptions and outlook during the fourth quarter and update you again next January.

Now, let's turn to our financial outlook for 2003 and 2004 on slide 12.

Today, we are updating our 2003 guidance to reflect year-to-date results.

Our 2004 guidance for growth and revenues, earnings and cash remains unchanged.

I will first discuss the outlook on our major segments starting with commercial airplanes and then conclude with the company guidance.

As Phil noted, commercial aviation markets remain challenging, the commercial airplanes team is doing an outstanding job managing through the down term.

This quarter, the only adjustment to the commercial airplanes outlook is to include the impact of the 757 decision.

Commercial airplanes delivery forecast for 2003 and 2004 is unchanged.

The forecast for 2003 deliveries remains approximately 280 airplanes.

The forecast for 2004 deliveries remains between 275 and 290 airplanes and is now essentially sold out at the lower end of the range.

Just under 3/4 of the deliveries during this guidance period are to international customers.

The commercial airplanes revenue forecast is also unchanged.

Revenue guidance for 2003 remains approximately $22 billion.

The revenue outlook for 2004 remains slightly less than 2003 reflecting mix and softness in airplane fares and services.

We are revising commercial airplanes 2003 margin outlook to row the third quarter charges to complete the 757 program.

The GAAP commercial airplanes margin outlook has changed from between 3 and 4% to between 2.2 and 3.2%.

Excluding goodwill charges, commercial airplanes adjusted margin outlook for 2003 is revised from between 4.5 and 5.5% to between 3.7 and 4.7%.

Commercial airplanes margin guidance for 2004 remains unchanged in the 4.5 to 5.5% range.

At Boeing Capital we are lowering the outlook for portfolio growth to reflect lower demand for aircraft financing and accelerated portfolio runoff.

We now expect BCC's portfolio to grow approximately $1.5 billion in 2003 and approximately $1 billion in 2004.

Our previous portfolio growth guidance was between $1 and $1.5 billion in 2003 and between $1.5 and $2 billion for 2004.

We are also revising BCC's 2003 outlook for return on assets, from approximately break even to approximately 1/2 of 1%.

In 2004, BCC's expected return on assets remains unchanged at approximately 1%.

As a result of strength in the company's defense and intelligence businesses, we are increasing Integrated Defense Systems 2003 revenue outlook from between $26 and $27 billion to approximately $27 billion.

The outlook for solid IDS revenue growth in 2004 remains unchanged with revenues expected to increase by approximately 10%.

The outlook for IDS margins remains unchanged.

For 2003 IDS's GAAP margins are expected to be between 3 and 4%.

Adjusted 2003 margins, which exclude goodwill charges only remain between 4.5 and 5%.

Guidance for IDS margins in 2004 remains unchanged at high single digits.

Putting everything together, we are revising Boeing's revenue guidance for 2003 from plus or minus $49 billion to plus or minus $50 billion. 2004 revenue guidance remains plus or minus $52 billion.

We are revising our 2003 earnings per share outlook to reflect the unfavorable 14 cent per share impact of the 757 decision I don't have set by good performance.

Netting these items together we are reduce our earnings outlook 5 cents per share.

On a GAAP basis, 2003 earnings per share guidance is revised to between minus 12 and minus 2 cents per share.

This compares to our previous adjusted outlook of minus 7 to positive 3 cents per share.

On an adjusted basis, excluding the first quarter of goodwill charges that totaled $1.02 per share, earnings are expected to range between 90 cents and $1.00 per share.

This compares to our previous adjusted outlook of 95 cents to $1.05 per share.

Our 2004 earnings per share guidance remains unchanged at $1.75 to $1.95 per share.

We are revising our 2003 cash flow guidance to reflect the $1.2 billion of pension contributions we made in the third quarter.

Our 2003 operating cash flow outlook is revised from $3 to $3.5 billion to a still strong $2 to $2.5 billion.

After deducting capital expenditures from capital cash flow free cash flow guidance for 2003 is revised from between $2 and $2.5 billion to between $1 and $1.5 billion.

In 2003, outlook anticipates fourth quarter receipts of approximately $350 million related to a U.S.

Air Force 767 tanker program.

The strong cash outlook for 2004 remains unchanged with operating cash flows expected to be greater than $3.5 billion and free cash flow holding at greater than $2.5 billion.

As always, we will update our outlook again as we announce full year results again in January.

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

Okay, we're ready to take questions.

And the question and answer session will be conducted electronically today.

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

If you are using a speaker phone please make your your mute is turned off to allow us to signal to reach our equipment.

We will proceed in the order that you signal us and we will take as many questions as time permits.

If you find your question has been answered you may remove yourself by pressing a pound key.

Again if you have a question press star 1now.

We will pause for a moment to give everybody an opportunity to signal for questions.

We will take our first question from Sam Pearlstein, Jefferies & Company.

Good morning.

Good morning, Sam.

Mike, I guess just in terms of following up on some of your comments, the other '04 plan had another $1 billion contribution.

One, are you still planning to make that contribution or did this contribution shrink that?

Secondly, you are implying a bigger FAS 87 expense yet the guidance is unchanged.

What is really offsetting that on the P&L?

On the funding side of the equation, Sam, we definitely will expect to have lower requirements or funding going forward in '04 and '05.

We will still maintain the discretionary perspective as we look at that.

On the expense side, we are seeing a very complicated to explain situation with pension expense rising and fighting through the FAS [INAUDIBLE] relationships on where do those expenses end up.

We are seeing some of that have come through into the BCA regime as those plans are adjusted.

So I think that is where you are seeing this difference between the guidance going down a little bit but the income holding.

But in terms of the cash flow is there some other area coming down if you are not going to have to contribute as much next year?

Oh, I'm sorry.

In order to keep the $3.5 billion for '04?

I'm sorry, so what we said was greater than.

And so, while we have uncertainty out there in the marketplace, we will have to wait and see what that looks like on a go forward basis, I think what we are all really saying is we expect that greater than number hold strong.

Okay, and then just one follow up which is, Phil, could you talk about different regions and what you're seeing in terms of commercial aircraft?

Has there been any noticeable change in discussions with people other than Southwest who may be pulling forward or are the discussions talking about pushing out deliveries?

If you roll back one quarter, I think the words are very similar.

Asia overall is the strong , Europe relatively relatively weak, U.S. relatively weak, with the exception of the low-cost carriers, where there is significant strength and growth.

So, you have got a couple off segment factor, but no significant change from what we have seen before.

Okay, thank you.

I will let someone go.

We will go next to Cai Von Rumohr with SG Cowen.

Yes, thanks.

You commented on '04 deliveries, can you give us any preliminary help in terms of understanding '05, you know, how much backlog do you have for '05?

Well, you know, what we are going to do is we will give you a much more definitive view when we do year end in January.

As I said, I don't think there is going to be a big move before '05.

If anything, in '05, it is going to be pretty gradual.

So, I think '04, '05 will be relatively the same, and we will give you more granularity on '05 in the quarter.

Just quick follow up, commercial margins, if you back out the $184 it looks unit cost was actually was better in the third quarter, program accounting was down.

What is the reason for that?

Was there a particularly good mix of deliveries in the quarter to account for the unit cost being where it was and why is the program accounting down?

Cai, this is Mike.

The major impact on that is the really outstanding work that the team is doing on getting costs down, particularly across both internal and external suppliers.

So as they were able to capture those costs, they were actually able to essentially accrue at a higher rate than they had been accruing on past deliveries.

And so there was a significant accumulation of those earnings that came forward in the third quarter, which did exactly what you described, it pushes the unit, the unit margins up.

It doesn't flow through into GAAP because GAAP is a looking forward and this was kind of a reach back and pull those earnings up.

Okay, great, thanks.

You bet.

We will take our next question with Heidi Wood with Morgan Stanley.

Okay, thanks.

Nice quarter, guys.

Thanks.

My first question is on tanker and sort of a three-part question if you don't mind.

Can you walk us through the next steps that happen with 767 tanker?

Mike, you talked about the outlook for the company contemplating signing this thing in '03.

You gave us some color on what you mean by that with respect to the $350 million in cash receipts.

But can you also tell us how it potentially affects next year with respect to, you know, the R&D ramp and further cash flow?

Does that $350 million number assume 100 aircraft lease or does the cash receipt get changed if it is a 20/80 split?

Well, one, I think you have got a pretty good grasp on all of the pieces that are moving here.

Clearly in Congress or Congressional authorization, we have three of the four committees who have approved, Senate Armed Services Committee yet to approve.

There are discussions, as you noted, between an all up lease and some kind of a split between lease and purchase downstream.

Those discussions tend to be around a total quantity of a hundred and that's the assumption we have made at this point, but obviously, until that is done, we don't know the final answer.

We have been expending R&D, through this year and we will continue to, because, of course, this is an internally-funded commercial program with the lease and purchase potential on the Air Force side.

So, there will be continued R&D expenditures in '04.

Trying to think if whether I answered all of your questions here.

Well, does the internal funding of R&D change Phil, if you go to a 20/80 split.

Because if it is a purchase then doesn't the Air Force then fair some of that expense for you.

It depending on the sequencing and how that final contract comes to be.

But remember, the original proposal had a, essentially, a lease/purchase option and the ability for the Air Force to move from lease to purchase.

And we are assuming we go forward down that general path.

Does the cash that you talked about come irrespective of the structure of the deal?

Most likely, but obviously until that deal is done, we can't give you a firm answer.

And the Air Force Procurement Chief has been quoted in the process talking about Boeing making $1.4 billion investment into this tanker program.

Can you give us a color, I know you have been expensing as you are incurring but how far along are you towards that number or maybe you could give us a percentage or some figure and does peak investments occur in the '04-'05 time frame and if so, how much of an uptick is that versus this year?

Hi, Heidi, this is Mike.

The first thing I should say is we will not support the $1.4 billion number in terms of our own investment.

We are investing some moneys, as you can see, as the Q comes out, the kind of liability we will see at the end of the year, you can get a sense for how much is there.

I think the important thing actually is what Phil said, as has currently been worked with the government, it is a hundred airplane program.

They are trying to figure out collectively how to move forward on that.

If and only if those parameters change significantly.

We may have to deviate in terms of the offer and pricing pricing that we have had but we just have to wait and see how the Congress decides to go forward with the program.

All right.

One last question, then I will let someone else ask.

Phil, to talk about 7E7, as we are watching about talking about this potential impending launch, can you talk to us about how you contemplated effect on pricing on for aircraft at the upper head, just to walk you through what I'm thinking, if you go ahead with a launch on 7E7, Airbus's probably response might be to cut pricing on A-330 which potentially spills into pricing on A-340 as well.

I am just wondering does that not then affect triple seven pricing as a consequence?

As you know, it is an aggressive pricing market.

There is price pressure.

We have been and remain focused on doing good financial deals.

We believe that we can get cost performance, both on 7E7 and on triple seven that will allow us to be very competitive in this marketplace and generate good returns.

So, yes, tough marketplace, but we think we are prepared and in a position to handle that.

Okay, great.

Thanks very much.

And our next question comes from Steve Binder, Bear Stearns.

Yes, Mike.

I just wanted to follow up on Cai's question, did I read this correctly, there is some favorable, essential [INAUDIBLE] adjustment or close out adjustments from some blocks that were completed in the quarter that accounted for the strength in the unit cost margin?

We probably used different terminology, Steve, but, in fact, as the guys went through and were able to accomplish better performance from both internal and external suppliers, the accrued assumptions, the earnings assumption in the past have been updated, and it does come through as a one-time improvement for the third quarter and therefore drives unit earnings to a higher margin level than program accounting for this particular quarter.

Also, Phil, would you say, I think Cai kind of got to the question, but if you look at '05 right now, would you say you are about 65 to 70% firm at the low end of the, you know, $275 range, you know, in the '05 time frame, is that probably a pretty good gauge of where you are at right now?

You know, you guys are pretty good at making estimates but we will give you that color in January.

All right.

Just a couple of this and that's, the depreciation expense looked like it was only $274 million this quarter, I wondering if [INAUDIBLE] higher in the first couple of quarters, do you know why it was that low?

We are scrambling, Steve.

Maybe you and Paul could talk about that afterwards.

There is nothing unusual going on in depreciation.

How about accounting, BCA accounting which popped up a lot this quarter, Paul.

The BCA accounting differences line?

Yes.

In In terms of the non accounting revenue elimination?

Yes.

On the revenues side we had a significant number of operating --

No, I meant non BCA.

Nothing really unusual in the differences elimination plan.

So, could I just touch on one last thing on this 7E7.

Are you committed to, essentially, I mean, you haven't frozen the design of the plane yet?

I am just wondering, are you you committed to going with one wing on that plane or is that still an open ended item?

We are obviously trying to make sure that we have a design that meets multiple market requirements, that means being both efficient at the shorter ranges and as a very long-range airplane.

That will mean some differences between those, and they are trying to find the most efficient way of going that.

So you can expect some differences, but also a lot of commonality.

So would that mean a change at all in your nonrecurring investment in what you thought at your conference earlier in the year.

I don't think any significant change in nonrecurring investment.

All right, thanks very much.

Thanks, Steve.

We will take our next question from Robert Toomey, Dain Rauscher.

Thanks, I wonder if Phil could comment a little bit more at your progress on BCA, in implementing lean manufacturing, and how that affects your margins going forward?

I think that probably the single biggest activity at BCA is the drive toward lean manufacturer.

I think what they have discovered is it is both significant in its impact, and there is a lot of room, a lot of head room ahead.

They continue to push that, it is really done down at the detail shop level, individual shop level, but we see that as a powerful tool going forward.

When you combine that with a fundamental change in design philosophy to try to optimize production efficiency, in other words, design for lien, then you get another big kick, and that is obviously where a big part of 7E7 is going.

In fact, if I were to characterize it right now, I would say that the biggest impact of the 7E7 program is the change in the way it is designed for manufacturability and designed to cost.

Are there things still specific to -- that you can comment on in the manufacturing facilities, individual programs or specific programs that you think are particularly important?

No, you can see it virtually everywhere you go.

Okay.

You can see it on the 737 product line, you can see it in the back shops, they are beginning to do some really first-rate work with our supplier base.

So just the moving line is one evidence of that, but it is only one of a whole bunch.

Okay, great, thank you very much.

Next we will go to Byron Callan, Merrill Lynch.

Good morning, gentlemen.

Mike, just a couple of quick questions, on the 2004 revenue guidance, can you give us any sensitivity to 767 assumptions that are baked into that and the other variable, at least in IDS might be future combat system, particularly if that program is restructured?

I know you are going to factor things but will it move those numbers around if those programs don't happen or are changed?

Byron, for sure, the planned growth in future combat systems is a significant piece of that, so, you know, we can all run our sensitivity analysis on the Army's ability to keep it funded and going forward.

As you know, there are higher growth programs that are in IDS that have natural growth associated with them, even things like the Hornet are growing at rate as are things like missile defense and some of the other classified programs.

So the natural funding within the Pentagon, and the programs that we have already won, are the programs that are driving that increase on the revenue base.

Fine, and then taxes, there have been this issue about export tax credits, I gather you guys where satisfied with the legislation moving through Congress now, and this shouldn't be a risk moving forward?

We have all been trying to provide our perspective on that, Byron, it seems that there is a convergence on ways forward throughout the hill.

I think they are all fairly sensitive to the current state and addressing a reasonable transition to the future state.

So my expectation is that that has some impact on on us, but it will be spread out over three to five years as the transition takes place.

Okay, great.

Phil, my last question, just on 7E7, can you map out some of the decisions that still really need to be made?

I guess you have got to choose some of the major system suppliers, but you still basically are on track for this board authorization offer and possible launch by mid 2004, is that a good way to characterize that stuff?

I think it's a great characterization.

Working with a number of suppliers, a lot of those not not yet closed, good progress, and generally on track as far as the program is concerned.

Great.

Thanks a lot.

And we will go next to Nick Fothergill Of Banc of America.

Hello, first quick question is, it is on record with a General Shoemaker of the Army is trying to pull forward electronics within FCS onto current present platforms.

I was just going to check with you, is that a advantage to you or does that create some delay in the restructuring of FCS or are you still able to capture the value if that were to take place?

We see that in the positive because that is done in the context of making those compatible with the Future Combat System.

And since we are the architect, the lead system integrator, as that is cycled back into existing platforms, that is positive from a Boeing standpoint.

Thanks, another one for you, you comment about Asia in the commercial side being the strongest market at the moment.

As you look at Asia and you make discussions just generally across the airlines that come from that region, what is the possibility of those Asian orders actually materializing in '04?

I think there will be Asian orders in '04.

Now, you know, we have been running at an order rate that is keeping our backlog in commercial airplanes pretty constant.

In other words, we have matched production rate against demand, and I think we are pretty close to being on track there, so I think there are likely to be orders from Asia in '04, but I don't look for a huge shift.

Okay, last one for Mike.

Mike, the Boeing Capital has financed quite a few 757 deliveries in the past 2.5 years, in fact $850 million higher net book value in the 757 fleet since 2,000.

Obviously these younger and later year built models are manned up suffering a diminution in the residual value.

Might that create a very small charge in the next the quarter or two at BCC?

Well, I think, Nick, in general, you know, we have all been watching the valuation piece.

It seems to have settled out reasonably well.

Certainly there could be minor charges, pluses or minuses in that area as the commercial marketplace returns.

Minor, just in the form really of tens of millions rather than of hundreds?

Well, you never really know, depending on where the marketplace go.

You all know what the total portfolio is, and were there another -- I use the term disaster, maybe I shouldn't, obviously could have a significant function, but under normal circumstances and what we see right now, we wouldn't expect huge write downs like we had previously.

Okay.

Thank you very much indeed.

Next we will go to George Shapiro, Salomon Smith Barney.

Good morning, Phil, a couple of questions, one on 747, the backlog is only $41 at this point, if you don't get orders for that, at when point do you have to make a decision to stop that line?

At current rates, which are relatively low, this is a very acceptable backlog.

I don't see having to make a decision there for a number of years.

Okay.

For Mike, the quarter, BCC had a charge of $34 million to revalue lease assets.

Do I assume that that reflect finishing the negotiations with United that you referred to in the release, and do we still have negotiations yet to go with American and others that would potentially cause additional charges in subsequent quarters?

Go ahead, Paul.

George, this is Paul.

The $34 million reflects -- does not reflect United and reflects a small number of operating lease transactions that were revalued, and the impact of United was accommodated in BCC's allowance from doubtful accounts.

So we don't see as it stands now we don't see United having material impact going forward based on what we see.

How about some of the other airlines that you haven't finished negotiations yet?

Does that potentially lead to charges?

No, we have done our best, obviously at this point to fairly represent our current situation.

If there is a radical change, obviously we will have to reflect that, but we think our current position is pretty accurate.

Okay, and then just one detail, maybe this is best off line, but the accounting differences, the eliminations of nearly $600 million in sales, what caused that number to be so much higher this quarter than what we have been running in the past?

George, it is simply the number that have happened in this quarter versus what happened last quarter.

George, you can see it on the last page of the financials on the operating financial data that some total of the off fleet within the company transfers.

You can see we have sixth year third quarter versus one last year third quarter.

Okay.

Then one last one maybe for Phil.

As of October 21, your Web site has about 168 net orders this year, I mean, we have two months to go.

Where do you think we will wind up roughly for the year?

You know, one of the things we never do is try to predict orders, because they always fall in or out of the year.

We do think there are orders yet to be booked this year, so they are not in that number.

Are there any significant ones other than the rumored ones with China?

I doubt if there are any other significant ones, but there are going to be some relatively small ones and of course, the other potentially big one would be the 767 tanker.

Okay thanks very much.

We will take our next question from Rory Cohen from Prudential Securities.

Just a couple of questions that we had earlier.

Would it be fair to say that the cash flow stayed roughly the same, that the offset from the reduction in pension contribution might be offset by the roughly equal offset in the Boeing Capital transactions, the financing?

Which you indicate your footnote comes through your Boeing operating cash flow?

I think that is not a good trade to make, Rory.

Okay.

Can you give us a little bit more color -- would it be fair to say on an EPS line, given the, I guess, a little more skewing towards foreign deliveries next year that your tax rate might might be a little bit lower?

No, no, I guess I would stick with our normal tax rate which is a little over 30, 30.5% for tax purposes.

We don't see anything happen there.

Okay, on the commercial side is it possible you can give the commercial operating margins if you exclude the profit on the aircraft with intercompany transactions?

No.

Okay.

Going down the list here.

How we doing, Rory?

Zero for three, actually.

On the BCC side, can you give us a sense of the sensitivity on how much higher your carrying value is versus the current fare market value on the 757s?

We go through every quarter and do an analysis and update it every 90 days.

We think think we are very closed based on everything we said, the market indicators that we look at.

Do you think the portfolio is pretty much mark to market and you don't need a significant recovery in lease rate or lease violations?

You get a roaring absolutely around this table.

It goes back to the process that our BCC uses on a quarterly basis to take the data that is current and make the adjustment that are appropriate.

I am just trying to get a sense as we look at following leasing rates, whether or not I guess a degree to which they might come back until there would be permanent impairment.

Is it possible maybe to even take a shot at that?

No, I think we provided a lot of visibility through the Qs.

As we said here just a minute ago, it is done very specifically and to discipline process on a quarterly basis. [INAUDIBLE].

So for 0 for 4.

I guess the last one, on the tanker deal, real quickly.

You mention here, in terms of deviation and pricing, do you feel there is any sort of exposure here that they go the 20/80 you actually seek a multi year procurement from the Air Force that pricing might come down a little bit?

I, you know, we have tried to be very careful all the way through to approach this as a commercial deal.

Uh-huh.

Properly priced, reflecting the investment and the cost, and I don't see a significant change there.

Okay.

I guess the last question, has there ever been contemplated, I guess, given the challenges that have been cited with respect to the special purpose entity, the third party intermediary other than the currently proposed legal trust might be used?

No, I think writ now we are heading exactly in the direction we have been headed.

Okay.

Well, I appreciate it.

Thank you very much.

Thank you, RORY.

Continuing on to our next question we will go to Howard Rubel, SoundView Technologies.

Hi, I only have one question with nine parts to it, guys.

Thanks, Howard.

I won't do that to you.

Actually, two very -- one from definitional point of view, I think early in the call there was a question about expenses on 767 tanker versus capitalizing it.

My understanding is that you've capitalized all the expenses to date on it so we haven't seen the P&L impact.

Is that correct?

No.

We are expensing.

Oh, but there is some also that is still capitalized, that's correct, right, Phil?

Yes.

All right.

Talking about agenda items, as you sit down with your team and look at 2004, what do you think are the three or four mission statements that you want to give to the heads of each of your business unit?

One, that aggressive cost control is and will remain absolutely crucial in this business now and going forward.

Two, that you can't count on growth to get to your results, you are going to have to do it by running the business where it is.

Very tight focus on execution and on fundamental performance.

Three, that there are and will be growth opportunities, and we need to make sure we are positioned to capture those, I think over this past year, year and a half, we have done that well, and I think we can continue to do it.

Those will be the things I would list.

Those seem pretty reasonable.

Then just two small items.

One is Cap Ex is at $478, looks like you are still targeting a billion dollars, Mike.

Aren't you being a little bit optimistic?

We might run under a billion.

A little.

Then last, connection looks like it is starting to turn the corner, I mean the losses are down significantly.

Can you sort of play it out from here how that is going to work, you have a nice customer list, that is one of your growth opportunities I think as we take a swing and look at results going forward?

I think that's right.

One of the real important keys is, as we light up different parts of the globe with satellite coverage, we obviously incur a fixed expense associated with the transponders on those satellites and therefore, the takeup rate on the airplane, the usage rate is important.

That is why getting the number of airplanes converted, getting them into service and then getting the takeup rate.

As a program, we are still pretty excited about the overall [INAUDIBLE] potential but there is a front end investment here but we are right on track.

That means sort of break even is towards the end of next year or is that being too optimistic?

That is probably being a little optimistic.

Thank you very much, gentlemen.

Thanks, Howard.

Next we will go to Joseph Campbell, Lehman Brothers.

Good morning, I wondered if on the 7E7 schedule, so to speak or the tentative schedule that Byron asked about, whether you could give us a sense of whether the actual decision to go forward with a plane is likely.

I think Byron suggested a six-month marketing window for the first half of the year.

Is that what you are thinking, or right it take a little longer?

I think six months is reasonable.

I can give you I don'ts that will take a little longer.

I can also give you scenarios that might make it a little quicker.

But for purposes, Phil, I am thinking of the guidance that we have and when you begin to spend, I presume that, you know, the real ramp up in 7E7 Dreamliner spending comes when you make a second decision after a 30 to offer to actually build the plane.

I am wondering whether your guidance contemplates a midyear begin or later?

Actual, the guidance reflects an end date, a delivery date in '08 and the work that is necessary to get there in in terms of configuration definitions.

So the '04 estimate is not affected by the point of go ahead.

If that go ahead were to slide significantly, then you would crank down on your expenditure rate.

But, you know, right now we are targeting on an end date rather than a go date.

So, the R&D, that we are -- you know, the preparatory R&D that is probably under way and all the work to take the suppliers, you know to think about the designs and so on, therefore, the '04 spend kind of unaffected.

Is that the right way -- You are planning on '08 and if the market says you have to slip it or pull forward you will adjust but the '04 R&D spend is what it is, I guess?

That is a good representation.

Terrific.

Then, on the charge or the pull forward or the correction due to efficiencies in the BCC, can you give us that -- I suppose we can probably all tinker with the numbers and try to back into them, but can you just sort of give us a sense of how big they were?

Are you talking about BCA, Joe?

I'm sorry, I said BCC, I meant BCA, excuse me.

There were several questions related to the unit margin differences with the program margins, the explanation has to do with apparently a one time effect represented by understanding what the external and internal supplier costs were that affected unit but not program.

We typically don't go into those kinds of specifics, Joe, but obviously they were significant.

One data point for every one is that, you know, obviously they had to take a charge of a couple of hundred million dollars on the unit cost side as well in relation to the 757 program.

You can see that, again, looking at their accomplishments with regard to organizational consolidation and working very well with their suppliers, they were able to the quarter achieve very good unit results on an ongoing basis.

I should should add we expect going forward that unit to relationship program will look more like it has the prior two quarters.

Just a clarification on the 57, is the unit cost, is the 757 charge in both unit and program?

That is correct.

It is in fact on the unit side it is about $277.

The $184 is the program accounting, Joe.

$184 is the program accounting and $277 is the unit?

Right.

Great.

Okay, thanks very much.

Thanks, Joe.

Okay, we will take one more question.

We will go to Peter Jacobs with Ragen MacKenzie.

Okay, gentlemen, first, Phil, could you talk a little bit more about the 767 tanker program and the impact it could have on the 767 line.

When we look at the backlog there for about 28 aircraft being produced at about 1.5 a month, let's call it, that's about a year and a half of production, there, I kind of worry about an extended delay in Washington, and then you might get to a point that you have to make a go no go decision on maintaining the 767 line.

So if you could please speak to that.

Secondly, if, Mike, you could give us an idea of basically the under funded pension amount currently, I don't know if you are comfortable giving that number, but if we look at last year, the end of last year is about $7 billion, under funded status.

I am wondering if if you are on track to see that narrow this year or do you think that could expand, basically, the relationship between the assets and the liabilities and the movements there?

Okay, on the 67 tanker, yes, they did a really great job of answering your question.

I think the assumption that you put forward is pretty accurate.

Okay, very good.

On the pension funding, Mike, could you give us a little color there, please?

Not a lot.

I think what we would expect to see is the possibility of a very modest growth in that number.

Okay, super.

And that's the end of my questions, thank you.

Thanks, Peter.

That wraps up this portion of the conference call, and we are ready to go to the press side at this point.

Again, that does complete the analyst question and answer session.

For members of the media, I will now returning you to The Boeing Company for introduction remarks by Mr. Tod Hullin, Senior Vice President of Communications.

Mr. Hullin, please go ahead.

Thank you we will continue with the media questions for Phil and Mike.

If you have any questions after the session ends please call our media relations teams at 312-544-2002.

We are ready for the first question and ian interest of time, we will ask that you limit everyone to just one question.

Again, it is star 1on your touch-tone phone to ask a question for members of the media.

We will pause for a moment to give everyone an opportunity to signal for questions.

We will take our first question from Paul Merrian with Crain's Chicago Business Journal.

Good morning, I was wondering if you could give us an update on the site selection process for the 7E7 production facilities?

It is going on.

Can you narrow down the timing of it at all or anything at all?

No, they are going through a very careful, very complete analysis, looking at a lot of factors.

When they are done with that process, we will then let people know what the answer was.

Okay.

Thanks, Paul.

Next we will go to Darrell Hassler with Bloomberg News.

Hi, Mike, good morning.

I wanted to -- if you could go back to the growth in the loan portfolio for Boeing Capital.

Number one, could you just over the expected growth in the next two years again that you already gave and if you could just comment on why that is slowing down because whether the financing environment is getting better or there is other financing that can be found or maybe from a lack of orders?

Okay, let's see, yes, we are looking at about half a billion dollars in '03 in terms of portfolio growth, about $1 billion in '04.

We had been $1 to $1.5 in '03 and $1.5 to $2 in and '04.

And what you are seeing there is a conscientious effort on our part to make sure that we are very prudent in looking at the opportunities that are there and helping our customers get third party financing as best they can and obviously making sure that we we do deals that make good sense to us from both a product perspective and from a customer perspective and make sure that we get the balance in our own portfolio in that regard.

And is it easier than say years ago to find outside financing with the airlines?

I'm sorry, I missed your question.

Is it easier than a year ago for the airlines to find outside financing?

I don't think there is any significant change in the last 12 months or so in that regard.

Thank you.

Yes, thanks.

And we will take our next question from Kevin Dunn, Financial Times.

Hello, there.

Kevin.

Hi, could you tell me how many engine suppliers there will be on 7E7, what the planned Japanese share of the program would be?

I think in terms of the analyst, you said there was no significant change nonrecurring investment for the program.

What is the estimate for the nonrecurring investment for the program?

Well, let's see, there will be at least one engine manufacturer, but we have not made a determination as to how many there will be, as normal, we are not going to disclose the actual nonrecurring expenditure and don't plan to do that.

There was one question is is in the middle, Kevin.

Which was the planned Japanese industry share of the program.

As with the triple seven, there will be a significant Japanese share in the program, final details of that have not yet been announced.

If I could just say that I am very encouraged that you are having at least one engine manufacturer, that sounds pretty good.

I thought you might be.

Thank you.

Kevin, we probably shouldn't let that question go by on the R&D and development expense.

Relative to previous program, we do expect to have a significant reduction in overall development moneys, they come in two buckets, one is efficiency of design manufacturer, and the other is slightly different business approach on risks sharing partnerships.

We will continue on with Francine Knowles, Chicago Sun Times.

Good morning, everyone, can you tell me when you are expecting board action on the 7E7?

Are you expecting it in November or December?

Our next regularly scheduled board meeting is mid-December.

If there is to be action that it will probably be where it occurs.

You know, nothing is definite until we obviously get there.

The next regularly scheduled meeting after that occurs at the end of February.

Thank you.

And we will take our next question from Brian Corliss of the Everett Herald.

Good morning, Mike said earlier that '04 is sold out at the low end of the range.

Would that mean that we could anticipate to know major work force reductions in BCA in the year ahead?

If we can move up to a production range that is pretty close to where we are this year, which in the current estimate is $275 to $290, we will be about $280 this year.

So we are in that range.

I would not expect to see significant changes in work force.

There are likely to be some, and there are positives in terms of the design of 7E7.

There are some downs in terms of continued efficiency and lien.

So we may see some balancing there, but overall, you know, big picture, relative stability.

Thanks.

You are welcome.

And continuing on, we will go to Peter Payne , Los Angeles Times.

Hello, Phil, Mike.

Peter.

How big is this deal supposed to be that will be announced in the next few weeks from China?

I am I am going to let you speculate on that.

Can you give us any sense of that?

No.

Can you characterize it as multi billion?

I am going to leave it where it is right now.

One of the things we try to always be careful on is never to count things before they occur.

And so I am going to continue down that path.

Do I get one more question then?

Sure.

Okay.

Could you talk a little bit about the launch and or tall systems business, is there some uptick in that and what is your forecast?

On the commercial side, we see it relatively flat both in the satellite side and in the launch side.

We have continued strength on the military side, nothing significantly new there, but probably the biggest issue is just making sure we size that business to the current market value.

Thanks.

Thanks, Peter.

Next we will go to David Bowermaster from the Seattle Times.

Good morning.

The BCA earnings, I was hoping you can clarify something about the numbers for me.

It looks to me like that deliveries, obviously, were down in the quarter versus a year ago, but that says down buy 11%, earnings, on the other hand, are down, even after you add back the 757 charge, looks like earnings are down 34%.

So could you explain that for me?

Let's see, without dissecting your your numbers we have differences in volume and so therefore we have earnings that down, we have the 757 charge, therefore, earnings are down.

We have better performance, as we talked about with a couple of questions with the analysts, therefore, earnings are up in that regard.

And then we have quarter over quarter, we have a pension expense that is coming into BCA that didn't come in in previous years.

I think those are the big pieces, David, that we have going pluses and minuses, and in general, I mean, what is encouraging to all of us about that is the ones that we know how to control we are controlling pretty darn well well and that team is going a great job of figuring out how to turn more efficiency into better profits.

Okay.

For your guidance in '04, does that reflect any significant payments you might get from launch customers in the 7E7?

There is an estimate that we make on all programs, in terms of forward payments.

That will show up on the cash side.

You know, that goes across every single program.

Yes, 7E7 is in that plan.

Okay.

Given that a lot of the talk on the call has been very upbeat about the 7E7 with regard to board decision.

Should it be recorded as as a foregone conclusion, or is there still a possibility that the board does not authorize it to go ahead and if that happens what is the impact for Boeing in '04 both financially and in terms of perception.

One of the things you learn in this business is you never anticipate the board.

The board has its fiduciary responsibilities and it will exercise that responsibility.

So, you know, is there a possibility?

Yes, of course there is a possibility.

You know, to speculate then on what and, I don't think makes much sense.

Our goal here is to find a product that fits the market place at a cost that allows us to earn a very positive return, and we are going to keep driving forward to find that place.

Okay.

Thank you.

We will take our next question from Kathy Fieweger with Reuters.

Good morning, how are you?

Good morning.

Kathy, whatever her name is.

Yes, you got it.

I was kind of struck by how you guys didn't address in your press release or you guys didn't talk about it more on your analyst call, more about the satellite systems.

Are the problems in that unit over given what you have said in the past couple of quarters and what is the update on the EELB investigation and what is going on there?

There is and I've tried to refer to, I will just amplify a little bit, there is intense focus within IDS on making sure that the satellite and launch part of our business is in fact sized to the market, and that means getting it down in terms of capacity, so that it is profitable.

You know, we are not there yet, but that is where we are headed, and the the team is working hard to accomplish that goal.

On EELB, we continued to work very aggressively to satisfy the U.S.

Air Force in terms of the programs that we have and make sure that we do that and then can be removed from suspension.

But obviously we have got to satisfy them, and we are working hard to accomplish that goal as well.

So, just in terms of what -- what do you mean exactly when right sizing it, that could mean additional layoffs or getting some additional parts for it?

Where are you on the cost overrun's that have been a problem?

The cost situation there has been driven primarily by decisions earlier, decisions to put technology into those satellites that in turn caused problems.

There are some satellites remaining in backlog, or in production that have those characteristics with them, and that is taken into account in our estimates.

There is a much more disciplined process in place now on design.

We think that will begin to impact us, as we go forward.

So, you know, we are not yet at a position where I want to be, but they are making progress.

Now, back to your other question, right sizing more than anything else means getting the facilities sized correctly, the work force sized.

They have made, I think significant gains there already.

Okay, I have one other question on the government IT area.

Obviously there have been a lot of activity going there with Lockheed, Titan, [INAUDIBLE], where are you guy?

Do you feel like you need to do something there what you have is sufficient?

We are very well positioned at the so point, obviously we're going to continue to look out for opportunities, if the right opportunities occur we will react.

Are there opportunities left of significant size that are attractive?

You know, to speculate further probably doesn't, doesn't pay, I can tell you, we are very comfortable with where we are, so there is no situation where we need to do something and solve an issue.

I would rather look for opportunities that might add value, but whatever we do, it is aimed at making sure that we create shareholder value by whatever action we take.

Okay, thank you.

Thanks, Kathy.

That's it for the call.

We have other things scheduled that we are bumping up against. very much.

If you have additional questions please call our media team and they will do everything they can to help you.

Thanks very much.

That does conclude today's conference call, thank you for your participation, have a wonderful day.

You may now disconnect.