波音 (BA) 2004 Q3 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to the Boeing Company's third quarter 2004 earnings conference call.

Today's call is being recorded.

The management discussion and slide presentation, plus the analyst and media question-and-answer session, are being broadcast live over the Internet.

At this time for opening remarks and introductions, I am turning the call over to Mr. David Dohnalek, Vice President of Investor Relations for the Boeing Company.

Mr. Dohnalek, please go ahead.

Thank you, and welcome to the Boeing third quarter earnings conference call.

I'm Dave Dohnalek, and with me today are Harry Stonecipher, Boeing's Chief Executive Officer, and James Bell, our Chief Financial Officer.

After brief comments by Harry and James, we will take your questions.

We ask that you limit yourself to one single-part question.

As always, we've provided detailed financial information in our press release issued earlier today.

As a reminder, you can follow today's company broadcast through our website at boeing.com.

Now, before we get started, 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 earlier this morning and in our various filings with the Securities and Exchange Commission, and in the forward-looking statement at the end of this web presentation.

I urge you to read them thoroughly.

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

Thank you, Dave, and good morning to everyone.

Today we will be discussing our third quarter results, and I will begin by sharing my thoughts on the quarter.

Then James Bell will summarize the financial results and provide you with our outlook, and then I will conclude by stating our priorities going forward, and then we will be happy to take your questions.

So let's get started on slide 2.

We had another really strong quarter, as our focus on execution continues to generate results.

With defense market strong and commercial markets recovering, we were able to deliver impressive financial performance.

Our Integrated Defense Systems business led the way with double-digit revenue and earnings growth, while commercial airplanes performed well and made important progress on the new 7E7 program.

Our business has once again delivered outstanding cash flow, and we used some of that cash to further strengthen our pension plans, part of our balanced approach to cash deployment.

With the strong performance of the Boeing team, significant investments in our core businesses and a large backlog, we are confident in our future.

Now let's move to the business unit segments, beginning with Integrated Defense Systems on slide 3.

IDS had a very strong quarter, turning in double-digit revenue growth and excellent margins.

Revenues grew by 13%, driven by strong growth in our network systems and support systems businesses.

Operating margins remain near 10%, as the aircraft and weapons systems, network systems and support systems businesses all delivered excellent profitability.

We made excellent progress on our key development programs supporting military transformation, including future combat systems, missile defense, and battle space communications.

We were disappointed, however, by the continued cost growth in our commercial satellite business, which affected our margins in the launch and orbital segment.

We are aggressively addressing these problems and are committed to returning the launch and orbital segment to profitability.

IDS continued to add to its industry-leading backlog, with a $6 billion expansion of the future combat systems contract, additional maintenance and support work on the C-17 program and a large order from DirecTV for three commercial satellites.

IDS also won one of two pre-SDD contract for systems architecture definition and initial design of the joint tactical radio system, a key element of the U.S. military's plans to enhance network centric operations.

The IDS team is performing very well and I am confident they will continue to deliver strong financial performance going forward.

Now let's turn to the highlights from commercial airplanes on slide 4.

Despite somewhat lower revenues on delivery of 67 airplanes in the third quarter, BCA achieved solid margins due to their ongoing focus on reducing costs and improving asset utilization.

Airline traffic continues to grow robustly, and with oil prices at high levels, we're seeing increasing interest from many airlines in ordering new efficient airplanes to meet the needs for capacity growth and efficient operations.

During the quarter, BCA captured 114 gross orders, including 52 7E7 launch orders from [INAUDIBLE] Airways and Air New Zealand, as well as key wins at Turkish Airlines and Air China for 737s.

BCA also won key 777 campaigns at Singapore Airlines, the Emirates, and Etihad Airways, which we expect to finalize into definitive agreements in the next few months.

We continue to be pleased with the unprecedented customer interest in the 7E7 airplane, and our program remains on track.

BCA reached important milestones during the quarter, with the 800th delivery of the 737-800 airplane and the beginning of final assembly on the first 777-200 long-range airplane, which will be the world largest, longest range jet liner when it enters service in 2006.

Commercial airplanes have the right strategy and is well positioned for profitable growth as the market recovers.

Now looking at the other businesses on slide 5, Boeing Capital delivered a solid quarter, as it continued to focus on supporting Boeing businesses and managing the risks.

As expected, BCC reduced its finance portfolio slightly, as the market for financing of commercial airplanes continues to improve, despite rising pressure from higher fuel costs.

BCC used a portion of the proceeds from the sale of its commercial finance business to retire $1 billion of debt during the quarter.

Connexion by Boeing made progress in this quarter by adding more planes to commercial service at Lufthansa and by capturing new orders from China Airlines, Korean Airlines, and Asiana Airlines.

Also, Connexion began its maritime market trials with TK Shipping during the quarter, and the early results are encouraging.

So with that review of our performance, I will turn it over to James, who will take you through our financial summary and our outlook.

After that, I'll wrap up with some final thoughts, and then we'll take your questions.

James?

Thanks, Harry, and good morning.

First, I'll discuss a few financial highlights for the quarter, and then take you through our updated financial outlook.

Let's begin with the financial summary on slide 7.

Boeing financial results for the third quarter reflect excellent top-line growth at IDS and continued strong operating performance across our businesses.

We also benefited from past positive tax settlements and adjustments during the quarter.

Our business generated 2.3 billion of cash flow in the quarter for full pension contributions, as our focus on working capital, management, and asset utilization continued to yield results.

With our strong cash flow, we continued implement our balanced cash deployment strategy, including making another $1.6 billion discretionary contribution to our pension plans.

After making the investment in pensions, we still generated almost $700 million of operating cash flow during the quarter.

Based on our third quarter performance and our forecast for growth, we are raising our financial guidance for 2004.

Now turning to slide 8.

Total company revenue increased 8% to 13.2 billion in the third quarter, led by double-digit growth in IDS revenues.

Growth at IDS offset a modest decline in commercial airplane revenues.

The company earned 56 cents per share in the quarter, up from 32 cents per share in 2003, as both IDS and commercial airplanes continued to generate improved operating efficiencies through their lean manufacturing programs.

We've benefited from a 14 cent per share contribution from state tax settlements and other tax adjustments, which offset a 4-cent per share charge related to the redemption of $1 billion of debt in BCC.

Turning to slide 9, our core business units performed well in the third quarter.

IDS grew its revenues 13%, led by 39% growth in its network systems segment.

Operating margins were 9.9%, driven by outstanding performance on most defence and intelligence programs.

IDS's nearly 10% margins include losses that Harry mentioned earlier in our launch and orbital systems, caused by cost growth from commercial satellite programs.

Commercial airplane revenues declined slightly, as a higher proportion of 737s offset two additional deliveries during the quarter.

Operating margins were 3.6%, reflecting the ongoing lean activities across the BCA Enterprise, which partially offset the lower revenues and increased R&D investment supporting the development of the 7E7.

Margins for 2003 reflect a charge for terminating the 757 program.

Unit cost margins were higher than program margins this quarter, due to favorable adjustments for good program performance.

Now moving to slide 10.

Our balance sheet and liquidity remains very strong, as we ended the third quarter with a cash balance of $4.3 billion, down from $6.2 billion at the end of the second quarter.

The decrease reflect the $1.6 billion investment in pensions, the redemption of $1 billion of BCC debt, and our decision to invest 1.3 billion in high quality fixed income investments, which are recorded in the short-term investment and investment lines in our balance sheet.

During the quarter, we also continued our disciplined share buyback program, repurchasing 2.2 million shares of stock for a total of $115 million.

For the year, we have repurchased 6.6 million shares, totaling about $319 million.

Boeing debt was flat at 5.2 billion.

Boeing Capital reduced its debt by 1.3 billion, due mostly to the debt redemption.

BCC's debt to equity ratio rose modestly to 4.8 to 1, as a significant cash dividend to the Boeing company offset the lower debt levels.

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

We remain at the top of our industry peers, with solid single A ratings.

Moving to slide 11, Boeing's cash flow was excellent, totaling almost $700 million for the quarter.

As I mentioned earlier, operating cash flow included another $1.6 billion discretionary contribution to our pension plans, which will reduce Boeing's required contributions going forward.

Boeing measures its pension plans using a September 30th year end for financial accounting purposes.

During the plan year that just ended, our pension investments earned over 13%.

In addition, we made cash contributions of 3.6 billion to our pension plans during the year 2004.

During the fourth quarter each year, we establish the discount rate and expected rate of return used by our pension plan for the coming year.

The applicable discount rate we will use for 2005, based on published long-term rates on September 30th, is 5.75%, which is below the 6% rate used to determine 2004 pension expense.

Now, should interest rates rise from these historic lows over the next few years, our pension liability and our pension expense could be materially reduced.

Our expected rate of return for 2005 is 8.5%, down 25 basis points from our 2004 rate, due to modest changes in asset allocation that will reduce portfolio risk.

As a result of our strong pension returns and significant cash contributions, offset somewhat by the lower discount rate and the lower expected return, we now estimate the unfavorable impact of noncash pension expense on 2005 earnings to be between 600 and 650 million, or about 46 to 50 cents per share.

Due to the sizable contributions made this year, we have essentially eliminated our cash funding requirements for 2005.

And as a result of those contributions and strong plan returns in 2004, we expect to write back a significant amount to our equity account on the balance sheet in the fourth quarter this year.

We will continue to evaluate additional discretionary contributions to our pension plan going forward.

We will be refining our pension assumptions and outlook during the fourth quarter, and we will update you when we report on pension performance and funding status early next year.

Now turning to slide 12, I'll discuss our outlook.

Today, we're raising our financial guidance for 2004.

We've increased our expected EPS for 2004, primarily due to the lower tax expense recognized in the third quarter.

Our cash flow guidance for 2004 is increased due to strong working capital performance, and now includes the third quarter pension contribution, which had not been previously included in our guidance.

Turning to our segment outlook.

Commercial airplane deliveries forecast for 2000[PH] remain at approximately 285 airplanes, and is sold out.

Our delivery guidance for 2005 has increased to approximately 320 airplanes, and it is essentially sold out.

Commercial airplanes expects a further delivery increase in 2006, driven by generally improving market conditions.

Commercial airplane revenue guidance is unchanged for 2004 at approximately $20 billion.

Revenue guidance for 2005 has increased to approximately $24 billion.

Commercial airplane operating margins in 2004 on a program accounting basis are increased to approximately 5.5%.

The outlook for BCA's operating margin in 2005 remain at greater than 5.5%.

BCA's operating margins include the planned increases in R&D for 7E7 development.

Integrated defense systems revenues for 2004 are expected to be between 29.2 and 30.6 billion, and then increase by about 10% in 2005.

This guidance is supported by continued strong growth in our network systems and support systems programs.

We anticipate that aircraft and weapons defense programs will be stable, while commercial satellite and launch markets are expected to remain challenging during this outlook period.

IDS margins are forecasted to be in the 9.3 to 9.8 percentage range in 2004, and slightly below 10% in 2005.

Turning to Boeing Capital, our new strategies and lower portfolio growth and risk is going well.

As a result of continued improvements in the aircraft financing environment and the sale of our commercial finance portfolio, we now expect BCC's portfolio to decline approximately 2.5 billion in 2004 and to be flat in 2005.

Reflecting the smaller portfolio, revenues are now expected to be approximately $1 billion in 2004 and $900 million in 2005.

Boeing Capital's annual return on assets is expected to be approximately 1% in 2004, which includes the costs associated with the $1 billion debt redemption completed in the third quarter; and for 2005, Boeing Capital is expected to return on assets to also be approximately 1%.

Additional segment guidance is provided in our press release, which can be found ton Boeing website.

Now, putting it all together, Boeing's revenue guidance for 2004 is unchanged at plus or minus 52 billion.

Revenue guidance for 2005 is also unchanged at between 57 and 59 billion.

Important drivers continue to be the rate of growth and performance on key defense programs and the number and mix of commercial airplanes we deliver.

We are raising our earnings per share guidance for 2004 to a range of $2.40 to $2.60 per share, and this primarily reflects the impact of lower tax expense experienced in the third quarter. 2005 earnings guidance remains unchanged at $2.35 and $2.60 per share.

Guidelines for 2004 and 2005 also include the impact of non-cash share-based plan expense, which totaled approximately 36 cents per share in 2003, and is expected to grow during the guidance period.

For 2004, operating cash flow guidance is increased to greater than 3.5 billion, and now includes a total of 3.6 billion in pension contributions made during the first nine months.

We continue to assess our -- the various options available for deploying our strong cash flow, including additional discretionary pension contributions.

Capital expenditures are expected to be approximately $1 billion in 2004.

For 2005, our operating cash flow guidance remains at greater than 5 billion.

Capital expenditures for 2005 are expected to be in the 1.5 billion range, which is unchanged from our previous guidance.

The growth in 2005 capital expenditures primarily reflect investments to support Connexion by Boeing and the 7E7 program.

We expect R&D expenditures to be between 3.25% and 3.75% of sales in 2004, growing to between 3.5 and 4% in 2005, driven by increases in 7E7 spending.

With that, I will give it back to Harry for some concluding remarks.

I will be very brief, and I think the only thing that I really want to point out is that we've delivered some really strong performance over nine months in the 2004, and we're well positioned in our major markets with the right strategy, great products and a great team.

This team has been committed to restoring our reputation; but at the same time, keeping their eye on the ball of running the business to produce the kind of results that you've seen today.

We are relentlessly focused on execution, meeting our commitments, driving our performance to new levels and restoring our reputation with all the stakeholders.

Now we would be happy to take your questions.

Thank you.

For our analysts, to ask a question on today's conference, please press the star key followed by the digit 1 on your touch-tone telephone.

If you're on a speakerphone, please be sure your mute function is switched off so your signal can reach our equipment.

Again, star one for questions.

And as a reminder, in the interest of time, we are asking that you limit yourself to one single-part question.

One moment, please, for our first question.

Rob Spingarn of Wachovia, you may ask your question.

Good morning.

Could you give us a little bit more color on the -- if you can quantify in the NIDS the portion of the business that's missile defense work and future combat system?

Well, it's in the -- both of those programs are embedded in our network systems program areas, so if you look on the financial statement, you can get a sense of what the size -- and they're about one-third each of that overarching --

One-third each of network systems?

That's correct.

And should we expect, given the fact on that -- you know, on GMD, the development nature of that, should we expect margins to continue there to stay below 10%?

I know you that you can get above 10% on FCS.

Well, we have in the statement what the segment guidance is, so we're expecting to the stay right around single high digits.

Thank you .

Heidi Wood of Morgan Stanley, you may ask your question.

Can you give us, Harry, a breakdown regionally of where your aircraft are going in 2005; and specifically, if we take the 34 planes going to Southwest out, what percentage of '05 deliveries are going to U.S. carriers directly and through lessors?

Well, I -- you know, Heidi, I couldn't answer that question sitting here, but the IR people can get that data back to you if you'll permit us to do that.

Okay.

Then can I ask another question?

Sure.

Can you give us some color on what happened at BSF and how much did they lose in the quarter and what you're doing to try and not mitigate that risk into 2005?

Yeah, Heidi.

What we're experiencing --we're still experiencing some technical issues that are occurring real late in the program production cycle, and what we tried do in going through developing this quarter's EAC is try to capture that.

Before, what we had been doing was looking at assuming our experience wouldn't get any worse and going through and comparing that to our detailed EAC preparation, and so now we've gone back and looked at some prior programs and at the end of them to see where that performance was.

And we saw that instead of staying constant, that performance did get a little worse.

And what happens is if you get in the late-stage tests -- you break something, you have to tear the product down and rebuild it.

And so we've incorporated that view into the EAC, and we're working really hard to make sure that the up-front work is done at a quality level that we don't necessarily repeat those.

But I just want to make sure I refresh your memory -- a lot of these problems are suspending from the front end of the program and the way these contracts were originally negotiated, and the way the design effort was originally done, and now we've changed all those processes, and all we're trying to do is digest these existing programs.

But we do believe that with the EAC methodology we have in place, we've captured, we believe, the lion's share of the cost risk associated with completing these programs.

Joseph Campbell of Lehman Brothers, you may ask your question.

Good morning.

I wondered if you could sort of tell us with regard to the pension contributions and then the changes in the assumptions for the 2005 year, you know, sort of on balance, does this make this make risk worse than it used to be, or better than it used to be?

I certainly didn't expect, you know, you would put $3.6 billion in -- and now I -- you know, should I expect you to put more in in the fourth quarter?

And I'm -- maybe you can also provide some comments on the newspaper business about the SEC and so on.

There's kind of a lot of money going on and we have a lot of headwind, and I'm trying to figure out is the headwind more or less than we thought it would be, and maybe just a little more color on how these various pieces affect the 50 cents that we might have.

I'll make one statement, and then I'll let James answer the tough questions; but number one is, investing in our pension as long as we get the tax deduction for is it a very good investment for us.

And so that's why we will continue to invest in that area, so long as we are under the IRS cap for investment, and we're looking to see if there's any more opportunity there.

So that's what's driving that investment, and also getting our pension plan up to a better funded status.

I'll let James answer the SEC question and the rates that we've assumed for '05.

Okay, let me start with the $3.6 million investment.

So, the impact of having the first part of that investment in the first quarter at a billion dollars had a positive impact on our pension expense for '04.

It actually reduced it.

It will -- the subsequent investments will reduce, and the one we made earlier. where they have an impact on our expense and '05 and subsequent.

It also will have a pretty significant impact on the requirements to fund going forward.

In fact, we've essentially eliminated any regulatory requirement of that fund in '05.

Now, the change in rate assumptions, both the discount rate and the rate of return, the discount rate is actually set based on the AA Moody's bond rate as of September 30th.

I mean, that's not really an option.

And so that rate, as of September 30th, which is our cut-off date for financial accounting and pension in the Boeing company, was at 5.75 which is, as we said, 25 basis points lower than what we had previously recorded this year.

Now, what that results in about bout a $95 million pretax impact to our interest expense om '05, and when we look at the rate of return assumption, which we also reduced 25 basis points, specifically for the reason that as we look at reducing the risks and our allocation of our plan assets, the return, we thought, going forward would be lower than what we previously used and so that -- that 25 basis points will impact the expense by about 75 million pretax.

Now, having said all of that, and we believe those are the appropriate assumptions going forward, and we will, as Harry mentioned, continue to try to fund to both somewhat mitigate some those expenses to the extent that we can get the tax protected provision of it via the IRS, we think that's the right thing to do with our cash flow position.

Now, as far as the SEC inquiry goes, clearly, the SEC is starting to get out front and go look at what they believe the potential risk areas, and they're asking certain companies to come support that activity.

So they've asked us -- and as would be expected, since we're one of the largest pension plans in the country -- for us to provide information on how we develop our assumptions and how we do our pension accounting, and we're supporting that.

Now, I want to be clear that they made it pretty obvious in their request letter that they don't suspect that there's any issue, but they do -- they would like to go through our process and see what our assumptions are so that they can go review this critical area and make sure that it's being done appropriately, and we believe that our profit in in the assumptions that we have in place and the discipline that we have over creating those assumptions will stand well up in this inquiry.

Howard Rubel of Soundview Technology, you may ask your question.

Thank you very much.

You've had a number of unusual items, James, in the quarter, and I just want to highlight a couple of them, and if you could address them.

There were a number of different items with BCC, some puts and takes, and also the profitability in IDS, especially with aircraft, was at the high end of a normal range, and I'm sure there were some great big cost items in there, but also you have the benefit of multiyear procurement and your work that's done there.

And then last, could you give us sort of what you think a more normalized tax rate might be.

Well, let me start with BCC.

Obviously, in BCC we did have a couple of things that happened.

We settled our Hawaiian issue, in terms of it -- we got a plan coming out of -- restructuring it coming out of bankruptcy, and we had more favorable performance than we had anticipated, so we were able to pick up some earnings associated with that.

We wanted -- we protected against our exposure on ATA, and then we just had our normal reviews of reserves and those that sort of fell out how they fell out.

But other than that, that was all that you saw in BCC .

Excuse me, we had the debt repayment and there was expense associated with the prepayment of that million dollars in debt that also had an impact, would have been an unusual item experienced in BCC for the quarter.

Now -- good question -- the tax rate -- we think the tax rate is going to normalize at about 30% or so.

What we experienced this quarter -- we did have some settlements with some state tax that impacted the tax rate.

We also received the benefit -- we adjusted for the benefit we got for last year's pension contribution, that flow through this year that affected it.

And then also the other pension pension contributions we made this year.

But over time -- over time, we are going to see that tax rate normalize around, we think, about 30%.

Now, we have better margins in our aircraft and weapon systems that was really due to performance, because they continue to perform well, and then we also had better performance in our support systems area -- our L3 support systems segment -- and that was basically due to closing out of some contracts and picking up some performance where we actually performed better than we'd estimated.

I hope I answered all the pieces.

Our next question comes from Cai Von Rumohr of SG Cowen.

You may ask your question.

Yes, thank you.

You had yet again very good performance at the commercial unit cost line -- 6.2% -- and you alluded to some favorable adjustments.

Could you tell us, how big were the favorable adjustments, and what should we look for here going forward?

I can't tell you the exact dollar numbers of that, Cai, but what I will tell is that what we had was better performance across all cost elements, both the internal and through our subcontract community, and what you saw is the cost improvement for those production lots early on.

The impact of that was larger on unit margins, because as you recall, it has both the impact of the current deliveries and the up -- the truing up of those that were delivered out of that production lot, where we saw better cost performance in the unit margin.

And then in the program margins, what you see is that moderated as it's prospective rather than retroactive; but it was good performance across really the whole accounting quantity block, but the impact is more predominant in this quarter for unit margins because of the early production lot.

George Shapiro of Solomon Brothers ,you may ask your question.

Yes, the ATA filed bankruptcy, as I'm sure you saw.

As of June, you had about $720 million -- I think they were the third or fourth largest customer,at Boeing Capital.

It appears, James, that you wrote off the remaining part of the preferred in this quarter.

What do we expect from the balance of what they have since what you -- they've got 757s, I think, is the bulk of your financing, so.

Yeah, they have 12 757-300s, which are really pretty good aircraft, George, and so to date they haven't defaulted on any of those lease payments.

And if they can't keep those airplanes, we will redeploy them.

We'll pull them in and redeploy them.

And there's a lot of interest out in the market for those -- for that particular aircraft type.

Now, so what our -- what our exposure, what our risk would be, is what we have to incur in terms of reconfiguring them for a new customer.

But to date, they are current.

We have taken them off the accrual basis, and so we're only recording their revenue when they pay us, and to date, they're up to date.

Byron Callen of Merrill Lynch, you may ask your question.

Good morning, gentlemen.

Harry, since the last call, there's hardly been a fair amount that's changed in the broader economic picture -- oils are record levels, we've had more financial trauma in the airline sector.

And I'm just curious,it really doesn't sound like you've changed your expectations at all.

Can you just walk us through that?

Are you thinking differently about the market going forward?

Are there some areas that have popped up more favorably in commercial airplanes since you really got on and talked about your outlook for the area?

I haven't changed my view at all actually, Byron, because traffic continues to surge, and I'm sure you've been around the airports, like a lot of people have, and traffic is picking up very remarkably, and we try to drive the business off the traffic curve.

And the kind of thing that you'll get into, if -- and by the way, I'm not one of these people that think oil prices will stay up -- I happen to believe that oil prices will moderate and come back down, because I believe that there's two big issues here.

One of them is disruption, and you can pick the country that you think is disrupting the most right now, or all of them; and the other thing is once you get the disruption, an awful lot of speculation goes in to the market -- and you folks know that better than I. And so I think we're going to see oil come back down, whether it's, you know, by the middle of next year or the end of next year, whatever.

But in the event that it doesn't, that really drives purchase of new airplanes, because every new airplane -- ours and theirs -- each new airplane is better than the one they're replacing, in terms of fuel efficiency, and so that's the way we view the market.

And in commercial, we continue to look at traffic, and traffic is at world records again.

And Asia is particularly strong, but all areas are strong.

So we haven't changed our view at all.

In fact, our view seems to be pretty modest compared to the view of our competitor; but still, that's our view.

Once again if you would like to ask a question, press star 1 on your touch-tone phone.

Our next question comes from Steve Binder of Bear Stearns.

Sir, you may ask your question.

Good morning.

James, you kind of touched on Cai's question about unit plus margin performance.

Particularly with respect to the program margins, I'm assuming there are no block changes in the quarter?

There was only 12 added to the 747 product line, Steve, but no material.

And that -- it had a very insignificant impact on the quarter closing position; so for the most part, no.

Joe Nadol of JP Morgan, you may ask your question.

Thanks.

Good morning.

Harry, I was hoping you could provide a more detailed update on the 7E7; and specifically, do you still expect 200 orders by year end?

And also, to what degree are you committing Boeing to support financing of the aircraft with airlines -- start-up airlines like Primaris -- ordering aircraft?

Number one is we haven't had much requirement to support financing at all, because what we're finding is an awful lot of people out there that want to do the financing.

It's -- they view it as a great aircraft, and Alan and his people actually did a lot of work with the financial community for the 7E7 in terms of changing the paradigm for how aircraft get financed, and that drove an awful lot of the commonality that comes into the 7E7 configuration ,so that airplanes are easily redeployed in the event that you have difficulty in financing.

So we don't see a big requirement to do financing at all.

There's lots of our partners, and lots of our partners meeting financing partners out there who are anxious to do that.

And so that's not an issue at all.

In terms of the 200 orders by end of year -- absolutely, that's what I still expect.

And Alan and his gang are working real hard on it.

They've got plenty of proposal acceptances to bring that home, but I've got to tell you, that it's really tough digging right now to get these things concluded with all the things that have to get done.

But that's my -- still my expectation.

Nick Fothergill of Banc of America, you may ask your question.

Yes, good morning, Harry.

What would be effect on outlook for 2005 if for some reason tanker wasn't achieved?

I know that's in your guidance for 2005. [INAUDIBLE] about 150 million.

And also, incorporated in that question as well, if you could update us on how you are faring with IDS at the moment with the ongoing government investigations.

Okay.

As I take the last one first. number one, ongoing government investigations are not bothering IDS at all.

It is fully cooperating with anything and everything.

As you're talking about, the new investigations started after Boeing [INAUDIBLE] sentencing session, and those are going along. we don't expect any impact from them; but as we stated publicly, anybody finds anything that needs to be cured, we'll cure it.

And -- but we don't expect to find anything.

So that's going along fine, and we expect it to.

What was the other part of the question?

The impact --.

Tanker impact, as you know, it won't have any impact on it other than if the thing didn't happen, there is a write-off, and that's fully disclosed, --.

It's $270 million.

$270 million, which will be a non-cash write-off, but in terms of -- you know, that tanker program doesn't deliver anything for several years, and so in terms of near-term impact, won't have any other than the write-off.

Robert Toomey of Dane Rauscher, you may ask your question.

Hi, two of my questions were already asked, but I just want to focus on commercial margins for a second.

They seemed a little bit low relative to my model.

Does that get, again, back to the issue of unit versus programming accounting?

And, again, the 3.6 seems a little low relative, I think, to your long term expectations for the commercial margins in the 5 to 6% launch range.

Wondered if you could comment on that.

Thanks.

So are you saying -- are you talking about the third quarter margins were down?

Yes.

Well, we were -- if you look at from the over quarter to quarter, we were down a billion dollars in revenue, and so, you know, it's lumpy, but overall we're expecting them to level out at the guidance range at about 5.5.

So that's what we think we'll see.

This quarter's low is because of the low revenue quarter.

Jim Higgins of Credit Suisse First Boston, you may ask your question.

Yes, hi.

Most of my questions have been asked as well, but are you seeing anything in the market that appears to be affected by the talk of the A350?

I mean, has anything changed in your discussions with airlines for any of your products because this is being floated?

Nothing's changed at all other than it's out there.

We fully expected there would be a competitor, and said so before we launched this thing.

And so we were a little surprised that they didn't get there faster.

I mean, they spent the first several months saying the 7E7 was irrelevant.

It obviously has become relevant.

But we're not seeing anything other than a competitor that's out there, which we always expected, and they're there.

Jarrod Murob [PHONETIC] of Prudential, you may ask your question.

Thank you.

Looking at commercial aircraft deliveries in your forecast for this year, it looks like you're looking at fourth quarter being relatively flat with the third quarter.

Should we expect margins to be similar and revenues to be similar?

And as well, did you pull some aircraft deliveries, just timing issues, into the third quarter from the fourth quarter?

I thought the third quarter was usually seasonally a little bit weaker.

Didn't intentionally pull anything forward.

And like you say, third quarter is normally a little weaker, and it was an pleasant surprise that it was as strong as it was.

But I think you've got it assessed about right, and you can add up the airplanes.

And we've pretty much said we're going to deliver 285 aircraft for the year.

So that's a pretty easy subtraction, so .

We expect the mix, though, will give us better margins, and so you can expect stronger margins out of commercial in the fourth quarter because of the mix change.

Stewart Havansky of Vanguard, you may ask your question.

Yes, good morning.

I have two, and they're hopefully quick, so maybe I can get them both in.

The first is, can you talk about your use of free cash flow over the next 12 to 18 months, what your main uses will be?

And second, your pension performance appears to be extraordinarily good.

You should be commended for that.

I'm curious if you can provide any further color as to how you've been able to have such high performance when many other companies have not shown such strong pension performance.

Well, it's interesting.

I'll answer -- this is Harry.

I'll let them answer it; but actually, as I looked at it I said, what's holding us back?

So depends on where your reference point is, and you're right that a lot of people have had lot less performance.

But there's also some outfits that are performing better.

And we are at least as good.

And so we're very pleased with the strategy that our investment management people have had, and we expect it the continue.

So we're trying to do that.

Uses of cash is -- it's the same old answer, except this time we have pension.

Used to be, it was simply continuing some program of increasing the dividends, M&A activity to the extent that it's prudent and makes some sense, investment in our development,and stock buyback -- and we expect to do some of all of that.

Whereas finding anything that's worth buying is very difficult, so I didn't spend much time worrying about that.

And so it's going to be dividends, stock buyback, and investment in our own developments.

And I'd only add to that, in terms of pension performance, is that if you recall the fourth quarter of last year was a pretty strong performance year in the pension plan and in the market itself, and because our year runs from October 1 to September 30th, this year has us performing really, really well.

Other companies cut off at the 31st of December, so they got the fourth quarter in their last year's performance.

So we don't know any secrets.

It's just good discipline, sound investment strategy, that manages the risk and tries to optimize the performance.

Heidi Wood of Morgan Stanley, you may ask your question.

Yeah, I had a follow-up.

I just want to be clear about the moving parts at BA -- BCAG.

Why did the accounting differential swing so much over the last three-quarters?

I looked back on my notes, James, and I think in the second quarter you said that you didn't expect much in the way of cost growth there -- you thought it would be pretty close.

How can we do a better job projecting that?

I'm not sure I understood the question.

On BCAG, the different between the program accounting and unit costs [INAUDIBLE].

You mean in terms of how we move down on the deferred production costs?

Yeah.

Well, again --so there's two things that happened First of all, we've sort of -- you allocate the normal allocation over the seven -- or over the eight 777 deliveries.

So you would normally amortize that, but the amortization is a little higher because of the good cost performance that increased the differential between the two -- between the unit margins and program margins.

But, you know -- so you're going to have that.

You can't -- it's kind of hard to predict just how good the good performance is going to be, and if it's in the outyears or in the early years.

And if it's in the early years, are equally across the whole accounting quantity, you're going to get a more pronounced impact in the current period on unit margin than you will on the program margins, and then it will increase how much you have to absorb and the preproduction cost, or deferred production cost, as you deliver in the current quarter.

Howard Rubel of Soundview Technologies, you may ask your question.

Yes hi, I have a follow-up concerning commercial deliveries in '05.

Given the ability to have shortened lead times and cycle time,s I'm surprised that you don't have the ability to sell more aircraft -- and also, can you give us a sense of the mix?

Well, selling more aircraft, I think we could probably sell some more aircraft while we move some more orders.

And so we've kind of moved the thing up to around 320 aircraft for next year, and that has moved up.

As the market -- if the market strengthens some more, then yep, we could see a few more airplanes in there, and that would be great.

But quite frankly, we see the market at about that level and we like where we are and the mix is not a heck of a lot different than you've seen in the past.

We continue to have -- the 737 is the biggest segment of the market, it's the biggest segment for us and for Airbus.

It's called A320s and 737s.

And then the second biggest one is in the A330 767 area, and the 777 A340, and so you can move up through there.

So still the biggest part of the mix will be the 737.

Joseph Campbell of Lehman Brothers, you may ask your question.

Yes, I wanted to pick up where Steve Binder got cut off, which was, did you make any changes in the production rate?

You said there were no block changes, but did you make changes in your estimates for '06 which will now be part of the program margins that we see?

And I'm wondering if you made any adjustments out in the pace with which you expect to move through the blocks, even though you didn't perhaps make any changes to the blocks or any changes to the expectations about the profitability in the blocks.

So, as I mentioned earlier, we only upped the accounting quantity on the 747 by 12 units.

We don't talk about production rates still, which you well know, and so that's the answer.

David Strauss of UBS Warburg, you may ask your question.

Looking at your guidance for aircraft and weapons systems and support systems and margin guidance, it looks like margins there are going to drop off fairly significantly --

You're really breaking up.

You're going to have to -- either you're moving in front of a digital phone or something.

We can't hear you.

Okay, can you hear me now?

We heard that one sentence.

Go ahead.

Looking at margins, your margin guidance for aircrafts and weapons systems and support systems for the full year '04, it looks like in the fourth quarter those margins are going to drop off fairly significantly versus what you've done the first nine months.

Could you just comment on that a little bit?

I think I -- I think got it.

You cut in and out.

You're asking that it looks like, based on our guidance on aircraft and weapons systems, that the first nine months' margins would have to drop in the fourth quarter for to us hit our guidance.

Was that the essence of your question?

Yes.

Okay.

Well, remember, as we mentioned in the first and second quarter, we had production lot close-outs on our production programs that really added significantly to the margins in the first and -- first quarter primarily, but some also in the second quarter.

So we're not going to experience that in the fourth quarter, plus we'll have a different in mix and delivery in terms of how the revenue itself is generated, and they have different profitabilities associated with it.

So we are expecting the margins in '04 to moderate a bit in quarter 4.

I'm sorry, operator, we have time for one more question from investors.

Thank you.

Our next question comes from Rob Spingarn of Wachovia.

You may ask your question.

Yes, I just wanted -- James, I wanted to follow up on Heidi's question on another comment that commercial margins would stay roughly flat from third quarter to fourth quarter.

So it seems to me that the weakness in the third quarter margin, was driven by a drawdown back on the deferred production of the 777; basically, catching up -- catching you up with where you might have been had you not capitalized costs in the first quarter, so wouldn't that imply if there's a catch up there that's been completed that we would have a higher commercial margin in Q4?

Yeah, we are.

I think we said earlier that the margins would float up in fourth quarter.

Okay.

I've been -- I think that Harry's characterization from a recent question suggested it would be flattish.

No, he said they would be up in fourth quarter.

I heard exactly what he said.

So we're expecting for the year program accounting margins for BCA to be around 5 to 5.5%.

And so they won't stay at the 3.6 that you saw in the third quarter, as I mentioned earlier, was principally driven by the lower revenue.

I mean, that and the increase we see in the 7E7 development costs.

I was addressing the number of airplanes and the revenue as looking like third quarter.

Okay?

That was the question I answered before.

Thank you.

That completes the analyst question-and-answer session.

For members of the media, if you have a question, please press the star key followed by the digit 1 on your touch-tone phone.

I will now return to the Boeing Company for introductory remarks by Mr. Todd Holland, Senior Vice President of Communications.

Mr. Holland, please go ahead, sir.

Thank you.

We will continue with the questions for Harry and James.

If you have any questions at the conclusion of the session, please call our media team at 312-544-2002.

Operator, we're ready for first question -- and in the interest of time, let's try to limit it to the one question so we can get through everybody.

Our first question comes from Susan Chandler of Chicago Tribune.

Hi, Harry.

Hi.

Since Congress threw out your sole source contract for tankers, wouldn't it be prudent to write off the tanker development cost now, and how long can you put it off?

Well, you can put it off until the accounting literature says we should write it off.

It's not a matter of putting it off, it's a matter of continuing to carry the assets on the books in accordance with general accounting principles, and that's what James does.

So even if you don't have a --

By the way, those people who prefer to have it written off in their assessment of the company, you know, you have your models, and you can go right ahead.

We've told you what it is.

And if you want to write it off, write it off.

Okay.

That's -- you know, that's our -- but that's fundamentally. nothing has changed in the program in our view except -- and I'll say, since back in, what was it, June when Secretary Rumsfeld laid out some guidelines, and nothing's changed then.

And in fact, you go back and read the congressional record of October the 8th, colloquy that took place there, it was -- we were rather encouraged by all of it.

Thank you.

Our next question comes from Molly McMillan of Wichita Eagle.

Hi, Harry.

Hi.

My question is, of course, based on Wichita and what stage is the potential sale going?

Have you narrowed down the field of potential buyers; and if so, you know, to how many?

Like is there one finalist left?

And are you in the long term, in the event of a sale, committed to keeping like the 7E7 work in Wichita with a new buyer?

The 7E7 work will stay in Wichita with any buyer.

And we expect the work in Wichita to expand, actually, and that's the whole concept of doing this, is that they will be able to go out and bring in work from other parties.

So the -- we do have bids in from a number of potential buyers, and those are in and they've been being evaluated and that's going on, and I think as I stated more recently, and so has Hallen and his team, is we expect it to the conclude by the end of the year.

Do you think it will be like toward the end of the year or next month, or will it --.

By the end of the year.

Okay.

As you know, you cannot -- there's another side to a negotiation, and so both sides have an opportunity to accelerate, to drag it out or whatever.

Is there one buyer left?

I mean, is there a finalist in the field?

Have you narrowed it down to one?

I can't answer that.

Well, I can answer it, but I won't answer it.

How's that?

Okay, and are you confident a sale is going to occur?

I won't answer that one, either, because we've maintained all along, is if it happens, it happens.

If it doesn't happen, we'll get along with improving the cost and running Wichita for the benefit of the commercial airplane group and the Boeing Company.

Is there anything that you can tell employees here that would make them feel that, you know, you're looking out for them?

I mean, in a sale, should some employees expect to lose their job?

That will be a negotiation that goes on between the employees and the buyer and the Boeing Company.

So, you know, you're looking for answers that just aren't available until we get a deal.

Okay.

And they're just not available at this point.

But if you look at and study the other deals that we've done, whether it's the St. Louis Fabrication Division, or Spokane or any of the other places is, you can get a pretty good insight into the way the process is run, and part of our process is to be sure that the employees and the communities are given every consideration by the buyer.

And that's part of our negotiation with the buyer, whoever it may be and if there is someone.

Our next question comes from Darrell Hasler of Bloomberg News.

You may ask your question.

Good morning.

James or Harry, is there any way that you could characterize the exposure to Delta -- to Delta Air Lines -- in the portfolio?

Yeah, we have a [INAUDIBLE] in the EETC that's worth about 185 million at book value, and we have collateral that would offset that exposure to the tune of about 60 million, and it would -- it comes due in November '05, so that's the one exposure I would say we really have to them, and now we have in our skyline at BCA to deliver about 66 airplanes to them, mostly 737s, over a pretty long period of time, and then we have a few 777s that are included in that number.

But, you know, those are really, really good airplanes with a lot of interest in the marketplace, so if they don't go there they'd get sent somewhere else, but I'd say to the tune of 120 million we have unexposed -- or exposed exposure, however you want to say it, that's true.

Are you talking to them in any by or doing any negotiations at this point?

We're always in discussions with our major customers -- and Delta, we obviously have a longstanding relationship.

We're pretty confident they'll make it through, and the airplanes that are the collateral we think is critical to their restructure plan, whether they go into bankruptcy or hot, and so we believe they will do everything in their power to continue to keep that current and make our payment in November '05.

What other types of airplanes are backing it up?

737s, 727s --.

18 of 757-200's, and six 737-300s.

Part of their restructure plan is to simplify their fleet, and I think they're going to simplify it around those aircraft models, so we're pretty confident that they're well incentivized to stay current on payments; and in fact, they have been current on all payments.

The plan you just mentioned to me are the collateral for -- planes are the collateral?

That's for that, and our allocated portion amount to about $60 million.

Thank you.

Our next question comes from James Wallace of The Seattle Newspaper.

Hi, Harry.

I had a question this morning about subsidies.

How critical is it that the Washington State incentive package stay in place in order to be competitive with the 7E7, as was suggested at the time?

Well, the 7E7 is going to be -- is going to be competitive, so keeping the cost down is very important.

As to whether the tax incentives in Washington State are a subsidy or not is something that will be argued long and hard, as we consider it nothing more than a lowering the cost of doing business in the state of Washington, and it's general to aerospace.

And we, as a company, have been dedicated to trying to identify areas for Washington State to become more business friendly.

Alan Malolly [PHONETIC] and a number of his staff work every day with public officials and private companies out there in terms of identifying ways to become more competitive in Washington State.

And, of course, we're going to build a 7E7, and always did intend to, no matter what.

And certainly, we were very pleased with the performance of everyone in lowering the cost of doing business in the state of Washington.

And it became very effective to us.

Do you consider, Harry, that to be a bargaining chip in whatever negotiations come up next?

Absolutely not.

There are no bargaining chips.

As I think everyone's taking a statement, which has to be proof.

You know, if you're not in compliance with the WTO, it doesn't matter whether this argument between Airbus and Boeing over the '92 agreement is there or not.

If it's not in compliance with with the WTO, it's always at risk.

And so everyone one is worried about the WTO and how it might go; but quite frankly, we're dealing with a 1992 agreement that is no longer in place, by the way, and that only involves two companies -- Airbus and Boeing.

So I think the way this thing is getting characterized, James, is the fact that we've all said, look, we want full transparencies -- we want to be sure that everything is put on the table, because I think when you compare Washington State tax incentives, I think will you find that they're probably not as good as Airbus gets them to lease in Hamburg.

And so we've had a lot of people trying to figure out what those are, and no one seems to be able to figure that out.

And it's because they're not available and not transparent like they are in the United States.

And so I think that we will find that those don't quite come up to par in terms of what Airbus is already getting out of locations where they do business -- in the U.K., Germany, and in France.

Thank you.

So -- and what we're trying to do is say, look, you folks keep talking about this, and if you wanted to make a case out of it, you have to show harm, and to show harm, there has to have been damage, or you know, we get the first dollar benefit out of these incentives in 2008.

And so I think if you waited until about 2028, you might have a case.

Yeah, thanks, Harry.

And so that's kind of the argument, and don't -- I mean, you folks that are in the press, you can help us by doing some research and reading the stuff and really help the public understand what's going on here.

So I would ask you to do that, and certainly our people will help you understand everything we can.

I know I've had a big time with a lot of reporters always asking them if they've read agreement, and you'd be surprised at the number that haven't, and so --

Once again, to ask a question, press star 1 on your touch-tone phone.

Our next question comes from Ken Vandross of Wichita Business Journal.

You may ask your question.

Good morning, Harry.

Good morning.

With -- regarding the tanker deal, and the original plan was to build 767s as commercial jets, then bring them to Wichita for the final modifications into tankers, has that process changed?

So would there be in the change in the amount of work?

I understand there was some discussion of perhaps making some of those modifications in-line similar to what you're planning to do with the 737 MMA project.

That's true, we are studying that, because it makes a lot of sense.

And you know, we're doing the Italian tanker down there now.

We've got one of them in, and we pushed to have the board around to look at it, [INAUDIBLE] on Monday.

And you know, [INAUDIBLE], taking an airplane, building a nice new airplane and hauling it down to Wichita, and chopping it to pieces and then putting it back together is kind of a hard way to do it.

We are looking at seeing if there's some way to do it on an I-TAR [PHONETIC] compliant basis in-line.

But we haven't been able to come to conclusion yet.

But all the delay in the activity does give us an opportunity to do some of that; but certainly, there will still be an awful lot of work done on that tanker in Wichita.

And so we might not just be chopping holes in the side of it, but there's an awful lot of things that go in the tanker that we expect Wichita to be part of.

Do you think that might impact the number of jobs -- of employees that would be needed in Wichita to finish off that --.

I don't have any idea, and if you look at the wait that this tanker program is going to run, is -- you know, that's the thing we ought to all be worrying about, is how many we're going to get and how many we're going to build.

That will have a bigger impact than anything.

Okay, and what about the Airbus attempts to get their foot in the door on this deal?

Well, they're always there and always running around, but we don't see any -- right now, the legislator does not require a competition, in our interpretation of it, a competition for the tanker program.

It does require competition for the sustainment, or the maintenance of the activity, but that language is in there to kind of protect the military bases.

So this will be a competition between the Boeing Company and the air bases that currently do a lot of maintenance on the KC-135.

You know, right now, the maintenance on the KC-135 is split between the Boeing Company and the Air Force bases, so I expect the same thing is what the language is all about.

Thank you.

Thank you.

Our next question comes from Tim McLaughlin of the St. Louis Post Dispatch.

You may ask your question.

Good morning.

I was interested -- I was trying to figure out how much, if any, of your net earnings is attributable to pension income or tax-related effects for pension accounting?

Well, actually, I wish there was some pension income.

There's a big pension trust -- James will give you the number.

A lot of -- we really have the tax this year for pension expense.

I don't recall exactly what the percent is, but this year we move to expense on our pension accounting, not income.

Last year we did have income.

The amount that is attributable to this quarter for taxes is 14 cents, and that's what we disclosed in the press release.

Just one quick follow-up.

The -- can you say what your pension benefit obligation was at the end of your measurement period and how much of that is funded?

We're still developing that.

Remember, it's September 30th is when you start to measure what that obligation is, and so we will be looking at going through that.

I think we're at about an 80% self-funded level -- excuse me, 90% funding level, and -- but we've got to get through and do that measurement.

And it takes quite a while to get through.

That's why we actually have a cut-off September 30th so we can have it done by the end of the calendar year.

Okay, thank you.

Cheryl Poe of the Inside U.S.

Trade, you may ask your question.

[INAUDIBLE] this quarter -- is there any worry that it would have an effect on the next quarter's earnings or any future earnings?

And also, could you explain a little bit more about R&D for 7E7?

You said you intend to improve R&D spending -- and I have the precentages, but how much does that translate into, and would there be any government R&D spending?

There's no government R&D spending on the 7E7.

And you can get the number by multiplying percent times revenue.

The revenue is 52 billion, and so -- for the year -- so you can pretty well come to a conclusion on that.

And that's the total R&D spent by the company.

That's not specific 7E7, which we do not provide that information.

That's competition-sensitive.

What about the effect of possible subsidies on future quarterly earnings?

There's no impact at all on the earnings.

Haven't been and won't be.

We don't get subsidies to support development of new products.

Peter Fay of the L.A.

Times, you may ask your question.

Good morning, Harry.

I've got a two-part question related to the launch and orbital systems business.

Could you -- Harry, could you walk us through sort of what are the technical problems that are still being worked on over there?

And I noticed that the forecast for next year is break even.

Does that mean you'll pretty much have those technical problems handled by the end of this year?

Well, we'll have most of them handled.

There will still be some of them hanging around, because we still -- we do have some profitable business over there in that division, so we have some that are giving us some trouble and they fundamentally are electronic devices that you get them in to test where they're stressed, and they fail.

And when they fail, we've got to go take them back out again, and as James said earlier, in some cases do a major tear-down of a satellite system.

And so that's the thing that costs all the money, and we continue to have those problems, and it really goes back to doing a lousy job of development of some of the components that were assigned to go into the major system, and so we're a piece at a time recovering from some very bad engineering that took place a number of years ago.

Some of these products that we're working on right now, we've been working on three to five years.

Okay, thank you.

But we are -- you know, we've got a lot of our very best people working on these things and, you know, I get aggravated and irritated sometimes, but I'm still on their team and I'm 100% behind them, and we've got a plan that says we'll break even next year, and we just finished our five-year plan and, you know, when you look three, four, and five years out, they've got a great business there, so we're going to hang with them.

Thank you.

Darrell Hasler of Bloomberg News, you may ask your question.

Hi again.

I wanted to know -- and perhaps this was explained to the analyst, but if it could be explained to me one more time, why in the IDS business we had such good margins, and what does it mean when you talked about the first and second quarter about these lot closings?

Why does that affect the margin?

Why it affects it is because when you go through and you're producing the lots for those contract and delivering on them, you're estimating what the cost is for those individual airplanes within those lots.

And when you true it up and you close those lots out, you really flush out.

You have estimates in for what you think your subcontract costs would be, what you would think for lagging work might be, and then when you close them out, what you find in a lot of cases, and what we found this year in the first quarter on our C-17 and F-18 production contract, is that those -- the actual cost came in lower than what we anticipated, and so that differential flowed right into our earnings.

But that did not affect the third quarter, necessarily?

No, we didn't have the same kind of lot closure in third quarter.

So when you think about lot closures, think about these production lots are probably a year's worth of production, so the first half of the year is when we would close them out, and then we would be operating in the new lot for the remainder of the year, so we won't see other lot closures until the first of '05.

And we may or may not have that same phenomena, just depends.

We also are trying to, as we improve our performance going forward, we're trying to improve our estimates of what our performance will be.

So you may not see the same phenomena next year, but that's what's driving the early high margin the first part of this year.

What drove this quarter?

What drove the third quarter?

The third quarter is just good performance.

And in -- as I mentioned to you earlier, we did have some close-out of contracts in our support systems area.

That's not a production program, but in our aerospace support area, we had some contracts that closed out that also added to that sort of a phenomena for that particular segment.

Thank you.

Jason Nealey of Reuters, you may ask your question.

Hey Harry, it's Jason London.

A quick question on 747.

I'm wondering when we might hear more about the advance system and the decision on going ahead with it or not.

Well, I think you'll probably hear more about it whenever the customers decide they want to do something.

The fellows are engaged with customers on what they'd really like to see happen in the 747 area.

And if we can find a big enough business space there to do something, then we'll end up doing what they want to do.

[INAUDIBLE, OVERLAPPING SPEAKERS] because of the A-380 or --?

Doesn't have anything to do with the A380.

It has to do with customers who have been using the 747 for many, many years.

T hey like it and they'd like to see it improved as we've done every -- you know, few years we've had a change to the 747 to improve its range, improve its payload, improve the operating performance -- and so it's the type of natural product development that all of our product go through, and people are saying, okay what's the next step?

And our answer is, hey, there's lots of things we can do, but there has to be enough business there to make it worthwhile.

And right now, we're running -- we're actually pleasantly surprised at how well the production rate on 747 is staying up.

So still a lot of people like that airplane, and as long as they like it, we'll keep building it.

Thank you very much.

That concludes the media portion of our earnings call.

If you have continuing questions, please don't hesitate to call our media team at 312-544-2002.

That concludes the call.

Thank you.

This concludes today's conference.

You may disconnect at this time.