波音 (BA) 2005 Q1 法說會逐字稿

Good day everyone and welcome to The Boeing Company first-quarter 2005 earnings 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.

For opening remarks and introductions, I will turn the call over to Mr. David Dohnalek, Vice President of Investor Relations for The Boeing Company.

Please go ahead.

Thank you, and good morning, welcome to the Boeing first-quarter 2005 earnings conference call.

I am Dave Dohnalek, and with me today is James Bell, Boeing's Chief Executive Officer and Chief Financial Officer.

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

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

As always we provided detailed financial information in our press release issued earlier today, and as a reminder you can follow today's Company broadcast through our website at Boeing.com.

Before we begin, I need to remind you that any projections and goals we may include in our discussions this morning, are likely to involve risks, the assumptions behind our projections and the factors that could cause actual results to vary, are detailed in the news release we issued this morning, in our various SEC filings, and in the forward-looking statement at the end of this web presentation.

Now I would like to turn the meeting over to James Bell.

Thanks, Dave, and good morning.

Today we will be discussing our first-quarter 2005 results.

I will begin with a brief review of our businesses, and then continue with some comments on our first-quarter financial performance, and our outlook.

After outlining our priorities going forward, I will be happy to take your questions.

Let's get started on Slide 2.

Boeing got off to a very good start in the first quarter of 2005, as our intense focus on execution delivered strong results.

With defense markets strong and Commercial markets on the rise, we were able to deliver solid financial performance.

Our Integrated Defense Systems businesses led the way with outstanding margins on modest revenue growth while Commercial Airplanes performed well and captured a significant number of new airplane orders and commitments.

Our businesses delivered outstanding cash flow, which we used to further strengthen our pension plan, and continue our share repurchase program, both of which are elements of our balanced approach to cash deployment.

We also continued to make significant investments in each of our businesses, to extend our product leadership and position us for growth over the next several years.

With the strong performance of the Boeing team, reinvestment of cash in key growth programs, and our large backlog, we are confident in our outlook.

Now let's move to the business units beginning with Integrated Defense Systems on Slide 3.

IDS had an excellent quarter delivering outstanding margins on modest revenue growth.

Revenues increased 2% as continued strong growth in Network Systems offset lower revenues in aircraft and weapons systems.

Operating margins reached 11.2% as all segments delivered excellent profitability.

IDS also delivered improved results in it's Launch and Orbital Systems segment, as U.S.

Air Force lift lifted its launch suspension, clearing the way for IDS to compete in future launch competitions.

During the first quarter, IDS added to its large backlog by signing a $6 billion contract expansion for the future Combat Systems Program.

IDS also hit several important milestones with the first flight of the F15-K for Korea, and the C-130 AMP test aircraft for the U.S.

Air Force, as well as the roll out of the Italian tanker.

Despite industry uncertainty over the DoD budget outlook, IDS remains well positioned for growth and strong profitability with its broad portfolio of key development, production and support programs.

The IDS team is performing very well across these businesses, and I am confident it will continue to deliver strong financial performance going forward.

Now let's turn to the highlights from Commercial Airplanes on Slide 4.

BCA generated strong performance in the first quarter, as its on-going focus on reducing costs, improving asset utilization, and driving product innovation continued to yield results.

BCA's revenues declined modestly to $5 billion on slightly lower deliveries of 70 airplanes.

Operating margins rose to 7.7% as excellent cost performance offset the reductions in revenues.

BCA had outstanding sales success during the first quarter despite continued intense price competition in its markets.

During the first quarter, BCA booked growth orders for 63 airplanes.

BCA also won commitments for nearly 190 additional airplanes, including 67 A-7 airplanes from 6 Chinese airlines, and large 737 airplane commitments from European and Asian airlines.

Since the 787 program launched just a year ago this week, we have captured 237 airplane orders and commitments from 19 airlines.

We are very pleased with the unprecedented customer response to this new airplane and our program remains on track.

BCA reached important milestones during the quarter with the first flight of the 777-200LR, the world's largest range Commercial airplane, and the announcement of the sale of our Commercial operations in Wichita and Tulsa to [ONEX].

Driven by its industry-leading 737, 787, and 777 product lines, Commercial Airplanes expects to see significant growth in airplane delivery, revenues and earnings, during the guidance period.

Let's look at our other businesses on Slide 5.

Boeing's capital continues to effectively perform its mission to support Boeing's core businesses, as it produced solid financial results in the first quarter.

Aircraft leasing rates continue to improve and BCC remains focused on effectively managing risks.

Connexion by Boeing continued to build customer interest during the first quarter, reaching definitive agreements with three new airlines, and launching its maritime service.

Connexion has now captured orders and options from 10 airlines for over 450 airplanes.

With that review of our operational performance, I will now turn to our financial results and outlook.

Let's begin with the financial summary on Slide 6.

Boeing's financial results for the first quarter reflect strong operating performance across our businesses, offset by significant growth in noncash expenses from pension and share-based plans.

Cash flow remains very strong.

Boeing generated over $1.8 billion of operating cash before pension contributions, reflecting strong profitability, as well as our ongoing focus on working capital management and asset utilization.

We use this strong cash flow to continue our balanced cash deployment strategy, including investing in new programs, contributing $455 million to our pension plans, repurchasing $500 million of our stock, and paying down $372 million of maturing debt.

The strong financial performance, combined with debt maturities in the first quarter, allowed us to further enhance our balance sheets strength.

Turning to Slide 7.

Revenues rose slightly in the first quarter to $13 billion, as modest growth at IDS offset lower Commercial airplane revenues on fewer first-quarter airplane delivery.

Earnings per share fell in the first quarter, primarily reflecting the significant increase in noncash pension and share-based plan expense, which offset strong operating performance in our core businesses.

Moving to Slide 8.

Boeing's core businesses are running well.

IDS revenue grew 2% during the quarter, led by 18% growth in its Network Systems segment, which offset a decline at Aircraft and Weapons systems.

Operating margins were 11.2% as IDS delivered outstanding performance on most defense and intelligence programs.

The IDS backlog totaled $86 billion at the end of the first quarter, providing a solid platform for growth.

Commercial airplane revenues declined 5% as deliveries fell modestly to 70 airplanes.

Operating margins grew to 7.7% as BCA continued to reduce costs and improve asset utilization, the lower costs included adjustments for spares and outside procurement that benefited income by approximately $100 million this quarter.

Unit cost margins were 9.5% for the the quarter, and as expected exceeded program margins as cost reductions benefit current production blocks.

Moving to Slide 9.

Our balance sheet liquidity remains very strong.

We ended the first quarter with cash and liquid investments balances totaling $6.3 billion. up from $6.1 billion at the end of 2004.

Boeing's debt ratio continues to improve during the quarter driven by retained earnings growth and lower debt levels.

Financial strength and solid credit ratings continue to be a priority for Boeing.

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

Moving to Slide 10.

Strong cash flow remains a Boeing hallmark.

Operating cash flow for the first quarter was $1.4 billion, after $455 million in discretionary contributions to our pension plans.

Working capital performance remains strong as improvements across the Company contributed to our operating cash flow.

Capital expenditures increased in the first quarter as the Company made planned investments in advanced production systems for the 787 program and supported ongoing IDS growth .

Now turning to slide 11, I will discuss our outlook.

The financial guidance we are providing today for revenue, earnings and cash flow is unchanged from our prior guidance.

Please note that this financial guidance does not reflect any impact from the sale of our Rocketdyne or Wichita businesses, which have not yet closed.

Broadly speaking, we are expecting solid revenue and earnings growth in 2005 and 2006, driven by significant growth at Commercial Airplanes at the Commercial market -- as the Commercial market recovers, and continued growth at IDS supported by the unit's large backlog.

Our earnings outlook reflect strong operating performance in our core businesses, offset somewhat by the increases in pension expense.

At a business unit level, Commercial airplane deliveries forecast for 2005 remains at approximately 320 airplanes and is sold out.

Quarterly deliveries are spread fairly even through the remainder of the year, as production rates have increased.

Our delivery guidance for 2006 is between 375 and 385 airplanes, and is now 84% sold at the lower end of the range.

Commercial airplanes expects a further delivery increase in 2007, driven by improving market conditions.

Commercial Airplanes revenue guidance is unchanged for 2005 at approximately $24 billion.

Revenue guidance for 2006 is between $27 billion and $28 billion.

Commercial Airplanes operating margins in 2005 on a program accounting basis are expected to be greater than 5.5%.

Margins are expected to moderate over the year, as we continue to increase planned development spending on the 787.

Operating margins are expected to grow to greater than 6.5% in 2006, even as the 787 development continues.

Unit margins are expected to exceed program accounting margins in 2005 and 2006, reflecting the significant growth in deliveries.

Integrated Defense Systems revenue for 2005 are expected to be approximately 32.5 billion.

In 2006, IDS revenues are expected to grow approximately 7%, driven by continued growth in our Network Systems, Support Systems, and Launch and Orbital systems revenue.

We anticipate that aircraft and weapons system revenue will be stable in 2006.

IDS margins are forecast to be approximately 9.8% in 2005 and approximately 10% in 2006.

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

As a result, we expect BCC's portfolio to be reduced by about $500 million in 2005 and remain flat in 2006.

Revenues are expected to be approximately $900 million each year, and return on assets is expected to be approximately 1% in 2005, and greater than 1% in 2006.

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

Now putting it all together.

Boeing's revenue guidance for 2005 is approximately 58 billion.

Revenue guidance for 2006 is between $62 billion and $63 billion.

Our earnings per share guidance for 2005 is between $2.40 and $2.60 per share, reflecting higher revenues and improved operating performance, offset by a significant increase in noncash pension expense.

2006 earnings guidance is between $3.00 and $3.20 per share.

Guidance for both years includes the impact of noncash share-based plan expense, which is expected to be approximately $675 million in 2005, and $575 million in 2006.

For 2005, operating cash flow guidance remains at greater than $5 billion after making $1 billion in anticipated pension contributions.

Capital expenditures are expected to be approximately $1.5 billion in 2005.

For 2006, our operating cash flow guidance is greater than $5.5 billion, and capital expenditures for 2006 are expected to be in the $1.7 billion range, reflecting investments to support the 787 program and growth at IDS.

We expect R&D expense to be between 2.3 and 2.5 billion in 2005, growing between 2.5 billion and 2.7 billion in 2006, reflecting increasing 787 spending.

Now to wrap things up.

We delivered strong performance in the first quarter and are on track to deliver significant growth in 2005 and 2006.

We are well-positioned in our major markets with the right strategy, great products, and a great team.

We are committed to restoring our reputation for excellence and integrity with all our stakeholders.

I am very proud of the focus that the Boeing team is bringing to create value for our customers, and our shareholders.

Finally, we are relentlessly focused on execution, meeting our commitments, and driving our performance to new levels.

Now I will be happy to take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Howard Rubel of Jefferies.

Thank you very much.

I will try to live within this question issue.

James, could you broadly outline the Commercial market activity?

It sure seems, for example, that the 84% sold out for '06, sort of understates a lot of the announced orders, but not yet signed contracts.

I think, Howard, you know, obviously we are really pleased with what we are seeing through the first quarter in the order and commitment traffic and as you know the commitments are just when the customer announces, so we do have to then go out and negotiate definitive agreements, before we are able to then actually say we are sold out.

We have to have those orders -- firm orders booked.

But we are pretty confident that we will get there for '06.

Clearly we have forecasted and have projected that the recovery will be gradual, but what we have seen to date, it is at least gradual and some would say better than.

So we are comfortable where we are.

Thank you.

Our next question comes from Joseph Campbell of Lehman Brothers.

Good morning, James and Dave and company.

You've warned us that you might close the 747 line and the 767 line, and you will take action or review that at mid-year.

And you've told us there will be some expenses on the 717 closeout, and you mentioned on this call, the impact of Rocketdyne and the ONEX divestiture.

I wondered if you could just kind of go through those, and talk about sort of what the ones that actions that are taken, where we will see the EPS impact, and for those that you are considering, maybe just update us on, what exactly you meant with the statements in the Q, about presumably it costs a lot of money to close the lines, but I guess maybe we won't see it.

Maybe you can sort of enlighten us on that?

Thank you.

I think the 717 charges are already included, and they were taken last year when we announced --

there were some period costs you warned us about, $62 million.

Exactly.

The period costs will continue to be recorded -- as a period expense, and they wouldn't -- they wouldn't necessarily just be identified to the 717 program, Joe.

So that's -- I think that is not going to be very much.

Clearly we are looking at a mid to late summer decision on both 767 and 747.

Clearly the 767 is really dependent on whether or not the market -- is looking to want to buy a few more for interim lift, as they bridge to the 787 introduction as we go through the orderly close out of the 767 program.

Now what we've said to you is on the 767, there will not be a forward loss.

What we would have is a moderation and an impact to the -- to the margins on the subsequent deliveries after we make that decision.

That would not be material to BCA's profitability.

On 747, we are also looking at a rate decision sometime mid to late summer.

Clearly we are out in the marketplace trying to make sure we understand the interest for our 747 advance product.

We are getting a lot of market interest there.

The real issue with that is, is that in order for us to move forward with that, the customer also has to buy some more current 747s in order to bridge to when the 747 advance would be deployed.

So from that standpoint, again, if we were to make a decision to discontinue it, there would not be a forward loss.

It would just be an adjustment of the margin rate.

The margins on those that are not yet delivered.

As we look at the Rocketdyne and Wichita --

James, but would you back off from the guidance if you took these decisions or no?

No.

Thank you.

They would not -- they would not be major impacts to the profitability of BCA, and we would not back off guidance.

Now as it relates to Rocketdyne and Wichita, which we do expect will close probably second, third quarter.

Between the two of those, it is going to be slight -- a wash or a slightly positive to EPS.

So, again, would not have any -- we would not anticipate any significant impact to earnings guidance, although the cash side of it would be significant.

It would be up and above what you see in current guidance.

Great.

That clears everything -- a lot up.

Thank you very much.

You are welcome.

Our next question comes from Byron Callan of Merrill Lynch.

Just following up on Joe's question.

Specifically on Wichita, the [IAM] had come out with a letter to its members earlier this week opposing some of the -- the givebacks that ONEX was looking for.

Can you talk a little bit about the status of that deal?

Is it --

Byron, you are breaking up.

I hear every other word you are saying.

So I don't know if you are on a speakerphone or not.

No, how is that?

That's better.

Just -- I was asking specifically about the ONEX deal with Wichita and the opposition that had been expressed by the IAM to some of the givebacks that ONEX was looking for.

I was wondering how confident are you that that deal will, in fact, go ahead and be completed, specifically given this latest IAM stance.

We are pretty confident that's going to happen.

We have made it pretty clear to the employees this is in their best interest that this sale goes through, and we have take a pretty firm stand that they need -- they need -- the unions should definitely negotiate with good faith to ONEX and we believe they will, in fact, do that, and this deal will get consummated.

Great, thanks.

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

Good morning, James.

Good morning, Heidi.

I want to ask Howard's question another way.

Many of us are hearing that BCAD has sold out on the 737s for the next 36 months, and Airbus' single-aisle aircraft are largely sold out, and they have a lower inclination to raise production rates.

Can you talk about what keeps you from raising the single-aisle production rate going forward, and providing more sales opportunity in the '06 to '08 period?

Presumably, James, to gain better pricing by reducing supply, and yet at the same time, we are hearing about price reductions in the single-aisle aircraft.

Can you help us, reconcile what's happening between pricing and how you are not losing additional sales opportunities in the next few years?

We are not going to overcommit, Heidi, that is for sure, so we are continuing to look at and evaluate the market demand for our 737 product, and we will be looking at -- if that demand is such that it warrants production increases.

We will be looking at our ability to do that within the confines of our capability, but, you know, I think that -- as you've heard, we have had obviously very, very good market response for that airplane, and in the near term, we have had very good sales experience on if, and, again, we will continue to look at and evaluate whether or not it will be appropriate to raise those production rates.

Can I have a follow-up to that?

Yes, you can.

So -- is what you are saying, James, that if you continue to see, as you typified, better than gradual demand, then you would be inclined to raise the 737 rates?

If the market is demanding that we produce more of them, we will surely make sure -- go take a look at, how we can orderly raise our production rate to meet that demand.

That is correct.

Great.

Thanks very much

Nick Fothergill of Bank of America.

You may ask your question.

Good morning, James.

Good morning.

Written sharing partner contributions in the K were about 100 basis points last year.

Has there been any contributions in this quarter?

And how do you expect contributions to shape up over the subsequent Qs.

I didn't hear -- I didn't hear the first part of that question, I am sorry, Nick, you cut out.

That's all right, James, risk sharing contributions at BCAG.

They contributed to about 100 basis points of margin improvement in the K. Have there been actually any in this quarter, and how do you expect contributions to shape up over the subsequent Qs, and that's obviously related to 787.

This quarter there will be about 150 in additional contribution -- or there are 150 in additional contributions.

And although, we don't give guidance of what they are going forward about that is probably within a reasonable range, and we will identify it as we -- as those contributions are made and are booked in the quarter.

Great, and a quick follow-up.

How is the CEO search going on?

It is going fine.

Can you give any more color than that, James?

I could.

I could tell you that the Boeing Board is executing their process.

They are going through their procedure to do that, and the outstanding performance of this Leadership Team and the results you are seeing in '01 is giving them the time to do it in a deliberate fashion, to make sure they do it correctly and pick the right person.

And so that's about all the color I can give you on it, Nick.

Thanks very much.

Good luck with that.

Steve Binder of Bear Stearns.

You may ask your question.

Yeah, James, can you just go over again -- provide some color on BCAG's program margins, and a couple of factors that boosted the profits by roughly $100 million with respect to spares and purchasing.

Can you give a little bit more color on that?

It was about half and half.

And what we had -- we went back and had an inventory adjustment where we had outcosted I think a little more, than I think what we should have in past periods.

So we had to make that adjustment and run that through the program margins.

The other piece related to some credits from our engine suppliers and we had not had those properly credited, so we had to go in and adjust that.

So that would be a one-time event.

And as we go forward, we would expect to see the program margins moderated more to what we have given you per full-year guidance.

And, you know, were there any -- I guess -- were there any block adjustments in the quarter, and any revisions in your cost assessments in your program margins on this 777 program?

No.

So the block -- the block -- the answer to the block changes, there was a 200 addition block to the 737 program, moving it from 2400 to 26, I think, which had a minimal or very -- a minimal impact to their earnings, and then we took out 3 out of the 767 accounting quantities.

Again, minimal impact.

And can you just touch on that 777 question.

Was there any change in the cost estimate on that?

Nothing out of the ordinary.

I mean, just the normal update of all the accounting quantity assumptions across all product lines and nothing specific to the 777.

Okay.

Thank you.

Cai Von Rumohr of SG Cowen.

You may ask your question.

To follow up to Steve, the deferred costs on the triple 7, the balances were down about -- a little over $100 million.

Of that was the inventory and how much of that was just good performance?

And given that some of that clearly was good performance, where are we now that, you know, you are getting all these orders, in terms of your potential to raise the accrual rates on that program?

Well, it's neither.

All it is is the normal amortization of the deferred production costs over the eight deliveries of the 777s for this period.

But the amount amortized per plane went up to $14 million, that's much higher than it has ever been before.

Well, that, again, just gets down to where we are from a margin perspective.

So you could say some of the cost performance, relative to what they are doing in terms of harvesting their productivity initiatives in the lean enterprise is being implemented does affect that, but we don't break it out specifically into those kind of pieces.

Thank you.

Jay Nadol of JP Morgan.

You may ask your question.

Thanks, good morning.

Hi, Joe.

James, I was wondering if you could give an update on the Future Combat Systems program, and if you are -- I guess you are in the process of renegotiating the contract.

And I guess more specifically, if -- what the financial impact might be to your guidance?

Okay.

So let me -- let me do that.

First of all, the contract -- the program is on cost, on schedule, and has met all its technical requirements.

So the program is being very, very well managed, and being performed very well by the IDS team.

The renegotiation of the contract is only a renegotiation for the instrument under which we are contracted.

We are going to move from another -- from another transaction agreement to one that a far coverage kind of contract.

So we are going to negotiate the increased costs associated with administrating those two contract forms.

It has nothing to do at this point with how the program is being performed, so consequently we don't expect any material impact to guidance, as it relates to renegotiating the contract type.

But given the fact that you have said in the past that you are doing double-digit margins in that program, and since we know for these large systems typically mid-single digits is generally what we see more often for cost-plus programs, why wouldn't that be the case?

Because we are going -- we expect to negotiate under the far contract provisions a fee opportunity that will allow us the opportunity to continue with the current performances to harvest the same fee that you are seeing to date.

Okay.

Thank you.

George Shapiro of Citigroup, you may ask your question.

James, why not increase the guidance by about the $.08 a share that you got from this $100 million benefit to Commercial?

And I got one quick follow-up.

Because it is early in the year, George, and there are some other things hanging out there we do have as we talked about earlier, the 767 decision, the 747 decision, and so, you know, clearly we want to wait until we get a little more stability on what is going to happen going forward, and so we will take a hard look at guidance again in the second quarter.

And then just on a different angle, with demand looking as strong as it is, why do you still sit there and make special deals like Air Canada take back A-340s, or some of this -- you know, early issue sales consideration that you had detailed.

I mean, why do that?

Well, you know, this is no different than what we normally do, in terms of helping customers if they want to take other -- other airplanes out of service, in order to introduce ours to help them do that.

That doesn't mean they actually come back to us.

If the market is strong enough, then clearly Air Canada will try to dispose of their own aircraft first, and then we only help them if need be, but that's not different than the way we have always constructed deals in the Commercial airplane business.

But the other part of my question, the early issue sales consideration, that's different than what we have had in the past.

No.

It's not.

Well, maybe you just never disclosed it to the extent that you did this time around then.

Well, as you know, the accounting disclosure and reporting requirements have become more complex, and have become more demanding, so we are trying to meet those, so there was no intention no to.

It just wasn't -- probably the need we didn't think it was that important.

And so as we continue to meet what the new disclosure requirements are, you will probably see more transparency, more detailed disclosure on things we might not otherwise have felt in the past, was important enough to have that kind of disclosure.

Okay.

Thanks a lot.

Doug [Harnett] of Sanford Bernstein.

You may ask your question.

Yes, on Network Systems, you reduced the guidance for margin for the year, and margins were down a little bit this year.

I know you referred to a cost of fee estimate issues around missile defense.

Could you talk about first what this is in missile defense, GMD, and second any programs that are contributed well to this change?

No, it's principally the missile defense program, and the reason we brought it down is because we had a couple of test failures -- the last two tests, of the missile did not leave the tube, and so consequently, we have been impacted in our award fee arena, so our expectations of award fee going forward has been adjusted downward.

And so we have adjusted the guidance to reflect that.

Now we will have an opportunity because that missile award fee does roll forward, and if we continue to perform as well, and we will fix the issue that we fully believe we will that happened that caused those test failures, we will have another shot at it and revisit the guidance at that time.

But otherwise you are seeing the same kind of margins in other programs that you have?

Absolutely.

Okay.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] The next question comes from Jared Muroff of Prudential.

Thank you, good quarter.

I was hoping you can provide a little color on launch and orbital systems.

Seems that business turned around a little bit faster, being profitable a little bit faster than we might have expected.

And related to that I think there was some [gain] on the EDD sale that was -- that was partly in that segment.

I was hoping you could break out where the various parts of the EDD [there's a gain and then a charge, where those are on your income statement?

Okay, you were -- you were breaking up a bit, but I think I got the gist of it.

The Launch and Orbital systems.

The Air Force -- U.S.

Government lifted restrictions on the launch business, and we had change orders that would add contract value, that we were then able to go negotiate, and that is what you are seeing, and that contract value covered prior fixed costs that we'd incurred, and that gave us some boost in margins in launch and orbital.

We are also seeing pretty good stable performance in the satellite arena, where we are not seeing any further deterioration of performance in that business, and so that also helped us.

And then finally, the sale of EDD did produce a profit that's also included in this first quarter.

Can you break out what the profit was for EDD, and the offset in charge was, and where that was?

I think it was about $25 million on EDD and maybe $100 million plus on the contract adjustments.

It is about 60 for the contract adjustments, I am sorry.

Thank you.

Thank you.

Our next question comes from Peter Jacobs of Ragen Mackenzie.

My question has been answered.

Thank you.

Robert Toomey of RBC, you may ask your question.

Good morning.

Good morning.

Two-part question.

James, I wonder if you could address -- you made comments earlier in your presentation about making significant investments in key growth programs.

I wonder if you can add a little bit of color on that?

And then, also, if you can talk about the sustainable growth in aircraft and weapons systems, which was down a little bit more than I expected in the quarter, and just wondered if you perceive continued declines in that business at that rate?

Thank you.

Yeah, the -- the investment in our growth -- I can put color on that as blue and white, and it is called the Dreamliner, the 787.

We will continue to invest heavily in that, and as you can see the market is really validating that is the right place to invest for a new Commercial airplane.

Finally on aircraft and weapons, I think what you are seeing, we think that will be stable, but this quarter you are just seeing a timing issue in terms of some deliveries.

And for the -- we are holding firm on the revenue guidance for the year.

Great, thank you.

Peter Jacobs of Ragen McKenzie, you may ask your question.

Good morning, James.

My question involves the launch and orbital systems business.

Given the margins were nearly 12% in the first quarter, that was due to a gain, and the margins are expected to be 3% for the year.

Just doing some quick back of the envelope math, that would suggest then that -- that the margins for the remaining part of the year will be flat -- or zero to down slightly?

Am I interpreting that correctly?

And if so, what are the drivers there that will take you from a -- you know, a decent margin in the first quarter then to be flat for the remainder of the year?

First of all, the decent margin for the first quarter I just explained what it was.

It was $120 million from basically one-time kind of events, the contract adjustments on launch, and the proceeds from the sale of EDD.

Now going forward, our NASA business is continuing to create decent margins and they are somewhat mitigated by the satellite business.

Now we are expecting the satellite business to sort of breakeven, and the Launch business to stay pretty stable going forward.

So the earnings for the year will moderate down to what our guidance levels are, and by the way, that will be pretty good if it does.

But if I -- if I am doing the math correctly, that would mean basically zero margins for the remainder of the year.

Is that -- is that correct?

Well, you know we haven't changed guidance in that area, you know, sufficiently up yet, but the point is, we want to get a little more feel for how we are doing in the satellite business.

One quarter does not a trend make.

As you know we've had issues in that area in the past, and so we think we have it under control.

We will be delivering the first article up on each one of those troubled programs this year, so that will give us a higher degree of confidence that we are over the technical issues, and we will revisit guidance in this area in the second and third quarter.

Okay, thanks for the explanation, James

Heidi Wood of Morgan Stanley.

You may ask your question.

Yes, James, I had a follow-up, R&D sales of BCAG rose pretty considerably to 5.7%, and yet R&D to sales for defense remained relatively flat.

You talked about ramping on the expenses on the -- on R&D for 787 going forward.

But can you give us a little bit of color about how quickly that's going to be ramping up through the rest of the year, and remind us when R&D -- R&D peaks on 787?

It will continue to ramp up, but it will be at -- if you look at total R&D to total sales for the company, it will be in the 4% range.

I think the ramp -- will be at '06-'07.

It will be a plateau of spending levels for those two years.

Then obviously start coming down.

But you can look at about 4% of Boeing revenue will be spent in R&D over the -- over that period, and the bulk of that you can assume is 787.

Does that presume a decline in R&D to sales on Defense?

Just a bit.

It is coming down.

Clearly we are done with the development on the Delta program.

We are comping off the Tanker development.

And so, you know , from that standpoint, it will -- it will decline a bit, Heidi, but clearly we will continue to invest in the IDS technology, to make sure that we are able to support our network centric program.

Okay, thanks very much

Byron Callan of Merrill Lynch you are may ask your question.

Yeah, James it's just -- looking at the backlog figures.

The BCA backlog was down in the first quarter compared to the fourth quarter.

I know you did have some -- I guess some aircraft cancellations, but then it looked like advances were up very ,substantially and I just wondered if you can kind of walk through, this kind of in anticipation of -- not in anticipation, but a reality that rates are going up, and you are announcing the payments coming in from customers.

Where do you think this backlog goings over the balance of the year?

Yeah, I wouldn't be be too overly concerned with it going down in first quarter.

Yeah, I understand.

I would tell you that.

And with the interest we are seeing in the 737s, the triple 7, and clearly the 787, we anticipate the backlog will grow over the year, and it definitely will do that.

Can we quantify that or bound it by any rough metric?

No, we said the recovery will be gradual, and we are staying with that through this quarter, and we will look and see if we have better information in second quarter, but clearly what we have seen to date, at least validates very, very strongly, that the recovery has taken place and it's at least, gradual.

Okay.

And then on the advances, do you have just an advances of [cloyless] billings figure for the first quarter, that we can net against inventory?

No, I do not.

Okay.

Thanks.

Howard Rubel of Jefferies, you may ask your question.

Thank you very much.

To go below the operating line, James, you had a number of unusual items.

Could you adjust -- address them First. sort of, Connexion, looks like it is getting a little better.

And then second, the -- the compensation line was substantially larger than one would have expected.

Yeah.

Three months ago, and would you -- looks like it kind of [jings] you by a dime in the quarter.

If you think about -- I think Connexion is staying -- it is moderating its spending in our investment there.

And -- but the other one you talked about is the share base, share base plan expense and what we did this quarter was implemented 123-R, so that had two things.

One, it -- it required that we use the binomial models of value to plan year and our latest plan year, and that helped us in terms of the value of the plan.

It cut it down from what we normally would see for our annual plan, cut it down by about 50%.

So the total cost of the five-year period will be less, but it accelerated the recording of the costs.

So you are seeing that adjustment in the first quarter, and below the line today, and I think that was about $120 million or so.

The other thing you are seeing there is pension, and that -- that pension expense relates to the divestiture of EDD, and we have the pension -- the pension curtailment costs that had to be accelerated, and taken as a charge in the quarter.

So those are the two major issues you are seeing below the line that impacts the earnings per share.

Now remember, the earnings from -- that transaction is in operating margins up in the IDS product segment.

Thank you very much.

You are welcome.

Operator, we have time for one more question please.

Our final analyst question comes from Joseph Campbell of Lehman Brothers.

Yes, just on the share-base plan expense.

Can you help us out with what they might be for the year?

I mean they have really popped up a bunch.

They were 576 last year, and 245 in the quarter.

Yeah, we actually put it in the release.

It was 675 million for the year.

Okay, great, James.

Sorry for not reading more carefully.

That's okay, Joe.

That's what I am here for.

Okay.

Thank you.

That completes the analysts' question-and-answer section.

For members of media, [OPERATOR INSTRUCTIONS] I will now return to you Boeing for introductory remarks by Mr. Tod Hollin, Senior Vice President of Communications.

Mr. Hollin, please go ahead.

Thank you and good morning.

We will continue now with the press question for James.

If you have any questions after this session ends, please call our media team at 312-544-2002.

Operator, we are ready for questions.

First question please

Thank you, our first question comes from Joey Schillingford of BBC.

Hello, I would just like to ask if you can break down the pension cost for the quarter a bit more?

Were they almost entirely to do with divestiture of EDD, or were there any other pension costs?

And also there seems to be quite high pension charges coming up next year as well.

Is that again to do with closing businesses?

No.

The pension costs are what -- what we normally expected to have.

We have the general expense associated with recording the -- the losses we have, or the underfunded position we had that resulted from the market performance of several years ago, and so we had already given guidance on what the pension expenses would be for '05 and '06.

So that's in there, in the first quarter, that piece of '05, and so -- in Q1, we have about $220 million of pension expense recorded, and as I mentioned to you earlier, about $120 million of that is related to the curtailment -- excuse me, $68 million of that is related to the curtailment expense associated with the EDD divestiture.

Okay.

So for the rest of the year, you can take out the 68, and then multiply it by 4 and that's approximately about what we'll see.

So the rest is about what you expected from the underperformance of the stock market?

So it was kind of a pension hold?

That's correct.

Now I mentioned to you earlier that -- that we don't have anything in our guidance related to our Rocketdyne and our Wichita sales.

So there could be curtailment expense.

In fact there will be curtailment expense associated with those two transactions, that will get recorded once those deals close, and I just don't know the timing of that.

Okay.

So there could be additional pension costs for 2005 if those sales go ahead this year?

If those close in 2005, there will be additional pension expense.

Okay.

Thank you very much.

James Wallace of Seattle Post-lntelligencer Newspaper, you may ask your question.

Yeah, James, a question on the CEO search.

Has the Board reached the point where you have a final list of -- of candidates that you are looking at?

So you should know, the Board is not consulting me on the CEO search, or keeping me posted on their progress.

So quite frankly, the answer I gave earlier is still the answer, that they are in their process.

They are executing it.

They are not -- they are not providing as you might imagine me progress reports on how well they are doing.

But I don't think, you know, they are overly concerned from a timing standpoint, because this leadership team is executing the business, and we are performing and delivering the kind of results you see in this quarter.

So they will take the time necessary to find the right person

If I can just follow-up quickly.

Any kind of a timeframe that you expect the CEO to be in place by the time of the Paris Air Show in mid-June?

I have no idea.

Okay, Thank you.

Molly [McMillian] of Wichita Eagle.

You may ask your question.

I have a clarification and then a question.

James you mentioned the sale of the Wichita sale in the second or third quarter and before now has been talking about the second quarter.

Has anything shifted?

I wasn't clear.

I didn't know everybody was talking just the second quarter.

I hope we close it as soon as possible.

We are surely trying to support that happening, and it is entirely possible it could be the second quarter.

Okay.

And my question is, the machinists as was noted by one of the analysts this week, was talking about the contract and givebacks, but they were also talking about cuts to the workforce.

And I am wondering whether you think that would be a hurdle for getting this deal done, and would job cuts be any greater if this sale doesn't go through?

You know either way, we have to manage the cost of running that segment of the business, so we believe that the best way to do that, is to have this deal be consummated, and have ONEX do it, because I think that is the greater chance of not having significant cuts in manpower, because they can actually go out and -- and sell that capability externally, which we would not do.

So I think it is in everybody's best interest to do everything possible to get -- this transaction closed as soon as possible.

Will there be -- has ONEX said how many they want to hire out of this workforce to you guys?

No, they haven't told us that.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Gerhard [Hegman] of Financial Times Germany.

Hello, good morning, Mr. Bell.

I have a question, what must happen that you will start the 747 advance project, and a short comment on the first flight of the Airbus A-380 from Commercial aspects?

So on the first half of your question.

What we just need to have is significant enough customer interest, defined by people willing to buy them, and also buying enough of the current 747s to bridge to it.

We should have a pretty good sense of that by midyear.

The second part of your question on it flying -- we always thought it would fly, because that's what airplanes do.

And we also thought that our bet on the mid-range market was a better bet and I think our orders traffic is sustaining that, so we are 2-0.

Okay.

Thank you.

Peter Pae of Los Angeles Times, you may ask your question.

Good morning, James.

Good morning, Peter.

Do you expect any settlement on the various investigations this year?

We are cooperating very intensely with all the folks involved -- in all of that, including the U.S.

Government, and we would hope that we are able to reach some agreement on some of those.

I just can't give you an exact timing of whether or not that will happen, but --

Do you expect any sort of like global settlement, as has been speculated?

That kind of an effort?

No, we are just supporting the government investigations and trying to work our way through what is the best way to resolve those, but we have -- I have no expectations of how -- what form or shape that would take at this point.

Thank you.

Dominic Gates of Seattle Times.

You may ask your question.

Hello, James.

I just wondered if you could just give a little more detail on one of your responses to Nick Fothergill.

You talked about the contribution from risk sharing partners.

I took that to mean the risk sharing partners on the 87, and you mentioned some numbers as a non-analyst, I didn't understand, can you tell us what are those contributions?

They are just from our risk sharing partners and what I told you was this quarter included in the numbers is a risk sharing contribution of $150 million.

And I was correct in assuming that's -- that's the partners on the 87 program?

Exactly.

It is all on the 87 program.

Is there -- have you got a number for the total contribution so far from those partners?

And what is expected over the course of the development of the new plan?

Last quarter I think we booked about the similar amount as we did first quarter, and, no, I don't -- won't disclose what the total will be.

We will let you know as it happens.

And one last question on that, I take it that's entirely separate from what you put down as, I think, 4% of Boeing's earnings going to R&D, most of it to the 87.

This risk sharing partner contribution is on top of that, correct?

That includes it.

That includes that.

Yes.

Okay.

Thank you.

[Christian Plum] of Reuter's, you may ask your question.

Yes.

I was wondering if you had any comment on this report today that the Pentagon is thinking about terminating -- your contract on the joint tactical radio system?

And what impact that might have on earnings going forward?

The JTRS Program is a program that worth today -- worth today as a contract value of about a half a billion dollars, and what we got from the government, from our customer, was a show cause letter where they have some concerns on our ability to perform to the contract requirements.

Clearly we take a letter like that seriously, and we are engaged with them to make sure we understand their concern, so that we can get our team engaged to go off and fix that.

The program is the cost priced contract so there is not a lot of risks associated with it, in terms of profitability and the earnings on that are very high.

So -- performance is immaterial, although It is a very [interesting, Inaudible-background noise] program in itself, and we will do everything we can to go and give the customer what they need, if we can do that.

Thank you.

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

I was curious in learning if you are confident with the sale of ONEX taking over the BCA operations, what opportunities do you see for employment growth in the IDS operations in Wichita?

Let's see, I don't think there are a lot right now.

The Tanker program, you know, that should go.

If we get a tanker program.

Obviously that modification center will be used to help to modify the Commercial airplane platform to meet that requirement.

But I think right now the growth that we show or the staffing plan that is in place today has imbedded in all the programs that we have, and that we know of on the near term in that plan.

So the -- the appointment rate for, at least for the near term is going to be flat?

It is going to be whatever the plan is, and I am not sure if the plan is just flat in Wichita or not, but we have all the programs where work would go in there, I think we already have imbedded in that plan.

Thank you.

Operator, we have time for one more question.

Thank you.

Our final media question comes from Mike Meacham of Aviation Week.

Good morning.

I just wanted to follow up a little bit more on the 747 advance, and some of the aircraft you've kind of got on hold.

You have informed GE, I believe, that they would carry the engine on that aircraft.

Is that simply a formal thing to do, and is not implying that -- you are necessarily further down the line in getting that aircraft off the ground?

Why did you have GE -- did you sign GE up?

Well, because obviously, we need -- as we go through and we solidify the design the 747 advance, we need an engine for it.

So GE is going -- has committed to design the engine for that offering.

Now once we have that, then we go out and market it, and if someone buys it, then we will build it, and that's -- you got to go through that process, in order to have a complete offering to the market, so we've done that.

So you are going through -- excuse me -- so you are going through the process there, is not a sign that you are seeing a better response, or a sign of anything as far as how the market is receiving the aircraft?

No.

And that's not to suggest that the market isn't receiving it either, but, no, you have got to go through and design the airplane, and then you have to have all the critical suppliers and teammates be on board, that they are going to support it, and then you have a much stronger position obviously, going to the marketplace to create the interest you need to launch it.

And so that's what we are doing.

Okay.

I understand.

Is it -- is there any change in the 767 position, which is another midyear decision, as to whether you continue that -- that line?

No change.

We are going to be -- we are looking at a decision in mid-summer.

Okay.

Thank you.

You are welcome.

Thank you very much.

That concludes our earnings call.

Again, for members of the media, if you have further questions, please call our media team at 312-544-2002.

Thank you very much.

Thank you.

This concludes today's conference.

You may disconnect at this time.