波音 (BA) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Boeing Company's third quarter 2005 earnings conference call.

Today's call is being recorded.

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

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

Mr. Dohnalek, please go ahead.

Thank you, good morning, and welcome to Boeing's third quarter earnings call.

I'm David Dohnalek and with me today are Jim McNerney, Boeing's Chairman and Chief Executive Officer; and James Bell, Boeing's Chief Financial Officer.

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

Now, please limit yourself to one single part question.

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

Now, 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.

These risks are detailed in the news release we issued this morning and our various SEC filings, and in the forward-looking statement at the end of this Web presentation.

Now, I will turn the meeting over to Jim McNerney.

Thanks, Dave.

And good morning.

As I complete my first full quarter at Boeing, I can tell you that I'm pleased with the operating strength I see in our business, and the promise I see in our future.

Let me begin with a few comments about our quarterly performance and let James -- and then James will walk you through some of the numbers.

After that, I will come back and talk a little bit about the road ahead and open it up for your questions.

Although we faced some challenges this quarter, we delivered strong results across our core businesses.

And extended the momentum we are building in our growth and profitability.

Commercial airplanes continued winning key orders while aggressively managing costs and investing to support long-term growth.

BCA orders are up over 300% in the first nine months of this year as compared to last year.

This is clear evidence that the market recognizes the tremendous value in our advanced and efficient airplanes.

BCA expanded its backlog by 13% in the third quarter alone and nearly 40% year to date.

They ended the quarter with a commercial airplane backlog approaching $100 billion.

Our commercial airplanes unit also delivered improved quarter over quarter margin performance despite the impact from the machinist strike, which caused a loss of roughly 1.5 billion in revenues and margins would have been in the high single digit range instead of around 4.3%, had the strike not occurred.

I will say more about this later and Jim will also comment on it in more detail.

IDS delivered another quarter of double digit profitability, and achieved major milestones on key programs, including the Osprey and future combat systems.

While we had good performance across most of the business, we saw some pressure on certain programs in our network systems segment that we're addressing.

Still, we expect IDS to continue to deliver strong margins as it executes on its industry-leading backlog, even as overall defense market growth moderates.

Driven by these positive developments in our businesses, we are raising our EPS guidance for both 2005 and 6.

So let me turn it over to James now to provide more detail on our financial results and our outlook.

James?

Thanks, Jim.

And good morning.

We delivered significant earnings growth in the quarter despite lower revenues.

Total company revenues declined 4% to 12.6 billion, due to lower revenues at IDS which were attributable to volume and timing, and the impact of the month-long strike at BCA which reduced revenues by about $1.5 billion.

Clearly, absent that impact, revenues for the quarter would have been substantially higher.

However, year to date revenues are up about 4% from same time last year.

These results reflect steady performance in our defense business, and an increase in commercial airplane revenue over the past are year.

We earned $1.26 per share in the third quarter, up significantly from the same period last year.

Clearly, there are some one-time items in the quarter that you did not have visibility into until now, namely the full financial impact of the strike, and a large tax benefit received -- Boeing received in September.

Third quarter results reflect continued strong core earnings performance, as well as the impact of these one-timers and some others that were previously disclosed.

Specifically on the strike, we estimate that the month-long IAM strike which caused 21 fewer deliveries in the quarter reduced our results by approximately $0.25 to $0.30 per share.

We expect that there will be a smaller impact from the strike in Q4 which I will cover in our guidance discussion.

Now, turning to highlights from our commercial airplanes, on slide 4.

BCA delivered 62 airplanes in the quarter, in the third quarter and grew revenues to $4.9 billion, despite the IAM strike reducing expected deliveries by 21 airplanes.

Even with lower delivery, BCA achieved a margin of over 4% on the strength of continued productivity improvements.

BCA's innovative product strategy continued to deliver outstanding sales success during the quarter.

We captured 202 gross orders across all models bringing total gross orders for the first nine months to 641 airplanes.

With higher demand across our products, our firm backlog for commercial airplanes, as of today, is over $100 billion.

The 787 program remains on track.

The Dreamliner's firm configuration was completed in September and the team is now working to complete the airplane's detailed design.

We continue to see increased orders and commitments for the 787 airplane, and since its launch in 2004, the 787 had captured 293 orders and commitments from 24 airlines around the world.

BCA reached another important milestone during the quarter by launching the 737-900ER program, with an order for 30 airplanes from Lion Air.

Driven by its industry-leading products and services, commercial airplanes expect significant growth in airplane deliveries, revenues and earnings, during the guiding period.

Moving to slide 5, IDS had another outstanding quarter of profitability, delivering 17.7% margins on revenues of 7.4 billion.

Revenues declined 11% in the quarter, due to timing and mix of aircraft deliveries.

Operating income grew significantly to 1.3 billion, mostly due to a gain on the sale of Rocketdyne.

Even without the Rocketdyne sales, IDS generated operating margins of about 10% due to very strong profitability in our aircraft and weapon and support system segments.

Margins for network systems declined due to revised cost in fee estimates on the future imagery architect program, and the military satellite program.

IDS won important new business during the quarter.

We signed a new production contract for the Apache attack helicopter and were awarded a follow-on contract for the demonstration phase of the joint unmanned compact aircraft system.

We were also selected by the U.K.'s Ministry of Defense to provide total life cycle support for its Chinook helicopters.

IDS achieved several important program milestones during the quarter as future combat systems passed its system of systems functional review and the Department of Defense approved full rate production for the V22.

Despite slowing growth in the DOD budget over the next few years, IDS is positioned to deliver moderate top line performance and excellent profitability with its $78 billion backlog of defense and intelligence programs.

Now, let's look at our other businesses on slide 6.

Boeing capital performed well in the third quarter.

The aircraft financing market continues improving and BCC is progressing well on its mission to support Boeing's core businesses while reducing its portfolio size and risk.

Connexion by Boeing continued expanding its business during the quarter with service now available on more than 120 daily flights.

Orders and options for Connexion's commercial service now totals over 450 airplanes from 11 airlines in addition to new orders and applications in the maritime industry.

Now, turning to cash flow on slide 7, our cash performance remained outstanding with operating cash flow of $1.9 billion in the quarter, before making a $1.4 billion in discretionary contributions to our pension plan.

This performance reflected strong quarterly earnings, excellent working capital management, and the tax settlement offset partially by the impact of the IAM strike.

During the quarter, we repurchased 13.7 million shares for $904 million, leaving 37 million shares still authorized for repurchase.

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

During the plan year just ended, our pension investments earned over 14%.

In addition, we made cash contributions of 1.8 billion to our pension plans during 2005.

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

The applicable discount rate we will use for 2006 is expected to be 5.5%, which is below the 5.75% used to determine 2005 pension expense.

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

Our expected rate of return for 2006 is likely to remain at 8.5%.

As a result of lower -- of the lower discount rate, offset somewhat by strong pensions returns and significant cash contributions, we expect noncash pre-tax pension expense to be approximately $1 billion in 2006, or about $0.80 per share.

Due to the sizable contributions made this year, we have essentially eliminated our cash funding requirement for 2006.

However, we will continue to evaluate additional discretionary contributions to our pension plans.

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 funded status early next year.

Now, turning to slide 8, our cash -- our balance sheet and liquidity remains strong.

We ended the third quarter with cash and liquid investment balances of $7.5 billion.

Our cash position reflects strong operating cash flow, completion of the sale of our Rocketdyne business for about $700 million in cash, and our tax refund.

Boeing's debt ratio continued improving during the quarter, driven by retained earnings growth, and steady debt levels.

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

Moving to slide 9, and our financial outlook.

Today we're raising our EPS guidance for 2005 and 2006 as we expect operating improvements and the recent tax settlement to more than offset the impact of the IAM strike.

Please note that this financial guidance does not reflect the proposed United Launch Alliance joint venture or the impact of an accounting change affecting supplier concession payments at BCA that we will implement beginning in 2006.

Both of those items are expected to reduce revenue due to new accounting treatment while not materially affecting earnings.

While we expect revenues for 2005 to be lower than previously forecast, due to the IAM strike, and the sale of Rocketdyne, earnings guidance in 2005 and 2006 is being increased to reflect the tax settlement in '05 and our forecast of even higher margins at BCA in 2006.

Commercial airplane deliveries forecast for 2005 is reduced from 320 airplanes to approximately 290 due to the strike.

We are holding our delivery guidance for 2006 at approximately 395 airplanes, which is now 93% sold out.

That reflects our decision to maintain an orderly production restart after the strike and disciplined ramp-up through the supply chain to support continued demand growth during this up cycle.

This approach will enable us to meet our customer commitments and continue our productivity gains and margin expansion.

Commercial airplanes expect a further delivery increase in 2007 driven by improving market conditions, and a heavy demand for Boeing airplanes.

Commercial airplane revenue guidance for 2005 is now approximately $22.5 billion, because of the be strike.

We are increasing BCA's 2006 revenue guidance to between 29 and 29.5 billion, because of airplane model mix.

We expect 2005 operating margins for commercial airplanes to be about 6.5% on a program accounting basis, reflecting the impact of the strike, partially offset by continued productivity.

We are raising our margin forecast for 2006 to between 8 and 8.5%, driven by strong cost performance.

Integrated defense systems revenue forecasts for 2005 is unchanged at approximately $31.5 billion.

In 2006, IDS revenues are expected to grow 2 to 4%, as we execute on our industry leading backlog in an environment of lower defense budget growth.

We are maintaining our IDS margin guidance at approximately 12% in 2005, and greater than 10% in 2006, driven by strong overall program performance.

Our guidance for Boeing capital is unchanged as our strategy to lower portfolio growth and risk continues to yield results.

Now putting it all together, Boeing's revenue guidance for 2005 has been reduced to approximately $55.5 billion, primarily due to the strike.

For 2006, our revenue guidance remains at approximately $62 billion.

We are raising our earnings per share guidance for 2005 to between $2.95 and $3.05 per share, reflecting the tax settlement, the strike impact, and continued improvements in operating performance at BCA and IDS.

We are also raising our 2006 earnings guidance to between $3.10 and $3.30 per share, as higher operating performance at BCA, along with lower than expected pension expense, is offset by a deferred tax charge of $0.15 per share that we expect in the first quarter of 2006.

We are increasing our operating cash flow guidance for 2005 to greater than $7 billion, driven by the tax refund and strong working capital performance, particularly at BCA.

Operating cash flow guidance including 1.8 -- includes 1.8 billion in pension contributions during the year.

For 2006, our operating cash flow guidance remains greater than 5.5 billion, after 500 million of anticipated pension contributions.

Our forecast for R&D and capital expenditures is unchanged for this year and next.

Turning to slide 10.

We have added this chart on our EPS outlook so you can easily track the changes from our prior guidance to our current guidance.

In both 2005 and 2006, our current guidance has increased.

Now, I will turn it back to Jim who will give you some final thoughts.

Jim?

Thanks, James.

Well, let me make a few observations and then we will take your questions.

Over the past four months I have been diving into detailed business, program, and functional reviews and spending a lot of time meeting with Boeing leaders, employees, and customers.

I've been focused on identifying ways to drive improved growth and profitability, including specific opportunities to get more leverage in areas like sourcing, technology, R&D, and applying lean principals across the Company and into our back office operations, among other things.

I've challenged the team with some new performance targets because I'm convinced that controlling our future has as much to do with advancing productivity year in and year out as having the right products, services, and solutions for our customers.

We are organizing our efforts toward achieving our longer-term performance goals, for example, 7% return on sales for the Company overall, double digit margins in BCA, and we're putting in place the hard actions and initiatives required to get us there.

In addition, I've made some internal organizational realignments to strengthen accountability, and corporate functional processes.

These are things we will continue to work on as we move into the new year.

And sharpen our focus on offsetting competitive and market pressure by driving performance to higher levels.

We talked about the IAM settlement later -- or earlier.

Let me add a few words here.

Overall, the final contract was a responsible settlement for both sides in my view.

Each side remained respectful of the other throughout the discussion.

Ultimately, the final contract remained within the requirements of our number one negotiating principal, which is enhancing our competitiveness as a business.

At the same time, to the extent possible, within that framework, we aim to respond to the priority issues the machinists valued most.

On the trade issue.

As you know, the USTR was pursuing a case in the World Trade Organization against European government launch aid to Airbus.

The USTR and Boeing would prefer a negotiated settlement here.

But the willingness to negotiate should not be misread as a willingness to allow any additional launch aid.

The U.S. is committing -- is committed to ending launch aid, even if that means seeing a WTO case through to the end.

And Boeing supports the USTR in this approach.

So to wrap it up, we see enormous opportunity in our business, and where we have challenges, we're addressing them.

The key to success in both areas is rooted in our ability to execute well.

I'm committed to turning up the gain on performance, and I am working with our team to enhance the long-term growth prospects for Boeing.

Now we would be happy to take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Byron Callan of Prudential Equity Group.

Yes, good morning.

Jim, you just discussed some of the changes leading to these performance targets you discussed.

I'm just curious, what led to the changes, was it because you saw slower progress towards this 7% goal or are you implying that the 7% goal with the changes you just cited could actually be met sooner or even exceeded?

Well, let's start at the beginning.

I mean I think the 7% target is the right one, is the right horizon to be shooting at for now.

And I wanted to ensure that our ability to execute against it was unquestioned.

So I suppose I did what any new CEO would do in a similar situation, where we've got raised performance as a goal we all share across the Company, and I wanted to spend a lot of time working with the team on alignment, on responsibilities, on how to break it down, and not necessarily because I didn't see progress toward the target.

I did.

But because I think we all know that to reach a target, have you to have effort in place that in total would overshoot it.

Because things happen.

Competitive pressures happen.

Market pressures happen.

And I have just always been fairly disciplined in this kind of activity.

And so I just jumped in and started working with everybody, I think is the way to characterize it.

Great.

Thanks.

Thank you.

Our next question comes from Joe Campbell of Lehman Brothers.

I have a question about your recovery from the strike, the prior goals for the Company were to deliver at least 395.

That was the number for the financial community.

So probably the internal number was a little bigger.

We've taken a strike that is going to take 30 airplanes out of 2004.

And as I understand, the guidance, you proposed to not be recovered from the strike until sometime in 2007 for something that occurred during the month of September in '05.

And I just wondered whether that was really the strike or is there something else going on with regard to your ability to deliver any more airplanes?

No, Joe, I think--.

It seems like a long time to recover from a relatively short strike.

No, I understand where your question is coming from.

And as an old manufacturing guy myself, I know why you're asking it.

I think -- the first thing, the first thing to recognize here is we haven't lost an order because of the strike.

So our customers through the good work of the Seattle team have kept the customers with us and the customers continue to believe in us and our products.

I think we could be accused of being conservative for next year.

And if we were not already ramping production rates next year to get against this $100 billion backlog which I had mentioned, were we not already ramping it and in some cases as aggressively as we have ever ramped production rates in this company, I would say our chances of recovering that lost volume during the guidance period would be greater.

But I think you know what it takes to put together 4 million pieces of stuff often made by other people, supply chains that need a couple of years of working together, a lot of technology goes into the systems integration, it takes -- it is an enormous effort to do that, and they have been working for the last couple of years on getting production rates up next year, and to add a -- add to it, and to tell you that we have an exact plan to add to that would be too aggressive and we might risk doing the job as we should on the production rate increases.

If we weren't raising production, as aggressively as we are, it would be a lot easier to replace those airplanes quickly.

So it is the reality of putting together a machine that has 400 -- 4 million pieces in it from sources everywhere around the world.

Well, I would say Airbus is going to do it, so I would hope you can, too.

Well, I mean I'm not sure what -- they didn't have a strike they're trying to replace volume from.

But they are raising--.

No, but their ramp-up is just as big or bigger than yours.

So I wouldn't -- it is not -- I mean I would hope you can do better.

I guess that would be -- I guess you hope so too.

And Joe, I think we hope so too.

We didn't want to put it in guidance because we're impressed with what it takes to raise production rates.

And you recall, you recall what can happen when you don't do it properly.

Yes, I do.

Thanks very much, for the answer.

I appreciate it.

All right, Joe, yes.

Thank you.

Our next question comes from Howard Rubel of Jefferies.

Good morning.

To go to the other side of the spectrum, net systems really missed by quite a bit and Jim, could you address a couple of issues here?

One is, why do you feel it's going to be better?

And what -- I know you've made some management changes.

And then last, related to that, it looks to me like it was roughly a $200 million item in terms of the adjustment.

James, why don't you take that one.

Yes, Howard, we did have some impact in our proprietary programs.

We also had a performance impact on our military satellite program, and we had a quality issue there that we know we fixed and we don't have that same problem on the remaining satellites under that same program.

In the proprietary world, we obviously had some technical issues again.

I just want to emphasize on those kind of programs, we are inventing as we go.

They're very complex.

They're very, very technically challenging.

We are working with our customer there to make sure that we have a -- the right plan going forward, and we think with that right plan, we will be able to perform well.

And on the satellite program, we think the quality problem is behind us, and we will be able to perform well on those as well.

But the -- how -- I mean how do you feel about your ability to win additional business given sort of these setbacks in this area?

I think our ability to win is based on the capabilities we bring and the value we bring and implements that we have embedded in our products and that is again based on our capabilities.

Clearly, our customer understands as well that these are very, very technically complex programs.

And I might point out that none of the incumbents has done even as well as we've done on the one that we've had problems on.

Having said that, though, we made a commitment, we didn't meet that commitment, and we're going to be looking forward, as we execute in the future, to do a much better job, and I think our customer will come back and give us that opportunity.

Thank you.

Thank you.

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

Yes, thank you.

While you didn't raise the delivery schedule for 2006, you did raise the revenues in commercial by 500 million to 1 billion, and you alluded to more favorable mix.

Could you be a little bit more specific in terms of what the mix is, and kind of what your strategy was in terms of figuring what planes you would deliver next year?

Yes, I think we will have a couple more -- a couple more wide bodies in that mix.

Not a major change to the overall mix but we do know we will have added features, we will have better performance in cash.

We'll see where -- we see where that is growing pretty rapidly.

And so it is -- that's where it is going to come from, Cai, but we're not going to have a significantly different mix year-over-year in terms of single Owls versus wide bodies but we will have a few extra wide bodies.

Is that the result of planes slipping out of this year, that the wide body slipped into next year?

Or is that the result of just more demand for the wide bodies?

Yes, it is a little bit of both.

Okay.

Thank you.

Thank you, our next question comes from Heidi Wood of Morgan Stanley.

Good morning.

Jim and James, back on commercial, so you have this challenge between profitably managing your production rate hikes and then you cited in the press release this increased interest by airlines in adding additional capacity.

But can you give us a little color on what you see as the most important choke points to ramping production rates?

Because clearly the issue is not lack of demand.

It is your concern on the manufacturing front.

So what aspects of manufacturing are you watching most closely?

I think Heidi, the issue is the supplier base.

And as you know, that business is depending on higher levels of integration from its supply base than it has -- than it did during the last up cycle.

And I think that represents a economic and quality opportunity for us, which is why we're doing it.

But it sometimes can represent more teaming required between us and a supply base to put together longer-term plans to support production rate increases for example.

And so I think the issue is more on the supply base.

I think the -- and that's not being critical of them.

That's just the nature of the business.

I think design, engineering, those kinds of things that we do internally, the ability to fabricate, are less the choke point than the proper supply-based planning.

And can you give us a -- some color on what percentage of your slots are full for '07 and your expectations for '06 orders both in terms of dollar as well as units next year?

I think we -- in '07, we will be prepared to talk about that in the first quarter.

In '06, what's the specific number, James?

On orders, Heidi, we think that obviously this is going to be a great order year for us.

We don't necessarily know whether or not repeat, we think that clearly having already booked over 600 this year, and a lot more in the pipeline, that we are going to try to get closed out, that the potential for having a good orders year next year is pretty good.

Now, having said that, we're at $100 billion backlog.

Now, that backlog is predominantly all international carriers.

We still -- and it has obviously a lot of the domestic low-cost carriers included in it.

But the domestic full fare carriers have yet to come back and have yet to get back into this marketplace and replace the orders and so we're anticipating that that is going to happen at some point in time.

We just don't know exactly when.

The other comment, Heidi I would make on the structure of our orders backlog is that it is very favorable in one other respect, which is that we will probably be exiting '06, entering '07, at significantly higher production rates in many cases for our currently fabricated airplanes, and then in '08, the H7 will begin production, will is really a take share airplane, that's one way to think about it, so on top of the market growth that is driving the legacy aircraft, there will be an H7 so -- and then you add James' comment about the North American carriers coming back at some point, you could see a little more extension to the backlog and the resulting manufacturing than you could by extrapolating other up cycles.

There has been sort of an order hiatus from the North American carriers, the last big orders took place between '97 and '99 so when is your best estimate of when they come in?

Is it '07 or '08?

Boy, I -- if Alan were here, he would -- I'm not sure he'd have a better answer for you than I would.

I think it is tough to predict, as you know.

And -- but they will come back at some point.

All right, great.

Thanks very much.

Thank you, our next question comes from Doug Harned of Sanford Bernstein.

Good morning.

Good morning.

Given the great demand for the 787, when you are looking out to production rates, how are you thinking about those production levels?

I know you've been talking about 95 in the first two years.

But I'm interested in knowing where you're at now and then what you can do if you get some of the good -- your core North American and European customers coming in and wanting them to provide slots?

We are constantly looking at what we can do in terms of could we up the near-term rate.

We don't believe there is a whole lot of that opportunity.

We have currently planned to deliver about 95 of them in the first year and a half.

As for introduction.

And so we will just have to keep watching that and see what the market demands.

But our concentration right now is on building the first one, getting through the development program, making sure that it meets what the customer expectations are, it meets what we believe its full capability is, and that we get there on time, and get there and make sure this product is delivered on time in '08, and we will be looking at what it takes to ramp production up after that.

Are you seeing any concerns in terms of not having a slot available and opening up the market to the A350?

Well, obviously, you're always concerned with that.

But the A350 won't be available until about 2010, or so.

Once they decide what it is.

And then we will deal with that as we need be.

And clearly, there is always an opportunity to negotiate slots, once the domestic comes back, the domestics come back in the market space, but right now, we can't just hold them open and wait.

And there is a lot of -- as you know there is a lot of demand for this airplane, and so we will do two things, we will be looking at what we can do in terms of moving things around once they do come back and if they need earlier slots then we will be looking at what we can do relative to our production rate.

Which I assume is good for pricing.

Not bad for pricing.

Great.

Thanks.

Thank you.

The next question comes from Steve Binder of Bear Stearns.

James, you touched on the margin improvement in '06 with BCAG, I think you associated with better cost performance.

I'm just wondering is there an expectation also of either better pricing in the blocks, or any blockage estimates or any rate adjustments as well during that period of time?

So we have had some cost base extensions that we booked this quarter.

They didn't have -- they had a minimal impact on earnings.

But we did increase the accounting quantity for 737s by 200, the 777s by 50, the 747s by 12, and for 767s by 7.

But clearly, it is mostly based on productivity and being able to harvest our productivity initiatives and we are going to grow those margin, and some of it is rate oriented, obviously, as we expect higher production rates, Steve, but we're going to grow those margin, we're going to increase our product development spend on 787 and obviously the -- looking at the 747 advance, so that is our game plan, and we're heading into a more competitive market environment now.

The market sets the prices.

So if the demand is higher than the supply, obviously we can have an opportunity to stabilize pricing.

But our focus is on making sure we have the cost improvement out of our productivity initiatives to be competitive in the marketplace.

And that's what you are seeing today and that's what you're seeing as we compete so effectively with our family of products.

And Jim, I would just like to ask a follow-up, you've been there for four months, you've been doing your deep dives, I was just wondering kind of a general cost question and a revenue question.

From a cost standpoint, where do you see is a potential lever point, the real opportunities in the cost structure, with Boeing in general?

And two, you came in in the end of June, when the market was really pretty strong, and arguably still pretty strong.

Would you characterize over BCAG any change in the revenue environment?

When I say revenue, the market environment globally?

Well, I think just take your second question first, market BCA, if anything, stronger, looked stronger than it did when I came, even though it was -- it looked good then.

And our ability to take share even slightly more favorable, so I think BCA, both market and competitiveness is pretty good.

On the IDS side, I think there is obvious market pressure.

We're fortunate to have the backlog we've got there.

And so -- but we saw that market pressure coming.

And so I would say that looks about the same as it did when I came here.

In terms of cost opportunities, the -- I think there are opportunities to address cost issues and centrally manage costs in this company, which would mean corporate costs and costs managed out of the center of the Company, and James and I are working on that as we speak.

I think there are opportunities to continue to drive great work that's going on in lean-related initiatives in the two big businesses and we're looking at ways to extend it and enhance it and to bring it into our back rooms in support of the first comment I made.

I also think there are opportunities in research and development and in sourcing through some standardized approaches.

And so we've sort of broken it down, and none of those are probably terribly surprising to you and none of them are magic.

I think it is a matter of addressing those aggressively as well as pursuing an industry-leading product and technology strategy.

And just one product question.

On the 787, I mean there has been a lot of talk about you possibly launching, going ahead with the 10 series, higher capacity derivative, to some degree that's -- Airbus with their 900, A350-900, seems to be moving the market up and you're talking about the 10 series.

Number one, do you think you will go ahead with it?

And two, are you concerned at all about the impact that could potentially have on demand for the 777 product?

Well, I think Airbus does have a bit of a dilemma with their product strategy because they are sandwiched between a couple of pretty successful airplanes, 777 and the 78.

So I understand why they are tempted to grow the plane quickly.

Now, as the Company that has the 777 and the 78, I think we will wait for our customers to tell us exactly which way they want us to go.

Because we have the low end of the 777 family which is extremely competitive, and new models introduced that you know about that go an awfully long way, and we've got a pretty good backlog there.

So I am not terribly concerned about the A350 eating into that.

I think it is Airbus that has the dilemma rather than us.

And we will get told by our customers whether they want another tweak on the 78, and we will listen to them.

Thank you.

Our next question comes from George Shapiro of Citigroup.

Yes, just probably for James, if you look at the third quarter, you had 93% of '06 deliveries sold which is like 367, if you compare that to Q2, you said 87, which was 344, so there is 23 more sold.

Yet I would have assumed that the 30 deliveries you missed in '05 would all be firm for '06, so I'm just trying to figure out why that effectively is only a 23% -- a 23 airplane increase instead of at least 30?

George, I don't know how to answer that question other than to say to you that, we have quite a bit of orders, order traffic out there, that we're in the throes of, of negotiating final agreements on.

And clearly, I haven't looked at it from that arithmetic answer that you just walked us through, but I wouldn't get hung up on 93 or 86.

I would get hung up on how many of -- how many of these commitments we're looking at converting to firm orders and we think where we are today is the numbers we gave you.

And there is a lot more out there that is available for us to close out by year-end.

Clearly, the 395 is a solid number for us.

And we're going to keep working on it.

But I hadn't looked at it particularly from the perspective that you have.

And just one follow-up, you left your defense guidance the same, yet it would imply like 8.9 billion in revenues in Q4 versus the 7.3 or so of this quarter.

Can you just go through what is going to occur that is going to give you that big a sequential jump?

Well, it is timing.

I mean, when we think about some of the deliveries particularly in IDS, some of the production platforms, we had a relatively low timing type quarter this quarter and we will pick them up in fourth quarter.

And clearly, in fourth quarter, we won't have, and those are the C-17s, and F-18s, clearly in the fourth quarter, we won't have as significant an impact associated with the strike.

And so we're pretty confident that our revenue guidance for the year, which you can back into a fourth quarter number, is pretty good.

I was just looking at the defense number.

Yes, but it is timing and volume, and of course, some of the -- what we saw particularly in network systems were rather one-timers and we will recover that coming out of the third quarter going into the fourth.

But we have -- we are recommiting to the guidance in our defense business.

We think we will end the year at the 31, over 31 billion in revenue.

And so the way we get there and the way we're comfortable with that is we have the timing issues, we have the one-timer that somewhat affected our third quarter revenue numbers in the defense business, and we will come out of that in fourth quarter and we will hit those targets for the full year.

Thank you.

Our next question comes from Nick Fothergill of Banc of America Securities.

Good morning, Jim and James.

I wonder if you can give us a little bit more color on some of your major defense programs?

You've said that FCS and B-22 have hit certain milestones but I wonder if you can comment on how those programs are going, ground based mid course systems obviously, and JTRS, all of these have pretty high margins and I just want to check with you that you're continuing to be robust about the margin outlook for those particular businesses, into '06.

Yes, clearly, we're still booking reasonably good margins on the ground-based mid course program, on the missile defense program.

We have a pretty significant test coming up towards the end of this year.

And we're all focused on working very hard so that we don't have the quality issues that we've had on our past couple of tests, and that test not be successful.

But other than that, Nick, that program is operating well, the performance on it is good and we're continuing to book high margins.

And as I said, we're focused on that test that will happen later this year.

On JTRS, those -- the margins on there are not high.

In fact, they're almost nonexistent.

And it is a pretty small program in terms of magnitude, size, or impact to earnings, it actually has very little impact on the defense business earnings, although it is something that is important that we do in that it helps to support our overall network century capability and how we implement that -- with the future contact systems program, but those programs are small.

That program is small.

We are doing well on the proprietary area.

We had the one setback.

We're working our way through it.

I think we will get that program back on track.

Clearly the satellite program, other than the military one, I think the military one where we took a charge on this quarter is also -- will also get back on track.

We only found the problem in one satellite and we think we've corrected that going forward.

And the other satellite work has stabilized, we're still seeing good performance in our support businesses.

Clearly, the fact that we signed some major new work with the sustainment work on the Chinook helicopters for the U.K., clearly that performance is going well.

So we're pretty -- we're pretty jazzed about how we're doing in our defense business.

And we think that the performance going forward will, as I said, do pretty well.

Now, having said that, we know we've had some issues.

And we are not looking at that business with rose-colored lenses.

We do know we have to go do some things differently going forward.

The team is focused on that.

Jim and his team have worked, I think really closely with our customers and I think we're well positioned in our defense business to continue to do well from a profitability standpoint.

I think the growth will moderate.

We've told you that.

We think it will be 2 to 4% next year.

But clearly, we're in double digit operating margins, and we intend to stay there.

And that will be based on our performance.

Thank you.

Our next question comes from Rob Spingarn of CSFB.

Good morning.

Jim, now that you have -- you talked a little bit in the beginning about having been there a few months and having had a chance sort of to peel the onion, could you perhaps share with us perhaps your biggest negative and positive surprises in the organization?

Well, I had a working knowledge of the Company, obviously, from prior partnerships and old roles over the last decade or so.

And being on the Board the last couple of years.

So it wasn't a coming in cold situation.

So I think the momentum that the businesses have on their own developed for productivity as well as the products and technology they are known for impressed me.

Which doesn't mean we can't do more, and we're going to do more.

But the team's commitment to a balanced execution on growth and productivity was impressive by any standard.

I think the places where we can do better and it has been a long standing challenge for this company, continue to do better globally.

I think we've made some big strides over the last few years, putting in place an international organization, Tom Pickering and his team have done a very good job, but I still think we can do more there to become more of a global enterprise, both on the sales, sourcing, partnership side, to strengthen our company, and so those will be a couple of comments.

And just as a follow-up, I think some people may look at next year perhaps similar to 1997 where there was roughly a 100 aircraft unit increase, the numbers aren't that dissimilar, but the following year production went up by about 200.

You alluded to an overaggressive ramp.

How would you characterize the long-term production ramp in your mind?

What would make you comfortable?

Well, I think, again, we -- I don't want to talk about specifics, beyond 2006.

We will talk about that when we're ready to talk about it.

But there will be a sustained ramp over the next couple of years.

Then there will be the 78 on top of it.

Which will increase it again.

Many of the same suppliers.

Many of the same partners involved.

More global.

Higher level of integration.

Not an unchallenging environment.

So whatever it is, we are taking it very seriously, very systematically.

You can tell in our comments about the -- why don't you turn on a dime and replace the 30 airplanes, and I am personally, with a manufacturing background, very sensitive to the issue, and we're going to work it through.

And Alan and his team are focused on it.

They all lived through '97 and they don't want to live through it again.

Thank you.

Our next question comes from David Strauss of UBS.

Thanks.

Could you give a little bit more color on the military aircraft segment?

Even when you account for the lower C-17 deliveries in the quarter, you compare that to similar quarters in '04.

It still looks like the revenues were fairly light.

Was there anything else going on there besides C-17?

There is some one-timers.

I don't know.

I think that fundamentally is pretty much it.

We had some contract close-outs in prior periods that would have had some one-time true-ups.

And that would account for a bit of it.

But the bulk of it is really when you look at the C-17 deliveries we had three in this quarter, we had five last quarter and we had five third quarter in '04, and so if you look at it from that perspective, that will drive it, those airplanes total out at about a little under 200 million each, and so that would really talk to the major difference.

Okay.

And on next year, on your EPS guidance for '06, what are you assuming for share count?

And what -- at what pace are you assuming the share repurchase program continues?

Well, we've told you we have 37 million more shares to repurchase, and we will repurchase those on a pretty regular basis going into '06.

The share count is probably somewhere a little under 800 million shares.

I don't know the numbers exactly.

But somewhere in that range.

And as we buy them back and then as we continue to perform like we perform our performance shares will probably pay out, so we will have to look at what we need to buy back to offset that kind of dilution.

But we have had a pretty good year, and performance shares vesting this year so a lot of shares have been issued and we've tried to buy back at least enough to offset that from a dilution standpoint this year and going forward we will be looking at the same thing.

Thank you.

Our next question comes from Sam Pearlstein of Wachovia.

Good morning.

I had a question, Jim, James, if you can talk a little bit about the accounting change in BCAG, in terms of that 1.5 billion to $2 billion.

I just want to understand is, there a one-time event to actually catch up anything?

And then on a going forward basis, are we just going to see a reduction on the revenue line?

Because that would seem to explain the 50 basis point improvement we're seeing in your '06 guidance.

It's not included in our '06 guidance.

The 50 basis points you see in '06 guidance is performance.

Now, having said that, what we're looking at here is is that it is a concession arrangement that when we had normally booked as a increase in revenue, that the literature says basically it should be booked as a reduction to your costs.

Now, the literature came in effect after we entered into this agreement, and it had a grandfathering provision in it, and -- but in that grandfathering provision, they didn't intend or didn't anticipate that you can have an agreement that would run 20 years.

And so we and our external auditors looked at this and decided that the appropriate thing to do was look at a prospective period in time that when we should implement this and we've both -- we've concluded that '06 is the appropriate time to implement, so there would be no retroactive adjustment, it is only perspective and it only has an impact -- the impact of it is a reduction in revenue and it will be a slight improvement in operating margins, but ha is not reflected yet, we will reflect it in guidance we give you at the fourth quarter earnings review.

And we will be booking it going forward.

Thank you.

Our next question comes from Ron Epstein of Merrill Lynch.

Good morning.

Getting back to commercial, as outsiders looking in, and we look the the development of the 787, are there any technical milestones that we can keep an eye out for to understand if indeed the program is on track from a technical perspective?

Well, the program just passed firm configuration a couple of weeks ago, which is a major milestone.

At the systems level, everything is set.

Now, the suppliers have some work to do to make sure that some of their low level designs are consistent with that.

But they know the envelope.

And that's a big deal in the development of an airplane.

And that was about on time.

So I think that bodes well.

And I think as we -- you never want to say there is never going to be issues, because there always are issues that you have got to overcome, but this development is moving along pretty well.

Operator, we have time for one more question from analysts.

Thank you.

Our final question comes from Joe Nadol of J.P. Morgan.

Good morning.

I made it under the wire.

I just have one more follow-up on the production in BCAG, and I want to hone in on the 737 specifically.

You are it sounds like implying slightly fewer deliveries out of Renton next year.

And my understanding was that there were going to be two -- a second production line implemented towards the beginning of the year.

Has that slipped at all?

And then, on the same topic, you've noted that supplier issues are constraining your production rates a little bit.

Are these new due to the strike?

Or would they have popped up anyway?

Let me just comment on supplier and then James you can handle the specifics on the 73.

The context in which I mentioned suppliers was that that is the issue whenever you're ramping up production rates, so none of the news is new.

The -- including our aggressive plans next year, and including the challenge for our production base to be with us as we do it.

That was the case before the strike.

That was the case after the strike.

I think I had mentioned it only within the context of it's difficult in that environment to quickly replace 30 airplanes.

Jim, do you want to comment on the 73?

Yes, in terms of the 737 and the production ramp-up there are no change to our plans.

We are expecting to do essentially what we had always been planning to do in Renton.

Clearly, the strike put timing pressure on it.

As to how you do the step-up.

But we still intend to be at the planned optimal production rate at the same time.

And no change of plans as it relates to Renton.

Thank you.

That -- go ahead, sir.

Operator, we're ready for the media portion.

Thank you.

That completes the analyst question-and-answer session. [OPERATOR INSTRUCTIONS] I will now return you to the Boeing Company for introductory remarks by Mr. Tod Hullin, Senior Vice President of Communications.

Mr. Hullin, please go ahead.

Thank you, and good morning we will continue with questions for Jim and James from the press.

After the session ends should you have additional questions please contact our media team at 312-544-2002.

Operator, we ready for the first question.

And in the interest of time could we please limit everyone to just one question.

Thank you.

Our first question comes from Molly McMillin of Wichita Eagle.

Hi, good morning.

My question just has to do with -- actually a clarification.

I may have missed this so I apologize.

Your press release says that there were 21 fewer airplane deliveries in the quarter but there would be 30 for the year and I'm unclear where the extra 9 is coming from.

The extra nine would be the airplanes that would fall out of fourth quarter.

So the third -- the 21 relates to what we were not able to deliver this quarter, and then there would be an additional 9 related to the fourth quarter.

Why is there -- why would that -- I mean the strike lasted a month and it didn't go into the fourth quarter so why is the fourth quarter impacted?

Because you stop work, and so a lot of what would be delivered out of the fourth quarter partly would be started building in prior quarters.

Oh, I see.

Okay.

And so that's why the total impact that we would see on the year more looks like 30, 21 out of this quarter, and the 9 out of fourth quarter.

Okay.

That makes a lot of sense.

And then would it -- it it going to take you all next year to catch this up or even beyond that?

Well, we haven't -- what we've said is that we probably -- we don't have yet the plan to catch them up during this guidance period, so we're going to be looking at what it takes subsequent to that to recapture some, if not all of these, but the thing you need to understand is that we're right in a phase of ramping up our production across all our models.

And that's where our priority is.

And that's what we're focused on, in making that happen, bringing together the supply base which is around the world, to get them poised to come up that production up ramp with us and while we're doing that, we're in a major product development period where we're making significant developments, significant investments in our 787, and to some other model expansions and derivatives across some of the other airplane models.

So there is a lot of work on the BCA's team and they're going through a very disciplined fashion to figure out how to make sure all that gets done and do it while they're expanding their margins.

And so we're not out trying to chase 21 or 30 airplanes over the next year and a half.

We really are looking at how we can ramp up and take full advantage of this robust demand that we're seeing in the marketplace.

Okay.

All right.

Thank you.

You're welcome.

Thank you.

Our next question comes from Lynn Lunsford of The Wall Street Journal.

Good morning.

Good morning.

I wanted to get a little clarification on the IDS side, having to do with network systems.

How much of that is FIA, and could you clarify, is Boeing still the lead contractor in that?

Clearly, Lynn, the work on FIA, we've had -- we've obviously -- is being restructured.

We are still the prime contractor.

There is still substantial work remaining in that program that we're working on.

We're not at Liberty to talk about numbers on that specific program.

But if you look at overall in network system, the impact on this quarter, when you take into consideration the performance issue we had on some military satellites, it is in the $150 million range.

And so clearly, we've had challenges on the program, we're working our way through those challenges with our customer, we're developing a plan for it, and we are still going to be the lead contractor as we continue that plan, and clearly, we're going to have to focus on improving our performance going forward over what we've experienced on a portion of the program to date.

But I just want to remind you that this is very, very complex work, it is invention, this is not even stretching the end of the technical envelope, it is well beyond that and so it is commonly understand and that's why the contract type is a cross side contract that you are going to learn as you go, and in learning sometimes, you find yourself more challenged than you thought and I think that's where we ended up on this program and I think that's why we and the customer will work our way through what's the right plan for it.

Okay.

Thank you.

Thank you.

Our next question comes from David Bowermaster of Seattle Times.

Good morning.

On the United Launch Alliance I was curious if you could talk a little bit about just your outlook for that going forward, and more broadly, Jim, I was curious to hear your thoughts on Boeing's relations with the Pentagon and with D.C. broadly since you've come on board.

On ULA, first Lockheed and us are committed to getting this done.

There is some more work we need to do with our customer, to get it done.

But things are progressing, and we are confident of a positive conclusion there, because we think it is the right thing for the country and the right thing for the business.

But we're still working it.

In terms of overall relations with the government and with the Defense Department, I would characterize it -- I would characterize it as good.

I think -- I've been around to see a lot of our customers in the Pentagon, and up on the hill, I see a lot of encouragement.

I think obviously recognition of some of the issues we had on the regulatory side and on the ethics and compliance side, I think I see support as we work through it.

I get a lot of comments about their strong feelings of approval, of a lot of the new disciplines we've but in this company to make sure that these kinds of issues don't pop up again, and so a supportive environment.

And by the way, I think that's the way a lot of our employees feel, too.

So that's sort of a rough characterization.

Okay.

Thanks.

Sure.

Thank you our next question comes from James Wallace of Seattle PI Newspaper.

Yes, a question for Jim.

Do you still believe the Board will make a decision before the end of the year on the 747 advance development?

And is the tipping point here the issue making sure you have a firm commitment or commitments for the passenger version as opposed to the freighter version?

I think we're hopeful that we will have government -- airline commitments in place by the end of the year, which will enable us to launch the airplane.

And I think things are on track to make that happen.

So I think there is a very good chance that there will be a launch by year end.

Great.

Thank you.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Stanley Holmes of Business Week.

Good morning.

I would like to follow-up on the 787-10 series.

Clearly there are some fairly significant customers, Emirates and Cafe Pacific to name a few that really, my understanding, are advocating a 10 series 787 and aren't interested in anything but.

How much -- my question is, how serious is Boeing on potentially pursuing this plane, and how many customers does it really need to go forward?

And then finally, when you talk about the aggressive production ramp-up, are you considering ramping up the 787 production beyond your already stated amount of units in the first three years?

I think Stanley, the -- just to take the questions in reverse order, the 787 production, the issue there is getting it done right.

And we will look for opportunities to ramp it up if we can but we do not have a plan right now to ramp it up beyond where we are at the -- by the same token, we haven't had anybody not order from us that wanted to order from us.

So we will mix and match and move them up if we can.

But the ordering is very strong, and people are willing to accept slightly stretched out positions, given the production schedule that's in place.

I think we're helped a little bit by the fact that Airbus at a minimum will be two years after we start, so as they, on this one are scrambling a little bit to catch up.

With regard to the longer range 78, I don't think -- I don't have a glib answer for you there.

I think of course we want to respond to customers that want the airplane.

We haven't gotten into detailed discussions with any of them.

I'm aware that there are reports and I guess obviously you are, too, you are very close to what's going on out there, and we're going to listen.

And we're going to make a common sense decision that sort of is at the intersection between satisfying important customers, and enough airplanes and financial returns that we would need to have to make a move like that.

We just don't have the answer right now.

All right.

Thank you.

Yes.

Thank you.

Our next question comes from Christian Plum of Reuters.

Actually my question has been answered.

Thanks.

Okay.

Thank you.

Ralley Ransom of Aviation Daily.

You may ask your question.

Good morning, just a quick question.

I was wondering if you had some sort of time frame for when you would reach that 7% return on sales and double digit margin growth for BCA?

Well, I think that's -- we have some thoughts internally that we're pressing now and working with each other, but I think it is fair to say we don't have the exact timing nailed down.

But we are committed to getting there.

And when we do, we will tell you about it.

Thank you.

Okay.

We have time for one more question.

Thank you.

Our final question comes from James Gonzalez of Bloomberg News.

I was just looking for a little bit more detail on the feature architecture impact on network systems.

To clarify, the 150 million impact, that's related to fees?

First of all, the $150 million impact is not all associated with FIA.

It is the impact that we would book this quarter in the network systems segment, and it also includes -- a portion of that includes an impact we experienced on the military satellite program.

But, yes, it is an adjustment, that 150 is an adjustment to our cost estimate to execute those programs and the fee that we would win, that we would actually earn as a result of the performance issues we've experienced.

Okay.

And then as a quick question on the 747 advance, you guys have said in the past that a passenger interest is key to actually getting it launched.

At this point, what kind of percentage do you see on cargo versus passenger?

I think it is hard to predict.

We're seeing -- it is hard to predict with precision.

But we've got a pretty good pipeline of opportunities in both areas, some may -- one side of it may come before, the other side of it, but I'm convinced over time that there will be a healthy mix of both, and so I think our view of a balance between our cargo and passenger remains that, a balance could be 60/ -- 65/35, 60/40, it could be 50/50 but the pipeline is equally long in both places right now.

Are you guys still expecting the launch customer to be Fargo?

We're in discussions with our customers.

We will let you know.

But it's -- there are discussions on both sides of that.

Great.

Thanks.

Okay.

That concludes the earnings call.

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

Thank you very much.

Thank you.

This concludes today's conference.

You may disconnect at this time.