波音 (BA) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the Boeing Company's third quarter 2006 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 very much.

Good morning and welcome to Boeing's third quarter earnings call.

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

After comments by Jim and James about our performance and our outlook, we will take your questions.

And as always, we have provided detailed financial information in the press release issued earlier today.

As a reminder, you can follow today's broadcast and slide presentation on our website at boeing.com.

Before I begin, we need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks which are detailed in our news release, in 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.

Thank you very much, David.

And good morning, everybody.

Let's get started by turning to our third quarter summary on slide two.

Boeing delivered strong results in the third quarter with revenues and core earnings per share growing at double-digit rates.

The productivity improvements we are making and the significant increase in commercial airplane deliveries generated our strong performance.

And this strong performance is allowing us to offset most of the connection charge and raise our outlook for 2007, which I will discuss in just a second.

We expanded our backlog again this quarter to a new record level of $229 billion, driven by the continued strong demand for our market-leading commercial airplanes, especially the 787 Dreamliner.

We also expanded our Services business during the quarter, with strong organic growth supplemented by the acquisition of Aviall, which will accelerate our growth and enhance our capabilities in the aviation services market.

In August, our board approved a new $3 billion share repurchase program, an important element of our balanced cash deployment strategy.

With this strategy, we continue to deliver value to customers and to shareholders by investing in our growth and returning capital to investors.

Today we have adjusted our EPS forecast for '06 to reflect the previously disclosed charge of $0.25 per share to end our Connexion service.

However, we expect to largely offset this with additional performance improvements across the business, totaling about $0.20 per share.

For 2007, we have raised our EPS guidance by $0.20 per share to reflect the discontinuance of our investment in Connexion the earnings contribution from our Aviall business.

As James will elaborate in just a second, our new guidance includes higher forecast R&D expense this year and next, but we expect to offset that higher expense with additional company-wide performance improvements.

To put it altogether, I believe Boeing continues to be well-positioned in its markets.

We expect our Commercial Airplane business will drive strong enterprise growth over the guidance period, while our Integrated Defense Systems business will generate excellent profitability in a moderating defense budget environment.

I am proud of the efforts and the results I am seeing across the Company.

We are making solid progress in driving growth in productivity and we have strong momentum.

Now I will turn it over to James who will take you through the numbers.

James?

Thank you, Jim, and good morning.

Let's start with an overview of our operating performance for Q3, beginning on slide three.

Our revenue grew 19% in the quarter, driven primarily by increased deliveries of commercial airplanes.

Reported EPS for the quarter was $0.89 per share, which includes the previously disclosed charge of $0.22 per share for Connexion.

Adjusted EPS was $1.11 per share compared to $0.33 last year when our financial results were affected by the IEM strike and including meaningful benefits from tax and a divesture.

Our businesses are running well, and our core EPS growth is strong.

Now let's review our business unit performance on the next slide.

Our Commercial Airplane business is benefiting from a product strategy that's keenly focused on our customers, as well as a commitment to continuous productivity improvement.

Revenues for the third quarter rose 45% and BCA's operating margins expanded to 9.7%, despite higher R&D expense.

We delivered 100 airplanes in the quarter, a 61% increase over the same period last year, which as I noted earlier, was affected by the strike.

These numbers reflect our success in working with our global partner network to efficiently increase production rates across the entire value chain, while at the same time, managing for profitability.

We captured 243 airplane orders during the quarter.

And our year-to-date order total has grown to 760 airplanes.

Our success in the marketplace has enabled us to continue increasing our very large commercial airplane backlog, while at the same time, increasing our production rates.

BCA's backlog has grown to a record $154 billion, or more than five times current annual BCA revenues.

The 787 Dreamliner continues to make great progress with customer orders.

As of today, we have won firm orders for 432 Dreamliners from 34 customers around the globe.

We also achieved important development milestones on the program as we prepare for flight tests next year and entry into service in 2008.

During the third quarter, we began flight testing of the large cargo freighter, a key enabler of our production system, which will transfer major composite structures for the 787 program from around the world.

We also achieved our first shipment of a major assembly between supplier partners.

The 787 program continues to experience pressure with respect to weight and supplier implementation.

We are raising our R&D forecast to reflect these increasing pressures, as well as modified and increased scope on the 747-8 program as we act on customer feedback to optimize this airplane.

The increase in total Company R&D reflected in our new guidance, is expected to be offset by performance improvements in our other businesses.

We continue to expect that the 787 and the 747-8 will be delivered on time and in accordance with our contractual obligations.

Turning to our Commercial Airplane Services business; we completed the acquisition of Aviall during the quarter, which will enhance growth and performance in both BCA and IDS businesses.

We also announced an agreement to acquire C-Map, a service that will accelerate growth in our navigation data service businesses.

Other milestones we achieved during the quarter included the delivery of the 2,000th 737 Next-Generation airplane and the successful flight of the 737-900ER.

We expect BCA margins to moderate in the fourth quarter, due to the timing of period costs and the absence of supplier participation payments to offset R&D expense.

Despite lower margins in Q4, we expect BCA's full year margins to exceed 9%, which is consistent with our current guidance.

And we also expect BCA margins next year to exceed 10%.

Clearly, our Commercial Airplane business is performing very well in a strong demand environment.

Next slide.

Our Integrated Defense Systems business had an outstanding quarter delivering strong financial performance, winning important new business, and completing key program milestones.

IDS generated $7.8 billion in revenues and 11.3% operating margins, driven by strong performance in our precision engagement and mobility systems segment.

During the quarter, IDS won the contract to provide the Secure Border Initiative Network to the Department of Homeland Security.

We've received support in the fiscal year '07 defense bill for additional C-17's and for Apache and Chinook helicopters.

And we're seeing increased priority for the tanker replacement program.

IDS achieved major mile -- program milestones during the quarter.

Our ground base missile defense program had another successful flight test, the future combat systems program completed its milestone review in great shape, and the KC-767 tanker boom was successfully flight tested.

Finally, we received FTC anti-trust clearance on the proposed United Launch Alliance joint venture.

We're hopeful that that will complete -- that we will complete this transaction in the fourth quarter.

IDS continues to deliver strong profitability over its diverse portfolio of development production and support programs in an environment of moderating growth.

Next slide.

Boeing Capital's earnings increased sharply to $122 million in the quarter, driven by gains from asset sales under-pinned by strong operating performance.

The aircraft financing market is healthy, and BCC is executing well on its mission to support Boeing's core businesses, while managing its portfolio size and risks.

BCC has returned nearly $300 million in cash dividends to Boeing so far this year.

During the quarter, we announced that we would discontinue our Connexion service by year end and take charges totaling approximately $320 million in the second half of 2006.

The process is going as expected and resulted in a charge of $0.22 per share in the third quarter.

We expect a charge of about $0.03 per share in the fourth quarter of this year.

This decision will add about $0.15 per share to EPS beginning in 2007, and we have updated our guidance to reflect this.

Now, turning to our balance sheet on slide seven; we continue to enjoy outstanding balance sheet strength and liquidity.

We ended the third quarter with over $8 billion in cash and liquid investments.

Major uses of our cash in the third quarter included; approximately $2.2 billion to complete the Aviall acquisition, $615 million to pay the previously disclosed legal settlement, and nearly $100 million in cash payments for the Connexion termination.

Our corporate debt levels decreased about $400 million to reflect the elimination of Connexion capital leases.

Boeing's credit quality is strong, and our credit ratings remain among the highest in our industry.

Moving on to cash flow on slide eight.

Our cash flow generation remains very strong.

We've increased operating cash flow to $560 million in the quarter, and that's even after making the $615 million legal settlement payment I mentioned earlier.

This cash performance reflects strong earnings, another excellent quarter of airplane orders and solid working capital management.

Also during the quarter, we repurchased eight million Boeing shares, paid a dividend, reduced debt, and continued to invest in our growth programs; all of which are consistent with our balance cash deployment strategy.

We completed our pension year at the end of September, and we had another very good year of performance.

Most notably, our preliminary assessment indicates that our pension plan is now fully-funded on a PBO basis, which is an important achievement.

The assets in our plan earned more than 10% this year, and we contributed over $500 million of cash to the plan during the past nine months, which helped to achieve this important milestone.

Now, looking to our 2007 pension year, we expect to use a slightly lower rate of return assumption of 8.25% to reflect asset allocation changes that will serve to reduce expected volatility and plan returns.

We expect our discount rates for 2007 to be approximately 6%.

As a result, we continue to forecast pension expense for 2007 to be around $1 billion.

Required cash contributions going forward are expected to be very modest.

With the new FASB rules on pension and retiree medical accounting taking effect at the end of this year, we expect our book equity to be reduced by approximately $7 billion.

We do not expect any material impact on our business from this new accounting rule.

Now, turning to slide nine, and I will go through our financial outlook.

We have adjusted our financial guidance to reflect the Connexion termination, the Aviall acquisition, higher R&D, and increased operating performance across the business.

We've raised our revenue guidance for this year to the top end of our previous range, due to the Aviall acquisition that closed in September.

Our EPS forecast for this year now reflects the charge for Connexion totaling $0.25 per share, offset by meaningful performance improvements in our businesses, totaling $0.20 per share.

Our 2007 revenue guidance now includes the benefit of the Aviall transaction, somewhat offset by lower revenue growth at IDS than previously forecast.

We have increased our 2007 EPS guidance by $0.20 per share, due mainly to Connexion and the earnings benefit from Aviall.

Included in this new guidance is the increase in R&D related to BCA new airplane development.

But that R&D increase is offset by our expected performance improvements across our business.

Next slide.

We have provided a schedule showing a walk from our previous EPS guidance to our current guidance here on slide 10.

With that, I will turn it back to Jim for some final thoughts before we take your questions.

Jim?

Thank you, James.

Let me sum up by saying that we delivered a strong quarter, and we're positioned to deliver the financial results we are forecasting for '06 and '07.

Our businesses are healthy and our outlook continues to improve.

Throughout the organization, Boeing is relentlessly focused on delivering value to our customers and our shareholders, with businesses that are leaders in their markets.

As we continue to do that, we will achieve the strong growth and productivity we're expecting.

And we will position ourselves as the preferred global aerospace partner for customers around the world.

Now with that, we'd be happy to take your questions.

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

Good morning, gentlemen.

I wonder if you could address the specific changes in the R&D guidance?

What changed since last July?

Byron, this is Jim.

The -- I think I would characterize what we're doing here as pretty aggressive contingency planning.

We are at that point in the development program where weight remains a dogged issue.

We know what we have to do.

Suppliers occasionally need help.

And what I am trying to do, along with the BCA team, is put a contingency plan in place.

Just to give you some context, we have eight contingency plans that we're looking at.

We've funded one right now.

We're kind of trying to get out ahead of it, just in case.

And this program has been characterized from the very beginning as a program that cuts across all boundaries, within our Company and across our Company and to other companies that are our partners.

We have one database, common tools and processes, we see everything.

And what we're trying to do is, as we go through this, just be as conservative as we can be.

And there is a fair amount of conservativism built into this.

We know how to build this airplane.

This plane will be done on time and will be done within contractual commitments.

I think the other point I would make is that half of this increase we're talking about -- obviously I was talking about the 87 -- is for the 747-8, where we had some -- as we talked to customers, we had some modifications we made to that airplane.

And we got at that early, before we really got into the major development.

Thanks.

I will get back in the queue.

Okay.

Thank you.

Our next question is from Howard Rubel of Jefferies & Co.

Thank you very much.

Jim, one of the things that we've seen a little bit of is a slip in revenues in IDS.

On the other hand, the margins at Networks were really quite impressive.

Could you address the -- what appears to be a little bit of push-out in revenues in Defense?

And then also the performance successes in the Network Systems area.

James, do you want to take that one?

Let me take that, Howard.

What we have said over time is that the growth in IDS would moderate as Defense spending moderated, and we saw the constraints from budgets -- but a couple of things.

That's starting take place, but again, it is offset by where we thought our real growth opportunities would be; one in Homeland Security and another in the international marketplace, which would be a little more volatile in terms -- or lumpy in terms of when we would see the addition of growth.

But the Secure Border Initiative win was a key win for us.

And I think really helps us to understand that we are going to be able to grow in those areas because we have the capabilities that we believe are going to be very, very important going forward.

We have seen some better performance relative to the earnings, and we're looking forward.

That's just improvements, particularly, we saw it in the Precision Engagement and Mobility, where we have our platform programs and we're continuing to see the benefit of the productivity enhancements coming out of that [power].

But I think we are going to say better performance.

We had good tests under GMD, which resulted in pretty good award fee scores and we'll see that.

You have a heck of a fourth quarter in Precision Engagement, relative to what the run rate has been all year.

Yes, and it is going to be timing of deliveries.

We'll see that we're going to have larger deliveries in the fourth quarter, and that's what's going to drive that year.

And those are pretty much cast in concrete.

Thank you.

Thank you.

Our next question comes from Heidi Wood of Morgan Stanley.

Good morning, gentlemen.

I sort of have a three-part question on the 787, if that's all right?

Yes.

So I am wondering -- to follow-up on Byron's question a little differently -- I am wondering if you can provide us a bandwidth of kind of the high-low range, where as you best see now R&D's possible variance could go, versus this '07 guidance you're giving us of the $3.2 to $3.4?

Obviously, that's a single figure number.

But how much risk do you see that to being up over the next couple of quarters?

I mean, $100 to $200 million a quarter through '07?

Heidi, thank you for not making me remember the next two parts of your question before I answer the first part.

As we see it now, that's a pretty conservative number, Heidi.

As was consistent with the answer I gave Byron.

We are trying to witch hunt the issues in this program right now.

And we do have some weight issues, as I've said.

We do have some supplier implementation issues.

We are addressing all of them with aggressive recovery plans and we've planned on more, should additional issues crop up.

So I would characterize this as a, from where we sit today, against the delivery commitments and the contractual commitments we've made, a pretty conservative number.

Now --

But you wouldn't want to give yourself a little additional cushion in saying, hey, even if we choose to spend an additional amount if we run through that scenario, it might be an additional $100 million a quarter max or something?

Give yourself a little --

We've got some cushion in this number.

And let me add to that.

What you're seeing as the spending profile, is still well within the business case -- actually, well under the business case for the non-recurring spending that had us to launch this program.

And as you can see by the number of orders today, it is obviously a lot more successful than we ever envisioned at this point in the program.

I think the key here is, we've gotten out early and looked at, what are the possible risks we can experience, given where we are at this stage in the development program?

And we decided that now is the time to resource those in case they're needed.

And that's what what's reflected in the increase.

Okay.

And then the second part; can you talk about what your pre-R&D BCA '07 margins would look like?

You talk about 10% on a post-R&D margin, but on a pre-R&D to sales margin in '06, you're running around 18%.

We don't comment on that, Heidi.

But you're well off -- you're not too far off track.

I think you can almost back into it because we are expecting to be greater than 10% on their operating earnings for our margins for '07.

And you see with the new guidance on the R&D, that we get close to a range like that.

Another way to look at it, Heidi, is that we are absorbing this R&D contingency plan without changing guidance or trajectory that we have had in place for the last year.

But is this 18% sustainable?

Well, you know our plan.

Our plan is not only to sustain but to grow.

We've given the guidance we've given.

Okay.

And then last part, and I am sorry -- but this is sort of the question for both of you, because it is both a strategic as well as a financial question; but your current market outlook pegs the 787 market niche size at around 3,600 aircraft, and assuming a 50% share, that's 1,800 planes.

But at the 432 bookings, you're 25% there before the first delivery.

So business case you talked about presumed an Airbus response, but now it is looking like the A-350, XWB isn't going to deliver until the 2014 or 2015 timeframe, which kind of gives you sole positioning in the mid-size wide-body niche for a good seven or eight years.

And the A350 looks like it is more positioning itself to attack [inaudible], more than fully take on the 787.

I am wondering if you guys can talk about how you think about the trade-off of production rates and pricing, given that it appears either your market share or the size of your market assumptions have been conservative?

I would say the 50% looks pretty good.

And there is upward pressure in our planning on production rates.

Exactly where that sorts out will be a function of what the other guys do.

But sort of keying off your words rather than mine, there is an opportunity there.

Would you need to spend additional capital, Jim, to get there, though?

Not anywhere near the size of the opportunity.

Okay.

Great.

Thanks very much.

Thank you.

Our next question is from Cai von Rumohr of Cowen and Company.

Thank you, gentlemen.

Could you give us some more color on the supplier issues and the weight issues on the 787?

And answer the perhaps more important question; you increased the R&D here in '06 and '07, but do you still feel as comfortable about the potential for this program to be solidly profitable as we get into the 2008 and '10 timeframe?

Cai, this program's projected economics are significantly better than any airplane program I have been involved with.

And that's because of the structure of the supply chain, both in its participation in recurring and nonrecurring costs.

And I think you know the business model.

The structure of it, combined with unprecedented market acceptance, leads you to a pretty good conclusion about the concept and the strategy.

And as James pointed out a few minutes ago, even though -- notwithstanding some upward pressure on research and development here in the short and medium term, the business case for the -- we are well within the business case.

Our internal targets were significantly within the business case because that's the way we like to run our business.

This pressure hasn't really changed that outlook.

So I don't see a fundamental change in an outstanding business case, because of what we're talking about here today, at all.

And to the issue of supplier issues and weight issues?

Just some more color -- you mentioned.

Yes.

I would say that we are working -- we have a significant amount of engineering resources.

Now that we've largely completed the engineering release process, there are some places we're going back to get weight out.

So the good news is that we completed the majority of the engineering releases within the timeframe we hoped to.

And we have time to go back with a team -- we have a weight reduction team that is going back, both on parts that we designed and parts that others have designed.

And remember, we're all on the same system.

We understand the design parameters and design specifics on a realtime basis, as well with our partners as we do in our own engineering shops.

And so we are very agile and quick, in terms of being able to go back and put resources on some of that.

Other things we're doing -- there has been some production process help we've given a couple of suppliers as they're setting up new facilities and needed some boundary list kind of collaboration between our production people and their's to move it along a little faster.

It is all the kind of thing we anticipated.

It is all the kind of thing that you could do face into when you share a supply chain with people who have a lot of skin in the game with you.

But the good news about a lot of skin in the game is that we are both incentive to get it done.

It is not a -- it's not us pointing them and them pointing at us.

It is us getting together.

It is a mix of weight reduction and production process facilitation, I would say.

Thank you.

You're welcome.

Thank you.

Our next question comes from Joe Campbell of Lehman Brothers.

Good morning, all.

I would like to go back to the second part of Heidi's question which is, when looking at the stock, it is a bit upset because it looks like people are assuming overruns in R&D are for sure and estimates that we'll do better in the future on the operating performance are maybe.

And I am wondering whether or not implicit in the numbers that are the 2007 guidance, are that will do even better?

It looks to me like what you've got is a forecast of the second half of 2006 performance forecast into 2007.

And if it is true that the R&D is really only contingency, it would seem that we might not be so heavy on the R&D, but we could be better on the operating side.

While the market seems to be worried that the R&D is kind of for sure, and we might not make the operating profit gains they're going to offset the R&D.

So I wondered if you could talk about what you've assumed, in terms of getting better versus -- I know your hopes are that you will do better.

We feel good about the underlying operating plan.

The ramp-up, which will continue next year in a number of our airplane programs, has gone well.

And I think we have confidence that the underlying operating margins for R&D will be delivered.

The R&D, I would characterize as a conservative number, one that anticipates contingency actions that could happen.

And we'll be ready for them if they happen.

Could there be an upside?

Perhaps.

I think planning on an upside is not the way to run a business.

James, do you have any other comments here?

I think the other thing, Joe, if you look at what we're projecting -- if you just normalize our earnings this year that we're projecting to special charges, I think we're still going to have over 30% earnings growth year-over-year.

And although we have the ability to see the way the program is being managed, the risks early, and make a decision to make available resources to have contingency plans to offset those risks should those risks hit the beach;

I don't want us to lose sight that we are making a -- we've had a significant number of recent accomplishments on this program that are hitting right on schedule.

For instance, we have begun major assembly of the center wing section, we have started fabrication of the landing gear, the APU integration facility is up and running, we've completed the first test of the engine pylon, we've unveiled the wing test box, we're opening the new production propulsion integration center.

We've had the first major partner-to-partner delivery, and that was the keel assembly on the pressure deck.

We completed the 787 integration test vehicle, and we're now -- we're testing the large cargo freighter.

Those things have been hitting right on point.

The fact of the matter is, Jim and I are going to run this business from a conservative perspective, and we're going to make sure we have in place, plans early enough so we can implement and that we can hold schedule and meet our customer obligations.

And I think that's what you're seeing in this increase in R&D.

Great.

Thank you.

You're welcome.

Thank you.

Our next question is from Doug Harned of Sanford Bernstein.

Good morning.

Good morning.

Over the last two quarters, as you've taken up your estimates for R&D, you've kept your guidance the same in Commercial.

I am interested in understanding -- that's about -- that's better than a point and one-half in margin, and I am interested in understanding where that benefit is coming from.

I know you had a number of initiatives on the operations side, also on the corporate side.

Could you talk about what you see that you've captured?

Where it has come from?

And how you get comfortable about the savings?

I think the two places we've had pressure, are R&D and some sourcing pricing inflation on some key raw materials.

I think that's well known in the industry and well known as discussed by us.

Where we are offsetting that both in conversion and productivity.

There is a lot of innovative work going on in the BCA factories; whether it is moving lines in Renton, the beginning of moving lines in Everett, which is a revolution in the way airplanes are converted, whether it is volume-related leverage as we take up our rates a bit, whether it is labor productivity.

There is a lot of great work being done on conversion productivity, which is by in large along with volume, offsetting these pressures.

That's the business model we run under.

When we talk about growth and productivity simultaneously, we mean it.

The reason we drive productivity so hard in the Company is to make sure we have resources available to properly fund these huge opportunities we've gotten.

And when you look at the 787, which we've talked a fair amount about here this morning, this is one of the most competitive airplanes, when both measured the against the planes it is replacing and against the planes that the marketplace is offering as an alternative, as you will ever see.

And we don't want to you lose sight of that, as we have these candid discussions about how we're managing R&D and managing risk, as we develop the airplanes.

We want to be upfront with you, we want to be upfront with ourselves, as we march through the program.

That's good.

I am trying to understand, though, on the cost side, the -- what's allowing you to get the better margin?

If you put R&D aside, is it also some of the overhead-type initiatives that you've led out of corporate?

There is some of that.

I think -- yes, the answer is yes.

We have reduced some of what you would call corporate and SG&A costs as a percentage of sales.

I think the hard work has been on conversion productivity in our factories and with the way we're working with our suppliers.

I think that is, leaving aside price inflation of commodities as separate issues as a pressure, I think that is a bigger part of it.

And there is more to go on both, by the way.

There is more to go on conversion productivity and there is more to go on G&A and corporate costs.

And we do have, as you point out, initiatives in place to address both; lean-plus initiative, our corporate services reduction initiative, as well as our development process excellence initiative, which gets at some costs.

We are going to be relentlessly focused on these things.

Okay.

Great.

Thank you.

You're welcome.

Thank you.

Our next question comes from Steve Binder of Bear Stearns.

Just a follow-up on that question for '07 -- you touched on cost initiatives, Jim.

I am just wondering, did block adjustments are things that helped out in the prior quarter -- but block adjustments, a revision of the pricing outlook or even a revision in production rates in the blocked period; has that kind of helped offset the bump in R&D?

Well, I think --

That's what I meant by volume.

Right.

Obviously, we are upping our production.

And clearly, we're going to get the opportunity there that's associated with the leverage we'll get, Steve.

Clearly, we're expecting to deliver more airplanes next year than we delivered this year.

We're going up to 440 to 445 versus the 395.

We only had a couple of accounting quantity changes this quarter, and it's 200 for the 737, 25 for the 747 and it's 3 for 767.

But it is really, as we up the production rates and we start getting the full-year benefit of those higher production rates, we'll get better leverage and better cost productivity as associated with that.

But under program accounting, you're looking beyond just '07 when you look at your '07 rates, right?

Absolutely.

So I'm just wondering, when I asked about rate adjustments, I am not just talking about '07 deliveries, I'm talking -- you're obviously thinking about going to 31 on the 737 and 7 on the 777.

And we never know what those rate adjustments are really going to look like in the planning period, right?

No, we don't.

And the same question was about pricing; we really have no clue what you're really assuming, not just for escalators but for pricing on your model types, especially since you have a compromised competitor.

That's why I was wonder, have we seen any revision in those aspects -- those variables?

Pricing is stabilized, we think.

And clearly, we are going to -- we are expecting more growth going out, which we'll give you more guidance on that, obviously in the fourth quarter, as it relates to '08.

But we are assuming we're going to get productivity as we go forward, and in fact, we've demonstrated it.

We've demonstrated we're able to -- we've been able to move up in rate in all the current models and do that effectively and do that profitably.

And we anticipate to do that going forward, and also get the additional leverage.

Last question, Jim or James, you obviously make some additional investments on the 747 eight-passenger plane.

You have a very important near-term campaign in Europe with a legacy carrier and another important European legacy carrier next year.

How confident are you in capturing, at least one of those two campaigns?

It is hard to predict, Steve, but I feel optimistic.

Without giving you a point estimate, as you would expect.

But I do feel optimistic about the campaigns you just referred to.

Thank you.

Our next question is from Robert Spingarn of Credit Suisse.

Good morning.

Jim, as a follow-up to what Steve just mentioned on the 747-8I, could you give us a little more color on where you are on that program?

Clearly, you have the R&D ramp.

It looks like from a macro perspective, you may have more opportunity here, lately, to capture some share, just based on some instability perhaps in the marketplace right now, vis-a-vis the competitor.

If you could give us some more color there?

I mean -- I think you got to back off a little bit and get some altitude on it.

First of all, this is a derivative program.

And the amount of money we're spending on this reflects that.

This is taking an airplane we know how to make, we've made for years, one of the world's most successful airplanes and we're modifying it.

As we adjust and tweak to meet specific market requirements, got to keep the condition text that it is -- this is not a huge development program for us.

Now, having said that, I think the requirements have settled down on that airplane now.

We've had a lot of dialog, with not only the legacy carriers in Europe that Steve referred to, but a lot of other people.

We've made some modifications.

We know what we have to do.

We understand the engineering of the airplane and we know how to do it.

So it's -- and we have time to do it, so I think we're in pretty good shape, with the requirements having settled down.

Jim, are you still on a back-end of 2009 delivery timeframe there?

And then just separately, I think James alluded to the 2008 growth you've mentioned in the release, in terms of production volumes at BCA, and you don't want to get into that, I don't think, until January; but could you give us your sell-out ratio, at this point, on '08?

Well, sell-out ratio in '08 -- I don't have the number, and we'll talk about it more specifically --

In February.

-- in February.

The guys aren't going to let me say anything here.

But it is -- there is reason to believe when we talk, it won't be a terrible disappointment.

But the 747 is, as you know, the cargo, -8 -- the cargo version is scheduled for the third quarter of '09.

We have a very robust pipeline already in place, between 40 and 50 solid orders, I believe on that plane.

And the intercontinental or PAX version is scheduled for mid '10.

That will depend on exactly when the first customer wants to take delivery.

Thank you.

Our next question is from George Shapiro of Citigroup.

Good morning.

Good morning, George.

I wanted to pursue the R&D a little bit more.

Effectively, you've raised R&D pretty substantially, now, two quarters in a row.

When do you think the period of greatest risk in this program is?

Or not -- you can't say until we get to, say the initial flight test program?

Well, I think we're in it.

We're in a period of considerable risk and I think we've identified them early.

Obviously, we want to get the contingency plan in place in time and have them resourced in case we need to call on them, George.

Obviously, you'll have a different set of risks once you get into the flight test.

I guess the real point I want to make on this is that we think we understand how to build this airplane.

We think we've gone through it.

We understand the systems we need to go deal with and how to do them.

We don't have the complexity on the airplane -- on our airplane that you see on the [Bohemis] that the A-380 is, we don't have -- we have one-fifth of the electrical wiring in it.

And so I think if some of the concern is being driven by what you see out there in other places, then I think you got -- you have to understand, there is some distinct differences in what we're doing here.

And what you're seeing here is early risk mitigation.

And so I think we're there, in terms of our ability to go -- look forward and see where those risks might hit the beach.

And where we can put contingency plans in place and hopefully mitigate it.

If something incrementally worse didn't happen in the third quarter, I mean why wouldn't you have raised the R&D by a bigger amount in the second quarter?

So I guess I am looking for, what did you incrementally see in the third quarter that you didn't in the second quarter?

Well, again, remember, in the third quarter, half of this increase is associated with the 747-8.

The other piece that's associated with the 787 is to look at those other contingency plans that we had on the table that we understood in the second quarter, but we now have another quarter of history -- or time has passed.

And so we wanted to make sure we had the resources available.

Quite frankly, what -- if we were going to focus on something big happening, it would be something that would be totally unexpected, like somebody dropping a big piece of hardware or a big piece of tooling or something having a major failure.

But right now, in terms of the technical things that need to be done, we think we understand them pretty well.

And we just want to get the weight out of it and then make sure we hold the schedule.

This is Jim.

There has been no dramatic or qualitative change in the risks we're managing, one quarter to the next.

I think it is a matter of, as James said, being at that point in the program where, as the risks exist, you want to get out ahead of them and more than get out ahead of them.

I think that's what you're seeing here.

Thanks.

And then one last -- James, for you maybe.

We left -- you left the Commercial revenue guidance at $28 billion for '06, despite the fact that you probably put in $350, $400 million of revenue from Aviall in the current guidance.

Was that round off or was there -- is there some pricing differences?

Just rounding, George.

It is not anything significant.

Okay.

Thanks again.

Thank you.

Our next question comes from Ronald Epstein.

Good morning, guys.

Good morning.

Just a two-part question, if that's okay, just real quick.

Just want to follow-up on one of Steve's questions.

So when we look into the outlook for next year, you increase the margin in BCA but also the R&D.

I think -- I don't know if you answered this or not, but how much does block extensions have to do with that?

Or is that just productivity?

It is productivity.

Okay.

And then a product placement -- or product development question for you.

Lately, I think the BCA guys, and they have been out talking in industry conferences, have been a little more vocal about Boeing being involved with a small plane, something maybe around 100 seats.

And, Jim, I was wondering if you can speak to that?

If -- how seriously Boeing is considering that?

And any color you could add on a smaller, narrow-bodied jet?

I don't think, Ron, that we have a crystal clear view yet of what the narrow body market of the future is going to look like.

Certainly, there is a lot of discussion around the 100 packs and there is a lot of discussion around a bigger version of a narrow body -- the 200-plus size, as well as the core of the market, the 150 to 180; a lot of discussion, a lot of debate, different camps within our Company.

And meanwhile, we're just focused on maturing the technologies that we know will fit into any of those versions as that clarifies.

But I hesitate to tell you I know exactly what that market is going to look like eight, nine years from now.

Over the next year, it will get a lot clearer.

When do you expect -- it's my understanding you guys are doing a deep market study on that segment of the market, now.

When do you expect that study to conclude?

I think -- it is an ongoing study.

And you've got to keep in mind, we have a 1,300 plane backlog with our current narrow body that we keep improving and spiraling technology into, that makes the bar tougher for the newer airplane.

We have pretty good market acceptance and a backlog going out many, many years on what we're doing today.

I think it will be an ongoing discussion that will probably take -- it will be measured in years not months, in terms of when at that market segmentation settles down.

Okay, that's great.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Robert Stallard of Banc of America.

Good morning, guys.

Good morning.

Jim, I was wondering if you could give us a quick update on some of your major Defense programs; notably FCS, JTRS, and the AEW programs?

I think the FCS is progressing very well.

You've seen that all milestones have been hit.

It continues as the cornerstone program for the Army.

And the funding remains as robust as any development program funded by our Defense establishment.

So going well.

Tied closely to our customer.

And some of the capability being spiraled into today's war fighter -- I think I would comment on GMD, ground missile defense -- this is one that you all were pushing us on last year.

We are back to hitting every milestone.

Test flights are going well, on schedule, achieving all objectives and then some with margin.

And the customer is very pleased in terms of the way we're marching through there.

AEW&C, we are still in the process of validating the re-baselining of that program that we went through earlier this year.

But we are confident that we're there, but we'll see.

What was the other one you asked me about, JRTS?

That one is also -- I would categorize as one that got recouped last year and is delivering on time and on schedule.

Thank you.

Our next question comes from Joe Nadol of JP Morgan.

Thanks.

Good morning.

Good morning.

I was wondering if you could comment just a little bit more on your current production at BCA?

Noted that the -- you've been running the past couple quarters with unit costs accounting, profits higher than program, and this quarter that slipped around.

I was wondering what caused that?

And also, your 777 volume dropped a little from the first two quarters to the third quarter.

Wondering if that was related or not?

On the 777, that was just timing.

And on the unit margins, it is just we've had the impact of the increased material costs and it has a more dramatic impact on unit margins early.

And it doesn't have the ability to have the production improvement that we have over time in programs.

Again, with -- the problem with unit margins, I know you all like them, but they're volatile because they can be affected by near-term things and doesn't take the program picture into effect.

It is it is a data point.

That's what's caused it.

You'd characterize the issues you're facing more as just raw material inflation, rather than getting the stuff in the door?

Exactly.

And then the quarter -- for the quarter, there was a mix difference in terms of the delivered units, which have a pricing impact on it.

Okay.

Thank you.

Thank you.

Our next question is from Troy Lahr of Stifel Nicolaus.

Thanks.

Recently in some of the conference calls from the domestic airlines, they've talked about exercising some options and maybe even accelerating some aircraft deliveries.

Have you been getting some pressure from airlines trying to move up a couple slots?

Yes, and maybe a little more than normal.

Thank you.

Our next question comes from Myles Walton of CIBC.

Thanks.

Good morning.

A quick detailed question for you below the segment level.

Unallocated expense, looks like it was a -- well down from the historical run rate, kind of a bigger swing item in the quarter, at least in my model.

What drove that in the quarter?

And also, what's embedded in your guidance for '06 and '07?

Share-based plan expenses is primarily it, as they -- when we implemented 123-R last year, the current plans obviously were -- when we valued those, the value turned out to be less in the new models.

Also, we've accelerated a lot of the payouts in the performance share late last year, early this year, which also accelerated the expense into those periods.

You're seeing less expense flow-through for the old plan, and the new plans are less costly.

So that's what you're seeing.

There is a little bit about the stock price going down on the deferred shares associated with that share-based compensation plan.

So the run rate, going forward, will be lower than what you saw in the past.

Thank you.

Our next question comes from Peter Jacobs of Wells Fargo.

Good morning, gentlemen.

James, could you just highlight again, specifically where you're seeing some of the weight issues on the 78 -- 87 program?

And any kind of additional color you can give there?

No, I can't.

Other than -- I don't want to name names on [inaudible].

But in general, what we have is the airplane pretty much designed, and as you start weighing out the components, there is weight opportunities, and it -- obviously, the bigger the component, the more, generally, the opportunity is.

So we're trying to attack those that have the highest payback and that we can do within the timeframe neccessary to meet our delivery dates and still meet all our contractual obligations.

That's the focus.

Okay.

Thanks.

You're welcome.

Thank you.

Our next question comes from David Gremmels of Thomas Weisel Partners.

Thanks.

Good morning.

Question on IDS -- and you touched on part of this earlier -- but your IDS revenue plan for '07 is now at the low end of the private -- the prior plan, despite the fact that you did win SBInet.

I am just wondering, what were the swing factors that moved that plan toward the lower end?

Was it funding issues in the '07 appropriation or the loss of the CEV?

Or what was happening there?

No.

Remember, we had some funding reallocation as it related to, one, our proprietary program, where we lost a piece of the [THEA] program where that got truncated.

And then the funding associated with programs that are now back on track, like GMD, were affected somewhat last year because of some performance issues, again, which we have turned around.

The funding levels haven't come back up to that we had previously anticipated.

It is more volume related to that.

And the SBI win, although significant, it has a -- it is a small program.

It is not a very large program on the initial phase or it is timed over a number of years, going forward.

We don't see a significant impact in this year.

Great.

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

Thank you.

Our next question comes from Gary Liebowitz of Wachovia Securities.

Hi, it is Joe San Pietro.

I am going to kick the R&D dead horse one more time.

Jim, in the beginning of the conference call, you were speaking that there were eight contingency plans, one of which you had funded.

Are you saying that there is potentially seven more contingency plans to be funded?

Or what did you mean by that?

What I meant by that was that we -- we have around eight, last time I reviewed it, contingency plans in place if we need them.

And the R&D level that we're talking to you about, assumes we fund all of them and more.

We've only triggered funding of -- we've only needed to trigger funding on one of them.

I was trying to point out a specific -- with regard to the conservative posture we have with our R&D.

Is that clear?

In other words, if we fund them all, we still won't be pressuring the number I gave you.

Thank you.

Okay.

Thank you, operator.

Now we'll shift over to the media questions, please.

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. Tom Downey, Vice President of Corporate Communications.

Mr. Downey, please go ahead.

Thank you.

We'll continue with media questions for Jim and James.

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

Operator, in the interest of time, we ask that you limit everyone to just one question, please.

And we're ready for the first question.

Thank you.

Our first question comes from Lynn Lunsford of Wall Street Journal.

Good morning.

Good morning, Lynn.

Just one little question, and I think it is more looking at nuance than anything else.

Up until now, you have pretty well said that you expected entry into service for the 787 to be mid-2008.

I noticed in your press release that in the graph where you talk about that, you just say during 2008.

Does that mean you're slipping that?

Or is that just wording?

Not at all.

That's wording.

There is -- I believe it's August '08 -- it has always been August -- late August/early September, has always been the timing and still is the timing.

That was inadvertent, Lynn.

Thank you.

Our next question comes from James Wallace of Seattle newspaper.

Yes, good morning, Jim.

I had a question.

In previously interviews that Mike Bair has done with me and others, he's mentioned about 2% has been the overweight issue, plus or minus something.

Has the weight increased recently?

Or are you just trying to tackle the same weight that he's been talking about?

I think it is within the range of what he is talking about.

I think, right now -- I don't know when you last talked to him, but I would say the weight pressures have increased slightly, but also the opportunities to reduce them have increased.

So we're working it, but it is within that range of sort of low single digits.

Thank you.

Our next question comes from Paul Merrion of Crain's Chicago Business.

Hi.

You said that the accounting rule change will mean a $7 billion decline in book value.

It won't be significant to the Company, but it is a large drop in your book value, I think about 70%.

Are you going to do anything to educate investors about that?

Or do anything to -- ?

We already have.

I think investors, and particularly analysts who investors rely on to provide a lot of the information, clearly understand this is an issue.

This is no more than a book-keeping issue that -- where in the past, we've always provided the same information for these unrecognized gains and losses for the pension assets in a footnote.

And because there hasn't been consistency across industries how that has is been done, the FAS, we decided, they would like to bring it onto the balance sheet.

Clearly, this thing is very volatile.

And as our asset performance improves and our plans are fully funded and we get the rate of return assumptions equalling what the real obligation is, you can see this swing by $7 billion.

So I think the investment community really does understand it.

And we will, obviously, continue to explain it as clearly and provide the transparency so individual investors will also understand it.

Our next question comes from Dominic Gates of the Seattle Times.

Good morning.

Good morning.

A couple of things.

I wondered, Jim, if you could give us any idea of what the one contingency plan that you have had to fund, what that was exactly?

Yes.

There will be some work that is going to be brought to Seattle, that was going to be done by a couple of our suppliers that is more efficiently done in Seattle.

And so we've made an adjustment there.

And that's the one we have triggered.

Is it major work?

Well, it's -- I don't know what you would categorize as major work.

It is systems installation work that is systems that are going to be installed in the airplane.

Thank you.

Our next question is from John Leung of Inside Defense.

Good morning, gentlemen.

My question is a little bit broad in the sense that the government of Electronics and Information Technology Association did a survey that -- an annual survey that just came out last week.

And in part in it, it found an increased skepticism among Wall Street analysts and some other folks that the Pentagon would continue to use lead systems integrators in future acquisition programs.

And so my question is, basically, how is your thinking or your assessment of the LSI concept devolved as you have been managing programs like FCS and GMD and that kind of thing?

Is there anything you think should be done -- or could be done to improve -- or make the managing of the programs under the LSI concept better or more efficient?

I think in terms of our programs and the concept of the lead systems integrator, it's more comparable to a prime contractor.

We will have total systems responsibility.

We're going to design the system.

We're going to go the systems integration, the systems engineering, and then we will have total system responsibility and accountabililty for its performance.

So I think that's going to what's key.

So it is in my mind and the way we look at it here is, that the -- that role is a role that has to be performed and very valuable, because it has capability embedded in it, in terms of the overall performance of the system.

Thank you. [OPERATOR INSTRUCTIONS] We do have a question from Dominic Gates of Seattle Times.

Thanks for letting me back in.

I just wanted to go back to one answer that Jim McNerney gave earlier.

I was a little surprised when you told Lynn Lunsford that the entry into -- the first deliveries of the 87 would be in late August.

Because I certainly understood it was going to be earlier that summer.

And one of the reasons for that was the Beijing Olympics -- the Chinese airlines that have ordered the 87 wanted it for the Olympics.

Isn't that going to be too late if you're delivering it in late August?

The first one, I think, goes to Japan, not China.

Dominic, you're right.

I may be confusing when we're shipping an airplane to somebody versus when they're implementing it.

And our date for delivery to the Japanese and Chinese airlines has not changed.

If I have confused the date, I apologize.

We'll reaffirm that with you.

I am not trying to signal any change at all.

All right, thanks.

Operator, seeing there are no more questions in the queue, that will conclude our call.

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

Thank you.