波音 (BA) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to The Boeing Company's third quarter 2007 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, you may go ahead.

Thank you.

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

I'm 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 brief comments by Jim and James, we will take your questions.

And in the interest of time, we ask that you limit yourself to one question, please.

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

As a reminder, you can follow today's broadcast and slide presentation through 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 which are detailed in our news release, in our various SEC filings and in the forward-looking statements at the end of this web presentation.

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

Thanks, Dave, and good morning, everybody.

I'll begin with some comments about our third quarter performance and our outlook.

I will also share some thoughts about what we're doing to keep the 87 program on schedule, on the schedule that we outlined earlier this month.

Then I'll turn it over to James, who will walk you through our results, and after that, we'll take your questions.

On Slide 2, we continued to make solid progress across our businesses during the quarter, as evidenced by our financial results.

We delivered double-digit topline growth and sharply grew our operating margin, net income, earnings per share, and cash flow.

Our commercial airline and defense businesses are performing well, and we are making good progress on our significant growth and productivity goals.

Based on our strong results through the first nine months of this year, we are again raising our '07 financial guidance.

We will say more about that in a few minutes.

Our total backlog expanded again this quarter to another record level of nearly $300 billion, which represents more than four times our current revenue.

Our backlog has grown 29% over the past year.

Thanks to the strong demand for our Commercial Airplane products and key defense program wins.

Our Integrated Defense Systems business generated solid growth and double-digit margins by executing well on its large and balanced portfolio.

IDS also made great progress winning new business, including the Ares I Upper Stage contract for NASA and the KC-135 depot maintenance program.

On the international side, IDS and its partner Thales were selected as the preferred bidder for the U.K.'s Future Rapid Effect System, or FRES program, a very significant program that will leverage our future combat systems' success.

We're also looking forward to the U.S.

Air Force's decision about its tanker platform, a national priority that all of Boeing is committed to and supporting.

We believe that our KC-767 is the best match for the Air Force's requirement, and that Boeing can uniquely deliver both the military and commercial expertise and teamwork to make it successful.

Boeing Commercial Airplanes continued building on its strong momentum during the quarter, as well.

BCA is effectively managing its airplane production rate ramp-up and is expanding its operating margins.

BCA also had another outstanding quarter for orders, bringing its nine-month total to more than 900 airplanes.

BCA has now grown its record backlog to more than $224 billion.

And what's most impressive is that our backlog is very well-balanced across customers, airplane types, geographic areas, and airplane business -- airline business models.

Our product strategy continues to yield very strong results and a healthy growth trajectory.

Now, on the 787, earlier this month, we explained how we have rescheduled our first flight and initial deliveries because we needed more time to complete assembly of the early airplanes and get the supply chain up and running smoothly.

While we are disappointed with this schedule change, let me tell you what we're doing to address the issue and achieve the new plan we have laid out.

First, we made a move to strengthen program management for the work that remains to be done to successfully field the 787.

In making the decision to bring in Pat Shanahan to take over the leadership of the 787, we recognize the exceptional job Mike Bair and the team had done, taking the program from concept through technology development to become the most successful new airplane launch the industry has ever seen.

We also recognize that we're at a stage where a different set of strengths is needed to bring it all home.

Pat, as I think most of you know and appreciate, has exceptionally strong detail-oriented program management skills and a proven track record in meeting customer expectations on complex programs.

He also has a deep knowledge and experience with Commercial Airplanes.

Pat has already hit the ground running and is fully immersed in leading the team.

Mike Bair is actively engaged with Mike to ensure a smooth transition.

Pat will join Scott Carson on the next 787 webcast a little more than a month from now, in early December, to provide his view on the program and discuss progress to our plan.

In addition to naming a new leader, we are taking a number of other actions to support our updated 787 program schedule.

Together with our supplier partners, we are finalizing the detailed plan and master schedule that reflects our commitment to achieve first flight, first delivery and production ramp-up on our new time frame.

This detailed plan addresses not only the timing of supplier deliveries to us, but also the quality and completeness of parts and assemblies delivered by the supply chain for each airplane number as we ramp up.

And as we mentioned earlier this month, the new plan reinserts normal margins in the schedule for dealing with issues we might uncover in our remaining ground or flight testing.

In support of our new plan, we are placing additional Boeing people at our supplier facilities to work side-by-side with our teammates to resolve production and procurement bottlenecks and to provide us with visibility into the progress being made on a daily basis throughout the supply chain.

These people are primarily manufacturing and procurement experts being deployed to assist both top-tier and sub-tier supplier performance.

We are also adding the financial resources to support the new time line, and the work that remains to be done to complete assembly of the early airplanes and achieve our planned production ramp-up.

Our new R&D budget for 2008 reflects changes in schedule for the early airplanes and flight tests.

Finally, since announcing the new schedule, we have been in close contact with the customers who are affected by our delivery delays.

We regret the impact the new schedule is having on them, and we have committed to doing everything we can to minimize the disruption to their business.

While each of them is certainly disappointed by the delay, they all remain enthusiastic about the 87 and its potential to improve their business and the flying experience they offer passengers worldwide.

Even as we implement these changes to our 787 program, interest in the Dreamliner remains very strong, as demonstrated by the 73 new orders we won during the third quarter.

We now have 710 firm orders from 50 customers, which is the highest order tally ever achieved by a commercial jet program at this stage.

At list prices, those orders are worth more than $100 billion.

And despite higher R&D spending, that tremendous market success makes the current business case for this airplane very compelling.

Let me wrap up my opening comments by saying that we have, again, raised our financial guidance for 2007 revenue, EPS and cash flow due to strong core business performance and lower corporate costs.

And we have adjusted our 2008 guidance to reflect the revised 87 schedule.

Now, let me turn it over to James for review of the numbers and some further insight into our new guidance.

James?

Thanks, Jim.

And good morning.

I'll begin with the third quarter results on Slide 3.

Our revenue increased 12% in the quarter, driven by higher commercial airplane revenue and modest growth in our defense business.

Our EPS grew 62% to $1.44 per share while our net income expanded to $1.1 billion.

Earnings from operations increased 58% to $1.5 billion, and our overall operating margins rose to more than 9%.

Our earnings were driven by higher Commercial Airplane deliveries, and double-digit margin performance at both BCA and IDS.

Last year's results included a charge of $0.22 per share to exit the Connexion business.

Excluding that charge, our adjusted EPS grew 30% this quarter, as our core businesses continued to deliver good performance.

Now, turning to our unit review, let's begin with Commercial Airplanes on Slide 4.

BCA continues to properly manage its production ramp-up while investing in its growth and expanding its record backlog.

BCA delivered 109 airplanes in the quarter, which, alone with higher service revenue, drove total revenue to $8.3 billion, a 23% increase over last year.

Operating earnings grew 46% to $945 million, and operating margins expanded to 11.4%.

BCA's margins reflect growth in productivity improvements across its products and services which more than offset a planned R&D increase.

R&D spending for the third quarter was $134 million lower than the second quarter due to the supplier support payments received during the latest period.

BCA does not expect to receive additional supplier participation payments this year.

For the first nine months of this year, BCA revenues were up 18% on a 12% increase in delivery.

Operating income grew 26% and margins expanded to 10.6%.

We continue the substantial market success we have enjoyed during the past few years, capturing 354 gross orders in the third quarter, lifting BCA's backlog to another record of $224 billion, which is approximately seven times BCA's revenue.

For the first nine months, Boeing won over 900 orders, a clear validation of our product strategy.

We also achieved important milestones during the quarter.

We surpassed 700 customer orders on the 787.

We pushed the total 777 orders over the 1,000 mark, and we surpassed 7,000 orders on the world's most popular airplane, the Boeing 737.

Finally, program margins exceeded unit margins as expected this quarter due to new customer introduction costs and pricing mix that reflects airplanes sold two to three years ago in a tougher pricing environment.

We expect this trend to continue for the rest of this year.

Now, moving to Slide 5 in our defense business.

IDS delivered 3% revenue growth and 10.3% margins in the third quarter driven by higher volume across most of its segments.

The unit delivered 30 production aircrafts and one satellite during the quarter.

Results were led by continued strong performance and support systems and double-digit margins in Precision Engagement and Mobility Systems.

Revenue in the Network and Space Systems segments grew 6%, but a charge related to the Delta II program caused margins to decline to 5.9%.

That $94 million charge resulted from a new assessment of the launch market made by our United Launch Alliance joint venture.

That assessment, based on recent customer discussions, caused us to write down Delta II inventory values and record our share of associated ULA losses.

For the first nine months of 2007, volume increased across all IDS segments, and operating earnings were higher by 23% compared to the same period last year.

IDS completed major milestones in the quarter in addition to the key wins Jim mentioned.

Those include a successful flight test in target intercept for the Ground-Based Mid-Course Missile Defense program, delivery of the first production EA-818, and delivery of the first C-17 for Canada.

IDS remains well-positioned for growth and profitability with its $70 million backlog and broad portfolio of development production and support programs.

Now moving to the next slide.

Boeing Capital delivered another solid quarter with pretax earnings of $61 million on revenue of $197 million.

BCC's results came despite the planned reduction of its portfolio, which was driven by normal runoff and customer prepayments during the quarter.

The year-ago quarter included favorable portfolio dispositions and a larger portfolio.

The aircraft financing market continues to be robust, and BCC is executing well as it supports Boeing's businesses.

The other expense category improved significantly for the quarter, due mainly to last year's exit from the Connexion business.

Share-based plan expense also fell due to the changes we made to our long-term compensation plans last year.

Noncash pension expense grew as expected in the third quarter, but we will see that expense trending down over the next few years as we previously told you.

We expect to realize significant savings in these areas this year.

We expect total other expense to be about $150 million.

We also expect total unallocated expense to be about $1.3 billion this year which includes about $600 million of fast cash pension adjustments and $300 million of share-based plan expense.

These savings are included in our guidance.

Now, let's move to our balance sheet on Slide 7.

Our balance sheet and liquidity remain strong.

We ended the third quarter with $12.2 billion in cash and liquid investments, up from $10.5 billion at the end of the second quarter, reflecting strong order flow and solid working capital performance.

Total comp consolidated debt declined modestly for the quarter.

Our credit rating and quality remains very strong, and we continue to earn credit ratings that are at the top of our industry.

Now, let's move to cash flow on Slide 8.

We generated $3.3 billion of operating cash flow in this period.

Another outstanding quarter for cash performance.

Strong net income and order momentum combined with effective working capital management drove these results.

We continued our balance cash deployment strategy as we invested in organic growth programs while paying our quarterly dividend.

We also stepped up the pace of share repurchase during the quarter by investing $905 million to buy back over 9 million shares.

For the first nine months we have repurchased 19.6 million shares for $1.9 billion.

We completed our pension year at the end of September.

Boeing's pension plan continues to be fully funded on a PBO basis which is an important achievement.

The assets in our plan earned approximately 14%, even as we shifted to a more conservative asset allocation strategy.

A look into our 2008 pension year, we plan to use the same expected rate of return assumption of 8.25%, which reflects the asset allocation changes we are making that reduce expected volatility in our planned returns.

We expect our discount rate for 2008 to increase slightly to approximately 6.2%, and as a result, we forecast pension expense for next year to be slightly above $800 million, and we continue to expect only modest required cash contributions.

Now, turning to the financial guidance on Slide 9.

As Jim mentioned, we are increasing our financial guidance for 2007 and adjusting our outlook for 2008 to reflect the new 787 schedule.

We are increasing our 2007 revenue guidance to approximately $66 billion on higher IDS revenue.

Our 2007 EPS guidance is raised to between $5.05 and $5.15 per share driven by higher revenue, lower corporate costs and a lower tax rate.

Operating cash flow guidance for 2007 is increased from greater than$ 6 billion to greater than $9 billion on effective working capital management, year-end cash flow timing, and very strong airplane orders.

The adjustment to 2008 guidance are largely due to the rescheduling of the 787 program.

Total Boeing revenue guides for 2008 is reduced to between $67.5 billion and $68.5 billion due to the moving approximately 35 Dreamliner deliveries from 2008 into 2009.

Despite the revenue shift, our 2008 EPS guidance is unchanged at $5.50, to $5.75 per share due to continued strong core business performance.

Shifting those deliveries will also cause cash flow to move from 2008 into 2009, so we are reducing our 2008 cash flow guidance to greater than $3 billion.

This reflects the reduction of customer payments associated with the deliveries, as well as higher expected inventory levels and timing of payments to suppliers.

It also reflects the acceleration of some customer advances into 2007 from 2008, which is helping to drive the very strong cash flow forecast for this year.

It is important to note that nearly all the 2008 cash flow reduction will be added to 2009, along with the 787 deliveries.

We expect cash flow in 2009 to be very strong.

It's also worth noting that our new guidance to the combined 2007/2008 cash flow is only slightly lower than our prior guidance due to strong core business performance this year.

We're also updating our R&D guidance.

We're holding 2007 R&D guidance steady, but increasing our 2008 forecast to between $3.2 billion and $3.4 billion from between $2.8 and $3 billion.

Approximately half of the increase is due to the 787 schedule change, and the additional flight test activity now expected to occur in 2008, and the other half is associated with IDS development programs specifically for the international tanker, and for agreed-to changes with our customer on the charging of certain contract proposal costs.

We're adjusting our IDS margin expectations to above 10% this year due to the Delta II charge and to 10.5% in 2008 to protect against possible budget and program impacts next year.

As usual, you will find more detail about our outlook in the earnings release we issued this morning.

Now, with that, we'll turn in to your questions.

Dave?

Yes, Operator, we're ready to start the analysts' question portion of the call, please.

Thank you.

(OPERATOR INSTRUCTIONS) In order that your question be clearly heard, we ask that you not use a speakerphone, cellphone, or phone headset.

Please use your handset to ask a question.

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

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

Again, it is "star 1" for questions.

Our first question -- One moment.

Our first question comes from Cai von Rumohr of Cowen and Company.

Yes, if you could give us a little more detail, the unit cost margin looks like it was kind of even worse relative to program than it's been in prior quarters.

I think you mentioned, you know, weak pricing in prior years, and that this will continue in the fourth quarter.

Was there anything else in that number?

And when do you expect this to reverse?

Cai, this is James.

No, other than the new introduction, new customer introduction costs, it is the weak pricing where the pricing was aggressive years ago.

Now you're seeing those deliveries come through.

We do expect that to start correcting itself going forward, but it will be a moderate correction going forward.

Thank you.

Our next question comes from Heidi Wood of Morgan Stanley.

Good morning.

A little bit of a devil's advocate question for you.

You have a pretty rigorous information system process for aircraft development.

It was designed to call out problems really early in the process, and many of us had confidence in it, given the vigor or the detail.

But should we believe now that it doesn't work?

I mean, you've highlighted the personnel changes and going deeper into supply chain, but I guess I'd like you to address in more detail how you're going to better draw out intellectual objectivity to identify problems earlier because, otherwise, the new schedule is also susceptible to slipping.

Fair question, Heidi.

This is Jim.

Listen, I think as we look back on it, the real-time visibility we had with common design tools on the engineering and development side of this program were, in fact, as robust as we thought they were and signaled during the development phase of this issues early that we were able to address.

And quite frankly, that's why the technology development has gone well here.

I think on the supply chain side, we had less visibility on a real-time basis than we needed to have as we look back on it.

And that has been corrected going forward in terms of -- Basically we have six supply chains that need to coordinate better with each other in terms of data exchange and real-time visibility, and that's what we've been focused on the last couple of months.

We are close to achieving that.

And that's what we need to get, as an underpinning, for getting the supply chain back on schedule.

So I think that's where the focus of our effort has been, and I think we've made real progress there.

Great.

Thanks very much.

Our next question is from Steven Binder of Bear Stearns.

Jim, I know this has been asked before, but I'm sure, given the schedule changes on the 787, you've got a number of suppliers that have come back to BCA looking for equitable relief because of all the scope changes both in terms of nonrecurring and recurring costs.

I'm just wondering, where do you think we are currently in that phase of discussion with the suppliers?

Are we in the early stages?

And do you feel as though you've adequately factored into your estimates for R&D in '08, number one, and, two, into your cost pool for the 787, any type of equitable relief you're going to have to provide to the supplier base?

I'll try to take your parts of the one question here.

In terms of scope changes, assertions along the way, that -- those discussions are in a fairly mature stage.

And so I would characterize that as the normal discussions that go on between teammates as they endeavor to complete the design and production of the early airplanes.

So we're at a mature stage there.

Now, in terms of the impact of the schedule change on them, I think James would say that we have factored in some margin in our cash projections to make sure that the extent to which there's some equitable cash relief required, that we're within those projections.

And furthermore, any cost that we would incur as we achieve settlements with customers as we move deliveries around on this new schedule, that's also anticipated in our costs, in our program costs going forward.

James, do you have anything to add there?

Yes, Steve, I'd go a different step forward, as we're looking at developing the cost base for the 87.

We have taken into consideration, I think we're being reasonably conservative as to the outcome of that.

Because although we are in, as Jim said, down on the road and mature in those discussions, obviously we want the supply chain focused on helping us get these first airplanes through and built, and so we're not pressing as hard as we might otherwise being at a different stage in the program.

So we are conservative in our estimates in those outcomes.

Can I just ask a follow-up?

Sure.

Just revenues, you know, in '08, in your projection, your starting point is $33 billion in '07, and the incremental deliveries in '08 are presumably just pretty much 73s and a handful of 78s.

I'm wondering, what are your assumptions?

Can you provide a little bit of color?

I would think that to use the midpoint of your estimate in '08, most of the increase is simply just volume.

It doesn't look like there's a whole lot of pricing factored in, number one.

And two, is there much growth assumed in commercial aviation services?

And third, used aircraft sales, is there a decline expected in used aircraft sales?

I'm wondering, it seems like a fairly conservative forecast in '08.

You know, the '08 shows the slide out of the 87s, which are pretty good revenue-producing aircraft, and then we have the mix, obviously.

There's still a lot of (inaudible), but there is growth also assumed for cash.

But we think, where we are today, with the units we are going to deliver, with the pricing that we know for those units that would be delivered in those years, we think it's a pretty accurate forecast, Steve.

Okay.

Thank you.

Our next question is from Troy Lahr of Stifel Nicolaus.

Thanks.

A question for James.

Really in the past, when analysts have really pushed back on the 2008 BCA margins, you've often stated that booking margins would be lower on the 787 and really dilutive to segment margins.

I was kind of thinking maybe 150 basis points.

Now that you aren't booking that lower margin revenue on the 787 in 2008, what is the likely impact to BCA margins?

I would think you would see a little bit of a favorable impact.

I don't know if that's being offset by overhead absorption.

And maybe a little bit of the higher R&D.

Can you just kind of help us understand that?

You just answered your own question.

Clearly, the -- We'll get some lift in terms of the margin with the number of 787s slipping out because they are dilutive, but that is going to be absorbed with the increased R&D costs.

The increased R&D cost is only like maybe 60 basis points, right?

I mean, does that fully offset it, or you have the overhead absorption also?

That's fully -- that's a pretty -- In fact, we have to do some productivity to offset still some of the R&D efforts.

Okay.

Thanks, guys.

Our next question is from Rob Spingarn of Credit Suisse.

Good morning.

James, could you go back and review the cash flow, perhaps the operating cash flow components?

I think we all expected the reduction in '08 cash flow based on the delay,and that that would flow as a positive or be offset in '09.

But this materialization of $3 billion in '07 is a large number.

You've attributed it to several components.

Working capital, moving around, advances, et cetera.

Could you give us some more clarity on the '07 uptick and the '08 downtick in terms of how much is 787, how much is working capital moving around elsewhere?

I'll do that.

In '07 we're seeing about $1 billion of that be an acceleration of what we thought we would have gotten in '08 as we have experienced much better order traffic and a lot higher orders.

So that's part of it.

A part of it is the fact that our tax payments have been deferred.

We thought that our tax this year we would -- they would be higher because of the higher earnings, and we would also pay them in this year and that's not happening.

That will happen in '03.

But it's principally that -- Excuse me, in '08.

And it's principally that, and the working capital management that we continue to focus on and to experience pretty good success within the increase in '07.

Now, in '08, the decrease is probably about $2.5 billion associated with the slide of the 787s and the loss of that revenue, and then the $1 billion I'd already mentioned to you is an acceleration into '07 as we've experienced better order traffic this year and some of our customers have accelerated their advanced payments.

And then finally, we have a little there to protect against any increases in cost in the supply chain as we go forward and deal with the disruption associated with the slide.

I see.

Thank you.

Our next question comes from Joe Campbell of Lehman Brothers.

Good morning.

I wanted to ask about the 787 production schedule rather than the delivery schedule.

And as explained in the first two years, there's only a couple of planes that are slipping.

So it appears, though, that we're relatively late on the first -- I don't know.

It's hard to tell because you haven't made it clear, but presumably by April or so, you had planned to make six flight-test airplanes and another, you know, 15 or 20 airplanes.

That doesn't now look likely.

So what is happening so that the downturn that we -- or the shortfall in delivery in production rather than deliveries is going to be made up later.

Presumably you have to go to a higher rate that you didn't anticipate going to sometime later in '09 in order to make up for the short fall in the front and turn out about even in the end.

And I'm looking through what Jim said he's done, and I'm -- I don't see in there the kinds of things that would allow you to go even faster than you had previously thought you could go in '09 to make up for the shortfall that you're going to have in '08.

Joe, this is Jim.

Let's go back and review the bidding.

I mean, I think the driving reason for the schedule pushout was the completion of the first airplane.

The-- And we're getting our arms around that as we speak.

But we never turned off the supply chain for the completion of all the work they needed to do on the balance of the airplanes.

But I would have thought you needed to have, say, six airplanes by December '07 in order to get your flight tests going.

Now looks like you're going to have two planes by March '08, so it seems like there's quite a few missing in the front.

If that's not right, then of course, you don't have to --

There's no question, Joe, that the final assembly of those airplanes will occur later than in the original plan.

However, the formation of all the components and the subassemblies and the major structures of the airplane which takes the most time, and which requires the most effort and the most investment, that is ongoing as we move forward.

So the assembly of the airplanes is -- The schedule is compressed, as you pointed out, but the majority of the supply chain work will continue on the old schedule.

So it's --

But if I go to Spirit or Alenia or whatever, I can't find 14-piece barrels.

In other words, it looks like the suppliers, because the final assembly was all clogged up, you moved two planes around these test units, but that doesn't seem like enough to keep these guys and get them to the rate that they were going to be on.

I don't think Spirit's supply chain plan has changed dramatically as a result of this pushout.

And we'd be glad to sit down and talk to you about it, but it's -- I think their plan in terms of the components they're building, that has not changed.

Now, we're obviously going through the detailed plan to make sure that the details support where we have all committed we can get to.

But it's something that is ongoing right now.

And if you'd like some more visibility, Joe, we'd be glad to sit down with you.

Okay, terrific.

Thank you.

Okay.

Thank you.

Our next question is from Robert Stallard of Bank of America.

Good morning.

Good morning.

Jim, I'd like to ask you about the demand environments of BCA.

You've mentioned that some of the orders have moved forward into '07 from '08.

Does that imply that we should expect BCA orders to be down fairly significantly next year?

And what do you think the book-to-bill ratio's going to turn out to be?

Well, I think we have been, I should say, pleasantly surprised by the strength of the Commercial Airplane market the last couple of years.

We always anticipated that we would exceed book-to-bill, and but we didn't, quite frankly, think it would be as -- by as much as we have.

I think it's largely driven by wide-body demand that came in stronger particularly the 787.

Now, in '08 and '09 we're not in a position to provide guidance right now, but we're seeing strong momentum as we sit here today.

And it would not be inconceivable that we ended up with a year that's not too different than last year before it's all over.

So you're saying that '08 orders could be as big as '07?

No.

No, I didn't say that.

I said I'm not in a position to tell you.

But what I am in a position to tell you is that '07 continues strong, as we sit here, and we're late into '07.

It would not be inconceivable that we would finish strongly, and now, the momentum, as it carries into '08, we're not in a position to opine on that now, but we will soon.

Okay.

Thank you.

You're welcome.

Our next question is from Ron Epstein of Merrill Lynch.

Good morning.

Good morning, Ron.

Just to follow up on Joe's line of questions.

When you and the supplier sort of continue to build the plane, and you conceivably have this inventory of planes you need to deliver, what makes you so confident that there's not going to be some sort of material physical change that you're going to have to make to that inventory of planes that could come up during flight tests that conceivably could be an unbounded viability?

It could really be a big number depending on what would have to change.

What makes you feel comfortable that that risk, that the probability of that happening is so small?

There is some risk of that.

As we look back over other programs we've had, we've had substantial builds during flight test, And as a matter of fact, we build into the flight test time for rework if there are any issues that pop up during flight test, and we have that planned in our schedule this time.

So, look, to say that it's completely risk-free is wrong because something could happen that's out of bounds, or the kinds of things we've experienced before.

But as we -- as the program has been pushed out, quite frankly, we have a little more confidence in the systems and in the structures, as we have more time to test them, than we do going into a lot of flight test programs.

So, not risk-free, but we built back the normal margin we have for rework.

The amount of planes we're building is not dramatically different than planes we built before in other flight test programs.

Can I ask one follow-on?

Sure.

How many airplanes do you expect to have floating around before you start delivering?

We can get back to you with a better number, but it's somewhere in the 55 to 65 range.

Okay.

Thank you.

Our next question is from Howard Rubel of Jefferies.

Thank you.

I want to follow up on the research and development a little bit.

I mean, there's two parts to it.

One is, it looks like, if you add back the supplier payments in this quarter, your R&D has peaked.

And then as we look into next year with the, I'll call it the accounting change, does that mean that your SG&A will be lower?

And then related to that, you've changed your program manager on the 747, so why don't we see that all of these disruptions and the additions to the R&D not, in fact, have caused some other knock-on effects elsewhere in the company?

Howard, let me take a shot at that.

Getting back to the first part of your question, clearly the R&D spend is peaking this year.

We do plan to have R&D come down in '08, just not as as much as we had originally planned for it to happen.

The accounting change was on U.S.

Government contracts where you have the ability on follow-up work to charge the proposal effort to contract.

We had discussions with our customers this year, decided that the -- it would be better and more appropriate to have that run through the normal B&P and R&D expense, so it's going from contract to R&D, not going back into G&A, although R&D is part of G&A.

But it's separated out.

So that's what's happening on that side.

And we have looked at the disruption caused by all that's going on in our overall R&D effort, both at BCA and IDS.

And the guidance we have today and what we're increasing it to, we think, accommodates all of that.

Thank you.

You're welcome.

Our next question is from Joe Nadol of JPMorgan.

Thanks.

Good morning.

Good morning, Joe.

Jim, my question is back in the 787, and it's on Pat Shanahan.

Is any change to the plan you announced?

I guess it was last week or two weeks ago.

Is there any change to that schedule on the table, or is that now -- we shouldn't expect any change certainly the rest of the year, and obviously to see how things go next year.

And did Pat have any input into that plan?

Pat had no direct input into the plan.

Pat is going through a slowdown of the plan right now with the team.

However, all the people that support the new plan and all the functions that support the new plan, as well as our suppliers, did support the new plan.

Now, as I said before, I thought -- Scott and I thought that Pat was the best guy to implement this phase of the program, which is much more of a supply chain operating focus day-to-day program management task.

So that's -- And he's embraced it.

He knows the people.

He knows the functions.

He's been in BCA, and there has been nothing that's popped out in the last week that suggests that this plan is not the right plan.

So is there a time in the next few weeks where we can assume basically that he's fully vetted the plan, vetted, gone through all the nooks and crannies of the program and bought into it, or is it still subject to change if he comes back and says, look, I didn't know about this, this and this?

There is a remote possibility that that could happen, but I doubt it.

He's been into this plan, and he -- Over the next couple of weeks, I think, the details will be flushed out of the operating plan at a very detailed level at the first and second tier supplier level that will support it.

As I said before, the -- you know, our supplier partners already supported it.

So I think the likelihood of a surprise is not high.

Okay.

Thanks.

Our next question comes from George Shapiro of Citigroup.

Yes, good morning.

Good morning, George.

There's a slight reduction in deliveries that you're projecting for this year down to low end of your guidance of 440, which is, you alluded to it in the second quarter.

But my question is, with demand seemingly as strong as it is, I haven't seen any deferrals for the rest of this year.

So do I conclude properly or improperly that there may be some supplier issues that have prevented you from getting to kind of the higher end of the 445?

And if so, what's the risk for reaching the higher deliveries next year?

They're not supply chain issues, George, they're just -- it's just timing issues with our customers and when they want to take the airplanes.

So that's where we are.

But we think it will be 440.

But given the strong demand out there, James, you would have thought that you would have demand for the higher end of what you are projecting?

But if the customer decides when they want to take delivery, and they've told us that this is about the -- what we're telling you the guidance is going to be for the next quarter and for the total year, that's where they are.

And it won't impact the wait.

Okay.

Can I get one follow-up, too?

Why should you be different?

Yes, thanks, Jim.

The margin XR, indeed, this quarter was dropped down to 19.1% from 19.9% in the second quarter.

Now, is that just reflecting some mix difference out there, or is there anything else involved?

No, I just think it's period expense and the timing of them.

I don't think it's -- there's nothing major that's causing that phenomenon.

Okay.

Thanks very much.

Sure.

Our next question comes from Doug Harned of Sanford and Bernstein.

Good morning.

Good morning.

On defense, James, you commented that you're looking at a -- you have lower margin guidance in 2008, and that's to protect against program risk.

I noticed also you had lower revenue guidance in IDS for '07.

Could you talk a little bit about what's driving this, and are there specific risks that you're concerned about next year?

The revenue guidance in '07 is higher.

Is it?

Yes, I said that we're going up to $66 billion driven by IDS.

And it's better volume principally in Network Systems.

Well, then in '08, can you talk about the lower margin guidance and any program risk you might --

Yes, you know, it gets down to we're at the front end of a lot of multiyear contracts.

It's the mix that we'll see next year, and obviously it's a constrained funding year.

And then when you put the R&D increase that we have associated with [R&D], it just says we ought to temper the margins to deal with that.

We're going to still be challenging them to do better, but obviously with what we see today that's about where we think it will be.

Okay, good.

Thank you.

Our next question is from David Strauss of UBS.

Good morning.

Thanks.

Could you just address profitability on initial batch of 787s?

I think in the past you talked about, from a program accounting standpoint, you expected it to be profitable.

I think from a unit accounting standpoint, you also said it would be profitable.

With the delay obviously we see in the schedule, with some of the penalty payments, and I'm not sure if you're capitalizing any other costs, could you just address what you're looking at or thinking about in terms of profitability on the initial batch?

We still think the initial units will be profitable.

We haven't gone through and completed our analysis yet on what the accounting quantity size will be, and they're still working all the cost estimates, and then obviously we have a pretty good feel on pricing because we sold so many of the airplanes.

But we haven't concluded those -- that analysis yet and worked it through our auditors and through me, quite frankly.

But we do know and still feel that those initial units will be profitable, but they will be diluted from a margin standpoint to our mature programs.

Okay.

And as a follow-up, I recall two weeks ago when you announced a delay on the 787, that you said that R&D was not going to increase in 2008?

It's now --

No, no, I never said that.

Okay.

I said that in '07, we would hold it.

In '08, we always had high risks on the R&D number, but what we said is if, in fact, it has to go up, we would still be able to hold the current guidance on earnings per share and we are holding earnings per share guidance.

Okay.

Fair enough.

Thanks.

Okay.

You're welcome.

Our next question comes from Myles Walton of CIBC World Markets.

Thanks.

Good morning.

Good morning.

Jim, I know it's a bit away, given you have your machinists' contract up in September of '08, is there anything you can do in advance to, perhaps, pull forward negotiations to mitigate that work stoppage in such a critical time in this delivery schedule for yourselves?

We're working with our employees, our represented employees all the time.

And I think the -- I think there's a low probability that we would change the timing of that discussion and the new contract for a variety of reasons, but I think there's a low probability of doing that.

And I think we're in a rhythm of working together with the union to come up with a successful negotiation.

And that's what I -- that's what I anticipate, quite frankly.

Can you remind us, if there were a work stoppage, are customer penalties excluded from you paying those if it's due to a work stoppage, or are customer penalties still on the table?

I'm not aware of any that would -- where the work stoppage would be included in the penalty set, but I don't want to answer that question categorically.

By and large, we have some, in so many words, indemnification from that.

That, in fact, could give you a little slack.

Pardon me?

Work stoppage could, in fact, give you a little slack if that were to occur?

We do not want a work stoppage, okay?

I understand why you make that comment, but the disruption for our customers and the pain we would cause them would be far worse than any slight sorting out of a supply chain issue.

We do not want that.

Fair enough.

Thank you.

Yes.

Our next question is from Ben Fidler of Deutsche Bank.

Yes.

Morning.

Question, if I could just clarify a bit more on the 787.

How far through the supplier renegotiations and the discussions with your airline customers you now are on the 787, and when you expect to fully complete those?

When you say -- Did you say customers or supply chain?

I think he said both.

Both actually, yes.

Both.

Well, obviously, we're -- On the supply chain, as Jim mentioned, the discussions around any changes associated with slide and any changes in statement of work associated with the development program are pretty mature.

And we believe we have the -- what the ultimate settlement position on that already taken care of both in our R&D guidance, where it would be R&D-related and in our assumptions for our booking rate on the program, and the program and accounting assumptions.

So that when we start delivering in the next year, that is already included.

On the customer side, we have, obviously, talked to all of them, and they are not pleased, but -- and we are obviously disappointed that we are causing them not to be pleased, but on the other hand, they're very, very supportive of the product, and we really don't, at this point, given what our current plan is, believe we're going to have a fatal issue with a customer.

Okay.

Thank you.

And maybe just one follow-on clarification.

I just didn't hear what you mentioned earlier, which is when you expect Pat to complete his own set of review of 787.

Did you put a time on that?

I characterized the flushing out of the detailed plan against the new schedule as occurring over the next two or three weeks.

Okay.

That's great.

Thank you very much.

Our next question comes from Gary Liebowitz of Wachovia.

Good morning.

Good morning.

The 787 is not the only new commercial aircraft you plan to introduce next year.

How should we think of the risks of the extra engineering and flight testing resources that have to be dedicated to the 787, affecting other programs?

Well, I think the -- there is a -- the 777 Freighter flight cert is also occurring next year.

We think both are accomplishable.

And that is really the only potential conflict that I see in terms of work, pushout work on the 87 having to be [dub-tailed] with other work on new products next year.

So, no impact, maybe, on 747-8 a little further down the line?

We don't see that.

There is obviously engineering resources that have shown up late on the -8 program versus an original plan, but we found ways to work around that through accessing engineers throughout other parts of the Boeing system and some external resources.

Thank you.

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

Our last question before media questions comes from Peter Arment of American Tech Financial.

Gary just addressed my question.

Thank you.

Okay, Peter, thank you.

Okay, Operator, we can shift now to the media questions, please.

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

For members of the media, (OPERATOR INSTRUCTIONS).

I will now return you to The Boeing Company for introductory remarks by Mr.

Tom Downey, senior vice president, communications.

Mr.

Downey, please go ahead.

Thank you.

We will continue with the questions for Jim and James.

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

Operator, we're ready for the first question, and in the interest of time, we ask that you limit everyone to just one question, please.

Thank you.

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

Good morning.

Good morning, Lynn.

One of the things that, Jim, that you've said in the past is that the 787 program sort of lives and dies by its transparency .

And you said earlier in the conference call that Boeing had sent additional people out to the suppliers.

What are the key things that it seems like that Boeing has had to get a handle on as being able to determine whether your suppliers were telling you what you wanted to hear versus what you needed to hear?

Are you feeling like you got a good idea into that, or a good window into that particular part of the equation given that you're relying on them so much for being able to complete

I understand your question, Lynn.

I mean, I think the -- We were surprised on the physical reality of some of the things that we received from suppliers versus the documentation.

We realized we really needed to work with them to make sure we had better visibility on the build and on the components that were coming into them, which is why we have sent out a number of procurement and manufacturing people as opposed to the engineering types that had been working with them historically on the design.

And one of the end products of that work is trying to get real-time visibility on the supply chain there, as well as here in the United States.

And I would say those efforts are ongoing, but almost complete.

And to your point, we need that -- we need that data transparency across all of the build in order to execute the plan that we've laid out.

And that's what we're doing.

One quick follow-on, and that is, I don't know if you really characterize it, but when you initially said that there was a slight delay to the program, but that you still felt like you could make the initial first flight, you qualified it by saying that pretty much everything had to go right.

Yes.

In this case, are you -- With saying that you can still deliver approximately the same number of airplanes by the end of '09, is that a conservative or conservative kind of statement, or are you again saying that's if everything goes right?

I would characterize it as an aggressive plan with normal margins in it.

Okay, thanks.

Okay, Lynn.

Our next question comes from Kevin Done of Financial Times.

Could you confirm for me, please, whether you said that 39 deliveries were being moved out of '08 into '09?

And that will mean you expect now to deliver how many in '08 and how many in '09 of 787s?

And Jim, did I understand you correctly that you said you thought gross orders for this year, 2007, could easily be as strong as 2006?

Many thanks.

Yes, I just to answer your last one.

First, I believe that, with the current momentum we've got, could happen.

I think order of magnitude, a good guess would be plus or minus '06.

Now, whether that momentum carries through to '08, I think we have to think about before we provide additional guidance.

I think the -- to your first question, I think we mentioned that 35 planes were moving out from '08 to '09, and a cum.

total by the end of '09, our current target is 109 versus 112, which was the original schedule.

So three being pushed into '10 net impact.

So how many would you delivery in '08?

Very -- a handful.

Can you put a figure on that?

Three or four, something like that.

Thank you.

We'll double-check that number for you.

Thank you.

Our next question comes from Dominic Gates of Seattle Times.

Hi.

Good morning.

Hello, Dominic.

Just a quick question.

You talked about sending a lot of people out to the supply chain.

Could you just -- In answering Lynn Lunsford, you seemed to indicate that there's less engineers and more procurement people.

Can you give us any idea how many people Boeing has got placed in the supply chain, and maybe just talk a little bit more about the difference in the type of work they're doing compared to earlier?

And by the way, Jim, I think I heard you say that you were basically dealing with six supply chains.

What are those?

We're talking about the big suppliers of the subassemblies -- the MHIs, KHIs.

Yes, that's what I meant by that comment.

The answer in terms of the number of Boeing folks out at suppliers, it's in the hundreds, is the way I'd characterize it.

And I would say the mix of the type of people out there used to skew more toward the front end of the development effort, which is more engineering and some procurement.

Now the mix skews toward actual manufacturing folks and procurement folks.

Not that there aren't an engineer or two out there, but it's -- and I don't know the number precisely, but the mix has changed substantially as the task has become more supply-chain-oriented and less design-oriented.

Is there any shortage of engineers (inaudible) to do things like this 747-8 Program and other engineering work that needs to be done?

As I mentioned before, as some pressure on the engineering population occurred, due to the 87 pushout, I think we had to tap into other parts of Boeing, and that's one of the advantages of our size.

Other parts of Boeing to staff some of the -8 work.

But we see that peak passing in '08.

So there has been some pressure, and we've had to scramble a little bit.

But I think by and large we've been able to get the work done.

Thank you.

Thank you.

Our next question is from Molly McMillin of the Wichita Eagle.

Hi.

Good morning.

Good morning.

I wanted to follow up on Joe Campbell's line of questioning with Spirit.

How many barrels do they have in production over there, and what is their schedule now?

And then, two, I know they weren't going to get paid until after certification to their contract, but have you renegotiated that where now payments will be made back on the original schedule, or will there be a delay?

I haven't been to Wichita to account specifically, but the last time I reviewed it, it was ten or more barrels.

But we can get you a specific answer there.

Okay.

And that supports the plan that we're on.

What was the other part of your question there?

The payments.

Oh, the payments, yes.

We do have contractual milestones on payments, and -- But the extent to which we cause suppliers undue problems, we will have fair discussions with them.

Okay.

Have you had any of those discussions yet?

No, not that kind of discussion specifically.

Okay.

And can I ask one clarification?

Ten or more barrels now, that's the new plan.

What was the old plan?

Well, I think that was my point earlier, trying to say to Joe, that the -- in terms of the build for Spirit, the two plans are not dramatically different.

We're continuing to build the major subassemblies for the airplane at the same rate.

It's the deliveries that will be pushed out.

Okay.

Thank you.

You're welcome.

Our next question comes from Stanley Holmes of BusinessWeek.

Good morning, Jim.

Good morning.

Hi, Stanley.

A couple of quick questions.

One is on update regarding the 787 systems.

First, you mentioned, last call, that the flight control software was pretty much completed.

The struggles, the challenges there you had handled.

However, there seemed to be quite a bit of struggle and challenge with the actual software systems that Smiths is overseeing and various other contractors that are connecting in with Smiths.

What's the status on that?

Well, I think that the overview comment would be that the software systems -- And as you pointed out, Honeywell and Smiths are two major partners there.

As we see it now, they are not long poles in the tent as we address this new schedule.

I think the Honeywell work is maturing nicely.

In fact, we're hopeful of even getting a later generation of software into the first planes, and we're seeing if we can do that now.

So that's a better new story, I would say.

Is there some risk?

Yes, but I think we're feeling much better about that.

And I think you alluded earlier to some of the bright control work that Smiths is doing, and we had a reschedule that we had accomplished there.

We had some struggles, but I think the joint team is feeling better about the schedule there, and it fully supports what we're doing here.

All right.

So the key -- Will the Smiths' part of the equation, which means not just Smiths, but the other suppliers that are connecting the software with the boxes that Smith is producing -- You feel that now can support the new schedule?

Yes, we do.

Okay.

And then finally, what about on the -- when the 787 is finally assembled in a production rate in Everett, do you expect to see or hiring more mechanics and machinists than you previously had expected in order to catch up and to keep the assembly lines humming at a peak?

Yes, I think there will be incrementally more labor required than we had originally scheduled because, as you know, there's the traveled work on the first couple of planes which obviously generates more labor requirement.

As we go through a transition from doing less and less of that, as the condition of assembly from our suppliers gets closer to the original plan, which is 100%, we're going to need some labor over the next few months to do that traveled work.

Just a quick follow-up to that, does that mean -- is there a number -- I mean, can you give us kind of just a ballpark figure of what you were anticipating to employ in final assembly versus what likely the new number will be to get you over the hump?

I can't give you that number, Stanley.

I think the -- it's not a large number.

Okay.

So, all right.

Thanks.

Okay.

Our next question is from Laura Mandaro from MarketWatch.

Yes.

Hi.

I was wondering.

You might have mentioned this, but I want to make sure I understand.

A question about customers, who were scheduled to deliver the airplane, and who are going to see these certified planes pushed off by at least six months.

Have you already agreed to compensate some of them?

Have they asked, and have you agreed to compensate some of them?

And where did you say that cost will show up?

Is that part of the R&D expense, or is it somewhere else?

We have had discussions with all the impacted customers.

There is constructive discussion on both sides.

Any penalties that are incurred by Boeing would flow into the program accounting of the total program.

So that's not part --

Not a direct period expense.

Okay.

Okay.

And then could you just give me a brief description of how your earnings outlook stays the same while the revenue projection is shaped for '08?

I thought I heard you talk about cost.

I mean, what's that coming from?

Are you taking people out of other programs?

No, what we said is the earnings we will be able to hold because we have really robust productivity programs underway, and that's going to contribute a portion of the improvement that allows us to absorb the additional costs.

Then we're also doing things here at corporate office in terms of affecting our compensation costs, affecting our pension costs, and some of the other things that we're responsible here between the two of those, they will offset the increased costs we're going to experience by the slide.

Can you give an example of what a productivity program is, so I know what you're talking about?

Like lean, for instance.

We're leaning out how we manufacture our products by taking out unnecessary steps, improving our cycle time while improving our quality, and reducing the cost and the number of hours it takes to produce the product.

Okay.

So,on the manufacturing floor.

And then you're trying to restrain compensation or to shave compensation in some ways?

We changed our compensation plan last year.

Our long-term compensation, that still provides a great incentive and ties it directly to the performance of our executives but it is a -- The expense of that program is less than our prior program.

I see.

Okay.

All right, thank you.

You're welcome.

Operator, we have time for one last question from the media.

Thank you.

Our final question comes from Mike Meecham of Aviation Week.

Good morning.

Good morning, Mike.

In your early recovery plan, you were going to shave some of the steps in flight test and move them back further into the program.

Now that you're on a new plan, are you going back to an original approach on flight test, that is to push fully through flight test both engines, as well as looking at improvements that might be applied to the aircraft later on gross weight and stuff like that, that is a normal part of flight tests, so that you get some data to be applied to the program further down the line?

The way I'd characterize it, Mike, is when we -- As part of the reschedule, we put some normal margin back in the flight test program.

We had squeezed most of that out as we tried to meet the original schedule.

And so I would say we're back to the originally contemplated test, and it does include the certification of both engines that does leave room for some rework if some of the test results suggest we should do it.

So I would characterize it as sort of the original schedule.

That would mean it's -- I'm trying to think of numbers.

It was still more aggressive than what you did on 777.

Yes, it was more aggressive.

I think, as we pointed out before, we had sort of 24x7.

We had -- we have more commonality in the airplanes, so less variance to test.

We had some work we've done if the system's preflight test we hadn't done before.

So, we had tried to learn from prior flight test programs, to, quote, "lean out" the flight test program, to begin with.

There's no ETOPS required here, either, as there was on the triple.

So that's saving you time there.

But in the hurried-up plan, if I can characterize it that way, it was referred to running a flight test as if it were an airline.

Are you of that kind of intensity?

No, we have kept that kind of intensity but reinserted normal margin for hiccups.

Okay.

Thank you.

You're very welcome.

That concludes our earnings call.

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

Thank you.