波音 (BA) 2009 Q1 法說會逐字稿

Thank you for standing by.

Good day everyone, and welcome to the Boeing Company's first quarter 2009 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 Ms.

Diana Sands, Vice President of Investor Relations for the Boeing Company.

Ms.

Sands, please go ahead.

Thank you.

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

I'm Diana Sands, and with me today are Jim McNerney, Boeing's Chairman, President and Chief Executive Officer; and James Bell, Boeing's Corporate President and Chief Financial Officer.

After comments by Jim and James, we'll take your questions.

In fairness to others on the call we ask that you limit yourself to one question.

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

And as a reminder, you can follow today's broadcast and slide presentation at our website at Boeing.com.

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

Now I'll turn the call over to Jim McNerney.

Thank you, Diana, and good morning, everyone.

Let me start today by discussing our first-quarter performance and the unprecedented market environment that we're currently facing.

As part of that I will talk about the things we're doing to respond to those challenges.

After that, James will walk you through our results.

And then we'll take your questions.

Starting with slide two, please.

Our first-quarter results reflect the impact of the steep global economic downturn on the commercial airplane market.

Which overshadowed the otherwise good performance in our commercial airplanes business and continued strong performance of our defense business.

As announced earlier this month, we have decided to bring 777 production rates down from seven to five airplanes per month affecting deliveries beginning in June, 2010.

We are also delaying plans to modestly increase our 747-8 and 767 production rates.

In addition, the weak global economy has driven significant declines in the indices that are the basis of our price escalation forecast for commercial airplane deliveries.

Together, the production decisions and the lower escalation forecasts reduced our first-quarter earnings per share by approximately $0.38.

Most of which represented a charge on the 747 program.

Commercial market factors aside, our underlying business performance remained solid in the quarter.

BCA production programs continued to execute well and improve cost performance.

Our commercial services business generated strong earnings and margins, even with softening revenue from spares and passenger to freighter conversions.

Integrated Defense Systems delivered strong financial results by executing on its large and balanced portfolio of programs.

IDS also achieved some key technical milestones during the quarter on ground-based missile defense, future combat systems, and the P8-A.

We continue to push ahead and achieve milestones on our development programs.

In March, we delivered our third international tanker to Japan.

And we completed development of and delivered the first 777 freighter to Air France.

We're making progress on the 747-8 program with fuselage and wing assembly continuing on the freighter airplane.

The first freighter is scheduled to deliver in the third quarter of 2010.

We are also working on the detailed design of the 747-8 intercontinental.

However, with the softening freighter market and the resulting decision to delay a planned increase in 747 production, first delivery of the intercontinental is now expected to move from second quarter, 2011, to fourth quarter, 2011.

This is consistent with discussions we've had with our intercontinental customers and was factored into the first-quarter production decision financial impacts we shared with you earlier.

On 787 we are on schedule for first flight later this quarter.

All the airplane systems including engines are cleared for first flight.

We've also completed the structural testing on the static air frame that is required for first flight.

Final analysis is underway, but the results are positive.

Earlier this week, we completed a full simulation of the first flight using the actual airplane.

The simulation exercised all flight controls, hardware, and software.

In the coming days, airplane number one will move out of the factory to the flight line.

There it will be fueled, and its engines operated prior to doing a final systems check.

And the high-speed taxi test that lead to first flight.

We're also making excellent progress on airplane number two.

On which ground vibration tests need to be completed before first flight.

Those tests are expected to begin later this week.

The 787 backlog remains strong with 886 orders from 57 customers around the world.

This includes previously disclosed cancellations of 32 airplanes and the order for eight 787s finalized with Gulf Air last week.

As mentioned last quarter, we expect a modest level of orders churn on the 787 during the year.

Even so, the backlog is unprecedented for a new airplane.

And we are confident in the long-term value of the 787 for our customers.

Our total Company backlog remains large at $339 billion.

By that -- while that number is down from last quarter due to current period deliveries, modest cancellations, and price adjustments from lower escalation, it still represents nearly five times our current and annual revenues.

New orders include the US Air Force contract for 15 C-17s that were previously funded under the fiscal 2008 budget as well as integrated logistics and support contracts.

Fundamentally, this is a solid Company with strong core businesses.

We are of course like all companies facing a very challenging market environment, which I will address on slide number three.

The global economy has further deteriorated, and we are facing economic times that are more difficult than many of us have ever seen.

This of course, is impacting our commercial customers in the form of lower air traffic growth and challenging financing conditions.

These pressures which are being addressed by various governments' economic recovery packages are also putting pressure on defense budgets.

As you know, earlier this month, the US Defense Department outlined its 2010 budget priorities which present a mix of both challenges and opportunities for our industry, including some specific challenges for some of our key programs.

It's important to keep in mind that the outlining of these priorities and the submission of the President's detailed budget to Congress next month only begins the lengthy annual authorizations and appropriations process.

Over the course of the next few months, we expect a healthy and rigorous discussion as Congress evaluates the proposals and determines the funding for each program.

While it will be some time before we know the final impact of these discussions, we continue to believe IDS is well positioned in a large, addressable market, with a diverse portfolio of defense, space, and security programs along with an increased focus on international defense opportunities and the pursuit of adjacent markets here in the US.

Because of the commercial and defense market uncertainties, we continue to step up our drive to become more competitive and productive.

As discussed last quarter, we are aggressively managing both costs and investments.

Unfortunately, part of this means a reduction in employment levels in certain areas of the Company.

We are on track toward the estimated 10,000 position reductions we expect by year's end.

We will continue to evaluate the appropriate infrastructure levels at the Company, especially in light of our recent decision to reduce commercial production in 2010,as we get more clarity on the US defense budgets.

Despite the challenging environment, our backlog is holding strong.

The only commercial airplane cancellations so far this year have been the 32 787s I mentioned earlier.

We have, however, been working with customers to defer airplanes in response to the unprecedented economic environment.

In the first quarter, we accommodated about 60 airplane deferrals from 2010 and 2011 into future periods.

We are in the process of working on more deferrals beyond that, all of which were factored into our production decisions made earlier this month.

The deferrals are occurring across all regions and all models.

I should point out that our decision at this time to hold 737 production rates reflects our practice of overcommitting 737 deliveries along the way, which has so far offset the current and anticipated deferrals.

Now, just a word on production decisions.

I want to emphasize that these are big business decisions for the Company and are not simply a reaction to today's view of the market.

The market is certainly a factor, obviously a factor.

But we also consider customer contracts, significant cost elements, and major employment implications.

While we monitor it all regularly, the scope and impact of these calls are significant and need to be made deliberately.

As you well know, the financing environment continues to be challenging.

Boeing capital conducts a bottoms up as well as top down analysis of financing requirements by tracking the status of each commercial delivery.

While at the same time evaluating the sources of global capital availability.

Currently, we still believe financing sources are sufficient to meet expected requirements for our products in 2009.

Part of this includes an assumption that BCC will need to provide about $1 billion of new financing this year.

However, we recognize the financial markets are fragile and can change quickly.

We believe we're in a good position to handle any resulting outcomes this year.

Let me summarize by saying again that we're in unprecedented times right now.

But I believe we have a solid foundation from which to work through this environment with strong products and services and a large backlog.

Importantly, we are aggressively managing our infrastructure, costs, and investments.

Now, let me turn it over to James who will discuss first-quarter results and our outlook.

James?

Thank you, Jim, and good morning.

I'll begin with our first-quarter results on slide four.

Revenue for the quarter was $16.5 billion, which were up 3% from a year ago.

Earnings per share was $0.86 per share, which includes the $0.38 reduction from twin aisle reduction rate decisions and lower price escalation forecasts.

$0.31 of the impact is a charge on the 747 program.

Because this program is in a loss position the production rate and escalation impacts are recorded in the current period for all units in the accounting quantities as opposed to recording the impact over time as the units are delivered.

Now, let me discuss BCA in a little more detail on slide five.

Commercial airplanes recorded first-quarter revenues of $8.6 billion, which is 5% greater than the prior year.

The increase was driven by higher airplane deliveries, offset by lower commercial service revenues.

Operating margins of 4.9%, 7 points lower than last year were significantly impacted by the $347 million charge driven by production rate decisions and lower escalation forecasts.

Our commercial airplane contracts have escalation provisions which state prices in current-year dollars at time of contract signing and allow for economic adjustments to be paid by customers at time of delivery.

These adjustments are determined from broad price indices.

During the first quarter, the global recession's impact on commodity and retail prices coupled with moderating wage growth significantly reduced these indices.

This change does not affect current year commercial revenues since pricing is fixed approximately 11 months before delivery, but it does impact our forecast of future revenues.

Lower revenue forecasts reduced program accounting gross margins during the quarter for our profitable programs and increased the loss recorded on our 747 program.

The first-quarter impact of escalation was approximately $235 million, $180 million of which increased the 747 reach-forward loss.

The Twin Aisle production decisions which impact production rates beginning in 2010 also affect current period gross margins.

Rate change disruption costs and redistribution of hard to vary costs over fewer units in the accounting quantity are the principal drivers.

The impact recorded in the first quarter reduced earnings by approximately $200 million, $175 million of which was included in the 747 charge.

This impact was net of a favorable adjustment to our prior 747 cost estimates.

The BCA team is focused on right sizing its infrastructure, and the associated cost to address the current market challenges.

Now, moving to slide six in our defense business.

IDS revenue was $7.7 billion in the first quarter, up 2% from the prior year.

Margins were 9.2%, down 2 points from a year ago.

First-quarter results reflect strong execution across its broad portfolio of programs, offset by less favorable mix in the Boeing military aircraft segment.

Prior-year results also included one-time favorable adjustments in Network and Space Systems and Global Services and Support.

During the quarter, IDS maintained its robust backlog of $73 billion by offsetting run-off with capture of new business.

IDS received contracts for 15 C-17s from the US Air Force, B-22 performance-based logistics, and maintenance and operations support for GMD.

In addition, UAE announced its intent to purchase up to four C-17s.

As Jim mentioned earlier, IDS achieved key program milestones including delivery of Japan's third aerial refueling tanker, loads calibration testing on the P8-A, a successful ground test and completion of the integrated mission test on Future Combat Systems programs.

The IDS team is performing well across its businesses and is on track to achieve its goals for 2009.

Now let's turn to slide seven.

Boeing Capital delivered another solid quarter with pretax earnings of $37 million on revenue of $163 million.

BCC had modest new aircraft financing in the quarter of approximately $135 million, which was offset by a portfolio run-off.

Our guidance still assumes that we will finance about $1 billion of new aircraft sales during the year.

Now I want to remind you that as BCC reduced its portfolio from a high of $12 billion to the current level of $6 billion, we have been preparing for this time of re-entering the financing markets.

We are well positioned and are entering the markets in a disciplined and approved manner.

Unallocated expenses increased this quarter as compared to last year, primarily due to higher intersegment eliminations.

We expect total unallocated expense to be approximately $800 million in 2009, with other segment expense forecasted to be about $200 million.

Now let's turn to slide eight and discuss cash flow.

We generated $200 million of operating cash flow in the quarter, reflecting cash from earnings and liquidation of inventory that we paid for during the strike last year.

This was offset by continued planned working capital build-up on our development programs, lower cash advances, and timings of receivables.

During the quarter, we paid approximately $300 million in dividends and used $50 million to buy back 1.2 million shares.

We have significantly reduced our share repurchases in light of the current business realities.

Turning to slide nine.

Our financial strength remains solid.

We ended the quarter with $4.7 billion of cash and marketable securities, including proceeds from the $1.8 billion of new debt issued in March.

After our announcement to reduce commercial production rates, S&P put our A-plus long-term credit rating on watch but confirmed our short-term rating.

Moody's reaffirmed our A-2 long-term rating and our overall credit ratings remain among the strongest in the industry.

Turning to slide 10.

We're upgrading our financial guidance to include the lower price escalation forecast and the resulting charge on the 747 program.

Earnings per share for the year is now expected to be $4.70 to $5.00 per share.

Now we expect second and third-quarter earning to be lower than fourth-quarter earnings reflecting revenue and R&D profiles.

2009 revenue guidance is unchanged at 68 billion to $69 billion.

The 2009 commercial delivery forecast also remains between 480 and 485 airplanes.

2009 operating cash flow guidance remains at greater than $2.5 billion.

We are diligently managing our cash and have action plans in place to preserve our strong financial position.

Now having said that, there are risks to our cash flow due to market uncertainties.

And in particular its potential impact on advances for commercial airplanes.

We continue to assume pension funding this year of about $500 million.

Total company pension expense is expected to be about $900 million in 2009, with slightly more than that recorded at the business unit, and a small offset in the unallocated segment.

The R&D expense forecast is unchanged at 3.6 billion to $3.8 billion, and we continue to expect R&D expense to decrease substantially in 2010.

Now let me turn to slide 11 and discuss in more detail our change in our earnings guidance.

As we mentioned last quarter, our guidance at the time considered the potential impact of modest production rate cuts.

Had the twin aisle production decision been the only impact this quarter, we would have maintained our earnings per share guidance.

However, the lower escalation forecast had a sizable impact on our results, which is the principal driver of our reduced EPS guidance.

We're expecting somewhat lower pension expense since last quarter but higher interest expense from the new debt issued in March.

We plan to provide 2010 financial guidance towards the end of the year.

Now let me turn it back to Jim who will give you some final thoughts.

Jim?

Thank you, James.

To close, let me simply say that we are diligently working on improving productivity, right sizing our infrastructure, and preserving our financial strength given the current uncertainties in both our commercial and defense markets.

While recognizing the risks at hand we continue to feel that we are relatively well positioned with the fundamental strength of our products and services, the size and diversity of our backlog and the long term outlook for the markets we serve.

With that said, we'd be now happy to take your questions.

(Operator Instructions) First on the line is Ron Epstein with Banc of America-Merrill Lynch.

Good morning, Jim and James.

Good morning.

Just a question on the 787 program.

As we start to think beyond the flight test program and into the ramp-up, what I've heard is Global Aeronautica is still a bit of a long tent pole, that the center fuselage integration is taking over, what, 300 days per section.

How do you work through that, and how should we think about the ramp of the program?

Well, I think -- I think the Global Aeronautica bottleneck as you characterized it is something that is not unusual.

The main body join is typically a challenge.

The -- but there is nothing we see as we work through it that will prevent us from meeting our ramp schedule.

The -- as you know, after the ownership change a while back, we have taken more direct control of that factory which I think has moved along process improvement significantly.

And we're making good progress there.

And while it has represented a bottleneck, we're confident that it won't as we meet our production schedule.

Okay.

And if I can just a follow-on on 78.

When you look at the suppliers, and different suppliers are developing either parts or subsystems for the program.

You've seen multiples of their original R&D budget that they thought they'd be investing.

When we think about the Boeing investment on 787, can you just maybe broadly say -- how many times is it what you thought it was originally going to cost the Company?

Well, it's -- there's not an integer involved in the multiple.

There have certainly been some pressure on research and development as you know and some nonrecurring costs and there have been some cost pressures that both we and our supplier partners have borne.

And it is -- but it remains a very economic proposition over time.

And I think the -- this is a very innovative product that did cost more and take longer.

But the market has recognized it as an innovative product by ordering many multiples times any commercial airplane that's ever been ordered before.

So we have a base over which to spread some of these increased costs, but the -- I wouldn't characterize it quite as direly as your question implied.

But we have been wrestling with pressures.

And they're slowly getting back into the box.

I mean, the condition of assembly by our partners from airplane 7 which is the first production airplane on out has improved dramatically.

We're in very good shape.

And quite frankly, I'm heartened by what I'm seeing in the ramp-up right now.

Great.

Super, thank you.

Thanks.

Next on the line is Howard Rubel with Jefferies.

If I did the math right you did about 8.5% to 9% margins in commercial and about 17.2% pre R&D.

That compares to 19.8 a year ago.

Two parts to this question.

What are you going to do to recover part of the loss of deflation?

I mean, the index works against you, but there should be lots of opportunities with -- of the rest of the industrial commodities being down to get some of that back.

And then the second question -- or second part of this is cash is clearly a challenge.

And could you be a little more specific in terms of what you're doing to try to improve the -- balance sheet's fine, but could you make it even better?

Howard, let me try to answer that.

As you know, on the escalation side, particularly on the commercial airplane where this impact has been felt, every quarter we get different escalation forecasts.

And we use -- we basically have two commodities.

One is the CPI index, and the other is for -- which is the consumer price index and the other is more commodities related.

They do change over time.

We will naturally see some of that happen.

As it deals with the costs associated with that that, it -- the timing is different.

As you know, we have long-term contracts which are fixed price with our subcontract communities.

So to the extent that some of those costs are going down, we will have an opportunity to renegotiate future contracts at lower prices, and then there are some contracts that we do have that see immediate impact, but it's minor.

So you'll see some of that.

Some of that is already into the -- into the impacts you saw on that escalation provision.

But over time, it generally balances it out.

And as we go into an inflationary period you can see that change rapidly.

On the cash side, clearly we're looking at a number of things relative to how we manage our cash and be more disciplined relative to inventory turns.

Be more efficient with just in time, we're looking at making sure as we move the schedules on production rates and on the deliveries out, that we also align that as perfectly as we can with the subcontract community so that we're not getting inventory before we need it.

We've cut back on -- on capital expenditures.

We're really looking at everywhere that we spend money that doesn't affect -- affect or go into the product, we're cutting back on all things that we would call nonessential.

We're having daily cash calls where we're making sure we're monitoring advanced pays and we're monitoring our disbursements to make sure that we're paying just in time, in accordance with our contract terms.

And that we -- we are aggressively pursuing our payment as required by contract.

We think the combination of all of that is going to make a strong balance sheet even stronger.

Are you seeing substantial delinquencies in your PDP's?

No, we're not.

What -- what you see in the first quarter is as we worked our way through the strike and we reset the delivery schedules and then that came out probably first part of this quarter, and so until we did that, obviously they were waiting to understand what the payment schedules, revised payment schedules were.

So we saw some of that impact in the first quarter.

Obviously we're going to have to do the same thing on the production rate changes.

And then reset that.

So we'll see some of that trueing up of cash payments.

But we think in the next three quarters that will have a much less impact and we'll be back on track.

But in general, we're not seeing delinquencies.

Thank you.

The next question is from the line of Robert Spingarn with Credit Suisse.

Good morning.

Good morning.

James, could you walk through your cash flow guidance?

With a flattish quarter here in the first quarter, you talked to some of the pressures and the things that are going on in the beginning of the call.

But how do you get to generate cash, operating cash of $2.5 billion in an environment where we would expect you're building 787 inventory, the advances are drying up from the absence of orders and you'll be increasing financing throughout the year?

Yes.

Well, there's a couple of things.

First of all, the advances really aren't drying up as a result of the orders.

We're not expecting a lot relative to cash receipts on orders.

In fact, it's a relatively modest number because the deliveries are so far.

The orders that we would write today are for deliveries so far out in the future.

The real issue is we -- we do have a -- quite a bit of receipts that are associated with deliveries after 2009.

And they are -- those are the PDP's that are set on the payment schedules and the inventory.

So clearly, we're looking at making sure we stay on track and order -- and we are able to collect those.

There is a timing of receipts in IDS that's different than the timing you saw last year.

So we're somewhat backloaded, but we're pretty comfortable that those will come to pass.

But overall -- and the financing as you know, is going to be leveraged.

So it really isn't going to have -- even though it's included in total and cash in the cash balance, it's not going to have a major impact.

But we have included the $1 billion already in the guidance.

And again, we've only done $135 million so far this quarter.

But we think we'll do a whole $1 billion over the course of the year.

But we think we're in pretty good shape.

And with the run rate in terms of what we'll deliver this year and the other -- the other initiatives we put in place to manage cash, we think we're going to be in pretty good shape.

Can you be a little bit more specific with regard to the actual working capital accounts and how you think those will play out through the year?

Well, obviously we'll continue to have some build-up on the development programs.

I mean, that's going to continue to build.

But I think also what I mentioned earlier to Howard, on the advanced pays as we settle down on what the delivery schedules are, we're going to see that the -- we're going to have in the -- the next three quarters, better performance relative to receiving those cash receipts.

We think accounts receivables will decline over the course of the year.

So I think we're in pretty good shape.

We think we understand all the pieces.

And we think that the -- what we saw in the first quarter is more attributable to timing.

And getting the production schedule set to get the payment schedules back and get back in place.

And solidified.

Okay.

Thanks.

Your next question is from the line of Joe Campbell with Barclays Capital.

Please go ahead.

Good morning.

I have a question about the numbers which I think Jim gave us on the 60 deferrals from 2010 and 2011 that you saw in Q1 that moved to the out years.

Now, I think that the number -- we probably guessed or triangulated that the number of wide bodies that moved was something a little over 50.

So it sort of suggests that there wasn't much movement in the -- in all the other airplanes.

And so I was wondering if, A, is that about right?

Or I mean I would have thought that there was a lot of in and outs and that that was what you were trying to convey.

So maybe just a sense of even if the 73's which are apparently so far okay, whether you can give us a sense of how many moved out and somebody else moved in so that we can get a sense for the fluidity of the 73?

Yes.

Joe, this is Jim.

The -- the number is more like half and half.

Narrow body and wide body.

Deferrals.

And as I also said in my comments, we're working others beyond the--.

But, Jim, you moved -- I mean, if you cut the production of 777s from seven to five, then that's going to be more than 30 airplanes.

So how could it be half and half?

Yes--.

Didn't we -- we cut the wide bodies by almost that much, I would have thought.

Yes.

I'm sorry, would you -- would you say it again, Joe?

I mean, we're talking about 60 airplanes.

A little more -- more than half of which were narrow body.

A little less than half of which were wide bodies.

But I thought--?

And we're working some additional deferrals, as well, right now, as I commented on.

And when you add that all up, that -- that does roughly true up to the production decision.

Remember, we're taking into account some things we're working now beyond just the 60.

Yes.

Oh, I -- okay.

But what I was really wanting to talk about was what's actually going on in the narrow bodies?

Presumably there's movement even though it nets out apparently to a number that's consistent with production, just as some sense of, whether it's 100 guys moved out and 100 guys moved forward, or whether it's five guys moved out and five guys moved forward?

Yes.

I mean, there's more moving out than moving forward, okay.

But what you have to remember I think, Joe, is that remember we -- we restrained production rates.

I mean, the big picture is that Airbus and us had roughly the same number of narrow body orders over the last few years.

They ramped up much more aggressively on production rates.

We were restrained.

Remember, they were in the high 30s, we were in the low 30's.

So we had a lot more overordering in our backlog, anticipating that someday there may be a softening, which is what we're seeing right now.

And so we're working through the overordered portion of the backlog, and when you look at what we deferred within the 60, plus the other ones we're working now, and are estimating based on that experience, we still think we're in good shape on the production rates.

And it's because we had a much larger margin of unslotted orders that we took, okay.

Okay.

That's great.

Thank you very much.

You're welcome, Joe.

(Operator Instructions) Next we'll go to Heidi Wood with Morgan Stanley.

Please go ahead.

Yes.

Hi, guys.

I want to take a step back for a moment.

In the first quarter of '08, the 747-8 was described as on track.

And over the span of four quarters, things went so awry that you took over $1 billion in charges.

And even as recently as the January call you described the 7-8 as a viable business and adding a lot of value to customers.

So while acknowledging that the 787 is likewise going to deliver value and is a viable business, can you describe the key underpinnings that anchor why the 787 won't be susceptible to reach forward loss kind of four quarters from now?

Well, the -- there's a specific accounting calculation, Heidi, that I know you're aware of.

But I mean, I think the big picture is a large accounting quantity, when the time comes to make that decision.

Which will be when we deliver the first airplanes.

Having worked through a lot of the nonrecurring, up-front costs, and having a much better handle now on the cost curve that is in front of us.

It's -- when you make the assessment, it trues up to where we are.

There is not a -- there is not a loss on the program right now.

Could things change?

Yes.

But there just isn't.

It's largely driven by the market acceptance of this product.

Heidi, let me just add one comment.

Traditionally when you look at us on a new airplane development program, at this stage in the program we've only sold 100.

So the major risk is the risk to market and the pricing associated with that.

The fact that we've sold so many has given us a lot more cushion on this particular airplane in terms of a forward loss because we really -- having sold them we have the market and we have the pricing pretty much set.

And then obviously there are a lot of moving parts on the cost side.

But as Jim mentioned, as we move through time we're getting a better handle on that.

So now -- could it -- could something happen in four months?

I mean, unless it was dramatic, I think something coming out of the flight test program that would cause a major new cost element, obviously that's always a potential because it is a development program.

But generally, I would say to you we're in much better shape on this program to avoid that -- than we have been on any prior program.

That's excellent.

And James, how do cancellations flow through to relieve the -- the presumed costs on customer penalty payments?

I mean, doesn't -- doesn't early cancellations relieve the entire skyline and presumably save you quite a bit of money?

Well, obviously, if a customer cancels, you have more space to work with.

That's -- that space was crowded otherwise.

So it does provide you more opportunities to move airplanes up and back depending on what the customer needs are.

But as you know, cancellations are not what we're looking to achieve in order to deal with our penalties.

We'd rather just go ahead and get this program back on track.

But obviously, you get some -- you get some relief, but that is not what we are -- what we're aiming for.

Great.

Thanks very much.

Our next question is from the line of Doug Harned with Sanford Bernstein.

Good morning.

On defense all three units came in well below your guidance, now, I understand when you do the comparison with Q1 of last year, there's some differences there.

But when you look forward for the rest of the year, first, what caused -- what has caused these things to have lower margins in Q1, and how do you get them up for the rest of the year to make the numbers you're talking about here?

Yes, basically it's the timing of revenue.

It's the mix that we're going to see in the next three quarters, are going to be better than the mix we experienced in this quarter.

And we had a better mix a quarter ago, a year ago this quarter.

So when you combine the fact that the -- we're going to see the better mix is going to improve performance.

We're going to have more of the delivery timing is out in the next three quarters.

And then we have additional revenue that we will see, a run rate that's a little different than what we've experienced in the first quarter.

But I think the -- James, just to follow-on there, I think BCA was at guidance.

Save the charges that we described a few weeks ago.

And those were nonrecurring in nature.

And the timing largely exists in IDS.

And that really, if you get into it traces to timing of C-17 deliveries, and mix of launches that we have in ULA.

There's some other noise around that, but it really traces to these big things that don't always conform like a flow business does to sort of even quarterly amounts.

And that's why we feel confident that the year's in good shape.

And in global services and support--?

Yes.

That one, as well?

I mean, what -- what's happening that's different in the back half of the year than in Q1?

Well, I think--.

Again, it's the timing of the volume of the work.

I don't know specifically exactly the -- what to call out, but it's some of the logistical support associated with some of the deliveries, particularly on the C-17s, I would think would be a piece of it.

But again, it's just the timing of the work.

Okay.

Okay.

Thank you.

Our next question is from the line of Myles Walton with Oppenheimer.

Please go ahead.

Thanks.

Good afternoon, or good morning I guess, fellows.

Good morning.

If you do eventually have to move or desire to cut the 737s to similar rates by mid-2010, what's the lead time we should anticipate for that rate change to be announced?

On the 37?

Correct.

Generally, 10 to 12 months.

In advance.

I mean, I think we need -- and every airplane model is slightly different.

But given the contractual relationships we have with our suppliers and the timing of our supply chain, a minimum of 10 months is the way to think about it.

Okay.

And just one follow-up if I could.

The 787 deposits on the 880 aircraft or so, are those at this point refundable deposits or are they still nonrefundable deposits?

Nonrefundable.

Yes, they're nonrefundable.

Okay.

Thanks.

Yes.

And next from the line of Joe Nadol with JPMorgan.

Good morning, Jim and James.

Good morning.

Back on the 747 program, just wondered if we could get a bigger picture update, Jim, on where we are there?

Freighter demand is part of the reason you cut the 777 rate.

And that's, where it's only -- it's part of the backlog for 777.

It's most of the backlog for the 47.

You have this delay in the intercontinental by a couple quarters, which may have been a -- not disclosed previously.

But you decided that a number of months ago.

But in any case, any time anything goes wrong anywhere in the commercial business, whether it's a 37 cut, a 87 slide, anything, are you going to have another 47 charge?

I'm just wondering what your comfort level is here with the backlog, the freighter, demand, and that we're not going to have significant more problems down the road?

Well, listen -- the economic situation is uncertain.

And it has had significant impact on the freighter market as you've seen.

And the -- we can't predict with absolute certainty that our current read of the market will hold forever.

So adjusting production rates is part of this business.

We think we've got it right now, but we have to keep reading and reacting.

Now that's a separate question from do we have a good business.

And you have to live through some ups and downs.

Unfortunately, we're getting a down here in the midst of the development phase of the program.

But we have seen very few signs that customers are running away.

We see signs that customers want deferrals.

And in fact, want to hold onto the business and are willing to keep making the progress payments required to have it.

So it's more of a story of an adjustment to a very difficult economic environment than it is a story about a program that doesn't make sense to customers.

These new airplanes, the 87 and the 47-8 that you're talking about are very productive airplanes and very productive alternatives to what they're flying now.

I mean, the 47-8 is the only airplane now in the -- in the sort of the 390 to 500-passenger airplane and -- which translates to a freighter size that is also extremely efficient.

So it's -- we've got to live through some ups and downs here.

But these are long-term, good businesses.

I think where I'm going, Jim, with this is the 87 I think we all can agree has unprecedented demand and is going to be a -- a great platform for airlines over the very long term.

The 47 just seems to me much, much more in doubt.

The basis of it is a -- is freighter demand.

And we're in a loss position now.

And I guess -- I'm trying to get my arms around how much worse things can get on the 47.

I mean, what's the number?

Well, I mean -- the number is the number we've given you now.

Is what we think -- what we think it is.

Again, customers are not running away.

There are a number of discussions for other orders that admittedly are going slow in the current economic environment.

But it's -- we think this is a good niche airplane.

I mean, this is not a brand-new innovation like the 87 is to your point.

But this is a -- an airplane that fills a good, solid niche.

And we typically launch airplanes with 100 orders.

This is more like the normal airplane we launch.

Everything isn't the 87.

So could it get worse, sure.

I mean, if the market, the economic environment continues to tank for another three or four years, I think the -- the impact of deferrals and production rate changes could put additional economic pressure on it.

Is it enough to kill the program, I don't think so.

I think this is a good product that serves a good market.

Are we past the point where you could kill the program, or is that still potential?

Well, we don't intend to kill the program.

Okay.

Thank you.

Yes.

Our next question is from the line of Cai Von Rumohr with Cowen and Company.

Yes, thank you very much and good quarter, guys.

On the 777 you took a reserve at year end to cushion us if the rate went down.

Do you have any similar reserve for the 737?

And what's the percentage by which it is now oversold for 2010?

And kind of how would you handicap the odds that it might go down in 2010?

Well, Cai, as we said last year, we did have -- it wasn't just 777 but it was for modest rate adjustments.

And right now, we do not -- we have not reserved for a rate adjustment on 37 because we don't think it's likely.

We thought what we saw a year ago, the uncertainty around it was enough for us to reserve something against what we thought could happen Right now, because of the oversolds we have on the 777 principally in 2011, gives us -- and what we are seeing in terms of our deferral discussion with our customers gives us reasonable confidence that we'll get through the year without a rate adjustment on 37.

Now, could things change?

It could.

But we haven't -- we have not reserved against that at any substantive level.

And then a very quick one on terms of opportunities.

Your commercial R&D was down sequentially in the quarter despite a lot of activity on the 787.

Should we expect it to continue on down sequentially in the second?

No.

We-- we'll be -- it was sort of timing that really impacted this quarter.

You'll probably see a little higher in the second.

Third quarter will probably be pretty stable, and then we'll come down in fourth quarter.

We will -- we should be down year over year, but it won't be -- don't take away from the first quarter that it's going to go down second and third, but it will go down in the fourth.

Excellent.

Thank you very much, and good quarter.

Thanks.

And next question is from the line of Troy Lahr with Stifel Nicholas.

Please go ahead.

Thanks.

Just -- you answered the last question on where you oversold on the 37?

I maybe missed it.

Well, it's hard to say exactly.

But I think we have more oversold positions and out in the 11 timeframe.

We're probably on balance in 2010 at this stage.

Okay.

And then just -- I guess my question would be on the defense side.

Seems like Gates' comments really could call into the question the future of C-17, FCS, GMD, and F-22.

But you did mention that you're going after, or you're trying to increase international defense opportunities and even go into some adjacent markets.

Can you maybe say how these headwinds really could materialize, and then also kind of what areas are you targeting in the international defense and some of these adjacent markets to offset that?

Well, first, a quick comment on the defense budget.

I mean, I think it's -- it's early days.

I mean, Secretary Gates has laid out his priorities in terms of programs.

And there will now be a six or seven-month discussion with the authorizers and the appropriators as they try to sort out program by program exactly what impacts will be available.

But there's -- but there is -- there's no doubt that -- that the budget implied by Secretary Gates' priorities does put overall pressure on the budget.

And -- but we've got a pretty broad and diverse portfolio here.

And we think while there will be some pressures there will also be opportunities.

It's really too early to know exactly what that would be.

The second part of your question was?

The international defense opportunities?

Yes.

Sorry.

On the international.

We still have a pretty rich backlog of -- or I should say pipeline of opportunities, C-17, F-15, F-18, pretty good services backlog.

And helicopters.

So it's a pretty good -- and some weapons systems.

I'm sort of rattling through in my mind country by country.

But it's -- it all represents a pretty good -- the P8, the P8, the P8-I for India.

There's some other countries that have shown interest.

So there's a pretty rich backlog on the defense side international.

We're excited about it quite honestly.

Okay.

And the adjacent markets that you were trying to to go into?

I think that comment referred to Homeland Security and some of the cyber markets that are beginning to open up.

Those of you that have followed us over the last couple of years, you've seen a lot of investment, both M&A and organic on the cyber side and on the Homeland Security and border security side.

And we think those kinds of investments are going to pay off within the priorities as we understand them from Secretary Gates.

But that still has to play out.

Okay.

Thanks, guys.

You're welcome.

The next question is from the line of Sam Pearlstein with Wachovia.

Go ahead.

Hi, guys.

I was just wondering if you could talk a little bit on the cash flow.

When I look at the CapEx, you've been running at about $400 million or so a quarter for the last couple of years.

And in order to get to the $1.4 billion this year, it would seem like we're going to start to see a pretty big stepdown.

And I'm trying to just think about as we go through the cycle, how low can you actually bring CapEx down the next couple of years?

Yes.

We'll get it down into our guidance this year.

I think the thing to -- to understand is that when you look at our CapEx expenditures, it's -- from a cash standpoint it's really December, January, and February.

We already know today that for March, CapEx is down.

And December is usually a big month.

So even though we make the expenditures, are we -- we incur the obligations in that month, from a cash standpoint, we generally don't pay it until the following month.

So what you're seeing is -- is running hot at the end of the year, which is typical.

And we're back to our more traditional run rates based on the actions we've taken.

We're seeing that in January, February, and the real -- it's really taken hold in the expenditures we're seeing in March.

So we're pretty comfortable we're going to get there.

Then if I just think about it, is the -- the pressure seems like it's probably more on the downside, certainly not upwards in terms of production and -- and capacity.

Is this something over the next couple of years we can see get back down to $1 billion or even lower?

We're going to continue to work it, but -- we absolutely aren't going to starve the needs we have to support our businesses.

But we obviously are going to continue to look at this, and we're going to right size that experience -- that expenditure for what we see in terms of the need driven by the markets.

Okay.

Thank you.

Our next question is from the line of Robert Stallard with Macquarie Research.

Please go ahead.

Good morning.

Good morning, Rob.

Just a question on the deferrals again.

Jim, I was wondering if you could note if there were any regional variations within that deferral number for the first quarter?

Looking forward, could you give us an idea of how many airplanes are in discussion for potential deferral looking at 2010 and 2011?

I think in terms of the regional experience on deferrals, it is -- it is remarkably balanced quite honestly.

If you look at Asia Pacific, North America, Middle East, Africa, and Europe, it balances roughly with the size of the aerospace markets in each of those places.

So it's a pretty balanced deferral base.

I would say the -- the discussions over and above the 60 involve somewhat more than the 60 we've already discussed.

And which has stayed fairly stable over the last couple of weeks.

But there are active discussions going on.

And we've anticipated that plus a little.

When you say somewhat more, are we talking twice as much or maybe around 100, something like that?

Well, it's -- it's hard to sort of divulge that number because there are active discussions that are confidential discussions with -- with our customers.

And-- but I would say it's greater than.

Thank you very much.

You're welcome.

Our next question is from David Strauss with UBS.

Please go ahead.

Good morning.

Thanks.

On 787, obviously you have a huge backlog.

But how are you thinking about the eventual production ramp in light of the environment we're in today?

I think you've talked about gaining the 10 a month in fairly quick order.

Could you just maybe discuss how you're thinking about with what's going on today?

Well, again, I think our current production plans which I don't think we've shared in detail, but most of you have taken a pretty good shot at figuring them out.

I think our current plans are well below the demand we're seeing, okay.

And so again, as in the case of the 737, there is a pretty fair cushion versus the initial production rate.

Now, the decision we'll have after we get going in the 2010 timeframe will be do we take them up beyond that to get to the demand that is, quite frankly, in place today.

And then we'll get to the question of will there be any -- if there is a long-term, longer than any of us experienced kind of recession that might call into question that ramp, that's a decision we'll make roughly a year from now.

And then--?

I'm sorry, go ahead, David.

Thanks, Diana.

And then on C-17, if indeed the program is -- we're finished as far as the US is concerned, how do you see it playing out from here from your standpoint?

Well, the -- it's hard to predict.

I mean, the -- it has not been in the budget for the last two or three years.

And the authorizers and appropriators have put it in.

So it's -- it's -- on one hand it's easy to say that it will happen again because it's happened historically.

It's the belief of ourselves and many of the customers we serve that this will remain an enduring requirement, the C-17.

And as we go through a tough budget exercise, that it will survive.

But it's -- to predict that with certainty is hard to do.

So we would -- if confronted with a production line cessation we would go through a normal process to do that supported by the government, by the way.

But it's -- but I don't necessarily think we're close to that.

But we'll have to see.

Operator, we have time for one more analyst question, please.

That will be from the line of [Etah Mikaly] with Citi.

Please go ahead.

Thanks.

Good morning.

Good morning.

Wanted to dig in a little bit more on the two-year cash flow picture.

And I guess if we assume sort of your baseline earnings forecast, can you help us walk through some of the deltas on the pension, where you stand today from a funding requirement.

Advances, inventory, and even your aircraft finance capacity.

And I guess maybe, a better way to phrase it is do you think in the next couple of years you can get back to the cash flow power that would enable you to have the flexibility to get back into $1 billion plus in share buybacks?

How should we think about that in the next two years playing out?

Well, obviously, it's all going to depend on what happens in the market.

But what we see today, I think you'd see us getting back to what the previous kind of cash generations back in probably the 2011 or so timeframe.

But right now, we have a requirement although we have assumed in our cash this year $500 million for pension, what we will actually be required to spend is probably 100 or just a de minimus amount of money.

Again, what we had mentioned in terms of the run rate this year, what we talked about earlier on the call was there are some timing issues.

Clearly there was pressure as we reset the production schedules as that affects the timing and the true-up of advances on airplanes to be delivered subsequent to this year.

But all of that will true up and settle out mid-year or so.

Relative to the buyback program, we'll look at what that looks like in the next year.

Obviously we're going to minimize it this year given what we see as pressure on cash.

But going into 2010 we'll take a look at and see where we are then and see whether or not we have the cash to continue to get back up to the buying levels we've experienced in the past.

We obviously have the authority from our Board to buy the shares.

So that's not the issue.

The issue is the priorities that -- put demands on cash and then how we address those with the current cash flow in the current environment.

Thanks.

That's helpful.

A quick follow-up.

You did raise some debt opportunistically in Q1.

Is there a minimum cash balance that you would like to have in this part of the cycle that we should be thinking about?

For you to maybe tap the market again, if cash flow comes under some more pressure.

How should we think about where you like to have your baseline--?

Well, we need about $2 billion for operation cash.

And that's -- so that's kind of it.

And then in this environment you surely want a safety net given the fact that we have two major development programs that haven't gotten through their applied certification programs yet so you'd want that.

So we possible could do more.

It just depends on what the circumstances are as we view the market, the opportunity in the market pricing-wise and other factors.

Great.

Thank you so much.

You're welcome.

And ladies and gentlemen, that completes the analysts' question-and-answer session.

(Operator Instructions) I will now return you to the Boeing Company for introductory remarks by Mr.

Tom Downey, Senior Vice President of Corporate 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.

First, we'll go to the line of Susannah Ray with Bloomberg.

Please go ahead.

Good morning.

I am wondering -- you mentioned that there were 60 deliveries scheduled for 2010 and 2011 that were deferred in the first quarter.

I'm wondering if any were deferred in 2009 and how many?

And then I'm also wondering how long the delay or the deferral is for those on average?

There were no deferrals in 2009.

Excuse me, maybe one or two.

But nothing significant in 2009.

Okay.

The deferral timing varies.

It's hard to generalize.

But it--.

Could you give a range maybe?

Well, it's -- it's generally one to two years.

Years.

Okay.

And then I'm also just wondering -- you mentioned $1 billion in direct financing this year.

You reiterated that.

Do you expect that to increase next year, and by how much?

Well, again, it's hard to predict.

James, why don't you take that one.

Right now we're just concentrating on this year.

We'll have to look at the credit markets -- actually the credit market's could get better.

And if they do we would not have to support delivery of airplanes.

But at this point we haven't decided what, if any, support we would provide in 2010.

Okay.

Thank you.

Yes.

Our next question is from the line of Ann Keaton with Dow Jones.

Please go ahead.

Hi.

Switching to the defense side.

You mentioned some good opportunities in international.

And I'm wondering if that is in any way you due to Gates' view of what's going on?

Or is this stuff that would have happened anyway?

And could you sort of flesh that out?

Yes.

I mean, I think the way to think about it is that international opportunities have been strong over the last couple of years.

And we've been working them hard, standing up new organizations to try to work better with our international customers.

And I think some of the fruit of that effort is beginning to show up.

Having said that, I think the -- there is -- I don't know how to say this.

I mean, I think that more and more countries are taking responsibility for their national defense.

And I think that's -- I leave that to the politicians and the government officials to comment on whether that's good or bad.

But it's -- we're trying to be supportive and work with our armed forces as they work with their armed forces.

Okay.

And are there any particular programs that we should keep an eye on?

Well, again, I -- I would just name the ones where we've seen the most interest.

C-17, F-15, F-18.

We're beginning to see some on the maritime patrol aircraft, the P8-A.

Some communications, AEW&C.

Some communications platforms, sensor platforms.

So I think -- I think it's characterized more by its breadth than any one or two things.

Okay.

Thank you.

You're welcome.

Next we'll go to the line of Dominic Gates with The Seattle Times.

Please go ahead.

Good morning.

Hi, Dominic.

I have a very -- specific question about the 787 flight test plans.

But first I just want to clarify my own understanding of a response you gave earlier to Ron Epstein.

When he asked about the sort of multiple, in terms of the spending on the 787.

You said no integer involved.

And I'm taking that that means it's less than 2, correct?

Yes.

Dominic, I was being somewhat facetious in response to a question that implied that it was some egregious multiple.

I think as you know there have been some -- some cost pressures that both us and our suppliers have -- have faced.

And it's -- and we're dealing with it.

But it hasn't doubled from what you originally expected in '03?

Is it right to make, from that response to make that assumption?

I think that's true, Dominic.

All right.

Well, to my own question, the first six test airplanes apparently now are unallocated after you've rejiggered your customer delivery schedule.

So are there concerns about selling those planes, getting those planes placed given the weight problems that they have?

- And where do we stand on weight with the ones that follow on?

Listen, the first production airplane that will be delivered is airplane number seven, as I mentioned today.

We will find homes for the first six airplanes.

We have discussions ongoing with people.

And I'm confident that -- that they'll end up placed.

And what about the weight issue?

Well, the weight--.

The first ones are overweight apparently.

And where do you stand on the first production plane?

Yes.

I think, weight is always a challenge in new airplanes.

We're working down the weight.

And we're working with our customers.

And we're satisfying their requirements with where we are on weight.

And it's -- but it is a challenge.

And we're working through it.

All right.

Thank you.

Operator, we have time for one last question, please.

That will be from the line of Molly McMillan with the Wichita Eagle.

Please go ahead.

Good morning.

My question has to do with the tanker and with Wichita and has there been any further decisions on whether Wichita would still be a finishing center for the tanker and kind of where are things when you look at the whole state of the Wichita plant and -- and the work that, -- that's still there?

And whether anymore is coming in and that sort of thing.

We're not even sure what the requirement is for the tanker now.

So it's hard to know what model we're going to build exactly where.

Although we are confident we can meet the requirement when it comes out.

And that requirement will come out in mid-year, sort of May, June, July sometime.

And we'll sort through, we'll sort through it all when that happens.

Okay.

And when you look at the Wichita plant overall, what are you seeing, any potential of new work coming in there?

What -- what's kind of the state of it?

Well, I mean, there's -- it's a -- it's a work force that has shown a lot of flexibility.

And I -- I know we're going through a down cycle there now.

Just in terms of the program mix.

But as we -- as we sort through responding to the new budget, we'll have -- we'll have to see.

I mean, it's a work force that -- that can be utilized on a number of programs.

We just have to see what programs we can -- we can win in a very dynamic environment right now.

Okay.

And what are you -- when you look at the tanker, when you look out at the tanker overall in discussions on whether it's a split buy, not a split buy, what are you thinking or what are you seeing?

Well, it's -- I think we're anticipating a winner-take-all competition because that's what our customer is saying they want.

And I mean, by that, the Air Force and the Pentagon, there is a lot of discussion about a split buy on the Hill, and I think they've got to sort that out.

But the -- the comment of record from Secretary Gates is a winner take all.

So that's what we're preparing for.

Okay.

Thank you.

Yes.

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.