波音 (BA) 2009 Q3 法說會逐字稿

Thank you for standing by.

Good day, everyone and welcome to The Boeing Company's third quarter 2009 earnings conference call.

Today's call is being recorded.

The management discussion and slide presentation, plus the analysts and media question-and-answer sessions are being broadcast live over the internet.

At this time for opening remarks and introductions, I'm turning the call over to Ms.

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

Thank you, good morning.

Welcome to Boeing's third 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.

As always we ask you that you limit yourself to one question to be fair to others on the call.

We have provided detailed financial information in our press release issued today and as a reminder you can follow today's broadcast and slide presentation through our website at www.boeing.com.

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

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

Thank you, Diana, good morning.

Let me start this morning with my perspective of our performance for the quarter and a look at the business environment as we see it today.

After that James will walk you through our financials and then we will be glad to take your questions.

Starting with slide two, our third quarter financial results were clearly dominated by the previously announced 787 cost reclassification and the 747 charge.

But excluding those impacts the double-digit margin performance of our two core businesses continues to be strong even despite ongoing market pressures.

As we discussed in August, our decision to reclassify costs on the first three 787 flight test airplanes through R&D expense was based on our conclusion those planes have no commercial market value beyond the development effort.

The costs through September for those aircraft, resulted in adding $2.6 billion of R&D expense to the third quarter results.

I'll talk more about the 787 in just a few moments.

Earlier this month we announced a $1 billion charge on our 747-8 program, due to increased production costs and difficult market conditions.

Because this program is in a loss position, costs associated with these factors were immediately recorded in the third quarter for future 747-8 deliveries.

When we began assembling the first 747-8 freighter in the third quarter, we encountered significantly more rework and disruption than we expected, both in our Everett factory and in supplier factories.

The root cause is something we talked about in the past.

The engineering on this program was late to mature, and that was compounded by the limited availability of engineering resources.

In addition, we have been working closely with our customers in what continues to be a very challenging cargo market.

These discussions drove our decision to defer a planned increase in the 747-8 production rate, which was prudent, but also contributed to the charge taken this quarter.

We fully understand the issues at hand and action plans are in place to address them, and smooth the production flow for the airplane moving forward.

Despite these challenges we are making good progress on this program.

The first 747-8 freighter is more than 90% assembled, and the second is more than more than 80% complete.

Power-on has been achieved on both airplanes.

Lessons learned on the assembly of airplane one are applied to airplane three and the initial join and integration has improved noticeably with assembly about 75% complete.

First flight of the freighter remains expected by early next year with first delivery scheduled in the fourth quarter of 2010.

We are operating with better discipline on the 747-8 intercontinental, the passenger model, where development is progressing well.

75% of the engineering is released on this airplane.

Now, turning back to the 787 program.

We made significant progress during the quarter on the side of body reinforcement issue that delayed first flight this past summer.

The 787 team is completing and validating this week the last detailed design for the stringer modifications on a flight test airplanes and the static and fatigue test air frames.

Installations of the fittings are proceeding and we are pleased with the progress we're making.

We will retest the modification on the full scale static test airframe after its installations are complete.

Once we are cleared for flight based on that test, we will repeat some gauntlet and taxi testing on airplane number one before flying.

Flight test is still expected by the end of the year.

And the first delivery remains scheduled for, scheduled for the fourth quarter of 2010.

As we forecasted, there has been and continue to be some modest orders churn on the 787.

But even so the 787 backlog remains strong with 840 orders from 55 customers around the world.

As you've heard me say in the past, we know that we can and must do better on our development programs and I'm confident that despite our setbacks we will get the 787 and the 747-8 through the flight test program and into the hands of our customers.

Jim Albaugh, in his new role leading BCA has been fully engaged with the programs, suppliers and our customers, on these development activities.

Jim's seasoned leadership and extensive experience and engineering and manufacturing on complex programs is being felt across the board.

And will result in further strengthening of our team and the program management and functional disciplines needed to improve our development program performance.

Development programs aside, I remain extremely pleased with the focus of our commercial and defense teams, on insuring our core operating engine continues to run well.

Production and services programs in both BCA and IDS delivered solid results in the quarter.

BCA deliveries remain on track for the year, and the team continues to make progress on cost and productivity improvements to help offset a range of market and development program pressures.

During the third quarter, IDS delivered 34 production aircraft and two satellites, the third P-8A achieved its first flight and we achieved milestones on directed energy programs.

IDS is solidly focused on executing across its businesses.

The discipline we've maintained on cash management is also evident in our results.

We continue to aggressively manage our infrastructure, costs and investments.

As of September, we have reduced our head count by approximately 7,200 positions, versus our November 2008 baseline.

While we are tracking somewhat short to our goal of 10,000 position reductions by year's end, we expect to achieve and surpass that target in 2010.

Our prudent management of all discretionary and capital expenditures, coupled with successful debt offerings, has enabled us to invest in our development programs and maintain a solid financial position.

We will continue to manage our business with the mindset of balancing financial strength and investing in our future growth.

Now, let me turn to the market environment on slide three.

The environment continues to be challenging in both commercial and defense markets.

In April, we announced a reduction to our 777 production rates starting in June 2010, and we postponed rate increases planned for the 767 and 747.

As mentioned earlier, in October we further deferred the increase in our 747 rates.

Consistent with these rate reductions and decisions BCA accommodated about 85 airplane deferrals during the third quarter, in addition to 130 they processed during the first half.

The current backlog of deferral requests, is about the same as it was last quarter.

There has been no change in our assessment that we can hold the 737 at its current production rate.

We will continue to evaluate production rates based on market conditions, and customer discussions.

Capital markets are gradually opening up for aircraft financing.

So our previous $1 billion estimate of BCC financing this year, has been reduced to about $800 million.

On the defense side, we continue to be actively engaged with our customers to work through their individual program needs amid growing budget pressures facing the US defense department and other agencies.

The vast majority of our programs are being well supported in the budget process.

We are particularly pleased with the strong congressional support of the C-17 and F/A-18 programs.

However, we do anticipate continued top-line pressures on all defense programs.

Our strategy at IDS in this environment remains three-fold.

To extend our existing programs that bring unmatched capability and affordability to US forces; capture a healthy share of growing international defense and security opportunities; and continue repositioning for changing US security priorities with investments in adjacent markets including Intel and cyber security, unmanned systems and services.

There is no doubt that both our commercial and defense businesses continue to face challenging times right now.

But I also continue to see a solid foundation from which to work through these challenges with fundamentally strong products and services, a solid balance sheet and a large backlog which now stands at $320 billion, nearly five times current annual revenues.

With that, let me turn it over to James who will discuss third quarter results and our outlook.

James?

Thank you, Jim, and good morning.

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

Revenue for the quarter was $16.7 billion, up 9% from a year ago.

Last year's revenues were reduced by the strike and supplier production problems at Commercial Airplanes.

Our reported net loss for the quarter was $2.23 per share, which includes $3.59 per share related to the 787 reclassification, and the 747 charge.

Underlying these impacts was solid performance in both IDS and the commercial production and service programs.

Now let's discuss BCA in more detail on slide five.

Commercial Airplanes reported third quarter revenues of $7.9 billion, 13% higher than the same period last year, driven by last year's strike and supplier production problems.

Third quarter year-to-date revenues included lower services volume of over 10% due to softening in spares and freighter conversions.

BCA's third quarter operating loss of $2.8 billion reflects the 787 cost reclassification of $2.5 billion for costs incurred through July on the first three flight test airplanes, $138 million of spending on those planes in August and September, and the $1 billion 747 charge.

During the quarter the Company paid $592 million in cash for the acquisition of Vought's 787 facilities in South Carolina, which is reflected in the investment section of our cash flow statement.

Included in gross inventory is $6 billion related to 787 work in process, supplier advances, tooling and other non-recurring costs.

This is down from the $7.9 billion reported in the second quarter due to the $2.5 billion reclassification to R&D, and the reduction of $416 million in supplier advances as a result of the Vought acquisition.

787 inventory also includes $800 million of planned inventory buildup on the program and an additional $187 million of inventory acquired from Vought.

As previously disclosed the 747 program $1 billion charge includes $643 million due to higher estimated production costs at both Boeing and supplier facilities.

The remaining $362 million relates to the challenging market conditions and the company's decision to maintain the 747-8 production rate at 1.5 airplanes per month for nearly two years longer than previously planned.

As we work through our development program and market challenges, the remainder of BCA is performing well as it continues to focus on productivity and cost improvements.

BCA booked 96 gross orders and 17 cancellations during the third quarter.

BCA's backlog remains large at $254 billion, representing greater than seven times current annual revenues.

Now moving to slide six in our defense business.

IDS revenue was $8.7 billion in the third quarter, up 3% from the prior year.

Margins were 10.1% reflecting the continued strong execution across IDS's broad portfolio of programs.

The IDS backlog is $66 billion, nearly two times expected 2009 revenues.

During the quarter, $3 billion was removed from backlog due to the termination of the manned ground vehicle portion of the future combat systems contract.

Additions to backlog included P-8 India, international Chinooks, Intelsat satellites and UK modification contracts.

The IDS team continues to perform well across its business and is on track to achieve its goals for 2009.

Now turning to slide seven.

Boeing Capital delivered another solid quarter with pretax earnings of $39 million on revenue of $166 million.

BCC's portfolio decreased from $6.3 billion as of the second quarter to $6.1 billion.

This decrease reflects aircraft financing and other volume in the quarter totaling $153 million, which was more than offset by portfolio run-off.

Our guidance now assumes that BCC will finance about $800 million of new aircraft and volume during the year.

Boeing Capital continues to evaluate the potential for debt issuance to help meet cash requirements which are primarily driven by debt maturities.

BCC is fortunate to have good access to the debt markets at reasonable rates.

Unallocated expenses increased this quarter as compared to last year driven by higher deferred compensation expense and workers compensation adjustments, somewhat offset by lower unallocated pension expense.

We continue to expect unallocated expense to be approximately $700 million in 2009, with other segment expense forecasted to be about $200 million.

The third quarter included higher interest expense and lower other income due to higher debt levels and lower interest earned on cash balances.

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

We generated $1.2 billion of operating cash flow which reflects continued discipline in working capital management.

During the quarter, we did not acquire any of our shares but paid approximately $300 million in dividends.

Turning to slide nine.

Our financial strength remains solid.

We ended the quarter with $6.6 billion of cash and marketable securities which reflect the strong operating cash flow and an additional $1.95 billion of new debt offset by the acquisition of Vought 787 South Carolina facility, and payment of the Sea Launch guarantee.

On July 1st, we paid the entire $448 million due under the Sea Launch Bank Guarantee.

We have rights to partial reimbursement from the other Sea Launch partners and in September we reached an agreement with one of those partners to receive payments totaling $122 million beginning in 2009 and ending in 2010.

Turning to slide 10.

Our financial guidance is now updated to reflect the 787 cost reclassification and the 747 charge.

2009 earnings per share is expected to be between $1.35 and $1.55 per share with revenues of $68 billion to $69 billion.

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

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

Looking forward we have pressure -- we will have pressure on our 2010 cash flow as inventory continues to build on the 787 program.

We expect that cash flows will improve in 2011 when we deliver more 787s and the 747-8s.

Our 2009 guidance still assumes a cash contribution to the pension plan of $500 million in the fourth quarter.

Mandatory pension funding in 2009 remains at less than $100 million.

Year-to-date pension assets returns have been strong at approximately 14%.

Discount rates have declined by about 50 basis points since year-end.

As we consider our overall pension status and our cash position, we're evaluating an option to make a discretionary pension contribution in stock rather than cash later this year.

If we do decide to contribute stock, the amount of the contribution could exceed the $500 million currently assumed in guidance.

While we recognize contributing stock would have a dilutive impact to existing shares, there would also be a net cash benefit to the Company and lower future pension expenses.

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

The R&D expense forecast is now $6.6 billion to $6.8 billion, which reflects the reclassification to R&D of costs for the first three 787 flight test aircraft of approximately $2.7 billion, which includes $2.5 billion through July, $138 million spent in August and September, and an estimated $100 million of spending in the fourth quarter.

R&D and guidance also includes the operating model adjustment we discussed in August to better balance future 787 R&D efforts between Boeing and our suppliers.

The 2009 forecast includes approximately $1.1 billion of R&D at IDS, which is higher than our prior forecast driven by additional investments and support growth.

2010 R&D expenses will be higher than we thought at the beginning of this year, due to the 787 operating model adjustment and the schedule slide announced in August.

The remaining spending on the first three flight test airplanes is expected to be approximately $100 million in 2010.

We will provide more detail when we issue guidance in January.

2009 capital expenditures are now expected to be approximately $1.3 billion, and that's down from our prior forecast of $1.4 billion.

Let me summarize the EPS changes we've made in our forecast on the next slide.

In first quarter, we updated EPS guidance for market factors impacting our escalation forecast.

This quarter we've included the 747 charge, the 787 cost reclassification, and higher R&D due to the BCA operating model adjustment, additional IDS spending.

Embedded within this guidance is productivity and performance at BCA that is offsetting commercial service markets softening.

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

Jim?

Thanks, James.

To close, let me just say, again, that the fundamental operating engine of this Company is running well.

We are making progress on our commercial development programs and I continue to believe that when we emerge from these efforts and the current market challenges, we will be a stronger company that is offering the right products and services and better positioned to grow and improve financial performance over time.

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

(Operator Instructions) We first go to the line from Doug Harned with Sanford Bernstein.

Good morning.

Good morning.

Next year after through first flight on the 787, hopefully this year, you'll have a lot going on.

You have 747 and the 787 flight test programs going in parallel, you're going to be in production on both planes ahead of first deliveries.

Could you talk about how you're thinking about managing this in terms of the resources you need to conduct two parallel flight test programs and also the number, how you're thinking about the number of airplanes that you'll be completing prior to first delivery toward the end of the year?

Doug, this is Jim.

Look, first of all, we are looking forward and delighted at the prospect of having both of those airplanes in flight test program.

Now, as you pointed out, there is significant overlap and the management challenge is not insignificant.

I think we've done a couple of things organizationally to help this.

We have recently cored up a number of our flight test organizations into one, which is going to allow us greater flexibility and greater comingling of the two schedules on an organized way.

That is going to help us.

We have long anticipated this overlap, so we have had plenty of time to think about it.

I think we're helped by the fact there's only one engine on the dash-8, which necessitates fewer planes and less data.

So I think combination of planning, organizational approach, and the number of engines involved, makes this doable.

The big picture is that we'll be doing it.

You also asked the question about inventory build.

Right.

I think, James, you have a comment -- I know we haven't -- don't have specific guidance out there next year but maybe James can give you some flavor.

I think what you're asking about is how many airplanes we have completed by the time we start delivery?

We'll probably have around 30 or so in the system at that stage.

Jim, on your comment, are you having to get more resources to do these two flight test programs together, or is this possible to do within your existing -- existing organization?

I think the concept behind coring up all the flight test programs across our Company, into one organization, really in essence frees up flight test capacity that heretofore had been decentralized and uncoordinated.

As a result I don't think we have to add a lot of resources even though the management challenge is significant.

Okay.

Great.

Thank you.

And the next from the line of Robert Spingarn with Credit Suisse, please go ahead.

Good morning.

Good morning.

30,000-foot question, if I may.

Jim, you've clearly acknowledged the challenge of the environment both sides of the business.

You've talked about the budget pressure at IDS and your three-pronged strategy there to offset.

But then we have an environment where BCA rates are declining on 777 a bit and flat at best on 737.

The two new programs are coming out of the gate at zero or low margin.

I think we would suspect.

So the question is, unless R&D declines materially, how do you grow earnings over the next three to four years, especially with the prospect of a pension headwind?

Well, I think the -- there is no doubt -- two things--there is no doubt about two things.

One is, when we get to an end state, we're going to have a more competitive company.

And what does that look like?

Well, it's a IDS business, reshaped to a certain degree as the customer asks for different kinds of goods and services , but a solid double-digit basis going forward.

And obviously you can see the market share gain potential associated with both the 787 and the 47-8, on top of two rock solid 737 and 777 production programs.

The challenge, as you point out, is getting through the next couple of years.

And I think that gets down to executing our plan.

And the plan over the next few years, and we haven't given guidance, so we haven't detailed this for you, is get these planes into flight test program, work with our partners on gross margin improvements for both of us, and at the same time reduce R&D significantly since we don't have an imminent new program in front of us.

And how that equation all balances out, it's a good question you're asking.

We're confident that it may look a little better than your question implies, but that will be provided first you'll get a first look at that.

We'll provide some guidance for you as we move into next

Jim, without pushing too far on this, is it fair to say that the real levers, though, are a few years out, and that we're really no better than flattish here in the near-term?

Again, I don't want to make a comment that can be construed as guidance.

I think the -- I think the diversity of our Company which is a defense business, but has shown an ability to deliver greater than industry average margins, combined with a 777, 737 program, that it still has growth and margin opportunity in front of it, can absorb some of the what I would call near-term pressure.

And on top of that, we are hard at work on improving the profitability of the two development programs.

Now, again, when we are comfortable pulling that altogether for you, we will do it.

But it's -- I think this discussion you and I are having, it does identify the levers I just want to assure you, that we're not going to accept these pressures.

Okay, thank you.

Next from the line of Heidi Wood with Morgan Stanley.

James, a question for you.

As we compare the business case to now to solve for revenues and to think about the costs, is it correct for us to think about two layers of 787 profit, the original margin assumption at the launch of the program and, secondly, better than expected pricing versus the normal launch discounts?

But I'm -- it is a little bit long, James, I'm going to continue the questioning before you answer it.

Because as I'm thinking about it, atop the positive better pricing, 787 revenues, can only grow 3% a year if you get escalation, but realistically to be flat.

But the mass of the ten years from 2004 to 2014, means that that 30% to 35% launch customer discount erodes because the business case includes escalation whereas the actual realized case has better pricing but no escalation.

So by 2014 those two are caught up, aren't they?

I'm not sure if 2014 is where all of that comes together.

But they are converging, right?

I think they will converge, and the fact of the matter is, as we continue to see how this plane operate and sell into a future market, I think we have an opportunity to get better pricing.

Also, as Jim mentioned, we'll be working on the cost side of this equation and I think that there is still a significant opportunity in that area, too.

So then but on the two layers of profit, then, we lose that latter one and we go back to the original margin assumptions on the business case, minus two to three times higher R&D, supplier claims, higher labor costs and higher raw material, et cetera, is that the right way for us to be conceptualizing what you're seeing?

I think the right way to look at the challenges facing us is clearly as we work our way through this development program, we are seeing claims, higher costs we have not yet negotiated our way through and settled all those but we do believe even in those claims, Heidi, there is an opportunity to do better.

So we'll continue to work that.

Okay.

Great.

Thanks very much.

Our next question is from Ron Epstein from Banc of America-Merrill Lynch, please go ahead.

Good morning guys.

By a 200,000 foot question.

When you think about -- excuse me -- the airplane development process at The Boeing Company, it has a long history of getting airplanes out nearly on time.

And we had 787 and what's happened there and recently 747-8.

Can you give us a feel for what is wrong, what is broken, what happened and how are you going to fix it?

Because it is really the root of what is not going right right now.

Well, I think the industry got a little overheated.

Are we really at 200,000 feet?

If we are, I'll give you that view.

I think our industry over the last 10 to 15 years got a little overheated, and I think baselines were set up that were very aggressive.

In our case, on top of a very aggressive baseline, there was significant outsourcing of both manufacturing and engineering at the same time we were dealing with a new material, new design tool.

So we experienced a bridge too far, leading edge kind of development, which is what we are trying to recover from right now.

And I think the seeds of the -- and you'll be hearing more, by the way, on this subject from Jim Albaugh and I going forward, but the seeds of performance improvement are going to lie in places where we -- you didn't do as well as we should have.

One is in realistic baselines that don't try to stretch into sort of market performance that is unrealistic.

At the same time remain competitive, obviously.

Our competitors also had trouble with some overreach.

I think the technical and engineering oversight of programs we have not had that balanced right.

And when we outsource some of the engineering, that compounded the oversight process.

We need to bring some more of the engineering, particularly at the systems level, back into Boeing, and we need to provide better oversight of it.

So we are spending a lot of time talking about how to restrengthen our engineering management process, shall we say.

And then the other thing is greater visibility on partners supply chains, and on their MRP.

In other words, IT systems, the seeds of that are already in place in Everett as we've stood up a PIP team that is managing across corporate boundaries, at the program level, with all of our partners, greater visibility and anticipation of issues, whether it is chasing down parts or issues in factories.

So we started the process.

This list that I just gave you is probably doesn't totally shock you in the sense of it sounds like business practices that in some cases we should have been pursuing, but when you -- when you look back, you see that we lost some of the disciplines particularly within the context of outsourcing so much of the work.

So we have to rebalance that and refocus on what successful programs are all about, and Jim Albaugh is the guy in the industry who has managed more technically difficult programs of anyone in the industry, and he and I will be working together on that.

Is there an engineering shortage within the Company?

I think the quick answer is no.

I think the experience we had on the 47-8 as I acknowledged in my comments, was more a result of both the 87 and the 47 reaching their engineering peaks at about -- at about the same time, even though we had originally planned to have the peaks be complimentary rather than overlap.

But because of the delay in the 87, that doesn't work out, and so our manpower planning was -- the plan was confronted with a different reality than it anticipated, and so it was more that, than recruiting engineers.

We still -- we still hire a lot of engineers and when we make an offer to 10 people, nine and a half of them accept coming to work for our Company.

So we -- it's more an issue of reality getting in the way of planning, quite frankly.

And we've got to fix that, too.

We have got to be better at managing surge capacity, because things don't always go as they're planned.

Great.

Thank you.

You're welcome .

Our next question question is from Cai von Rumohr with Cowen & Company.

James, if you take your pension guidance and we close the year about where we are, it looks like you end up with maybe underfunding of about $9 billion going into next year.

Maybe give us some thoughts as we think about 2011 and 2012 in terms of where the pension expense is going to go, and where your funding requirements are going to go, and how you plan on meeting them.

Well, Cai, I think we've already said that we expect it to go up a tad next year.

I mean, we do believe that it will be higher than this year based on that asset performance, and obviously we are looking at ways to, today, mitigate what that turns out to be.

But, clearly it's going to be today given what we see the pension expense would be higher than it is today, or it's going to be this year, but and with the mandatory funding requirements being low, we have to make a decision as to how we want to deal with that going forward.

So it won't be mandatory that we put cash in.

It will be discretionary, but we'll be taking a look at that, because obviously we want to manage two things.

We want to manage how much cash we put in, and we also want to manage the impact of the expense to our earnings.

When you get out to 2011 isn't the number something like $2 billion?

It is a very large number as we move out, and while it is not a large mandatory number next year, you are going to have to have some kind of plan--

Are you talking expense?

Contribution, contribution.

Contribution, okay.

Probably 2012 is more where it would be and obviously we have to be looking at that.

As I mentioned in my remarks, we're looking at alternative ways to fund our pension plan and thinking of doing that yet in the fourth quarter, that would help to mitigate some of what we would see in the out years.

Okay.

Thank you.

Next we'll go to Joe Campbell with Barclays Capital, please go ahead.

Hey, guys, good morning.

I wanted to ask about the supplier claims and how you're working through these, and while I know -- I don't want to ask about specific ones, and you probably wouldn't answer if I did, but what I'm wondering about, is what's the nature of the way in which you take these planes and many of these big guys have claims that are $1 billion or certainly high hundreds of millions.

And how do you settle the--the fact that the early ones are just going to cost lots more than anybody ever envisioned without getting signed up, since you outsourced all of this stuff, to having all of the unit costs rise.

I remember the CFO of the program early on said, well, if anything ever goes wrong with the unit price head for the hills.

Because they're all outsourced.

First and foremost, Joe, we haven't defaulted to the conclusion that we're going to -- they're going to be higher than anticipated on the front end of this program.

Clearly in the -- in our current--

Excuse me, James, you don't think that the costs of building the first few planes or the first 50 planes after all the changes will be higher than anticipated?

Yes the costs are.

You asked about the claims , the assertions.

The claims.

So we've assumed already what those are in those higher costs of those airplanes, and, yes, we've dealt with that on the front end.

Going out, obviously, we'll have to -- we will look at every one of these claims that have been provided by the subcontractor community and go through a detailed cost evaluation of them and do an analysis on them.

But we think what we've seen today, we have a pretty good handle on what those are and what the entitlement should be relative to those, and for the most part, we have looked at settling better than what we've assumed in our cost base assumptions.

So we'll continue to work them, Joe.

Obviously that continues to be an issue we'll have to address and one we're putting a lot of priority

The question I have is not whether you've got some number for them, I'm just trying to get a sense of if the suppliers say that a part doesn't cost X but it costs 1.5X to build, how do you work it out with them?

They don't have contracts for the dash-9.

They don't have any contracts for 10 a month.

Right.

And they don't have a contract that's for the part that you want them to build.

They have a contract for a part that doesn't exist anymore.

Yes, absolutely, Joe, So that is also an opportunity in helping them do that part more cost effectively.

Also, the fact that what they're looking at on the front end doesn't really project what we believe might be an accurate learning curve on them.

We have an opportunity to go work that.

Obviously that is an open issue we have a lot of attention focussed on.

But clearly we see it two ways.

Obviously we have to work our way through it, but it doesn't mean that the initial claim that they put forward is what we will ultimately settle on.

You're still not getting -- so if the first parts cost lots more, forget -- I'm trying to figure out how do you -- how do you get to assuming that the last -- I mean, if you start in a learning curve, if the first part costs 50% more than you thought, how do you get that the average cost is unchanged?

Well, we didn't -- we've never -- we've never said that the average cost was unchanged.

We have said to you that we've gone through and evaluated and we have an estimate of where we think we'll end up based on the fact that we're working with new materials and we have a pretty good appreciation now of what that is and we obviously recognize the fact that up front that these costs were more expensive on the first few airplanes, but Joe, we're talking a lot of airplanes mere that we believe the market is going to buy on this particular model and we have an opportunity over that time period, a lot of airplanes, and a long time, to improve this performance.

And based on our past experience, we've -- we believe we have been able to demonstrate our ability to do that.

Do you think we'll settle these things by year-end, these guys are mostly public companies.

Absolutely not.

I think we'll settle some as we have settled some.

But this is going to be a process that goes out for a few years.

Our next question is from the line of Itay Michaeli ,

Great thanks.

Good morning.

Wanted to switch over to IDS, specifically on margins.

Really two questions here, one has your confidence around sustaining 10% margin change at all given the top line pressures you alluded to earlier.

Secondly, if you could walk us through what you're looking for Q4 margins at the three sub segments at IDS.

I don't think our confidence changed.

Obviously it will be more challenging as the volume has decreased as the government goes through and wrestles and has wrestled with other changing priorities.

We saw in some of the segments where clearly the volume has gone down, that has affected total profitability.

We also experienced this quarter, in a contract adjustment, a lower margin than that were normally has taken.

We've gotten on it before.

So we have to work through that and that was sort of an artifact of how late we were able to finalize a contract negotiation on a particular change in the particularly in the support business.

But overall we think that we still have an opportunity to maintain our double-digit growth margins in the defense business and that is what the team is focused on doing through a combination of continuingly driving productivity, and also the negotiation of contracts going forward to make sure we have a profit opportunity that would allow us to deliver on that double-digit margin commitment.

Great.

And just on the fourth quarter issue, should we expect GS&S margins to revert back or--

Yes, absolutely.

That is where the contract adjustment, that is a one-time adjustment we would expect them to be better in fourth quarter

Okay.

Great.

Thank you.

Next question is from Howard Rubel with Jefferies please go ahead.

Thank you.

Jim, normally when you put in the new manager often times you put in the new manager you might very well give him a free pass to have everybody come forward and offer confessions of past sins.

The platform is burning a little bit this time.

Is Mr.

Jim Albaugh going to be in a position to be able to offer up opportunities to come clean for BCA?

Well, look we're all on the same team, not on different teams okay.

Jim Albaugh and I and the whole executive team have been working together and there's probably more sharing across the top of this Company as we focus on problems in one business or one function than you would probably imagine.

So Jim was not unknowledgeable of the issues at BCA that we're wrestling with.

And, therefore, he is not startled by what he's seeing and the challenges and the opportunities.

So he probably was a little more in the flow because of the way we run the Company than somebody who had been plopped in from zip code A, to zip code Z, and had an oh my God period to go through.

So having said that, there is a human tendency, obviously, to take a fresh look at things, but I think in Jim's case, his experience, and as he relates to me, is as much about the opportunities, as the issues.

But he does -- he does have a tiger by the tail, getting the 87 completed and delivered, and the same with the 47-8.

And we're 100% focused on trying to knock down the issues and move forward.

Yes, so I mean I don't think you totally answered the question whether we're going to -- whether we're going to see that, or whether in fact has there been a slip on the 787 schedule from the last time you spoke with us, even though you still may be able to deliver the airplane by the end of the year?

Yes, no, I think -- I think the -- our comment and our plan has always been by the end of the year, and that's where it is today.

And Jim and I probably talk about it daily.

And we get blogs daily, too.

But anyhow, I appreciate that .

And, I mean, there is an element of frustration that you want to feel like you're chasing down every little nugget in terms of a move here.

So what you're saying the schedule you laid out a while ago with respect to the fix and in terms of implementing these changes, is unchanged from where it was the last time you spoke with

The schedule changes everyday.

Okay?

In the sense of problems come up, we have to deal with them.

There is opportunities that come up, we have to deal with them.

And the original guidance we gave about why this year anticipated that process, that process we go through.

And as you add it you will all up, we're still on track to fly for the end of the year.

Our next question is from Joe Nadol with JPMorgan, please go ahead.

Thanks, good morning.

I had a very similar question as Howard, maybe still a little bit different angle on it.

Jim came in on September, Jim Albaugh came in September 1, one would expect he's conducting this big top to bottom review, he has taken ownership now of the 747 schedule effectively with the announcement earlier this month.

So, Jim, on the 87, and I'm thinking less about the blogs and the wing body joint fix but more about the delivery schedule and the flight test schedule, has he expressed to you any apprehension about what is still a fairly--less aggressive than a year ago, but still aggressive flight test program and any talk about pushing that up a little bit even if you get the plane in the air by year end?

Listen, he has accepted the flight test program and the production program.

Look, I think he views it the same way I do, which is that the flight test program can produce issues that we have to deal with.

And if it does, we'll deal with them.

So I think he and I are both concerned at the same level there, which is the normal level of concern, as you go through testing.

But Jim didn't come into the job and then come to me and say, hey, Jim, we're four months out of bed on the flight test program.

Or, hey, Jim, we can't make airplanes as fast as the team the minute before I got here said they could.

We haven't had that.

What we've had is focus on work and focus on getting it done.

All right.

And, James, just on the R&D, understood the three aircraft you gave good numbers there for the fourth quarter of next year.

Just the change in the R&D model, any way you can help us understand what that might do to your R&D for the full year next year?

No, we'll have to give you that in January when we update the '10 guidance.

But clearly it obviously would have been higher than what we thought it would have been at the beginning of this year, Joe.

But we'll give you more color on that in January.

Okay.

I mean, you said $0.25 for the year and that is basically for half a year this year.

So if we double that, is that--

Pardon me?

Would you repeat that?

You said $0.25 in the EPS walk for this year, and you changed the model around mid-year.

But remember a lot of that work will be over -- will be a lot more of the work will get done in '10 than you see in '09.

You can't just automatically assume the '09 effort will be what the '10 impact would be.

Just note it will be a little higher than we thought it would be earlier this year and we will give you that color in January.

Okay.

Thank you.

And next in the line is Robert Stallard with Macquarie Research, please go ahead.

Good morning.

Good morning.

Jim, you mentioned that you saw 85 deferrals in the third quarter at BCA.

I was wondering has this made you any more or less confident on the projected build rates for the 737 and 777 moving into next year?

Well, the -- I think the risk to the 777 has been taken into account with the -- with the production rate change that we announced earlier.

And the deferrals and discussion is about what we thought it would be and have anticipated.

On the 73, the deferral rate, the requests, has stayed about the same, which is what we anticipated, and we just don't see when you add it all up, customer by customer add it all up, and an overall trend that is not worsening significantly at all, financing markets are actually getting more robust, which I suppose is a plus, moving forward.

We just, when you add it up, airplane by airplane, customer by customer, we don't see a need to change the 737 rate.

Still very confident on the 737 rate but how much is the flat rate into 2010 been a big expense pulling demand forward from out years like '11 and '12?

Say that again?

Pulling forward demand.

Again, the actually the deferral pressure moves the other way.

I mean, the deferral pressure tends to move incrementally more planes out, rather than pull them in.

Even though there are some pull-ins, as people opportunistically want lift.

So I don't see us pulling demand into '10 out of '11 and '12, when you look at the net impact.

I see probably a little one.

I don't have the numbers front of me specifically, but I think I'm right.

I see incrementally more moving the other way.

So the fact that we feel comfortable holding it in '10, is a sign of strength.

I'm just finding on this, many of your suppliers seem to be very skeptical of your ability to hold production flat.

Are you concerned that if you keep things flat that you may not be able to keep up?

Well, our suppliers, and I was one in one life, so I understand how they feel.

But I think they are recently heartened by the recent change, I would say, the gradual thawing of the capital markets over the last six months, the active engagement of Ex-Im, some increase in capacity there, same thing in Europe.

We try to give them visibility.

I'm sure they will tell you that we don't give them enough.

I get that.

But I don't think there's any supplier out there that has a hard-wired plan that anticipates production rates coming down.

If you know of any, please shoot me an e-mail, and I'll go deal with it.

Okay.

Thanks.

Thank you .

And next from the line of David Strauss with UBS, please go ahead.

Good morning.

Good morning.

Good morning.

Just a follow-up to Rob's question, obviously with these deferrals, unless you're overbooked, you're having to pull customers forward to fill in those slots.

Are you having -- are you seeing it more difficult to actually pull customers forward to fill in these slots?

No.

Actually what we have is the oversolds that are coming down in, to fill in for those getting deferred out to the right.

Remember, our production rate is based on the backlog that we have, where we have under contract it says we have delivery commitments over a period of time, and that fundamentally is what is driving the rate, and that order book is holding.

And so that is why we are where we are and then as we do the deferrals we continue in the out years as we get -- have opportunity to oversell over the what we -- what our current backlog will require us to deliver in those periods and so when we get into the deferral discussions, we move those airplanes out that the customers want to defer, and we move into those spots those oversold.

So, James, can you just give us an update where you are from an oversold status on '10 and '11?

I thought for '10 you were even with planned production rates.

I didn't think you were oversold for that.

In '10 we're solid.

So we're not having a lot of debate and discussions around deferrals for '10.

It is moving out to '11 and subsequent.

So we're in pretty good shape there.

We still have some oversolds in '11.

And so we still have some flexibility and having that dialog and discussion around, you know, what would be appropriate relative to a customer wanting to defer.

Now, in '10 we're about lead time away for most of the year.

And so those are different discussions if someone comes to us today on '10, we would have to have some consideration to deal with that.

But basically 10 is solid.

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

That is from Troy Lahr from Stifel Nicolaus.

Please go ahead.

I wonder if you guys can update us on the timing of all six test flight aircraft of 787 when they will be up in the air?

And also is the marketability for the three remaining test flight aircraft, are you still confident you can get those sold?

The last assessment on the last three test airplanes are that we feel they are marketable.

That assessment is consistent with the assessment we made earlier this quarter.

That hasn't changed.

The -- I will have Diana call you with the specifics of the six airplanes.

If I try to give you dates on all six, I'll screw up one or two of them.

So but they are as we have anticipated, and are consistent with the flight test program, the -- but it is basically every month, every month after first flight, a new one comes in.

I don't want to say anymore than that and Diana's team will fill you in on that specifically.

Okay.

But so by June though all six should be in the air you think?

Yes, roughly every month starting here in the fourth quarter.

Thank you.

You're welcome.

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.

Thank you we will continue for a few minutes 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 go to the line of Susanna Ray with Bloomberg News, please go ahead.

Good morning, I've just got a question about the level of deferrals, you mentioned that 2010 is solid.

Does that mean you're sold out for 2010 and you don't have any open spots left?

And will that level -- deferral level will that be the same as 2009, then, is that what you're saying?

What we're saying is two things: one, that 2010 is sold out.

And the level of deferral -- and deferrals, remember, are not cancellations.

These are moving planes either out or in, usually out.

That discussion, which is ongoing, that level of discussion is staying about the same as we've experienced over the years, not getting worse, and that we have enough oversolds in the pipeline to accommodate those deferrals.

That is what we're saying.

Okay.

And will the level of cancellations in 2010 be the same as 2009, as well?

I don't believe there were any cancellations here in the quarter.

But let me double--

I'm sorry, I mean, for the year.

For the year?

Yes.

I will get you the number of cancellations.

We'll call you back with that.

It's a modest number.

But will it be about the same or do you expect more?

I don't want to say it.

What I want to do is have Tom's team call you back just to be sure.

Got you.

Okay.

And one more quick question about job cuts.

You mentioned job cuts above that 10,000 figure.

Can you give us a sense of what magnitude you're considering?

We're working through that right now.

It will have to do with reshaping of defense programs as -- as the defense budget, which is under pressure, sorts through its own pressures, and then it makes its way back to defense contractors, such as ourselves.

And ongoing market pressures in -- in BCA, which tend to relate more on the services side.

Okay.

Thank you.

You're welcome .

And next go to Ann Keeton with Dow Jones, please go ahead.

I have a tanker question.

There has been some talk in the marketplace that Boeing has an advantage in this competition?

Could you just discuss this situation generally for us and let us know what your feeling is on tankers?

Is there a specific issue, Ann, that where we have this purported advantage?

Or are you asking me an open-ended question?

It's kind of open-ended but I guess it's based on -- on what came out in the initial RFP.

I think what you may be referring to, is that our competition somehow feels that we have some information coming out of the last protest environment about them, that we don't -- that they don't have about us.

I'm not sure what they mean.

Okay?

And my suggestion would be that you talk -- you talk to the -- to our customer, if that is what you're referring to.

If you're referring more broadly, listen, we're sorting through the RFP now, we will have some comments, where we think the RFP can be improved.

And I have no idea, to be honest with you, whether that advantages or disadvantages us at this standpoint but we're taking a hard look at it.

The only thing I would say is that the -- the recent WTO ruling, is one where we think the playing field is not level.

Basically because the ruling, at least as people have described it, point to virtually every airplane that Airbus has developed, being the result of a subsidy, which including the A330, and that -- that should enable them to take more risks during the competition that I can take as a purely commercial operation.

So that is one area that we are probing very heavily.

Oh, okay.

Thank you.

You're welcome .

And next from the line of Jon Ostrower with Flight International, please go ahead.

Good morning.

Questions for you about we come back to hearing different things about pages that are scheduled, whether it is from on-line news media, or the financial community, and you then get these very confident declarations from you guys about the status of the (inaudible) of the program.

Are you guys willing to stake your leadership on this?

I'm trying to get a sense of where the buck stops after six delays here.

Listen, you're breaking up a little bit.

I think it may -- you may be on a wireless device.

We didn't hear all of the question.

Could you try one more time.

I would be happy to.

Every several months we hear very confident declarations from Boeing regarding the pace of the program and the updated schedules, and I'm just trying to get a sense that when we start to hear that things maybe are not going on schedule-- just trying to get a sense from you guys, where -- are you guys willing to stake your leadership of the Company on this?

Where does the buck stop ultimately?

Listen, we're all responding, I assume you're talking about the 787 program?

Yes, I am.

And the entire leadership of the Company plays a role in -- in getting this program done and out to our customers.

It has been a difficult program.

It has been technologically innovative, new to the world, in its characteristics, and we all wish that the program had gone more smoothly, and I think we all share responsibility in it not going as smoothly as we want but we're also going to share responsibility in its ultimate success when we get there.

So we're a team going after this thing.

Thank you.

Yes.

Go to the line of Mike Mecham with Aviation Week, please go ahead.

Hi, I just want to switch to an upcoming issue, and that's the choice for a second 787 line--

Mike, Mike, you're fading out.

Can you come through stronger ?

There you

Can you hear me now?

Yes.

I want to do ask about decision process on the second 787 line.

First question is, are we really talking about a choice of two different places, or are there still multiple locations?

The two places being South Carolina and Everett.

Or are there still multiple locations under consideration.

And then, second, are you moving forward that you expect the decision to be announced relatively soon?

Yes, the -- we -- we started with a pretty broad playing field on the second line consideration, but we're really down to Everett and Charleston as the choice.

We are sorting -- we are sorting through that right now.

And you should expect a decision over the next -- next couple of weeks.

Okay.

Thank you.

Yes.

And from the line of Dominic Gates with the Seattle Times, please go ahead.

Good morning, Jim.

Good morning Dominic.

On the same subject, you give an intriguing indication in the remarks to the analysts that you and Jim Albaugh would talk to us later, perhaps later after the turn of the year, I would expect when he settles in a bit, about how things will be handled differently in BCA in the future, in terms of the problem that have arisen over outsourcing of engineering and all of the things that culminated in the delays that you've had.

But as you've just pointed out, before you give us that indication of where you strategically go in the future, within the next couple of weeks, you're going to make a decision on the second line.

And so I want to ask why -- a lot of people see the idea of putting a line in Charleston, so that you would have assembly lines on opposite coasts.

See that as a decision that doesn't make a lot of business sense, because it -- because it adds tremendous risk and tremendous duplication.

So the question is, why would you do that now?

Having had all of these problems, with this new program, why would you introduce the risk of separating assembly lines on two opposite coasts?

It's a fair question, Dominic.

There would be execution challenges associated with that choice.

But keep in mind that we've got a pretty good-sized operation down in Charleston today.

The -- there would be some duplication.

We would obviously work to minimize that.

But I think having said all of that, diversifying our labor pool and labor relationship, has some benefits.

I think the union IAM and the Company have had trouble figuring it out between themselves over the last few contract discussions.

And I've got to figure out a way to reduce that risk to the Company.

And so some of the modest inefficiencies, for example, associated with a move to Charleston, are certainly more than overcome by strikes happening every -- every three or four years in Puget Sound and the very negative financial impact of the Company, our balance sheet would be a lot stronger today had we not had a strike last year.

Our customers would be a lot happier today, had we not had a strike last year.

And the 787 program would be in better shape had we not.

And so I don't blame -- I don't blame this totally on the union.

We just haven't figured out a way, the mix doesn't -- isn't working well, yet.

So we've either got to satisfactory satisfy ourselves the mix isn't different or we have to diversify our labor base.

And if the union goes along with your request of them to come to some kind of no-strike deal, does that mean that you definitely keep it in Everett?

Listen, Dominic, the discussions and the decision-making is ongoing right now.

I really--the discussions are confidential and the decision-making will be as rational as we can make it.

All right.

Thanks.

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

And that will be from the line of Steve Wilhelm with the Puget Sound Business Journal.

I want to follow up a little bit.

Can you give some color about the discussions, how often they are, what the tone of them is, with the union?

Steve, the discussions are -- you're referring to the discussions in Puget Sound?

Yes, and (inaudible).

Yes.

I would say that the discussions are occurring on a regular basis.

I would say the tone is constructive.

And we'll see what it produces.

Okay.

Okay?

Thank you.

Okay.

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.