波音 (BA) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to The Boeing Company's fourth-quarter and full-year 2010 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'm turning the call over to Mr.

Scott Fitterer, Vice President of Investor Relations for The Boeing Company.

Mr.

Fitterer, please go ahead.

Thank you and good morning.

Welcome to Boeing's fourth-quarter and full-year 2010 earnings conference call.

I am Scott Fitterer 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 will take your questions.

In fairness to others on the call, we ask that you please 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 through 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 disclaimers at the end of this Web presentation.

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

Thank you very much, Scott, and good morning.

I will begin with a few brief comments on the business environment followed by some thoughts on our performance during 2010.

After that, James will walk you through our results and 2011 outlook, and then we would be glad to take your questions.

Starting with the business environment on slide two.

During 2010, we saw the global economy continue its transition to a sustained albeit generally slow recovery.

As part of that, however, there was a significant rebound in air traffic with 2010 passenger and cargo levels reaching peaks last seen in 2007 and 2008.

This traffic growth is being experienced in all regions with emerging markets continuing to show the strongest recovery.

Looking forward, we expect growth rates to continue along their historical growth trends as air traffic has reached pre-recession levels.

Demand for new airplanes remains strong driven by the traffic rebound, high load factors and yields that continue to improve.

In response to this broad-based market strength, Commercial Airplanes made a series of decisions in 2010 to increase production rates across its product line.

The most recent was in December when we announced a 777 rate increase to more than eight per month in the first quarter of 2013.

Previously we announced our plans to increase the 737 production rate from 31.5 airplanes per month to 35 in the beginning of 2012 and then to 38 per month in the second quarter of 2013.

In commercial aviation services, airplane utilization rates and the size of customer fleets continue to grow, which has led to increased core spare sales.

And with improved airline profitability, we are also seeing an accelerated recovery in aircraft modifications.

On the defense side, budget pressures in the US and in other developed markets continue while spending in the Middle East and Asia remains strong.

As affordability becomes more critical to key customers, we are seeing a renewed demand for proven and reliable platforms and systems, a development which plays to the strength of our portfolio including the multi-mission F/A-18 aircraft family and our rotorcraft products.

In addition, spending priorities in many markets now include more non-traditional growth opportunities.

In unmanned systems, C4 intelligence, surveillance and reconnaissance and cyber security.

Increasing international demand for defense and security systems continues to bode well for us as well.

There is a clear window of opportunity for our multi-role aircraft and other products as our international customers confront the need to transition to the next level of capabilities while also seeking proven, reliable systems.

Our core strategies for Defense, Space & Security markets are unchanged.

First, extend and grow our existing programs; second, capture an increasing share of international and services opportunities; and finally, accelerate our repositioning with investments in adjacent markets.

Notwithstanding the high national security threat environment in the United States, and our solid foundation of proven and affordable solutions, we do see an extended period of flat to declining US defense budgets with intensifying pressure on contractor margins.

In that light, we continue to accelerate our own efforts to reduce infrastructure costs and maximize efficiencies.

Overall, the commercial and defense and security markets we serve remain large.

Our current portfolio of products and services is a great strength and source of value for us and we are making solid progress on the strategies we are pursuing.

Turning to the fourth quarter and 2010 highlights on slide three.

Our core programs executed exceptionally well in 2010.

737 and 777 continued to realize productivity gains during the year.

Services performance across both businesses was strong and core defense programs performed well despite the challenging contracting environment.

Our overall backlog increased last year with book to bill ratios above one in both of our big businesses.

Commercial Airplanes delivered 462 airplanes during the year including a record number 376 737s.

Net orders for the year of 530 units greatly exceeded our initial expectations as the airline industry experienced its strong rebound.

On the development side, the story was more mixed.

While we made significant progress during the year on flight testing of the 787 and 747-8, we continued to face challenges in fully meeting our commitments.

As you recall, just over a year ago, we made the first flight of the 787 and entered the beginning stages of our flight test program.

Since that time, we have flown more than 2500 hours on over 800 flights.

We have completed just over 75% of the flying required for certification and delivery of the first 787 while retiring a significant portion of the high-risk test conditions.

We have also made steady progress in the production system.

There has been improvement in the quality of shipments to final assembly from our supply base and traveled work on current production units continues to decline.

At the same time, we have had discoveries during flight tests, the most notable being the in-flight electrical incident this past November that resulted in the move of first delivery to the third quarter of this year.

As we return to full certification testing over the next few weeks, we continue to work with our supplier partners on previously identified issues.

In addition, we will be working through the process of incorporating changes that have been identified during flight tests on previously built units.

We are currently operating at two per month production rate in final and despite the delay in first delivery, we're continuing our efforts to reduce out of sequence work and expect to ramp up to 10 per month by the end of 2013.

Development of the 787-9 is progressing well as we have incorporated lessons learned from the 787-8 experience including rigorous adherence to development program disciplines we have installed company-wide.

Our first 787-9 delivery is expected in late 2013.

Market demand for the 787 remains strong with 847 firm orders at year-end from 57 customers around the world.

Turning to the 747-8, flight testing is two thirds complete with over 17 hours on 650 flights.

We are making progress on testing.

The inboard aileron actuator and the low-frequency suppression system.

The program continues to expect first delivery in mid-2011.

Build of the 747-8 Intercontinental passenger airplane is also progressing.

First flight of the Intercontinental is on track for the end of this quarter with first delivery expected at the end of the year.

As we look forward in Commercial Airplanes, the priorities are clear.

We must complete 787 and 747-8 development and deliver these airplanes to our customers and we need to successfully ramp up production across all commercial programs to deliver on our backlog of over 3400 units and create the capacity to support further customer demand.

In Defense, Space & Security solid 2010 operating performance generated 9% margins in a very challenging contracting environment.

Complementing this performance were key accomplishments in extending our core programs, pursuing targeting adjacencies and capturing international sales opportunities.

Most recent examples of these successes during the fourth quarter include achieving preliminary agreement to sell C-17s to India, completing Congressional review of the pending sale of F-15s, Apache helicopters and other systems to Saudi Arabia, receiving the UK's Ministry of Defense future logistics information systems contract and winning the GEO-Mobile contract from government of Mexico to deliver an end-to-end satellite communications system.

Looking forward in the defense business, we remain focused on meeting customers' requirements affordably while investing both organically and through acquired capabilities to compete in higher growth adjacent markets.

As we begin 2011, I am confident that we have the right plans in place to deliver on our current commitments and that we are executing the right strategies to position our businesses for the future.

With healthy core operations and total Company backlog exceeding $320 billion, we have a solid foundation to support our future growth.

Now, over to James who will discuss the fourth quarter and 2010 results and our outlook.

James?

Thank you, Jim, and good morning.

I will begin with our 2010 results on slide four.

Revenue for the year was $64.3 billion, down 6% from a year ago due to anticipated lower airplane deliveries and reduced defense volumes.

Earnings per share for the year were $4.45 on strong core performance across our business despite the lower volumes.

Results were also affected by higher planned pension and interest expenses and higher R&D spending.

2010 EPS included a $0.50 per share favorable tax settlement in fourth quarter and a $0.20 per share tax charge on health care legislation in first quarter.

Last year's earnings per share of $1.84 was reduced by $3.58 due to the reclassification of the first three 787 flight test airplanes from program inventory to R&D expense and for charges on the 747 program.

Operating cash flow for the year was $3 billion.

This reflects strong performance from our production and service programs which helped mitigate continued investment in our development programs.

Now let's turn to slide five and take a look at our fourth quarter performance.

Revenue for the quarter was $16.6 billion, down 8% from the same period last year due to lower deliveries and volume.

Earnings per share for the quarter was $1.56 reflecting the lower revenue, the favorable tax settlement and anticipated higher period experiences.

The quarter also included the extension of the R&D tax credit and a special one-time contribution we made at the end of the year to our charitable trust fund.

This investment was in addition to our annual normal charitable contributions.

Now let me discuss our commercial airplane business on slide six.

Boeing commercial airplane fourth quarter revenue was $8.2 billion with operating margins of 7.7% reflecting anticipated lower airplane deliveries and higher R&D and other expenses.

There was no material financial impact this quarter from our decision to raise 777 production rates in 2013 as the majority of the volumes benefits are outside the current accounting quantity.

For the year, Commercial Airplanes delivered $31.8 billion of revenue on 462 airplane deliveries.

Operating margins were 9.4%.

The results reflect strong performance on the 737, the 777 and in our services business.

Commercial services revenues grew over 11% in 2010 driven by the market recovery and focused investments.

Gross inventory for the Company now includes $12.9 billion related to the 787 work in progress, supplier advances, tooling and other non-recurring costs, an increase of approximately $6 billion during 2010.

Gross inventory for the 787 is expected to increase by a similar amount during 2011 as we prepare for first deliveries later this year.

We have made substantial progress over the past year with our 787 suppliers reaching fair and equitable settlements on their assertions.

We anticipate being substantially complete with supplier negotiations by the end of this year.

Customer discussions are also ongoing.

To date, settlement with our suppliers and customers are tracking to our expectations.

We assess the profitability of the 787 program as part of our normal quarterly closing process.

The analysis evaluates all the revenue and cost assumptions associated the expected initial accounting quantity.

As of fourth quarter, we have determined that the program is not in a loss position including the additional costs associated with the recently revised schedule.

The cumulative impact of the 787 schedule revisions has put pressure on program profitability and the team continues to evaluate improvement opportunities to offset these pressures.

Boeing Commercial Airplanes won 180 gross orders during the quarter including 162 737s and nine 777s while 22 orders were canceled.

The commercial backlog remains strong with over 3400 airplanes valued at $256 billion.

Now let's move to slide seven and talk about our Defense, Space & Security business.

Boeing Defense, Space & Security reported fourth-quarter revenues of $8.2 billion with operating margins of 10% reflecting strong performance across the majority of its programs despite fewer deliveries and lower services volume.

Boeing Military Aircraft recorded a charge of $136 million on the AEW&C during the quarter primarily for resolution of technical performance issues associated with the test program for Peace Eagle and additional software development and testing required for acceptance of the Wedgetail aircraft this year.

For the year, BDS generated $31.9 billion of revenue and delivered 115 production aircraft and four satellites.

Operating margins of 9% for the year reflect solid performance across four programs offset by challenges in the current defense environment and charges related to the AEW&C.

Boeing Defense, Space & Security backlog remained strong at $65 billion which is approximately two times unit's annual revenue.

Now let's move to slide eight and talk about our other businesses.

Boeing Capital continues to perform well as it reported $6 million of pretax earnings in the quarter and $152 million for the year.

The portfolio balance at year-end was $4.7 billion.

That is down $1 billion from the end of 2009.

During the fourth quarter, we recorded a non-cash income tax benefit of $371 million or $0.50 per share resulting from settlements with the IRS for the 1998 through 2003 tax years.

As expected, the fourth quarter also included a benefit of $154 million or $0.21 per share from the extension of the R&D credit for the 2010 tax year that was signed into law in December.

Our pension asset returns for the year were 12.7% driven by strong performance in nearly all asset classes.

Discount rates decreased from 5.8% in 2009 to 5.3% at the end of 2010.

The Company's pension plans are now 83% funded on a financial accounting basis and that is down from 88% funded at the end of 2009.

On an ERISA basis, our plans are more than 100% funded.

2011 pension expense is expected to be $1.8 billion, an increase of $650 million versus last year driven by the lower discount rate, a decrease in our loan term expected return assumption to 7.75%, actuarial updates and the amortization of asset and liability performance from prior periods.

During 2010 we contributed $35 million for our pension plan and expect required contributions over the next couple of years to be minimal.

We do plan to make a discretionary contribution of approximately $500 million in 2011.

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

We generated $3 billion of operating cash flow in 2010 on strong operating performance in our core programs, advanced payments received on orders and timing of certain receipts in the defense business.

Capital expenditures of approximately $1.1 billion were less than expected as some of the expenditures have moved into 2011.

Now turning to slide 10.

We ended the year with $10.5 billion of cash and marketable securities.

Debt levels remained flat during the quarter and decreased $500 million from 2009 due to Boeing Capital debt maturities.

Our cash position provides strong liquidity as we continue investing in our development programs and our growth strategy.

Now let's turn to slide 11 and take a look at the outlook.

Guidance for 2011 reflects solid operating performance on our production and service programs, higher pension expense, the revised 787 schedule and the current defense contracting environment.

Revenues for 2011 are forecasted to be between $68 billion and $71 billion and EPS guidance is set at $3.80 to $4.00 per share.

This includes $1.58 per share for total pension expense, an increase of $0.58 per share from 2010.

EPS excluding pension expense and tax adjustments is expected to increase approximately 6% as compared to 2010.

The 2011 commercial delivery forecast is between 485 and 500 airplanes and is sold out.

This includes a combined 25 to 40 787s and 747-8 deliveries split roughly equally between the two programs.

On operating cash flow, we expect the two-year 2010 and 2011 cash flow to remain the same as prior guidance.

2011 operating cash flow is now expected to be greater than $2.5 billion including the $500 million of discretionary pension funding.

We expect first-quarter revenues, EPS and cash flow to be the lowest during the year based on timing of volume and expenditures.

First-quarter EPS is estimated to be approximately 15% of full-year earnings.

Operating cash flow is expected to be negative in the first quarter.

In 2011 we expect other segment expenses to be about $250 million and unallocated expense to be about approximately $900 million.

R&D expense for 2011 is now forecasted to be between $3.7 billion and $3.9 billion including impacts of the recently revised 787 schedule.

We're forecasting capital expenditures to be $2.3 billion in 2011.

This represents continued investment in the 787 final assembly line in Charleston as well as investments to ramp up commercial production rates and it also recognizes ongoing capital improvements that have been deferred over the last couple of years.

Now let me turn to slide 12 and discuss how we bridge our 2010 performance to our 2011 guidance.

First, we exclude the unusual tax adjustments experienced in 2010.

I have already discussed that we expect pension expense to be $650 million higher in 2011 driven by lower discount rates, lower expected rate of return, actuarial updates and continued smoothing of prior year losses.

R&D is expected to be down $200 million to $400 million from 2010 as the 787 and the 747-8 start deliveries later this year.

Fleet support costs will increase as these airplanes are put into service.

The early 787 and 747-8 deliveries will be dilutive to commercial airplane margins as our guidance assumes essentially zero margins on these initial deliveries.

Volume along with other ongoing efforts to manage costs and drive productivity will offset some of the pension headwind this year.

Our segment guidance does consider risks associated with our development program, production ramp-up and the current defense contracting environment.

With that, I will turn it back over to Jim for some final thoughts.

Thank you, James.

Let me close by simply reiterating our focus and priorities.

To deliver on our development programs, successfully ramp up production rates at Commercial Airplanes, extend and reposition our defense business and continue to harness the earnings power of our core production and services programs across the Company.

I am confident in our team and our ability to deliver on these priorities.

The underlying operating engine of the Company is running very well.

It provides the foundation and strength to support our development efforts and deliver on our growth and performance in the future.

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

(Operator Instructions) Ron Epstein, Bank of America Merrill Lynch.

When we think about what's going on with the re-engining with the A320 NEO, the traction it is had in the market and the C series, how should we think broadly about product strategy at Boeing in terms of re-engining a new airplane, maybe both?

How does the 757 factor into it?

If you can proffer some color on that?

Well, this is Jim.

Listen, I think the framework for thinking about it is the same as when we last talked about it which is the airplane -- if we can come up with the right airplane in roughly the 2019, 2020, somewhere in there, I personally feel that there is a strong argument that the market will wait for us, notwithstanding the re-engining.

Most of the feedback we're getting from customers is in alignment with that, but we have got to work through and we are this year working through what the airplane will more precisely look like.

So, I -- for me, putting our backlog at risk twice, once with the re-engining not to mention the cost of two development efforts and then again that the new airplane only makes sense if the new airplane wants to be developed in 2025 or beyond.

And I think based on what we are learning to date about what our customers need and what technologies we have available to us, I think we are leaning toward the development in the 2020 timeframe.

But we're going to confirm that as we go through it this year, preserving the option if we are wrong as we go through the analysis to re-engine.

But I don't think it's going to turn out that way.

Doug Harned, Sanford Bernstein.

Following on that, if you look going forward, you've got the 787-9 design to complete, potentially a -10, some action on the 777 and then a response to the A320 NEO which could be a new airplane or a re-engine.

When you look at all those together, how do you see the requirements for R&D and CapEx?

If you look out over the next five years, should we expect these to be up, down?

How do you look at that?

This is a lot on your plate.

I agree, Doug.

I mean, I think what I would look for though is R&D down in the medium term.

I think the -- if this scenario plays out, new airplane developments except for a possible derivative as you point out, a -10 would be example of that, I think those are going to tend to be in the second half of this -- the derivatives will be in the second half of this decade and then new airplanes will be at the end.

If that situation plays out, we are going to be down for a few years on R&D.

That doesn't mean we're not working on the things we have to work on to get these airplanes out.

As you can tell, there is a lot of investment in research and development in this Company, even $1 billion lower than we would be at next year, for example.

So I think you would -- we can still sustain the investment in people and technology we need to get to those new planes significantly down from where we are today.

So are you looking to take engineering resources down over the next two to three years?

Well, I think -- yes, I mean I think some engineering resources will be down, some will go up, but the net will be down.

And these aren't all internal costs, as you know, Doug.

A lot of these are external costs.

But we will fight hard to preserve the core engineering capability in this Company during a period even when we are down.

I think the way to look at it is we are extraordinarily high now and not so much that we will be cutting to the bone then.

I mean we are riding very high to get these development programs done and we're paying the price for being late.

But, I'm going to make sure that we don't cut too deep.

We have done that before in our history and we are not going to do it again.

But if I can, the two programs that are not a derivative which could be a 777 replacement or a new 737, if those are coming at the end of the decade, if they would have come together, that would be an extraordinary amount of development.

You're right.

I'm not being very clear.

We're going to make sure they don't come together, okay?

Okay, good.

Yes, I think -- that's one of the independent variables in the equation.

As we look at the market, we think that's going to make sense from a marketplace standpoint too.

Okay, very good.

Thank you.

Sam Pearlstein, Wells Fargo.

Good morning.

Just wanted to follow up a little bit on the cash flow.

At this time last year, James, I guess you provided what the next year's cash flow from operations would look like which at that point presumed you would be on the certification.

So I'm wondering if I just look at the CapEx this year, which I'm wondering first of all, is that a peak number?

Does that fall as we look out into 2012?

And what is your sense as to what cash flow from operations would look like out into next year?

So, yes, the CapEx you are seeing next year would be a big number again.

It's because a lot of the expenditures specifically on Charleston slid from 10 to an 11 just from timing and then also some of the catch-up for some of the infrastructure effort that we hadn't done as we really managed cash more tightly over the prior years.

So I expect that to be a peak.

What we told you last year over this two-year period we'd be at over $5 billion in cash and we're sticking to that even though we have added to the cash pressure the fact that we're going to make a discretionary contribution to the pension plans of $500 million.

So I think that what you see happen in 2011 is going to be very closely tracking to the guidance that we provided for 2011.

But I also want to remind you that as we think about going beyond that, the rates we have announced on 777 and on 737, the benefit of that will start occurring in 2012.

As Jim just mentioned as we look out and see us getting done with the 787 and 747 programs, the principal development in 2011, we see R&D go down.

So I think you could see that 2011 is the year that we're really focused on now and have some challenges with it, but if we get through the things we have on our plate to get done with, I think after 2011, you'll see cash flow jump back up.

Thank you, and if I can just follow up one question on the 777.

At what point do we see that block get extended?

Just because it seems like with only 240 or so planes left in the block and now a rate increase up to 8.3 per month, it would seem like we should be seeing a lot of orders and options exercises etc.

to drive that.

It's a good question.

There is certainly upward pressure.

We have a process we religiously follow.

It wouldn't be a total shock if at some point it didn't get extended.

But we're working through it right now.

Heidi Wood, Morgan Stanley.

There seems to be some debate about ETOPS, and so I just kind of want to understand how to conceptualize this.

Can you or will you deliver the 787 in 2011 without ETOPS i.e.

if ETOPS goes to 2012, do you still deliver in 2011?

No, Heidi.

This is Jim.

No, I mean ETOPS is fully in the schedule and is contemplated to be completed.

We don't want to deliver these airplanes without ETOPS and neither do our customers and neither does the FAA, by the way.

Okay, great.

And then another thing I would like to get a better understanding on is back in October of 1997, you had some production snafus and I remember you had 53,000 jobs behind schedule.

(inaudible) back down but it had some pretty significant cash flow implications.

Now here on the outside, we can't tell if that is analogous or not but there seems to be an understanding that there may be 100,000 rework or out of sequence jobs on the 787.

Maybe that's over-reported (inaudible) how should we think about the cash flow and the accounting implications of this additional work?

And is it a negotiation between you and your suppliers or do you have to foot the bill?

There's a lot of questions in there, Heidi.

The high-level answer is that we think that this situation is more manageable than the one in 1997 turned out to be.

That's the high-level answer.

Now that doesn't mean it's without challenges because we -- suppliers are delivering higher level of aggregation to us than they were back in times past on the 37 program.

And as a result, it's sort of a double whammy.

If they deliver it not completed, that's work that we have got to do that was unanticipated as you know.

I'm telling you something you know.

But we are seeing now on the current airplanes very high levels of completion.

I mean we are now through a lot of the issues that caused some of the backed up work and on top of that, there's been some engineering change based on what's going on in the flight test program.

But that is beginning -- it has been for the last couple of months to get under control.

So still challenging, fully built into the schedule, healing up in terms of the suppliers getting the work done, less for us to do and fully contemplated in the schedule.

But the planes on the ramp, that's incorporated into your cash flow for 2011?

Yes, yes, yes.

Okay, thanks very much.

Joe Campbell, Barclays Capital.

It's Joe Campbell and Carter Copeland.

We were a little surprised to see that despite another delay in starting the 787 deliveries and despite deferring this year's previously planned ramp-up to seven a month and two occur during 2011 with the ramps with the production struggling during 2010 at two a month and staying at two a month, you're still going to ramp up to 2013 to 10 a month.

So apparently you're going to be able to ramp up faster than you ever planned before, and I was wondering A, how are you going to do this?

And how important was this decision to keep the ramp to the financial observations that the program's not in the forward loss?

And related to the inventory and the same ramp question, apparently we're going to have $18 billion worth of 787 inventory for coming out at 12 and adding six.

Is the ramp-up that's contemplated going to force the 787 inventory up higher than 18 or is that the end of it?

The quick way into the end zone on your question is that we had a very conservative view and a significant amount of margin in our production ramp-up plans.

A lot of that margin is now eaten up by this latest delay.

But we are not changing significantly the trajectory of our ramp as compared to what we planned before.

I don't think that's right.

I think in 20 -- you are going to ramp up during 2011 during this year?

We were going to start delivering in February or so and weren't we going to ramp up?

That's part of my answer.

Everything slid to the right, roughly equivalent to the delay, and that is offset by a contingency we had in 2013.

Okay?

So we had a very conservative view of the ramp when we talked to you and a lot of that margin is now gone.

It seems like two to 10 is a pretty speedy ramp.

Well there's no question the ramp is challenging.

It was going to finish earlier than the end of 2013 by our internal plan, but that is now largely eroded at this point with the slide.

And then about the money, I mean, assuming that -- is that a key factor in keeping the no-forward-loss assumption and how does it play out with the cash and the inventory (multiple speakers)

I'll let James answer that.

Joe, it's not a key.

It's another element that has to be taken in consideration in terms of additional cost associated with the schedule sliding.

But it along with a lot of the other assumptions as well as the improvement we're making and being able to confirm now and put in -- include in our assumptions.

So it is a factor, but clearly it alone would not have a significant impact on whether the program would be in a loss position or not.

But clearly it's something we had to take into consideration and address.

The cash has been -- the cash impact of the slide is in the guidance.

We do understand that as well as what Heidi mentioned earlier about the behind schedule, out of sequence work.

We've taken all that into consideration in our review for -- determine whether the program was in a forward loss and our going-forward cash projections.

James, what I was asking though was, so if we end this year at $18 billion and we are going at two a month all year long, and then in 2012 and 2013 we begin the steady drumbeat from two to 10 and we started say 2012 with something like $18 billion of inventory, 12 plus six, does the $18 billion then rise to some larger number because of the ramp-up or does the $18 billion start to go down because of the deliveries?

The $18 billion will still go up, Joe, but at a much lower rate as we start to deliver and relieve the inventory.

So that's the way to think of it.

It won't be growing at the same pace of $6 billion a year.

I mean, we will still have some increase but it will be at a lot lower rate than what we have experienced to date.

All right, I hope we don't see too much north of 20.

It's a lot of dough.

You don't have to remind me.

Joe Nadol, JPMorgan.

Could we speak to -- a little bit to the certification process with the FAA specifically?

It seems like over the holidays, the return to flight -- into certification flight was delayed for a few weeks, and then the language in your press release a couple weeks ago seemed to intimate that the goalposts might be moving a little bit, and maybe you don't quite know where they are.

I'm just wondering if you could specify that you do know everything you have to get done to get certification and ETOP certification and I guess how that process has evolved.

Well, one way to answer your question I think is that the -- we have a very clear view of what we need to do.

The FAA has been working very closely with us.

Now the clear view of what ETOPS is ETOPS is different this time around than it was on the 777.

The FAA quite properly has got a new way of -- it used to be just sort of cycle based back in the 777 days.

Now it's kind of fault based, condition based.

And so it is a series of tests that we have got to go through, we understand them.

The question is exactly what data is applicable to each test point at the FAA and we are working together to make sure we do it right.

And so we have got a little wiggle room in the sense that it's the first time we have been through it.

We think we understand it.

Could it be a couple of weeks less or a couple of weeks more?

That's all encompassed in the margin and the guidance as we go through this more -- this different ETOPS testing regime.

We've largely gotten most other things done.

So we have got to get this one done.

So you completely agreed with them and you are all perfectly synchronized on the electrical system and software versus hardware updates and wiring and all of that where we know exactly where we need to go?

Yes, I think yes, we are in agreement.

We have got a temporary fix in right now that we are all flying with for score, the FAA is flying with us, and we will be implementing a permanent solution on all the airplanes that we have all been discussing and all understand as we go into ETOPS.

That fix needs to be in before ETOPS testing.

But I think it's very fair to say that the FAA and our people are working very closely together to have a common view and there is no misunderstanding between us about what needs to be done on what timing.

Okay, James, just a clarification, if I am right.

The 787 fleet support and other investment, the $300 million that you're expecting in BCA in 2011, is there -- am I wrong to say there might be some contingency in there and that's where it's being built in?

If not, can you explain exactly what that is and why that's not R&D?

Yes, that is not contingency and there's not any built in.

That is preparing to support the airplane when it enters into service.

It is stuff like being ready to help the pilots be prepared to fly the airplane.

It's to be able to support the airplane wherever it flies.

And by the way, when you think about fleet support, we have it on the 777, the 737, the airplanes that are already in service.

Why is it such an issue here or such an impact to earnings is because obviously one, we're not delivering yet; and two, when we do deliver, we are expecting zero margin, so it's not covered by the gross margins of the program.

But it is the infrastructure that needs to be put in place when you put an airplane into service that's going to fly all over the world.

Because you only have a couple of customers getting deliveries this year, and that's going to grow substantially next year, is that number going to grow a lot as you put more customers into -- as they go into service in the plan?

We're going to have -- first of all is putting the infrastructure in and then it has to be serviced.

so the growth won't be as sizable but it will grow to a level and it will be at one that will be sustained over time in terms of supporting what that infrastructure is.

Cai von Rumohr, Cowen and Company.

So your R&D was at a very high level commercial in the fourth quarter.

How much of that was supplier negotiations?

And you gave us some color on the earnings in the first quarter.

Could you give us some color on the pattern of expected R&D spending throughout the year and the expected pattern of kind of period expense and 787 support over the year?

So some of the R&D -- the higher R&D at the end of the year was associated with the change in the model on the -9 where we are maintaining the control and design of that whole program, and so we are paying the suppliers, we're contracting with our supply base as we go.

So a lot of the growth was associated with that and I don't know -- have the exact number, but that's a lot of what you saw in terms of increase over the normal run rate was associated with that.

Going forward, obviously the run rate will be higher the first part of the year and tail off at the end as we complete certification and start delivering it.

So I think you should look at the profile, higher in the first half, starting to diminish over the last half.

And then the 787 support pattern?

It will be flat.

Flat throughout the year?

About, yes.

Okay, but I mean, if your R&D starts out high and had an abnormal in the fourth quarter, that would suggest your run rate should be down fairly substantially in 2012 on the R&D.

Is that (multiple speakers)

That would be the expectation if everything goes according to the current plan and the current schedule.

Thank you very much.

Rob Spingarn, Credit Suisse.

So you guided to 25 to 40 combined on the new wide bodies.

Wondering if you can separate this a little bit by program.

We know that there's 18 747s at least we believe by contract based on what the databases say.

And then continuing, with regard to the 787s, which line numbers would these deliveries be given the resequencing you've talked about?

And then finally for James, part of the question, how much cash flow, operating cash flow is associated with these particular deliveries?

Okay, your guess is about right.

It's roughly a 50-50 mix between the two airplanes, the 25 to 40.

We're still sorting out precisely which line numbers will go first.

I don't want to give you the current view because it could change by an airplane or two.

But we're getting pretty close to knowing precisely.

Yes, on the cash part, the way the model works, we get about 40% of the cash before we deliver and about 60% at delivery.

You know, I haven't worked the numbers, but it's not a significant piece of the cash we are estimating or guiding you to next year, but it does contribute to our overall operating cash picture.

So, James, if 787 slipped out of the year, how would that affect the $2.5 billion?

It would have an impact, it would be lower.

They haven't calculated the numbers, but it would be lower.

David Strauss, UBS.

Are you guys ready to disclose the block size that you are assuming on 787 given that its margin on -- lack of margin is now incorporated into the actual guidance at this point?

No, and the zero margin has been incorporated in the guidance.

We have been saying that for the last year or two, but we are not yet ready to disclose what the opening initial accounting quantity will be.

Would it be upon first delivery or when would you -- ?

Yes, upon first delivery.

And then as a follow-up, we've been kind of dancing around this, but on the reworked airplanes, can you give us an idea of how many -- roughly how many units there's significant rework to be done and when you would expect to have all those reworked airplanes delivered by based on your current delivery schedule?

Well, yes, I think it would be sort of in the 20 to 25 area.

Another way to look at it is we're working on -- I'm looking at the guys here about airplane 31 now -- and the completion -- the work completion rates on the incoming is very, very high.

And so our production system is getting stable, but in the first 20 plus airplanes, there's still some work to be done and we're going through it.

Okay, but no estimate on when those will actually be delivered?

We do have a current estimate within our own production planning system but it does move around a little bit.

So we're just -- we're not going to disclose that.

Myles Walton, Deutsche Bank.

Just switching gears a little bit on defense.

I'm curious on the BMA margin for 2010 and the outlook, trying to map the two.

It looks like in 2010 you probably had 200, 250 basis points of headwind from unique charges, AEW&C, tanker, C-17, EACs and yet you're looking for a flat margin guidance for 2011.

And I'm just curious, is that all the C-17 lower rate and repricing elsewhere across the business or is there something else?

Well it's that and there is the mix of deliveries that we expect to see in 2011.

So does it -- I mean indicatively though your F-18 multiyear starts to get repriced in '12, your lower rates in C-17.

So, if you have a 200 basis point organic drop '10 to '11, what should we conceptually think about '11 to '12?

I mean, the rate for the F-18s, you'll see more of the impact after 2011.

But in '11, you'll see us deliver in the AEW&Cs at zero margin and that will have a dilutive impact and also the tanker, also a zero margin.

So that would be the other -- that's the mix issue along with the contracting environment where we're seeing lower profitability on some of these contracts.

Okay, and then a quick one on 87.

In the release it mentions that there is some schedule margin in there.

Are we talking days, weeks or conceptually a month?

I think it would be more in the weeks category.

Noah Poponak, Goldman Sachs.

You guys have already announced a series of production rate increases at BCA, but you started the year close to a record backlog and have actually had backlog growth.

Can you just touch on how much upside there still is versus what you've already announced?

You've talked about exploring where it will ultimately go on 737.

Can anything be accelerated?

And just strategically, how are you balancing the efforts to dampen the cycle that you've talked about before versus maybe having overdone that a little and needing to catch up on demand?

No, I think the best way to answer that question is -- and we go through each of our programs asking the question that you are asking, and I think when you take everything into account -- demand, backlog, supplier readiness, investment -- you take that all into account, there is more bias to move up than there is to move down.

Okay.

From the announcements we've already made.

So we've got to sort through that and make sure it makes sense.

We are a long way from announcing anything different than we have announced.

But I think when you take all that into account, there's as you point out, there is I think on balance some opportunity.

Is there potential to accelerate anything that has been announced or is that something the supply chain is just not ready for?

Yes, I think it's the latter.

I think it -- we're always asking the question but we're mindful of the readiness of our supply base, very mindful of that, having as Heidi pointed out earlier lived through an experience that we don't want to live through again back in 1997.

So those announcements are pretty solid.

I think it's beyond that that we are looking at.

Makes sense.

Thank you.

Troy Lahr, Stifel Nicolaus.

Wondering if you can just speculate on how many orders you are kind of thinking about for 2011 out of BCA.

And how are your conversations with customers going?

Are you seeing more discussions with the domestic carriers looking to recapitalize their fleet?

I think the discussion level is about the same as it was this year which is higher than we thought going into this year.

Now, whether that converts to orders that are the same, a little less, a little more, it's really hard to know.

I think we tend to approach this pretty conservatively and would rather be surprised.

But the level of discussions is still high and what gets converted remains to be seen.

And it will -- could be up, could be down, but we'll have to see.

But kind of in line with orders, maybe plus or minus some for 2010 though?

Or kind of more in line with deliveries, you think?

I really don't -- if I knew, I would tell you.

Therefore, I really want to hedge.

I'll just say, discussions with customers are about the same level as they were during this year and what that produces will remain to be seen.

Are you seeing the domestic carriers start to talk more or same type of customer mix?

I still think the -- it's really across the board as I sit and reflect on it.

I think most areas of the world are -- just thinking through my head.

Most areas of the world, there's a pretty good pipeline of discussions going on, including the US.

I wouldn't say other than the Middle East and Asia, I wouldn't say anything else really stands out.

Operator, we have time for one more analyst question.

Jason Gursky, Citigroup.

One quick question on the defense side of the business.

You mentioned margin pressures, but I was wondering if you could talk a little bit about the rapidity at which new programs are getting awarded and whether we're continuing to see a slowdown in the process or whether we have maybe perhaps now finally stabilized and how fast you can get contracts definitized etc.

I think your question was around the speed of getting contracts from the US government?

Yes, that's right.

Well, I don't think we have seen any deliberate slowdown.

What I think is happening, there clearly are fewer programs that are being competed now.

I think that those that are, there is an obvious -- a focus on making sure there's a disciplined process in to fairly go out and procure those.

But I wouldn't say that we have seen any slowdown.

Obviously taking the tanker out of that equation, obviously that has been more prolonged because some of the issues and challenges they have had on that procurement.

But in general, I would say not.

Ladies and gentlemen, that completes the analyst question-and-answer session.

(Operator Instructions).

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

Tom Downey, Senior Vice President of Corporate Indications.

Mr.

Downey, please go ahead.

Thank you.

We will continue with the questions for Jim and James now.

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

Operator, we are ready for the first question.

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

Susanna Ray, Bloomberg News.

I am wondering, what percentage of the aircraft orders that you won in the last, I don't know, six months or whenever, represent penalty payments or penalties for the 787 delays, perhaps in the form of discounts or if there's any kind of color you can give us on that?

The answer would be very few.

Can you say anything further?

What does very few mean?

No, I mean, I'm struggling with -- I mean, very few means very few.

I mean it's -- most of the orders were --

Susanna Ray Five?

Straight up or conversions of options.

Okay, so we're talking less than a dozen or --?

I really don't know, Susanna.

I don't have that number here in front of me.

But there weren't very many.

I'm struggling to think of any.

But we'll get back to you.

Okay, that would be great.

Thank you.

Dominic Gates, Seattle Times.

First of all, I just wondered, could you say anything about your employment projections, headcount projections for the year ahead, especially in BCA, and if you could, with the Puget Sound region?

I think BCA headcount will go up somewhat this year in support of the new airplane introductions and readiness prep, and that would be both in Puget Sound and in Charleston.

A few thousand?

I think a number was quoted recently, 4000 to 5000.

Is that about right?

That is a total Company number, Dominic.

I think you are remembering a quote in response to a question I had a month or so ago.

Could I ask James a question or perhaps to both of you, but James mentioned increased R&D in the last quarter because of a change in the way you're handling the -9.

I think you said you're maintaining more control of that or taking more control of it?

Could you elaborate on what that means?

How differently are you doing the -9?

Does this really change the relationship with your major partners and does it do it with all of them?

It doesn't change the relationship.

It does change our executing that particular development effort.

As you recall on the base development it was -- the partners had more autonomy as to going out developing their particular piece and they recovered those costs as they delivered the units and they were amortized over their delivered units.

On the -9 we're keeping a little more close control and doing it more typically how we have done it in the past where we would outline what the development effort is and contract with the supply chain for their particular piece which means we would pay them as we go.

And so what you saw in the fourth quarter was that change.

That does sound like a change in the relationship, instead of previously it used to be build to print, then you changed it to letting them design the detail stuff, and now it sounds like you are giving them less control and changing the way you pay them.

This is -- it's on the development piece only, the design and development end of it only.

We wanted to be involved, more engaged.

We found ourselves having issues on the original program and we found some ways to improve on that.

And so when we got into the development phase of the -9, we implemented those lessons learned and that's what it is.

I mean for the production piece, clearly it will be the same relationship we've had in the past.

So it's a very small piece, it's just the derivative -- the differential change from the -8 to the -9 on that effort.

Christopher Drew, New York Times.

How do you feel about GE and your other suppliers transferring technology like the 787 core computing system to the C919?

And everyone always talks about how US companies or the way to stay ahead is just to continue to stay ahead on innovation.

But how realistic is that for our companies to be able to do that as you look out in the long run?

Well, I don't want to answer for GE, Christopher, as you can imagine.

I don't think the -- I think you're talking about the avionics deal.

I don't think that that -- it threatens the proprietary nature or the innovativeness of our airplanes here.

If I did, I would raise my hand, but I don't see that.

And we all have to strike a balance between protecting our IP and innovating.

I don't know what's going on in the minds of the GE folks and I don't want to try to represent it either.

In the long run, this question of the short-term gain obviously for everyone to get into this huge Chinese market versus whether we're setting ourselves up, competitors up and hurting ourselves in the long run.

I think it is a fair question.

It's one that everyone has to be mindful of.

I know I'm very mindful of it as I run this Company, and it is always a balance that has to be struck.

But you're right.

The way you asked the question, you cannot give up your ability to innovate just on an expedient short-term basis.

That is not a winner long term.

Glenn Farley, King TV Seattle.

I have a specific question for James.

Early on, you were rallying off a whole bunch of numbers relating to the costs.

I believe on 787 in terms of how many billions of dollars of sort of accumulated costs we've seen in terms of delays, penalty payments, extra R&D development.

Can you go back over that again?

Yes, I don't think you got that right.

I wasn't (multiple speakers)

I think I don't, that's why I want to get down to it.

Those are numbers I don't think I ever talk about.

I think I was talking to the impact of moving from the inventory growth that we have experienced over the last several years and that rate of growth will probably diminish as we go into 2012 and we start delivering them.

But what I was saying is that we increased our inventory last year by $6 billion on the 78 program.

It will grow by $6 billion again this year and then we would expect it to diminish although continue to grow but at a much lower rate growing into the out years as we start delivering the airplanes and until we release some of the inventory.

Alright, that must have been it.

Thanks.

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

Mike Meacham, Aviation Week.

One thing you haven't talked about in quite some detail is just how productivity is or how your development for your production lines is going.

You're working on Charleston.

You're slowly developing a backup line for 787 there in Everett and of course 767 lines coming on.

Can you just go through how Charleston is coming along and your whole outlook on your productivity or your production -- excuse me, your production lines?

Well Charleston is going along well.

The final assembly capability we're building there for the 87 is actually ahead of schedule.

We are feeling good about the -- about its construction and the hiring of the people that we are currently training to work in that facility.

You're right.

We have a surge line in Everett which is a temporary line to give us the flexibility to make sure we move the work properly to Charleston that we're going to move.

So that's all working well.

The 67 line is -- I guess that really depends on tanker, yes or no.

I think in either case, we have a plan for that line to either morph into a tanker line.

And we as you can imagine spent a fair amount of time planning on how we would do that and feel very confident of that move.

And if we do not end up winning the tanker competition, we think there's commercial demand that can keep that line open for somewhat longer.

But it's -- I think everything is sort of in front of us.

I think the bigger question is implementing all these rate increases that really are a tremendous economic opportunity for The Boeing Company over the next two or three years.

And we feel equally confident there.

So production plan -- you are on an important issue -- production planning and execution, we're spending a lot of time on it and we feel great about the opportunity in front of us.

With the rate increase in Renton, is there anything special you're thinking of with regard to those two lines?

Or is it just mainly an increase on the second line?

Well up to the rates that we have announced now, there is not too much that has to be -- you're implying big capital expenditures (multiple speakers)

Or changes in structure or whatever.

No, not too much because this team has done a wonderful job in freeing up capacity with lean and productivity.

So we are -- removed one of the big bottlenecks which was the wing operation which has been has really been transformed over the last few years.

You may know some of the details there, but that was the last big bottleneck.

So the capacity isn't free, but it isn't what you can often have in these situations.

It's a pretty efficient move-up.

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.