The Boeing Company (BA) Q2 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Boeing Company's Second Quarter 2010 Earnings Conference Call. [Operator Instructions] 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 Second Quarter earnings call. I'm 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'll 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 do 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 disclosures at the end of this web presentation. Now I'll turn the call over to Jim McNerney.

Thanks, Scott, and good morning, everyone. Let me start by addressing the current business environment, followed by some comments on the second quarter. James will walk you through our results, and then we'll take your questions. Starting with the business environment on Slide 2. As the global economy continues to recover, albeit at a moderated pace, airline traffic indices are showing some strong signs of recovery. Passenger freight traffic have rebounded sharply with capacity levels still constrained. Both of these market segments are now forecasted to return to their peak 2007 and 2008 levels earlier than originally anticipated, and we are seeing improving fundamentals for the airlines. As we have experienced in past cycles, the single-aisle market is leading the passenger recovery. This segment is showing the strongest growth, led by emerging markets and low-cost carriers. This growth, combined with our disciplined production and sales strategies, prompted our recently announced 737 production rate increase to 35 airplanes per month beginning in early 2012. As the airline industry recovery advances, we will continue to assess the demand requirements in this growing market segment along with importantly, the ability of our supply chain to move to higher rates if warranted. The air cargo market is also staging a strong turnaround, supporting demand for new and more efficient freighter capacity. With 747-8 coming online and the new, 777 Freighter unlocking additional opportunities, we see our market-leading position in this segment growing even stronger in the months and years to come. We are also seeing continued improvement within aircraft financing markets. The level of uncertainty has moderated, and new financing sources are positioning for the improving, Commercial Airplane market. On the Defense side, while we are seeing some additional clarity around national security priorities, both inside and outside the United States, several of our government customers are facing continued budget pressures as they try to meet increasing requirements. Our focus in Defense, Space & Security is fourfold. First, extend our existing programs by bringing capability and very importantly, affordability to our customers. Second, capture a growing share of international and services opportunities. Third, accelerate our repositioning with investments in adjacent markets such as cybersecurity, Intelligence, Surveillance and unmanned systems. And fourth, size our overhead and indirect cost very conservatively in the face of our U.S. customers, contracting and cost pressures. We had successes in many of these areas during the quarter. In May, the U.S. Department of Defense notified Congress, that it is taking initial steps to pursue a new F/A-18 and EA-18G multi-year contract spanning fiscal years 2010, 2013. That will include 124 Super Hornets and Growlers. In June, we were awarded a research and development support contract from U.S. Federal Aviation Administration for the next-gen air transportation system. We also won an award from the U.S. Air Force to upgrade the services 59-jet KC-10 tanker fleet, with a new communication, navigation, surveillance and air traffic management system. On the international front, we continue to pursue significant opportunities for our Rotorcraft, tactical and derivative aircraft and C-17 products. We have a broad and deep pipeline internationally, particularly in Middle East and Asia. And to accelerate our repositioning in adjacent markets, we announced two acquisitions: Argon ST and Narus, that increased our strength in growing domestic and international cybersecurity and Intelligence Surveillance and Reconnaissance markets. With Argon ST, we have significant potential to enhance our Military platforms business by leveraging Argon's extensive experience in sensors, sensor integration, communication technologies and information management. For example, we see synergy opportunities with our unmanned vehicles family, our commercial military derivatives, like the P-8A and AEW&C and more. Argon's vertical content and key customer relationships also enable opportunities for developing new business in the C4ISR area. Recognizing that there are still some pockets of economic uncertainty within the global recovery, we remain solidly positioned with a healthy balance sheet and an expanding portfolio of market-leading products and services to meet evolving customer needs. Now let me turn to address second quarter highlights on Slide 3. Core performance was strong during the quarter, and we achieved some key milestones across both our businesses. In Commercial Airplanes, our production programs and services business continued to make productivity gains and generate strong operating results. On the development side, we continue to make progress on the 787 flight test program, and we are very pleased with the performance of the airplane in test. The fifth airplane, which is the first of two powerful GE engines, joined the test fleet in mid-June. Airplane 6 is expected to be in the air within the next several weeks. We have flown more than 400 flights and 1,300 hours. Extreme weather, icing and cruise performance testing have all been completed. The flight and ground test results to date have retired a majority of the technical risk and validated the breakthrough innovations behind the game-changing efficiency and economics of the 787, that they will bring to our customers. We have found nothing in the flight test program to diminish our confidence in the ability of the 787 to meet the mission needs of our customers. While testing efficiency in flight remains high, the cumulative impact of a number of relatively minor-recent issues has reduced our schedule contingency. Our plan remains to deliver the first airplane by the end of the year, although it could move a few weeks into next year, depending on when we wrap up our remaining flight test and certification activities. Progress on the 787 production ramp-up also continues. We are seeing welcome improvements in overall quality and productivity, and reduced traveled work as we work closely with our partners to balance the production flow throughout the supply chain. As we move through a series of upcoming rate increases, we will make adjustments to the production flow as needed, to ensure the health of the production system. We also continue to make solid progress on the 787-9. In early July, the team completed firm configuration on this airplane, which defines its overall structure, propulsion and systems capability and allows us, together with our suppliers, to begin detail design of the airplane. We expect first delivery of the -9 to occur in late 2013. On the 747-8 Freighter, we now have four flight-test airplanes in our test fleet that have accumulated over 200 flights and 600 hours. The plane earned its expanded-type inspection authorization during the quarter and is making progress on its certification requirements. We continue to work toward delivering the first 747-8 Freighter later this year, although as we work through discoveries in the flight-test process, we could see first deliveries move into early 2011. Our focus on both the 747 and the 787 is to improve flight-test efficiency, build schedule contingency and retire any remaining technical risk. Shifting to Defense, Space & Security. The second quarter included several key achievements. Our ground-based midcourse Defense program completed a successful flight-test of the two-stage ground-based interceptor. The U.S. Air Force authorized the C-130 Avionics Modernization Program approval to begin with low-rate initial production. And the global positioning system 2F-1 satellite was launched and is undergoing on-orbit tests. Inaugural spacecraft is the first in a 12-satellite constellation that the company is building for the U.S. Air Force. We also made initial deliveries of the Wedgetail 737 AEW&C to the Commonwealth of Australia. During the quarter, we also put the finishing touches on our proposal for the U.S. Air Force's KC-X tanker program, which we submitted on schedule earlier this month. We submitted an aggressive, but responsible bid for a modern 767-based tanker that we believe will bring more advantages for the war fighter at substantial, life cycle savings for the customer and U.S. taxpayers. We anticipate source selection in November. Although Defense, Space & Security generated solid performance for the quarter, we are slightly underrunning our targeted 10% margin for this business, due to modest charges and the current U.S. government contracting environment, which is putting greater pressure on program pricing. As we move forward, we must continue to work aggressively to optimize our cost structure, and reposition this business to meet our customers' needs affordably, while at the same time, achieving our expected returns. As in his [ph] (14:53) teams are focused intensely on doing just that. At quarter end, our total company backlog remains strong at about $312 billion, close to 5x our current annual revenue and the foundation for significant growth potential. Our commercial orders forecast continues to improve, supported by the announcements we saw last week in Farnborough. While we still expect the book-to-bill ratio to be below one this year, we do anticipate substantially higher orders than last year across both of our businesses. One final note before I turn it over to James. As I believe most of you know, on June 30, the World Trade Organization issued its final ruling in the trade case against subsidies to Airbus, finding every instance of launch aid challenged by the U.S. to be illegal and harmful to U.S. interests. This decision by the World's ruling body on trade matters is important for both Airbus and Boeing because it sets the precedent for emerging competitors from Canada, Brazil, China, Russia and others, who want to enter the market. While the EU has exercised its right to appeal the ruling, we are as confident in the case today as we were when it was first filed. And we look forward to a future where all competitors in the market for commercial airplanes and their military derivatives compete on a level playing field. Now, over to James, who will discuss the second quarter results and our outlook. James?

Thank you, Jim, and good morning. I'll begin with our second quarter results on Slide 4. Revenue for the quarter was $15.6 billion, down 9% from last year driven by anticipated lower Commercial Airplane delivery, seat supplier challenges and reduced combat systems and Missile Defense volume. Net earnings were $1.06 per share, reflecting the anticipated lower revenue. Operating margins were 8.4%, slightly lower than last year as strong commercial operating performance was offset by lower margins in our Defense business. Now let me discuss our Commercial Airplane business on Slide 5. Boeing Commercial Airplanes second quarter revenue was $7.4 billion, down from last year due to fewer delivery, somewhat offset by higher service revenue driven by focused investments and ABL's part distribution business. Anticipated lower wide-bodied deliveries and seat supplier challenges are reflected in the quarterly results. We expect to recover from the seat delays over the second half of the year. Commercial operating margins were strong at 9.2%, down slightly from last year on the lower delivery. Strong airplane performance operating performance and higher commercial aviation service earnings were slightly offset by increased research and development costs. During the quarter, we extended the accounting quantities on all our production programs. The 737 was increased by 400 units, the 747 by 25 units, the 767 by 13 units, and the 777 by 50 units. The financial impact of these expenses in the quarter was not significant. There was also no material financial impact this quarter with our decision to raise 737 production rate in 2012 as the volume benefits were somewhat offset by costs to implement. Gross inventories for the company now includes $9.7 billion related to the 787 work in process, supplier advances, tooling and other nonrecurring costs, an increase of $1.3 billion during the quarter. We expect this expenditure rate to continue during the remainder of the year as we ramp up production. We continue to work closely with our 787 suppliers to reach fair and equitable solutions on their assertions. We still anticipate having the majority of these assertions negotiated by year-end. Customers' discussions are also ongoing, and both are tracking to expectations. We continue to monitor the market schedule, cost and production ramp-up assumptions on the 787 program, and we'll provide more insight later this year on the accounting quantity and profitability. Boeing Commercial Airplane won 88 gross orders during the quarter, including 44 737s and 38 777s, while 20 orders were canceled. The commercial backlog remains strong with over 3,300 airplanes valued at $252 billion. That's more than 7x BCA's projected 2010 revenue. Now moving to Slide 6 on our Defense, Space & Security business. Boeing Defense, Space & Security reported revenues of $8 billion with operating margins of 8.9%. Boeing Military Aircraft revenues rose 4% to $3.6 billion on higher volume. Operating margins of 9.9% reflect the impact of labor disruptions and AEW&C charge of $46 million, primarily driven by schedule delays in our Peace Eagle program. Network & Space Systems recorded revenues of $2.4 billion, down from last year, primarily due to expected lower volume on the Brigade Combat Team Modernization and the ground-based Midforce Defense programs. Operating margins of 7.1% reflect solid performance across its array of programs. Global Services & Support's revenues were down slightly to $2 billion with margins of 9.2%, impacted by performance on certain integrated logistics maintenance modifications and upgrade programs. During the quarter, key program wins discussed earlier by Jim, enabled Defense, Space & Security to maintain a solid backlog of $61 billion, even as runoff of multi-year contracts exceeded additions. Now let's turn to Slide 7 and our other businesses. Boeing Capital delivered another solid quarter with pre-tax earnings of $55 million on revenues of $162 million. Its portfolio balance declined to $5.3 billion, down from $5.7 billion at the end of 2009. Other segment expenses were $72 million, while unallocated expenses were $70 million down from last year, driven by lower deferred compensation expense. We expect Other segment expense for 2010 to be approximately $200 million with total unallocated expense at about $800 million, which still includes some provision for risk. Income tax expense in the first half does not include the R&D tax credit, although we expect that that credit will be signed into law by year-end. Our estimated tax rate for the year is approximately 36% including the first quarter tax charge due to health care legislation. Excluding this charge, we expect our 2010 tax rate to be approximately 32.5%. If the R&D credit does is not signed into law, our tax rate would increase by approximately 3%. Now let's turn to Slide 8 and discuss cash flow. During the quarter, we generated $266 million of operating cash flow, reflecting continued investment in our development programs. Gross inventories on the 787 and the 747-8 programs will continue to increase as we prepare for first deliveries. Capital expenditures will continue to ramp up as construction on the final assembly building in Charleston remains on track. We expect the majority of that investment to be incurred later this year and early next year. Let's turn to Slide 9. We ended the quarter with $10 billion of cash and marketable securities, down $400 million from the previous quarter. Our debt levels remained unchanged. Our current cash levels provide us with strong liquidity as our development efforts evolve into production programs. We continue to execute our balanced cash deployment strategy which includes targeted M&A activity such as the recently announced Argon ST and Narus transactions. Both of these acquisitions are expected to close in the third quarter with cash outlays made at that time. Turning to Slide 10 in our outlook. Our earnings per share guidance remains unchanged at between $3.50 and $3.80 and continues to consider risks around development programs in the business environment. 2010 revenue guidance remains unchanged at between $64 billion and $66 billion, while operating cash flow is expected to be approximately zero. The R&D expense forecast is unchanged at $3.9 billion to $4.1 billion. Capital expenditures are now expected to be $1.7 billion during 2010, down from our previous estimate of $1.9 billion. This is a result of our progress being made on the construction of our second assembly line in Charleston and expectation that some of those expenditures will shift into 2011. Pension funding is expected to be less than $100 million this year, while total company non-cash pension expense is expected to be about $1.2 billion. We are monitoring potential impact to our 2011 pension expense based on current interest rates and market conditions. To date, returns on our pension assets are tracking in line with our assumed 8% return for the year, although discount rates have declined below our expectations. We will provide you more information after year-end when our planned assumptions are finalized. We continue to expect Commercial Airplanes to deliver between 460 and 465 airplanes, generating revenue between $31 billion and $32 billion. Operating margin guidance is increased to between 7.5% and 8.5%, reflecting strong performance on production programs and in the Service businesses. Defense, Space & Security revenue is reaffirmed at between $32 billion and $33 billion with margins reduced to approximately 9.5% reflecting performance on development programs as they near completion and the current U.S. government contracting environment. For 2011, we continually expect revenues to be higher than 2010, primarily driven by projected 787s and 747-8 deliveries. R&D expenditures are expected to decrease by an amount greater than $500 million. With the higher deliveries and our current spending plans for R&D investment, we continue to forecast 2011 operating cash flow at greater than $5 billion. We plan to provide detailed 2011 financial guidance with our fourth quarter results. Now I'll turn it back over to Jim, who will give you some final thoughts. Jim?

Thank you, James. We had another solid quarter of results from our businesses, and we continue to make progress on our key commercial and military development programs. With rebounding commercial air traffic growth, some further clarity on government customer priorities and a continued focus on productivity improvements, we believe we are well-positioned for growth in 2011 and beyond. With that said, we'd be now happy to take your questions.

[Operator Instructions] And our first question's from the line of Joe Campbell of Barclays Capital.

This is Joe from New York and Carter from London. Jim, you mentioned that the order rates were up in both your businesses, and I think the commercial orders that something like 317 through last week, were more than we saw all of last year and the net orders, I think, are actually running twice what they ran last year for the full year. Given that you've been saying that you're fairly tight and well sold out into the future, how do you see the second half shaping up? Are we going to continue on at some pace like this? And is this selling aircraft out into the distant future? Or is this indicative of upward pressure on rates?

Well, I think, Joe, we were mildly surprised at the strength of the orders we've seen over the last quarter. Not totally, but mildly surprised. It did support our thinking to take up production rates and supports our ongoing analysis to think through whether there's more opportunity beyond what we've announced. Where at 35 for the -37 and the previously announced increases on the 777 and the -47, are supported by what we're seeing now. Hard to predict what we'll see in the second half. I mean, the pipeline is good. There are many discussions going on, even discussions on Skyline. That's pretty far out there, but we'll just have to see. We still see a book-to-bill of less than one but we'll monitor the situation as we go forward.

Our next question's from the line of Howard Rubel with Jefferies. Howard Rubel - Jefferies & Company, Inc.: Jim, I want to focus on operations for a second. If we look at three R&D margins, they rose year-on-year to 18.5% from 17.5%. Yet this came on lower volumes and some slips and deliveries. And then, also, I'd say, some disruptions in the flight schedule on the 78 and 74. Could you address sort of how you have, in one case, a bunch of challenges and yet the bottom line results for commercial was probably better than what you thought? And could you be specific with some examples?

Well, Howard, it is primarily our performance on our current expenses and our drive to really manage the cost associated with running our operation and particularly those costs that don't go into the end product. And so that's what you're seeing. And it really is those types of costs that are incurred basically on the core product line, the production line, particularly on 737 and 777. Those are holding pretty strong as we continually to operate more efficiently, particularly on those things that would drive current expenses.

And next, go to Heidi Wood with Morgan Stanley.

How appropo for you guys, Jim and James, to have reported 787 in net income this quarter. I think the program is clearly on the mind of the whole enterprise. A question on the margins, as well, that was very good, but as we look at the shipments in 2010 and 2011, you're shipping the planes that were booked that were ordered in '05 and '06, when planes were probably had fairly handsome pricing. You also have had good performance and maybe some escalations. James, can you break down for us as we look at these results? How much of it was pricing? How much of it was performance, and whether escalation played in a part? And second part of that question is the mature planes in 2011 -- are the pricing on those planes meaningfully better than the 2010 plane?

So let me try to take it in pieces. I think the pricing is small, but I mean, it's good. The escalation, we had some clawback on that. In past periods, we had a pretty significant hit to our margins relative to escalation. Some of that, a small bit of that, come back. That sales pricing, though, I think has been pretty stable in terms of the airplanes we delivered this year and will deliver in '11, Heidi. So I think what you're really seeing is good performance on productivity and our acceleration of our efforts in those areas. So I'm optimistic as we go forward that we'll continue going with that, particularly with the new order traffic we are starting to see. We're going to be pricing those reasonably and trying to keep them stable. But obviously, we have some room so that we can really be competitive as necessary.

And next, go to the line of Ron Epstein with Bank of America Merrill Lynch.

So it's my understanding that you still have a challenge that Alenia with 787. Do you mind just to talk about how you're managing it?

Well, there have been a couple of what I would characterize as workmanship issues there that we just worked through. I mean no design issues, no configuration issues. A couple of instances where the workmanship was not what we wanted it to be, and we do what we always do, which is to work with our suppliers to resolve them. And that's been the case with Alenia.

Our next question's from Noah Poponak with Goldman Sachs.

Can you give us a little bit more specifics on what you're sort of learning and seeing as you perform this study on rates, particularly on 737? I guess to Joe's question, you were talking about higher rates, and at the same time, saying you didn't expect new order activity. Now you're getting that. So what's the upside risk beyond 35? And what are you seeing in the supply chain's ability to go higher?

Yes. I think -- if I had to answer the question today, I'd say that there's some upside just based on a market view and the supply chain is the key question. I think moving from where we've been, low 30s to something north of 35, puts a -- while your competitor is also looking at moves and while also other airplanes are also moving up in rate, can put pressure on suppliers. And so the key question is making sure we're right there that we have properly facilitized the suppliers with the right manning and capability and material commitments to get there. And so we're just working very methodically through different scenarios. And if the market is there and the supply chain is committed and capable, you will see further movement.

Can you just maybe give us a little color on what you are learning in the supply chain, where you see bottlenecks where you see challenges?

Well, I would characterize it as the normal number of bottlenecks and challenges. I think that there's some suppliers that would have to make investments in plant and equipment to meet significantly higher rates. There are others who would need some additional screening. There are others, with whom, we'd have to come up with a new business deal. I would sort of characterize it as business as usual, quite honestly. I wouldn't say it's anything abnormal.

And is it still a late summer, early fall kind of timeframe that we'll hear a little bit more official results from the study from you guys?

I would characterize it as early fall as when we're targeting.

Next question is from Joe Nadol with JP Morgan. Joseph Nadol - JP Morgan Chase & Co: James or Jim, I was wondering if you could provide some more context around the 47-8 and 87 forward loss analyses that you conduct every quarter? You have a lot of contingency in your overall EPS guidance and I'm sure that's a big part of it. Maybe just in the following context, on the 47-8. You extended the block. If you haven't extended the block by 25 units, would there have been a charge? Then the 87, you said last fall, James, that you wouldn't have had a forward loss even if you hadn't taken the R&D charge. Would that still have been the case? Have you eroded that margin?

Let me start with the first question. No, we would not have had a look forward loss had not extended the accounting quantity on 747. There are a lot of moving pieces. We're finding as we continue to look at our profitability initiatives on both of those programs, we're finding things we can do better at the same token as we continue to muscle our way through the flight certification testing, we find issues we have to account for. But on balance, we're in pretty good shape on 747-8. And we would not have been into a reach even had we not extended the accounting quantity. 787, very similar, we are looking at all the assumptions around that program. The profitability on that program has not eroded since the first quarter. So we're still looking at things that have been better. I mean, the composition of how we get there changes because of the fact that obviously, we're still working through the ramp-up issues. We're still working through issues coming out of the development program. But we're reasonably comfortable where we are on this program. We do expect this program to start out with margins that are low, and they will build over time as we get more experience on both our productivity efforts and also, our supply chain gets more comfortable with the rates and the due learning curve. So I think we're in pretty good shape, Joe, with from where we stand today. Joseph Nadol - JP Morgan Chase & Co: So you must have a pretty good buffer now on 47. Why is there so much contingency in the EPS guidance?

I would call it being prudent. The fact of the matter is that we still have two major programs that are in flight-test that we need to get certified. We do have a lot of units that are in production that, should something come out of that certification process that would have to require us to have to modify them. I just want to be sure we have adequate resources to deal with that. Don't anticipate it happening, but it is a development program and there are two of them.

Next, we go to Cai Von Rumohr with Cowen and Company.

James, you mentioned that the period expenses at BCAG were under good control. Could you tell us where were those expenses versus the prior quarter? And where were they year-to-year? And where should we expect them? How should we expect them to ramp over the balance of the year and next year as you start deliveries of the 87 and 47-8?

Well, I think the -- a quarter-over-quarter, we've had about the same performance in terms of those period expenses. And there are some challenges in the period expense category in the second half of the year, so we may see them pick up a little bit as we start dealing with the fleet support costs associated with the introduction of the 87 in the service, and some of the other areas that are dealt with, like investment and some of the two in productivity. But I think that we're going to continue to work that area hard the second half of the year, Cai, and the also as we head into '11. But clearly, there will be some expenses associated that are period-related that are associated with the production as it ramps up. So we'll continue to work to control them as we have over this past first half of the year, and quite frankly, as we started doing in '09.

And next, we go to Doug Harned with Sanford Bernstein.

I'd like to continue on margin topic, but as part of that, I wanted to understand when you're looking at the 460 to 465 deliveries for this year, how many of those are still scheduled to be 787s and 747-8s? And given the lower margin that's implied in your guidance now for the rest of the year, can you talk about what's driving that lower margin? You did a walk-through back after Q4 with a number of topics and I'd just like to understand where you stand now on those and with the mix of airplanes?

There are very view deliveries of the 787 and the 747-8 assumed in the 460 to 465 delivery. So if all of them do get delivered, that will have some impact on the over-arching margins, but it's a very small number. And that's already baked into the things we've talked about. Now some of the other things that we've talked about is pressure. We do have some investment in some of our productivity tools, the investment in the fleet support cost associated with entry into service on the 87. And those are things in the second half of the year that we're looking at that's going to impact margin. There is also a little of things for the suppliers as we move, as we've talked to you about, as we look at development on the -9. We are taking some of those costs now, are going to be period expense. And they're going to affect second-half margin and we're still in the process of implementing that change. So that you'll see very little of that in the second half of the year. And then some of that will be offset about with what we look at volume going forward. And then clearly the last piece is the prudent provision for anything wrong coming out of the two flight programs.

And has that mix of things, or magnitude of things, has that changed at all since you reported last quarter?

No. It's about doing the same proportions.

And next, going to Robert Spingarn with Credit Suisse. Robert Spingarn - Crédit Suisse AG: James, I'd like to continue in the same direction if I can. When I think about your margins and the implied margins for the second half of the year, there does seem to be cushion, both the BCA and BMA, and then the opposite in the network business, the networking space business. So the cost that you just mentioned, are those in R&D because it would seem in your guidance range of 7.5% to 8.5% for BCA, you could actually have maybe, by our math, $200 million to $600 million or $700 million in cushion in R&D.

I would call it prudent, I wouldn't just call it cushion. But I think that, I go back to what I just said. We've still got these two programs, we still have a lot ahead of us. And clearly, we want to be conservative in our full year guidance because although both of these test programs have gone reasonably well, again, we're going to be building up a lot of inventory on both of those programs, 15 airplanes on the 47 side and 30 on the 87. That we would have to have the kind of resources available should we have something that becomes a problem that would cause a retrofit. But clearly, it is what I just said. We do have other investments that aren't in the first half of the year -- we're going to affect [ph] (44:21) in the second half of the year. And clearly, there is still even though we've lowered the guidance relative to BDF margin down to approximately 9.5%, there's still that pressure when we continue to look at the contracting environment we're dealing with on the government side of the house. So we are trying to have a prudent protection against all those things that we see that could happen in the second half of the year. Robert Spingarn - Crédit Suisse AG: Do you think you're being a little aggressive perhaps on the network side, where you've been in the low sevens? And I think the guidance implies high eights.

No. I think that we think that in the second half of the year it's reasonably balanced. We think that we have a good chance of hitting those numbers in the second half.

We'll go to Troy Lahr with Stifel, Nicolaus. Troy Lahr - Stifel, Nicolaus & Co., Inc.: I'm wondering if you could just talk about ongoing customer discussions with the 737 re-engine? I don't know if there's any update out of Farnborough based on customer discussions, what the customers are saying to maybe what you're thinking now on that program?

Well, Troy, the decision framework for us is -- and we'll work through it over the next for the balance of the year -- is when does a new airplane come together in terms of the technology readiness and customer willingness to pay for one? We think that's the first question that has to be answered. If that is sometime this decade, then the case for re-engining weakens dramatically. That would -- if you did re-engine, you'd be doing two major developments in the course of four or five years, which makes no sense. If on the other hand, the new plane comes together much, much later, but say, deep into the next decade, then the case for re-engining strengthens because there is some efficiency that can be derived from a new engine. So we're trying to balance all those things. I think on balance, the customer feedback, which was your specific question, is sort of pushing us toward a newer airplane on balance. But there are those that also make the case for re-engining. But we've got to sort out what is technically feasible and the kind of benefit this new configuration could provide our customers. That's the first order of business.

And our next question is from Sam Pearlstein with Wells Fargo.

I guess it's all in and around on the Defense side. I guess, if I look at the airborne early warning or the Wedgetail charge in the quarter, is that really what the difference is in terms of the BMA margins as we look through the end of the year? Because you took 50 basis points, really, out of each of the three segments, and you alluded to pricing pressures from customers. I'm just wondering if you can talk a little bit about what you're seeing in the market that causes you to be more conservative on margins.

Yes, the chart was not on Wedgetail, it was on Peace Eagle, which is the Turkey product offering, but yes, that was part of it. And then, the environment in general is we're finding to be more challenging in terms of negotiating a larger profit opportunities. And also add to how we negotiate and how our work is put on contracts, where in some cases, we're getting independent [ph] (48:06) contract orders, and then we're negotiating those later after a lot of the costs are in. And the end result of that is a lower profit opportunity. So those are the kind of things we're trying to deal with and address our going-forward guidance.

But are there specific programs that you are referring to?

The specific program on the chart, obviously it was the AEW&C offering associated with the Peace Eagle program. But in terms of the environment, it's more general and its impact is more generally felt across all segments in BDF.

And next, we'll go to David Strauss with UBS.

On 787, it appears you've stopped the line once. Apparently, you're going to stop the line again later this year. Can you talk about what's going on here, and if you're running into issues that these low rates, even after a two-year delay, what's to think you won't run into issues as you ramp higher into next year?

I think the 24-day pause was associated with allowing our suppliers to sort of heal up their configurations, in some cases some new engineering as well as their supply chain. So that was more about supplier condition of assembly, making sure that we got what we needed when we need it. The so-called firing of three blanks, the second is really more about shuffling the production against customer requirements. As we get closer to delivery, things move around a little bit and we just want to make sure we're lined up because some configurations and timing changes. And that will be ongoing for the next 25 years. And so this is the first of these. And I would anticipate more of that as we get into next year. Neither of these things -- and I would characterize them as sort of normal adjustments -- really have impacted our view of what we will deliver next year. It didn't really change our view of that.

And next, we'll go to Myles Walton with Deutsche Bank.

Jim, you obviously faced schedule risk on both the new developments on 787 and 747. But can you weigh for us on balance, which do you think has more rework risk? Trying to weigh the potential significance of the workmanship issues at Alenia and other supply-chain issues versus some of the couple of technical issues that are still playing out on the 47. Can you give those in balance in terms of a rework prospective even if you all have [ph] (50:57) 15.

Yes I would both characterize them as normal flight-test programs in the sense that there's no major reconfiguration that's been driven by any discoveries as we've gone through that. With that said, I mean, the extent to which there is some risk to the schedule. On the 87, I would characterize that as more getting through lower risk kind of certification, turn times on telemetry certification, documentation. And so I would characterize that -- I don't want to call it administrative because it's not administrative. You could find some things even in the lower risk back end of a flight-test program, but I would characterize it like that. I think on the 47-8, there is that, and there are a couple of workmanship issues and a design issue or two that we're wrestling through. And so maybe, if you force me to compare it, I'd say maybe a little more risk on the 747-8.

The next question's from Jason Gursky with Citigroup.

Jim, I was wondering if you can walk us around the globe and talk a little bit about the international opportunities that you have on the Defense side, and perhaps offer up an update as to where you are in a lot of the processes and the business?

On the Defense side, was that the. . .

Yes, exactly.

I think we have characterized the pipeline, the last couple of times we've talked to all of you as broad and deep. I would still characterize it that way. And I would say that what six months ago we saw as possibilities, qualified opportunities, I'd say a number of those have hardened up into contract discussions, negotiations, the final ends of competitions. So my view remains that particularly in the Middle East and in Asia and selective other places in Rotorcraft, Freighters, C-17 commercial derivatives in particular, I think there is, as a stronger pipeline as I've seen internationally in the Defense business in a long, long time. And so how much of that will actually convert? You know we discussed that as being the fastest growth part of our Defense business as we project it going forward. I think things I've seen over the last quarter would only make my feeling somewhat stronger, rather than weaker, that aggressive view.

And the pricing environment there?

The pricing environment, good. I mean I think the -- I would say on average, the margins would mix up somewhat from our average.

Our next question is from Ken Herbert with Wedbush.

I just wanted to follow up on your comment on the Defense side, specifically. I know you're doing a lot with the margins specifically from potentially overhead and indirect costs. Is there anything you can specifically say that you're looking at here that might have an impact this year and certainly in 2011 in the Defense side of the business?

Yes, as I mentioned in my introductory remarks, there's no question that the overall cost structure of that business has to come down. I think the uncertainty and pressures in the U.S. contracting environment as the Defense Department sorts through responding to overall U.S. government priorities and pressures, I think is going to focus us very intently on both affordability, and in some cases, reduce volumes on existing programs. Now what we're working through is how much of that'll be offset by some of the new areas we've gotten into, the acquisitions we've made and how that all sorts out. But will be part of our guidance next year when we start talking about it. But there is no question that the overall cost structure will be down. We have plans to do that and we're working through the details of it right now.

And next, we go to Peter Arment with Gleacher & Company. Peter Arment - Gleacher & Company, Inc.: A question, I guess, on 787, your flight-test is about 40% complete, I guess, based on the hours flown and you indicated you're getting another aircraft on the yard in the next several weeks. Jim, how do you kind of characterize given sort of, your words, I guess lower-tech hurdles that you brought into the opportunity I guess to get some margin back in the schedule. How can you handicap that for us?

Well, I think as we've characterized it, most of the margin is gone from the schedule. You heard me characterize it a couple of questions ago about the nature of where we are. I think we're a little more than halfway through the flight-test program now. I'm trying to remember exactly where we are, so it's more than 40%. But we do -- in the next several weeks, we'll have the sixth airplane out flying. That's on the schedule. That sixth airplane is not on the critical path. I mean, it's mostly eking the data out of the planes that are flying in addition to the sixth airplane, but most of the margin's gone. We don't see any big technical risk. In fact, we see most of the tough stuff having been dealt with. The static tests and a lot of the systems and stress testing of the airplane and we have found no issues. And as I said before, it's not that there is no more risk, but there is proportionally less risk in the second half of the program than there was in the first, I would say, personally.

Operator, we have time for one more analyst question.

And that will be from the line of Harry Nourse with HSBC.

Airbus is now saying that it expects export credit agencies to support 45% of 2010 deliveries which is up quite a bit from last year's 35%. And some Chinese carriers apparently are now looking for assistance with that. Are you seeing a similar trend with Axim [ph] (57:37)? And how should we reconcile higher levels of government support with the prospects of higher production rate, especially in light of the continuing weakness in the secondary market?

I would say that the overall financing market remains stronger than we anticipated it would be. So most sources of financing are more online for I would say both us and Airbus than we had anticipated. And that includes the banking system and capital markets and ECA so as you're talking about. And I think both the European ECAs as well as XM here in the United States have increased the amount of commitments they've made, sort of in line with the improved market conditions and deliveries we're seeing. And it's impossible for me to predict how much more that either side would give because it's somewhat related to politics, but our current skyline is in very good shape in terms of its financeability and XM has increased its commitments somewhat over the last couple of years. And I think it's my understanding based on your questions and some other things that Airbus' sort of increased level of commitment from its ECA is roughly in line with that.

Do you expect the level of support to increase or decrease next year?

It's really hard to predict. I think it increases just based on the commitments that are out there, okay? I mean it increases, again, it's the Skyline, but again, since it's in part decided by people that don't work for me, it's really hard for me to predict. I'm hoping there's continuing sentiment to support these high-tech exports.

Ladies and gentlemen, that completes the analyst question-and-answer session. [Operator Instructions]. I'll now return you to the Boeing Company for introductory remarks by Mr. Tom Downey, Senior Vice President of Corporate Communications. Mr. Downey, please go ahead.

Thank you. We have a few minutes remaining for questions from the media for Jim and James. If you have any questions after the session ends, please call our Media Relations team at (312) 544-2002. Operator, we're ready for the first question, and in the interest of time, we ask that you limit everyone to just one question, please.

And we'll go to the line of Hal Weitzman with Financial Times.

First, just a clarification, you talked about the workmanship issues at Alenia. Just to be clear, are those completely resolved, or are they ongoing?

I don't know what's happening this minute, okay, but the couple that I've heard about, and there are others, I don't mean to single out Alenia, that was just the basis of someone's question. I mean I think we're always working through workmanship issues. As far as I know, we have largely worked through what is going on with Alenia, but it's impossible for me to know what's happening this minute.

You suggest that the supply chain could constrain your ability to ramp up production in the future. So I wonder, are you looking for alternatives suppliers, new suppliers, that might help you overcome those problems?

I think when we're talking about existing airplanes, by and large we'll be working with our current supply base. As you know, we have invested in additional capacity of our own in Charleston and some other places. So we do have some options to do some work ourselves if we can't reach the proper accommodation in some cases. But in most cases, it's working with the current group that's been on these programs for a long time.

Am I right in thinking that you suggest that the supply chain could constrain your ability to increase production in the future?

Well, the way I would characterize it is that we that have to have clarity on their capability and intent. And that's our ongoing process all the time. And I think the answer to the question that was asked earlier was, we have probably better clarity on the market right now than we do on the supply chains' capability to go higher than they have already committed, which is higher than before. So we're just working with them and I'm hopeful...

Just to be clear, that wouldn't affect the increases that you've already announced by 2012?

No. We're talking about even going higher beyond that.

And next, go to Susanna Ray with Bloomberg.

I've also got a question about the supply chain. How much overlap is there among I guess what you would consider the weaker or the strained suppliers between the 737 and the 87? In other words, would taking the 737 up even further put the 787 ramp at risk? Is that something you're considering?

I tend to think they are independent issues. Our supplier partners tend to have separate facilities in many cases for the 87, and it's an independent development. There could be an instance of trade-off capacity but, by and large, they tend to be separate issues.

Next, we move to the line of Aubrey Cohen with Seattle PI.

You've been able to provide some details on what is driving your decision on the 737 or placement or re-engining. I was wondering if you could give some similar clarity on the 777 and to the extent that, that depends on what you find out about the A350-1000. What is it about it that you're looking for.

Yes. I mean I think you've in part answered your question in the sense that understanding with clarity what the capabilities of the A350-1000 is or isn't is an important input to the 777 decision, and I think that is going to take some time. I mean I wouldn't totally characterize it as a paper airplane at this stage, but it's pretty close to that. And as they get closer to a firm configuration, we'll have some more clarity. And I think that'll take another year or so.

What kinds of details are you looking for about that?

Well, Ken, Airbus has characterized its capabilities very aggressively and I think in terms of range and payload performance, fuel efficiency. And I think until we get down to the details of understanding the propulsion system, understanding the weight of the airplane and a number of other things, and those things remain a little unclear, it's really impossible to know for sure.

And next, go to line of Doug Cameron with Dow Jones.

Jim, one of the reasons that you didn't -- or you surprised some folks by not cutting production during the depths of the downturn was overbooking. I'm wondering, with potential re-engining or replacement of the single all fade [ph] (1:05:42) as well as potential production increases, whether the sort of percentage buffer or the way you think about overbooking is different going into this stage, or I guess the up cycle?

Well, I would tend to issue the other way around, which is that we have a very large backlog for our existing airplanes. We have tremendous customer acceptance. For what it does, we have planned to continue to upgrade them. And so the question would be, why re-engine? And the answer, in my view, is you consider re-engineering if you weren't going to have an airplane available for another 10 to 15 years, and that's what we're trying to sort through right now.

Maybe I'll just ask in a slightly different way. I guess I'm saying -- is your overbooking rate right now, given we've seen a splurge of orders, basically, level with what we saw in '05, '06, '07?

I would characterize it as maybe modestly less but still significant.

Are you comfortable or is there room for the concentration of aircraft leasing company derived [ph] (1:06:58) orders to increase in your order book? Or do you have some internal limit, however nonpublic it might be?

No. I mean we don't have an internal limit. I think leasing as a percentage of the total has been increasing gradually over the last few years. We in the airlines have learned to work with them productively. So no, we don't have a limit. But the preponderance of the market still prefers to order direct and I don't see that changing dramatically.

Operator, we have time for one last question.

And that'll be from the line of Paul Merrion with Crain's Chicago Business.

I wanted to ask you about the effort to reduce the cost structure in Defense business. One of your major competitors has implemented plans to do some executive layoffs and I was wondering if you're -- how likely to be considering that?

Well, we'll be looking through our entire cost structure, including the top of the business on down to the bottom of the business. And so my guess is, layoffs would be, in our current plans, would be layoffs would be proportional.

You mean to the rest of the plan?

No. What I'm saying is that there would be no over-concentration at the bottom of the organization. The top of the organization -- they are equal brunt [ph] (1:08:25).

Right. So you are anticipating layoffs, then?

Yes, and attrition, and churn, all the above. But there will probably be some layoffs in the midst of it all.

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.