Operator: Good day, everyone, and welcome to the Boeing Company’s Fourth Quarter and Full Year 2009 Earnings Conference Call. Today’s call is being recorded. The management discussion and slide presentation plus the analyst and media question-and-answer sessions are being broadcast live over the Internet.
At this time for opening remarks and introductions, I’m turning over the call to Ms. Diana Sands, Vice President of Investor Relations for the Boeing Company. Ms. Sands, please go ahead.
Diana Sands - IR: Thank you and good morning. Welcome to Boeing’s fourth quarter and full year 2009 earnings call. I am Diana Sands, and with me today are Jim McNerney, Boeing’s Chairman, President and Chief Executive Officer; and James Bell, Boeing’s Corporate President and Chief Financial Officer. After comments by Jim and James, we’ll take your questions.
In fairness to others on the call, we do ask that you limit yourself to one question please. 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, in 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.
W. James McNerney, Jr. - Chairman, President and CEO: Thank you, Diana, and good morning. Let me start today with a discussion of our 2009 performance and the evolving business environment. After that, James will walk you through our results and outlook, and then we’d be glad to take your questions.
Starting with slide 2, 2009 was a challenging year for our Company, but in the end, it was a year of significant achievement and one that we exited with momentum in our favor. We confronted an unprecedented market environment with the global recession affecting our commercial business in the form of reduced orders, softening services revenues, lower delivery price escalation forecasts and our decision to reduce 777 production rates. At the same time, the U.S. Defense Department and other agencies began reevaluating their key priorities amid significant budget pressures, which has impacted some of our defense programs, most notably in the areas of Army modernization and missile defense.
Despite these business environment pressures and development program challenges that I’ll speak to in a moment, our fundamental core operating engine continued to perform well. We delivered record revenue for the year in both our Commercial Airplanes and the Defense, Space & Security businesses, while production programs like the 737, 777 and our portfolio of military aircraft delivered strong earnings.
Our Defense Services business earned double-digit margins and grew its top line 18%, of which 16% was organic growth. Our Commercial Services business also maintained strong double-digit margins even as it experienced marketplace realities that brought revenue down 6%. Our combined services business generated more than $13 billion of revenue in 2009 and this continues to be an area we are intent on growing and leveraging across the Company.
Our cash performance was outstanding, given both market and development program pressures during the year. Disciplined cash management across all areas of the Company paid off as we generated $5.6 billion in operating cash flow, while at the same time made significant 787 investments in both R&D and inventory.
Regarding our development programs there is no question that the 787 side-of-body issue and the increased costs we experienced on the 747-8 significantly affected our overall financial results, but through the diligent efforts of our team, the signs of progress are evident and we are achieving important milestones toward getting these sought-after products into the hands of our customers.
The 787’s first flight on December 15 was truly a historic moment in aviation, as this game-changing product has a level of technological advancement not seen since the 707. Since then, airplanes one and two have collectively made more than 15 flights, encompassing more than 60 flight hours. Pilots have taken the airplane to an altitude of 30,000 feet and a speed of Mach 0.65. Initial stall tests and other dynamic maneuvers have been completed as well as extensive systems checkouts. Initial airworthiness was achieved earlier this month, and in the weeks ahead we will continue to expand the flight envelope and move deep into a rigorous flight testing regime. While there is much work to be done in the challenging days ahead, we are pleased with the progress we have made to-date. We expect that the third and fourth flight test airplanes will make their flight tests in February, and that all six airplanes will be flying by the end of the second quarter.
The production ramp-up is also progressing as we prepare to deliver our first 787 late this year. We expect to be at a production rate of 10 airplanes per month by the end of 2013. To support that rate buildup, gain tighter control of our supply chain and better diversify our manufacturing base, we took several recent steps focused on the program’s operations in South Carolina. We acquired Vought 787 facilities and Alenia share of the Global Aeronautica joint venture, while also breaking ground on the North Charleston 787 final assembly line.
We believe these actions will help ensure the success of the 787 program for our customers and sustain our Company’s competitiveness over the longer term. We continue to be pleased with the 787 market success with approximately 850 firm orders from 56 customers around the world.
On the 747-8, we anticipate first flight and the start of our flight test program in the very near future. We expect to deliver the first freighter at the end of this year and the first passenger variant in the fourth quarter of 2011. We believe strongly in the long-term market for this airplane and see the order by Korean Air late last year as evidence for that.
Beyond those two programs, there were several other development program successes in 2009. The 777 freighter had its first delivery, the EA-18G was approved for full rate production and the P-8A made its first flight during the year, even as the Future Combat System Program was restructured and it is now called Brigade Combat Team Modernization. The team executed well to its plan. Increment 1 of this program was approved for low rate production in the fourth quarter.
Our efforts to incorporate lessons learned from our development program challenges will remain a priority for us. We have been reintroducing rigorous functional disciplines across the Company, and as part of those efforts, we recently appointed nine senior engineering leaders to work closely with program teams to help ensure technical integrity and excellence in critical areas of engineering expertise.
As we begin 2010, we are reassured by the fact that our fundamental product and services strategy and competitiveness remain intact. We have built a large backlog, which at year-end stood at $316 billion, Commercial Airplanes booked 263 gross orders in 2009 and its backlog now stands at $250 billion, representing more than 7 times its annual revenue. Our Defense business, recently renamed Boeing Defense, Space & Security, has a backlog of $65 billion. This business had several key wins in 2009, including the Intelsat satellite contract and key proprietary and services contracts. We also sold P-8s to India, Chinooks to Canada and Italy, and C-17s to the UAE. We have been pleased with the further international interest in C-17s and the U.S. Congressional support of this program.
Fundamentally, this is a solid company with strong core businesses and significant growth potential, but we continue to face a challenging market environment, which I’ll now address on slide 3. The global recession has clearly affected our airline customers in the form of reduced air traffic growth and resulting capacity reductions. While consumer sentiment appears to be improving, we believe it will take some time for economic indicators to rebound significantly.
Despite the challenging environment, our commercial backlog is holding strong with over 3,300 firm orders. In 2009, BCA had 121 order cancellations and accommodated 271 aircraft deferrals. There were 57 deferrals in the fourth quarter, down from 84 in the third quarter, and the backlog of deferral requests has decreased. There has been no change in our production rate plans, which include holding the 737 at its current rate into the foreseeable future. We believe the discipline we have exercised in managing both production rates and market opportunity has paid off. We foresee holding to our production plans without having to enter into bad business deals for the Company. In fact, we remain oversold in 2011 with a strong customer base.
On the Defense side, our focus continues to be threefold; extend our existing programs by bringing capability and affordability to our customers; capture a healthy share of the international and services opportunities; and accelerate our repositioning with investment in adjacent markets, including cyber security, intelligence and surveillance and unmanned systems.
In light of the challenging business environment in both Commercial and Defense, we continue to be vigilant in our drive to become more productive. We ended the year with over 9,300 job reductions, just shy of the 10,000 we anticipated for 2009. Our plan reflects ongoing headcount reductions in light of continued market pressures and related productivity requirements.
Let me summarize by reiterating that despite challenges in 2009, I believe we are making good progress across the Company and that we have faced the market and development program challenges head-on accompanied by a relentless focus to improve competitiveness and reduce costs.
Now, I’ll turn it over to James, who will provide a more detailed review of the numbers and our outlook. James?
James A. Bell - EVP, Corporate President and CFO: Thank you, Jim, and good morning. I’ll begin with our 2009 results on slide 4.
Revenue for the year was a record $68.3 billion, which was up 12% from a year ago. 2008’s results were impacted by the strike, which reduced revenues by $6.4 billion. Earnings per share was $1.84, which includes previously announced 787 and 747 impacts. 2009 EPS was reduced $2.38 due to the reclassification of the first three 787 flight test airplanes from program inventory to R&D expense.
In addition, we took charges totaling $1.20 per share on the 747 program as a result of difficult market conditions and higher cost estimates. Because this program is in a loss position, costs associated with those factors were recorded during 2009 for future 747-8 deliveries.
As Jim mentioned, operating cash flow for the year was strong at $5.6 billion. This performance reflects disciplined operational management across entire Company and includes outstanding cash collections during the fourth quarter.
Now let’s look at the fourth quarter performance on slide 5. Revenue of $17.9 billion was up 42% from the same period last year. Fourth quarter 2008 revenue was reduced by $4.3 billion due to the strike. Earnings per share was $1.75, driven by strong performance across both businesses and a residual tax benefit from third quarter charges. I will discuss our airplane businesses in more detail on slide 6.
Boeing Commercial Airplanes fourth quarter revenue of $9.2 billion reflects increased deliveries and a greater mix of widebody airplane. The team delivered operating margins of 11.1% in the third quarter, driven by strong executions across its production and services programs and favorable delivery mix.
Fourth quarter R&D expenses were lower than expected, driven by timing of the operating model adjustment to better balance 787 development between Boeing and our suppliers. This timing shift has no impact on the overall 787 schedule or costs estimated.
Gross inventory for the Company now includes $7.3 billion related to 787 work-in-process, supplier advances, tooling and other non-recurring costs and increase of $1.3 billion during the quarter. We expect the rate of increase in 2010 to be slightly higher as we prepare to begin deliveries later this year.
As part of our normal closing process, we performed a 787 profitability assessment and determined that the program is not in a loss-forward. This analysis evaluates all of the revenue and cost assumptions associated with the expected initial accounting quantity. Included were costs related to the side-of-body modification, the schedule revision in August, anticipated production and productivity improvements and the R&D operating model adjustments. We continue to make progress on further productivity improvements, while at the same time face increased profit pressure, driven by the second assembly line and lower delivery price escalation assumptions.
Supplier assertion discussions are progressing, and although we’re in the early stages right now, we expect to make substantial progress this year. Customer discussions are also ongoing with about 30% of them complete. Both were tracking to expectations, but we still have a lot of work ahead.
Let me remind you that initial deliveries for new programs typically start out with lower zero margins and improve over time. We anticipate that 787 will follow the same pattern. We will continually assess this program’s profitability in advance of first delivery expected later this year and will provide you further insights as we gain them.
For the year, we delivered 481 Commercial Airplanes, including most ever 737 and 777 deliveries in a given year. BCA captured 263 gross orders and canceled 121 orders, ending the year with a backlog of $250 billion.
Now moving to slide 7 in our Defense, Space & Security business. Boeing Defense, Space & Security delivered margins of 9.7% on revenues of $8.5 billion in the fourth quarter, reflecting strong performance across the vast majority of its program, which was offset by higher cost of $133 million on the AEW&C program. The unit delivered 121 production aircraft and fixed satellites during 2009 and continue to capture new business and achieve key program milestones, many of which Jim mentioned.
For the year Defense, Space & Security generated $33.7 billion of revenue on strong growth and services in military aircraft. Operating margins were 9.8%, reflecting good overall performance. We were pleased with the relative strength and stability that this business provides us. It has performed very well even with shifting DOD priorities and increasing budget pressures.
Now let’s turn to slide 8 to our other businesses. In 2009, Boeing Capital delivered solid pre-tax earnings, reduced its portfolio size and returned cash dividends to Boeing, all that against a backdrop of an economic downturn and challenging financial markets. Boeing Capital financed approximately $800 million of new aircraft and other volume in 2009, and expects to finance less than $500 million of new volume this year.
Now let me discuss our pension plan performance in 2009. Our asset returns for the year were approximately 15%, driven by strong equity market performance. Discount rates decreased from 6.1% in 2008 to 5.8% at the end of 2009. During the fourth quarter, we contributed approximately 29 million Boeing shares valued at $1.5 billion to our pension plans. The Company’s pension plans are now 88% funded on a financial accounting basis and that’s up from 83% funded at the end of 2008.
2010 pension expense is expected to be $1.2 billion, an increase of $300 million versus last year, driven by a smoothing in of the 2008 market performance. The increase will be realized at the business units and a portion will be reimbursed through government contracts. We expect required funding in 2010 to be less than $100 million. We also expect 2011 funding requirements to be minimal, but they will depend on this year’s market performance.
Now let’s turn to slide 9 and discuss cash flow. In addition to the $5.6 billion of operating cash flow we generated in 2009, we also issued $5 billion of corporate debt at very attractive rates, which solidifies a strong liquidity position. Boeing Capital separately issued $1 billion of new debt, while paying down over $500 million of maturing debt.
Let’s turn to slide 10. The debt issuances coupled with the strong operating cash flow performance position us well as we enter 2010. With over $11 billion of cash and marketable securities, the Company has ample liquidity to continue in investing in our development efforts and growth strategies, while dealing with ongoing market uncertainties.
Now let’s turn to slide 11. Our financial guidance anticipates solid operating performance in mid-lower 777 volume and reduced scope on Army modernization and missile defense programs. Revenues are forecasted to be between $64 billion and $66 billion. We are setting 2010 EPS guidance at $3.70 to $4 per share. This reflects the lower volumes due to the marketplace impacts and continued investment in our business. It also considers some additional uncertainties in both Commercial and Defense markets and some short-term risks around our development programs. We expect first quarter revenue EPS and cash flow to be the lowest during the year based on timings of volumes and delivery. Q1 EPS is estimated to be between 15% and 20% of full year earnings.
Our 2010 Commercial delivery forecast is between 460 and 465 airplanes and is sold out. This includes a few 787s and 747-8s as we begin delivering these airplanes at the end of this year.
Our 2010 operating cash flow guidance is approximately zero, reflecting a sizeable buildup of 787 and 747 inventory for delivery in 2011. As we delivered those aircraft next year, we expect operating cash flow to rebound to a level above $5 billion in 2011, and we also expect revenues to be higher next year.
In 2010, we expect other segment expense to be about $200 million and unallocated expense to be approximately $800 million. This includes some of the provisions for market and development program uncertainties.
2010 R&D expense is forecasted to be between $3.9 billion and $4.1 billion and includes approximately $100 million associated with the first three 787 flight test aircraft. We are not forecasting any supplier cost sharing receipts this year or in 2011. We expect 2011 R&D expense to decrease by more than $500 million, a substantial reduction, but one that retain funds to support the 787 and 747 derivatives and pursue potential investments in the 777 and the 737.
We are forecasting capital expenditures to be $1.9 billion in 2010, including $700 million for the majority of the 787 capital investment in South Carolina. We expect 2011 capital expenditures to trend down.
Now let me turn to slide 12 to discuss how we bridge our 2009 performance to our 2010 guidance. As Jim mentioned, 2009 was significantly impacted by the 787 reclassification and the 747 charges that we don’t expect to repeat in 2010. Earnings will be impacted this year by the lower volumes as well as the continued high level of R&D investments.
Commercial Airplanes will spend an additional $100 million this year in its Commercial Services organization to invest in infrastructures to support the 787 fleet entry into service. Defense, Space & Security expects improved productivity and better performance on its development programs to mitigate higher pension expenses and lower volumes.
We expect interest expense to increase about $120 million this year due to the higher debt levels. The share count is expected to be about 740 million, reflecting the stock contribution to our pension plans last year.
We are encouraged by the trends we’re seeing in Commercial market, the opportunities we have in Defense, Space & Security and the recent progress on our development programs. But there is still a lot in front of us, and as I mentioned before, we feel it prudent to consider some risks and uncertainties in our financial guidance.
Now I know many of you want to know more about 2011 performance, which is why we provided some context today. 2011 results will be driven by three key factors; how Commercial and Defense markets evolve; our ongoing performance and required investment on our development programs; and our success in executing growth strategies in the Defense and services businesses. We are aggressively addressing all of these areas and have planned to leverage the opportunities in front of us while continuing to drive performance improvements. We will share more details on 2011 as we gain further clarity in these areas.
Now I’ll turn it back to Jim who will give you some final thoughts. Jim?
W. James McNerney, Jr. - Chairman, President and CEO: Thank you, James. To close, let me say that our key priorities continue to be getting the 787 into the hands of our customers, repositioning our Defense, Space & Security business, while extending existing programs and expanding internationally, leveraging and growing services, maintaining our lead in innovation and preserving our financial strength. I believe the challenges we’ve encountered, the lessons we’ve learned and the actions we’re taking to improve our development program performance are making this a much stronger Company, both today and for the years to come.
With that said, we would now be happy to take your questions.