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Executives

Diana Sands – Vice President of Investor Relations

W. James McNerney Jr. - Chairman of the Board, President, Chief Executive Officer

James A. Bell - Corporate President, Chief Financial Officer, Executive Vice President

Tom Downey – Senior Vice President of Corporate Communications

Analysts

Ronald Epstein - BAS-ML

Howard Rubel - Jefferies & Co

Robert Spingarn - Credit Suisse

Joe Campbell - Barclays Capital

Heidi Wood - Morgan Stanley

Doug Harnett - Sanford Bernstein

Myles Walton - Oppenheimer & Co.

Joseph Nadol - J.P. Morgan

Cai von Rumohr - Cowen and Company

Troy Lahr - Stifel Nicolaus & Company

Samuel Pearlstein - Wachovia Securities

Robert Stallard - Macquarie Research

David Strauss - UBS

Itay Michaeli – Citi

Susanna Ray – Bloomberg News

Ann Keaton - Dow Jones

Dominic Gates - The Seattle Times

Molly McMillen - Wichita Eagle

The Boeing Company (BA) F1Q09 Earnings Call April 22, 2009 10:30 AM ET

Operator

Good morning everyone and welcome everyone to the Boeing Company’s First Quarter 2009 Earnings Conference Call. Toda’s call is being recorded. The management discussion and slide presentation plus the media and analyst question and answer sessions are being broadcast live over the internet. At this time for opening remarks and introductions I am turning the call over to Miss Diana Sands Vice President of Investor Relations for The Boeing Company. Miss Sands, please go ahead.

Diana Sands

Thank you and good morning and welcome to Boeing's first quarter earnings call. I’m Diana Sands and with me today are Jim McNerney, Boeing’s Chairman, President and Chief Executive Officer, and James Bell, Boeing’s Corporate President and Chief Financial Officer.

After comments by Jim and James, we’ll take your questions. In fairness to others on the call, we ask that you limit yourself to one question. As always, we have provided detailed financial information in our press release issued earlier today. As a reminder, you can follow today’s broadcast and slide presentation through our website at www.boeing.com.

Before we begin, I need to remind you that any projections and goals we may include in our 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 statement at the end of this web presentation.

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

Jim McNerney

Thank you, Diana, and good morning everyone. Let me start today by discussing our first quarter performance and the unprecedented market environment that we’re currently facing. As part of that I will talk about the things we’re doing to respond to those challenges. After that James will walk you through our results and then we’ll take your questions. I will start with Slide 2 please.

Our first quarter results reflect the impact of the steep global economic downturn on the commercial airplane market, which overshadowed the otherwise good performance in our Commercial Airplanes business and continued strong performance of our Defense business. As announced earlier this month we had decided to bring 777 production rates down from seven to five airplanes per month, affecting deliveries beginning in June 2010. We are also delaying plans to modestly increase our 747-8 and 767 production rates.

In addition, the weak global economy has driven significant declines in the indices that are the basis of our price escalation forecast for commercial airplane deliveries. Together the production decisions and the lower escalation forecasts reduced our first quarter earnings per share by approximately $0.38 most of which represented a charge on the 747 program.

Commercial market factors aside, our underlying business performance remained solid in the quarter. BCA production programs continued to execute well and improve cost performance. Our Commercial Services business generated strong earnings in margins even with softening revenue from spares and passenger to freighter conversions.

Integrated Defense Systems delivered strong financial results by executing on its large and balanced portfolio of programs. IDS also achieved some key technical milestones during the quarter on ground based missile defense, future combat systems and the P88A. We continue to push ahead and achieve milestones on our development programs. In March we delivered our third international tankard to Japan and we completed development of and delivered the first 777 freighter to Air France.

We’re making progress on the 747-8 program with fuselage and wing assembly continuing on the freighter airplane. The first freighter is scheduled to deliver in the third quarter of 2010.

We are also working on the detailed design of the 747-8 Intercontinental, however with the softening freighter market and the resulting decision to delay a planned increase in 747 production first delivery of the Intercontinental is now expected to move from second quarter 2011 to fourth quarter 2011. This is consistent with discussions we’ve had with our Intercontinental customers and was factored into the first quarter production decision financial impacts we shared with you earlier.

On 787 we are on schedule for first flight later this quarter. All the airplane systems, including engines, are cleared for first flight. We’ve also completed the structural testing on the static airframe that is required for first flight. Final analysis is underway, but the results are positive. Earlier this week we completed a full simulation of the first flight using the actual airplane. The simulation exercised all flight controls, hardware, and software. In the coming days airplane #1 will move out of the factory to the flight line. There it will be fueled and its engines operated prior to doing a final systems check and the high-speed taxi tests that lead to first flight.

We are also making excellent progress on airplane #2 on which ground vibration tests need to be completed before first flight. Those tests are expected to begin later this week.

The 787 backlog remains strong with 886 orders from 57 customers around the world. This includes previously disclosed cancellations of 32 airplanes and the order for eight 787s finalized with Gulf Air last week. As mentioned last quarter, we expect a modest level of orders churn on the 787 during the year. Even so, the backlog is unprecedented for a new airplane and we are confident in the long-term value of the 787 for our customers.

Our total company backlog remains large at $339 billion. While that number is down from last quarter due to current period deliveries, modest cancellations, and price adjustments from lower escalation it still represents nearly 5x our current and annual revenues. New orders include the U.S. Air Force contract for 15 C-17s that were previously funded under the fiscal 2008 budget, as well as integrated logistics and support contracts. Fundamentally, this is a solid company with strong core businesses. We are of course, like all companies, facing a very challenging market environment which I will address on Slide 3.

The global economy has further deteriorated and we are facing economic times that are more difficult than many of us have ever seen. This, of course, is impacting our commercial customers in the form of lower air traffic growth and challenging financing conditions. These pressures, which are being addressed by various governments’ economic recovery packages, are also putting pressure on defense budgets.

As you know, earlier this month the U.S. Defense department outlined its 2010 budget priorities, which present a mix of both challenges and opportunities for our industry including some specific challenges for some of our key programs. It is important to keep in mind that the outlining of these priorities and the submission of the President’s detailed budget to congress next month only begins the lengthy annual authorizations and appropriations process. Over the course of the next few months we expect a healthy and rigorous discussion as congress evaluates the proposals and determines the funding for each program. While it will be some time before we know the final impact of these discussions, we continue to believe IDS is well positioned in a large addressable market with a diverse portfolio of defense, space, and security programs, along with an increased focus on International Defense opportunities and the pursuit of adjacent markets here in the US.

Because of the commercial and defense market uncertainties, we continue to step up our drive to become more competitive and productive. As discussed last quarter, we are aggressively managing both costs and investments. Unfortunately part of this means a reduction in employment in certain areas of the company. We are on track towards the estimated 10,000 position reductions we expect by years end. We will continue to evaluate the appropriate infrastructure levels at the Company, especially in light of our recent decision to reduce commercial production in 2010, as we get more clarity on the U.S. Defense budgets.

Despite the challenging environment our backlog is holding strong. The only commercial airplane cancellations so far this year have been the 32 787s I mentioned earlier. We have, however, been working with customers to defer airplanes in response to the unprecedented economic environment. In the first quarter we accommodated about 60 airplane deferrals from 2010 and 2011 into future periods. We are in the process of working on more deferrals beyond that all of which were factored into our production decisions made earlier this month. Deferrals are occurring across all regions and all models.

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

Now I have just a word on production decisions. I want to emphasize that these are big business decisions for the Company and are not simply a reaction to today’s view of the market. The market is certainly a factor. It is obviously a factor. But, we also consider customer contracts, significant cost elements and major employment implications. While we monitor it all regularly, the scope, and impact of these calls are significant and need to be made deliberately.

As you all know, the financing environment continues to be challenging. Boeing Capital conducts a bottoms up as well as top down analysis of financing requirements by tracking the status of each commercial delivery while at the same time evaluating the sources of global capital availability. Currently we still believe financing sources are sufficient to meet expected requirements for our products in 2009. Part of this includes an assumption that BCC will need to provide about $1 billion of new financing this year. However, we recognize the financial markets are fragile and can change quickly. We believe we are in a good position to handle any resulting outcomes this year.

Let me summarize by saying, again, that we are in unprecedented times right now, but I believe we have a solid foundation from which to work through this environment with strong products and services and a large backlog. Importantly, we are aggressively managing our infrastructure, costs, and investments.

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

James A. Bell

Thank you, Jim, and good morning. I will begin with our first quarter results on Slide 4.

Revenue for the quarter was $16.5 billion which was up 3% from a year ago. Earnings per share were $0.86 per share which includes the $0.38 reduction from Twin-Isle reduction rate decisions and lower price escalation forecasts; $0.31 of the impact is a charge on the 747 program. Because this program is in a loss position, the production rate and the escalation impact are recorded in the current period for all units in the accounting quantity as opposed to recording the impact over time as the units are delivered.

Now let me discuss BCA in a little more detail on Slide 5.

Commercial Airplanes recorded first quarter revenue of $8.6 billion which is 5% greater than the prior year. The increase was driven by higher airplane deliveries offset by lower commercial service revenues. Operating margins of 4.9%, seven points lower than last year, were significantly impacted by the $347 million charge driven by production rate decisions and lower escalation forecasts.

Our Commercial Airplane contracts have escalation provisions which state prices in current year dollars at time of contract signing and allow for economic adjustments to be paid by customers at the time of delivery. These adjustments are determined from broad price indices. During the first quarter the global recessions impact on commodity and retail prices, coupled with moderating wage growth, significantly reduced these indices. This change does not affect current year commercial revenues since pricing is fixed approximately 11 months before delivery, but it does impact our forecast of future revenues.

Lower revenue forecasts reduced program accounting gross margins during the quarter for our profitable programs and increased the loss recorded on our 747 program. The first quarter impact of escalation was approximately $235 million, $180 million of which were increased the 747 reach forward loss. The Twin-Isle production decisions, which impact production rates beginning in 2010, also affect current period gross margins. Rate change disruption costs and redistribution of hard to vary costs over fewer units in the accounting quantity are the principle drivers.

The impact recorded in the first quarter reduced earnings by approximately $200 million, $175 million of which was included in the 747 charge. T his impact was net of a favorable adjustment to our prior 747 cost estimates. The BCA team is focused on right sizing its infrastructure and the associated costs to address the current market challenges.

Now I am moving on to Slide 6 in our Defense business.

IDS revenue was $7.7 billion in the first quarter up 2% from the prior year. Margins were 9.2% down two points from a year ago. First quarter results reflect strong execution across its broad portfolio of programs offset by a less favorable mix in the Boeing Military Aircraft segment. Prior year results also included 1x favorable adjustments in network and space systems and global services and support.

During the quarter IDS maintained its robust backlog of $73 billion by offsetting run-off with capture of new business. IDS received contracts for 15 C-17s from the U.S. Air Force, B-22 performance based logistics and maintenance and operation support for GMD. In addition, UA announced its intent to purchase up to four C-17s.

As Jim mentioned earlier, IDS achieved key program milestones including delivery of Japan’s third Aerial Refueling Tanker, loads calibration testing on the P8-A, a successful GMD ground test, and completion of the integrated mission test on future combat systems programs. The IDS team is performing across these businesses and is on track to achieve its goals for 2009.

Now let’s turn to Slide 7.

Boeing Capital delivered another solid quarter with pre-tax earnings of $37 million on revenue of $163 million. BCC had modest new aircraft financing in the quarter of approximately $135 million which was offset by portfolio run-off. Our guidance still assumes that we will finance about $1 billion of new aircraft sales during the year.

Now I want to remind you that as BCC reduced its portfolio from a high of $12 billion to the current level of $6 billion we have been preparing for this time of reentering the financing markets. We are well positioned and are entering the markets in a disciplined and a prudent manner.

Unallocated expenses increased this quarter as compared to last year primarily due to higher intersegment eliminations. We expect total unallocated expense to be approximately $800 million in 2009 with other segment expense forecasted to be about $200 million.

Now let’s turn to Slide 8 and discuss cash flow.

We generated $200 million of operating cash flow in the quarter reflecting cash from earnings and liquidation of inventory that we paid for during the strike last year. This was offset by continued planned working capital build up on our development programs, lower cash advances, and timings of receivables. During the quarter we paid approximately $300 million in dividends and used $50 million to buy back 1.2 million shares. We have significantly reduced our share repurchases in light of the current business realities.

Now let’s turn to Slide 9.

Our financial strength remains solid. We ended the quarter with $4.7 billion of cash and marketable securities including proceeds from the $1.8 billion of new debt issued in March. After our announcement to reduce commercial production rates S&P put our A+ long-term credit rating on watch, but confirmed our short-term rating. Moody’s reaffirmed our A2 long-term rating and our overall credit ratings remain among the strongest in the industry.

Now I will turn to Slide 10.

We are upgrading our financial guidance to include the lower price escalation forecast and the resulting charge on the 747 program. Earnings per share for the year are now expected to be $4.70 to $5.00 per share. Now, we expect second and third quarter earnings to be lower than fourth quarter earnings reflecting revenue and R&D profiles. 2009 revenue guidance is unchanged at $868 to $869 billion.

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

2009 operating cash flow guidance remains at greater than $2.5 billion. We are diligently managing our cash and have action plans in place to preserve our strong financial position. Having said that, there are risks to our cash flow due to market uncertainties and in particular its potential impact on advances for commercial airplanes.

We continue to assume pension funding this year of about $500 million. Total company pension expense is expected to be about $900 million in 2009 with slightly more than that recorded at the business unit and a small offset in the unallocated segment.

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

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

As we mentioned last quarter, our guidance at the time considered the potential impact of modest production rate cuts. Had the Twin-Isle production decision has been the only impact this quarter, we would have maintained our earnings per share guidance. However, the lower escalation forecast had a sizable impact on our results, which is the principle driver of our reduced EPS guidance.

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

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

Now let me turn the call back over to Jim who will give you some final thoughts. Jim?

Jim McNerney

Thank you, James. To close let me simply say that we are diligently working on improving productivity, right sizing our infrastructure, and preserving our financial strength given the current uncertainties in both our commercial and defense markets. While recognizing the risks at hand, we continue to feel that we are relatively well positioned with the fundamental strength of our products and services, the size and diversity of our backlog and the long-term outlook for the markets we serve.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ronald Epstein with Bank of America-Merrill Lynch.

Ronald Epstein - BAS-ML

I have a question on the 787 program. As we start to think beyond kind of the flight test program and into the ramp-up, what I have heard is Global Aeronautica is still a bit of a long tent pole that the center fuselage integration is taking over what 300 days per section. How do you work through that and how should we think about the ramp of the program?

Jim McNerney

Well I think the Global Aeronautica bottleneck, as you characterized it, is something that is not unusual. I mean the main body join is typically a challenge. But, there is nothing we see, as we work through it, that will prevent us from meeting our ramp schedule. As you know, after the ownership change awhile back we have taken more direct control of that factory, which I think has moved along process improvements significantly and we’re making good progress there. While it has represented a bottleneck we are confident that it won’t as we meet our production schedule.

Ronald Epstein - BAS-ML

Okay and if I can I have a follow up question on 78. When you look at the suppliers, and different suppliers are developing either parts or subsystems for the program, you have seen multiples of their original R&D budget that they thought they would be investing. When we think about the Boeing investment on 787 can you just broadly say, I mean, how many times is it what you thought it was originally going to cost the company?

Jim McNerney

Well there is not an integer involved in the multiple, okay? There has certainly been some pressure on research and development, as you know, on some non-recurring costs and there have been some cost pressures that both we and our supplier partners have born. But, it remains a very economic proposition over time. I think this is a very innovative product that did cost more and take longer, but the market has recognized it as an innovative product by ordering many multiples times any commercial airplane that’s ever been ordered before. So, we have a base over which to spread some of these increased costs, but I wouldn’t characterize it quite as direly as your question implied. We have been wrestling with pressures and they’re slowly getting back into the box. I mean the condition of assembly by our partners from airplane 7, which is the first production airplane, on out has improved dramatically. We are in very good shape and quite frankly, I’m heartened by what I’m seeing in the ramp-up right now.

Ronald Epstein - BAS-ML

Great, super. Thank you.

Operator

Your next question comes from Howard Rubel with Jefferies & Co.

Howard Rubel - Jefferies & Co

If I did the math right you did about 8.5% to 9% margins in commercial and about 17.2 per R&D and that compares with 19.8 a year ago. There are two parts to this question. What are you going to do to recover part of the loss of deflation? I mean the index works against you, but there should be a lot of opportunities with the rest of the industrial commodities being down to get some of that back.

The second part of this is cash is clearly a challenge. Could you be a little more specific in terms of what you’re doing to try to improve the balance sheet fund, but could you make it even better?

James Bell

Let me try to answer that. As you know, on the escalation side, particularly in the commercial airplane where this impact has been felt, every quarter we get different escalation forecasts and we basically have two commodities, one is the CPI index and the other is for, which is the consumer index, and the other is more commodities related. They do change over time, so we will naturally see some of that happen.

As it deals with the costs associated with that, the timing is different. As you know we have long-term contracts which are fixed price with our subcontract community, so to the extent that some of those costs are going down we will have an opportunity to renegotiate future contracts at lower prices and then there are some contracts that we do have that see an immediate impact, but it’s minor. You will see some of that and some of that is already into the impact you saw on that escalation provision. But, over time it generally balances it out. If we go into an inflationary period you could see that change pretty rapidly.

On the cash side, clearly we’re looking at a number of things relative to how we manage our cash and be more disciplined relative to inventory turns. Be more efficient with just in time. We’re looking at making sure as we move the schedules on production rates and on the deliveries out that we also align that as perfectly as we can with the subcontract community so that we’re not getting inventory before we need it.

We’ve cut back on capital expenditures. We are really looking at everywhere that we spend money that doesn’t affect or go into the product. We’re cutting back on all things that we would call non-essential. We’re having daily cash calls where we’re making sure we’re monitoring advance pays and we’re monitoring our disbursements to make sure that we’re paying just in time in accords with our contract terms and that we are aggressively pursuing our payments as they are required by contract.

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

Howard Rubel - Jefferies & Co

Are you seeing substantial delinquencies in your PDPs?

James Bell

No we’re not. What you see in the first quarter is as we worked our way through the strike and we reset the delivery schedules, then that came out probably first part of this quarter. Until we did that, obviously, they were waiting to understand what the revised payment schedules were. But, we saw some of that impact in the first quarter. Obviously we’re going to have to do the same thin on the production rate changes and then to reset that. So, we will see some of that truing up of cash payments, but we think in the next three quarters that will have a much less impact and we’ll be back on track, but in general, we are not seeing delinquencies.

Howard Rubel - Jefferies & Co

Thank you.

Operator

Your next question comes from Robert Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

James, could you walk through your cash flow guidance? You know with a flattish quarter here in the first quarter, you talked to some of the pressures and things that are going on in the beginning of the call, but how do you get to generate operating cash of $2.5 billion in an environment where we would suspect your building 787 inventory the advances are drying up from the absence of orders and you’ll be increasing financing through out the year.

James Bell

There are a couple of things. First of all, the advances really aren’t drying up as a result of the orders. We are not expecting a lot relative to cash receipts on the orders. In fact it is a relatively modest number because the deliveries are so far. The orders that we would write today are for deliveries so far out in the future.

The real issue is we do have quite a bit of receipts that are associated with deliveries after 2009 and those are the PDPs that are set on the payment schedules and the inventory; so clearly, we’re looking at making sure we stay on track and we are able to collect those. There is a timing of receipts in IDS that’s different than the timing you saw last year, so we’re somewhat back loaded, but we’re pretty comfortable that those will come to pass. The financing, as you know, is going to be leveraged, so even though it is included in the total in cash in the cash balance, it is not going to have a major impact, but we have included the billion dollars already in that guidance. Again, we’ve only done $135 million so far this quarter, but we think we’ll do the whole billion over the course of the year.

We think we’re in pretty good shape and with the run rate in terms of what we’ll deliver this year, and with the other initiative that we put in place to manage cash we think we’re going to be in pretty good shape.

Robert Spingarn - Credit Suisse

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

James Bell

Well obviously we’ll continue to have some build-up on the development programs. I mean, that is going to continue to build. I think also, what I mentioned earlier to Howard on the advance pays, as we settle down on what the delivery schedules are we are going to see better performance in the next three quarters relative to receiving those cash receipts. We think that accounts receivables will decline over the course of the year.

I think we’re in pretty good shape. We think we understand all of the pieces. We think that what we saw in the first quarter is more attributable to timing and getting the production schedules, they have to get the payment schedules back in place and solidified.

Robert Spingarn - Credit Suisse

Okay, thanks.

Operator

Your next question comes from Joe Campbell with Barclays Capital.

Joe Campbell - Barclays Capital

I have a question about the numbers, which I think Jim gave us, on the 60 deferrals from 2010 and 2011 that you saw in Q1 that moved to the out years. Now, I think that the number, I don’t know, we probably guessed it or triangulated, that the number of wide bodies that moved was something a little over 50. So, it sort of suggested there really wasn’t much movement in all the other airplanes. I was wondering if that is about right. I mean, I would have thought that there was a lot of in and outs and that that was what you were trying to convey. If you could give us a sense of even if the 73s, which are apparently so far okay, can you give us some sense of how many moved out and somebody else moved in so that we can get a sense for the fluidity of the 73?

Jim McNerney

Yes. The number is more like half-and-half narrow body and wide body deferrals. As I also said in my comments, we’re working others beyond the [interposing].

Joe Campbell - Barclays Capital

But Jim you moved, I mean if you cut the production of seven 77s from seven to five than that is going to be more than 30 airplanes, so how could it be half-and-half? I mean we cut the wide bodies by almost that much, I would have thought.

Jim McNerney

I’m sorry, would you say it again Joe? I mean, we’re talking about 60 airplanes, a little more than half of which were narrow bodies, a little less than half of which were wide bodies, and we’re working some additional deferrals right now, as I commented on; when you add that all up that does roughly true up to the production decision. Remember, we are taking into account some things we’re working now beyond just the 60.

Joe Campbell - Barclays Capital

Yes, okay, but what I really wanted to talk about was what is actually going on in the narrow bodies? Presumably there is movement even though it nets out, apparently, to a number that’s consistent with production. I just want some sense of whether it is 100 guys moved out and 100 guys moved forward or whether it’s five guys moved out and five guys moved forward.

Jim McNerney

There is more moving out than moving forward, but what you have to remember, I think, Joe is that remember we restrained production rates. The big picture is that Airbus and us had roughly the same number of narrow body orders over the last few years. They ramp up much more aggressively on production rates and we were restrained. Remember they were in the high 30s we were in the low 30s, so we had a lot more over ordering in our backlog, anticipating that someday there may be a softening, which is what we’re seeing right now.

So, we are working through the over ordered portion of the backlog and when you look at what we deferred within the 60 plus the other ones we’re working now and are estimating based on that experience, we still think we’re in good shape on the production rates. And, it is because we had a much larger margin of unslotted orders that we took, okay?

Joe Campbell - Barclays Capital

Okay, that’s great. Thank you very much.

Operator

Your next question comes from Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

I want to take a step back for a moment. In the first quarter of ’08 the 747-8 was described as on track, and over the span of four quarters things went so awry that you took over $1 billion in charges. Even as recently as the January call you described the -8 as a viable business and adding a lot of value to customers. While acknowledging that the 787 is likewise going to deliver value and is a viable business can you describe the key under pinnings that anchor why the 787 won’t be susceptible to reach forward loss kind of four quarters from now?

Jim McNerney

There is a specific accounting calculation, Heidi that I know you are aware of, but I think the big picture is a large accounting quantity when the time comes to make that decision, which will be when we deliver the first airplanes. Having worked through a lot of the non-recurring up front costs and having a much better handle now on the cost curve that is in front of us, when you make the assessment it trues up to where we are. There is not a loss on the program right now. Could things change, yes, but there just isn’t. It is largely driven by the market acceptance of this product.

James Bell

Heidi, let me just add one comment. Traditionally when you look at us on a new airplane development program, at this stage in the program we’ve only sold 100. So, the major risk is the risk to market and the pricing associated with that. The fact that we’ve sold so many has given us a lot more cushion on this particular airplane in terms of a forward loss, because we really, having sold them we have the market and we have the pricing pretty much set. Then obviously there are a lot of moving parts on the cost side, but as Jim mentioned, as we move through time we’re getting a better handle on that.

Now, could something happen in four years and four months? I mean unless it was dramatic, I think something coming out of the flight test program that would cause a major new cost element obviously that is always a potential because it is a development program, but generally I would say to you we are in much better shape on this program to avoid that than we have been on any prior program.

Heidi Wood - Morgan Stanley

That’s excellent and James, how do cancellations flow through to relieve the presumed costs on customer penalty payments? I mean doesn’t early cancellations relieve the entire skyline and presumably save you quite a bit of money?

James Bell

Obviously if a customer cancels you have more space to work with. The space was crowded otherwise so it does provide you more opportunities to move airplanes up and back depending on what the customer needs are. But, as you know, cancellations are not what we’re looking to achieve in order to deal with our penalties. We would rather just go ahead and get this program back on track, but obviously you get some relief, but that is not what we’re aiming for.

Heidi Wood - Morgan Stanley

Great, thanks very much.

Operator

Your next question comes from Doug Harnett with Sanford Bernstein.

Doug Harnett - Sanford Bernstein

On defense all three units came in well below your guidance. Now, I understand when you do the comparison with Q1 of last year there are some differences there. But, when you look forward for the rest of the year, first what has caused the seams to have lower margins in Q1 and how do you get them up for the rest of the year to make the numbers you’re talking about here?

James Bell

Basically it’s the timing of revenue. It’s the mix that we’re going to see in the next three quarters are going to be better than the mix we experienced in this quarter and we had a better mix a quarter ago, a year ago this quarter. So, when you combine the fact that we’re going to see the better mix is going to improve performance. We’re going to have more of the delivery timing is out in the next three quarters and then we have additional revenue that we will see a run rate that is a little different than what we’ve experienced in the first quarter.

Jim McNerney

But I think, James, just to follow on there, I mean I think DCA was at guidance, save the charges that we described a few weeks ago and those were non-recurring in nature. And the timing largely exists in IDS and really if you get into it, traces to timing of C-17 deliveries and mix of launches that we have in ULA. There is some other noise around that, but it really traces to these big things that don’t always conform like a flow business does to sort of even quarterly amounts. That is why we feel confident that the year is in good shape.

Doug Harnett - Sanford Bernstein

And in global services and support, that one as well? I mean what’s happening that’s different in the back half of the year than in Q1?

James Bell

Again, it’s the timing of the volume of the work. I don’t know specifically, exactly what the call out, but it is some of the logistical support associated with some of the deliveries, particularly on the C017s I would think would be a piece of it, but again, it is just the timing of the work.

Doug Harnett - Sanford Bernstein

Okay, thank you.

Operator

Your next question comes from Myles Walton with Oppenheimer & Co.

Myles Walton - Oppenheimer & Co.

If you do eventually have to move, or desire to cut the three 7s to similar rates by mid-2010 what is the lead-time we should anticipate for that rate change to be announced?

James Bell

Are you talking about the timing on the three 7?

Myles Walton - Oppenheimer & Co.

Yes.

James Bell

Generally 10 to 12 months.

Jim McNerney

In advance, I mean I think we need and every airplane model is slightly different, but given contractual relationships we have with our suppliers and the timing of our supply chain, a minimum of ten months is the way to think about it.

Myles Walton - Oppenheimer & Co.

Okay and just one follow up. The $787 deposits on the 880 aircraft or so, are those at this point, are those refundable deposits or are they both still nonrefundable deposits?

James Bell

They are non-refundable.

Operator

Your next question comes from Joseph Nadol with J.P. Morgan.

Joseph Nadol - J.P. Morgan

Back on the 747 program, I am just wondering if we could get sort of a bigger picture update, Jim, on where we are there. I mean freighter demand is part of the reason you cut the 777 rate and that’s where if it’s only part of the backlog for 777 it’s most of the backlog for the 47. You have this delay in the Intercontinental by a couple quarters which may have not been disclosed previously, but you decided that a number of months ago. In any case, anytime anything goes wrong anywhere in the commercial business whether there is a 37 cut, an 87 slide, anything. Are you going to have another 47 charge? I am just wondering what your comfort level is here with the backlog, the freighter demand, and that we’re not going to have significant more problems down the road.

Jim McNerney

Well listen, the economic situation is uncertain and it has had significant impact on the freighter market, as you have seen. We can’t predict with absolute certainty that our current read of the market will hold forever; so adjusting production rates is part of this business. We think we’ve got it right now, but we’ll have to keep reading and reacting. Now that is a separate question from do we have a good business.

You have to live through some ups and downs. Unfortunately we’re getting a down here in the midst of the development phase of the program. But, we have seen very few signs that customers are running away. We see signs that customers want deferrals and in fact want to hold onto the business and are willing to keep making the progress payments required to have it. It is more of a story of an adjustment to a very difficult economic environment than it is a story about a program that doesn’t make sense to customers. These new airplanes, the 87 and the 47-8 that you’re talking about are very productive airplanes and very productive alternatives to what they’re flying now. I mean the 47-8 is the only airplane now in the, sort of the, 390 to 500 passenger airplane, which translates to a freighter size that is also extremely efficient.

We have to live through some ups and downs here, but these are long term, good businesses.

Joseph Nadol - J.P. Morgan

I think where I’m going, Jim, with this is the 87, I think we can all agree, has unprecedented demand and it’s going to be a great platform for airlines over the very long term. The 47 just seems to me much, much ore in doubt. The basis of it is freighter demand and we’re in a loss position now. I guess I am trying to get my arms around how much worse things can get on the 47. I mean what’s the number?

Jim McNerney

Well, I mean the number is the number we’ve given you now, is what we think it is. Again, customers are not running away. There are a number of discussions for other orders that, admittedly, are doing slow in the current economic environment. We think this is a good niche airplane. I mean, this is not a brand new innovation like the 87 is to your point, but this is an airplane that fills a good, solid niche and we typically launch airplanes with 100 orders. This is more like the normal airplane we launch. Everything isn’t the 87. Could it get worse? Sure. I mean if the market, the economic environment continues to tank for another three or four years I think the impact of deferrals and production rate changes could put additional economic pressure on it. Is it enough to kill the program? I don’t think so. I think this is a good product that serves a good market.

Joseph Nadol - J.P. Morgan

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

Jim McNerney

We don’t intend to kill the program.

Joseph Nadol - J.P. Morgan

Okay, thank you.

Operator

Your next question comes from Cai von Rumohr with Cowen and Company.

Cai von Rumohr - Cowen and Company

On the 777 you took a reserve at year-end to kind of cushion us if the rate went down. Do you have any similar reserve for the 737 and what is the percentage by which it is now over sold for 2010? Also, how would you handicap the odds that it might go down in 2010?

James Bell

As we said last year, it wasn’t just 777, but it was for modest rate adjustment. Right now we do not, we have not reserved for a rate adjustment on 37 because we don’t think it’s likely. We thought what we saw a year ago, the uncertainty around it was enough for us to reserve something against what we thought could happen. Right now, because of the over solds we have on the 37 principally in 2011, and what we are seeing in terms of our deferral discussion with our customers, gives us reasonable confidence that we’ll get through the year without a rate adjustment on 37. Now, could things change? It could, but we have not reserved against that at any subtenant level.

Cai von Rumohr - Cowen and Company

Then in terms of opportunities, your commercial R&D was down sequentially in the quarter despite a lot of activity on the 787; should we expect it to continue on down sequentially in the second?

James Bell

No. We will be, it was sort of the timing that really impacted this quarter. You will probably see it a little higher in the second. Third quarter will probably be pretty stable and then we will come down in the fourth quarter. We should be down year-over-year, but don’t take away from the first quarter. That is going to do down second and third, but it will go down in fourth.

Cai von Rumohr - Cowen and Company

Excellent, thank you very much and good quarter.

Operator

Your next question comes from Troy Lahr with Stifel Nicolaus & Company.

Troy Lahr - Stifel Nicolaus & Company

Could you answer the last question on where you oversold on the 37? I maybe missed the answer.

James Bell

It is hard to say exactly, but I think we have more oversold positions out in the ’11 time frame. We’re probably on balance in 2010 at this stage.

Troy Lahr - Stifel Nicolaus & Company

Okay and my question would be on the defense side, it seems like Gates’ comments really could call into question the future of C-17, FCS, G&D and F-22, but you did mention that you are trying to increase International Defense opportunities and even kind of go into some adjacent markets. Can you maybe say how these headwinds really could materialize and then also kind of what areas are you targeting in the International Defense and some of these adjacent markets to offset that?

Jim McNerney

First, I have a quick comment on the defense budget. I mean, it is early days. Secretary Gates has laid out his priorities in terms of programs and there will now be a six or seven-month discussion with the authorizers and the appropriators as they try to sort out, program by program, exactly what impacts will be available. There is not doubt, though, that the budget implied by Secretary Gates priorities does put overall pressure on the budget, but we’ve got a pretty broad, diverse portfolio here and we think while there will be some pressures there will also be some opportunities, but it is really too early to know exactly what that would be.

The second part of your question was on the International. We still have a pretty rich pipeline of opportunities C-17, F-15, F-18, pretty good services backlog and helicopters and some weapons systems. I am sort of rattling through in my mind country by country, but it all represents a pretty good, the P8, the P8I for India now; there are some other countries that have shown interest. So, there is a pretty rich backlog on the defense side, international, that we’re excited about, quite honestly.

Troy Lahr - Stifel Nicolaus & Company

Okay and the adjacent markets that you were trying to go into?

Jim McNerney

Well, I think that comment referred to Homeland Security and some of the cyber markets that are beginning to open up. Those of you that have followed us over the last couple of years, you have seen a lot of investment both M&A and organic on the cyber side and on the Homeland Security and Boarder Security side. We think those kind of investments are going to pay off within the priorities, as we understand them, from Secretary Gates. But, that still has to play out.

Troy Lahr - Stifel Nicolaus & Company

Okay, thanks guys.

Operator

Your next question comes from Sam Pearlstein with Wachovia Securities.

Samuel Pearlstein - Wachovia Securities

I was just wondering if you could talk a little bit on the cash flow. When I look at the CapEx, you have been running at about $400 million or so a quarter for the last couple of years. In order to get to that billion four this year it would seem like we’re going to see a pretty big step down. I am trying to just think about as we go through the cycle how low can you actually bring CapEx down over the next couple of years?

James Bell

We’ll get it down into our guidance this year. I think the thing to understand is that when you look at our CapEx expenditures, from a cash standpoint it is really December, January, and February. We already know today that for March CapEx is down and December is usually a big month. So, even though we make the expenditures, are we incur the obligations that month from a cash standpoint. We generally don’t pay it until the following month; so what you’re seeing is running hot at the end of the year which is typical, and we’re back to our more traditional run rates based on the actions we’ve taken. We’re seeing that in January and February and it is really taking hold in the expenditures we’re seeing in March. So, we’re pretty comfortable we’re going to get there.

Samuel Pearlstein - Wachovia Securities

Then if I just think about it, the pressure seems like it’s probably more on the down side, certainly not upward in terms of production and capacity. Is this something over the next couple of years we can see get back down to $1 billion or even lower?

James Bell

We’re going to continue to work it, but we absolutely aren’t going to starve the needs we have to support our businesses. We obviously are going to continue to look at this and we’re going to right size that expenditure for what we see in terms of the needs driven by the markets.

Samuel Pearlstein - Wachovia Securities

All right, thank you.

Operator

Your next question comes from Robert Stallard with Macquarie Research.

Robert Stallard - Macquarie Research

My question is on the deferrals. Jim, I was wondering if you could note if there are any regional variations within that deferral number for the first quarter. Also, looking forward, could you give us an idea of how many airplanes are in discussion for potential deferral looking to 2010 and 2011?

Jim McNerney

I think in terms of the regional experience on deferrals it is remarkably balanced, quite honestly. If you look at Asia Pacific, North America, Middle East, Africa, and Europe, it balances roughly with the size of the aerospace markets in each of those places. So, it is a pretty balanced deferral base. I would say the discussions over and above the 60 involve somewhat more than the 60 we’ve already discussed. Which has stayed fairly stable over the last couple of weeks, but there are active discussions going on, and we have anticipated that plus a little.

Robert Stallard - Macquarie Research

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

Jim McNerney

Well, it is hard to sort of divulge that number, because there are active discussions that are confidential discussions with our customers, but I would say it’s greater than.

Robert Stallard - Macquarie Research

Thank you very much.

Operator

Your next question comes from David Strauss with UBS.

David Strauss - UBS

On the 787s you have a huge backlog, but how are you thinking about the eventual production ramp in light of the environment we’re in today? I think you’ve talked about gaining 10 a month in fairly quick order. Could you discuss how you’re thinking about it with what’s going on today?

Jim McNerney

Again, I think our current production plans, which I don’t think we’ve shared in detail, but most of you have taken a pretty good shot at figuring them out. I think our current plans are well below the demand we’re seeing. Again, as in the case of the 737, there is a pretty fair cushion versus the initial production rate. Now, the decision we will have after we get going in the 2010 timeframe will be do we take them up beyond that to get to the demand that is, quite frankly, in place today. Then we’ll get to the question of will there be any, if there is a long term, longer than any of us have experienced kind of recession long term that might call into question that ramp, that is a decision we’ll make roughly a year from now.

David Strauss – UBS

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

Jim McNerney

Well it is hard to predict. I mean it has not been in the budget for the last two or three years and the authorizers and appropriators have put it in. So, on the one hand it is easy to say that will happen again, because it has happened historically. It is the belief of ourselves and many of the customers we serve that this will remain an enduring requirement, the C-17, and as we go through a tough budget exercise that it will survive, but to predict that with certainty is hard to do.

If confronted with a production line cessation we would go through a normal process to do that, supported by the government, by the way. I don’t necessarily think we’re close to that, but we’ll have to see.

Diana Sands

Operator we have time for one more analyst question please.

Operator

Your last question comes from Itay Michaeli with Citi

Itay Michaeli - Citi

I wanted to dig in a little bit more on the two-year cash flow picture. I guess if we assume sort of your baseline earnings forecast; can you help us walk through some of the deltas on the pension where you stand today from a funding requirement, advances, inventory, and even your aircraft finance capacity?

A better way to phrase it is do you think you can get back to the cash flow power that would enable you to have the flexibility back into a billion plus in share buybacks in the next couple of year? How should we think about that playing out in the next two years?

James Bell

Obviously it is all going to depend on what happens in the market, but what we see today I think you would see us getting back to what the previous kinds of cash generations back in the, probably 2011 or so time frame. Right now we have a requirement, although we have assumed in our cash this year $500 million for pension, what we will actually be required to spend is probably $100 or just a de minimus amount of money.

Again, what we had mentioned in terms of the run rate this year, what we talked about earlier on the call was there are some timing issues. Clearly there was pressure as we reset the production schedules as that affects the timing and the true up of advances on airplanes to be delivered subsequent to this year, but all of that will true up and settle out mid-year or so.

Relative to the buy back program, we’ll look at what that looks like in the next year. Obviously we’re going to minimize it this year given what we see as pressure on cash, but going into 2010 we’ll take a look at and see where we are then and see whether or not we have the cash to continue to get back up to the buying levels we’ve experienced in the past. We obviously have the authority from our board to buy the shares, so that is not the issue. The issue is the priorities that put demands on cash and then how we address those with the current cash flow in the current environment.

Itay Michaeli - Citi

That’s helpful. You did raise some debt opportunistically in Q1. Is there a minimum cash balance you like to have at this part of the cycle that we should be thinking about? You know, for you to maybe tap the market again if cash flow comes under some more pressure. How should we think about where you like to have your baseline fall?

James Bell

Well we need about $2 billion for operation cash, so that’s kind of it. Then in this environment you surely want a safety net, given the fact that we have two major development programs that haven’t gotten through their flight certification programs yet; so you would want that. So we could possibly do more, it just depends on what the circumstances are as we view the opportunity in the market pricing wise and other factors.

Itay Michaeli - Citi

Great, thank you so much.

Operator

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

Tom Downey

Thank you. We will continue with the questions for Jim and James. If you have any questions after the session ends, please call our Media Relations team at 312-544-2002. Operator we are ready for the first question and in the interest of time we ask that you limit everyone to just one question.

Operator

Your first question comes from Susanna Ray with Bloomberg.

Susanna Ray - Bloomberg News

You mentioned that there were 60 deliveries scheduled for 2010 and 2011 that were deferred in the first quarter. I am wondering if any were deferred in 2009 and how many. Then I am also wondering how long the delay or the deferral is for those on average.

Jim McNerney

There were no deferrals in 2009, excuse me, maybe one or two, but nothing significant in 2009. The deferral timing varies. It is hard to generalize, but it is generally one to two years.

Susanna Ray - Bloomberg News

Then I am also just wondering, you mentioned $1 billion in direct financing this year, you reiterated that. Do you expect that to increase next year and by how much?

Jim McNerney

Well again, it is hard to predict. James, why don’t you take that one?

James Bell

Right now we are just concentrating on this year as actually the credit markets could get better and if they do we would not have to support delivery of airplanes. But, at this point we haven’t decided what, if any, support we would provide in 2010.

Susanna Ray - Bloomberg News

Okay, thank you.

Operator

Your next question comes from Ann Keaton with Dow Jones.

Ann Keaton - Dow Jones

Switching to the Defense side, you mentioned some good opportunities in international. I am wondering if that is in any way due to Gates’ view of what’s going on or is this stuff that would have happened anyway and could you sort of flesh that out?

Jim McNerney

Yes, I mean I think the way to think about it is that international opportunities have been strong over the last couple of years and we have been working them hard, standing up new organizations to try to work better with our new international customers. I think some of the fruit of that effort is beginning to show up.

Having said that, I think there is, I don’t know how to say this, I think that more and more countries are taking responsibility for their national defense. I leave that to the politicians and the government officials to comment on whether that’s good or bad, but we’re trying to be supportive and work with our Armed Forces as they work with their Armed Forces.

Ann Keaton - Dow Jones

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

Jim McNerney

Well again, I would just name the ones where we’ve seen the most interest, the C-17, F-15, F-18. We’re beginning to see some on the maritime patrol aircraft the P-8A, some communications AEW&C, some communications platforms, sensor platforms. I think it is characterized more by it’s breadth than any one or two things.

Ann Keaton - Dow Jones

Okay, thank you.

Operator

Your next question comes from Dominic Gates with The Seattle Times.

Dominic Gates - The Seattle Times

I have a very specific question about the 787 flight test plans. First, I just want to clarify my own understanding of a response you gave earlier to Ron Epstein, when he asked about the multiple in terms of the spending on the 787, you said no integer involved. I am taking it that means it is less than two, correct?

Jim McNerney

Yes. Dominic, I was being somewhat facetious in response to a question that implied that it was some egregious multiple. I think, as you know, there have been some cost pressures that both us and our suppliers have faced and we’re dealing with it.

Dominic Gates - The Seattle Times

But it hasn’t doubled from what you originally expected in ’03? From that response you gave, is it right of me to make that assumption?

Jim McNerney

I think that’s true, Dominic.

Dominic Gates - The Seattle Times

All right and to my own question, the first six tester planes are apparently now unallocated after you refigured your customer delivery schedule. Are there concerns about selling those planes, getting those planes placed, given the weight problems that they have and where do we stand on weight with the ones that follow on?

Jim McNerney

Listen, the first production airplane that will be delivered is airplane #7 as I mentioned today. We will find homes for the first six airplanes. We have discussions ongoing with people and I am confident that they will end up placed.

Dominic Gates - The Seattle Times

And what about the weight issue? The first ones are overweight apparently. Where do you stand on the first production planes?

Jim McNerney

I think weight is always a challenge in new airplanes. We are working down the weight and we are working with our customers and we’re satisfying their requirements with where we are on weight. But, it is a challenge and we are working through it.

Dominic Gates - The Seattle Times

All right, I thank you.

Operator

Your last question comes from Molly McMillen with the Wichita Eagle.

Molly McMillen - Wichita Eagle

My question has to do with the Tanker and with Wichita. Have there been any further decisions on whether Wichita would still be a finishing center for the Tanker and kind of where are things when you look at the whole state of the Wichita plant and the work that’s still there and whether any more is coming in and that sort of thing?

Jim McNerney

We’re not even sure what the requirement is for the Tanker now, so it’s hard to know what model we’re going to build exactly where, although we are confident we can meet the requirement when it comes out. That requirement will come out in mid-year, sort of May, June, July sometime. We will sort through it all when that happens.

Molly McMillen - Wichita Eagle

Okay and when you look at the Wichita plant overall, are you seeing any potential of new work coming in there? What is kind of the state of it?

Jim McNerney

It is a workforce that has shown a lot of flexibility and I know we’re going through a down cycle there now just in terms of the program mix, but as we sort through responding to the new budget we will have to see. I mean it is a workforce that can be utilized on a number of programs; we just have to see what programs we can win, in a very dynamic environment right now.

Molly McMillen - Wichita Eagle

Okay and when you look out at the Tanker overall there are discussions on whether it is a split by, not a split by, what are you thinking or seeing?

Jim McNerney

I think we are anticipating a winner take all competition because that is what our customer is saying they want. By that I mean the Air Force and the Pentagon. There is a lot of discussion about a split buy on the hill and they have got to sort that out. The comment of record from Secretary Gates is a winner take all and so that is what we’re preparing for.

Molly McMillen - Wichita Eagle

Okay, thank you.

Tom Downey

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.

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