The Boeing Company Q4 2009 Earnings Call Transcript

| About: The Boeing (BA)

The Boeing Company (NYSE:BA)

Q4 2009 Earnings Call

January 27, 2010 10:30 am ET

Executives

Diana Sands - Vice President of Investor Relations

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

James A. Bell - Corporate President, Chief Financial Officer

Analysts

Ronald Epstein - Bank of America/Merrill Lynch

Samuel Pearlstein - Wells Fargo Securities

Joseph Campbell - Barclays Capital

Cai von Rumohr - Cowen and Company

Howard Rubel - Jefferies & Co

Joseph Nadol - J.P. Morgan

Doug Harnett - Sanford Bernstein

Heidi Wood - Morgan Stanley

Troy Lahr - Stifel Nicolaus & Company

Robert Spingarn - Credit Suisse

Myles Walton - Oppenheimer & Co.

Robert Stallard - Macquarie Research Equities

Noah Poponak - Goldman Sachs

Itay Michaeli – Citi

David Strauss - UBS

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 the call over to Miss Diana Sands, Vice President of Investor Relations for The Boeing Company. Ms. Sands, please go ahead.

Diana Sands

Thank you and good morning. Welcome to Boeing’s fourth quarter and full year 2009 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 will 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 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.

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 will 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 US Defense Department and other agencies began re-evaluating 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 and 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 cost 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 the sought after products into the hands of our customers.

The 787’s first flight on December 15 was truly an historic moment in aviation as this game changing product has a level of technological advancement not seen since the 707. Since then, airplanes 1 and 2 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 air worthiness 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 and 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 [bought] 787 facilities and a lenient share of Global Aeronautica, a 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 systems program was restructured and it is now called Brigade Combats 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 re-introducing 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 and Security, had a back log of $65 billion. This business had several key wins in 2009, including the Intel 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 US 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 will 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, DCA 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 back log 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 opportunities has paid off. We foresee holding to our production plan 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 9300 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 A. Bell

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 the 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 the 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 wide body airplanes. The team delivered operating margins of 11.1% in the quarter driven by strong execution across its production and services program and favorable delivery mix.

Fourth quarter R&D expenses were lower than expected driven by timing of the operating model adjustments to better balance 787 development between Boeing and our suppliers. This timing shift has no impact on the overall 787 schedule or cost estimates.

Gross inventory for the company now includes $7.3 billion related to 787 work in process supplier advances, tooling, and other non-recurring costs, an 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 adjustment. 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 deliver 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 are tracking to our 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 deliver 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, and security business. Boeing Defense Space and 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 6 satellites during 2009 and continued to capture new business and achieve key program milestones, many of which Jim mentioned.

For the year, defense, space, and security generated $33.7 billion of revenue on strong growth in services and military aircraft. Operating margins were 9.8% reflecting good overall performance. We are 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 pretax 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 plan. 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 [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 solidify 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 a 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 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 amid 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 $4.00 per share. This reflects a lower volume 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 program.

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 sizable build up of 787 and 747 inventory for delivery in 2011. As we deliver 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 from market and development program uncertainties.

2010 R&D expense is forecasted to be between $3.9 and $4.1 billion and includes approximately $100 million associated with the first three 787 flight test aircraft. We’re not forecasting any supplier cost share and 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 retains 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 investment. Commercial airplanes will spend an additional $100 million this year in its commercial services organization to invest in infrastructure to support the 787’s fleet entry into service.

Defense, space, and security expect improved productivity and better performance eon 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 trend we’re seeing in the commercial market. The opportunities we have in defense, space, and 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.

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: our commercial and defense market, our ongoing performance and required investment on our development program, and our success in executing growth strategies in the defense and service businesses.

We are aggressively addressing all of these areas and have plans to leverage the opportunities in front of us while continuing to drive performance improvement. 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.

W. James McNerney Jr.

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, and 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 have encountered are making this a much stronger company both today and for the years to come. 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 - Bank of America/Merrill Lynch.

Ronald Epstein - Bank of America/Merrill Lynch

On 2011, so far how does the commercial sky line look, if you can give us any flavor or color on that.

James A. Bell

It looks good. I think we’re predominantly sold out in that year and we have oversold. We’re in pretty good shape there.

Ronald Epstein - Bank of America/Merrill Lynch

Is that part of your conservatism?

James A. Bell

The conservative is dealing more with the market probably beyond that and then also dealing with the development challenges we have with these two major programs both in flight tests.

Operator

Your next question comes from Samuel Pearlstein - Wells Fargo Securities.

Samuel Pearlstein - Wells Fargo Securities

I was wondering if you could help me with the delivery assumptions of the 460 to 465. You talked about no change in the production rates. We know what the 777 is doing midyear and looking at it I guess if I kind of translate that, I want to make sure this makes sense, but it would seem like you’re implying something like 15 to 20 airplanes for the 47 and the 787, is that in the right ballpark?

James A. Bell

No. We’re looking at just a few deliveries on both of those models and the deductions principally is in the wide bodies and the 777s.

Samuel Pearlstein - Wells Fargo Securities

So therefore the low gross margin on that small number of units isn’t a big driver of the margin assumption for 2010?

James A. Bell

That’s correct.

Operator

Your next question comes from Joseph Campbell - Barclays Capital.

Joseph Campbell - Barclays Capital

I wanted to ask a bit about the 787, sort of what’s happening with regard to savings that you might be able to do or cost growth as a result of supplier settlements where you made paying them more than you once anticipated, but I also noted that you said somewhere that you did not intend to now have a 787-9 larger wing as much planned and there are no customers for the 787-3. So I wondered whether there were savings as a result of not doing these two modifications and whether they were significant, and secondly, when we do see the first glimpse of financials for the 787 later this year, how far away from the GAAP profits will the unit profits get to be; in other words, how big initial losses might we see when you first show us? I mean, is this many billions of dollars? If I recall, that’s what it was when the 777 was a couple.

James A. Bell

That was a long one question. Let me see if I remember all the pieces.

Joseph Campbell - Barclays Capital

There are really only two things. The 787-9 and 787-3 cost savings, are they large amounts, and then two, when we really see how much you spent on the initial handful of 787s, is it likely to be many billions? We saw 2.5 billion on three airplanes, so what should we be thinking for the first handful of planes?

James A. Bell

Our R&D guidance takes into consideration the puts and takes of the fact that there’s a change in the wing assumption on the 787 and the fact that there are no customers on the 787-3. So there weren’t significant savings. When we work our way through what we have to do on a development program --

Joseph Campbell - Barclays Capital

But what about in the cost estimates? Isn’t the 787-9 wing, wouldn’t that have made the 787-9 cost higher on just the R&D?

James A. Bell

Not necessarily. The whole fact of the way the wing is being designed now, it just meets the requirement, and the cost associated with that is there as opposed to the way we were going to meet it before with a larger wing. So no, there aren’t any large savings in the cost base relative to either one of those.

As to the profitability differential between the program margins and the unit margins on the first three deliveries, it’ll be huge, obviously because we’ll be averaging that for program as we normally do which as I want to remind you, the only GAAP certified way to do that from an accounting perspective, so that GAAP will be large as it always is.

Joseph Campbell - Barclays Capital

We saw 2.5 billion for three airplanes in the reclassification, is that the same order of magnitude that we’ll see on the first planes? When you say huge, is it larger than the three that already went away?

James A. Bell

It’s larger because it’ll have all the deferred production and all of that on the first delivery, so it will probably be larger than that and I don’t know what the number is, but it’ll be large.

Operator

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

Cai von Rumohr - Cowen and Company

Maybe you could help us understand the very good 11.1% margin in the fourth quarter and then kind of a large drop that you’re looking for at DCAG in 2010 in light of Sam’s question. It sounds like you have maybe 6 or 7 kind of 747-8s and 787s so the mix should be pretty good and the R&D doesn’t look like it should be a huge surprise, so is there a lower accrual rate, or maybe you can give us some color as to how big your conservatism placeholder is.

James A. Bell

It’s prudent, not conservative but let me just tell you what it is. First of all, the deliveries are going to be lower next year than this year by about 20 unites. Most of those units are wide bodies so that has a pretty significant impact on the gross profit margin, almost a point. We talked about the R&D model change on how we’re going to do R&D to better balance that on the derivatives between us and our supply chain. That’s going to have a margin impact of probably about 0.6 points.

The fleet supports investment. They increase then what we have to do in terms of being able to support the 787s once it goes in service. Those costs are higher. That has an impact on margins, and then we do have some other issues, investments and productivity tools and things of that nature that impacts the margins for productivity effort that we would see going forward and some contingencies for being prudent to deal with our risk that we see going forward.

When you take all of that into consideration, it walks that 11.1% to the range we’re showing you, between 6.5% and 7.5%.

Cai von Rumohr - Cowen and Company

But there are no other block program accounting changes?

James A. Bell

The only block chain we had this quarter was the 737 and we increased it by 200 which basically just says that those are airplanes that we already have on order and they’re coming into the nearer term phasing of us getting ready to deliver them which obviously provides us greater confidence on the greater rate we have on 737s.

Operator

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

Howard Rubel - Jefferies & Co

You talked about taking out and reducing about 10,000 employees last year. Could you address a little bit of how that cost savings manifested itself this year and how it will show up next year and what are sort of your objectives for your team to gain some productivity?

W. James McNerney Jr.

Obviously these headcount reductions are related to volume changes as well as some program challenges on the BDS side and some decreases. When James went through a discussion of ’09 and ’10 pointed out some earnings tailwinds provided by productivity. Obviously the headcount reductions were part of that. In the case of IDS, it’s more holding onto margins in a flattening and in the case of next year a declining environment and in the case of BCA, it’s a matter of ensuring the funding of our growth, ensuring that we have the resources available to complete these development programs as well as anticipated volume shortfall next year. We anticipate continued work on the headcount side in light of the market pressures that we see on both sides of the business next year.

Operator

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

Joseph Nadol - J.P. Morgan

On the 2011 cash flow, any kind of bridge you could provide, even just the big pieces, to get you from zero to $5 billion plus, and certainly in there, I imagine the $1.3 billion plus per quarter of inventory growth is a big factor, but maybe help us with that and what else might be going on.

James A. Bell

That’s just it. We’ll maintain the disciplined financial management that we began enhancing in 2009, continue that performance, so we manage the working capital with a lot of discipline, a lot of focus. The real kicker is that we’ll start delivering in greater quantities the 787 and the 747 in 2011 and that is just going to reduce the inventory balances or have an impact on that, and that’s going to drive the performance we talked about.

Joseph Nadol - J.P. Morgan

Is it going to reduce the inventory balance or just will it grow more slowly?

James A. Bell

It’ll grow more slowly and then obviously we’ll start getting the revenue in associated with the deliveries and that’s where the real impact will be relative to our operating cash.

Joseph Nadol - J.P. Morgan

And the pre-delivery payments for 2012 deliveries really start kicking in, is that fair?

James A. Bell

Exactly. As you know, the way the model works, the closer you get to delivery, the higher the payments are and then we get about 40% of them prior to delivery but it is the delivery that kicks in the bulk of the payments at about 60%.

Operator

Your next question comes from Doug Harnett - Sanford Bernstein.

Doug Harnett - Sanford Bernstein

On the 787 and the supplier assertions, are you negotiating supplier assertions in conjunction with the negotiations on the 787-9 in general, and I’m curious as to where things do stand on the 787-9 negotiations.

James A. Bell

Quite frankly we are doing that and in some cases we’ve combined them and those are going well also and what we believe the end result of those negotiations, those assumptions have been included in our profitability assessment on the 87, and I think it’s going well. The key for us is that we think we’ll get through the majority of the assertion negotiations this year, so that will obviously put us on solid ground in terms of really finalizing that our assumptions relative to how those negotiations would go would just firm up. They’ll be firming up every quarter this year.

Doug Harnett - Sanford Bernstein

Is it fair to say from a cash flow standpoint the cash impact will be spread over quite some time on the result?

James A. Bell

That is fair to say.

Operator

Your next question comes from Heidi Wood - Morgan Stanley.

Heidi Wood - Morgan Stanley

As you see it, one of the longest poles in the tent regarding coordinating the production build up on then 787, what would you guide us to look for on the outside to see execution on that through 2010?

W. James McNerney Jr.

Obviously deliveries I think would be the number one thing to look at which is in our guidance which would commence by the end of this year in our current estimate and in the basis of our guidance. I also think progress in Charleston in terms of that facility coming online as we anticipate which would begin some production in 2011 with some deliveries in the first half of 2012. I also think, and the comment refers obviously to the 87 in Charleston, but the first comment, both the 47 and 87, I think just the inventory, our ability to manage the inventories as we project and we’ve allowed for significant inventory buildup this year and the [inaudible] work down in 2011. I think all of those factors which we intend to make visible to you as we march through it.

Heidi Wood - Morgan Stanley

What’s the order outlook for 2010? Obviously we saw weak orders in 2009, not unexpectedly. Are you seeing a pickup in campaigns? Can you give us some color? Will orders in ’10 be up considerably versus ’09?

W. James McNerney Jr.

I think we would anticipate the book to bill to be again below 1. Exactly where we sort out there, as you know, we don’t provide in our guidance. But I would say that the customer discussions are not slowing down. They’re at a good level if not a little stronger.

Operator

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

Troy Lahr - Stifel Nicolaus & Company

In our R&D guidance you were talking about some R&D spending on 737s and 777s. Can you tell us what you’re thinking there, is just some initial work that you’re looking at or possibly even more like re-engineering, re-engineering the 737?

W. James McNerney Jr.

I think I would characterize it as maturing technologies associated with both efforts but as you imply with your question, some pretty detailed thinking now about product alternatives and obviously one of those is re-engining the 73 which is under active consideration from a product requirement standpoint and so we’re beginning to harden up alternatives, maturing the technologies with the right amount of R&D spending, and have a wedge in our budget to quickly move on both as the market requires.

Troy Lahr - Stifel Nicolaus & Company

I thought on the 777 you were going to kind of wait to see what the A350-1000 really looked like, is that still the case?

W. James McNerney Jr.

Yes. I think so. I think we will have to make the 73 re-engining decision I would say probably a little quicker than the final 777 decision, and you’re right. I think understanding the A350-1000 a little bit better, we have a little time to understand that as we consider alternatives.

Operator

Your next question comes from Robert Spingarn - Credit Suisse.

Robert Spingarn - Credit Suisse

I think you said on the 787 you noted all the progress but you said there’s more work to be done this year during the certification program. Is this largely the normal blocking and tackling as you go through the various tests or might we anticipate some more mod work perhaps to get weight down and while on the topic, where do you stand on weight relative to customer delivery spec?

W. James McNerney Jr.

I think on the weight question, we have block improvements. As we march through initial production quantities which are, we’ve worked with our customers with and keep us within the mission requirements that we’ve agreed to with them. With regard to the flight test program, we don’t anticipate any major modifications to the airplane. The flight test is so far so good. We’re moving along as expected. We have not discovered anything significant in the design or the fabrication of the airplane. Initial air worthiness came along quickly so I think there’s still risk in the flight test program as you know. Something could be discovered when we don’t anticipate it. The weight program is on track.

Robert Spingarn - Credit Suisse

On the same topic, will the mods so far on the wing to body join, maybe on the first 20 or so ship sets, will those drive a higher inventory amortization on those aircraft?

James A. Bell

For program accounting, no.

Robert Spingarn - Credit Suisse

So we won’t see any adjustment, the flow is going to be just linear as we go, we won’t see any difference?

James A. Bell

In program accounting, the whole thesis is you take all the costs and you average it over the deliveries in accounting quantities. As I mentioned earlier in my discussion, we have that assumption as it relates to cost associated with that issue in the accounting block cost assumptions and it will be amortized over the initial accounting quantities.

Robert Spingarn - Credit Suisse

You’ll give us that accounting quantity?

James A. Bell

Once we start delivering and we final determine what it is.

Operator

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

Myles Walton - Oppenheimer & Co.

Question for you on the 737 and hypothetical of re-engining. What do you anticipate the effect would be on the existing customer base for the 37s and their likelihood of deferring and waiting for what could be a step up in efficiency just five years out? Do you think it would induce some deferral activity on the 37 and put pressure on those rates?

W. James McNerney Jr.

Obviously a good question. I think there is always this tension when new technology is introduced. Having said that, it’s that customer base that is pushing us to consider re-engining or in some cases, a completely new airplane. So I think in this era of high fuel prices and productivity requirements, I think airlines are focused less on the obsolescence issue although it’s a factor obviously, but more on ongoing productivity. That’s sort of a change in the behavior that we see out there so many of these operators are anxious for us to move.

Myles Walton - Oppenheimer & Co.

If I could just squeeze in one on the 737. The disclosed backlog there, unidentified customer backlog, pretty significant as a proportion of the pool. Are those destined to be deliveries in the ’11 time frame that give you the confidence and visibility that we on the outside don’t see because we can’t see the customer base?

W. James McNerney Jr.

The vast majority of those planes are beyond 2011.

Operator

Your next question comes from Robert Stallard - Macquarie Research Equities.

Robert Stallard - Macquarie Research Equities

You gave some good data on the deferral situation. I was wondering if you’ve started to discuss with some of your customers whether they’d be interested in reversing some of the deferral decisions they may have made over the last 12 months as they look forward to better growth?

W. James McNerney Jr.

I think the discussion today with most of our customers is about moving things around. In some cases, customers are moving things forward. I think what we focus on with you are the deferrals but in many cases, some of these deferrals are taken over by existing customers who are more anxious to get their technology. But those that have deferred by and large have not come back and re-ordered.

Operator

Your next question comes from Noah Poponak - Goldman Sachs.

Noah Poponak - Goldman Sachs

Can you guys give us more color on these one-time items at IES? Can you size them and maybe just sort of walk through the latest on Wedgetail and what the issues are there?

James A. Bell

We did size them. We told you that in this quarter it was $133 million on the AEW&C and what that represented was about 88 or so on Wedgetail where we have struck an agreement with what it takes to do to final deliver these airplanes and we’re in the process of doing it and we think that this additional recognition of cost would be sufficient to do that if we can perform based on what we agreed with. The remainder of it was on Peace Eagle on the Turkey contract and so what we think we have in our cost assumption is what it will take to get those two programs delivered and completed and the key thing is we’re really making good progress. We’re down now to basically the fine tuning so I think it does size it and it recognizes the reduction of risk as we continue to move forward and get closer to final delivery on those two programs.

Diana Sands

Noah Poponak - Goldman Sachs

Can you talk about what the abnormal that went on at network and space?

James A. Bell

We did have an adjustment on some inventory associated with the launch business, a one-time write down of the Delta II inventory that we have an obligation and we have dealt with in terms of as it relates to the joint venture with Lockheed, then we had a legal settlement associated with a contract that’s embedded there. About $50 million, the total of the two.

Operator

Your next question comes from Itay Michaeli – Citi.

Itay Michaeli – Citi

Question on cash and cash flow. It looks like with the pre-funding it did in ’09 the cash balance is well strong enough to handle the 2010 cash flow burn potential and then you have the 2011 tailwind going up to $5 billion. Can you maybe talk about with some of this excess cash you’ll be building, what some of your cash flow usage priorities might be in the next couple of years, where you see the opportunity to perhaps deploy some of this cash as we turn back into positive territory in 2011?

James A. Bell

Did you say excess cash?

Itay Michaeli – Citi

Excess cash.

James A. Bell

You have two major development programs. I don’t think there’s any such thing as that. But basically what we have is now the liquidity that we need to have to get through the final investments associated with the development of those two airplanes and get those airplanes started on a delivery route and then also to support the ramp up on both programs so those are going to be the primary focuses. We have other growth strategies as we look at repositioning our Boeing Defense and Space business. We want to be able to make sure we continue to stay focused on that because that’s a high priority for our future growth, and those are the two things.

At this point we’re not considering going back and starting our share repurchase program and we won’t get back to that or start considering things like that probably until 2011 once we get through the challenges we have on our books today.

Diana Sands

Operator, we’ll take one last analyst question please.

Operator

Your last question comes from David Strauss - UBS.

David Strauss - UBS

At defense, you’re highlighting what looks like a 3% hit this year which is a little bit smaller than I would have thought given some changes in GMD and FCS. Can you talk about the outlook beyond 2010 into 2011 with F22 rolling off? Is defense going to shrink again probably in 2011?

W. James McNerney Jr.

I think the moving parts there are continued growth in the services business, continued strong growth on the international side, accelerating growth in the adjacent markets that we’ve mentioned, and we anticipate some success in extending a number of our big platforms offset obviously by GMD, FCS, and F22. We’re going to stop short of providing you guidance for how that sorts out in 2011 but we see some momentum there, let’s just leave it at that.

David Strauss - UBS

On pension, if you hit your assumed rate of return in 2010 and discount rate doesn’t change, is pension expense higher in 2011 than 2010?

James A. Bell

Just slightly because it’s still the smoothing on the performance in 2008 that’s really driving that expense but in the out years, obviously better performance this year will help years after that.

Operator

Ladies and gentlemen, that completes the analysts’ question and answer session.

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