Boeing Company (The) (BA)

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Boeing (BA)

Q4 2012 Results Earnings Call

January 30, 2013 10:30.m. ET

Executives

Stephanie Pope - VP, Investor Relations

W. James McNerney - Chairman, President, and CEO

Gregory D. Smith - CFO

Analysts

Douglas S. Harned - Sanford Bernstein

Robert Spingarn - Crédit Suisse

Joe Nadol – JPMorgan

Cai Von Rumohr - Cowen and Company

Ronald J. Epstein - BofA Merrill Lynch

Carter Copeland – Barclays

Samuel J. Pearlstein - Wells Fargo Securities

Howard A. Rubel - Jefferies & Company

Josh Freed – Associated Press

Al Scott – Reuters

Jon Ostrower – Wall Street Journal

Phil Lebeau - CNBC

Dominic Gates - Seattle Times

Susanna Ray – Bloomberg News

Mike Mecham – Aviation Week

John McDermott – The Post and Courier

Presentation

Operator

Good day everyone, and welcome to the Boeing Company’s fourth quarter and full year 2012 earnings conference call. [Operator instructions.] At this time, for opening remarks and introductions, I’m turning the call over to Ms. Stephanie Pope, vice president of investor relations for the Boeing Company. Ms. Pope, please go ahead.

Stephanie Pope

Thank you and good morning. Welcome to Boeing's Fourth Quarter 2012 Earnings Call. I am Stephanie Pope and with me today are Jim McNerney, Boeing's Chairman, President and Chief Executive Officer; and Greg Smith, Boeing's Chief Financial Officer.

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

Before we begin, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks, which are detailed in our news release and our various SEC filings and in the forward-looking disclaimers at the end of this web presentation.

In addition, we refer you to this morning’s earnings release and to the presentations that accompany the webcast for disclosures and reconciliations of non-GAAP measures that we may use when discussing our results and outlook.

Now, I will turn the call over to Jim McNerney.

Jim McNerney

Thank you, Stephanie, and good morning everybody. Let me start today by addressing the business environment, followed by some thoughts on our strong performance during the quarter, and then a few word covering my view of where we are at this point on the battery issue with the 787. After that, Greg will walk you through our financial results and outlook, including the new non-GAAP measures we’re introducing, which we believe will provide more insight into our underlying business performance.

Turning now to slide two, our view of the business environment remains positive overall, given our record backlog and our customers’ continuing need for the efficient and value-creating products we provide.

Passenger traffic remains resilient, despite limited global economic growth, and airlines continue to replace older airplanes in favor of new ones that provide compelling economics and increased fuel efficiency. We continue to monitor pressure in the air cargo market, with the expectation that conditions will begin to stabilize this year.

In 2012, Boeing restored our market share leadership, and commercial airplane deliveries was 601 delivered, the most since 1999, and the second-most in commercial aviation history. On continued strong demand for our new airplanes, we also led the industry in net new orders, with 1,203, the second highest total in our company’s history. Orders for our new 737 MAX were especially strong last year, and the program has surpassed 1,000 cumulative orders to date.

Our commercial backlog of nearly 4,400 airplanes totals a record $319 billion, and reflects global customer preference for Boeing airplanes. Nearly two-thirds of our order book is with customers outside the U.S. and Europe, a major shift, as many of you know, from past cycles. In addition, demand continues to be split roughly equally by worldwide fleet growth and a healthy replacement cycle. Furthermore, with ongoing volatility in fuel prices, our customers continue to seek accelerated deliveries, while requests for deferrals and cancellations remain below historical levels.

Turning to Defense, Space, & Security, while overall U.S. defense budget pressures persist, the United States nevertheless remains a substantial market for our products and services. We also continue to capture extensive growth opportunities in international defense markets, driven by increased regional security requirements and the modernization of aging platforms and systems.

In 2012, international customers for defense space and security represented 24% of revenue and grew to 41% of our current backlog.  While notable alone for its size, the strength of our international defense backlog also comes from its diversity across our product and services portfolio and the wide geographic mix of its customer base.

We continue to see strong demand for our offerings particularly in the Middle East, Brazil and the Asia Pacific region.  Our defense business also continues to maximize efficiencies and reduce infrastructure costs, further enhancing our competitive position.

These aggressive affordability actions combined with our existing portfolio of proven reliable and affordable systems and services uniquely positions us among our competitors in this challenging budget environment.

And while the threat of budget sequestration creates added uncertainty, unmanned systems, C4ISR, cyber security and international markets continue to offer a broad range of new opportunities.

As I mentioned last quarter, we continue to focus at an enterprise level on our initiative to partner with suppliers to drive significant improvement in supply chain quality and flow and efficiency, to increase productivity at lower product and services costs for customers.

Given the growth potential booked in our backlog and with pending new program decisions, we are offering supplier partners who step up to the challenge, a win-win opportunity to share in that growth and profit potential and earn work on future programs.

We are taking a team oriented one (Boeing) approach to examine opportunities up and down the supply chain in design, production and support.  We are applying lessons learned on past programs sharing best practices and process expertise and where we find partners who can’t, who won’t step up to these objectives, we will recomplete the work or pull it back in-house if that’s what provides the most value to our customers.

We are pleased with the response from many of our partners at this early stage and the effort is already producing real savings.

Moving on the Slide 3, 2012 was a year where we successfully achieved our plan for higher airplane production rates, improved execution on new programs and continued strengthening and repositioning the defense business.

We reported strong revenue growth, sustained solid operating margins and generated significant cash flow.  These achievements, combined with the strength of our balance sheet, enabled us to announce in December a dividend increase of 10% and the resumption of our share repurchase program this quarter.  We delivered 165 commercial airplanes in the fourth quarter for a total, as I mentioned before, of 601 deliveries in 2012, which compares with 477 in 2011.

For the quarter, we delivered 23 787s, reaching a total of 46 for the year.  On the 737 program, we had record deliveries of 105 in the quarter and 415 for the year.

Revenue of commercial airplanes reached a record $49 billion with a healthy operating margin of 9.6%, a meaningful accomplishment in the face of dilution from the 787 and 747-8 deliveries.

In 2012, we also successfully achieved five separate rate increases on our commercial airplane programs.  Other key accomplishments included delivering the 1000th 777, adding Boeing South Carolina to our commercial airplane production certificate and delivering the first three Charleston built 787s to Air India.

Our success in standing up Charleston to expand our production capacity and geographically diversify our capabilities will be a competitive advantage for us going forward.

We were also successful last year in more than doubling 787 production, increasing the rate from two airplanes per month to five per month.  The program remains on track to further increase the final assembly build rate to seven per month in mid 2013 and 10 per month by late 2013 with a subsequent increase in delivery rates naturally following that achievement as we move into 2014.

Job one on the 787, however, is supporting the investigations underway on the two battery incidents that occurred earlier this month.  But while we are limited by the rules of the investigation on what we can say publically, let me assure you that’s not always comfortable for us. Nonetheless, we rigorously support the process because it gets to the right answers the right way, and that is what has made air travel the safest form of transportation in the world.

Read the rest of this transcript for free on seekingalpha.com