The Boeing Company (BA)
Q3 2009 Earnings Call
October 21, 2009 12:00 pm ET
Diana Sands - Vice President of Investor Relations
Jim McNerney - Chairman, President & Chief Executive Officer
James Bell - Corporate President & Chief Financial Officer
Tom Downey - Senior Vice President of Corporate Communications
Doug Harnett - Sanford Bernstein
Robert Spingarn - Credit Suisse
Heidi Wood - Morgan Stanley
Ron Epstein - Banc of America Merrill Lynch
Cai von Rumohr - Cowen & Company
Joe Campbell - Barclays Capital
Itay Michaeli - Citi
Howard Rubel - Jefferies
Joe Nadol - JPMorgan
Robert Stallard - Macquarie Research Equities
David Strauss - UBS
Troy Lahr - Stifel Nicolaus
Susanna Ray - Bloomberg News
Anne Keeton - Dow Jones
John Austrauer - Flight International
Mike Meacham - Aviation Week
Dominic Gates - The Seattle Times
Steve Wilhelm - Puget Sound Business Journal
Previous Statements by BA
» The Boeing Company Q2 2009 Earnings Call Transcript
» The Boeing Company F1Q09 Earnings Call Transcript
» The Boeing Company Q4 2008 Earnings Call Transcript
Thank you and good morning. Welcome to Boeing’s third 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 will take your questions.
As always, we ask that you limit yourself to one question to be fair to others on the call. 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.
Thank you Diana and good morning. Let me start this morning with my perspective of our performance for the quarter and a look at the business environment as we see it today. After that, James will walk you through our financials and then we’d be glad to take your questions.
Starting with slide 2, our third quarter financial results were clearly dominated by the previously announced 787 cost reclassification and the 747 charge. But excluding those impacts, the double-digit margin performance of our two core businesses continues to be strong, even despite ongoing market pressures.
As we discussed in August, our decision to reclassify costs on the first three 787 flight test airplanes to R&D expense was based on our conclusion that those planes have no commercial market value beyond the development effort. The costs through September for those aircraft resulted in adding $2.6 billion of R&D expense to the third quarter results. I will talk more about the 787 in just a few moments.
Earlier this month, we announced a $1 billion charge on our 747-8 program, due to increased production costs and difficult market conditions. Because this program is in a loss position, costs associated with these factors were immediately recorded in the third quarter for future 747-8 deliveries.
When we began assembling the first 747-8 freighter in the third quarter, we encountered significantly more rework and disruption than we expected, both in our Everett factory and in supplier factories. The root cause is something we talked about in the past. The engineering on this program was late to mature and that was compounded by the limited availability of engineering resources. In addition, we’ve been working closely with our customers in what continues to be a very challenging cargo market. These discussions drove our decision to defer a planned increase in the 747-8 production rate, which was prudent but also contributed to the charge taken this quarter. We fully understand the issues at hand and action plans are in place to address them and smooth the production flow for the airplane moving forward.
Despite these challenges, we are making good progress on this program. The first 747-8 freighter is more than 90% assembled and the second is more than 80% complete. Power on has been achieved on both airplanes. Lessons learned on the assembly of airplane one are being applied to airplane three and the initial join and integration has improved noticeably with assembly now about 75% complete.
First flight of the freighter remains expected by early next year, with first delivery scheduled in the fourth quarter of 2010.
We are operating with better discipline on the 747-8 Intercontinental, the passenger model, where development is progressing well. 75% of the engineering is released on this airplane.
Now, turning back to the 787 program, we made significant progress during the quarter on the side of body reinforcement issue that delayed first flight this past summer. The 787 team is completing and validating this week the last detail design for the stringer modifications on our flight test airplanes and the static and fatigue test air frames. Installations of the fittings are proceeding and we are pleased with the progress we are making. We will retest the modification on the full scale static test air frame after its installations are complete. Once we are cleared for flight based on that test, we will repeat some gauntlet and taxi testing on airplane number one before flying. Flight test is still expected by the end of the year and the first delivery remains scheduled for the fourth quarter of 2010.
As we forecasted, there has been and continue to be some modest orders churn on the 787 but even so, the 787 backlog remains strong with 840 orders from 55 customers around the world. As you’ve heard me say in the past, we know that we can and must do better on our development programs and I am confident that despite our setbacks, we will get the 787 and the 747-8 through the flight test program and into the hands of our customers. Jim Albaugh, in his new role leading BCA, has been fully engaged with the programs, suppliers, and our customers on these development activities. Jim’s seasoned leadership and extensive experience in engineering and manufacturing on complex programs is being felt across the board and will result in further strengthening of our team and the program management and functional disciplines needed to improve our development program performance.