Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's 4th Quarter 2014 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 Mr.
Troy Lahr, Vice President of Investor Relations for the Boeing Company. Mr. Lahr, please
go ahead. Thank you and good morning. Welcome to Boeing's Q4 2014 earnings call. I am Troy Lahr and with me today are Jim McNearney, Boeing's Chairman and Chief Executive Officer and Greg Smith, Boeing's Chief Financial 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 today's press release and you can follow this broadcast and slide presentation through our website atboeing.com. Before we begin, I need to remind you that any projections and goals included in our discussion this morning are likely to involve risk, which is detailed in our news release and our various SEC filings and in the forward looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non GAAP measures that we use when our results and outlook. Now I'll turn the call over to Jim McNearney.
Thank you, Troy, and good morning, everyone. Let me begin today with a brief review of some recent strategic achievements followed by comments on our strong 2014 operating performance, then an overview of the business environment. After that, Greg will walk you through our financial results and outlook in greater detail. Now let's move to slide 2 please. Boeing is entering 2015 stronger healthier and better positioned in its markets than any time in recent memory.
Our strategic accomplishments over the past 24 months alone provide a compelling picture of the progress we have made to enable sustained growth and improving profitability as we near the start of our 2nd century in business. During that time frame, we captured more than 2,700 net new commercial airplane orders, grew our market share and deliveries with 6 successful production rate increases, including reaching our target 10 per month on the 787 with more than 3 per month flowing steadily from our capacity expansion in South Carolina. We completed a comprehensive refresh of our commercial airplane product line with the highly successful launches of the twin aisle 787-ten and the 777X on a combined 400 orders and commitments and the launch of the single aisle 7 37 MAX200 with a 100 airplane order from Ryanair. Starting with the hard fought technology gains of the 787, we have built a substantial technological lead in commercial aviation, particularly in the high value twin aisle market. And by listening to our customers and applying our proven technologies edge in the performance and efficiency of our airplanes.
Turning to Boeing Defense Space and Security. Despite a tough domestic budget environment, BDS continued to strengthen its relative market position and competitiveness. We have accomplished this by driving significant new efficiencies in response to the environment in order to meet government customer needs and fund investments in technology and innovation, including in space programs, where we have restored our technological lead and market position in satellites, autonomous spacecraft, missile defense and human space flight. To the benefit of both businesses, we also secured unprecedented production continuity and improved economics with long term labor agreements at our major production sites in Puget Sound, St. Louis and Philadelphia.
And we retired significant and long standing legal and financial risks from 1,000,000,000 in prudential liability on matters such as the A-twelve program to the short term threat to our balance sheet from defined benefit pensions. As you know, by the end of next year, approximately 90% of our workforce will participate in defined contribution plans, which provide attractive and competitive benefits to employees without the risks to our balance sheet. Going forward, we remain ever focused on driving productivity and executing on our growth initiatives, which are fundamental to our success. To meet customer demand for for our market leading commercial airplanes, we have 5 more rate increases ahead of us over the remainder of the decade. These higher production volumes will provide additional capturing the value of quality and our partnering for success efforts.
We are equally committed to breaking the cost curve on our new development programs and delivering them on time with performance as advertised. To that end, we have focused our engineering teams on designs that are more producible, common systems and parts across airplane families and our disciplined gated development process. We have also increased our investment in manufacturing and production innovations, including automation to increase quality and safety in the workplace and reduce flow times. Overall for 2015 and throughout the remainder of the decade, these recent achievements in the marketplace, in our operations and in our financial performance set the stage for expected significant cash generation, the flexibility to invest for growth in support of our customers and the increasing return of cash to shareholders. With that as perspective, let's discuss our 2014 results on slide 3 please.
Strong 4th quarter results driven by higher commercial deliveries and solid operating performance capped an outstanding year. We continue to deliver on our strategies to convert our backlog into profitable growth and to drive productivity and affordability throughout the company. For the full year, we reported record revenue and core earnings per share, solid operating margins and strong cash flow, much of which was returned to shareholders. Boeing Commercial Airplanes reported record revenue of $60,000,000,000 for the year on higher production rates and an industry record 7.23 deliveries, which expanded our global market share leadership in deliveries for the 3rd consecutive year. 2014 was also an exceptional year for new bookings as we captured commercial gross orders of 15.50 airplanes and record net orders of 1432 airplanes, which increased our backlog to nearly 5,800 airplanes.
When combined with strong orders from our defense business, total company backlog grew to a record $502,000,000,000 Other Commercial Airplanes key milestones in 2014 included successfully reaching the 42 per month production rate on the 737 and announcing plans to increase to 52 in 2018. Model certification and delivery of the first 10787-9s completing preliminary design review on the 787-ten and breaking ground on the new 777X composite centers in Puget Sound and St. Boeing Defense, Space and Security also had a very strong year with solid revenue, healthy margins and significant new business wins and program milestones. Key contract awards captured during the Q4 included an order for 2,702 high power satellites, multiple long term international service contracts, including a 25 year order from the Australian government to train rotary wing aircrews valued at approximately $500,000,000 and finalization of the NASA Commercial Crew Award announced in the 3rd quarter. Noteworthy program milestones in the quarter included the first flight of the 767-2C test aircraft for the KC-forty six tanker program, the selection of the V-twenty 2 by Japan to fulfill their tiltrotor aircraft requirements and U.
S. Government funding for EA 18 gs Growler production. Finally, our strong operational performance trend, significant cash flow and confidence in the future, all supported by our December announcement of the new share repurchase authorization totaling $12,000,000,000 and a 25% increase in the quarterly dividend. With that, let's turn to the business environment on slide 4. Our view of the business environment remains positive, given favorable global air traffic trends, improving airline profitability and the continuing need for efficient and value creating products we provide.
Strong growth in the commercial airplane market continues to drive demand that supports our planned production rate increases over the remainder of the decade. Net new orders for 2014 that I mentioned earlier were essentially twice our and our record backlog of 5,800 airplanes represents approximately 8 years of production at current rates. Replacement demand remains an important market driver with airlines continuing to introduce newer more efficient airplanes with superior economics and a rapid return on investment in place of older less efficient models in service. Notwithstanding a fuel price environment today that is well below the Historically, we have seen aircraft orders more correlated to airline profits. And as many of you may recall, we closed the business case for and launched the 787 when oil was at $40 a barrel.
Furthermore, based on discussions with our customers, lower oil prices have not substantially changed their views on fleet planning or their commitment to existing delivery schedules. Our new technologically advanced airplanes not only have far better fuel efficiency and lower maintenance costs, but also often deliver higher passenger and cargo revenue, increased residual values, a better overall passenger experience and greater range allowing for new city pairs and more optimal routes. All of these elements provide significant value to our customers over the life of the aircraft. Overall, we see low fuel prices and positive traffic trends as beneficial to our industry and growth prospects. Our long term outlook also remains strong as we expect the combination of growth and replacement to drive the need for nearly 37,000 aircraft over the next 20 years.
In the twin aisle segment, we continue to see healthy demand for both the 777 and the 777X, which are outselling the competition by a wide margin, giving us confidence in our ability to efficiently transition production between the 2 airplanes. In 2014, we captured 63 new orders for current 777 models giving us 217 firm orders in backlog. We expect demand for the 777 to remain healthy through the end of this decade with an anticipated average order capture of around 40 to 60 airplanes per year to support the transition to the 777X. With the new airplanes scheduled to enter final assembly in the 20 18 timeframe, this transition will leverage new manufacturing processes and technologies being proven on the current 777 to optimize the 777X production system. On the 787 program, which delivered a twin aisle industry record 114 airplanes in 2014, we remain focused on continued Since the first customer flight, 787 fleet has now flown has now safely flown approximately 30,000,000 passengers more than 400,000,000 miles while saving £1,000,000,000 of fuel, providing game changing efficiencies and capabilities to 29 customers worldwide.
In the single aisle segment, demand for our new fuel efficient 7 37 MAX also remains high with cumulative orders totaling more than 2,660 airplanes from 57 customers. Development of the MAX remains on track for the first delivery in 2017. Turning to Defense, Space and Security. We continue to see solid support among U. S.
Customers and Congress for our major programs. In addition to the Growlr funding I mentioned earlier, the FY 2015 budget signed into law in December fully funds other core Boeing production programs such as the Apache helicopter and the P-8A Poseidon. Key development programs like tanker and long range strike also were fully funded and additional funds were added for space for the Space Launch System. We continue to see strong international demand for our offerings as well, particularly in the Middle East and the Asia Pacific region. In 2014, international customers for Defense, Space and Security represented 28% of revenue and 36% 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 geographic mix of its customer base. Our investments in technology and innovation for organic growth continue in areas such as commercial derivatives, space, unmanned systems, intelligence surveillance and reconnaissance and the critical few large scale future programs that are priorities for our customers like Long Range Strike, U Class and the T X Trainer. The relative strength of our Defense Space and Security business stems from a portfolio that is reliable, proven and affordable, supported by our ongoing market based affordability initiative, which is focused on reducing operating costs by another $2,000,000,000 to ensure competitiveness through the ongoing downturn in domestic defense spending. In summary, our business strategies are aligned to the realities and opportunities of our markets and our teams are executing them well to deliver top line and bottom line performance and capture new business to sustain our growth and profitability for the decades to come. Now over to Greg for our financial results and our updated guidance.
Greg? Thanks, Jim, and good morning.
Let's turn to slide 5 to discuss our full year results. Revenue for the year was a record $91,000,000,000 reflecting 5% growth from last year driven by higher deliveries in our commercial airplane business. Core earnings per share totaled $8.60 for the year, representing a 22% increase. The increase in core EPS was driven by strong operational performance across the company. Adjusting for the tax items in A-twelve litigation settlement in 2013, core earnings per share increased 14%.
Operating cash flow for the year was also very strong at 8 $900,000,000 The robust cash generation was driven by higher deliveries, solid core operating performance, favorable timing of receipts and expenditures and capturing the early benefits of our disciplined working capital initiatives. Let's now move to our quarterly results on slide 6. 4th quarter revenue increased 3 percent to $24,500,000,000 driven by strong commercial airplane deliveries. Core operating margins increased to 9.6% reflecting solid productivity gains in both businesses. 4th quarter core earnings per share increased 23 percent to $2.31 on higher volume and continued strong operating performance.
Q4 2013 included again $0.34 for the A-twelve litigation settlement. Let's now discuss Commercial Airplanes on slide 7. For the Q4, our Commercial Airplane business increased revenue 15% to 16,800,000,000 dollars on a record 195 airplane deliveries and solid operating margins of 9.3%. The margin benefit from the higher volume in mature programs was offset by the impact of higher 787 deliveries and the anticipated increase in period costs primarily for investments to support future growth and productivity. Commercial airplanes revenue for the year was a record $60,000,000,000 an increase of 13% as we successfully executed on our planned production rate increases resulting again in record deliveries totaling 723 aircraft.
Commercial airplanes captured $27,000,000,000 of net orders during the quarter and backlog grew to a new record of $440,000,000,000 and nearly 5,800 aircraft. Specifically on the 787, we exceeded our delivery guidance for the full year as the team worked hard to deliver 114787s. And in total, we've now delivered 228787s to 29 customers, 14 of which were new customers in 2014. We continue to see operational performance indicators as we further implement production efficiencies and stabilize the overall 787 production system. On the 787-eight, we've seen a decline in unit costs of approximately 30% over the last 175 deliveries.
And on 787-nine, we've seen declines of 20% since the first delivery. Based on this progress, our production schedule and planned productivity investments, we continue to expect the 787 to be cash positive during 2015 and we still anticipate deferred production to decline shortly after we've achieved the 12 per month production rate in 2016. No change to these fundamental milestones. In the Q4, the 787 deferred production increased $960,000,000 to $26,100,000,000 and we now anticipate 787 deferred production to grow at moderate levels for the next several quarters as productivity improvements on both models offset timing of supplier negotiations, further investments to optimize the production system and our decision to maintain higher employment levels to ensure the continued smooth introduction of the 787-nine and further incorporate additional productivity and reliability investments. These focused decisions and efforts are expected to continue to drive long term efficiencies, margin improvement and cash generation on the 787 program.
Overall, our focus and priorities remain unchanged for the 787 program. Solid day to day execution, risk reduction and improving long term productivity and cash flow going forward, while continuing to have smooth ramp up on the 787-nine production, prepare for the 12 per month rate introducing the -ten, while again driving efficiencies across all aspects of the program. Let's turn now to Defense Space and Security results on slide 8. 4th quarter revenue for our Defense business was $7,600,000,000 and operating margins increased to 12.1% due to strong business across the portfolio. Revenue for Boeing military aircraft declined to $3,000,000,000 in the 4th quarter resulting from lower planned C-seventeen and F-fifteen deliveries.
Operating margins increased to point 3 percent in the quarter driven by solid operating performance. Network and Space Systems revenue declined $2,200,000,000 in the 4th quarter on lower government satellite volume. Operating margin at NS and S was 8.8% in the quarter. Global Services and Support reported a 2% increase in the 4th quarter revenue to $2,400,000,000 on higher and U volume and generate strong operating margins of 14.9% driven by higher operating performance. Defense, Space and Security reported a solid backlog of $62,000,000,000 dollars with 36% of our current backlog now representing from customers outside the United States.
Let's now turn to slide 9. Operating cash flow for the 4th quarter was $5,000,000,000 The strength of our cash flow was driven by higher volume, strong operating performance, favorable timing of receipts and expenditures and again early benefits of our disciplined working capital initiatives. With regard to capital deployment, we paid $519,000,000 in dividend to shareholders and repurchased 7,800,000 shares for $1,000,000,000 in the Q4, bringing our total 2014 repurchase activity to 47,000,000 shares or $6,000,000,000 And as Jim mentioned earlier, we announced in December that our Board of Directors increased the share repurchase authorization to $12,000,000,000 and increased the dividend 25%, up 88% in the last 2 years. We expect to complete the repurchase authorization over approximately the next 2 to 3 years. Our capital deployment to date continues to demonstrate the strength of our portfolio and backlog and our commitment and confidence in the business performing well going forward.
Returning cash to shareholders along with continued investment to support future growth remains priorities for us. Let's now move to cash and debt balances on slide 10. We ended the quarter with $13,100,000,000 of cash and marketable securities and our cash position continues to provide solid liquidity and positions us well going forward. Again, our financial strength allows us to continue to invest in key growth areas of the business, return cash to shareholders and execute our cash deployment strategies going forward. Turn now to slide 11.
We'll discuss our outlook for 2015. Our guidance for 2015 reflects solid core operating performance, higher deliveries at Commercial Airplanes Business, while reflecting the near term investments needed to support our efforts to drive long term growth and productivity. Core earnings per share guidance for 20.15 is set to be between $8.20 $8.40 per share and excluding the 2014 tax settlements totaling $0.71 per share, 2015 earnings per share is expected to grow between 4% 6%. Revenue for 2015 is forecast to increase to be between $94,500,000,000 $96,500,000,000 representing growth of between 4% 6%. Our 2015 commercial airplane revenue guidance is between $64,500,000,000 65 $500,000,000 reflecting 8% to 9% growth as we execute on our record backlog.
The 2015 commercial delivery forecast is now between 750 and 755 airplanes and 787 deliveries for 2015 are expected to be essentially in line with the 10 per month production rate plus a few early build deliveries. Commercial Airplanes operating margin guidance is set to be between 9.5% 10% on improved operating performance, offset by greater dilution impact of higher planned research and development spending, higher 787 deliveries and further investments to support future growth. Defense, Space and Security revenue guidance for 2015 is between $29,500,000,000 $30,500,000,000 reflecting the continued challenging defense environment, particularly offset partially offset excuse me by the ongoing international growth. Operating margin guidance of the defense business is now between 9 0.75% 10% reflecting continued productivity efforts offset by the impact of lower volume and delivery mix. Supporting our long term growth plans, we expect research and development spending for 2015 to be approximately $3,500,000,000 with about 70% related to 787 particularly driven by the planned increase in 777X and 787-ten development, while at BDS we continue to invest in key strategic growth opportunities going forward.
We expect operating cash flow for 2015 to be greater than $9,000,000,000 reflecting higher deliveries, strong operating performance, continued 787 productivity and capturing final C17 orders. This is somewhat offset by higher cash tax payments and favorable timing of receipts and expenditures benefited 2014 results. As we look forward, we expect further growth in operating cash flow in 2016 as we continue to execute on our backlog, capture additional productivity gains and improve 787 cash performance. Capital spent in guidance for 2015 is approximately $2,800,000,000 driven by the new 777X facilities and equipment, Charleston expansion to support the 787 rate increase and other investments to support continued growth and productivity. Our required pension contributions in 2015 will be minimal as a result of legislative pension changes.
We are now foregoing discretionary pension funding in 2015. As we look into the next quarter, we expect 1st quarter revenue, core EPS and cash flow to be the lowest during the year based on timing of deliveries, phasing the expenditures and advances. 1st quarter EPS is estimated to be approximately 20% of our full earnings. So in summary, Boeing's 2014 financial performance and the 20 15 financial guidance reflects the strong demand for our products and services, the strength of our backlog and our continued focus on driving productivity throughout the entire enterprise. With that, I'll now turn it back over to Jim for some final thoughts.
Thank you, Greg. 2014 was another year of strong operating performance and significant cash generation as we successfully executed on our record backlog that allowed us to return cash to our shareholders, while still prudently investing to sustain our growth and competitive advantage. Built upon an underlying foundation, 2014 was a very strong year for Boeing as we continue to deliver a significant and sustained growth and increasing profitability and cash flow that our strategies were designed to produce. Thanks to the tremendous efforts of our employees, our partners and customers around the world, we achieved critical strategic milestones in both businesses, continued focus and execution on production and development programs that are important to our customers and maintain our relentless focus on productivity to enable continued investment in our future, all of which sets the stage for further growth and
Our first question comes from the line of Carter Copeland with Barclays. Please go ahead.
Hey, good morning, gentlemen.
Good morning. Good morning, Carter.
Just some quick clarifications about your comments on deferred production, Greg, and a question. Did that change result in any negative margin impact on the program? And how far right where did it shift the cash breakeven point you had talked about in the past? And then just from a high level, has it changed does the difference in the profile of deferred production here represent a change in how you're managing the program or thinking about the long term risk profile or return profile on the program? Is it reactive in any way?
Just from a high level, is there something more we should read into that and how you're approaching risk and return there?
Yes. No, I think that there's you shouldn't look at it any differently Carter. I think when you step back and you look at how this program has performed, it's performed very well, 114 deliveries last year. And obviously, we reached a record production rate higher than any wide body in history and we're planning to go up. The fundamental milestones that you talked about whether with regards to cash positive, we still expect that in 2015.
And we still expect deferred to decline shortly after we hit that 12 a month that we're planning for in 2016. So those things have not changed. We obviously as I discussed, we see in the next 2 to 3 quarters similar growth than what we've seen and then later in 2015 to decline at a healthier rate. But all of that is anticipated in the guidance we gave on cash flow. And at the end of the day, that's what matters.
You've seen our results in 2014, you see our guidance for 2015 on cash, all of that is again taken into consideration.
And the program margin?
Program margin was just down slightly in the quarter, but not significant.
Okay. Thanks.
Thanks. You're
welcome. And next we'll go to Doug Harned with Sanford Bernstein. Please go ahead.
Good morning. Good morning. Good morning. I'm interested you've got I mean you had very strong cash in Q4. So we're looking at more than $9,000,000,000 in operating cash in 2015.
And then I was surprised to see deferred continuing to rise. Could you walk through really two things here, the puts and takes of getting of your cash operating cash flow in 2014 to 2015. And then when you look at how much you've got in the balance sheet, you've got now cash and STI of over $13,000,000,000 and you're going to generate more than $6,000,000,000 in free cash flow. How do you expect to deploy that? You should have declining risk here.
This is a lot of cash and it seems like it's a lot more than you would really need to manage the company on the balance sheet today.
Well, as you know Doug, one of the strategies we had in place was to derisk the decade and we've certainly done that. And the risk profile going forward is very different than it was in the past. And so continuing to execute on delivering on the backlog, focusing on the core operating performance, again improving the 787 cash profile and of course capturing those final C17 ore. That's the biggest driver from 14 to 15. We are going to have higher cash taxes because we're improving unit cost on 787.
And we have again slightly higher R and D all planned out 777X and 10x. So those are kind of the moving pieces from 2014 to 2015. With regards to a deployment, you've seen what we did last year. You see the authorization we have in place. It's in place to utilize it and we plan to do that.
Our next question is from Howard Drbul with Jefferies. Please go ahead.
Thank you very much. Good morning, Howard. Good morning. Nice numbers.
Thank you, Alex.
One question related to the 7 87 and sort of orders related. As I look at it this year is more of a year to fill in some holes and demonstrate that the products you have extended legs. Could you address some of the opportunities with some specificity on 777? And then also on what you're finding from customer feedback on the 787 and what kind of movement there is to -9s?
Let me take a swing at that one Howard. On the 777, the gut issue there obviously is the bridge transition to the bridge because I think the market has spoken on the launch of the 777X a very robust launch. As to the bridge, the 63 orders this year that Ray and his team secured bodes well for the $40,000,000 to $60,000,000 we need over the next few years to get to the bridge. So I'm feeling increasingly comfortable there. Long term demand for the airplane, there is no competition for the airplane.
So I feel very good about the long term demand for the airplane. I think on the 787, I think what you're going to see is a mix from -8s to -9s to -10s and there'll be some moving around to the skyline as that's accommodated. That's all goodness for the Boeing company in the sense that we are usually selling more capability for a higher price. And that dynamic, I don't see changing. I think we're still we're a little bit hampered by the number of orders we have.
I mean, it's we're out to 20, 21 ish. I would anticipate toward the end of this year and into next year, a rekindling of orders on the H-seven as we get a little closer to the end of the decade, people begin to pick up options. The moving around of the skyline will have subsided a little bit. And the airplane's performance, quite frankly, I cited it in my remarks, the airplane's performance to be candid is better, I think, by and large than we sold it at. And we're very pleased with the operating cost, the fuel savings obviously.
And the thing that is often left unnoticed here is that this grows the market. This airplane enables wide body or any kind of body quite frankly, city pairs that have never been enabled before. And so I'm sort of making up the number, but it's 20% of the demand for this thing is opening up capacity between city pairs that was not available before because of the performance of the airplane. So it's a little bit longer answer than you wanted, but that's my dump on the subject.
Thank you very much.
Thanks, Howard.
And we'll go to Joe Nadel with JPMorgan. Please go ahead.
Thanks. Good morning, everyone. Greg, I had a couple for you on just deferred. Just wondering if you could as you've done the last quarters quantify if there was any pull forward from building -nine inventory. If you could give us a sense sequentially if -eight and -nine unit costs declined and if this was just mix related that you didn't see any deferred reduction sequentially?
Yes. There was no pull forward in the quarter, Joe. There was more -nine. There was about 30% more -nine mix in 3rd quarter versus 4th quarter. So that obviously had an impact.
And then we had more reliability enhancements in the 4th quarter than we did in 3rd. And again that's something that we're really trying to be proactive and get those embedded into the production system so they're there when we deliver the airplane. But those are really the big moving pieces between 3Q and 4Q.
So the unit costs on both models did decline sequentially or were flat?
They did. They did come down in the quarter.
Okay. And then just one final clarification. When you say you expect the program to be cash flow positive in 2015, that's deferred building, but you deliver a few of the early production aircraft and you're also including advances in advance of that production rate increase to help to get you to cash flow positive. Is that right?
That's right, Joe. No change.
Okay. Thank you.
You're welcome.
And we'll go to Cai von Rumohr with Cowen and Company. Please go ahead. Yes. Thanks so much.
So you're talking about the deferred going up another, it sounds like $2,500,000,000 over the next three quarters. That's a pretty big change. Could you give us a little bit
more granularity in terms of
how much of that is inventory pull that's a pretty big change. Could you give us a little bit more granularity in terms of how much of that is inventory pull forward? How much of that is buffer stock? And how much of that is other items?
Yes. I guess I'd put it into 3 categories. First of all, let me just back up. I mean, the things we're doing on this program every day are all about driving cash and profitability over the long term. So there's going to be decisions we make quarter over quarter or frankly between last year and this year and forward that are enhancements to the production system over the long term that are proven.
We've done them on other programs. And now it's about implementing them on the 787. So there's some of that in there that's really again focused on investments over the long term of the program. On as far as labor, we are coming down on unit cost, but we're coming down in a lower rate than what we expected or anticipated. And again, we're doing that at these higher labor levels to really achieve the stability, incorporate those reliability enhancements I talked about.
And then these productivity initiatives, again, they're going to take folks to work through each one of those at every sequence of the build and we're working that and we're working at an enterprise level. We're leveraging across Boeing. So we know where the bottlenecks are or some of the challenges are. So now it's about reaching when we reach the 10 a month capturing that and improving upon that. On the supply chain side, we've talked about the timing of some of our discussions and negotiations.
And some of those have moved out to the right. And I think I've mentioned before that we've seen a benefit in doing that. These guys are still coming down a learning curve. We are helping them encapsulate productivity enhancements that we're seeing or able to achieve in Charleston and Everett. We want to get that back into the supply chain.
And then from there, we'll mature our negotiations. So again, a near term sacrifice, but much long term benefit frankly for us and our supplier. But those are really the 3 main categories that we're faced with over the next year until the end of 2015. But very focused again on the long term and very focused on improving cash in the program and none of those fundamentals have changed.
Can you quantify any of those three items?
No, I can't, Ty. I mean those are the main three categories and like I said, those the ones we're working on. There's no, I think, significant split between the 3 of them.
Thank you very much. You're welcome.
And next we have a Sam Pearlstein with Wells Fargo. Please go ahead.
Good morning.
Good morning, Sam.
I just wanted to see if you could help me out on 2 things. One is on the C-seventeen, can you talk about how many were on the balance sheet at the end of the year of 2014? And how many assuming will be there at the end of 2015? And then just looking at the share count assumption you have embedded in your guidance, that would seem to imply a pretty sizable buyback in order to get 40,000,000 shares down on average over course of the year, can you try and size at all your thinking around that?
Well, on C17, we've got 7 that remain unsold, Sam. We delivered 7 last year. We'll deliver 4 in 2015 and then Ford 16 and then probably about 2 in 2017. So we're in active discussions with On the share count, like I said earlier, you saw what we did in 2014. We upped the reauthorization.
So we're very focused on that. And we'll continue to execute and utilize that authorization.
Thank you.
Welcome.
Our next question is from Myles Walton with Deutsche Bank. Please go ahead.
Thanks. Good morning. Good morning. Hey, Craig. If I kind of look at the last 3 years, you've been running if you correct for the $787 after tax $14 a share pretty consistently over a period of time or about $10,000,000,000 As you level off on the 787 any reason we shouldn't think about that as a starting point of discussion?
I'm sorry, Myles, I wasn't tracking exactly what you were focused on.
If over the last 3 years, you're correct for all the 787 inventory build, you've been doing a consistent level of $10,000,000,000 or about $14 a share in free cash flow. Yes. Any reason that shouldn't be the starting point of the discussion once you do level out on the 787 inventory?
No, I think that's fair. Okay. That's fair. I mean, obviously, you've seen it. It's a significant focus area for us and any all elements around working capital and we're going to continue that effort going forward.
Just one clarification. Were there any adjustments on the accounting blocks in the quarter?
Yes, 737 an increase of 200 all of which were MAX airplanes.
Okay.
Thanks. You're welcome.
And next we go to Jason Gursky with Citi. Please go ahead.
Hey, good morning, everyone.
Good morning.
Greg, I was wondering if you could just talk a little bit about the trajectory of CapEx and R and D as we move out into 2016, 2017 maybe even into 2018 just kind of relative to where we're going to be in 2015 going up, down, sideways on those items?
Well, I mean CapEx this year obviously is just tied to the growth, right? On the successful launch of this 777X, the -ten and then of course 787 rate combined with 7 37. So those are the real, I'll And we'll probably have a similar year next year and then it will start to decline from there. And again, all tied to growth, all tied to the successful launches of those programs. Combined with productivity, we've got additional productivity initiatives in here including the automation that Jim talked about.
And so that's kind of the profile on CapEx. For R and D again 777X and 10X as 787-nine certainly winds down and 37, I'll say MAX continues at a similar spend rate. If you look at the entry into service on 777X, you're going to see a profile from here. But again, you're going to see 10X declining. So we're continuing to manage it and look at further ways to optimize the R and D spend as Jim has talked about a lot.
But for this year, we're seeing it at about $3,500,000,000 and I'd say managing it very efficiently and taking advantage of a lot of the things that again that Jim highlighted in doing it in a more efficient and effective manner.
And just one quick follow-up on the 777. Can you talk a little bit about what the impact is going to be on your ability to deliver aircraft late in the decade as you feather in the 777X? Will that be coming in at a slower flow time? And will your ability to deliver come under some pressure as we go out later in the day?
Well, I don't think our ability to deliver will come under pressure, but you'll have very similar to what you've seen on the 787, you'll have some additional flow time associated with those early introductory units and that will get feathered in to the current 777s as we deliver those. So I'd say that it's well planned out phasing in strategy that was really leveraged off the success of the 787 and that's the plan going forward.
Okay. Thank you. You're welcome.
Thank
you. And next we go to Peter Arment with Stern AG. Please go ahead.
Yes. Good morning, Jim, Greg.
Good morning.
Hey, Jim, Greg is getting all the work here. Let me give you one. Jim, does book to bill ever go down again? It's another strong year. How are you thinking about 2015?
And your comment on the 777 bridge, you're getting increasingly comfortable there. The 63 new, would you characterize that as just replacement for the -200s? Or could you give a little more color there? Thanks.
No. I mean, I think the I mean, two examples would be ANA and Qatar where there was a blended order of both the new airplane the X as well as one of the current models. I think in both cases the 300ERs, I may be forgetting exactly the model type in one of those cases. But the I think it is a sign that the capability is an enduring capability and the competition is you hate to say it this way, but there is not much competition for this capability. So versus any alternative, both the old and the new makes sense.
And it's more a matter of satisfying demand and running a competitive airline that drives them to buy both types. And so we're in a fortunate position here. And it's one that we will shamelessly take advantage of.
And on book to bill for 15?
Book to bill, it's early in the year. I think it will at least be 1 to 1 would be is the way it looks now and we'll see as the year goes forward.
Okay. Thank you.
Yes.
Our next question is from Ron Epstein with Bank of America Merrill Lynch. Please go ahead.
Yes. Good morning. You've obviously done a fantastic job getting airplanes out the door. Just wanted to follow-up on profitability, however. One would think unless I'm thinking about it wrong that given the volume of airplanes that the company has delivered that profitability in the quarter would have been better at Boeing Commercial.
Defense seemed to do wonderful. And then as we go into next year with that volume of airplanes going out the door and given the overhead absorption that again margins would be higher than what you guys are projecting them to be?
Yes. I mean in the quarter Ron, 37 and 777 unchanged from quarter over quarter, so no change in margins there. And as I mentioned, we did have a block extension on the 37. This is really associated with period costs. As you know, we're seasonably high in 4th quarter around taxes and fleet support and just the amount of deliveries we have.
And then some investments we've made across the business whether it's an 87 Reliability or in some of the fleet management efforts. So I'd say high in the quarter, but not something that it would take forward from here.
Okay. Okay. And then one follow on if I may. In the defense business, we haven't talked a heck of a lot about that. Were there any contract closeouts one time types of things in the quarter that boosted margins there?
Nothing significant. No.
Okay, great.
Thank you.
Yes,
okay. Operator, we have time for one more question.
And that will be from Rob Spingarn with Credit Suisse. Please go ahead. Good morning.
Good morning.
Greg, just on the improvement in cost on the 87, I think you said that you took cost down about 30% over the last 170 odd airplanes something like that?
175. Right.
So now I'm guessing with the deferred unit deferred as it stands a little over $30,000,000 and I know there's some puts and takes and some things in those in that number that probably aren't aircraft specific. But I'm guessing airplanes are costing you these days somewhere specific. But I'm guessing airplanes are costing you these days somewhere around $130,000,000 To get down to a breakeven level, I would imagine you need about another 20% cost reduction from here give or take back of the envelope. Can that be done inside of a year with the volume of airplanes we're talking about?
Well, we continue to have plans unit cost on the program, Ron, whether it's through our own internal efforts or working with the supply chain. So those initiatives are all laid out and now we got to go execute those and we have plans in place to do them. Again, this is stuff we know how to do. We've done it on other programs and we're putting obviously additional focus on that and this again remains a priority for us. So at the same time, we're continuing to invest in productivity as I talked about.
As we get more mature with the production system, we see more opportunities to do things better and more efficiently, but they take an investment. It's a short term investment or short term challenge, but long term significant gains for the program. And that's really where we got everybody focused.
Okay. And then just a clarification from earlier. The guidance embeds the buyback that you've talked about?
Yes. It embeds some form of buyback. Yes.
Okay. Okay. Thank you very much. You're welcome.
Ladies and gentlemen, that completes the analyst question and answer session. I'll 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.
Thank you. We will continue with
the questions for Jim and Greg. If you have any questions following this part of the session, please call our media relations team at 312-5442 2. Operator, we're ready for the first question. And in the interest of time, we ask that you limit everyone to just one question please.
And first go to John Uhlstrower with The
Wall Street Journal. Please go ahead. Good morning, guys.
Good morning, John.
Just a bit of clarity on the math that you guys presented on the 77 deferred production. Obviously, you're passing $26,000,000,000 on deferred costs with 1100 airplanes to go in your accounting block. So you're booking a positive margin on each 787. Just really flat out mean to zero out those deferred costs, just really simple back of the envelope, you need to be generating $25,000,000 in profit per plane starting today. And obviously, there's a curve in there and you guys haven't hit the unit breakeven yet.
So the $25,000,000 figure is even higher than that. So I mean at what point are the assumptions that you're putting into your accounting estimates that are generating your record earnings? Ultimately do they reflect the reality of the 77s program cost reductions while ultimately keeping the program stable?
Well, John, I guess I would start with, as I said, the fundamental milestones around the 787 being cash positive and the deferred mining after we reach 12 a month haven't changed. And the focus on the program hasn't changed. It's all around again being more efficient on each unit and capturing additional unit cost. There's initiatives within the supply chain. Obviously, there's initiatives within our factory and we're working to capture those and continue the journey on the successful productivity we've had in the program to date.
That's what everybody is focused on ultimately leading to again cash positive in 2015.
Our next question is from Julie Johnson with Bloomberg News. Please go ahead.
Hi, all. Congrats on a great quarter.
Thank you.
I just wanted to follow-up on something that we saw late in 2014. Zodiac had some issues with seat deliveries and certification and I know it affected some 787 deliveries. And they had cautioned that it's taking longer than they had anticipated to straighten some of those issues out. Just wondering if you see any trickle over into Q1? And if this is a potential warning sign or red flag as you prepare to ramp up 7 37 and 787 production?
I think there is no question that seat supply did impact some deliveries and some flow in our production system. We're working through it now. We see it being resolved this year. We regret any impact it has had on our customers, but it's all been within our plans and within our guidance as we work through it. I think the supply base is adjusting to these higher volumes both 787 and anticipated higher volumes in other programs.
And I think they'll be ready.
And next we'll go to Doug Cameron with Wall Street Journal. Please go ahead.
Hi. Good morning, everyone. Good morning, Doug. The quarterly defense question, Tim. You got some you got funding for some more Growlers in the 2015 budget.
What are your thoughts of the timing for the future of the St. Louis line? And does it depend at all on what happens with the long line strike contest which is upcoming?
Yes. I mean, I think the status is we're through close to the end of the decade on F-15s, which is a big piece of St. Louis. We've regained momentum on F-18s. I think in the minds of many, there remains a need beyond that order.
So there is a good chance that that line could continue at least to the end of the decade, although we do not yet have firm orders. That's an assessment. And there is no question that when we win a long range strike and I'm sounding as confident as I can and because I do believe we will that it will solidify the future of St. Louis for many, many years to come.
Our next question is from Dominic Gates with The Seattle Times. Please go ahead.
Hello, gentlemen. This question is for Greg. You mentioned delivering some early 787s this year, early build 787s. There are something like 11 airplanes usually mostly the terrible teens as they're called that have been sitting there for 4 years and more. And about a year ago, a couple of customers seem that those were earmarked for pulled out TransAero was one of them.
So two questions about or 2 parts to the question about that. First of all, is there any chance those have to be written off or sold so cheaply that it's almost the same thing and we get some accounting charges for those plans? And then secondly, it looks like you want to deliver maybe 3 this year, maybe 3 next year, very slow output. Is that a deliberate strategy because of the head to unit costs every time one of them enters the delivery stream?
Not at all.
The timing of the deliveries is really solely tied to when we finish the work on the aircraft. And frankly, it's a matter of prioritizing the teams of taking them off the production line and moving them over on the early build. So that is the only thing tied into that. It's really just about finishing up the aircraft for the customers. With regards to aircraft themselves, we continue to see a viable market and we're in active discussions with many customers related to those airplanes.
So that is fundamentally how we're handling the EMC airplanes. And you're right. I mean we're working through them in a prudent fashion And we do expect to deliver 3 or 4 this
year. Operator, we have time for one last question from the media.
And that will be from Christopher Drew with The New York Times. Please go ahead.
Good morning. Jim, you mentioned space and I was just wondering if you could talk us a minute about what it's like to compete with SpaceX with their lower cost and aggressive lobbying and political clout in Washington in various ways that you are Boeing and the United Launch Alliance compete with them and what you see happening in the long run in some of these areas?
I have respect for SpaceX. I think they offer more limited mission types than we do at this stage. And but their combination of focus on gaining capability at improved cost is going to benefit the market. It will make us a better competitor in some segments where cost is has become more important. I suspect that we will retain the lead in those many places we've never been before.
I see the advantage we have there will sustain itself for a long period of time.
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.