Annual Meeting, Chicago, IL
W. James McNerney, Jr.
Chairman, President and Chief Executive Officer, The Boeing Company
April 29, 2013
Last year at this meeting, I described our aspiration on behalf of our shareholders and our employees to convert the foundational strengths of this company (our strong core operating performance and unprecedented backlog) into sustained business performance—the year-in, year-out excellence that defines the world’s top-performing companies.
Our results for 2012 and the first quarter of 2013 demonstrate clearly the capacity of our team to consistently deliver the levels of world-class performance and growth that we aim to achieve.
From commercial airplanes to military aircraft and satellites, to the next generation of space exploration vehicles, Boeing remains at the forefront of innovation. This innovation—in the form of both incremental and step-function advances—is fueling our growth and our productivity, and providing our customers with unmatched value and capability.
While more work remains to be done to achieve our full potential, our momentum toward the goals we have set is accelerating, and our confidence in the future is increasing, as we approach our second century of aerospace leadership that begins in 2016.
I am very proud to lead the skilled and dedicated people of Boeing, and I’m honored to share the results of their work—and our outlook—with you today.
By every measure, 2012 was a very strong year for Boeing.
- Increased deliveries from both our major businesses produced record revenues of $81.7 billion, 19 percent higher than in 2011.
- Our backlog also reached an all-time high of $390 billion on continued customer preference for our efficient and affordable products and services.
- Near-double-digit operating margins in both businesses drove net earnings of $3.9 billion.
- And strong core performance across our production programs and services businesses generated operating cash flow of $7.5 billion—our highest since 2007.
These results—and our positive outlook for 2013—enabled our decision in December to resume our share-repurchase program this year and increase our dividend by more than 10 percent.
Taking a closer look at our businesses and our markets:
Last year, Boeing Commercial Airplanes restored our market-share leadership with 601 deliveries—a 26 percent increase over 2011, and the most since 1999. We also led the industry with 1,203 net new orders, our second-highest total ever. Customer demand for the fuel-efficient new 737 MAX was particularly strong, and the program now exceeds 1,200 firm orders. With a major commitment from Ryanair last month for 175 new 737 NGs, we have effectively bridged production between these two single-aisle efficiency leaders.
We also extended our leadership in the twin-aisle market last year with the delivery of the 1,000th 777, the successful entry into service of the 747-8 Intercontinental and the delivery of 46 787 Dreamliners to eight customers.
Through the first quarter of 2013, we have booked an additional 209 new orders. That increases our backlog to more than 4,400 airplanes valued at $324 billion and further strengthens our foundation for sustained growth.
During 2012, we continued to steadily increase our production rates to match growing market demand for our airplanes. In addition to five successful rate increases across our programs, we achieved a major strategic milestone with the start of 787 deliveries from our new facility in Charleston, South Carolina—the first commercial airplane factory built in the United States in more than four decades.
Our success in standing up Boeing South Carolina—along with other recent steps to expand our production capacity and the geographic diversity of our manufacturing and engineering footprint—will help ensure continuity for our business as we scale up for the major growth that’s in our future. The four-year contract agreement we reached earlier this year with union-represented engineers and technical workers in Puget Sound will also help ensure we deliver on our growth plans.
We’ve addressed a number of challenges recently, too, most notably with a battery issue on the 787 program.
After more than a year of strong in-service performance, 787 flights were suspended after two batteries overheated. Because nothing is more important to us than the safety of the passengers and crews who fly on our airplanes, we made resolving that issue our top priority. We committed resources from across the company and engaged outside experts to work with us — alongside global regulators, our suppliers and our customers—to develop a comprehensive and permanent solution.
Last week, the Federal Aviation Administration and its global counterparts fully certified our solution and approved the 787’s return to service. I’m pleased to report this morning that the first passenger revenue flights took place over the weekend.
While we deeply regret the impact this issue had on our customers, we have learned from it and have made our airplanes even better. The promise of the 787 and the game-changing benefits it provides to customers and their passengers remains fully intact. We look forward to returning the entire fleet to service and to resuming deliveries from our factories in the days ahead.
Now let’s turn to Boeing Defense, Space & Security, whose disciplined focus on program execution—and portfolio of proven, reliable and affordable systems and services—exceeded expectations in 2012, despite a very difficult and uncertain business environment.
During the year, we delivered 144 military aircraft, 10 satellites and nearly 11,000 weapons systems. Our defense, space and security revenue increased 2 percent over 2011 to $32.6 billion. International business accounted for nearly one-quarter of 2012 revenues, and we expect it to grow to 30 percent of annual revenues in the near-term.
Despite intense budget pressures for many of our customers and a growing field of very capable competitors, we secured $44 billion in new orders in 2012. Among them:
- Seven new satellites, including four all-electric 702SPs, strengthening our position in the commercial satellite market
- Eleven additional P-8A submarine-hunting aircraft for the U.S. Navy, positioning us for additional business in the growing intelligence, surveillance and reconnaissance market
- Contracts for NASA’s Space Launch System and Commercial Crew programs — two essential elements of the future of U.S. human spaceflight, and
- The largest U.S. Air Force performance-based logistics contract ever awarded, further validating our services strategy.
We also made progress on several of our innovative new programs, including the test flights of the Phantom Eye liquid-hydrogen-powered unmanned aircraft, a 469-day mission for the autonomous unmanned X-37B spacecraft and the start of work on our first international cybersecurity program.
Including new orders booked in the first quarter of 2013, Boeing Defense, Space and Security’s backlog has grown to $68 billion. That’s more than twice 2012 revenues and among the strongest order books in the defense industry.
Leveraging the international strengths of our company has been a high priority for several years, and the return on that investment in our people and resources has improved our results and expanded future opportunities. Roughly 80 percent of our commercial airplane backlog is committed to international customers, as is now 42 percent of our backlog on the defense, space and security side.
Let’s now discuss our outlook for the remainder of 2013.
The priorities we defined two years ago for achieving sustained growth and continued aerospace leadership are serving us well. As business-and-competitive pressures have increased, our customers are demanding even more capability and greater efficiency for less cost. While our teams have made tremendous progress over the past several years in improving affordability, we must do more — and we must do it faster.
To that end, we have launched three new enterprise initiatives:
- First, a “Partnering for Success” program with our top supplier-partners to reduce costs to customers by improving quality, flow time and efficiency throughout the supply chain
- Second, a concerted effort to reduce new-product-development costs, and
- Finally, a strengthened focus on workplace safety to eliminate on-the-job injuries and improve the health and productivity of all Boeing employees.
These efforts—combined with our ongoing focus on disciplined execution, productivity improvements to fund innovation, and effective management of our risks—will ensure we continue to compete and win in our markets and satisfy increasing customer expectations.
Commercial airplanes represents a strong and attractive growth market. Passenger traffic has proven resilient despite a slow-growth global economy. The world’s airlines and leasing companies continue to replace older airplanes with new, more fuel-efficient jets.
Our opportunity for significant and sustained growth in commercial airplanes is simply unprecedented. We are committed to capturing that growth and to extending the market-leading position we have earned through superior product strategies and strong program performance over the past several years.
While the 787’s successful return to service is our first order of business for Boeing Commercial Airplanes, we are also intensely focused on a list of additional priorities for the year.
First and foremost is to continue the steady and profitable ramp-up in production rates to deliver our 4,400-airplane backlog to customers sooner, and generate the means to fund sought-after additions to our product lines.
Among those additions, successfully executing our current 787-9 and 737 MAX development programs remains high on our priority list. So does finalizing our plans to launch the 787-10X and the 777X programs.
These game-changing airplanes represent attractive investments that will dramatically increase customer and shareholder value, and lower execution-and-return risk to Boeing. These new airplanes will leverage prior lessons learned and previous technology development efforts. The 737 MAX will sustain our strong position in the single-aisle market, while the 787 and 777 derivatives will extend those market-leading franchises and secure our twin-aisle leadership for several decades to come.
Continuing to grow our services business rounds out our priorities for Commercial Airplanes.
In Boeing Defense, Space & Security, while the full impact of U.S. budget sequestration remains an unknown, we are seeing strong customer and congressional support for the majority of our programs. And, as I mentioned earlier, we are aggressively pursuing—and expanding—our share of growing international markets.
Our broad portfolio of proven, affordable and highly capable systems and services is simply unmatched by our competitors. On top of that, our recent investments in growth areas of unmanned systems; satellites; cybersecurity; and intelligence, surveillance and reconnaissance have added to the strength of these offerings.
To remain competitive in this environment, we have reduced BDS’s operating costs over the past two years by $2.2 billion through targeted facilities consolidations, reductions in executive and management ranks, and supply-chain improvements. These measured and sometimes difficult decisions have improved the affordability of our products and enabled us to continue investing in future growth.
In summary, our Defense, Space & Security priorities are:
- First, extend and grow our core business by bringing improved capability and affordability to our customers
- Second, further expand global sales and operations
- Third, successfully execute our development programs, including the KC-46A Tanker, and
- Finally, continue our market-based affordability drive to fund investment in tomorrow’s capabilities and programs.
While we are often and appropriately measured by our financial performance and program execution, environmental stewardship and community engagement are deeply held core values at Boeing.
- For instance, over the last five years we set and achieved aggressive goals to reduce greenhouse-gas emissions, energy use, hazardous-waste generation and water consumption—even as we significantly increased airplane production.
- We have been increasingly active in the communities in which we live and work. In 2012, Boeing—along with its employees, retirees and charitable trust—invested $179 million in communities around the world.
- We also stepped up our efforts to recruit military veterans and make it easier for them to match their skills and experiences to our needs. We have hired and trained more than 3,600 military veterans since January 2011, and we recently doubled our hiring commitment for veterans going forward.
In summary, over the past year, we have delivered significant growth, executed on our core business, continued to improve productivity to fund innovation, and advanced the product-and-services strategies that will drive success for our customers and enable our long-term industry leadership.
As you will see in this video, our people’s passion to innovate and make a difference permeates the Boeing culture. It motivates us to come to work each day. I believe it separates us from our competitors. And it is what will help us create a bigger, better Boeing through our centennial in 2016 and throughout our second century of innovation and excellence.