By Calvin Biesecker

As expected, Boeing [BA] yesterday reported lower sales and earnings in the second quarter on fewer planned commercial aircraft deliveries, less work on an Army ground combat system and a missile defense program, and lower margins at its commercial and defense divisions.

Boeing maintained its financial guidance for 2010 with a “prudent” level of cushion built in should unforeseen difficulties arise in its major commercial development programs, the 787 Dreamliner and a new 747 variant, the 747-8. James Bell, the company’s chief financial officer, said that inventory of both aircraft is ramping up and that reserves have been created to guard against the impact of any potential retrofits.

Risks remain in both commercial aircraft programs, which are currently in flight testing and slated to deliver the first aircraft to customers toward the end of this year. Boeing said it is possible that deliveries for both aircraft could slip into early 2011.

James McNerney, Boeing’s chairman, president and CEO, told analysts yesterday that there isn’t any margin left in the 787 flight-test program. However, the “majority of the technical risk” has been retired on the aircraft development and that various metrics used to measure progress on the production ramp are improving.

Net income in the quarter tumbled 21 percent to $787 million, $1.06 earnings per share (EPS), from $998 million ($1.41 EPS) a year ago, still topping consensus estimates by a nickel. Margins fell 50 basis points to 8.4 percent, due to declines in both the commercial and defense segments.

Boeing’s sales dropped 9 percent to $15.6 billion from $17.2 billion a year ago. The company’s overall backlog has dipped $3.3 billion since the start of the year to $312.3 billion. Free cash flow was $9 million.

At the Defense, Space & Security segment, sales fell 8 percent to $8 billion mainly due to lower volume on the Army’s Brigade Combat Team Modernization, formerly called the Future Combat System, and the Missile Defense Agency’s Ground-based Midcourse Defense anti-missile program.

Operating earnings in the defense segment dropped 19 percent to $711 million on the lower sales and a 120 basis point decline in margins to 8.9 percent. Boeing recorded a $46 million charge on the Peace Eagle Airborne Early Warning and Control aircraft program for Turkey and both Bell and McNerney said the business environment in general is more challenging due to increasing pressure on prices that in turn impacts profits, and challenges in how work is being put under contract.

Defense group margins so far this year are at 8.8 percent, below Boeing’s expectations of 10 percent for the year, due to the Peace Eagle charge and the difficult business environment, McNerney said. The “cost structure” of the defense business needs to come down and the company is working out the details, he said. This is being driven not only by pricing pressures, but also possible drops in volume as well as the Pentagon’s affordability needs, he added.

Revenues at Boeing Commercial Aircraft were off 12 percent to $7.4 billion on a decline in aircraft deliveries and expected passenger seat supplier challenges. Aircraft orders were significantly higher than a year ago, which helped justify the company’s recent decision to ramp up monthly production rates of 737 aircraft, and give it confidence in a modest economic recovery.

McNerney said that various airline indices are showing recovery with a return to peak levels sooner than expected, noting that air cargo is also experiencing a “strong turnaround” and that new sources of aircraft financing are appearing.

Profits at Commercial Aircraft fell 16 percent to $683 million on the fewer airplane deliveries and higher research and development spending.

For 2010, Boeing still expects sales to be between $64 billion and $68 billion and earnings between $3.50 and $3.80 EPS. The company still projects higher sales in 2011 driven by 787 and 747-8 deliveries. Boeing will provide detailed guidance for next year when it reports fourth quarter results in January.