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Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

Q4 2012 Earnings Call

February 12, 2013 11:00 AM ET

Executives

Coleen Tabor – Director, IR

Jeff Turner – President and CEO

Phil Anderson – SVP and CFO

Analysts

Doug Harned – Sanford Bernstein

Robert Spingarn – Credit Suisse

Christine Lewald – Bank of America

Sam Pearlstein – Wells Fargo

Myles Walton – Deutsche Bank

Joe Nadol – JP Morgan

Carter Copeland – Barclays

Cai von Rumohr – Cowen & Company

Carter Leake – BB&T Capital Markets

George Shapiro – Shapiro Research

Michael Ciarmoli – KeyBanc Capital Markets

Carl Oshlager – RBC

Operator

Welcome to the Spirit AeroSystems Holdings, Inc. Fourth Quarter and Full Year 2012 Earnings Release Conference Call. My name is Sandra and I’ll be your operator for today’s call. (Operator Instructions) Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Coleen Tabor. Ms. Tabor, you may begin.

Coleen Tabor

Thank you, and good morning. Welcome to Spirit’s Fourth Quarter and Full Year 2012 Earnings Call. I’m Coleen Tabor, and with me today are Jeff Turner, Spirit’s President and Chief Executive Officer, and Phil Anderson, Spirit’s Senior Vice President and Chief Financial Officer. After brief comments by Jeff and Phil regarding our performance and outlook, we’ll be glad to take your questions. In order to allow everyone to participate in the question-and-answer segment, we do ask that you limit yourself to one question.

Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our news releases, in our SEC filings and in the forward-looking statement at the end of this Web presentation. As a reminder, you can follow today’s broadcast and slide presentation on our website at spiritaero.com.

With that, I’d like to turn the call over to our Chief Executive Officer, Jeff Turner.

Jeff Turner

Thank you, Coleen, and good morning. Let me welcome you to Spirit’s Fourth Quarter and Full Year Earnings Call. I’ll begin with a look at our business and related performance, and then Phil will review the financial results. After that, we’ll be glad to take your questions.

2012 saw strong top line growth in core operating results, as deliveries grew by more than 13% over 2011 and annual revenues increased 11% to record levels. In 2012, we successfully implemented production rate increases to unprecedented levels on our core programs and continued to deliver strong core operating results, while managing both the financial and operational impacts of the severe weather event at our facility in Wichita, Kansas.

While the company’s strong core business generated the profitability and cash that we expected, these results were overshadowed by cost challenges on development programs in the year. Our results, along with several significant accomplishments during the year, demonstrate the complexity of our business.

A few of the highlights from 2012 include: we delivered initial A350 XWB production units to our customer; we celebrated with our customers as they achieved tight certification and delivery on the G650 and G280 programs; we successfully executed rate increases on the 787 program, ending the year at five per month; we delivered the first flight test C series pylon to our customer; and we strengthened our work force partnerships by finalizing long-term agreements with Spirit’s Wichita engineering unit and the IAM unit in North Carolina.

While we remain watchful of global economic and political dynamics, we are closely managing our capital spend to support increased demand for our products, including the derivative and next-generation airplanes like the 737 MAX, the A320neo, the 787 and the A350. They drive clear line of sight into Spirit’s backlog of approximately $35 billion.

Now let’s talk about some of the specifics across the business during the quarter, beginning on Slide 3. Fuselage Systems had strong top line growth and operating performance, with margins of 14% on $680 million in revenue during the fourth quarter, as volumes across both core and new programs increased, including the anticipated increase in zero-margin revenue. The Fuselage segment’s high rate 737 production line continues to perform well, as the team delivered its 4,300th ship set of the Next-Generation fuselage.

During the quarter, the Fuselage team delivered the third A350 XWB composite center fuselage to our Airbus customer. And we congratulate our customer as they achieved the important milestone of the first structurally complete A350 XWB flight test aircraft late in the year.

The 787 team continued to support our customer by increasing deliveries in the quarter to 15, more than twice the number of deliveries compared to a year ago, demonstrating our successful rate increase to five per month. Milestones in the quarter included the delivery of the 99 787-4 fuselage section and the celebration of the rollout of the 100th unit.

On Slide 4, you see the Propulsion team delivered solid operating margin of 13% on $368 million in revenue as volumes across core and new programs as well as aftermarket increased. Current quarter margin was impacted by the restart of the 767 Pratt & Whitney and nacelle and increased revenue from zero-margin new programs.

The Propulsion team’s core business is performing well at higher rates as we deliver the 4,300 737 Next-Generation engine pylons and thrust reversers in the quarter. Additionally, we continue to progress as the 787 team ship pylon line unit 102 in the quarter. The team also delivered the 1,075th 777 nacelle and pylon packages. In addition to continued development on the 737 MAX and the 767 Tanker, the team delivered the first flight test C Series pylon and continued to make progress on the design effort for the MRJ pylon in the quarter.

On Slide 5, you see the Wing Systems segment, which primarily consists of our Europe, Malaysia and Oklahoma operations. The Wing team reported operating margins of 5% on $375 million in revenue during the fourth quarter, reflecting the forward loss recorded. Margins were impacted in the quarter by a G284 loss and increased volumes of zero-margin programs.

During the quarter, the G280 team made progress on cost improvements. Over in the fourth quarter, we experienced supplier performance issues, resulting in a further reset of the costs in front of us, rescheduled recovery and timing of supply chain cost improvement. Spirit Europe produced higher volumes of hardware for our Airbus customer, surpassing line unit 5,500 for the A320 wing components.

The Wing team in Tulsa showed steady core program performance, delivering the 4,300 Next-Generation 737 slats and flaps in the quarter. The group continued to make progress on the A350 delivering a third production unit, fixed leading edge from the North Carolina spar production and Prestwick assembly facilities, in addition to delivering the 99th slap ship sets in the fourth quarter. The 787 team made progress in our transition of the fixed leading edge assembly to our Malaysia facility as they completed the first 787-8 fixed leading edge assembly at that site.

Now let me turn it over to Phil who will provide more details on our financial results and outlook.

Phil Anderson

Thanks, Jeff, and good morning. I’ll begin with the key financial highlights for the fourth quarter and full year of 2012 on Slide 7. Revenues for the fourth quarter of 2012 were up approximately 17% as compared to a year-ago, a higher volume of large commercial aircraft and business jet deliveries. Operating margins for the quarter were 6.9% compared to 2011 margins of 8.4% and fully diluted earnings per share were $0.43 compared to $0.42 a year ago.

Fourth quarter 2012 operating income included $18 million of severe weather related expense. The fourth quarter tax rate benefited from a state and federal tax credits and the release of some reserves in our U.K. business. The current quarter result reflect positive contributions from the core business as spar realized favorable accumulative catch up adjustments totaling approximately $10 million or $0.06 per share, primarily associated with the productivity and efficiency improvements on core programs.

The current quarter results also reflect a forward loss charges totaling $34 million or $0.19 per share associated with the G280 wing, 767 propulsion and 747-8 Fuselage program. The G280 program experienced additional cost growth during the quarter associated with lay vendor shipments that significantly impact the production schedules and in repay supply chain contracting plan. We are continuing our efforts to stabilize and improve this program.

Revenues for the full year 2012 grew 11% from 2011 as deliveries increased across majority of our programs. Operating margins for the full-year grew 1.7% compared to 2011 margins of 7.3% while fully diluted earnings per share were $0.24 per share driven by the new program charges partially offset by the net gain from the severe weather event at the Wichita, Kansas facility.

The core operating engine of the company continues to perform well. Excluding forward loss charges, the net insurance benefit and favorable program adjustment in 2012, adjusted operating margins were 10.3% compared to 9.5% in 2011 after excluding forward loss charges and favorable program adjustments in the previous year.

Cash from operations for the fourth quarter was a $309 million source of cash as core programs generated strong cash flows and we received the final $130 million payment associated with the insurance settlement. Capital expenditures were $79 million for the quarter, which includes $6 million related to severe weather compared to the $86 million during the fourth quarter of 2011, as we continue to proactively manage investments in programs and capacity expansion as we rebuild from the severe weather damage. Slide 8, fourth quarter R&D and SG&A totaled approximately 3.8% of sales and reflects our continuing disciplined cost management.

Slide 9 summarizes cash and debt balances. Cash balances at the end of the fourth quarter were $441 million as compared to the third quarter of 2012 balance of $222 million. At the end of the quarter our total debt to capital ratio was 37%. Our liquidity position remains strong as we continue to proactively manage the capital structure of the company. Our U.S. defined benefit pension plan remains fully funded while we continue to make modest cash contributions to our U.K. plan.

Slide 10 summarizes net inventory balances at the end of the fourth quarter of 2012. Physical inventory balances were relatively stable from quarter-to-quarter as we continue to increase rates on new programs in the quarter and continue strong inventory management on our core programs. Deferred inventory balances increased by $71 million driven by the A350 XWB production and increased business jet deliveries. In the quarter we delivered 15 787-A units, which contributed approximately $17 million in growth or approximately $1.1 million per unit.

While 787 deferred inventory growth continues to moderate with our current period unit cost performance, we are seeing the expected lengthening of load times associated with the Dash-9 derivative introduction which could flatten this improvement curve for a period of time. Non-recurring inventory balances decreased as we reached certain development milestones on derivative programs in the quarter.

Slide 11 summarizes our full year, 2013 GAAP financial guidance, and Slide 12 summarizes our financial guidance, excluding our forecasted expenses, and capital expenditures associated with the recovery efforts from the April 2012 severe weather event in our Wichita, Kansas facility. Global market demand for commercial airplanes remains strong as our customers continue to see robust order intake and we continue to increase production rates to meet the demand. New and development programs continue to pose certain challenges and financial risk as we design and produce these products.

Our current guidance assumes that the 787 and the A350 XWB will continue on the schedules issued by our customers and we continue to execute our cost reduction plans. Business jet products continue to pose financial risks. Our guidance reflects our current cost estimates with an appropriate view of potential future risks. Based on the current customer demand and risk profiles, our financial guidance for 2013 is unchanged. Our revenue guidance for 2013 is $5.8 billion to $6 billion. Fully diluted earnings per share guidance for 2013 is expected to be approximately $1.90 to $2.10 per share. Excluding the severe weather spend, the company is expected to have earnings per share of between $2.20 and $2.40 per share.

2013 cash flow from operations is expected to be between $250 million and $350 million. Excluding the severe weather spend, 2013 cash flow from operations is expected to be between $300 million and $400 million. Capital expenditures in 2013 are expected to be approximately $400 million which includes approximately $50 million related to severe weather rebuild.

For perspective, Slides 13 and 14 show our revenue, earnings per share, and free cash flow trends. As you know, our revenues are growing as we increase production rates on core programs and bring new programs into full rate production. Our earnings and cash flows continue to reflect the strength of our core business while new and development program challenges have impacted profitability and extended the cash investment period.

As we execute our strategy and move through 2013 and on, we are intensely focused on continuously improving our strong core business while managing the financial risk of our new and development programs. And now, I’d like to turn it back over to Jeff for some final comments, before we take your questions.

Jeff Turner

Thank you, Phil and I’ll wrap up on Slide 15. The operating engine of Spirit continues to be strong driving the underlying cash and earnings from core programs, while post-storm rebuild continues through 2013. The catalyst continues to be the market demand for single-aisle aircraft and growing demand for wide-bodied products as well. In 2012 we supported this demand by successfully implementing rate increases across the business and our plans for 2013 and beyond build upon this success as we support our customers in extending the life of these programs well into the future.

While the cost challenges on development programs overwhelmed 2012 financial results, we are moving these programs into full rate production and leveraging the opportunity to improve cash flows that comes with production stability and volume. Our primary goal in 2013 is to continuously improve operational and cost performance across the business and manage the risk profile of development programs.

Looking forward with a strong balance sheet and liquidity, a significant backlog and our role on the best-selling airplanes, we are well positioned to drive performance and cost improvements to improve cash flows and create long-term value.

We’ll now be glad to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question is from Doug Harned from Sanford Bernstein. Please go ahead.

Doug Harned – Sanford Bernstein

Good morning.

Jeff Turner

Morning, Doug.

Doug Harned – Sanford Bernstein

I’d like to understand if we went back to Q3 and at that time you took the charge for the four programs, the G280, G650, the BR725 nacelle and the 787 wing. If you look at those four programs today, how do you see the risk with them going forward? You did take an additional charge on the G280, but could you talk about where you stand with respect to your supplier agreements and which ones are perhaps more difficult than other ones to stay – to ensure you can stay within the charge you took before?

Jeff Turner

Sure. I would look at it like this. Not a lot has changed in the environment over the ensuing quarter. So the risk profiles remain about the same. We did, in order to keep that risk profile from escalating on the 280. We took the charge on some specific issues we had with the 280 in the quarter. And I would say the – we continue to progress on the supply chain front. As Phil said in his remarks, the challenge is probably greater in the business jet part of the market, but I would say relatively the same as where we were about a quarter ago. We’re seeing some improvement on the BR725 and then we saw the – some issues on the 280 and took those in the quarter.

Doug Harned – Sanford Bernstein

And then just on the 787, I know Phil you mentioned that when you go to the Dash-9 there may be some flattening in production, but can you talk about what the issues are going to the Dash-9? Boeing has said that they at a final assembly level are able to go to seven a month and stay at that, they expect, through the summer, but that some of their suppliers who are running Dash-9s down the same line as Dash-8s, that that’s going to be a slower process. Can you talk about where Spirit stands with respect to that? Is this something that is slowing you down? And if so, what aspects of the program are causing that?

Jeff Turner

Well, I would just say categorically, Doug, every derivative or every major change takes more hours, more energy to get that major change through. We are in the process of moving the Dash-9s through our lines, and we actually have that in our plan. We’ll be able to meet the pull demands from the customer. So I think it’s just – it’s prudent and appropriate that extra time is planned into the production schedule any time there’s a major change, and certainly a derivative counts as a major change.

Phil Anderson

Yeah, Doug, just to amplify it, in the normal course of business, when you introduce a new derivative, it has longer flow times to the factory, and so when you’re flowing it down the same line as like a current derivative, you end up losing a little bit of efficiency as you move the new derivative with longer flow times through the factory.

Doug Harned – Sanford Bernstein

Okay. Thank you.

Phil Anderson

You bet. Thank you.

Operator

Thank you. And the next question is from Robert Spingarn from Credit Suisse. Please go ahead.

Robert Spingarn – Credit Suisse

Good morning.

Jeff Turner

Good morning, Rob.

Robert Spingarn – Credit Suisse

Jeff, since the third quarter, your Q3 report, Airbus noted that Spirit is a risk on A350. Can you interpret that for us on a more specific basis and perhaps frame that risk? And to what extent do unsettled LTAs with suppliers in Kinston limit your future cost visibility?

Jeff Turner

Well, a couple thoughts. One is, you know anytime we build a new product, send it through the production line, my experience is there’s always traveled work. There’s always late breakthrough changes. Certainly the issues on the A350 are not unique. I think it’s fair to say there’s always frustration with whoever it is that you’re waiting on to get something done. In our case, with Airbus, we’re working very closely with Airbus. We’ve got traveled work in their factory. They’ve got some folks working with us to help us understand their processes and, frankly, help us move some late-breaking changes, all of which, not driven by Spirit through our factory. So all those things add to the complexity of the early production programs and we certainly have it on the A350. We have delivered six units now: two test units, four that are intended to be flying units. And Airbus, very dynamic company, continuing to drive hard on their schedule.

Robert Spingarn – Credit Suisse

But, Jeff...

Jeff Turner

That does – that does give us some issues in the supply base, and we’re working hard to stay on top of those. The ones that we have closed so far we’re closing inside our plans.

Robert Spingarn – Credit Suisse

But is there a similar situation there that we saw in Tulsa, with Gulfstream and some of the other development programs, where the LTAs are not yet in place because a similar approach was taken in North Carolina, and therefore we could see a repeat, maybe not of the magnitude, but could you talk about that?

Jeff Turner

Sure. Sure, Rob. I think there are similarities on every development program. And, certainly, if it – and we didn’t manage it as well in Tulsa at all, as we need to. You know, we’re taken those lessons learned through the company, putting a lot more emphasis a lot earlier on getting those things worked.

Operator

Thank you. And the next question is from Ron Epstein from Bank of America. Please go ahead.

Christine Lewald – Bank of America

Hi. This is actually Christine Lewald calling in for Ron. Our question is, would you consider doing something strategic for Tulsa, so you can focus more on core operations?

Jeff Turner

Well, I think we’ve said in the past in response to that question that we continually look at the strategy of the company, what makes sense. So of course we’re continually looking at it and deciding what does make sense. So clearly we consider it but again we’re a structures builder and when we stick to structures we do well. We’ve struggled where we got outside of that a little bit. The more systems we have, the more challenged, especially on new development programs. But again once we get things under production they tend to flow well and we tend to be able to make significant improvements.

Phil Anderson

And I go just amplify that. We are currently focused on improving and helping Tulsa overcome the growth profile that they have over last several years and making those programs cash positive so I think that’s the current intense focus in the company.

Jeff Turner

Yeah, absolutely. But again I’d say strategically we’re open to the things that create value for Spirit shareholders.

Christine Lewald – Bank of America

Great. Thank you.

Operator

Thank you. And the next question is from Sam Pearlstein from Wells Fargo. Please go ahead.

Sam Pearlstein – Wells Fargo

Good morning.

Jeff Turner

Good morning.

Sam Pearlstein – Wells Fargo

Can you talk a little bit just about how the quarterly progression in 2013 unfolds when it comes to revenues and cash flow? Just because we’ve got the 787 ramping up, you’ve got things like the 767 ramping down and I’m just trying to think about how that plays out over the course of the year.

Phil Anderson

Yeah. Sam, I’m not sure about the 767 ramping down. Maybe a little bit. I think it just follows really the normal trajectory where our second, third quarter tend to be stronger revenues on a constant run rate basis. But with the current plan production increases on the 737, 787 faster business you have production, good chance you’ll see that that growth second, third, and fourth quarter picking up through the year.

Sam Pearlstein – Wells Fargo

Okay. And if I can follow-up with something is back in November you talked about $5.2 billion to $5.3 billion in revenues. It looks like you came in really almost $100 million above the high end, so what did you deliver more of? What really came in ahead of plan?

Phil Anderson

Yeah. I think we actually got a few more just the core business models in the plan and a few more of the business jets.

Sam Pearlstein – Wells Fargo

Okay. Thank you.

Phil Anderson

Sure. Thanks, Sam.

Operator

Thank you. The next question is from Myles Walton from Deutsche Bank. Please go ahead.

Myles Walton – Deutsche Bank

Thanks. Good morning. The first one is a clarification. The 747-8 forward loss in the quarter, I think you had a block change in the quarter as well. And so was that a forward loss on the block you were exiting or the block you were entering?

Jeff Turner

No. Actually the block changes in the first quarter of 2013. So it was the end of the previous block. And let me just amplify a little bit on that. The 747, frankly, is one of our most challenging programs to build. It’s mixed media. That means part of the airplane, as it’s gone through its derivative life is on digital definition and some of it is still on the old Mylar’s from frankly the 1960s. And so the building of that is challenging. Adding to that, it’s relatively slower rate production. It is a slower rate production program, so the learning curve on it is – takes longer to get through the learning on the process, and both for us and for our supply base. We are about to enter the next block. We’re going to see improvement, we believe, from the current block to the next block. But again, we’re still pretty early on the Dash-8 as we move from the Dash-400s to the Dash-8s.

Myles Walton – Deutsche Bank

So to just follow up, though, as you enter the new block, the size of the new block would, I imagine, be a couple of years, and would you effectively walk into the new block in a forward loss?

Jeff Turner

No. We will not walk into the new block in a forward loss.

Myles Walton – Deutsche Bank

Okay. The real question was on volumes in the 878 in 2013. You talked a bit about the step-up in rates, but I’m curious what you actually expect to deliver in terms of ship sets.

Jeff Turner

We expect to deliver in the mid-60s on a pull from our customer. And that fits the production schedule and also the phase-in of the Dash-9.

Myles Walton – Deutsche Bank

Okay. Thanks again.

Operator

Thank you. The next question is from Joe Nadol from JP Morgan. Please go ahead.

Joe Nadol – JP Morgan

Thanks. Good morning.

Jeff Turner

Good morning.

Joe Nadol – JP Morgan

My first question is, you guys noted a few times the strong core results on the core programs. I’m wondering if you would mind specifying what the EBITDA was of core programs in 2012 and then what’s embedded in your 2013 guidance?

Jeff Turner

Phil?

Phil Anderson

Let’s be blunt. Joe, no, I would mind specifying. Yeah, we don’t break it out between the core and the new, as you know. So we just consolidated view and the guidance of course is strong revenue growth this year and if we exclude the severe weather, $2.20 to $2.40 a share.

Joe Nadol – JP Morgan

Right. I mean, just if you note that you’re doing well and it looks like it, for those of us that are looking at trying to value the stock, thinking about separating those, it might be – I think it would be helpful. But the second question was just on the CEO transition, Jeff, anything new on timing there or internal versus external if you’re leaning or if the board is leaning one way or the other? And then finally on that point, with regard to the supply agreement with Boeing, how the company is handling negotiating that? Is this something that the new CEO will have to sign off on or is this something that you can sign off on before a transition? Thanks.

Jeff Turner

Okay, sure. On the transition itself the – I’m not going to provide a great deal of color other than to say it’s a rigorous process as you would expect. It’s disciplined. We’re using outside support to do it and do it thoroughly. We’re looking at both internal and external candidates thoroughly. We’ve reviewed a number of candidates; a lot of good candidates and we’re moving through the process. I would say on the issue of the – really not just the pricing issue that you brought up but really all major issues facing the company, we keep our board fully involved in that.

Certainly anything as major as the reset of the pricing, the board is not only highly involved in but will ultimately have the authorization authority on that. So this is no – under no circumstances would it be a one person issue whatsoever. But our internal team, supported by our board and certainly myself, are progressing ahead with that. Timing will be what it is. Business will progress. I continue to have my hands on the reins and will do that until an appropriate transition has occurred.

Joe Nadol – JP Morgan

Okay. Thanks, guys.

Jeff Turner

Yes. Thank you.

Operator

Thank you. And the next question is from Carter Copeland from Barclays. Please, go ahead.

Carter Copeland – Barclays

Hey. Good morning, guys.

Jeff Turner

Hi. Good morning.

Carter Copeland – Barclays

Just a couple of clarifications actually, first on the 787, the flattening of the deferred production cost curve for Dash-9, can you clarify if that’s simply related to absorption – overhead absorption or is there any kind of impact from price discounts for particular volumes or contractual break points or is it just absorption?

Jeff Turner

It’s just absorption, Carter.

Carter Copeland – Barclays

Okay. Okay, great. And on the 767 forward loss, I think that was kind of a bit of a surprise given the maturity of the program. Was that related to the longer production flows for the tanker or was it related to the restart of the prep propulsion? How should we think about what surprised you there?

Jeff Turner

You should think of that as an anomaly. We have Pratt & Whitney in the sales certainly in our catalogue and they’re orderable at a price frankly that was established at the divestiture point. And I think the one we’ve built in the quarter was the first one we built in well over a year. I think we’ve gone as long as three years at a time without building them so when they come in, they’re a challenge to restart and that’s what occurred there. The Pratt & Whitneys will be the Tanker, the nacelle for the Tanker so when we get in a production where we have a group of the build, we should see much better performance but think of it as a one-off that hasn’t been built for quite a while.

Carter Copeland – Barclays

So it’s part learning. The remedy is part learning and part pricing or just learning?

Jeff Turner

Well it can be both.

Phil Anderson

Yeah. Basically, Carter, we’re restarting a cold production line and last time we built a couple of airplanes worth of hardware was in 2011.

Carter Copeland – Barclays

Okay. And one last quick one, if I may, on the 747-8 as you enter this next block what are you assuming in terms of production rates? I mean are you leaving yourself any room? Boeing was pretty clear on their recent filings that there are some unfilled slots beyond 2013 that could pressure that rate. So how are you thinking about what sort of production rate you’re going to assume in that block?

Jeff Turner

Right now we’re assuming that those are going to fill in but either way it’s a pretty slope production run.

Carter Copeland – Barclays

Okay. Thanks, guys.

Jeff Turner

Thank you.

Phil Anderson

Thank you.

Operator

Thank you. The next question is from Cai von Rumohr from Cowen & Company. Please go ahead.

Cai von Rumohr – Cowen & Company

Yes. Thank you very much. So as you look at your programs given kind of the large losses we experienced in the third and now we had some more in the fourth, if you were to rank your programs in terms of risk, in terms of which would be the one – the one, the two or three that would still have the greatest risk for charges from this point forward, how would you rank them?

Jeff Turner

Well rather than say the risk for charges, Cai, let me just say this volume risk in terms of hitting the learning curves. I mean we’ve said it all along the 87 because of its size is the greatest risk. We like the process that we’re using with the customer to identify and make improvements on it. That’s got opportunities out in front of it because of derivatives and rates and those sorts of things. The next biggest volume, just simply because of the size, the risk, would be on the A350, again because of the size of the program.

I would say in terms of what would have risk for further charge, I mean you’d have to put the 280 in that category just because of its pedigree and some of the challenges we’ve had on it, especially when you think about it’s a relatively – it’s a small, low-rate production program going into a pretty full supply base. So that’s been a challenge for us. We think we’ve got that scope, but I would say there’s risk on it. So I would put it in the, probably the business jet piece in terms of the most risky to the execution of our plan and then to the size that I’ve already talked about.

Cai von Rumohr – Cowen & Company

Thank you very much. And, if we go back to the 787, I believe you said, what, mid-60s is what you expect to deliver this year?

Jeff Turner

Yeah, I think that 60 to 65 is what’s in our plan, and that’s responding to the pull from the customer.

Cai von Rumohr – Cowen & Company

But have they changed that pull? Because, you know, my understanding was this was going to be bigger, and, at one point, you also mentioned crossover on the deferred, it looked like it was going to be in 2013. So is that 60 to 65 lower than you thought six months ago? And has the time at which you would cross over, which I believe was around mid-2013 or, you know, has that pushed out into 2014?

Jeff Turner

This – first let me address the schedule and then I’ll let Phil address the financial impact. The schedule’s been pretty steady for us for quite a while. So the – and, again, we talked a little bit earlier about it, part of that is rate, but it’s also planning in some time to bring the Dash-9 through the line. So it’s pretty much what we’ve been planning. I don’t think we’ve had a change on it for several quarters now.

Phil Anderson

No, it’s been very stable Cai. To the deferred, we do see introducing the Dash-9 is going to cause some more extension out on the cash flow break-over. But, no, I still think it’s in 2013. You know, I think that the total 787 program is going to be cash flow negative this year. But it’s mainly driven by our investment now in the 10-a-month capital. So on a per-unit basis, you know, we still think that program starts to generate some positive cash yet this year.

Cai von Rumohr – Cowen & Company

Okay. And last one, the Boeing master contract, it expires in April, so we’re approaching it. What are your expectations for having that negotiated before the contract expires?

Jeff Turner

It actually expires in June, I believe. And we are very active in that conversation and hopeful we’ll be able to close it. There is wording in the original contract that contemplates if it isn’t closed there is a continuity of business agreement as well. So I mean we are diligently working on it with Boeing and hope to have it closed. But again, it may or may not.

Cai von Rumohr – Cowen & Company

Terrific. Thank you very much.

Jeff Turner

Thank you, Cai.

Operator

Thank you. And the next question is from Carter Leake from BB&T Capital Markets. Please go ahead.

Carter Leake – BB&T Capital Markets

Good morning.

Jeff Turner

Good morning.

Carter Leake – BB&T Capital Markets

Let me circle back to the rate, because it’s going to come up. I mean, if you do the mid-60s, how can we reconcile with Boeing saying on the 10-per-month rate? What am I missing there?

Jeff Turner

Well, I think a couple of things. One is production rate and delivery rate. And again, you’ve got to think about it as having some slower flow in the middle of faster flow in order to accommodate the Dash-9s as they come through. So published rate, the rate we can hit, and then stepping up to faster rates, but having some – we call them non-scheduled days – in the process so that we can accommodate the change, packages coming through. And so we can be moving through at a faster rate and then be ready to deliver in say 2014 at an even faster rate.

Phil Anderson

Carter, we are fully aligned with the customer on the schedules. But as you know, Boeing can actually deliver more units based on some of their inventory that’s been built up over the last several years that may not match Spirit’s, but the overarching goal of the program is to keep the production lines flowing for efficiency and continued cost improvement. And I think by all standards we’re on the mark to support that.

Carter Leake – BB&T Capital Markets

Okay. This is a small point, you’ve done it before. Is there any chance on the regional deliveries to give us any color on 280 versus 650 deliveries?

Phil Anderson

Well, I’m not sure what you’re referencing to regional. These are the business jets.

Carter Leake – BB&T Capital Markets

Right, right. Just on the business jets, any kind of breakout against that?

Phil Anderson

No. Frankly, I mean, we are moving to full rate production and we let our business jet customers talk to production rates.

Carter Leake – BB&T Capital Markets

And finally, if we could on the 280, maybe if we could go into more specificity on the issues here. The question I have is in such a short period between a large charge which I would have thought would have exhausted most risk, what would cause an additional charge in such a short period of time from the quarter?

Jeff Turner

Sure. Let me talk to that. As you know, we’re in the process of moving some product around, some supply around to get better value. In the process of doing that, some pretty major parts of the wing we moved to a new machining supplier. That supplier had some yield issues and those yield issues drove a schedule problem for us and then delivery of key products and had to move to some alternative supply including building some of it in-house ourselves.

But it put us significantly behind our production plan, drove expedite cost for both the delivery if the wings to the customer but also delivery of the parts that we needed internally. And we elected to not take that out of management reserves that we’d established on the program. Actually the management reserve on that program is a bit higher today than it was a quarter ago. So we took that in the quarter in order to keep from compounding risk there. And that’s what happened to us. So it showed up some challenges for us in our work movement process that we’ve shored up. But it’s one of those things that on a longer run big production program where we do a lot of movement wouldn’t have had the same level of impact. But on a slower rate lower volume production lower value production it showed up.

Phil Anderson

Carter, I do think it also speaks to just the nature of this industry. When you get behind in your factories by two or four weeks, it takes somewhat – more of a longer time to recover. It’s just the nature of this business. And it also speaks to why when there’s short-term events from other customers that they tend to try to use the balance sheets to keep the factories flowing because it is so disruptive to slow down and gap production. So Jeff’s point about a late supplier coming into us and the cost and getting us behind schedule, it takes months to recover from these things at some point.

Operator

Thank you. And the next question is from George Shapiro from Shapiro Research. Please go ahead.

George Shapiro – Shapiro Research

Hi, yes. Phil, if you take a look at accounts receivable they’re up like year-over-year over 50% well above what revenues are up. If you could discuss what’s going on there and then the second part of it is in your cash flow guidance for 2013, what have you assumed happens to the receivables?

Phil Anderson

Yep. Sure, George. The biggest piece I think that you’re seeing there we have some retainage from a customer that we’ve been disclosing now for well over a year that we’ll continue to work with them on that based on some of the performance issues that we’ve had. And that’s what that is and I think 2013 as we move to full rate production on all of these new/development programs we’re working pretty intensely with our customers to try to get these things squared up for the year.

George Shapiro – Shapiro Research

So are you assuming that that receivable is why in 2013 would come down some and so be a source of cash or kind of what’s your assumption in there?

Phil Anderson

Yeah. That’s a reasonable assumption that we come down some, yeah.

George Shapiro – Shapiro Research

Okay. And then just one other quick one; 747-8 with the new block, why won’t you sit there and be able to accrue some small profit on that new block?

Jeff Turner

Well, I think that again you look at the volume, you look at the risk on the program and look at where you are on the cost curves. Again remember we’re pretty early on the cost curve on the Dash-8 with a fixed price over a long period of time on the product. So we’ll work hard to being prudent.

George Shapiro – Shapiro Research

Okay, thanks.

Jeff Turner

Thank you, George.

Phil Anderson

Thanks, George.

Operator

Thank you. The next question is from Michael Ciarmoli from Keybanc Capital Markets. Please go ahead.

Michael Ciarmoli – KeyBanc Capital Markets

Good morning. Thanks, guys. Thanks for taking the questions.

Jeff Turner

Sure.

Michael Ciarmoli – KeyBanc Capital Markets

Maybe just a couple of clarifications first. Phil, I’m back to Rob’s question on the LTAs for the A350. So would you be willing to disclose what percent of those LTAs are already in place?

Phil Anderson

Well I don’t know off the top of my head, Michael. What I do know is we’re very early in the process. I think we’re well ahead of the point in time where we were on some of the other development programs and I think we have the right level of intensity focused on managing those LTAs and apply our lessons learned to it.

Michael Ciarmoli – KeyBanc Capital Markets

Okay. Fair enough. And then just on fixing Tulsa, you see that’s the first priority. At what point does the simple financial equation or an NPV analysis enter in to say maybe it’s more beneficial to walk away or sell those assets back to Gulfstream. I mean, what does the sheer math tell you about the financial benefits of fixing Tulsa?

Jeff Turner

Well, I think one of the things to bear in mind is Tulsa has about – I think it’s six major programs. Four of those six are – well, three of the six are production and three of the six are coming into production mode. So part of the challenge, frankly, Michael is this is – we’ve gone through the travails of the development and then the question become pretty straight forward. What’s the cash value of these programs going forward? It’s pretty straight forward, if you look at it as a strategic question.

Michael Ciarmoli – KeyBanc Capital Markets

Okay. Fair enough.

Jeff Turner

Again, good, good underlying cash generating on some of the programs and all the challenges, the development on some of the others.

Michael Ciarmoli – KeyBanc Capital Markets

Okay. Fair enough. And then just the last one, quickly, if you can; on the business regional deliveries, I think you’re almost at the 2008 levels this year. What do you sort of have built into your plan for 2013 for those platforms?

Phil Anderson

Yeah. I think back to one of my previous comments, unfortunately, is we don’t guide – because it’s mainly business jet deliveries at this point.

Michael Ciarmoli – KeyBanc Capital Markets

Okay...

Phil Anderson

And we’ll let you talk to our customers about rates and things.

Michael Ciarmoli – KeyBanc Capital Markets

Okay. Fair enough. Thanks a lot, guys.

Phil Anderson

Yeah. Thank you.

Coleen Tabor

Thank you, and operator, we have time for one more question.

Operator

Thank you. The last question will be from Carl Oshlager from RBC. Please go ahead.

Carl Oshlager – RBC

Yeah, thanks for taking the question here.

Jeff Turner

Sure.

Carl Oshlager – RBC

Can you give a little color on next year’s CapEx? It seems like it’s still going to be pretty high after stripping out the severe weather impact. Where is that money going?

Jeff Turner

Sure. If you think about a – I think we’ve talked in what, Phil, $100 million, $120 million range for kind of maintenance level? But we’ve got rate increases on the A350 and rate increases on the 787 coming. And so that’s really the prime driver, although there is some rate increase for production as well, but the two big drivers are those big programs.

Carl Oshlager – RBC

Okay. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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