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Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

Q1 2014 Earnings Conference Call

May 02, 2014, 11:00 AM ET

Executives

Larry Lawson - President and CEO

Sanjay Kapoor - SVP and CFO

Coleen Tabor - Director of IR

Analysts

Carter Copeland - Barclays Capital

Howard Rubel - Jefferies

Finbar Sheehy - Sanford C. Bernstein & Co.

Robert Spingarn - Crédit Suisse AG

Cai von Rumohr - Cowen & Company

Myles Walton - Deutsche Bank

George Shapiro - Shapiro Research

David Strauss - UBS Investment Bank

Jason Gursky - Citigroup

John Godyn - Morgan Stanley

Samuel Pearlstein - Wells Fargo Securities

Seth Seifman - JP Morgan Chase & Co.

Kenneth Herbert - Canaccord Genuity

Michael Ciarmoli - KeyBanc Capital Markets Inc.

Operator

Good day, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings Incorporated First Quarter 2014 Earnings Conference Call. My name is Shannon, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the presentation over to Mrs. Coleen Tabor, Director of Investor Relations. Please proceed.

Coleen Tabor

Thank you, Shannon, and good morning. Welcome to Spirit's first quarter 2014 earnings call. I'm Coleen Tabor, and in the room with me today are Spirit's President and Chief Executive Officer, Larry Lawson; and Spirit's Senior Vice President and Chief Financial Officer, Sanjay Kapoor.

After opening comments by Larry and Sanjay regarding our performance and outlook, we will take your questions, and then Larry will share some closing comments. In order to allow everyone to participate in the question-and-answer segment, we 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 release, in our SEC filings and in the forward-looking statement 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 we use when discussing our results. As a reminder, you can follow today's broadcast and slide presentation on our website at spiritaero.com.

With that, I would like to turn the call over to our Chief Executive Officer, Larry Lawson.

Larry Lawson

Thank you, Coleen, and good morning, everyone. Welcome to Spirit's first quarter earnings call. I want to begin by thanking our employees around the globe for your ongoing dedication to the transformation we are undertaking. Your commitment to quality and delivery with a disciplined cost management approach is exactly what we need as we support customers and deliver results to our shareholders and to our employees.

Today, I'm going to give you an update on our progress and review our quarterly results. Sanjay will walk you through the numbers in more detail and then we'll answer your questions.

2014 continues a transformation of Spirit as we made decisions that position us for longer term growth. Let me start by saying we're pleased to have completed the memorandum of agreement covering the pricing on our mature Boeing programs. This agreement balances the benefit of rate increases with the need to invest in our customer's success in the competitive new and replacement marketplace.

This is an equitable deal for both parties and exemplifies our constructive partnership with our biggest customer. As we look at the remaining decisions in front of us, we will continue to apply a disciplined approach whether it's in our supply chain negotiations, our make versus buy decisions, investments or the use of cash. We will be thoughtful about operational, financial and market returns on our investments.

We continue to add talent and challenge how we do business. We're driving every sector of the business to align the market reality and the natural opportunities in the commercial aerospace sub-cycle, as well as a longer term in the defense sector.

Now let's take a look at the first quarter. For the first quarter, we reported revenues of $1.7 billion which was up 20% year-over-year and operating income of 194 million, which was up 35% year-over-year. Operating margins were 11% compared to 10% in the prior year.

Operating cash flow was $45 million and free cash flow was a negative $8 million, an improvement of $117 million over a year ago. Our backlog continues to be strong with $41 billion. Further evidence of our disciplined decision making is a restructuring of our debt in the first quarter as we leveraged lower interest rates in the market to reduce our interest expense over time.

We also met our commitments to invest in Malaysia and to realize the tax benefit we negotiated for our operating location in Kuala Lumpur. As I said in our year-end call, 2014 is the first full year we put our plan into action. It's about making our commitments and this quarter is one step in the right direction.

I'll turn the call over to Sanjay and we can walk through the details. Sanjay?

Sanjay Kapoor

Thank you, Larry. Good morning to everyone as well. I am looking forward to sharing our strong first quarter results with you today. But before I begin I want to reiterate Larry's thanks to our team for their commitment, to successfully serving our customers while at the same time staying focused and continually improving our performance across all parts of our business.

The performance that we have delivered in the first quarter is evidence of what we can achieve as a team and it strengthens our resolve to deliver on our commitments. Let's begin by taking a look at the consolidated results in the quarter. I will then review the quarterly segment results. And finally, we'll wrap up with the outlook for 2014.

Now let's turn to Slide 4 for the consolidated results of the company. Overall revenues for the first quarter of 2014 were up almost 20% as compared to the same period in 2013. After adjusting for the four additional days in the quarter, this year compared to last year, revenues were up 13%.

It's important to note that this growth is impressive because we achieved all-time high production rates on our 737 program while at the same time maintaining our cost structure. Operating margins for the quarter were a solid 11.2% compared to 10% in 2013.

The quarterly results demonstrate positive contributions from our mature businesses as well as some net favorable cumulative catch-up adjustments. Earnings per share for the quarter were $1.07. In addition to strong operating performance and the benefit of 17 million or $0.08 for cumulative catch-up adjustments, this also includes fees from the previously announced debt refinancing of approximately $0.08 offset by the favorable impact of the Malaysian tax holiday of about $0.09.

Lastly, it includes the partial release of the deferred tax valuation allowance of roughly $0.22. While there was a one-time charge for the debt refinancing we will benefit from lower interest costs in future years.

The Malaysian tax holiday represents an achievement of a long-term initiative for this company and allowed us to release a net of 13 million of tax reserves into earnings this quarter. As we previously communicated, we will continue to follow accounting guidance and access the need to maintain our valuation allowance against our U.S. net deferred tax assets.

The partial release of the deferred tax valuation allowance of about 32 million in the quarter represents the realization of certain deferred tax assets based on the demonstrative performance within the quarter. To the extent that the company continues to generate positive taxable income, we will release additional valuation allowance in future periods.

Cash from operations for the first quarter of 2014 was $45 million source of cash, impacted by higher volumes and the benefit of a prior year cash tax refund. Capital expenditures were $53 million for the quarter as we continue to make better decisions on deployment of our investments.

Free cash flow for the quarter is $117 million improvement year-over-year, driven by the benefit of tax refunds, better capital expenditure management and increased operating cash performance.

As Larry and I have indicated, our focus is on generating operational cash. We are making steps in the right direction and we have much more to do here. Our focus on resetting our cost structure through overhead cost reductions, balanced capital spending and data-driven decisions in areas like supply chain and our make-buy strategy are driving measurable improvements.

Let's move to Slide 5 that summarizes our cash and debt balances. Cash balance at the end of the first quarter was 382 million which does not include $73 million of restricted cash reserved for the redemption of the 2017 notes outstanding as compared to the fourth quarter 2013 cash balance of 421 million.

At the end of the quarter, our total debt to capital ratio was 43% and our net debt to total capital ratio was 34%, which includes the 73 million of the 2017 notes outstanding. Our U.S.-defined benefit pension plan remains fully funded.

Slide 6 summarizes the net inventory balances at the end of the first quarter for 2014. Deferred inventory balances increased by 96 million, driven by the A350 XWB program and the Gulfstream programs. 56 million of the deferred growth is on the A350 XWB program and as I have reminded you in the past while we are making good progress, work completed at our customers' pre-final assembly and final assembly sites on previously shipped units is included in this number and it also includes engineering that winds down as we move through the year. The 787 program realized a net decrease of 17 million in deferred inventory on 31 deliveries, or roughly $550,000 per unit.

Now let's discuss our segment performance on Slide 7. Fuselage segment revenues grew to 858 million in the quarter and operating income was 142 million on higher volumes and cumulative catch-up adjustments on our mature programs. In the quarter, the fuselage segment 737 and 777 production lines performed very well.

We realized 9 million in positive cumulative catch-up adjustments and we also achieved production rates of 42 ship sets per month on the 737 program. The A350 team is progressing well on the Dash 1000 engineering design as they take advantage of opportunities for commonality with the A350-900.

In our propulsion, segment revenues grew to 450 million and operating income was 80 million, driven by higher volumes and cumulative catch-up adjustments on mature programs. The propulsion segment's 737 and 777 production lines have strong performance contributing $5 million in positive cumulative catch-up adjustments. The propulsion 737 MAX team is on track for their development milestones.

In our wing segment, revenues also grew reaching 414 million on strong deliveries in the quarter. Operating income was 50 million as the segment benefited from rate increases and no forward losses as compared to the same period last year. Our 737 and 777 slats production lines in Tulsa had solid performance in the quarter contributing $3 million in positive cumulative catch-up adjustments.

The wing segment's A320 production team continues to successfully support our customer's high-volume program as they gear up on the A320. And consistent with what we have said before, we are continuing to work with potential buyers for our Oklahoma operations.

Now let's move to Slide 8. This quarter is a good start to our year, but we still have plenty of work to do. In the quarter we saw solid performance across our mature programs. We met our customers' needs and achieved all-time high production rates on the 737 program. We refinanced our debt on better terms and offset the near-term costs by closing on our tax initiative in Malaysia. And by performing well, we also released a portion of our DTA valuation allowance back to income.

We also continue to add talent on our leadership team, particularly in finance where we made our processes much more robust and more importantly we completed our negotiation with Boeing for our pricing on our mature programs. We're very proud to be a partner with Boeing on all of their platforms.

We remain confident in the revenue and EPS guidance we provided you just three months ago with a revenue range of 6.5 billion to 6.7 billion, a double-digit increase compared to 2013 results and earnings per share for a range of $2.50 to $2.65. In addition today, we are increasing our free cash flow guidance to 200 million to reflect the 787 advanced repayment deferral impact resulting from our agreement with Boeing.

I'll remind you of some important notes to our guidance. Consistent with 2013, it includes all of the Oklahoma operations for 2014. And two, it excludes any potential adjustment to the valuation allowance recorded against the U.S. net deferred tax asset recorded at the end of 2013. While our guidance is not risk free, we are actively monitoring of performance and driving to consistently deliver on our commitments.

In closing, the team is focused on delivering predictable and consistent results. We're quite excited about the opportunities and continue to manage the risks that are inherent in our industry and our business.

We are happy to take your questions at this time.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Carter Copeland from Barclays Capital Incorporated. Please go ahead.

Carter Copeland - Barclays Capital

Hi. Good morning, all.

Larry Lawson

Good morning, Carter.

Carter Copeland - Barclays Capital

Just a clarification and some color, if you will, Sanjay, on the comment you made about the A350 deferred to 56 million. You said that includes work done in pre-final and final assembly, so presumably that's rework being done post delivery. Are those the costs you're referring to?

Sanjay Kapoor

Yes, Carter, what I'm referring to there as you know we had last year to maintain schedule with our customer shipped units and we're completing some of that work at those places. And all of those costs are contributing to the increase in deferred. So it's not just the two units that we shift this quarter but also the work that we performed on previously shipped units as we finish that work there.

Carter Copeland - Barclays Capital

Can you help us think about from a magnitude standpoint, is it half of the increase, a material portion of it? How should we think about how much of the deferred cost increase relates to previously shipped units versus the one in the quarter?

Larry Lawson

I think part of – this is Larry. I think it's very difficult for you to get kind of a – draw a conclusion about this measure. I'll walk you through what happens in any given quarter. So, as you know, the deferred inventory buildup there is – it's the cost above revenue, so it's tied to how many units you deliver in any given quarter. So if you deliver more or fewer units then you're going to see potentially above in a quarter that's given that these very low rates have a little bit of digital phenomenon. And then there is really three components of costs that go into the deferred. There is the recurring costs which we're doing. We're on our plan. There is the deferred costs associated with the work being done in the FAL and the pre-FLA that we call it the backlog. I think I've referred to this in prior two earning calls. We believe we'll have that work behind us this year. We've been working hard and burning hot to get that work complete. And then there is the nonrecurring cost. It falls in the recurring bucket because you're in production, but it's related to batch upgrades, block nonrecurring. So it makes for kind of a lumpy phenomena because you're not looking at just recurring costs on a given ship set in the quarter and if you try to amortize it, then it's tied also to the deliveries. Prior quarter I think we had three deliveries or four and then this quarter was two. So there's a lot of moving parts here. What I would tell you is that our burn rate didn't go up in the quarter and that we're continuing to work our way down. And then – I'm sorry, go ahead, Carter.

Carter Copeland - Barclays Capital

I was going to say so from a recurring standpoint on the units delivered, you're still consistent with your prior curves? There's nothing new incrementally versus the prior plan I guess is the question?

Larry Lawson

No, there isn't.

Carter Copeland - Barclays Capital

Great. Thanks for the color, Larry.

Larry Lawson

Thank you.

Operator

Thank you. Our next question comes from Howard Rubel from Jefferies. Please go ahead.

Howard Rubel - Jefferies

Thank you very much. Larry, the agreement with Boeing is probably a pretty significant milestone. Could you put a little color on that and talk about some of the things that you've committed to and how this fits into partnering for success? And maybe some spill into some of the other programs related to Boeing?

Larry Lawson

Sure. The easiest thing to do and something we don't do would be is disclose the details of the pricing. I think if we did that, this would be – and that's an easier conversation. So we'll try that to see if we can give you a sense of the agreement about getting into pricing. But I would say as first of all, as it relates to partnering there's probably not a – from our standpoint not a more important partnership in the industry than the one we had with Boeing. It doesn't mean our other customers don't matter to us, but I mean this from a point of separation between the companies, this has been a really important partnership. And frankly Spirit's delivered a lot of economic value to our most important partner. And so we kind of – as we work with each other, we look at all of the programs we have and then kind of look forward and try to find a way to navigate. Now, the length of the agreement is important. A lot of people ask me, hey, can you tell me why the agreement ends in '15 and I think maybe that will give you some color on this, because the timing actually is quite nice. It gives us an opportunity to work with our customer on cost downs in the products in the period and see what – how much of that actually gets realized before – and then kind of as we move into '15 the timing is really nice as it relates to kind of moving forward on new product line and gives us a lot of opportunities there. The commitments, I think to answer that piece of your question, what commitments did we make? Well, they made a commitment on pricing and then we made a commitment on investing in a build rate and the build rate I think we disclosed was up to 47. We maintained all the other elements of the agreement, the prior MLA are in place and so from our standpoint this is a very equitable deal and there's several moving parts in the deal but when we balance it all out, we're very pleased with it.

Howard Rubel - Jefferies

So there's an ability for you and they both to find costs and share in that benefit, is that one of the conclusions we can draw?

Larry Lawson

I won't get into the details but those opportunities always exist between the parties.

Howard Rubel - Jefferies

Thank you very much.

Operator

Thank you. Our next question comes from Finbar Sheehy from Sanford Bernstein. Please go ahead.

Finbar Sheehy - Sanford C. Bernstein & Co.

Good morning. If I could come back to the other side of – the other big program on the deferred production on the 787. If I get the numbers right, you reduced the deferred there by 550 per unit, $550,000 per unit this quarter down from $860,000 last quarter. Can you give us a little sort of insight into what drove the reduction? Was it the cost of bringing in the Dash 9, pricing, some nonrecurring costs, all of the above?

Larry Lawson

No. Again, I think we talked a lot about this with the last quarter as well when we shared with you that our current blocks do have not just our learning curves. We've got some pricing step downs. We continue to manage on both of these things and we are managing to the cost curves that we had. Our rates are increasing. That's a factor. So I won't read anything into the decrease or the increase. I think I shared with you the last time that you got a good cost curve, you got pricing step downs and over the quarter there will be some movement quarter-over-quarter as we navigate through this. The 787 program team is performing very well. As you know, we sort of deliver 10 a month. We delivered 31 ship sets this quarter and we are making really good progress across all fronts on that program.

Finbar Sheehy - Sanford C. Bernstein & Co.

Thanks.

Operator

Thank you. Our next question comes from Robert Spingarn from Crédit Suisse. Please go ahead.

Robert Spingarn - Crédit Suisse AG

Good morning.

Larry Lawson

Good morning, Robert.

Robert Spingarn - Crédit Suisse AG

Sanjay, just two quick things here. The first is a clarification. The unusual items you talk about at the frontend of your monologue, the negative $0.08 and then the positive $0.09 and $0.22 for the tax, what if any of that was contemplated in your introductory guidance last time which of course has been held here in this quarter? And then separately, could you give us a sense for the sustainability of the margins, particularly wing? How do you think about your segment margins for 2014? What should we expect? Thank you.

Sanjay Kapoor

Sure, Robert. Robert, again, when I gave you guidance early this year for 2014, it's kind of like in my monologue as you said, repeated this time. There's really only two big things that are outside of that guidance and one was that for all the right reasons, we maintained Tulsa as if we own it, just to be comparative to 2013. And the second was any impact associated with the deferred tax asset valuation allowance as we reverse that. So those are two things that are outside of our guidance of $2.50 to $2.65. Everything else – I mean every day we try and work on some of the issues that we have. As you saw we did some refinancing which did cost us some money this year but we'll reap the benefits in future years. At the same time we have been working for a long time with the Malaysian authorities to try and capture the benefit of the tax holiday in Malaysia and we were successful at that. Those are the things that are inside our guidance. The only two things that are not are the DTA valuation allowance and if there's something on Tulsa.

Robert Spingarn - Crédit Suisse AG

So just to be clear, the $0.22 was not in guidance before and is not in guidance now?

Sanjay Kapoor

Absolutely, Robert. You can add that. And again, depending on how we perform at the rest of the year there will be – again depending on earnings there could be a release of additional DTA valuation allowance and that again is not inside our guidance.

Robert Spingarn - Crédit Suisse AG

Thank you for clarifying that, yes. Thank you.

Sanjay Kapoor

Okay. I think your second question was associated with wings. Again, listen we are very proud of the way we handle this quarter across many of our mature programs, across a number of the initiatives that we've been working on. We actually had some very good performance. Now in the wings, at least year-over-year it got impacted because we took accumulative cash off this quarter against a charge that we had in the previous Q1 of 2013 and if you adjust for that that broadly explains to you the improvement in our margin percentage. But again, we are very proud of the way we've been performing this quarter. It's been our first good quarter and that's what it is.

Robert Spingarn - Crédit Suisse AG

So just qualitatively, how do you think about margins by segment for the year?

Sanjay Kapoor

Again, I think the margins by segment get affected as the 787 ramps up. That obviously creates a mix effect. Some of that was captured in the first quarter. Larry has been very focused as I think we've talked to many of you that our game plan here is not just to try and work on the programs that are in their early stages and are developing the nature, but also make sure that we maximize the benefits and the efficiencies on all of our mature programs and that continues to be our goal. But margins going forward should be consistent with what we have demonstrated in the first quarter.

Robert Spingarn - Crédit Suisse AG

Thank you.

Operator

Thank you. Our next question comes from the Cai von Rumohr from Cowen & Company. Please go ahead.

Cai von Rumohr - Cowen & Company

Yes, thank you and good performance, guys.

Larry Lawson

Good morning, Cai.

Cai von Rumohr - Cowen & Company

So I guess two sort of related two part question. So does your guidance include the Malaysian tax benefits? And secondly, what does it include regarding SG&A, because SG&A kind of ramped up in this quarter? Should we assume that that's kind of the run rate for the year, the 60 million odd?

Sanjay Kapoor

Sure. Cai, again, just to repeat myself a little bit. The only two things that are not included in the guidance is the DTA and the Tulsa. Everything else is included in the guidance. Again, we work constantly. Some of the things like the refinancing of our debt cost us something. We offset that with the Malaysian tax credit. So that's all in my guidance of $2.50 to $2.65. DTA is not. It's a good question on the SG&A and two or three things that are happening there. Firstly, I will tell you, I've said it a number of times. I think Larry has talked to you as well. We are quite focused on managing our costs in our business particularly as we ramp up on our volumes. That continues to be the case. And if you really look at SG&A as sort of a percentage of sales in 2013, our goal is and we will be slightly better than that in 2014. And we will manage our cost. Now what you're seeing in the first quarter is a little bit of timing. You may or may not have noticed it but there's small amounts of tornado-related activity that's in our SG&A. It's very small. We intend to finish all of that work by basically the second quarter of this year. But more importantly we have a number of initiatives, Cai, inside our business where we are trying to make sure we can get some outside help, and look at and benchmark ourselves as we look at our indirect costs and all of the kinds of costs that are in our SG&A. So there is some timing associated with some professional fees in the quarter. I would not run rate that for the year. What I would suggest is look at 2013, we intend to be on a percentage of sales perspective slightly better than that in 2014.

Cai von Rumohr - Cowen & Company

So we can do – figure out the run rates. You said you had four additional workdays. Maybe give us the workdays by quarter so we can model it?

Sanjay Kapoor

Yes. So, Cai, the workdays again, they typically affect Q1 and the offset of then Q4. Usually Q2 and Q3 are very comparable to last year. So we had four additional days in the first quarter. By default we'll have four less days in Q4. And the other two quarters should be normal. The first quarter at 66 working days compared to – this is the anomaly of the start of the year compared to 2013 last year which had only 62 days. That's why I wanted to make sure we highlight it. The second and third quarter are basically 64 and 63 days.

Cai von Rumohr - Cowen & Company

Thank you very much.

Operator

Thank you. Our next question comes from Myles Walton from Deutsche Bank. Please go ahead.

Myles Walton - Deutsche Bank

Thanks. Good morning. It's a single question, but again two parts in the Boeing agreement. And the first part is whether the agreement itself triggered any part of the $17 million favorable cums in the quarter or if that's just the progress of efficiencies and maturity of the programs? And the second part is whether the signing of the agreements enables a process associated with Tulsa to kind of pick up momentum, if that had been a stalling function? Thanks.

Larry Lawson

I think to answer your first question, there's a small contribution to the cum catch for the quarter. And with regard to Tulsa, I think certainty always helps but it's not – I guess it's determinative in any way in terms of Tulsa.

Myles Walton - Deutsche Bank

And what's your current timeline thinking on Tulsa?

Larry Lawson

Well, I'd just say that the process is underway. If I've learned anything is that if you assign a timeline, you're probably either going to beat it or – we're going to let this – we're patient with regarding the process. We're going through all the – it's going through its normal standard. We're just moving along from one step to the next. People are quite diligent on how we do things, very thorough and I would love to be able to say it's on this date. Of course, if I did I'd have to file an 8-K. And so let me just say it's moving along.

Myles Walton - Deutsche Bank

Okay. All right, great. Thanks, guys.

Larry Lawson

Thank you.

Operator

Thank you. Our next question comes from George Shapiro from Shapiro Research. Please go ahead.

George Shapiro - Shapiro Research

Yes. I wanted to pursue a little bit more of the A350, Larry. If I look at the first quarter of last year, you delivered two A350s and the same number this quarter. And the deferred per plane was a little higher this quarter than it was in the first quarter. So I'd just ask if you could break out maybe a little bit more of the color you tried to provide earlier to…?

Larry Lawson

Let me try without getting into the, so let me do this way. There's been 13 ships that's delivered, George, so if you're thinking about this, last year there were much fewer units sitting on the FAL and the pre-FAL. And when I came on board a year ago, there were a number of units sitting there but there's more units today obviously than there were in the quarter ago and I don't know the numbers. I'd have to talk with my head. Sanjay is passing a piece of paper here.

Sanjay Kapoor

George, at the end of last year we had eight units shipped…

Larry Lawson

…or did you say a year ago from now, so do we know the numbers for a year ago? Two?

Sanjay Kapoor

Two in the first quarter of 2013.

Larry Lawson

Yes, but how many total units were sitting on the FAL and pre-FAL is his question? George, I'll tell you what, we'll try to get back with you with the specific or I think you can find the numbers, let me say it that way. You'll know how many units we delivered by this time last year. You can do the math and figure out how many units were in the FAL and pre-FAL. I apologize, I don't have it right here in front of me. And then obviously you know that today there's 13 units delivered, so there's more units delivered. Now the good news is with every unit we've delivered it's had smaller and smaller [travelled] (ph) work and as a matter of fact today it's very small. And so we're not accumulating a backlog like we were a year ago. But this assigned work occurs and it occurs at frankly the productivity that we get in the FAL and pre-FAL as opposed to the productivity we get in our factory. So the first order of business was to make this backlog first of all eliminate the inflow and then the second order of business was to work it all off. And that's our plan for the year.

George Shapiro - Shapiro Research

Okay. So effectively if I could have all the data, the deferred per shipped units today would be lower than what it shows in last year's first quarter by just simply dividing the two numbers?

Larry Lawson

Yes, it's actually quite small today in all the deliveries that we're sending over to Airbus.

George Shapiro - Shapiro Research

Well, that's good. Okay. I'll get back in the queue for another question. Thanks.

Larry Lawson

All right. Thank you, George.

Operator

Thank you. Our next question comes from David Strauss from UBS. Please go ahead.

David Strauss - UBS Investment Bank

Good morning.

Larry Lawson

Good morning, David.

David Strauss - UBS Investment Bank

So you have part of Boeing negotiations I guess behind you but you've still got the 787-9 that you're negotiating. Larry, can you just talk about where you are with that? As well, Sanjay, maybe some idea of how you're booking that given that you don't have a pricing arrangement? And then exactly how many 787-9 ship sets that you had delivered to this point? Thanks.

Sanjay Kapoor

David, let me try and tackle it back from your last back up. We have only a few Dash 9s that we have delivered so far. I think we talked about this even in the last quarter. We have made some reasonable estimates in terms of Dash 9 pricing for our current block, but as you state this is something that we have to negotiate in terms of the Dash 9 and the Dash 10 pricing with Boeing. And that becomes much more material as we get into the following block which is late in 2016. So that's a discussion that obviously we have with Boeing. That's something that we continue to work on. So right now the impacts are fairly minimal, right, because we've got only a few Dash 9s in our process. I don't know if answered all of your questions, David?

David Strauss - UBS Investment Bank

Yes. Larry, if you have any color kind of where we are in the process of negotiating the Dash 9?

Larry Lawson

I think part is that as we deliver the units, Sanjay kind of alluded this, you collect your cost data and then you have an opportunity to look at that. In addition, as we've been working really closely with Boeing on the cost reduction opportunities, supply, aggregation, a number of initiatives that Boeing has put in place, we get some real uncertainty around that. It allows us then to kind of come to the table at some point and say, okay, this is much more definitive in terms of we know where we are. It helps the parties then reaching agreement and I'd say we're certainly navigating our way to that certainty.

David Strauss - UBS Investment Bank

Great. Thank you.

Operator

Thank you. Our next question comes from Jason Gursky from Citi. Please go ahead.

Jason Gursky - Citigroup

Good morning. Sanjay, just a quick question for you on the guidance. I just want to make sure that this is really clear. So you're guidance excludes the tax allowance and yet you just printed $1.07 for this quarter. So on an apples-to-apples basis that $1.07 should we be backing out the $0.22 when we're looking at it relative to your guidance? And then Larry just a quick question for you on Tulsa. If you were left keeping this asset, would that necessarily be a bad thing at this point? Can you see a long-term strategic fit for this asset at this point?

Larry Lawson

Well, I guess – I think it's always good to revisit your decision, Jason, and I can tell you we just had our Board meeting and we always talk about these things. So we made this decision to divest Tulsa really around strategically how we felt about ourselves as a business and then really kind of a thought about focus. We looked at that business – as we look at our value prop, we see ourselves as uniquely positioned in terms of our engineering capability and our value-added approach and then our ability to build these very large structures. We look at that part of the business, it's a little bit more to the commodity into things. There is less engineering associated with that work. There is more – I don't want to describe it purely as a build to print just because we've designed some pretty nice products down there. But if we say, look, we want to really – the thought was kind of retrench, focus and then frankly accumulate some cash. And then as we go forward, figure out how we would deploy that capital. That was the method that we had. It wasn't an easy decision to make to sell Tulsa and so – because we see it, there are some very, very big contracts there. So then it becomes a function of are you happy with the propositions that you get and that's what we'll work our way through as we do this. But we're not backing away from it. Once you decide to do something, you need to follow through on it.

Jason Gursky - Citigroup

And Sanjay on the…

Sanjay Kapoor

Yes. And again, I apologize for confusing some of you on this, but again the way I'm trying to give you the guidance is with $2.50 to $2.65. Now let's just say we need our guidance of $2.65, the $0.22 is additive. So at the end of the sale, all other things remain in constant what you will see is $2.87; $2.65 plus the $0.22. That's what you will see. And of course during the course of this year, as we perform and as we release possibly additional valuation allowance then that will also be additive. I don't know whether I'm capturing your question?

Jason Gursky - Citigroup

No that's perfect. That's exactly what I was looking for. Thank you.

Sanjay Kapoor

Okay, great. Thanks.

Operator

Thank you. Our next question comes from John Godyn from Morgan Stanley. Please go ahead.

John Godyn - Morgan Stanley

Hi. Thank you for taking my question. Sanjay, if I could just ask the guidance question a little bit more directly. Adjusting for tax as you guys did almost $0.80 this quarter, guidance implies $0.60 per quarter or so for the next three quarters. I'm not sure I understand what that step down is. And if you demonstrated $0.80 this quarter, I mean is there reasonable framework a number north of $3 in 2015? I'm just trying to understand these puts and takes and why the numbers don't add up?

Sanjay Kapoor

It's a great question. It's a very fair question. First of all, let me just say I'm really – the entire team is very proud of how we have done and executed this quarter. I think Larry and I both have told you that this is a long journey for us. It's not just a one quarter or two quarter. We got a long way ahead. And if you look at our past and our performance from the businesses we came from, we have a track record of making sure we get to sort of best in class kinds of demonstrations. But it's our first quarter. And when I gave you guidance early this year, I think I shared with you we are setting expectations that we want to meet. It's been sometime that our company has not necessarily met all of our expectations. But this is really the first quarter and as we get into the year, we'll have better information and then we'll coordinately provide that information to you.

John Godyn - Morgan Stanley

Okay. And just the follow-up on that. I mean there isn't any specific reason for the step down. It sounds like there's just some conservatism.

Sanjay Kapoor

There is nothing specific that I can see today that I can point to other than we need to continue to execute. And if we continue to execute then we're guiding in the $2.50 to $2.65 and we will be within that range.

John Godyn - Morgan Stanley

Thanks a lot, very helpful.

Operator

Thank you. Our next question comes from Joe Nadal from JPMorgan. Please go ahead.

Larry Lawson

Good morning, Joe. It sounds we're having a technical issue with Joe.

Coleen Tabor

We can come back to you again. We'll go to the next one.

Operator

Our next question comes from Sam Pearlstein from Wells Fargo. Please go ahead.

Samuel Pearlstein - Wells Fargo Securities

Good morning.

Larry Lawson

Good morning, Sam.

Samuel Pearlstein - Wells Fargo Securities

I was wondering if you could talk a little bit about the cash flow. First I guess, is the $50 million increase all the suspension of the reimbursement of the advances on the 87 or is there anything else underlying that? And then related why did receivables move up almost 200 million? I'm trying to just understand what's actual performance versus perhaps the Gulfstream underpaying issue that's just going to continue until that's resolved?

Sanjay Kapoor

Thanks. Sam, yes, what I shared with you in our prepared remarks is that we've increased our cash flow guidance by actually $60 million because we factored in small amounts of money we have remaining associated with our severe weather event and we based that all in. So if you really look at the cash flow from operations, it's going up 60 million. And most of all is that is associated with the agreement that we have with Boeing on the deferral of the 787 advanced payments. Your second question in terms of receivables, no, I've looked at this quite a bit actually. It's largely due to the higher volume that we have. As you saw we had a 20% increase in our top line. And if you really calculate our sort of DSO it's very consistent with what we had in Q1 of 2013. Q1 typically has a little bit of a timing effect because in the December month shipments showed down. They kind of get launched in the first quarter and by default given the payment terms the receivable balance builds up. So there's nothing in there associated with any increases or changes associated with Gulfstream receivables or anything like that.

Samuel Pearlstein - Wells Fargo Securities

Thank you. And Sanjay, if can also, can you break up the interest expense a little bit in terms of what the ongoing interest should look like on a quarterly basis if you back out the one-time costs?

Sanjay Kapoor

Sure, Sam. I think the best way to look at that is we refinanced our debt from I believe 7 in the quarter to 5 in the quarter as well as we changed actually on the term loan B, we improved our interest rates and you'll see that in the Q when you get it. But also quite frankly made is covenant like. The impact of both of those events is roughly about $0.05 EPS going forward, so roughly around $10 million of low interest cost annually in the out years. Now obviously there was a small cost associated with that and we bore that cost and I shared that with you again. That was worth about $0.08 or $0.09.

Samuel Pearlstein - Wells Fargo Securities

Thank you very much.

Operator

Thank you. Our next question comes from Joe Nadal from JPMorgan. Please go ahead.

Seth Seifman - JP Morgan Chase & Co.

Hi. Can you hear me now?

Larry Lawson

Yes, we can hear you.

Seth Seifman - JP Morgan Chase & Co.

Okay. Good morning. Actually it's Seth Seifman on for Joe this morning. Just two quick questions. First of all, on the – at the risk of asking a question without having all the data, the deferred numbers you gave for A350 and for 787 implied that the cash burn on the Gulfstream programs maybe came down pretty significantly in the quarter although that bounces around a lot and doesn't seem to move along a smooth path. I wonder if you could address what happened in the quarter and maybe some thoughts on that going forward.

Larry Lawson

Seth, I think you're talking about Gulfstream cash burn in the quarter?

Seth Seifman - JP Morgan Chase & Co.

Yes.

Larry Lawson

So again, when you look at our deferred inventory, like I shared with you, 56 million of that – I think it's $96 million in total, I think 56 of that approximately was associated with the 350. The rest of it was associated with the Gulfstream program. And so while we are performing well and actually making our deliveries and the team is very focused and we're making some really good improvements down in Tulsa on our Gulfstream program that increase – the remaining increase was associated with the Gulfstream program. And that is a cash burn that's happening on that program, but it is in line with what our internal plans are and it's in line with our – because we have made also that…

Seth Seifman - JP Morgan Chase & Co.

Okay. Thanks very much.

Operator

Thank you. Our next question comes from Ken Herbert from Canaccord Genuity. Please go ahead.

Kenneth Herbert - Canaccord Genuity

Hi. Good morning.

Larry Lawson

Good morning.

Kenneth Herbert - Canaccord Genuity

Larry, I just wanted to ask first a two part question. First, you've obviously been in the seat now give or take a year. Lots happened in the year and it seems like you're making pretty substantial progress. But if you would just sort of how would you rate – relative to your expectations a year ago sort of what you've been able to accomplish? And sort of second part is if you look at your three buckets specifically that you mentioned around the cash flow improvements sort of the cost structure expectations, the capital allocation, and then more of a data-driven environment there, where do you see the most opportunity now for the remainder of '14 and the runway of those three respective areas?

Larry Lawson

Okay. That's a complicated question, but let me see if I can adequately kind of answer. So are we where I hoped we would be in a year? I guess let me just take on the performance issue first. I think that the most important element of the company is its ability to deliver quality products to its commitment. And so we've been – the enterprise is incredibly focused. We are not the company today that we were a year ago and I mean that in the best way. I think the thing we're really happy with is that the fundamentals of our business side have changed and we're really proud that we're part of a company that has strong integrity. But we had performance issues. We've had – I've described the business I think the question went more like what surprised you the most? And I said, hey, it's kind of the mix of the 20 and the 80. We've got 20% of our revenues that we're investing in and then 80% of our revenues that have been our, I'd say, money makers for the business. And that's a pretty high percentage when I've compared this to my 34 years in the business. Normally when you looked at any one of these companies you would have a smaller part of your portfolio that you'd be investing in. Timing being what it is, we ended up – for Boeing it was the 787, for Airbus it's the A350, for Gulfstream you might say it was there for their airplane programs. For us, it was all the above. And so I looked at this. I said okay. But the path forward here isn't simple. It's not that, hey, look, just go address the 20% but it's worth the 20% and also worth the 80% because frankly whatever percentage improvement you make if we improved our performance by 10% on the 20% and 10% on the 80%, it's pretty straightforward math. At the bottom line it's the 10% on the 80% of the business that's going to deliver. So my message to the team was performance on all fronts. And so we're going after every opportunity. So I think in the early days I went after overheads to start but it doesn't mean that stopped, but we took a 1000 heads out of the business pretty early in the game, made some very significant overhead reductions and we've been measuring ourselves against that and continue to look for, I'll say, world class performance in overhead. We continue to attack that. On the performance front, I'd have to say that I am pleased. Do I think we're there yet? No, but I'm incredibly pleased that we are able to make the step up for the rate increases which were not small as we moved into this year and have not been without challenges, but we did that and we made those rate increases which has frankly delivered this 13% increase of equivalent revenue in the quarter to 20% adjusted for the quarter time, it's 13%, so pretty pleased with that. The quality of the product has improved dramatically and that's in all fronts. That's not isolated Boeing only programs, but that's true across the board. So reducing costs, meeting your delivery commitments and improving your quality those are things that are important I think to your brand and to the value of enterprise. So I'd say I'm – to be honest with you, for me to say I'm pleased that's a hard thing. That doesn't happen very often here. So as opposed to saying I'm pleased let me just say that this is the transformation and we're moving along smartly in that transformation. We're not where we need to be. We have got a lot of room to improve. As you can see that is a good thing or a bad thing. Whenever I see a particular thing, I always – it creates some angst or me, but on the flipside it made this opportunity to perform better and obviously realize the financials that go with that. As it relates to negotiating, obviously it's always incredibly important to get the largest part of your business to get an agreement between your partner that both parties can walk away and that's really a good thing. So really happy there and now I think it's easier for me to kind of see with a little more clarity more specific approaches to dealing with other issues. So do I have a – I get asked this question quite often. What do you see ultimately the company being in terms of where will you settle out? And I have a view of that, but I think really what I'm focused on is the ramp to getting there. And really right now what I'm trying to do is just make that a steep – the path to getting to our ultimate objective as steep as possible. And I think the focus on cash has got us really working and thinking about doing the right thing. It's not the only thing we think about, but it certainly drives the right behaviors. So that was probably more than you actually wanted to hear, but I am you can tell pretty excited about the change that I'm seeing.

Kenneth Herbert - Canaccord Genuity

No, that's very helpful and good color.

Larry Lawson

Thank you.

Coleen Tabor

Thank you. Operator, we have time for one more question.

Operator

Absolutely. Thank you. Our final question comes from Michael Ciarmoli from KeyBanc Capital Markets. Please go ahead.

Michael Ciarmoli - KeyBanc Capital Markets Inc.

Hi. Good afternoon, guys. Thanks for taking the question. Sanjay, maybe just one on the cash flow. It's clearly an internal focus that's a big priority. How should we be thinking and I don't expect you to really provide a formal outlook for '15, but you've got this suspension of the Boeing payments. That's going to create some of a headwind in '15. And then how do we think about maybe development or investment for the MAX and the 777x in '15? Are you guys as you're strategically focused on cash how do those kind of puts and takes enter into the equation?

Sanjay Kapoor

Michael, thank you for that question and you're right. I can't sit here and I'm not going to sit here and give you guidance for 2015. And many of these initiatives that you talked about we clearly are working on and as we develop our numbers and as we get later in this year and talk about 2015 and the impact of those initiatives, we will certainly talk about that. But I also want to leave you with something that we have been telling you for the last quarter that our focus on cash flow is not just a one year focus, it's a long-term focus and clearly adjusted for some one-time things that we will see. It is our – but we have given you directional indication that '15 will be better than '14 and '16 better than '15 and so on. But we'll talk a lot more about that when we give you guidance for '15. You saw the 787 deferment of the advanced payments and we've rolled that into a cash flow and we've upped our numbers from sort of the $140 million or $150 million up to $200 million. And the reason we're able to do that is because we are focused and confident about our guidance.

Michael Ciarmoli - KeyBanc Capital Markets Inc.

Perfect. Fair enough, guys. Thank you.

Coleen Tabor

Thank you, Mike. Now, I'll turn the call over to our President and Chief Executive Officer, Larry Lawson for some closing comments.

Larry Lawson

Thank you, Coleen. Well, as I had a chance to say it a couple of minutes ago, I think that it's been a very interesting year. We've spent the last year mapping a path forward at the same time transforming our operations and I think that this is the first indication of – maybe our second indication of a change in direction. And as Sanjay said, we're not changing our direction or guidance.

We're going to continue to be better year-over-year. I think what's incredibly important to us is that we deliver quality to our customers and we deliver product to our customers. We're not done with our transformation that relates to working the enterprise. Our value proposition is solid and the market is very strong and we're focused on all the moving parts of the business, as I said, our performance, certainly cost and free cash flow.

So in conclusion, my view is that it's a good start to the year but our transformation as a company will continue. And I very much appreciate your participation in the call today. Thank you very much for your questions and I'm sure we'll have a chance to talk between now and the next quarter, so thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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