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Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

Q4 2011 Earnings Call

February 09, 2012 11:00 am ET

Executives

Coleen Tabor – Director of Investor Relations

Jeffrey L. Turner – President and Chief Executive Officer

Philip D. Anderson – Senior Vice President and Chief Financial Officer

Analysts

Howard Rubel – Jefferies & Company, Inc.,

Robert Spingarn – Credit Suisse

F Carter Leake – BB&T Capital Markets

David E. Strauss – UBS Investment Bank

George D. Shapiro – Access 3:42, LLC

Cai Von Rumohr – Cowen and Company

Sam Pearlstein – Wells Fargo Securities LLC

Douglas Harned – Sanford C. Bernstein & Co., Inc.

Robert Stallard – Royal Bank of Canada

Michael Callahan – Auriga Securities

Eric Hugel – Stephens Inc.

Richard Tobie Safran – Buckingham Research Group, Inc.

Kenneth Herbert – Wedbush Securities Inc.

Michael F. Ciarmoli – KeyBanc Capital Markets Inc.

Peter J. Arment – Sterne, Agee & Leach, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings Incorporated Fourth Quarter and Full Year 2011 Earnings Conference Call. My name is [Francis] and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Coleen Tabor

Good morning. Welcome to Spirit’s fourth quarter and full year 2011 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 will 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 release, 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 webcast 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.

Jeffrey L. Turner

Thank you, Coleen, and good morning. First let me apologize for the condition of my voice. It is suffering the affects of a head cold. Fortunately, I feel better than I sound and hopefully my voice will hold out for the duration of this call.

With that said, 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 will be glad to answer your questions.

The core businesses remain the strong foundation for Spirit as we executed rate increases across the company delivering solid core operating performance in the fourth quarter. 2011 was an important year for Spirit, while we successfully transitioned to a higher production rates on our 737, 777, and A320 programs. We delivered over 1,000 core end items and a 11% increase over 2010.

When we entered 2011, we had 10 development programs, six of which were in flight and ground test and we exit the year with three successful transitions to early production. Along the way, the year marks several important milestones for these programs as the 787 and 747-8 Freighter programs achieve certification and delivery. The P-8A entered low rate initial production and we made progress on the development of the G280 and the G650.

We also reached several delivery milestones this year. As we ship two CH-53K helicopters to Sikorsky. In the first test, CSeries pile on to Bombardier. We also shipped the first A350 production composite panels from Kinston, North Carolina to our St. Nazaire, France facility. And the first Fixed Leading Edge was delivering to our customer.

Clearly, the unplanned concurrency of our new programs has been challenging for us, as we work our way through them. This quarter includes a net $0.25 per share of losses on the G280, 747-8 and A350 wing programs. While I am disappointed with these losses, I know the investment we are making in the development and manufacturing plants for these programs will position them to create long term value for our shareholders.

In the quarter, we also finalized a 9.5-year agreement with our technical and professional workers in Wichita, marking our fourth long-term contract. These agreements are focused on enhancing our partnerships and sharing the risk and reward of keeping our company healthy and our team for the future intact.

As the large commercial aircraft market continues to be positive, we remain watchful of global economic and political dynamics, while closely managing our capital spend to support increased demand for our products.

Now, let's talk about some of the specific accomplishments across the business during the quarter beginning on slide three. Our Fuselage Systems executed well with operating margins of 16.6% on $582 million in revenue during the fourth quarter, as volumes across core programs increased.

Fuselage segment 737 production line continues to perform well at high rates. The team delivered its 3,900 ship set of the Next Generation fuselage in the quarter. The 787 team delivered 4 fuselage number fifty-six, another 100% complete and fully powered on tested unit for a total of 7 fuselage sections in the quarter, and the joint Boeing and Spirit teams continued to make progress on cost improvements across the program.

The Fuselage team also celebrated delivery of the 1,000th 777 forward fuselage to our Boeing customer. For more than 15 years, the dedication of – to continuous improvement on this program has been evident in this airplane success in the market.

Our North Carolina team shipped the first production composite panels for the A350 fuselage from our Kinston facility to our St. Nazaire, France facility where they were successfully joined in the quarter and recently delivered to our customer.

On slide four, you see the Propulsion team had strong execution with margins of 16.3% on $322 million in revenue during the fourth quarter as volumes across the core programs increased.

The propulsion teams core business is performing well at higher rates as we delivered the 3900 737 next generation Engine Pylons and Thrust Reversers in the quarter. The segments 787 team also delivered Engine Pylons for unit number fifty-seven in the quarter. The Propulsion team marked a significant milestone as they delivered the first C series test Pylon highlighting our teams’ dedication, determination, and expertise to meet our commitments to our customer.

Across the segments, our teams continue to work closely with our Boeing customer in the early design phase of both the 767 Tanker and the 737 MAX with focus on value engineering. I’m pleased with their progress on these two programs that will extend the life of these successful airplanes.

On slide five, you see the Wing segment which primarily consists of our Europe, Malaysia, and Oklahoma operations. The Wing team reported a disappointing operating loss of 2.6% on $314 million in revenue during the fourth quarter as volumes increased across core programs and margins were impacted by increasing costs on the G280, the 747-8, and the A350 non-recurring wing programs.

As I discussed throughout 2011, the risk on the G280 is centered around achieving our plan. As we continue the implementation of that plan late last year, we continued to see engineering change in higher than forecasted assembly and supply chain costs resulting from it.

The team also identified additional opportunities to bring more automation into the manufacturing processes for both the G280 and the G650 in Tulsa. This additional investment in Spirit (inaudible) and automation on the programs will leverage our expertise to develop an efficient production line in support of these programs.

Spirit Europe produced higher volumes of hardware for our Airbus customer reaching line unit 5100 for the A320 wing components. The Oklahoma team delivered the thirty-eighth 747-8 Fixed Leading Edge Wing section and the fifty-six set of 787 slats in the fourth quarter. Development efforts progressed on the A350 wing program as the Spirit Europe team delivered the first Fixed Leading Edge test article in the quarter.

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

Philip D. Anderson

Thanks, Jeff, and good morning. I’ll begin with the key financial highlights for the fourth quarter and full year 2011 on slide number seven.

Revenues for the fourth quarter of 2011 were up approximately 14% as compared to the fourth quarter of 2010 on higher volume of large commercial aircraft deliveries.

Operating margins for the quarter were 8.4% compared to 2010 margins of 9% and fully diluted earnings per share were $0.42 per share, decreased from $0.44 per share a year ago, as our efforts to provide a balanced risk profile new programs more than offset the contribution from the higher volumes and good expense management.

The quarterly results reflect contributions from the core business as the Fuselage and Propulsion segments realized favorable cumulative catch-up adjustments totaling $23 million or $0.11 per share, primarily associated with the productivity and efficiency improvements in the 737 contract block that closed in the quarter, slightly offset by an unfavorable of $2 million or $0.01 per share cumulative catch-up adjustment due to cost growth in the Wing segment.

The quarterly results also reflects the foreign loss charges totaling $50 million or $0.25 per share associated with the G280, 747-8 and A350 Wing non-recurring program. Revenue for the full-year of 2011 grew 17% from 2010 with higher deliveries across all programs. Operating margins for the full-year were 7.3% compared to 2010 margins of 8.6%, while fully diluted earnings per share declined 13% to $1.35 per share, driven by the charge recorded on development programs in 2011. Cash from operations for the quarter was a $128 million source of cash, as lower customer advance repayments and normal year-end timing of receivables was realized.

Capital expenditures were $86 million for the quarter compared to a $105 million during the fourth quarter of 2010 as measured investment to new programs and capacity expansion for core products continued.

Slide number eight represents the adjusted 2011 fully diluted EPS without the one-time new program charges realized throughout the year of 2011. The net charges for the CH-53K includes inaudible favorable adjustment in the fourth quarter reducing a portion of the forward loss on the SDD program. As you can see, adjusting for the total charges, result in $2 per share in 2011 driven by the strong core business, controlled SG&A and R&D spending.

On slide nine, R&D and SG&A expenses as a percentage of sales, 2011 reflect a consistent level of spend for the company going forward and expense management continues to be a high priority for the company.

Slide 10 summarizes cash and debt balances. Cash balances at the end of 2011 were $178 million as compared to the third quarter of 2011 balances of a $138 million. At the end of the year, our total debt to capital ratio was 38% and our U.S. defined benefit pension plan remains fully funded, while we continue to make modest cash contributions to our UK plan. Our overall liquidity position and balance sheet remained strong.

Slide 11 summarizes net inventory balances, which increased by $59 million during the quarter. This inventory growth reflects increased deliveries in our core and 787 programs, inventory management improvement initiatives, and the investment in new programs. As slide 10 showed, the business (inaudible) programs the 787 and the A350 continue to be the primary drivers of inventory growth in the quarter.

787 deferred production balances continue to increase at a slow rate as expected. 787 deferred production average growth rate for full year 2011 was $6.2 million per unit as compared to the full-year 2010 average growth rate $14.2 million per unit.

Turing to slide 12. Our focus on execution intensified in 2011. As we transition to higher production volumes on multiple programs. We began initial work on the 737 MAX, which will extend our largest core program well into the future and make good progress on 787 cost reduction initiatives. We also made good progress, as we focused on the basics including physical inventory management, period expense control, as well as capital investment decisions and implementations.

We continue to focus on meeting customer requirements on new programs, as we manage design evolution testing and certification and transition to production. Certainly the quantity of new programs has posed challenges. However, we continue to retire risk as design and production plans mature and full rate production is achieved. As we manage the dynamics of an expanding core business and new program development, our liquidity and balance sheet remains strong.

Slide 13, summarizes our 2012 full-year financial guidance. As we move into 2012, the demand for our core products remains strong and the next generation of large commercial airplanes and business jets are entering production. Reflecting this growth, we expect our revenues for 2012 to be between $5.2 billion and $5.4 billion with fully diluted earnings per share of between $2 and $2.15 per share. The guidance range is anticipate growth and stability in the core business and allows for some additional more modest changes on new programs and experience in 2011.

Cash flow from operations for 2012 is expected to be greater than $300 million driven by core volume growth, slowing inventory growth and substantially lower repayments associated with customer advances.

Capital expenditures are expected to be approximately $250 million as we invest in core program capacity expansion and prudently time our investment to new program infrastructure and growth.

We expect the 2012 tax rate to be approximately 31% to 32% assuming the U.S. research tax credit is extended. Combined, R&D and SG&A are expected to be between 4% and 4.25% of revenue for the full-year of 2012.

I'd now like to turn it back over to Jeff for some closing comments before we take your questions.

Jeffrey L. Turner

Thank you, Phil. I’ll ramp up on slide 14 with a few brief comments. Our core business continues to be the foundation for Spirit as these teams executed well in the fourth quarter and throughout 2011. We have successfully transitioned to a higher production rates across our core programs and the same systematic process used for these transitions is in place for the upcoming rate increases.

In 2011, we managed the challenges of working with new customers, engineering change inherent with new programs, and executing new production plans all while working to meet our customer expectations and moving these programs closer to production.

As we move into 2012 and beyond, our unique competitive position on the best-selling commercial and business jet platforms along with our strong financial profile positions us well to deliver long-term value to our customers, employees and shareholders.

We remained focused on execution; investing in our core programs, improving profitability, as well as developing, supporting certification and transitioning new programs to initial production.

We will now be glad to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Howard Rubel from Jefferies. You may proceed.

Howard Rubel – Jefferies & Company, Inc.,

Good morning and thank you very much. Jeff or Phil you were kind enough to give us a walk of the programs that gave you challenges and problems during the course of last year. Could you give us a sense of – for your guidance for 2012? What percentage of the business is zero-margin?

Jeffrey L. Turner

Yeah, Howard. Good morning by the way.

Howard Rubel – Jefferies & Co.

Well, I’d just start with the easy question first, right.

Jeffrey L. Turner

Yeah, thanks very much for that one. Well, the guidance range of $5.2 billion to $5.4 billion of course includes rate increases on 777 that was began last year and that was sustained full-year. We moved to higher production on 777 this year. And we moved another higher rate production of 737 later in the year, as well as an A320 volume increase. And as you know 787 is in that mix as well. We delivered 25 787s last year. We anticipate approximately 40 units this year that has tended to fluctuate over the last several years depending on the [pull] from Boeing. We are kind of dialed in to a 40 number, but that could change and of course that is volume a zero-margin. So that is a clear headwind for us as the core business volumes improve.

G280, of course, that’s a zero booking rate now as well. 650 is a firmly margin program, both of those programs increasing volumes in our factories as we go through the year and mostly in the second half.

So, it’s roughly I would couch this year as really 15% to 20% of our revenues are going to be in some of these more challenged programs this year. That said, we think that the ability to improve productivity on the core business is very much within our range to do that and we’re working very hard to do that.

Jeffrey L. Turner

Yeah, I think that’s a good point Phil that 85% plus of our core base here is the strong and growing programs.

Howard Rubel – Jefferies & Company, Inc.,

Because it does look like on what you’re doing that you do have some modest, but possibly there is some upside to the core profitability, as we go forward.

Jeffrey L. Turner

Yeah. Clearly there is tailwinds from those core programs and some headwinds that Phil identified. And clearly as those core programs if as we execute that rate increases successfully, they add to the tailwind.

Howard Rubel – Jefferies & Company, Inc.,

Thank you very much.

Jeffrey L. Turner

Yes. Thank you, Howard.

Operator

Next question is from the line of Robert Spingarn from Credit Suisse. You may proceed.

Robert Spingarn – Credit Suisse

Good morning.

Jeffrey L. Turner

Good morning, Rob.

Robert Spingarn – Credit Suisse

Couple of questions on that note. You guys did talk about 40 787 deliveries in 2012, what specifically Phil does the guidance embed and at what point, at what number of 787s would cash flow – free cash flow go below zero?

Philip D. Anderson

Well, the guidance embeds approximately 40 as I said. The breaking across the average cost line we still view that as the line units which we’ve been very consistent on talking about between [one year to] 125 and 150, which we always are pushing to do better than that. That tends to be kind of where the norm is and that’s probably sometime in 2013 given current production plans.

Robert Spingarn – Credit Suisse

Okay. And then when I look at your – you had a slide in here that talked about you EPS in 2011 versus your adjusted so $1.35 versus about $2. So $0.65 roughly of headwind from development programs, what is embedded in the 2012 $2 to $2.15 if we were to look at the numbers both from a GAAP and an adjusted basis?

Philip D. Anderson

Yeah. It’s clearly the – it’s of the top end of the range, we’ve not really – we basically assume we (inaudible) and we hadn’t experienced anymore cost growth. I think the lower end of the guidance would anticipate some modest challenges on the development programs, which we’ve talked about. But also I will tell you as we increased volumes, Jeff, can certainly I do this, this is an opportunity in our volume driven business to try to breakout and really drive the core business to a high level of profitability, which we are very much focused on. But I think current range I think you can takeaway that we are being somewhat conservative given our past experiences here on the development programs and we think we’ve got the risk calibrated just about right and we feel good about our guidance range given where we are.

Robert Spingarn – Credit Suisse

But is it fair to say you’re saying what was $0.65 a headwind in ‘11 is now $0.15 in ‘12?

Philip D. Anderson

Yeah that’s what the guidance would imply, Rob. I mean, we had some bigger – we had some bigger challenges in $0.15 this year obviously. At this point there is nothing that tells us those are going to repeat.

Robert Spingarn – Credit Suisse

So those – that’s pretty much. In other words you’ve de-risked enough and as a final question 747-8 pre-production or intangible inventories looks like that’s mostly gone. Is that a fair conclusion?

Jeffrey L. Turner

Yeah. That’s correct.

Robert Spingarn – Credit Suisse

So that program do you feel that that’s almost fully de-risked here?

Jeffrey L. Turner

Yeah, it’s close. I mean, we look that, we do a very thorough job and trying to evaluate the risk and opportunities. And as I said here today, I think the charges we took and calibrate the operating team for success. It doesn't mean they are now working really hard to do better.

Philip D. Anderson

And I would add to that Rob, I mean clearly this particular block of the 747 is a highly disrupted block. So steady production throughout the rest of the block is an important element in our plan. We anticipate that that will occur, but should it not it would put us on the risk side of that register. And clearly a short block with a lot of change in it and a lot of disruption has created the 747-8 situation that we’re dealing with.

Operator

Thank you. And your next question is from the line of Carter Leake from BB&T Capital Markets. You may proceed.

F Carter Leake – BB&T Capital Markets

Thanks for taking my call. Just 787 number of 40 shipped sets, what production rate are you assuming on that. Is that 3.3 a month or those aircraft that will be or some of those already built?

Philip D. Anderson

Well, so Carter, many of them are of course in the production line. We don’t carry a large amount of reserve. So they are working their way through the line and we’ll plan to produce a lower rate at first of the year and then increasing as we go through the year.

F Carter Leake – BB&T Capital Markets

Are you currently at 2.5, is that the current rate?

Unidentified Company Representative

That’s approximately the rate we’re in.

F Carter Leake – BB&T Capital Markets

Okay.

Unidentified Company Representative

And preparing to step that up as we move through the year.

F Carter Leake – BB&T Capital Markets

Thank you.

Operator

Thank you.

Unidentified Company Representative

And I would just say categorically, Carter, we are well prepared to make those steps and we are very much in sink with the pool signals that we get from the program.

Operator

And your next question is from the line of David Strauss from UBS. You may proceed.

David E. Strauss – UBS Investment Bank

Good morning.

Unidentified Company Representative

Good morning David.

David E. Strauss – UBS Investment Bank

G280 the latest charge you took there, how does that breakout between cost growth and setting up the move to North Carolina and where are you in terms of moving the program to North Carolina?

Unidentified Company Representative

Yeah, couple of thoughts on the program. We’ve actually stayed to manufacturing plan with the great deal more I guess rigor and try to get our mind around how we actually introduce automation on the 280 and the 650. And so we’ve adjusted the manufacturing plans on what – we will still have subassemblies in North Carolina, but some of the major assembly work will still be done in Tulsa, which will take advantage of some capital we put in place that can be utilized on the 280 and the 650. So some of the cost growth is associated with that new improved manufacturing plant and then some of it is, the assembly curve is, we’ve overrun the assembly curve a little bit in the past quarter. So we’re recognizing that here as well and then we remain conservative about some supply chain costs. Now, I think it’s important to note that a great deal of this continues to be driven by some engineering changes.

As late engineering changes come through it impacts the assembly, it impacts the supply chain, the parts you are buying and so we’re still dealing with a fair amount of that development, maturity of the design. So when you wrap all that up, that really recognizes where we’re at in the fourth quarter here.

David E. Strauss – UBS Investment Bank

Okay on cash flow, we obviously know 787 is going to be less of a drag in ‘12 on the advance side and potentially even on the deferred side. What about the other big moving pieces like the Gulfstream program, 747-8? Can you give us some help there on how, whether they are hurting or helping from a cash flow standpoint and maybe by roughly how much?

Jeffrey L. Turner

Yeah I won’t size it up for you specifically David but G programs are the ones contributing probably more substantially even than the 787 at this point. Our progress on 787 has been very, very good. Although we’re still building inventory and the deferred account it at a much slower rate as compared to 2010 and so that will grow but at a slower rate.

G programs will grow and then there is some A350 growth that’s magnitude, order magnitude less. Still see inventory growth this year. I guess that I would couch it between 5% to 8% is where it looks like it’s heading to. Now again the cash flows, the volume coming up on the core, slowing inventory growth and then you pointed out correctly the 787 advances. We finished repayment of $396 million last year and so our current look at advance repayments is less than $10 million this year. So all of that combined really allows us to turn the corner on cash from operations in 2012.

Operator

Thank you. Your next question is from the line of George Shapiro from Access 3:42. You may proceed.

George D. Shapiro – Access 3:42, LLC

Yes, good morning.

Jeffrey L. Turner

Good morning, George.

George D. Shapiro – Access 3:42, LLC

Hey Phil, I just wanted to push a little bit when you said that the top, there is only like $0.15 of contingencies embedded in the guidance, because if I ruffle it out, I figured you’ve got maybe $350 million increase in legacy revenues this year that probably should contribute maybe $0.40 by itself. So I would argue you probably got more contingency in there and I was just wondering how you would respond to that.

Philip D. Anderson

George, you are usually very accurate. So I think that’s fair and I think it’s also prudent from our chairs given the number of development programs and where they are at in the development cycle. So I think we view the guidance as appropriately conservative given our past challenge with development programs and but I have to be always close with the horsepower and the ability to drive our core business even a better place.

And we had the 737 MAX which extends our product lines now for quite some period of time and all of our core businesses are increasing in volume and quite frankly this is as good as it gets in the commercial aerospace from my knot-hole, all-time record volumes and a lot of opportunity for us improve.

George D. Shapiro – Access 3:42, LLC

That’s fair. And then, same questions similar on cash flow. So given, I mean, you’ve clearly been opting your cash flow guidance for a number of years, but it would seem to me that you’re somewhat conservative there yet this year and rightfully, so I mean obviously given the history I just care to get your comment on that.

Philip D. Anderson

No, I think you’ve adequately described it George.

Jeffrey L. Turner

Plenty of moving parts on the cash flow.

George D. Shapiro – Access 3:42, LLC

Okay. Thanks a lot guys.

Philip D. Anderson

Thank you, George.

Operator

Your next question is from the line of Cai Von Rumohr from Cowen and Company. You may proceed.

Cai Von Rumohr – Cowen and Company

Yes. So to refresh my memory, you said with $6.2 million average, so where were you in the fourth quarter on 787 deferrals, it looks like 4.5, something like that?

Philip D. Anderson

Yeah, that’s pretty close, Cai.

Cai Von Rumohr – Cowen and Company

Okay. Or less than that?

Philip D. Anderson

A little bit less, yeah.

Cai Von Rumohr – Cowen & Company

Right. So I mean you’re pretty close to four, I mean this is pretty good improvement from 6.3 in the second and the anomaly in the third quarter. So as we are looking at next year, I mean what kind of a number, I assume it’s less than the four, it’s probably down in the twos or something like that, is that a reasonable guess?

Philip D. Anderson

Yes, I guess it’s reasonable. I don’t have the numbers, but we’re going to continue to improve of course and we are working hard at driving it down as quickly as we can through both, value engineering, through supply chain management and internal productivity improvements.

Jeffrey L. Turner

And, Cai, I would say clearly the more steady the drumbeat and the hitting of the milestones in terms of rate, the rate breaks and rate increases, the better the news for us on the program.

Operator

Thank you. Your next question is from the line of Sam Pearlstein of Wells Fargo. You may proceed.

Sam Pearlstein – Wells Fargo Securities LLC

Good morning. Couple questions just on the cash flow again. In the last several years you typically have a lot of usage of cash in the first couple of quarters and then a big positive in the fourth quarter, so can you just talk about the seasonality of this year as to see how you see that laying out, and more specifically can you quantify in anyway what the A350, G280 milestone payments that you expect to receive this year?

Philip D. Anderson

Yeah, on the first question, the seasonality, as you probably know the first quarter tended to be the trough for cash flow for sprit, a lot of that’s associated with our year-end timing of the receivables given a large portion of our core business is on net 10-day payment terms. So the first quarters is the resetting the normal receivable flow. And then really from the second quarter through the remainder of the year, we expect cash flows to improve as we go through the years or through the quarters.

The development programs tend to be, it looks like the milestones associated with specifically the A350 are second half loaded, so that would have improved cash flow as we go across those milestones in the second half of the year. Yeah, I’ll reserve my comments on the size of the cash on the Gulfstream in the A350 programs but the seasonality is as I described.

Sam Pearlstein – Wells Fargo Securities LLC

Okay, and if I can just follow up on the ending of the accounting block on the 737, is there anything you can help us with in terms of just balancing the higher volume on the new block versus the volume price changes in terms of just block-to-block, is it up 25 basis points, 50 basis points, any sort of order of magnitude in terms of how to think about those?

Philip D. Anderson

Well, not specifically, Sam. As the volumes go up, this is a volume driven business and so we expect to capture the appropriate margins. We drive more volume across our fixed cost base.

Jeffrey L. Turner

And I would just give a little more color, Sam. Each of these blocks that has a succeeding block with increased rates in them, the cost of achieving the next rate step is often born in the existing block, so that tends to be a bit of a depressor. But fundamentally, as we’ve been saying consistently, these are tailwinds for us, and we have very high focus throughout the company on it on achieving the improvements associated with increasing rate.

Operator

Thank you. Your next question is from the line of Doug Harned from Sanford Bernstein. You may proceed.

Douglas Harned – Sanford C. Bernstein & Co., Inc.

Good morning.

Jeffrey L. Turner

Good morning, Doug.

Douglas Harned – Sanford C. Bernstein & Co., Inc.

I am interested on the A350, and I know you delivered the first panel two Airbus and when you think about progress on the fuselage, I know in December Airbus talked about issues that Spirit had been having with the supply chain, can you comment on where you stand in terms of the fuselage program and if there are still any issues there that you’re particularly worried about?

Jeffrey L. Turner

Sure Doug, I’d be glad to. First of all, I think we were very clear that we’ve had some schedule challenges as some of the designs were late on that, and that of course bleeds into the production side, the supply chain side all of that, and we were full-court press at the end of the year with our supply chain in our assembly. We have put those first units together. They went together exceedingly well, the Spirit exact process worked phenomenally, so the products came together, they came together beautifully. We still have a couple of units that we’re working on right now and are working through some additional supply chain issues, but that is quickly coming around like we needed to, and I feel very good about the assembly on the fuselage, the units that we’ve been able to send over to Saint-Nazaire.

We had some travel work on the first ones, which are endemic to a late engineering relation and late supply chain deliveries. Those are going to clean up, we believe during the first part of the year here. So the finished product is magnificent, and looking very good and working well.

Douglas Harned – Sanford C. Bernstein & Co., Inc.

And then, if I can ask G280, I found it a little surprising to see you take charges related to production as apposed to development. If you can comment on, has it been a surprise to you to see more challenges on the production side, which I normally think of it’s been quite strong at. When you look at the G280 and also the G650 are those going compared to your prior in terms of production?

Jeffrey L. Turner

You broke up a little Doug, but I think you’re asking about the 280 and the fact that we’re taking charges as it moves into production, as opposed to the development side. I would just say categorically as we characterize it, it’s still not settled down like it needs to in terms of the engineering design changes and therefore the production side of that is still more disturbed than we would like it to be and that drives itself into supply chain and into our assembly.

So surprised, I mean clearly we would have liked to manage that better and not had the additional cost, but we are over the cost forecast and we thought we’d bring it down cost curve quicker than we have and that has a tremendous amount of our focus as we work on that program.

Operator

Thank you. Your next question is from the line of Robert Stallard from Royal Bank of Canada. You may proceed.

Robert Stallard – Royal Bank of Canada

Good morning.

Jeffrey L. Turner

Good morning.

Philip D. Anderson

Good morning.

Robert Stallard – Royal Bank of Canada

Jeff, I was wondering if we could go back to the A350 and if you could maybe elaborate on what drove the charge in this quarter in the wind section and whether there is a risk of something similar happening in the fuselage area?

Jeffrey L. Turner

Sure, I think the issue there it continues to be the engineering and a few changes that have come and through on that program. If you recall, we have four contracts on the A350 of fuselage development or wing development then in fuselage production and in wing production.

The thinnest one of those was the wing development. That’s the one that that we had some additional engineering dollars coming through in this quarter. We have delivered hardware, the hardware again went together very well. We had some finish up on the engineering that we did that added some additional cost to it. So I’d see the other three contracts have better contingency conditions associated with them. This is the one that we’ve had concerns with from previous quarters as well. So it’s not big but it needs to be finished and completed. It should be this year and we need to get through that and get it behind us and then move it to the production side which is looking better for us.

Robert Stallard – Royal Bank of Canada

Okay and just quick follow up for Phil. I was wondering if there is anything we should be aware of looking at the quarters in terms of maybe revenues and EPS, if you expect any anomalies there?

Philip D. Anderson,

Regarding the look ahead in ‘12?

Robert Stallard – Royal Bank of Canada

Yeah, in 2012.

Philip D. Anderson,

No, there is no really no anomalies, I think we laid out, there is some seasonality to our delivery profile where the second and third quarter is going to be the heaviest delivery quarters. Fourth quarter is a little bit lighter normally given that we have a shutdown in the last week of the year, but nothing stands out that we should talk about.

Operator

Thank you. Your next question is from the line of Michael Callahan from Auriga Securities. You may proceed.

Michael Callahan – Auriga Securities

Hi, good morning guys.

Jeffrey L. Turner

Good morning.

Michael Callahan – Auriga Securities

I guess the first questionnaire is, on the 737 production increase that were up 38 and then the 42, I guess where do we stand on that process? How much additional inventory or do we still have to add CapEx things like that and than kind of what have we done already versus what is going to happen here in 2012?

Michael Callahan – Auriga Securities

So we have made this step very successfully to 35 a month. There will be, as there always is with increasing rates, there will be constrain relieving capital and tooling that are in our plans and baked into this year’s guidance. That will primarily be to take us from 35 to 38.

We will began in some of our back shops before the end of this year to break to a production to support 38 deliveries I think being first quarter next year to support the customer, but those are in this year’s plans and we will continue to use, we have a very robust process for rate increase analysis and we will continue to use that. It has served us well on previous rate increases and I think will on the 38, 42 as well. Now 42 is out into the next couple of years and so I won’t talk about it specifically.

Philip D. Anderson

And I think I’d just add to that broader on the capital investments we are making. Clearly we are really pleased to put money into our core business, because it’s a very nice return for us. Equally important, we are actually timing the investment in these new programs, both the infrastructure and the inventories given they have tended to move around in time the schedules are fluid. So we will pay close attention to when we make the actual capital investment for higher rates on some of the new development programs and I think we are doing that pretty well.

Operator

Thank you. Your next question is from the line of Eric Hugel with Stephens Incorporated. You may proceed.

Eric Hugel – Stephens Inc.

Hey, good morning guys.

Jeffrey L. Turner

Good morning Eric.

Eric Hugel – Stephens Inc.

Can you talk us, can you walk us through I mean you took the charge on the 280. Can you give us sort of an update on how things are standing with the 650? I mean trying to catch up with the sort of the work as well as sort of the ramp up in production there?

Jeffrey L. Turner

Sure. I will say that our operation’s tempo is improving inside the factory is becoming more stable. We are adding some support and some labor as needed as we come up the curve in terms of higher rates, working very closely with the customer, we had some of the work shared and some done in Savannah and some done in Tulsa, and we will continue to do that and move the work appropriately to support the continued improvement in the production and to prepare for and to achieve the rate increases.

So, inside our factory is progressing well. We are smoothing out the supply chain, there has been some issues there as there are almost all new development programs, we’re seeing that improve. So, overall we’re seeing the kind of improvement that we need on that program.

Eric Hugel – Stephens Inc.

Great, and real quick, still the interest look pretty light this quarter, was there anything in there and sort of what’s the good run rate that we should be thinking about for next year?

Jeffrey L. Turner

No, the run rate is pretty consistent with this year.

Operator

Thank you. Your next question is from the line of Richard Safran from Buckingham Research Group. You may proceed.

Richard Tobie Safran – Buckingham Research Group, Inc.

Hi, good morning.

Jeffrey L. Turner

Good morning, Rick.

Richard Tobie Safran – Buckingham Research Group, Inc.

I missed part of the call, so few addresses, I apologize. But your volume pricing agreements expire in ‘13 or mid part of ‘13, I wanted to give you, want to know and I know you’re in discussions with that. Can you give us some sense of progress, may be a timeline here if possible. Generally, I want to know what we were expecting and obviously one concern here is how much leverage you actually have negotiating market-based pricing?

Jeffrey L. Turner

So, I would just key on a couple key things you’ve said. I mean it is a 2013 re-pricing and clearly important to us and our customer. So, you can appreciate that a lot of dialogue is underway and I think the key words are market-based pricing. So, clearly we need to make sure that these prices are appropriate for ourselves and our customer and we get the kind of returns that are appropriate and allow to be strong company that continue to invest in the future and we’ll do all that and frankly as non-publicly as possible.

Richard Tobie Safran – Buckingham Research Group, Inc.

Okay, thanks a lot.

Jeffrey L. Turner

Yes, thank you, Rick.

Operator

Your next question is from the line of Ken Herbert from Wedbush. You may proceed.

Kenneth Herbert – Wedbush Securities Inc.

Hi, good morning.

Jeffrey L. Turner

Good morning

Kenneth Herbert – Wedbush Securities Inc.

I just wanted to ask a question again on the free cash flow guidance, specifically on the CapEx side, I remember you started 2011, talking about a larger number than you ultimately came in at and as recently as the end of last year you were talking about I think in range of $300 million in CapEx for ‘12 and then again in ‘13. How much of the reduction to $250 million is timing or how much is really prudence and obviously ability to do more with less so to speak with the existing investments?

Jeffrey L. Turner

So there is obviously both in the equation Kenneth and timing is certainly a part of it. We want to have the capital required on the floor ready at the point of use, at the point in time where we need to use it, and not way ahead of time. That’s clearly part of our analysis and we look at that frankly on a monthly and often times weekly basis.

And then the other side of it is, part of our capital planning is to have the appropriate plans in place, but we also look at the productivity that we get out of current assets and if the plans and actuals are in place getting us productivity out of existing assets and we can delay the purchase of new assets, especially in the areas where we’re looking at rate increases. So it is a combination of both and clearly an emphasis on making sure that the capital that we need, we really need, and then it’s there when we need it.

Kenneth Herbert – Wedbush Securities Inc.

Okay. Is it safe to assume that lot of this is 787 related and then we may see a bigger step-up in 2013 perhaps than we were previously anticipating?

Jeffrey L. Turner

Well, some of it is 787, and as you know we have other programs as well. We have A350, we have the increases for the production program. So, it’s a couple big programs and some of that we have been able to push to the right and some of them we’ve been able to albeit for a period of time until the rate increases began to hit us. So, there will be requirements in 2013. We haven’t forecast what they are yet and they will depend a lot on the drumbeat and rates that are hid on both new programs and existing programs.

Operator

Thank you. Your next question is from the line of Michael Ciarmoli from KeyBanc Capital Markets. You may proceed.

Michael F. Ciarmoli – KeyBanc Capital Markets Inc.

Hey, good morning, guys. Thanks for taking the questions.

Jeffrey L. Turner

Good morning.

Michael F. Ciarmoli – KeyBanc Capital Markets Inc.

Just a follow up on the CapEx and the investment this year, are you going to sort of facilitize yourself with machining and tooling to get to a rate of 10 per month for the 787s, or is that going to be more of a 2013 event?

Jeffrey L. Turner

So what we’ve said consistently and it’s no different now, we have the floor space required for 10, we have capital equipment either installed there in the plant for 7 and as the plan for 10 comes clear and our timing and our productivity we will be installing both capital and tooling again in specific areas. Some places our tooling and mostly our capital is capable of doing 10.

There are other places where we’re going to have to put in some constrain relieving equipment. So we will make that, we will make those decisions lead time away and we’ll have those that capital in place and that’s part of the plan for this year and of course will be for future years as well.

Michael F. Ciarmoli – KeyBanc Capital Markets Inc.

Okay.

Philip D. Anderson

I just had one comment to the capital. One of our core competencies is large scale automation and that is capital intensive, and so we have gotten much better over the course I think the last couple of years on deploying the right capital at the right time to enable and support our customers.

And that’s always part of the discussion as we move to a year given the development cycle, and so I think that’s one of the things our customers, now we bring to the table is the ability to use the large scale automation. And from our cash flow stand point, we’re getting better working the timing aspect.

Michael F. Ciarmoli – KeyBanc Capital Markets Inc.

Got you. And then, Phil, just one last one. The revenue guidance, the 6% to 10%, what are sort of the puts and takes there from the low-end to the high-end? I mean are there specific programs like the 787?

Jeffrey L. Turner

Yeah, sure. Yeah, the 787 is probably the biggest variable on the revenue line, given that the volumes coming approximately 40s in the plan, that adjusts of course we can bring it down. Other than that the core business although the basic 320s, 37s, 777s very, very stable as they ramp up that we are stable and very confident. So it revolves more on 787 and some of the business share programs.

Coleen Tabor

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

Operator

And that question comes from the line of Peter Arment from Sterne, Agee. You may proceed.

Peter J. Arment – Sterne, Agee & Leach, Inc.

Yeah. Good morning Jeff and Philip.

Jeffrey L. Turner

Good morning.

Peter J. Arment – Sterne, Agee & Leach, Inc.

Just a question, I guess on the supply chain, Boeing spending a lot of the time, ordering suppliers and ordering suppliers, suppliers. Jeff, you may just give us a little color on what the discussion look like or what you are seeing in the supply chain given the ramp that’s particularly back half of this year and going forward?

Jeffrey L. Turner

Well, I think clearly for any just like for Boeing or Airbus or Gulfstream any of our customers, their supply chain is critical. Our supply chain is to us is well. We often do a joint reviews of the sub supply chain that supports a specific customer. But clearly as you look out at the kind of rates that we are all contemplating, Tier 2, Tier 3, even Tier 4, raw material supply, fastener supply, reasonable price all those things are very critical to the ability to continue to ramp.

And so that continued development and support of the supply chain both for current, stable production for bringing new programs in and then for facilitating it for the rate increases, very critical part of our rate management process.

Peter J. Arment – Sterne, Agee & Leach, Inc.

Are you seeing any like long polls in the 10 year regarding concerns or anything regarding lead times or anything else from raw materials all the way up through?

Jeffrey L. Turner

Not at this point for the rates we’re at, but clearly if you look back where the supply chains have been constrained and other rate increasing environments, clearly raw material is something to pay a lot of attention to and fasteners especially, specialty fasteners very important part of the management. And what we frankly look for is, is places where supply might be constrained, and try to look far enough ahead that we can do something about it.

Operator

And Ladies and gentlemen, this concludes your presentation, you may now disconnect. And have a good day.

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