Spirit AeroSystems Holdings' (SPR) CEO Larry Lawson on Q1 2016 Results - Earnings Call Transcript

| About: Spirit AeroSystems (SPR)

Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

Q1 2016 Earnings Conference Call

April 29, 2016, 11:00 ET


Ghassan Awwad - Director, IR & Corporate Strategy

Larry Lawson - President & CEO

Sanjay Kapoor - SVP & CFO


Sam Pearlstein - Wells Fargo Securities

Doug Harned - Bernstein & Co

Howard Rubel - Jefferies

Myles Walton - Deutsche Bank

Seth Seifman - JPMorgan

Carter Copeland - Barclays Capital

Jason Gursky - Citigroup

George Shapiro - Shapiro Research

Cai von Rumohr - Cowen and Company

Robert Spingarn - Credit Suisse

Ken Herbert - Canaccord Genuity

David Strauss - UBS

Michael Ciarmoli - KeyBanc Capital Markets


Welcome to Spirit AeroSystems Holdings Inc. First Quarter 2016 Earnings Conference Call. My name is Sonja and I will be your coordinator today. [Operator Instructions]. I would now like to turn the presentation over to Mr. Ghassan Awwad, Director of Investor Relations. Please proceed.

Ghassan Awwad

Good morning. And welcome to Spirit's first quarter 2016 earnings call. I am Ghassan Awwad 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. 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 earnings 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 www.spiritaero.com.

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

Larry Lawson

Good morning, everyone. And welcome to our first quarter earnings call. We're pleased that Tom Gentile has joined us, assuming his role as Executive Vice President and Chief Operating Officer. Tom oversees all of Spirit's programs, as well as engineering, operations and business development. Over the last two decades, Tom has held several leadership roles at General Electric, to include President of GE Aviation Services and, most recently, as the President and COO of GE Capital. It's been great working closely with Tom over the last month.

In March, Spirit AeroSystems was named by the Secretary of the Air Force as one of seven subcontractors on the B-21 program, we’re very proud to be part of the team. We're currently in the early phase of the engineering and manufacturing development program, but this is a landmark win that gives us a new growth engine. It confirms our value proposition, not only in aerospace, but also in defense, as a proven, value-added, low-cost partner. Earlier this year, we celebrated a significant milestone with Boeing, when the 737 MAX took to the skies for its first test flight. We're very honored to play such a crucial role in the development and production of the latest generation of this great program. Relative to the A350 program, we continued to make progress.

We delivered 14 shipsets, with an average deferred inventory, per ship set, of $400,000, as compared to $1.2 million in 4Q 2015 and $3.6 million in the same period last year. With regard to capital deployment, we remain opportunistic. In the first quarter, we purchased 3.6 million shares for $155 million. This concluded the previous share repurchase program announced in 2015 and, at the end of this quarter, there $485 million under the current repurchase program. Every quarter, I comment that were driving excellence into all of our operations and we're comprehensive in our near- and long term plans for improved performance. We're seeing the results of these efforts. In addition to that, Spirit achieved investment-grade credit ratings from Moody's and S&P. Both agencies cited expectation of a strong balance sheet, with sustained earnings and cash-flow generation in coming years as the basis for the upgrades.

So, now let's take a look at the first quarter's results. For the quarter, we reported revenues of $1.7 billion, operating income was $267 million which was up 13% year over year. Operating margins were 16%, as compared to 13.5% in the same period of 2015. Operating cash flow was $94 million and free cash flow was $43 million. Our backlog continues to be strong at $46 billion. Our 2016 guidance remains unchanged. We expect 2016 sales to be between $6.6 billion and $6.7 billion. Earnings-per-share between $4.15 and $4.35. Free cash flow is expected to be between $325 million and $375 million.

With that, I'll ask Sanjay to lead you through the financials and give you more specifics about the first quarter and then, of course, we're always happy to take your questions. Over to you, Sanjay

Sanjay Kapoor

Thank you, Larry. And a very good morning, everyone. Let me take you through our first quarter 2016 financials and, then, we will summarize our full-year outlook. But, before, we begin I'd like to first thank every Spirit employee for the contributions in the quarter and, for once again, meeting our commitments to our customers, as well as our shareholders. Now, let's start with slide 2. First, we have a very at solid start this year with robust earnings of $1.29 per share. In the quarter, we met all our commitments to our customers and delivered 397 shipsets, including 130 737s, 20 6777s and 33 787s.

In addition, we delivered 147 A320s and 14 A350s. Second, along with six other partners, we were awarded significant work scope on the B-21 program and are very excited about the opportunities that this program brings to Spirit, long term. We're now executing on the detailed plans to balance all the required investments and meet program deliverables. Third, a key accomplishment was our participation on the successful first flight at the 737 MAX. We would like to congratulate Boeing on achieving this major milestone. The 737 program and all derivatives are a cornerstone of our current and future business. Fourth, we remain steadfast in our continuous focus on improving operational performance and managing all components of our cost structure.

As we have often repeated on our calls, we continue to challenge ourselves on direct and indirect levels, for efficient production in our factories. We continue to look for every dollar of savings in our overhead spend and are working hard, now, on rationalizing our entire material and procurement strategy. Lastly, in recognition of our solid financial performance over the last few years, as well as a strong balance sheet, we finally achieved an investment-grade credit rating with both Moody's and S&P in the quarter. This is a result of all the hard work by each and every employee at Spirit. Again, my thanks to the entire team. Turning to slide 3. Revenues for the quarter were $1.7 billion, 3% lower, compared to 1Q 2015, due to slightly lower deliveries on the 737 and 747 programs. And lower 787 revenue, due to price step downs and, partially offset by increasing rates on both the A-350 and the A320 programs.

Our strong portfolio is bolstered by programs that are projected to increase in production rates through the rest of this decade, such as, the 737, the A320, 787 and the A350, resulting in a very healthy backlog of $46 billion. Moving to slide 4. We reported EPS of $1.29 for 1Q 2016, versus adjusted EPS of $1.00 for 1Q 2015, adjusted to remove the impact of the partial release of the deferred-tax, asset-valuation allowance. Most of the improvement in core earnings resulted from disciplined cost-reduction initiatives and productivity increases across the board.

These initiatives were identified and put into place over the last several years and have given us the confidence to recognize accumulative catch up in the quarter, as some of our blocks near completion. In the quarter, we released the majority of the deferred credit balance on legacy programs for prior years. At the same time, we Incorporated performance improvements into future booking margins. Earnings per share for the quarter also benefited from a 5% lower average share count, as compared to the same quarter last year which is a result of the opportunistic execution of our share-repurchase program. Turning next to free cash flow on slide 5. For the quarter, we reported free cash flow of $43 million. Historically, first quarter free cash flow has always been impacted by the seasonality of working capital and incentive-plan payouts.

The $384 million cash flow in 1Q 2015 included a number of significant, positive, one-time items, such as the tax refund, as a result of the Gulfstream program divestiture, the favorable settlement with GD, as well as the suspension of the 787 advance repayments. In 1Q 2016, cash received as part of the 787 interim pricing agreement was $43 million, compared to $16 million in 1Q 2015. As you may recall, this interim cash is treated as deferred revenue and excluded from our guidance. We remain on plan to achieving our guidance of $325 million to $375 million for 2016.

Slide 6 summarizes our share-repurchase activities. Since 2014, we have returned $594 million to our shareholders, in the form of share repurchases. And we plan to return an additional amount of up to $485 million through 2017, as part of our $600 million share-repurchase program announced earlier. In total, all this adds up to over $1 billion in cash, that is planned to be returned to our shareholders. And as we've always said, our approach to capital deployment remains disciplined and opportunistic. For our segment results, let's turn to slide 7. Fuselage segment revenues were $874 million, down from $917 million for the same period last year.

The decrease was primarily due to lower revenues recognized on the 787 program, lower production deliveries on the 737 and 747 programs and offset by higher revenues on the A-350 and the 767 program. Operating earnings were $177 million, up from $165 million for the same period last year, reflecting favorable performance and productivity improvements. The segment reported $16.2 million, favorable cumulative catch-up adjustments on mature programs and a favorable change in estimates on forward-loss programs of $3.1 million. Propulsion segment revenues were $439 million, down slightly from $446 million, for the same period last year.

Operating earnings were $99 million, up from $96 million for the same period last year, as a result of continued improvement in our cost performance. The segment realized $5.9 million favorable cumulative catch-up adjustments on mature programs and a favorable change in estimates on forward-loss programs of $8.9 million. Wing segment revenues were $361 million, down from $377 million, for the same period last year. The decrease was due to lower revenues recognized on the 787 program and lower production deliveries on the 747 program, partially offset by higher revenues recognized on the A350 program. Operating earnings were $59 million, up from $45 million, for the same period last year, resulting from productivity and efficiency improvements.

The segment recorded $10.1 million favorable cumulative catch-up adjustments on mature programs and a favorable change in estimates on forward-loss programs of $3 million. On the 787 program, we delivered a total of 33 shipsets in the first quarter and the deferred inventory balance grew overall by $33 million, due to price step downs in the quarter and offset by cost improvements. Our current block will end later this year and we remain on plan to our estimates and guidance. On the A350 program, we delivered a total of 14 shipsets in the first quarter, compared to six shipsets in 1Q 2015, the average deferred inventory per unit decreased to $400,000, as compared to $3.6 million in the same period last year. As Larry mentioned, we continue to make progress in our performance and invest in ramping up our production rates.

As we have always said, while we have made progress in reducing our deferred growth per shipset, there is still a lot more work to do. Turning to our guidance on slide 8. We expect revenues to be between $6.6 billion and $6.7 billion which reflect the higher deliveries on the A350 and A320, steady rates on the 787 and 737 programs this year, as well as lower deliveries on the 777, 747 and the A330 program. 2016 EPS is expected to be between $4.15 and $4.35 per share, again reflecting a strong year-over-year improvement in our earnings, as we continue to focus our efforts to improve our performance and cost structure.

Free cash flow is expected to be between $325 million and $375 million which includes the investments on the defense programs. As we mentioned last quarter, our focus on cash continues, as better performance offsets the significant headwinds of higher advance repayments and working capital requirements on the A350 program, as well as the impact of lower 777 and 747 deliveries in 2016. Our guidance is based on an effective tax rate of 31.5% to 32.5%.

And with that, we will be happy to take your questions.

Question-and-Answer Session


[Operator Instructions]. And our first question comes from Sam Pearlstein from Wells Fargo Securities. Your line is now open.

Sam Pearlstein

Sanjay, I wanted to ask about the guidance and looking at where you are in the first quarter. It implies about $1.00 a share for the remaining three quarters but you have now fewer shares outstanding which I think was not in the guidance. The 87 moves to a new block. I know the 777 comes down in the fourth quarter but what else would be negative that would keep you from seeing earning power decline as we go through the year?

Sanjay Kapoor

It's a very fair question and again I have to take us all back to 2014, 2015. As you know we've been building a reputation in our company of always meeting our commitments. Quite frankly our internal plans are always to try and find ways to exceed our commitments. But it is the first quarter and at the end of the day what we try and do here is make sure we not only improve year-over-year which as you know we have, I think in 2014 we did $3.57, last year we did $3.92 and this year we do $4.15 to $4.35. But you also have to remember, Sam, that we're ramping up in rates and we always have to -- that’s one of our brands, we always ensure that we deliver to our customers and sometimes we do anything and everything that it takes including with our suppliers as well as expediting parts and so forth.

So, it is the first quarter. We're comfortable with everything that I know today in terms of our guidance. And obviously we will try and do better. Lastly, as you pointed out and I think we were very clear, the share repurchase which is a component in our current results was excluded from our guidance. So over the course of the year depending on the outcome of how opportunistic and disciplined we're, whatever the impact of the share repurchase is, is obviously additive to our numbers.


And our next question comes from Doug Harned from Bernstein & Co. Your line is now open.

Doug Harned

On the A-350, your progression on looks very good. I'm interested in at this point when do you expect to be at breakeven. And then also, the Airbus has a large number of airplanes in various stages of completion in Toulouse right now. Many waiting on interiors. Have the delivery delays associated with those affected your work at all?

Larry Lawson

So if you can visualize and I know you're quite familiar with our business, as you're ramping up in rate and I've done this quite a few times in a number of programs, this is probably -- there's a number of really challenging periods as you mature your production line. You're getting to your ultimate rate. Maybe the most difficult is the ending of the engineering phase and the beginning of the production phase because there are so many changes that are making their way into your production line. Thank goodness for the most part that's behind us. Change traffic is very small in comparison to what it had been historically.

So today as we ramp up in rate, we're just dealing with the machinery and Airbus is dealing with the machinery inside their own company as well as inside the supply base. So the front end of the line runs faster than the back end of the line. As you go up and rate our deliveries, our build and then our deliveries precede obviously the Airbus build and delivery. So we haven't seen and it's a reasonable question -- we haven't seen any slowdown from the plan in terms of demand. It's generally been within days and so all of us, I think, across the board in terms of we supply both wing parts as well as center section of the fuselage. We’re all working hard to continue the path up to ultimately, whatever the ultimate rate turns out to be.

And as it relates to your first question where is breakeven -- I'm not going to give a forward-looking projection. I tend to be, I guess I prefer to be safe and demonstrate results. And particularly in this phase -- when the numbers get down -- when you're in this phase of the ramp rate what happens is this is -- and I mentioned this last year, this is the rate, you're very rate sensitive. And your rate sensitive in two aspects, right, you’re rate sensitive on the revenue side because if you don't have deliveries then obviously the impacts the revenue side and on the cost side your fixed cost obviously you’re very sensitive to the number of units delivered in any given quarter. This is not a good time to be doing that and there's actually a third component I probably should mention which is you will have some one cost, one time nonrecurring costs that occur as a you're paying kind of an expediting, I call it expediting cost associated with getting to rate. Whether that expediting cost is manifest is surge capability in your line or that expediting cost is in freight or its, you’re expediting your supply base. I mean there's a whole number of things that occur in this space. You can see we're making very good progress but it's not -- and I think the really good news, the really good news is I think we have very good cost transparency at this point.

But there's a difference between saying hey, how do you feel about your ability to project your labor learning curve, your support ratios, your supply base, cost downs versus how will you handle the turbulence in any given year or quarter. We're feeling really good as you can see but there will be some challenges during the year, quarter-to quarter and we'll continue to make progress, but this is one of those transitional years.


And our next question comes from Howard Rubel from Jefferies. Your line is now open.

Howard Rubel

I want to also pursue a cost question. You've been able to recover, Larry, some of the losses on some of the programs you've taken charges on but they're very small relative to what's still out there in terms of potential. Could you address the possibility of I'll say taking a step function forward in terms of recovering those costs?

Larry Lawson

Well, Howard, I'm not sure I know what specifically, what program you referring to. We certainly don't anticipate any step losses or anything right now. I could go through the whole portfolio program by program but we just discussed A-350. I think you can see the progress there. I think on 787 and this particular quarter it's as we move toward the end of the block, we're right on the plan that we laid in, my gosh, it goes back two years ago.

So we're marching right along. We know what our step down pricing looks like. We know what our cost visibility is on 87 and we’re confident about where we're going to end up there. So I certainly don't see any negative news or maybe even positive news, I'm not sure. There's always the potential as we continue to drive down cost but the whole enterprise, that's our objective. But again, we try to put that in our guidance. As we look at our guidance we sit down and we take a look at the historical view of our cost reductions and there's always a little bit of conservatism so you saw some of the negative deferred building up in some of the accounts last year. As we continue to drive the enterprise down, that kind of that manifests as the team of both looked at that and then we saw the progress that we were making or the status against our future initiatives, the team's confidence showed as team catches. That doesn't mean a multiplied by 4 by the way. To be clear those really were catches and we’re not -- and part of our thinking, quite candidly when we gave guidance.

So really, the machine is working very, very well. Our approach to cost reduction, when I say comprehensive, I mean, it doesn't mean that we've used up, we've emptied the tank of opportunities. We have number of identified things that are -- very well thought out initiatives which as we measure those things, again, our confidence is quite high that they will come home, that's manifest.

And then as I look forward into the other things that we have in play that play out not over quarters necessarily but play out over years, I'm really confident there as well and really the big question for us often is, gosh, how much change can we consume without disrupting our primary objective which is to make sure that the number one thing about our brand is that we deliver product and meet commitments. And that's the balancing act and the great news is when it shows up as a win where you go to market and you compete head to head like we were able to compete in a very significant way as part of the B-21 program and then demonstrate our value, it's a great thing, especially when it's in a new markets. So I don't know that I answered your question to your satisfaction Howard, but that's the best I can offer.


And our next question comes from Myles Walton from Deutsche Bank. Your line is now open.

Myles Walton

When I'm comparing the quarter one to quarter one in terms of cash flow and I did the corrections for the one timers last year and also incremental pricing, is it a fair compare to last year something like maybe it's down 15 million or so year on year versus obviously a headline number. And then on the forward loss reversals, could you give us some color as to programs were you're doing those reversals. Thanks.

Larry Lawson

Sure, Myles. Listen, obviously Q1 of last year in terms of cash flow was so corrupted by these one-time events. They were large and they were everything from taxes to settlements with GD which, again, if you really look at the balance sheet, Myles, it's confusing because it flowed in and out of everything between receivables that we've had as well as settlements that we had and so on and so forth. And if you recall when we gave you guidance for this year and I tried to say that we, the 325, 375 guide we have this year is representative of a clean number that you guys can look at.

So the real question is, what is Q1? Because, again, if you exclude the interim payments it's fundamentally zero. But that is historically, and again if you go back to 2012, 2013, 2014, all aerospace companies you see the impact of the December sat down that creates the anomaly in Q1 of your accounts receivable bumping up. And again you can see that and you'll see that in fact we're hoping to release our Q this afternoon you'll see all that.

So there's nothing other than timing in working capital as far as cash flow is concerned for Q1. Other than we to have, compared to last year, like we did talk earlier as well, there is a little inventory buildup on 787 and 350 programs but these are ramping up. But again that cleanse itself. And again we’re quite comfortable with our guidance for the full gear as well. Nothing other than timing. It's really working capital and obviously the other big thing that happened in the first quarter is the incentive payouts to our employees and executives and that's obviously usually a large number. So those are the two things that in a normal course of events would affect cash flow in Q1 and again, without looking at '15 if you really go back into 2014 and 2013 you'll see a very similar trend. I hope that helps.

I'm sorry, you also asked about forward losses? And what programs. Again, the programs if you recall last year when we gave you guidance associated with Boeing's announcements on the 47 and programs like that we did our best estimate in terms of what the costs would be and we continue to manage our costs and so they really relate to that but it's across the board to. So that's really what the forward loss and the way this works is we and I think Larry's been talking about for the last two years, we work on not -- we work on all cost. And as all cost filtrate into the allocation, that's really what happens. So it's cost reduction across-the-board that benefits and profitable programs and obviously it reverses itself in terms of losses [indiscernible].


And our next question is from Seth Seifman from JPMorgan. Your line is now open.

Seth Seifman

I was wondering, Larry, maybe if you could talk more about, now that Tom Gentile has joined Spirit, you mentioned some very broad responsibilities at the beginning of the call. Where do you see him focusing specifically? How you see those responsibilities evolving and what this means for where you'll be focusing?

Sanjay Kapoor

Sure. Absolutely. The truth is fundamentally we're remanufacturing company. And there's lots of other things that we do but the truth is we're a manufacturing and also engineering company because we're not just a build to print house. We have a lot of design activity going on as well. So I think the important factor of course is, Tom is spending a lot of time, we’re spending a lot of time together really getting a good foundation as it relates to each of our sites. We're a global companies of course that means traveling both here to the U.S. sites as well as to our sites overseas. Getting to know the team. Hitting involved in the daily tempo. And really, again, the fundamental thing here is, the most important thing of what we do is our ability to deliver on commitment and of course the efficiency at which we do that then of course drives the financial engine.

Those are the things that are the fundamentals of our business and that's where he's spending the preponderance of his time. Now, certainly he brings a lot of experience and talent to our team as it relates to other things that we’re interested in doing and chasing whether that is M&A or other kinds of financial considerations. But if we don't build and deliver and the real machine here is working on the efficiency, that's really what manifests itself and has manifested itself over these last few years. And of course we have quite a bit of rate increases in front of us and so we're working hard on the engine. He's, frankly, we're working side-by-side and I wouldn't say he has any specific emphasis. At some point in my meeting, Lawson invites to meetings reduces, I will know that he has the ball with a number of things but so far so far pretty much every meeting I go to we're both there.


And our next question comes from Carter Copeland from Barclays Capital. Your line is now open.

Carter Copeland

I just want to clarify and tie of A350 quickly and ask you about B-21. I know you said on the A350 you have cost transparency but when you look at the revenue side I noted the disclosure in the K that said you had some assumed recovery there and future revenues. Is that a price adjustment we should be thinking about over the long term or is it a lump sum repayment or capture. Anything you could do to help us clarify that would be great and then adjust on the B-21 in general. Obviously, big win and it changes the value proposition. Larry, how does that change how you think about what the universe of BD opportunities are for the company or M&A opportunities are for the company, any color you can provide their.?

Larry Lawson

Let me take the last question and let Sanjay answer the A350 financial question. On the B-21, I think that the thing that is encouraging to us and I can't get into too much detail but let me just say it highly levered our design manufacturing expertise and the commercial space as applied to the defense space. Now having spent 36 years in one or 34 years, excuse me and one and so many years in this one, I can tell you, having lived on both sides of that fence that it's an impressive thing to see and whether it's manifest in terms of approach and the ability to do some very different things or its manifest in just the basics which are labor rates and cost structure. It's really an incredible value proposition to the defense side of things where budgets are getting tighter, in particular they are getting tight on the acquisition side because of growing operations cost, growing maintenance cost etcetera.

So I think what it does is it introduces DoD, at least over some progression to a different thought for how to go forward. Now, opportunities -- my view of defense opportunities is that there's a variety of them. And the probability that anyone goes forward is 50/50. You can decide, you can participate in everyone and live with the yield and still not do poorly. If you're smart about your investments. But I think for us we’re going to be pretty selective in terms of looking for the things that I think our entrees that either feed our R&D or manufacturing side of our I will say the development side of our cycle but be on the right programs the one that you're going to get funded and make their way ultimately into production and become needle movers and our overall financial gauge.

So they come every often, so often as you look on the horizon you want big things. You want things that fit. So there's a some natural things I can see for us. And so what we have to do now is kind of take this, my view of all of this is that this is a fantastic win. But if we don't win more business then it would be, frankly, it would be a disappointment. But I see just the opposite happening. I'm just waiting for that next entree and I can see at least one or two. Sanjay do you want to take--

Sanjay Kapoor

I'll take your second question it may have been about the A-350 and our disclosure etcetera. As you know, Carter, we've obviously had a nonrecurring program any contract of course recurring. What that largely refers to and Larry has talked about this in the past that there are three or four aspects of achieving long term what we need to do on the A350 program. Of course need to work on our cost which we have been doing, clearly the rates matter because they do lead to absorption in the last one is a negotiation with our customers associated with resetting due to all the changes there are natural and every new program.

And that's really what we were talking about so were not talking about some big one time a lump sum or anything like that. And to Larry's point, good performance and good cost visibility is not only important for us is also important for us in the context of how we discussed that and obviously cost reduction initiatives with our customers as we try to resolve these issues. We work with all of our customers exactly on the same kind of principles. And that's really what that refers to. It's more recurring than sort of nonrecurring kind of thing. I hope that helps.


And our next question comes from Jason Gursky from Citigroup. Your line is now open.

Jason Gursky

Larry, a quick question for you. In the past you've talked about this journey you've been on with the cost side of things and when you arrived you went in and attacked headcounts, efficiencies and you've talked I think in the past about the opportunity there in the supply chain and the ability to perhaps reduce the number of suppliers and give more work to fewer guys and get better pricing out of it. You also talked about make buy decisions.

Can you provide us an update on where we're at this point and when, I know it will be a continuous process but those initial remarks that you made about the supply chain side of things, where are we at this point? I think I remember at one point you suggested 2016, in 2017 at a very large number of supply chain contracts that were rolling off that would allow for consolidation. I know is continuous but it like to get an update relative to your initial comments about that.

Larry Lawson

Okay. First of all we're making good progress but like anything, you figure out, you look at your planning in you say, okay, the first step was to say, okay, how do we take our supply and then develop I'm going to say a strategy. The strategy, step one is to say, okay, let's figure out how to break these things into categories and then it look at those categories and figure out, okay, what would be a global strategy for each of these categories of things that we buy. And what are the organic surround with these costs are? Does it make sense to change at all? Are there some pure economic levers that we could pool through either consolidating around existing suppliers? And just use either an under capacity they might have or aggregating their investments because it just like us the suppliers are faced with the same dilemma. It's an interesting thing.

One of the challenges that we've had is that as we looked at a lot of our supply base we were a large percentage of their base which meant any time there was a rate related investment or I'll say a technology related investment we effectively pay that bill. The other part was to really look at, I hate to say this but the overhead structure and the G&A and labor rates of each of the suppliers and make some smart decisions about, okay, how are we going to do this. Again, as I pointed out, depreciation is a big part of the, structure, labor rates are a part of the, structure as well. And then the question is, how much can we, given it's an interesting, it's not bad news is good news, we're going up in rates, but, you don't look for us, number one, nothing more important is delivering product. And so here we're going up in rate so the question then is, how do we lay this out? So the planning for these things as we make these arrangements don't go over, don't manifest in one year.

They actually don't manifest in two years. They generally manifest, anyone of these arrangements, generally manifest in three years. It's a progressive thing. There's a longleaf material, there's tooling, there's all kinds of things you have to do. But the payoffs are substantial. And so it's very comprehensive. We're not done. You have a sense of there's two parts to story. One is the plans we've already laid in comedy arrangements we've already made, manifest over some period of time and then it is probably another 50% of the plan that you have to, the material base that you have to be had. There's room for us to continue to do better there from a supply standpoint.


And our next question comes from George Shapiro from Shapiro Research. Your line is now open.

George Shapiro

Two-part question. Sanjay, if I look at receivables they were actually up $146 million which is a big number and I know that comparison to last year is no good because of all the stuff going on. But is there anything that you can isolate and that $146 million as to why it wasn't collected in the quarter? And then my second part is, I thought you said the deferred for the 87 went up by $33 million, if that's correct, it implies you got to really step down sharply the rest of the year because you've only got like $21 million to absorb another 59 aircraft deliveries. So if you could explained that further. Thanks.

Sanjay Kapoor

Firstly, on the receivables. I know it's big. Is anything monthly? I actually looked at DSOs and look at everything in terms of our 30/60 days by customer. We do that as a religion run here as you can imagine. There is nothing, there's no anomalies in that accounts receivable other than timing. So there's nothing there that is a one time that slipped or anything like that. As I remember we're ramping up and so that's just pure timing and that will cleanse itself over the rest of the year. So I'm not worried about that and certainly it's in line with the cash flow guidance. Now in terms of 787.

You're absolutely right. We did have a step down. Is the impact of the step down obviously it is offset a little bit by cost reduction. The step downs happened at a discrete event, cost reduction happens gradually and over time. Our cost reduction initiatives for the rest of the deliveries through a one unit 500 which is been when our block will end. Continues. Planned and like I said in my comments we're very comfortable with what we set out like Larry said, this is quite amazing. We set this goal for ourselves and our team almost 3 years ago. And we have and it's not been easy but we've actually worked our way down that throughout those three years. There is one thing that you maybe forgetting.

I have talked about this in the past which is if you remember there are two components of the deferred revenue in terms of our arrangement that we agreed with our customer. The first one was the money that we get as payment associated largely with the investment that was required to get to rate 12. That portion of the deferred revenue will start getting amortized as we start in fact delivering 12 aircraft per month which is a little later this year. So that deferred revenue will get accounted for partially in this block as well. And again if you take that in our cost reduction and everything that we're working on and some other things, we're quite comfortable with the fact that we will be on track for this particular block and that's all baked into our guidance for the year.


And our next question comes from Cai von Rumohr from Cowen and Company. Your line is now open.

Cai von Rumohr

So to follow up to George's question, are there any other step downs before the end of this block and secondarily given that you stressed that there are multiple step downs going forward, perhaps you could update us on your status of negotiations with Boeing, particularly on the 787 and then with Airbus with any of your equitable adjustments requests. Thanks.

Larry Lawson

Sure, Cai. Those are some very fair question, Cai. I respect those questions. It's so hard for me, for us to talk about negotiations in these kinds of forms, particularly since they are non-concluded yet. We're in the midst of negotiations with both of our customers. All I can tell you which I know I've shared with all of you in the past which is our negotiations are always fact-based. They are based on performance. Good solid performance. Value that we know we bring to both our customers and so on.

First question was also are there additional step downs and things like that? Again, I know I'm going to duck these questions but we don't talk about step downs when they happen and so on and so forth. All I can tell you is that we've laid out our plans. We have are very comfortable with what we have laid out otherwise as you know we're getting into the blood. I'd be required and have a very good estimate in terms of where we will end up. I'd be required to disclose any pluses or minuses at this stage. I know you're going in that. The negotiations with both Airbus and with Boeing are progressing and we had a really good discussions with all of our customers.


And our next question comes from Robert Spingarn from Credit Suisse. Your line is now open.

Robert Spingarn

Larry, I want to go back to defense and treat eight, a quick clarification for you. Larry, you said you'd be disappointed if you didn't win some more defensive longer term and obviously the B-21 is a huge coup for you guys. Do you have a target mix for the company, I don't know, 5 or 62 years ago. I seem a trainer is that other program that's on your list.

Larry Lawson

Actually -- I'm not going to comment on a. I'm very familiar with trainer, obviously from our prior job so I'm quite familiar with that but that's not necessarily a specific target of ours. But as it relates to the company at large, there is the opportunity for the business to grow but I don't ever release is being really more than 20% of the company unless we and we certainly could expand. And it just takes time in defense, expanding the things that we do today in the structures business and given the low rate nature of defense, the only high rate programs right now really is the F 35 and its supply base is fairly well-established.

So for that to become a larger part of our portfolio really moves us over to more of a conversation around M&A and certainly we think long and hard about when we're thinking about acquisitions. We have a pretty specific view of this. We're looking for somebody obviously who has value but back to your point, has the right programs. We'd love, when we look accompanies and we see companies that have commercial high rate on the right programs, programs that are not coming to an end, right or not low rate, then that's attractive but if they have a defense mix as well, that, for us, that's something that is of particular interest.

So there will be two methods for us to try to grow that. And given the tempo for new starts, right now, the new starts that are being talked about, obviously, trainer is one and then there are some, always discussions around one man vehicles. So there's that and of course as I said there's an acquisition.


And our next question comes from Ken Herbert from Canaccord Genuity. Your line is open.

Ken Herbert

Just wanted to follow up. You had a nice quarter obviously with the cumulative catch ups. I just wanted to get clarification more this quarter than we've seen over the last couple of years. Was the amount this quarter the benefit perhaps more than you'd expected heading into the quarter? And I'm just curious for the full-year guidance, your typically this seems to be running maybe 5% to 10% of earnings. Is that a fair assumption to use for this year or is it perhaps a little bit more of a benefit this year considering obviously Larry, everything you've done and talked about in terms of the overheads, the supply chain, the automation and everything else you've invested in.

Larry Lawson

I think there is, I'm going to say this -- there's a growing confidence on the team said. I referred to some of the negative deferred that had built up and I think, obviously when you have negative deferred that's a little bit of conservatism so as the team came into the year and I really can't tell you -- I think you'd be surprised at the level of detail that we're really working these things and so I was kind of looking at as last year ramped up and we were going into this year and kind of looking at the overall historical performance. Okay, did we do what we said we were going to do? Cut along the line of the question I was asked about supply chain.

Today we're reaping the benefits of the initiatives that are old. That we put in place behind us, right? And they go all the way back. Some of these initiatives go back three years and so as they come they are kind of like, okay, as this manifests then you see it show up and so you say, okay, hey, guess what, my 777 blocks coming to an end. I need to do this.

My confidence in the historical is good and now I've ended the quarter looking forward to the initiatives because these initiatives all have timelines. Some of them are immediately in the year, right, so a lot of our indirect cuts, management of non-labor, everything from tools to -- I think you'd be quite surprised at the level of detail. We look at that anyway though, you know what, here's what happened in the first quarter it looks like we're on track, it's consistent with the guidance we brought. It's a little frontloaded in terms of manifestation of the EPS. Does it give us good confidence that we've got the ability to perform for the year? Maybe do better? Sure. So I think the teams overall confidence is coming up as all of this comes to fruition and I think again back to an earlier question, have we used up all of our powder? The answer is no. But don't think it all shows up in one year. These things take time, especially when you've got to be diligent about making sure that you don't create chains that disturbs your ability to deliver product in a way and high quality at the same time. As well as execute on your development programs which we have quite a bit going on the development side as well. So, I think what we’re trying to say is hey, guys, don't multiply by 4, that wouldn’t be real. We would change our guidance if we thought that were the case and do we feel optimistic about the rest of the year? Well, we're going to keep pushing and it's always our objective to try to outperform.


And our next question comes from David Strauss from UBS. Your line is now open.

David Strauss

So obviously during the quarter there was news around the aftermarket and your arrangement with Boeing there. Could you just maybe level set us, what the arrangement was in the past? How it worked between you and Boeing and what the arrangement is on a go forward basis and how did this end up coming about this change? Thanks.

Larry Lawson

You know, we don't described contract terms but I think basically it's no secret that we sold parts and provided services to the market. And we also sold parts and services to Boeing and in addition to that we also had, we have I should say in the [indiscernible] business. And so, now, we're going to sell -- and by the way our customers were very happy with us. We received a lot of recognition for our service through our customers so this outcome wasn’t related to any customer dissatisfaction with us. This is more along the lines of a strategy that Boeing has.

And so we're going to sell parts to Boeing instead of -- so will sell all the parts to Boeing now and will provide our services to Boeing and our [indiscernible] business will continue. And I think Boeing is very optimistic about the aftermarket. The general idea is that first of all in their view and I think it's factual, there's a very large aftermarket there and they believe they can garner a bigger percentage of it. I think from our perspective there is a growing aftermarket just associated with the fact that the fleet is growing. It's kind of interesting thing. The fleet is growing and retirements are down. This progression of time, this is good news for us. It just means at some point there's more airplanes out there that we'll sell parts for. But in any consequence this is not a big, big part of our business. I don't think I've ever at any quarter in any call ever said, it's my objective to grow aftermarket. Frankly it was a service that we provided when I got here and I think we will move forward and hopefully be the beneficiaries of this growing market space.


And our last question comes from Michael Ciarmoli from KeyBanc Capital Markets. Your line is now open.

Michael Ciarmoli

Larry, just on the B-21 can you maybe sell me and shareholders on why we should be really excited about this? This is going to be a low-volume program. If it goes the way any other large scale DoD program goes it's going to be behind schedule, over budget, the contract environment. So, the structure business is tough in general. Why is this a good thing?

Larry Lawson

Well, I had this conversation over my career so many times. Now I'm trying to remember. It seems like to me that the defense guys are doing quite well as it relates to their share price so people must feel like that the defense business is a worthwhile thing. It doesn't generally expose you, first of all, two losses. Right, you're not taking a commercial risk. On the flip side the margins in the defense business are often not as attractive as ultimately as you get in the commercial side but there is these very, very significant investments that occur on new starts that that's a big part of this phone call today and discussions about the investment side versus the return side. It's accretive from an EPS standpoint. Absolutely. How is this program different? You're talking to somebody who has run some of the largest, most difficult defense programs so I'm -- I understand all of the challenges that go with this.

Do I think this one is different? Well, I do think that the service has been incredibly disciplined. I mean incredibly disciplined. My involvement goes way back on this and I don't think I've ever seen the kind of disappointed that I've seen as it relates to define requirements. They have not moved off the requirements for the platform at all in my gosh, it's been six, seven years. So they've been very, very disciplined in terms of cost being important and manifesting that in the reflection of requirements. Will it ever be high-volume? This particular program is not a high-volume program that then the question really is, what are the collateral benefits. And that was my point. We would be disappointed if this when did not manifest in other areas as part of an overall ability to grow our portfolio.

And frankly people coming to us to choose us as a partner, the very attractive thing about us is not only do we have incredible technology but we're incredibly affordable in terms of both the design and manufacture proposition. So are we asserting that this is going to be a major knob turn up in the business in another itself? No. Is going to be quite nice. I have to tell you I was just over going to the details yesterday. I think it doesn't look like many of the delayed starts and all, a lot of uncertainty. It looks quite good.

The DoD and Congress and the administration seem very committed to funding the program. Everybody understands the need. And for us, I think it's a chance to sell our value prop in a broader sense and hopefully expand the number of things we participate as part of a long term view. Of growing the portfolio. What is the negatives? Honestly, I can't think of a negative unless somebody is worried about some very, very small margin dilution but this is on the EPS side it's eventually A plus.

Larry Lawson

Okay. That concludes our earnings call. Thank you for your participation.


Ladies and gentlemen. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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