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Executives

Coleen Tabor -

Jeffrey L. Turner - Chief Executive Officer, President, Director and Member of Government Security Committee

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

Analysts

Robert Spingarn - Crédit Suisse AG, Research Division

F. Carter Leake - BB&T Capital Markets, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Michael Sang - Morgan Stanley, Research Division

Carter Copeland - Barclays Capital, Research Division

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

George D. Shapiro - Access 3:42, LLC

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Eric Hugel - Stephens Inc., Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Spirit AeroSystems Holdings Inc (SPR) Q1 2012 Earnings Call May 3, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings Inc. First Quarter 2012 Earnings Conference Call. My name is Gina, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mrs. Coleen Tabor, Director of Investor Relations. Please proceed.

Coleen Tabor

Thank you, and good morning. Welcome to Spirit's First Quarter 2012 Earnings Call. I'm Coleen Tabor and with me today are Jeff Turner, Spirit's President and Chief Executive Officer; and Phil Anderson, Spirit's Senior Vice President and Chief Financial Officer.

After brief comments by Jeff and Phil regarding our performance and outlook, we'll be glad to take your questions. In order to allow everyone to participate in the question-and-answer segment, we do ask that you limit yourself to one question.

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

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

Jeffrey L. Turner

Thank you, Coleen, and good morning. Let me welcome you to Spirit's First Quarter Earnings Call. I'll begin with a look at our business and related performance and then Phil will review the financials. After that, we'll be glad to answer your questions.

Let's begin on Slide 2. Let me begin by saying how thankful we are for the safety of our employees, contractors and our community in Wichita during and after the recent tornado. I'm extremely proud of what our team and partners accomplished in a very short period of time, to bring our Wichita facility back online safely. It's a testament to the team we have here at Spirit, as well as our unions, customers, suppliers and government and community partners.

I would particularly like to note our partner, EB Construction for their tremendous support during this difficult period. I am pleased to say that due to the team's execution of our disaster recovery plan, all employees returned to work on April 23 and have shipped products across all core programs since the tornado struck on April 14. This performance, along with our first quarter operating results, exemplify what this team is capable of achieving.

Now turning to the first quarter results. Our core program demonstrated solid operating performance, as we delivered 16% more commercial airplanes and recognized over 40% higher aftermarket sales for the same quarter in 2011. Our backlog, at over $33 billion, continues to illustrate the strong demand for our core products and our development programs transitioning to production.

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 increasing demand for our products.

Now let's talk about some of the specifics across the business during the quarter, beginning on Slide 3.

Fuselage Systems delivered solid operating margins of 14% on $623 million in revenue during the first quarter, as volumes across core programs increased. The Fuselage segments 737 high rate production line performed well as the team delivered its 4,000th shipset of the Next Generation fuselage. The 787 team made progress by delivering 8 airplane fuselage sections in the quarter, including the forward fuselage number 64.

While we are still early in our cost improvement efforts on the 787, the joint Boeing and Spirit teams continue to track per plan to identify and implement cost improvements across the program through value engineering, supply chain architecture and production flow.

The fuselage team also continued initial production on the 747-8 program this quarter by delivering the 45th fuselage. Additionally, in the quarter, the team shipped the first A350 XWB composite center fuselage to our Airbus customer in France.

On Slide 4, you can see the propulsion team delivered strong operating performance with margins of 16.7% on $344 million in revenue during the first quarter, as volumes across the core programs and aftermarket increased. The propulsion team's core business is strong at high rates. As we delivered the 4,000th Next Generation 737 Engine Pylon sets and Thrust Reversers in the quarter.

The segment's 787 team delivered Engine Pylons for unit number 65. Progress continues on the 747-8 engines truck production, as the propulsion team delivered the 41st shipset.

The propulsion team continues to work closely with our customers in the development phases of several new programs, including the 737 MAX, 767 Tanker, BR725, Mitsubishi Regional Jet and Bombardier CSeries. The team is focused on value engineering, supply chain architecture and production flow to ensure the long-term success of these programs that extend the lives of our core programs and contribute to our diversification strategy.

On Slide 5, you see the Wing Systems segment, which primarily consists of our Europe, Malaysia and Oklahoma operations. The Wing team reported operating margins of 6.9% on $297 million in revenue during the first quarter, as volumes increased across core programs and the segment realized certain supply-chain cost challenges on the G280 program.

Spirit Europe continued to produce high volumes of hardware for our Airbus customer, reaching mine unit 5,200 for the A320 wing components. The Oklahoma team delivered the 4,000th Next Generation 737 Slats and Flaps in the quarter. They also continued to produce hardware for derivative programs, including the 43rd 747-8 Fixed Leading Edge Wing section and the 64th set of 787 slats, in the first quarter. The segment made progress on development programs, as early production efforts continued on the G650 and G280 wing programs and development efforts progressed on the A350 leading edge and spar.

On Slide 6, you see an update of our progress to our plan to recover from the tornado at our Wichita facility. Our top priority was and continues to be to execute the recovery plan safely. We remain vigilant in our efforts to ensure the safety of our employees and contractors working on this effort. Clearly, now our priority is to minimize the impact of this event on our customers by bringing the site back to full operations as soon as possible. This began by returning all employees to work on Monday, April 23, just 8 days after the tornado.

As I mentioned, the team demonstrated remarkable focus and determination to meet this goal, and their success is a credit to the Spirit team's ability to execute.

Our next priority is to get the site back to full-rate production in the near term and recover schedules to fully support our customers. We are progressing well toward this goal.

Next, we plan to recover lost deliveries by the end of the second or the beginning of the third quarter 2012, resulting in 0 loss plan deliveries for the year.

Permanent repair of the storm's damage to our buildings and infrastructure will require many months of focused efforts, but is not expected to impede production.

Ultimately, we plan to complete an assessment of the financial impact of the event and update our financial guidance in our second quarter earnings report.

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 first quarter on Slide #8. Revenues for the first quarter of 2012 were up approximately 21% as compared to the first quarter of 2011 on higher volume of large commercial aircraft deliveries.

Operating margins for the quarter were 9.7%, including $14 million of new program-related charges. This performance reflects year-over-year improvement associated with increased production, aftermarket volumes and productivity and efficiency improvements.

The quarterly results reflect positive contributions from the core business, as the Propulsion and Wing segments realized favorable cumulative catch-up adjustments totaling approximately $6 million, which is offset by $6 million unfavorable cumulative catch-up adjustment to forecast its modest cost growth as we close out blocks on the twin-aisle program in the fuselage segment. The quarter also included an $11 million additional forward loss from the G280 program due to additional supply-chain costs and the $3 million additional forward loss on the 747-8 Wing program due to slightly higher manufacturing costs.

Fully diluted earnings per share for the quarter was $0.52, reflecting margin expansion on higher volumes and it included a $0.06 per share impact associated with the new program charges during the quarter.

Cash from operations for the first quarter of 2012 was a $12 million source of cash, which included a $150 million customer advance related to the A350 XWB fuselage program, offset by higher taxes and the timing of accounts receivable and accounts payable.

Excluding the $150 million customer advance, cash from operations was $138 million use of cash in the quarter. Capital expenditures were $54 million for the quarter compared to $42 million during the first quarter of 2011, as investment in new programs and capacity expansion continues.

On Slide 9, first quarter R&D and SG&A expenses reflect our continuing disciplined expense management and lower new program related R&D.

Slide 10 summarizes cash and debt balances. Cash balances at the end of the first quarter were $134 million as compared to the fourth quarter of 2011 balances of $178 million. At the end of the quarter, our total debt-to-capital ratio was 37%.

We continue to proactively manage the capital structure of the company. On April 18, 2012, we completed a $1.2 billion refinancing of senior secured facilities that included a new $650 million revolving credit facility that matures in 2017 and a new $550 million term loan maturing in 2019. This refinancing continues to provide the appropriate liquidity and balanced maturity profile for the company, as we invest in new programs and capacity expansion for our core programs.

Our U.S. defined benefit pension plan remains fully funded, while we continue to make modest cash contributions to our U.K. plan.

Slide 11 summarizes net inventory balances at the end of the first quarter of 2012. Physical inventory balances remain stable so we increased deliveries in the quarter and prepare for additional production increases through the year.

Non-recurring inventory balances increased by $41 million, driven by the continuing engineering effort on the A350 XWB 800, excuse me, 900 and the 787-9. Deferred inventory balances increased by 64 million, driven by the initial A350 XWB Section 15 recurring contract delivery, which contributed $39 million in growth and we delivered 8 787-8s, which contributed 17 million in growth or approximately $2.1 million per unit.

787 deferred inventory growth rates continue to moderate as expected. Slide 12 summarizes our full year 2012 financial guidance. As noted in our press release issued earlier today, our 2012 financial guidance excludes any financial impacts caused by the April 14, 2012 tornado. Our primary focus is to minimize disruption and impact to our customers caused by this event. We are in the process of implementing our stabilization, recovery and surge plan at the Wichita factory, while we work with our insurers. We're moving quickly and applying the resources necessary to minimize the impact on our customers. We do expect to occur a financial impact from this event and will include the impact in our second quarter 2012 financial report, outlook and filings.

As you know, the market for commercial airplanes remains strong, and we are increasing production rates again in 2012 to meet the increased demand.

Based on the current customer demand, our revenue guidance for 2012 is unchanged at $5.2 billion to $5.4 billion.

Fully diluted earnings per share is unchanged and expected to be $2 per share to $2.15 per share. Cash flow from operations, excluding customer advances for 2012, is unchanged and expected to be greater than $300 million. This is driven by increased core program volumes, substantially lower repayment of customer advances and slowing inventory growth as we move through the year.

Capital expenditures are unchanged and expected to be approximately $250 million, as we continue to invest in core program capacity expansion and to appropriately time our investments in new program infrastructure.

Our 2012 tax rate is expected to be between 31% and 32%, assuming the U.S. Research Tax Credit is extended. And combined R&D and SG&A is expected to be between 4% to 4.25% of revenue for the full year of 2012. I'd now like to turn it back over to Jeff for closing comments before we take your questions.

Jeffrey L. Turner

Thank you, Phil. I will wrap up on Slide 13 with just a few brief comments. Our core business gained momentum in the first quarter and continues to be the strong foundation for Spirit going forward. We successfully delivered at unprecedented rates and achieved productivity and efficiency gains across our core programs. While we have experienced a near-term setback from the tornado in Wichita, we are focused on systematically achieving the upcoming rate increases. Our recovery plan to take us to full production in Wichita in the near term is robust and achievable.

Looking ahead, our position on the best-selling airplanes, combined with our agility, quality and capability, continues to align the business for long-term value creation. We will now be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Phil, it was discussed last quarter on the call that your earnings power appeared to be something in the neighborhood of $2.40 for this year and that your guidance of $2 to $2.15 provided some cushion for potential negative cum catches. And with the results today, this essentially confirms this thinking, $0.52 GAAP, $0.58 without the cum catches. So that being the case, can you offer some specific color on the remaining swing items among the development programs and their relative sizes?

Philip D. Anderson

Sure, sure, Rob. I think the risk profile on the development programs is essentially what we described last quarter. Of course, 787 is a big program, which we're doing pretty well on. So I think that's important to note. But again, it's a big program for us, we're still booking under 0 gross margins but on plan at the end of the first quarter here in '12. The other programs, I think, the A350 wing program, given it's early in this development cycle or maybe mid- first-round of engineering here, is fairly, fairly margined right now. So I think that one continues to be a watch item for us. Again, don't expect big numbers out of that effort. The G280 is certainly, as it moves into production, is something we're watching closely. Supply chain challenges are there, they remain there. And I think as we move through this year, that will become clear and I think we did quite a bit of work in the first quarter and we didn't quite get to our unit too on some of those supply chain items. But there's still a lot of work to do there on that program. With the expectation of actually, 2012 with a very holistic view of the program. 747, the wing, again, that program continues to be challenging for us. I don't see big numbers coming out of it. But again, it's some risk as we move through manufacturing with the redesigned 747-8 Intercontinental and Freighter. So I think those are the usual suspects we've been talking about for quite some time and we'll just have to keep working on them really hard to, as we move through the year and go from there.

Operator

Your next question is from the line of Carter Leake, BB&T Capital Markets.

F. Carter Leake - BB&T Capital Markets, Research Division

What is your lean on the comment with regard to the tornado activity? If I hear you right from a delivery perspective, you think you will be able to recover by the end of the year. But still, there could be a financial impact. Could you clarify some of that? Perhaps, speaking to insurance coverage or consequential damages or put some color on to that comment.

Jeffrey L. Turner

So let me start, Carter. First of all, I think it's really important to realize that the way the team responded is going to, we believe and the way we're executing the plan, is going to keep all the deliveries, as we said in the year. Frankly, if we hit all of our plans, we'll be keeping them in the quarter. But there's several outlying areas that have taken a little extra time to get our plan solid. Obviously, it's an area of intense activity for us. We have extensive insurance coverage. But it does take some time to work through all the implications of that. And you can imagine with the loss itself and the operational disruption issues and multiple carriers. So we're being somewhat cautious in projecting that, and we will have a pretty clear view as we come through the second quarter.

Operator

And your next question comes from the line of David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Phil, deferred production cost on 787, obviously, nice progress there. You've been talking about the crossover, I think 100 -- somewhere between 100, 150. It looks like you might get there sooner. Could you talk about that? And then, obviously, the potential to start taking margin on the program?

Philip D. Anderson

Sure. I like your sentiment. It's very good progress. We're very pleased with where we're at right now. I think we've delivered now 64 shipsets, and we're very happy with how that's going. Yes, I mean, I think we're just going to -- we're going to continue to execute our plan. We've certainly talked about 125 or in that range. We are working hard to beat that, I can assure you. But we'll see where we kind of go to the year and how we continue to progress. Regarding the margin, when do we come out of 0? I think, once we can actually forecast sustained profitability and get into that zone, we'll certainly do that. Again, I think that the program itself is going very well. Airplane is in service, we're happy with our progress, both in Wichita and in Tulsa. And probably 2012, we'll let it play out. We'll know a lot more as we sustain the volumes and we'll go from there on the profitability.

Operator

Your next question comes from the line of Heidi Wood with Morgan Stanley.

Michael Sang - Morgan Stanley, Research Division

It's actually Mike in for Heidi. I was hoping you could talk a bit more about what drove the charges on 280 and the 47-8. You took charges in both parameters in 4Q, and as historically, you haven't wrote down programs in the second quarter. So I guess, what changed in the cost side between when you reported in February and today. It sounds like it could have been pretty material to warrant the new charges?

Jeffrey L. Turner

Sure. Let me just give you a view. We're doing several things on the 280 to enhance its long-term run. And part of that was an intense review of the supply chain itself. As we got into that review, there were a couple of areas where we thought the risk associated with hitting the cost curve that we had test the team with was a higher risk than we had originally assumed. And we considered, frankly, taking it from the reserve that we established in the last quarter and thought instead that we would just take it to the program profitability. Again, what Phil said was an intense -- we have an intense focus on that to get it on the footing for a long-term production run and this is one of the steps along the way to get that done.

Operator

Your next question is Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

Just a question, sort of conceptual around the tornado recovery and the relative risk you see to earnings versus cash. I wondered if you might just talk through the relative size or buckets of things you think you may encounter in terms of cost, whether it's poor overhead absorption or logistics-related cost from expedited shipping or anything or staffing or is there anything penalties from the customer that you expect to incur? And then, on the back of that, as you think about cash, could we see that insurance recoveries are a longer-term item than the near-term cash outlays associated with recovery and there's more relative risk to the cash than to the earnings, which you'll recognize over the block?

Jeffrey L. Turner

Let me start with that, Carter, and then let Phil chime in. I think -- the way to think about it is, it's clearly a disrupted environment. Clearly, we spent -- we had a week -- we basically had a week, a full week of lost production and deliveries, which have to be made up. And frankly, will need to be made up at premium overtime. We -- the team has diligently set about doing that. So the way we think about it is a blip on the curve, if you will, that we are working very hard to contain in a relatively short period of time and certainly, all within this year. So if you think about the business disruption side, it will be there and we'll clearly see it, but keep it contained. I know of no penalties or anything we would incur from our customers. Part of the reason for that is how intensely the team has dedicated themselves to getting back to production and to keep the pain inside, this inside Spirit, and not push that pain into our various customers. And I think, so far, we have a solid plan to do that. And again, clearly a plan that is going to have some disruptive cost associated with it. We resumed some shipments within the first few days of some product that we had ready to ship, and we will be continuing to grow that. I think we are very near now to full delivery production rate. We will have to actually surge above the base rates in order to recover, and we will do that but obviously, with some additional cost associated with that. Buildings themselves, the infrastructure itself is working doing several -- some areas completely restored to where they were before the storm and a few areas are still in a disrupted environment. So we'll work our way through that and do complete restoration, and that will take a number of months. But we think, in the next few months, we'll have a very -- much more clear view of what that -- A, what those costs are, and B, what the funding stream of those would be. So let me let Phil amplify anything that I may have missed in regards to your question.

Philip D. Anderson

Jeff captured just about all of it. We are applying the resources to limit the impact to the customers. I mean, that is the most important thing right now as we look forward. It's a stabilized recover, and surge plan to make up the volume for ourselves and so our customer doesn't lose volume. We think we have a path to do that and we're clearly working very closely with our customers daily as we move through the process, to report our progress and work together to make it happen for us. On the P&L side, all of that says, [indiscernible] track you is costs over and above any forecast we had in the window. So as we move through the next 8 weeks here, we're capturing the real cost. We're going to forecast what this recovery looks like, and then put that into the P&L. Of course, a lot of that cost, we expect to be recoverable through our broad coverage of insurance. And we have some very good insurers, names which you would recognize, being very supportive and very appreciative of the work we're doing very rapidly to not lose the volume and to recover our buildings, to not experience any additional impact. And so that's just going to take a little while, to forecast the cost to the P&L. The cash basis, as you know, we're very well-capitalized. Cash liquidity is not an issue. Insurers will be doing their jobs, as we move through to provide cash as we move the process. And all that's going quite smoothly. So I don't expect that to be a problem for us, either.

Operator

Your next question is from the line of Doug Harned with Sanford Bernstein.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

You reported a huge increase in aftermarket sales and I'm curious. I assume most of this is coming from the sales but can you say how large your aftermarket sales are now and are you doing something differently that could potentially lead to a larger amount of the aftermarket work going forward?

Philip D. Anderson

Well, we're certainly working on the aftermarket hard. I think you're seeing results coming through. The efforts that have gone on for the last several years where the team has gone out and actively tried to attract new customers in terms of contracting and our parts catalog, as well as repair and maintenance of thrust reversers. Our shops are full. I think we're doing quite well and we're seeing some nice volume pickup on the aftermarket. But again, I think it's just the result of fostering customer relationships over the last couple of years and as we've expected, and I think as we've articulated our strategy, the more, the newer next generation aircraft, 777, 737s move into their maintenance cycles, we expect to see that volume come up and I think we're probably on the front edge of seeing that.

Jeffrey L. Turner

I would just also say, Doug, I wouldn't characterize our growth there as huge. I think it's -- I mean, it's clearly a contributor in our propulsion business segment, probably to a greater degree or not probably but it is, to greater degree, than in other segments. But we're seeing strong execution of the business in the core business as well. And clearly, aftermarket does help and we're seeing some growth there. But I don't see a huge surge over time. That is a pretty defined marketplace for us and as we said in the past, it's a niche business for us that we want to execute well on and extract the value for it. But it's clearly limited by the products at this point that we are OEMs for.

Operator

Your next question is Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

My question is on the A350. You got the advanced payments, which is nice and I'm wondering if that was contractual or if that was a result of negotiations you had based on some of the delays in the program? And if there's more to it, specifically, on the 787, you got an adjustment to the price curves. And I'm wondering if any such thing happened on the A350 as well due to your higher carrying cost of all of your overhead?

Philip D. Anderson

Sure, Joe. It wasn't part of the original contract. This was something that we sat down with Airbus and as we move through the development cycle, it was various things that fall into change buckets that we have to discuss the economics on how to settle those. And this was just simply an economic discussion about cash versus price later. As development programs mature, those change discussions, the volume of them comes up. So I think we've had a very good experience with Airbus we're very appreciative of their working together relationship with Spirit on not letting these things age and finding a way to settle them very amicably and fair to both parties and I think that's what this advance represents. And so I'm very pleased with the outcome of that.

Jeffrey L. Turner

I would add to that, that the better balance, the outflow that we are experiencing with the cash inflow that we're now experiencing.

Operator

Your next question is from Cai Von Rumohr with Cowan and Company.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

I have a 2-part question. First part is, would you have increased guidance if you didn't have experienced the tornado? And secondly, could you give us a little color on the G650 BR725? How much did the deferred production go up and how is it doing?

Jeffrey L. Turner

Let me answer the first on guidance. I don't know, frankly, Cai, if we increased it or not. You can appreciate the last 3, almost 3 weeks now have been really focused on recovery and we had sat down and asked ourselves about guidance and felt that given the results of the first quarter, given the additional risk that we have and frankly, not the additional risk, but the risk that we have identified in terms of development programs and now this new event, we basically decided to stay with the guidance we had and work through what could be impact to it. And we won't, frankly, know that for probably until the end of the second quarter.

Philip D. Anderson

Cai, specifically, to your deferred production inventory question. The 650 in the Rolls-Royce collectively grew about $15 million. So there were some offsets. Our credit balance of another contract actually increased nicely as well to net out to the $64 million I mentioned in my comments.

Operator

You're next question comes from the line of George Shapiro with Shapiro research.

George D. Shapiro - Access 3:42, LLC

Phil, the receivables were up $145 million, which caused cash to be a little weaker than what I thought. Can you explain what happened there? And does that wind up correcting itself in the second quarter?

Philip D. Anderson

Sure, George. Yes, it does correct itself. As we move through the year, we always have a timing issue on the receivables, given our net end payment terms with the big customer. So the first quarter, there's a normal seasonality there, as well as there's the growth in the volume coming through the receivable line.

Operator

You're next question comes from the line of Sam Pearlstein with Wells Fargo.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

I had a question again on cash flow as well, which is you specifically mentioned that the cash flow from operations outlook of over $300 million excluded the advances. So are you effectively raising that by $150 million now that we include the A350? And I guess related to that, I know that there were some milestone payments for one of the business jets and does that wait for the actual certification and are you know you're including milestones in the same bucket as advances?

Philip D. Anderson

No, you're correct. The cash from operations, if we include the advances, goes up by the $150 million. And the business jet programs are not flowing through the advance line. I think they come through deferred revenue. We'll double check that for you and make sure that's correct though, Joe.

Operator

Your next question comes from the line of Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

First, Jeff, on the A350 wing, can you point to kind of the risk reduction you're looking anticipating on that program? Is it ultimate low tests that kind of gives you the big sigh of relief? Is it more manufacturability? Is it more you don't sleep at night until first flight? And then before again, company operator, also on the 280, at what point do you reevaluate the market size that you're assuming in that accounting block, which seems like it might be a little bit high and you have to reevaluate that number?

Jeffrey L. Turner

Okay. First on -- let me just do the 280 while I'm thinking about it. Actually, any reevaluation we're making at this point, based on the data we have, would indicate a potential stronger sales on the 280. We're clearly sticking with the block that we have in the window and we'll see how that unfolds as it gets through its completion of certification and its entry into service. The wing on the A350, recall that we have 2 contracts on the A350. One is for the development, that's the one that's stressed and the second one will be the production. The risk that we see in the window on the A350 wing development program at this point, is the additional engineering to complete all the production drawings. And we think we've got that bounded. But it's got some -- a little bit of risk surrounding it. Clearly, static and fatigue tests may bring something to the forefront that we don't see at the moment but we don't anticipate, all of our internal tests have borne out the strength of that structure. So right now, the risk that we see is some additional cleanup or really, finishing of the detailed engineering.

Operator

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Just a follow-up on the cash flow line of questioning. If we take the advance, the A350 advance out, I believe the use of cash from ops was larger in this quarter than it was in the year ago quarter. And then, obviously, your target for the full year is very significantly higher than where you came in for the full year last year. Can you walk us back through -- I know you spent some time with us at the Investor Day, but can you walk us back through the quantified big main buckets of why there's such a steeper ramp in 2012?

Philip D. Anderson

Sure. The core business, obviously, in volume contributes to the positive side of that equation. The lack of 787 advances this year, I'm sorry, advance repayments this year certainly is a big change in cash flows. Excluding the Airbus payment here and then we continue to invest, of course, we expect inventory to grow modestly. So those are the 3 biggest components. I know when we add them up, we expected to have the seasonality of the first quarter and then we expect cash recovery really, probably more than second half versus the first half.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Can you quantify those 3? '12, versus '11?

Philip D. Anderson

Yes, I don't have them in front of me but the 787 lack of repayments is probably, is well over $100 million.

Operator

You're next question comes from the line of Eric Hugel with Sterne Agee.

Eric Hugel - Stephens Inc., Research Division

Eric Hugel, Stephens. Can you talk about your, I know you recently refinanced your credit facility. What are the implications there in terms of the interest cost and any covenant? And also, just real quick, is there any exposure to the Hawker? Did they go bankrupt?

Jeffrey L. Turner

Well, let me answer the first one first or the second one first, which is very little, if any implication for Hawker. We had a very small amount of work with them. Most of that has moved, as you might recall, back to them. So just very little at all, nothing material.

Philip D. Anderson

And on the refinancing code, 2 positive things there. We have a little bit better borrowing cost as a result in terms of both the interest rate and the annual fees. So that's positive for us. And more importantly, really, longer-term, is the maturity profile. Now our big towers of debt, which really aren't that big, kind of in less than $300 million range, the first maturity is now '17 followed by a '19 maturity of the term loan and a '20 maturity of the next 300 high-yield notes. So modestly favorable economics on the interest side but a big benefit to the company in terms of debt maturities. All of which made this a very attractive deal for the company. And I think, as we continue to execute a proactive capital structure plan, we feel very good about the execution of this refinancing.

Eric Hugel - Stephens Inc., Research Division

Should there be a change to the interest rate, to the interest on a quarterly basis?

Philip D. Anderson

Yes, it will be modestly more favorable.

Operator

Your next question comes from the line of Peter Arment with Sterne Agee.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Yes, maybe you could just give us a rundown now on the 788-9. How much of the design engineering, I guess, has been released at this point? And how do you see that progressing, the schedule and how things look in general on that?

Jeffrey L. Turner

Sure. First of all, let me start by saying it's on schedule. It's performing well. Our design team's very integrated with the customer's design team there. That's actually part of our strategy on bringing the overall cost of the production of the 787 down. So as much as we can, we're doing -8 -9 commonality with better efficiency. We're somewhere between 25% and 40% released, depending on which of our components. And again, doing very well, staying on the schedule.

Operator

Your next question is from the line of Michael Ciarmoli with KeyBanc Capital.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

I guess, maybe a lot of my questions have been asked. Maybe if we could talk about the 737 MAX and what sort of timeline there, what you're seeing in the form of maybe capital requirements and maybe scope changes or I'm not sure if it's too early there. But if you can just give us an update on that program.

Jeffrey L. Turner

Sure. Let me -- I'll be very general because we still are early in the program. I think there's a couple of points that I'd want to make. The first is, again, the high level of integration that we have on those program teams early in the development of that derivative. Clearly, a new engine pylon/strut is required for a new engine to wing interface and a new engine in the cell so we didn't comment on the thrust reverser and the engine struts. So those will be new, clean sheet developments. And then, of course, any major change at the wing drives back into the fuselage, a lot of loads. We think we, with the customer, we think we've got a general scope of that. Again, it'll be a derivative. Much, much of the capitalization throughout the supply chain, including Spirit, will be usable, the capital, the flow lines, the skin lines, all those sorts of things. We are anticipating a control change environment not unlike other major derivatives, probably one of the biggest derivatives we've done on the 737. But a very tight relationship with the customer, a clear line to input our thoughts on what it takes to keep the airplane highly producible and -- but early this, to be specific about releases and flows and capital requirements and so on. Realize that also, the impact of production rates of the existing program as we bring new derivative, like the MAX, into line will have impacts. We don't know how big yet and that will unfold as the program solidifies.

Philip D. Anderson

Yes, I will just amplify that. This is a great outcome for Spirit. MAX extends our core business for a long time in the future and so, as we move through it, we should never lose sight of the positive nature this has on the company.

Operator

You're next question and last question is from the line of David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Just as a follow-up. Phil, back on deferred. You moved up $60 million or so in the quarter. You're looking for -- I think your guidance was for deferred to move up $300 million. Is that still roughly what you're looking at even though 787 is obviously coming in pretty well here? And if so, how do you get the $300 million build this year?

Philip D. Anderson

Yes, I think, not pointing to an exact number for you, David. But the 787 is doing well, 350 as we deliver more units on the recurring contract this year, we'll build the deferred, as well as initial additional production of the G650, 280, BR725. Those will all be adding to the deferred balance through the year.

Operator

Thank you, ladies and gentlemen. This concludes the presentation for today. Thank you for your participation. You may now disconnect, and have a good day.

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