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Spirit AeroSystems Holdings (NYSE:SPR)

Q3 2012 Earnings Call

November 01, 2012 11:00 am ET

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

Carter Copeland - Barclays Capital, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

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

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

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

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

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

George Shapiro

Ronald J. Epstein - BofA Merrill Lynch, Research Division

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

Lucy Guo - Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings Inc.'s Third Quarter 2012 Earnings Conference Call. My name is Dawn, and I will be your coordinator today. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the presentation over to Mrs. Coleen Tabor, Director of Investor Relations. Please proceed.

Coleen Tabor

Thank you, and good morning. Welcome to Spirit's Third 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. 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 third quarter earnings call. I'll begin with a look at our business and related performance, and then Phil will review the financial results. After that, we'll be glad to take your questions.

As we discussed last week, I am extremely disappointed we have not better managed the complexities surrounding our new programs that has resulted in the previously announced pre-tax $590 million charge this quarter. Understandably, many of you are also disappointed and focused on how we are managing these programs to turn them cash positive as soon as possible.

As I shared with you last week, we are doing this by strengthening our leadership team, our development disciplines and our management operating systems. The leadership alignment that drives this performance includes a significant infusement of skills in program management, supply chain management and engineering leadership. The development disciplines include program management; change management; contractual rigor; and engineering management tools application. Finally, the management operating system that enables us to drive cash generation on these programs is through shop floor operating performance, supply chain cost improvements and overhead management.

Turning to our core program results in the third quarter. The strong operating performance of our core programs is evident as revenue grew by 21%, and we saw the sixth consecutive quarter of year-over-year increases in deliveries.

Additionally, as we announced last week, we finalized the settlement with our insurers for all claims related to the April 14, 2012, severe weather event at our Wichita, Kansas facility.

Due to the quick response of our team and partners, we were able to mitigate the damage caused by the severe weather and ultimately reduce the final insurance claims significantly below initial estimates. The strength of the large commercial aircraft market continues, as global demand and order volumes for the Next Generation derivative airplanes, like the neo, A320neo and the 737 MAX drive clear line of sight into Spirit's backlog of approximately $34 billion.

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

Fuselage Systems had strong top line growth and operating performance, with margins of 17% on $660 million in revenue during the third quarter, as volumes across the core programs increase. The Fuselage segment's high-volume 737 production line continues to perform well, as the group has now delivered more than 4,200 chipsets of the Next Generation fuselage.

During the quarter, the Fuselage team continued to make progress on the A350 program, having delivered the second composite center fuselage to our Airbus customer. The 787 team remains focused on supporting our customer and delivered the 84th forward fuselage section. Additionally in the quarter, the Fuselage team demonstrated continued success in producing 737 derivatives by delivering line unit 20 of the P-8A Poseidon fuselage.

Translating our success with derivative products to the Next Generation of airplanes is one of our strategic priorities, and we are proceeding well on the 737 MAX and the 767 Tanker programs as we move through our customer's gated process. We were pleased with the continued momentum on the 737 MAX.

On Slide 4, you'd see the Propulsion team reported operating margins of negative 27% on $358 million in revenue, as the quarter was impacted by the forward loss on the BR725 program. The segment's top line growth continues, as both core and new program deliveries continued to increase. Propulsion's core business is anchored by the 737 Next Generation Engine pylon and thrust reverser teams, who continue to perform well as the groups have now delivered more than 4,200 units of hardware.

The Propulsion team also demonstrated its effectiveness in another of our core programs, delivering the 1,050th 777 nacelle and pylon packages in the quarter. Additionally, we continue to progress as the 787 team shipped pylon line unit 87 in the quarter.

The Propulsion team continues to successfully meet major design milestones on the 737 MAX, the Bombardier CSeries and the Mitsubishi Regional Jet as they work to develop the Next Generation of aircraft.

On Slide 5, you see the Wing Systems segment, which primarily consist of our Europe, Malaysia and Oklahoma operations. The Wing team reported operating margins of negative 118% on $345 million in revenue during the third quarter, reflecting the forward losses recorded.

I would like to begin this segment discussion by complementing our customer on achieving the important milestone of type certification on the Gulfstream G650 and G280 programs in the third quarter. We are pleased for our customer and look forward to seeing these business jets perform in the market. This milestone is significant for Spirit as it sets the configuration to build and signals the ramp-up to full-rate production. However, the challenges that tends to limit the opportunity to design in cost improvements.

As I have described, as we have moved to full-rate production on the business jet programs, our cost improvement unit-by-unit isn't fast enough to achieve our cost targets, resulting in the forward losses this quarter. We have adjusted the anticipated cost curves, and I expect to continue to come down these curves over the blocks and drive to positive cash generation.

Also in the quarter, our Spirit Europe operations continued to produce significant volumes of hardware for our Airbus customer, surpassing line unit 5,400 for the A320 wing components. Steady core program performance continues across the segment, as the Wing team in Tulsa delivered the 4,200th Next Generation 737 slats and flaps in the quarter.

And at both our North Carolina spar production in our Prestwick assembly facilities, progress continues to be made on the A350 program, as early-production hardware is delivered to our customer. Additionally, the 787 team delivered the 86th slat in the third quarter.

While our scheduled challenges and cost improvement delays on the 787 have contributed to the forecast cost growth in the quarter, the team is performing well to meet our customers' needs.

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 third quarter on Slide #7.

Revenues for the third quarter of 2012 were up approximately 21% as compared to the third quarter of 2011 on higher volume, large commercial aircraft deliveries.

Reported operating margins for the quarter were a negative 15.4%. Excluding the previously announced new program forward-loss charges totaling the pre-taxed $590 million, the net insurance benefit of $219 million and the favorable program adjustments totaling $18 million in the quarter, adjusted operating margins were 10.5%. The loss per share for the quarter was $0.94 per share.

Cash from operations for the third quarter of 2012 was $103 million, as the current quarter includes an additional $50 million of customer cash advances related to the A350 fuselage program.

Also, last week, we completed an amendment to our senior secured loan and credit facility in order to adjust the senior secured leverage ratio through the first quarter of 2013 and the remaining financial covenant ratios through the second quarter of 2013, after which time, the financial covenant ratios will revert back to pre-amended ratios.

Also in the third quarter results is the previously announced finalization of a settlement with our insurers for all claims relating to the April 14, 2012, severe weather events at our Wichita, Kansas facility. The settlement of approximately $235 million reflects claim estimates that were significantly lower than the initial estimate and resolve all property damage cleanup, recovery and business interruption costs. The gain associated with the insurance settlement was recognized in the third quarter.

Net of the current period expenses and cash proceeds from the settlement, less the $105 million previously paid, will be received in the fourth quarter of 2012. We expect to recognize the majority of expense in cash outlay associated with the repair work over the next 12 to 18 months.

Capital expenditures were $67 million for the quarter, which includes $7 million related to severe weather, compared to the $80 million during the third quarter of 2011 as investments in new programs and capacity expansion continues.

On Slide 8, third quarter R&D and SG&A totals approximately 3.5% of the sales and reflects our continuing disciplined expense management and stable new program-related R&D.

Slide 9 summarizes cash and debt balances. Cash balances at the end of the third quarter were $222 million as compared to the second quarter of 2012 balances of $180 million.

At the end of the quarter, our total debt-to-capital ratio was 38%. We continue to proactively manage the capital structure of the company, and our liquidity position remains strong. Our U.S.-defined benefit pension plan remains fully funded, while we continue to make modest cash contributions to our U.K. plan.

Slide 10 summarizes net inventory balances at the end of the third quarter of 2012. You will notice a new presentation for inventory this quarter, as the forward losses year-to-date is shown -- is now shown as a distinct category. The same presentation will flow to our financial reporting in the 10-Q in a tabular format.

The forward losses will not be reflected as reductions in individual categories of inventory, allowing for better analysis of performance. Physical inventory balances increased as we increased rates on new programs in the quarter. This increase was partially offset by continued strong inventory management on core programs.

Deferred inventory balances increased by $180 million, driven by A350 XWB production, increased business jet deliveries and 9 787-8 deliveries, which contributed $11 million in growth or approximately $1.2 million per unit. 787 deferred inventory growth rates continue to moderate as we continued to improve our overall current period unit cost performance. Nonrecurring inventory balances decreased as we reached certain development milestones in the quarter.

Slide 11 summarizes our full year 2012 and 2013 full year financial guidance; and Slide 12 summarizes our financial guidance, excluding our forecasted expenses and capital expenditures associated with the recovery efforts from the April 2012 severe weather damage at our Wichita, Kansas facility.

Global market demand for commercial airplanes remains strong, as our customers continue to see a robust order intake trend and we continue to increase production rates to meet the demand.

Based on current customer demand, our revenue guidance for 2012 is updated at $5.2 billion to $5.3 billion. Fully diluted earnings per share guidance for 2012 is now expected to be approximately $0.19 to $0.24 per share. Excluding the net insurance benefit, the company is expected to have a loss per share of between $0.38 and $0.43 per share.

2012 cash flow from operations is expected to be between $500 million and $600 million. This includes customer cash advance payments of approximately $250 million and net insurance proceeds. Excluding the net insurance settlement, 2012 cash flow from operations is expected to be between $400 million and $500 million. Cash flow from operations guidance has been adjusted for certain milestone payments that are now expected in 2013.

Capital expenditures in 2012 are expected to be approximately $250 million. Our revenue guidance for the full year of 2013 is expected to be between $5.8 billion and $6 billion, as our core business grows and new programs enter production. Fully diluted earnings per share guidance for 2013 are expected to be between $1.90 and $2.10 per share. This includes --

[Audio Gap]

with approximately 40% of the after-tax charge impacting cash in 2013, 30% in 2014 and 15% in 2015. The balance is expected to be -- it impacts 2016 and '17. This cash impact is included in the financial guidance we're providing you today.

Slide 13 shows our revenue growth, our solid earnings per share outlook and recent free cash flow trend. While our new program challenges have delayed our move towards more robust positive cash flows, our cash flow generation trend is improving, although at a slower rate than previously anticipated.

We are well-positioned for the future on the Next Generation of commercial aircraft and expect to generate long-term value for our customers and our shareholders.

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

Jeffrey L. Turner

Thank you, Phil, and I'll wrap up on Slide 14. As the global demand for our customers' products continues to grow and is supported by global air traffic and load factors, the long-term growth trajectory of the commercial aerospace industry is clear. The growth in the industry and popularity of the Next Generation of commercial aerospace products drives revenue, earnings and cash for our core business to support our growth.

As we transition our new programs to full-rate production, our focus is on leveraging the learning that comes with volume and stabilizing production to drive performance on these programs and generate cash.

We are strengthening our leadership, our development and our management operating systems that are driving this performance on our new programs, and we'll deliver results.

In summary, with a strong balance sheet and liquidity, a significant backlog and an excellent position on the best platforms in the industry, we are well-positioned to drive performance and cost improvement to create long-term value and generate cash.

We will now be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Carter Copeland from Barclays Capital.

Carter Copeland - Barclays Capital, Research Division

Just one quick around the contractual terms you have on some of these forward loss programs and the latitude you may have for any sort of relief. How should we think about that? And are there -- is there a reason or do you have a contractual way to exit some of these programs if the terms are not sufficiently -- sufficient to drive any sort of value relative to your current forecast? Are these contracts you can get out of?

Jeffrey L. Turner

Well, most of our contracts, Carter, are assumption of performance and are based on the assumption that we will perform to the requirements on the contract, their requirements-based contracts. Having said that, we have to look at everything to generate the cash and performance in the future. So I would just say, categorically, nothing is off the table as we look forward to improving our performance. But at this point, we are fully committed to executing the requirements of our contracts.

Philip D. Anderson

And Carter, I think I'd just tag on to Jeff's comments, clearly, these contracts that we took the loss on, they were all at -- we were booking them as 0 margins historically. And so while they're not going to generate earnings, given kind of where they are, we do see them as cash generators as we move through time. I think Jeff mentioned that in his opening comments. So we do expect them to generate cash as we move through time and execute the contracts.

Carter Copeland - Barclays Capital, Research Division

But presumably, buried into the expectation of the cash generation is some sort of relief on some of these contracts, presumably. And if you didn't get that relief, I'm wondering is this a path you might go down? And it sounds like the answer is yes.

Jeffrey L. Turner

Well I think, like I said, Carter, I think, clearly, it's an ongoing process and to talk specifically about each one is not appropriate. But there are always puts and takes with any customer-supplier-partner relationship.

Carter Copeland - Barclays Capital, Research Division

Okay. And another quick one just as a follow-on. You mentioned briefly, Phil, milestone payments that shifted from '12 into '13. Can you tell us what that was and how big it was? What sort of impact it had?

Philip D. Anderson

Yes, the -- regarding the development work on several different programs, again, it's not -- it's actually, we can still accomplish the milestone yet this year, but the timing of the payment is likely to slide into '13. The A350 is one of them, and then there's a couple of others we're working with on -- even in some of the traditional legacy programs, we're always negotiating things with our customers, whether it's tooling packages or things like that. So size-wise, it's kind of $50 million to $100 million,that risk that we've included in the guidance.

Operator

Our next question comes from David Strauss from UBS.

David E. Strauss - UBS Investment Bank, Research Division

In terms of cash flow '12 to '13, if I adjust for the impact of the tornadoes, it looks like it's going to get a little bit better. Maybe could you break that down by bucket between the core business? What's going to happen with 787, then what's going to happen with all the development programs? And then on 787 still specifically, obviously, the situation with deferred per unit continued to get a little bit better here this quarter. Can you just square that up with the forward loss charge that you took on the program?

Philip D. Anderson

Sure. I'll take your second one first. Yes, so we continue to, in aggregate, on the 787, well. I mean, I think we're -- the curve, we're approaching unit 100 in production here. At some point, the learning curve kind of breaks over and flattens. And so the learning is not as drastic as you move into the more mature production program. So we're currently doing well in aggregate. But the forward loss, mainly on the wing, was really a reflection of not being able to achieve our cost targets in the future over the remaining units to deliver. And so that's what? That's going to have squares out that we can actually be doing reasonably well near term, again, in aggregate on all 3 products. But the wing -- to a point where we didn't think we can achieve the cost targets. And then on the cash flow around breaking it out between core and 7A, we just tell you that the core business continues to do very well. I think you see that reflected through the operating performance. It's generating, obviously, very good cash flows for us. 787, I think, the cash flow breakeven has pushed out a little bit based on the wing performance. But again, we still, still very excited to be on that program, and we'll be building it for the next 30 years. So while it's pushed out a little bit in the scope of the longer-term nature of the program, we feel pretty good about it.

Operator

Our next question comes from Myles Walton from Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

Just a quick one on CapEx first. The jump in the '13 implied [ph]guidance, is that as a result of the revaluation of the programs or is that always the plan? And what does the profile look like beyond '13 for CapEx?

Jeffrey L. Turner

That is reflected -- the 2013, Myles, reflects what was in the plan. It's not impacted by what's happened here in terms of our forward look. It's primarily driven by rate increase and then capitalization for the big development programs getting ready for the A7 and the A350. So it was pretty much an increase required for 2013. We'll of course, watch that very closely and determine exactly when we need to spend that money. But it was pretty much the plan going forward. And I would say, frankly, with everything that's on our plate, it looks like our peak year.

Philip D. Anderson

Yes, I think, Myles, I would just amplify that a little bit. I'm sure you saw the guidance pages this morning. We tried to show the kind of the full CapEx, then we showed the CapEx excluding what we think we'll be spending on the recovery of the storm-related damage. But I would echo that it looks like a peak year. We've been, over the last several years, aggressively managing the need for the capital and the timing of the deployment of the capital, as many of these development programs, milestones have moved around in time. And many of these now are in production and moving to more mature-staged production. And so we do -- we're going to have to deploy the capital at some point in time. And as Jeff said, we think '13 reflects much of that timing and very likely the peak year of capital with the current work statement in front of us.

Operator

Our next question comes from Sam Pearlstein from Wells Fargo.

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

Phil, I just want to make sure I understand. Before, you wouldn't talk about cash flow from operations in previous guidance, before the advances and before the insurance/recovery spending. Now you're including that. So it looks like about $50 million to, call it, $150 million got shifted out of 2012. Is there anything in there besides just the milestone payment? And why is none of that $590 million costs that were taken as part of the charge, why are none of those affecting cash in 2012?

Philip D. Anderson

Sure. Yes, I think you've got the -- the milestones are certainly the main driver. The majority of the loss really is '13 and on. Again, because that loss reflected higher cost in front of us. A bit of it could impact Q4 '12. But certainly, in the profile I gave you is kind of $40 million, $30 million, $15 million over the next 3 years encompass the bulk of that. Front-loaded, as I described it last week. So it really is around '12, shifting out is really around timing of milestones, not a degradation in cash flow, just the timing. Again, once you get into -- you can accomplish milestones in November, December, but based on your payment terms, you're not going to only receive the cash until earlier in 2013. So that's really the shift that you're seeing in the guidance.

Jeffrey L. Turner

I would also add, Sam, that there is strong performance in other parts of the business, and that offsets some of the issues that we've tackled in 2012 that resulted in the forward reach in terms of the loss. So again, the solid performance of the core was a little bit massed this quarter.

Operator

Our next question comes from Carter Leake from BB&T Capital Markets.

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

The comment on your peak year CapEx for '13, does that assume that you're going to 42 a month? Or would you need another step to get to 42?

Jeffrey L. Turner

It would include everything that's in the forecast.

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

So as volumes stop, let's say 38, that number would go down?

Jeffrey L. Turner

It would depend on the timing, obviously, if it had been capital it would've already been laid in. Because the constraint-relieving capital, Carter, is put in place prior to rate changes.

Philip D. Anderson

And I would add to that, Carter, we don't look at capital spend on a minute-by-minute basis. Even if we laid in the additional capital for 42 a month in the market, yes, for whatever reason, no longer support of that. Given the max that's on the horizon and the transition of that program, we may well go ahead and lay all that capital in just to make that transition as smooth as we possibly can.

Operator

Our next question comes from Howard Rubel from Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

I want to shift a little bit to the next year. With respect to your guidance for revenues, how did you factor in some of the negotiations you have ongoing with your customers?

Philip D. Anderson

Yes, we just try to take a conservative approach, Howard. And I think the contract blocks actually are somewhat timed to coincide with the conclusion of our pricing agreements. But we -- I think we've took kind of a neutral position on the outcomes of any discussions. And so as we move in through the year, right now, as we sit here today, I don't see that as being a big risk to our revenue guidance.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Just a follow-up on that Phil. Would you say that some of the ongoing issues are drive by your customer to lower cost as either going to give you an opportunity to expand, scope or give you some other opportunity? And how did you -- I mean, so this would seem to me that you're very close to feeling comfortable with where your negotiations are?

Philip D. Anderson

Yes, I think we -- clearly, we heard a big customer talking about we've been involved in the discussions on how we make this industry, frankly, more cost competitive. And so we're deeply involved in that effort with them. In our discussions with them on many matters, but these matters, specifically, are going quite well. I think there's a lot of -- we know each other well. We have a lot of similarities in our cost profiles. And so we're working together quite closely to try to find a solution because we all need each other to make this successful. So I think there's a lot of agreement in how we going to do this in the air.

Operator

Our next question comes from Robert Spingarn from Credit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Jeff, how should we gauge the robustness of your new assumptions on the troubled programs beyond the fact that the cash earnings are more negative now? Might -- should we conclude that you're at the targeted 2013 cash loss levels today? In other words, your production cost today are what you're expecting to generate what I calculate from Phil's comment is a $230 million cash loss next year?

Jeffrey L. Turner

You're talking about on the new programs?

Robert Spingarn - Crédit Suisse AG, Research Division

Yes, I'm talking about -- yes, so we take the $575 million or so cash component of the $590 million. And then we take 40% of that and lay it in, in '13. And we then have to ask you if how robust that number is, what's the risk? And then the follow-up question to that is, if there is more risk, and it sounds like there is, if you can't achieve cost savings beyond that is the right way to think about these blocks through '18 that they are a straight line loss of $230 million for 6 years. Is that the worst-case scenario?

Jeffrey L. Turner

I would -- let me just start, and then let Phil chime in on the numbers. So what we've done -- what we've done, Rob, is look at the cost curves that we had been forecasting. We look at the cost curves that we are achieving and saw that we could achieve in the third quarter, and we projected those cost curves, okay? So it's not a flat line across, but it is a much more achievable cost curve and in my mind, significantly de-risk where we were certainly for '13 and '14. But it continues, as any program does early in its production, with an assumption of cost curve improvement. Phil, you want to add anything to that?

Philip D. Anderson

Sure. Just a bit, Rob. Yes, I mean if you straight line it, I think it's just -- it's not -- as far as being conservative. I mean the history of this business, not just Spirit, the history of the industry tends -- you run reasonably good cost curves. So I don't think that's a reasonable assumption to take a worst case. We do expect to get improvement in the cost as we go through time. We do expect them to generate cash a little bit later than what we previously expected. But they're not going to generate as much cash, but we still expect them to be cash generators. And that would include improving the cost profile as we go through time.

Jeffrey L. Turner

And I would add again, as we've stated, we are seeing cost curve improvement on all of these programs. What we saw in the third quarter was the cost curve improvement wasn't sufficient to hit the forecast we had in the window. So we anticipate the actions we have in place will continue to drive cost down, and we believe we have identified the appropriate curves that we will hit.

Operator

Our next question comes from Doug Harned from Sanford Bernstein.

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

I'm trying to understand a little bit the origin of these issues. Because at first, I know in the past you had some issues in Tulsa. And in '09, there was a change in leadership there. And then this time, we're looking at the problems, wing systems problems, also in Tulsa, and you've made a leadership change again there. But what I don't -- what I'm trying to understand is the BR725, which is in Wichita, is there something going on that's a common issue that extends across Wichita and Tulsa? How does this all come together? Is there a single thing driving these problems?

Jeffrey L. Turner

I would say there -- again, there are multiple issues. I mean clearly, challenges that we had put on ourselves, believing we could meet the cost curves associated with the programs we took probably, obviously too risky a curves. We had, early on, some design issues that have driven a higher cost into the supply chain, than our experience has shown our ability to get out of the supply base. But I would say our biggest challenge across the programs that we had, certainly, the business jet side, has been in the supply base. We had forecast the ability to come down at a cost curve and we have not been able to achieve that, the aggressive curve we had set. We are coming down a good cost curve, but not to the extent we had forecast. So BR725 is primarily on the cost curve on the buy, on the 280 and the 650 as well. So on the 787, in Tulsa, the issue there has got some buy in it, but it's also got the curve we were forecasting in terms of our own internal labor and our own internal shop support cost.

Operator

Our next question comes from Joe Nadol from JPMorgan.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

First question's on the revenue outlook. You guys have tightened the lower end of the range of your revenue outlook for this year. And I see now for next year, we're looking at $58 million to $60 million, and you laid out a little more than $60 million on your slide at your Investor Day earlier this year. So is this just -- is this related to the milestones slips on some of these things? And if that's the case, why would we be looking at less sales next year as well than you thought?

Philip D. Anderson

Joe, yes, you're right on the trimming of the 2012. That's what it's related to. I think 2013 is -- we're just looking at some of the market dynamics in not only the bigger airplanes, but some of the smaller airplanes. And there is -- milestone we're going on in '13 also with some of the dash 1,000 courses still on the drawing board. So I think it's just -- it's a bit more of a conservative view at this point in time as we look out across '13.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just for the follow-up, you guys had mentioned in your Q last quarter that you hadn't fully evaluated the A350 delays and that was a risk. And obviously, that didn't show up in your loss announced last week. So could you give kind of maybe -- particularly in light of the announcement last week, maybe a fuller, more detailed explanation of where you think you are in the program and how you evaluate the risks here?

Jeffrey L. Turner

Sure. Let's just talk about A350. Go back to the risk profile and the 250 has got similarities to other development programs. The way we have contracted it and the partnership and the development of it, de-risk that from some other programs we've had in terms of its magnitude and its percentage. We have 4 blocks, if you will, that we look at. One of those, the A350 nonrecurring wing is in a forward loss. The other 3 are not and are -- we believe, adequately reserved. We are in the throes of building the first few units on the Section 15. We have a lot of work on -- especially on the first 4 units that were behind in the process. So we've got a lot of travel work and a lot of extra work being done to stay ahead of the customer and help the customer get those airplanes through their production line. The wing's in a little bit better position. But again, we see those as well reserved and conservatively forecast at this point in time, clearly, early in the program, with just a handful of units being built and built in the kind of a typical development program mode. And we'll have -- we have the learning curves or cost curves associated with those, that we have clearly focused about what we need to do for, again, the internal labor, the supply chain and the overheads associated with running those programs.

Operator

Our next question comes from George Shapiro from Shapiro Research.

George Shapiro

Yes, 2 quick questions for you, Phil. With the 747 block ending in the fourth quarter here, do you have any profit for that program in your guidance for 2013?

Philip D. Anderson

Yes, it depends on the components. We build -- we have some 47 contents going through all 3 segments in Wichita and in Tulsa. Some of them are in better shape than others. So I think as we move into the next block, we're in a little bit better shape, but nothing to write home about, I can assure you. So we've got a lot of hard work to keep working on, to keep the 747-8 on a path to improved profitability really across the board.

George Shapiro

Okay. And then the other one, if you didn't -- before the charges, you would have had what looks like cash flow next year, $500 million to $600 million plus. Could you give some glimpse at how much you would think that would have increased in '14 or would increase in '14 before the charges that you've detailed for us?

Jeffrey L. Turner

Well, we're not -- George, we're not in a position to forecast 2014. But I would say we anticipate, given everything we know today, we anticipate continued improvement.

Operator

Our next question is from Ron Epstein from Bank of America Merrill Lynch.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

I know this has sort of been talked about in certain [indiscernible] for the last couple of weeks.

Jeffrey L. Turner

Excuse me, Ron, you're very garbled. We can't hear the question.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Can you hear me better now?

Jeffrey L. Turner

A little bit. Let's try it.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Yes, I'll try. [indiscernible] Hurricane Sandy. But I know the servers [ph] have been hurt a lot. Can you [indiscernible] how did this happen on this scale? And how -- can you guys make a decision now or really can offer any certainties going forward that it won't happen again? How -- I mean, the picture is [indiscernible] for you Jeff. I mean, how did this happen?

Jeffrey L. Turner

Let me -- Ron, you were quite garbled. I think what you asked was how in the world could something like this happen on this scale. And I would just answer that by saying, we've tried to detail the changes that we saw as we came into the third quarter, and it was program-by-program. The fact that we had reached a certification milestone on the Gulfstream programs, that -- it became clear to us that it closed off some of the opportunities we had for -- not closed them up entirely, but made it more difficult in terms of getting design changes in for producibility. The biggest element in those programs was, again, where we were performing in our supply chain cost curves. And frankly, we had -- we were making substantial improvement, but again, not to the level forecast. And when we took that cost curve and projected out what we believed, after looking at it hard in the third quarter, we believed it yielded on a program-by-program basis. And so there were 3 of them that were in that mode on supply chain. And the 777, again, we were running that in Tulsa, specifically, we were running that as lean and efficient as we knew how. We frankly didn't achieve some of the labor curves on that. And again, we looked at that and said "Hey, we've got to reset that curve." So a combination of things coming together, and we think we've got it squared to balance the opportunities that we have to come down the less aggressive curves on these programs.

Operator

Our next question comes from Michael Ciarmoli from KeyBanc Capital Markets.

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

Two questions. Phil, maybe first, just if I look at the implied midpoint of earnings guidance next year, it would seem your operating margins are maybe going to trend down a little bit, maybe low kind of 9%, kind of just above-type margins. These charges shouldn't have had an impact. So is there anything going on? You talked about some of the milestones, but is there anything hitting the legacy or core margins next year that you've made some assumptions about?

Philip D. Anderson

No, nothing specifically on the core, Michael. I think it really revolves around the volume of low-to-no-margin programs as we move through time. We -- aerospace is an interesting industry. But early days of these programs, they're going to be built for 20 and 30 years. We've got a lot of volume coming on, on 78 as it ramps up. 350 starts its slower, initial production phase. And then I can just go down the list of 280s, 650s, BR725s. So really, the ability to offset the lower-margin programs, we're working pretty hard to do that. But I think we're just being appropriately conservative as we look out into '13 relative to margin guidance.

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

No, and that's fair. Has anything changed with your sort of longer-term 12% operating margin outlook?

Philip D. Anderson

Absolutely not, absolutely not. I mean thanks for bringing it up. We are driving the company to achieve that. That's a way point, I think, as we think about it. It's not the endgame, but even in light of the higher-volume, lower-margin programs initially in their life cycles, we are -- we think this company should deliver 12% operating margins as we move through time.

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

Okay. And then just the last. Obviously, cash the focus here. It seems like everyone was comfortable at one point with the 87. How do we get comfortable? I know you've got, obviously, a different contract in place on the A350, 4 contracts, different risk-sharing. As we move through the calendar, the months here, the likelihood that a charge kind of sneaks up, which seemingly could be a pretty sizable magnitude, I would imagine, a couple of hundred million dollars. How do we get comfortable with the cash picture going forward with that program hanging out there and the potential unknown risks?

Jeffrey L. Turner

Well I think, clearly, the A350 is going to continue in its development cycle and be a use of cash until we get it through its development and test and into production. I think I mentioned multiple times the number of process improvements that we have implemented and have underway, and I think much more aggressive look at the program. We're very active now in making sure all the details are in place, are coming into place for the labor curves, the overheads and the supply chain. In the program, we're driving real-time change control, conversation and all the things that are appropriate on the program that, frankly, I don't think we did as good a job on, on some of these early programs as we're now doing.

Operator

Our last question comes from Lucy Guo.

Lucy Guo - Macquarie Research

It's Lucy calling for Cai. Just one question, as a result of the Q3 program charges, when do you expect to reach cash flow breakeven on the 87, the biz jet programs?

Philip D. Anderson

Yes, the 787, we described it -- we've talked about kind of in the 125 range and given the wing performance, in aggregate, it's probably pushed out a little ways, so certainly, expected to generate very good cash flows in the current block. And of course, our current block's only 500 airplanes, as you'll recall. And this airplane is going to deliver thousands of airplanes through time. So we expect it to be a nice generator in the first block. It's just pushed out a little bit here with some of the challenges on the wing. Biz jets are a little bit further out. Of course, they're slower-rate programs. So we think cash, cash generation to them is further out in time in the '15, 2015 range is kind of our best view of it right now.

Jeffrey L. Turner

And I would just add to that by saying, I think, we've -- I mean, we've got them, we think, in the point again where their costs are improving. And the question will be how rapidly will they improve and how quickly can we do the crossover from a cash use to a cash generator. And clearly, the sooner we pull that in, the better.

Operator

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

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