Rockwell Collins (COL) Kelly Ortberg on Q3 2016 Results - Earnings Call Transcript

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Rockwell Collins, Inc. (NYSE:COL) Q3 2016 Earnings Call July 25, 2016 9:00 AM ET

Executives

Ryan D. Miller - Vice President-Investor Relations

Kelly Ortberg - Chairman, President and Chief Executive Officer

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Analysts

Peter John Skibitski - Drexel Hamilton LLC

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Samuel J. Pearlstein - Wells Fargo Securities LLC

Carter Copeland - Barclays Capital, Inc.

Jason M. Gursky - Citigroup Global Markets, Inc. (Broker)

Cai von Rumohr - Cowen & Co. LLC

Seth M. Seifman - JPMorgan Securities LLC

George D. Shapiro - Shapiro Research LLC

Robert M. Spingarn - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Howard Alan Rubel - Jefferies LLC

Ken Herbert - Canaccord Genuity, Inc.

David E. Strauss - UBS Securities LLC

Michael F. Ciarmoli - KeyBanc Capital Markets, Inc.

Richard T. Safran - The Buckingham Research Group, Inc.

Noah Poponak - Goldman Sachs & Co.

Operator

Good morning, and welcome to the Rockwell Collins Third Quarter Fiscal Year 2016 Earnings Conference Call. Today's call is being recorded. For opening remarks and management introductions, I would like to turn the call over to Rockwell Collins' Vice President of Investor Relations, Ryan Miller. Please go ahead, sir.

Ryan D. Miller - Vice President-Investor Relations

Thank you, Chris, and good morning to all of you on the call. With me on the line this morning are Rockwell Collins' Chairman, President and Chief Executive Officer, Kelly Ortberg; and Senior Vice President and Chief Financial Officer, Patrick Allen. Today's call is being webcast, and you can view the slides we'll be presenting today on our website at www.rockwellcollins.com under the Investor Relations tab. These slides include certain non-GAAP financial information and a reconciliation to the related GAAP measure.

Please note today's presentation and webcast will include certain projections and statements that are forward-looking. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed on slide two of this webcast presentation, and from time-to-time in the company's Securities and Exchange Commission filings. These forward-looking statements are made as of today, and the company assumes no obligation to update any forward-looking statement.

With that, I'll now turn the call over to Kelly.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, thanks, Ryan, and good morning, everyone. This is really a solid quarter for us as we saw some major accomplishments in our markets and also had good execution performance in all of our businesses. Among the market highlights was the C Series' entry into service with Swissair. We're very pleased to see Bombardier accomplish this major milestone, and it's a real time that this program is turning the corner. As you know, this has been a big investment for us, and we're all pleased to be moving from the investment phase to the return phase for this program.

Another major OEM accomplishment was the successful refueling test with the KC-46 tanker, paving the way towards production of that airplane. These are both important programs for our long-term growth in our Commercial and Government businesses.

Annually, both Boeing and Airbus survey the airlines to gauge their supplier performance and customer support, and recently, it was announced that Rockwell Collins was ranked number one for both Airbus and Boeing. In fact, we're ranked ahead of both of the OEMs themselves. I'm very proud of our team's performance, which is a testament to our brand promise of building trust every day, and will help us to continue to be the supplier of choice in our markets.

Overall, we executed our business quite well during the quarter, delivering solid margin performance, while also stepping up our R&D spending in Commercial Systems to support the development of the 777X. We also make great progress in booking the Government orders necessary to achieve our abnormally large second half sales plan. And our IMS business grew 10%, and we achieved our expected growth in the non-aviation segment, which demonstrates that some of our strategies to grow that portion of the business are beginning to take traction.

Now, we're not without challenges and they seem to be focused in our Commercial Systems markets right now. The business aviation end market continues to struggle to find the bottom. This last quarter, we saw shaky utilization, and recently, we've seen even further declines in demand from the OEMs. If you recall, we started the year with some discount in OEM production, and we saw reduced demand at the beginning of the calendar year, which used up our discount and then some. I was hoping to see demand stabilize through the summer, but unfortunately, this hasn't been the case. This is going to further impact our top line in Commercial Systems.

Just to give you a – some color on this, it's not really specific to any particular airplane type, but rather an overall market condition. We're seeing softness in product demand across all major business jet manufacturers. Recall that we moved our fiscal 2016 guidance back to the fourth quarter earnings call to allow us to get better aligned with the OEMs. And I think this is going to be really applicable to the biz jet demand this year. It's not yet clear to us how these latest changes from the OEMs will impact their 2017 demand. And I'm sure that they're going to be moderating the next quarter of market dynamics before they set that outlook.

In addition, we've had another quarter of no growth in air transport MRO. And in the last earnings call, I indicated that I believe this is a structural change to our aftermarket due to the component recycling practices at the airlines. So if you couple the business aviation OEM and the air transport aftermarket sales environments, we're lowering our Commercial Systems sales forecast for the year from up single digits to down about 1%.

On a more positive note, as I mentioned earlier, Government Systems has a – had a nice quarter in sales and earnings, but has an even bigger fourth quarter yet to go, and I – as I've done in the last couple calls, I'd like to give you some granularity on how we're progressing in capturing the business to achieve that growth.

During the last quarterly call, I said that 77% of the second half growth was either in backlog or coming from annual follow-on buys. This is now at 94% at the end of the third quarter. So, I remain very confident in our ability to achieve the sales growth that we projected and finish the year strong. Some of these sales will be later in the year than we originally planned, and it's going to stress our ability to collect cash by year end, and that's a contributor to us adjusting our guidance on cash flow to the lower end of our previous range.

So, to summarize, before Patrick takes you through the details of the quarter, we really executed well this past quarter. I'm particularly pleased to see the restructuring savings flowing as we expected, and we are successfully bringing in the Government business needed to accomplish the abnormally large second half ramp.

Business aviation remains a challenge for us as the industry is still searching for the bottom of the market. And I continue to see good things from our IMS business, and we're making good progress on the new OEM programs that will set us up for future growth.

So with that, let me turn the call over to Patrick to walk us through the quarterly details.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Thanks, Kelly, and good morning to everyone as well. I'd now like to walk you through today's presentation slides that summarize our results for the third quarter of fiscal year 2016. I'll begin on slide three, where we highlight our total company third quarter sales, earnings per share, income from continuing operations and shares outstanding.

Total company's sales for the quarter increased $41 million or 3% compared to the third quarter of last year, primarily due to higher Government Systems and Information Management Services sales. Income from continuing operations increased $36 million or 20%, and earnings per share from continuing operations increased $0.30 or 23% compared to the same period last year.

The increase in income in earnings per share from continuing operations was primarily due to lower income tax expense that was favorably impacted by the release of a valuation allowance related to a capital loss carry forward, as well as higher pre-tax earnings from the higher sales.

As we turn to slide four, Commercial Systems achieved revenue of $612 million in the quarter, about flat with the same period last year. Sales related to aircraft OEMs decreased $6 million or 2% to $367 million, primarily due to lower business jet aircraft OEM production rates, lower product deliveries to a Chinese regional jet manufacturer, and lower Airbus A330 production rates. This was mostly offset by higher deliveries in support of the A350 and Boeing 787 production rate ramps, favorable customer timing for airline selectable equipment, higher Bombardier C Series sales in support of bids entering to service this year, and higher customer funded development program revenues.

After market sales increased to $11 million or 5% due to higher simulation hardware deliveries, inorganic sales from the acquisition of International Communications Group, and higher flight-deck retrofits, partially offset by lower spares provisioning and lower cabin retrofits.

And Commercial Systems operating earnings were flat at $141 million, and operating earnings were about flat at 23%. Operating earnings and margins were flat with the prior year as benefits from the cost savings initiatives from previously announced restructuring plans were offset by unfavorable sales mix as lower margin customer funded development sales increased and higher margin business jet OEM sales decreased.

Moving on to slide five, Government Systems overall revenue increased by 5% to $555 million, driven by higher fixed-wing platform revenues and higher simulation training sales, partially offset by lower deliveries of various rotary wing platforms, the wind-down of an international electronic warfare program, and lower international deliveries of targeting systems.

Government Systems' third quarter operating earnings increased $7 million to $115 million, resulting in an operating margin of 20.7%, a 30 basis point improvement compared to the third quarter of the prior year. The increased operating earnings resulted from a higher sales volume and cost saving initiatives from previously announced restructuring plans, partially offset by unfavorable development program adjustments.

Turning to slide six, Information Management Services sales increased 10% over the prior year as commercial and business aviation services sales increased 9%, while the non-aviation related businesses increased 11%, primarily due to higher airport and rail program sales. Information Management Services' third quarter operating earnings increased $3 million to $26 million, resulting in an operating margin of 15.6% compared to 15.1% in the third quarter of last year. The increase in operating earnings and margin was due to the incremental earnings with a higher sales volume.

Looking next to slide seven, we show our year-to-date results for revenue, income from continuing operations, earnings per share and operating cash flow. Through the third quarter, we generated $223 million of operating cash flow compared to $341 million last year. The decrease in cash generation resulted primarily from the timing of sales and lower advance payments from our customers. These items were partially offset by lower tax payments.

Slide eight provides an update to our total R&D investment. Total spend decreased from $731 million in the first nine months of fiscal 2015 to $741 (sic) [$714] million year-to-date in fiscal 2016. Company-funded R&D decreased $47 million due to lower business jet development costs in Commercial Systems and lower software-defined radio development costs in Government Systems.

Customer-funded research and development expense increased $25 million due to higher development costs for international regional jet development programs in Commercial Systems, partially offset by the wind down of an international electronic warfare program in Government Systems.

Pre-production engineering investment net increased due to higher costs incurred for certain military transport programs in Government Systems and the Global 7000/8000 program, partially offset by lower spend on the C Series program.

Moving to slide nine, we show the status of our capital structure as of the end of the third quarter compared to the end of last year. During the first nine months of fiscal 2016, our debt-to-EBITDA ratio increased to 2 from 1.7 at year end. The increase is primarily due to an increase in commercial paper as the first three quarters of the year had typically light cash flows. I expect the level of debt to come down over the balance of the year as a larger portion of our cash flow is traditionally generated later in the year, and we pay down a portion of that short-term debt.

The updated status of the share repurchase program as of the end of the quarter is detailed on slide 10. During the third quarter, we repurchased 0.7 million shares at an average cost of $90.71. Our repurchase authority remaining at the end of the quarter was $125 million.

Now, to move to slide 11, where we provide a summary of our fiscal 2016 financial guidance, which has been updated as we enter the last fiscal quarter of the year. Total sales are now expected to be about $5.3 billion, which is the bottom of the previously guided range of $5.3 billion to $5.4 billion.

As Kelly discussed in his opening remarks, we've updated Commercial Systems sales to be down about 1 percentage point this year due to softness in business jet OEM deliveries, as well as muted market conditions in air transport service and support. We have narrowed the earnings per share guidance to $5.50 to $5.55, which is within the previously guided range of $5.45 to $5.65.

We've also updated our cash flow from operations outlook to be about $750 million, which is at the bottom of the previously guided range, due primarily to the timing of receivable collections and higher pre-production engineering spend. Our guidance for total segment operating margins, research and development investment, and capital expenditures is unchanged from the previous guidance.

With that, that's the end of my review of the financial results and projections. So, Ryan, back to you to kick off the Q&A session.

Ryan D. Miller - Vice President-Investor Relations

Thank you, Patrick. In order to give everyone the opportunity to ask questions, we ask that you limit your questions to one per caller. If you have further questions, simply reinsert yourself into the queue and we'll answer those additional questions as time permits. Operator, we are now ready to open the lines.

Question-and-Answer Session

Operator

Thank you. And the first question is from Pete Skibitski with Drexel Hamilton. Your line is open. Pete Skibitski, your line is open. Please go ahead.

Peter John Skibitski - Drexel Hamilton LLC

Sorry about that. Good morning, guys.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Hi, Pete.

Peter John Skibitski - Drexel Hamilton LLC

Can you add some comments to introduce about kind of weak biz jet conditions across the board. But are you seeing anything incrementally at the high end versus the low end? Can you maybe talk about it in terms of cabin size and how exposed are you to the Dassault cut of announced last week?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, let me answer the last part first. Dassault, we primarily do cabin equipment for Dassault, so those aren't super heavy content aircraft for us, but we are exposed to that. We're seeing it really across all categories of aircraft. As I said in the comments, it really – I can't point right now to, this is a heavy phenomenon or median or life phenomenon. It's really across the board. I think everybody has gotten through another quarter. It's not been an overly good quarter in terms of the end markets, and I think everybody is truing up their outlook for the balance of the year. As I mentioned, I'd hoped that we get through the summer. But we were clear to point out that the summertime, if they're going to adjust their rates, we're probably going to hear about it, and unfortunately, we have been hearing about it from all of them.

Peter John Skibitski - Drexel Hamilton LLC

Okay. Okay. Got it. I'll honor the one question. Thank you.

Operator

The next question is from Myles Walton with Deutsche Bank. Your line is open.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Thanks. Good morning.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Hi, Myles.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Hey, Patrick, I was wondering if you could touch on the cash flow for a second. So, the pre-production expectation for this year versus the $100 million net increase previously, what's the number this year and are you on track for that to normalize?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Yeah. Yeah, Myles, I want to tell you it's going to be about $125 million this year. We're seeing a little bit higher spending on 737 MAX as that program accelerates, and we're also seeing a little bit less amortization on the Government Systems side due to some lower deliveries on helicopter programs, and those are the two things that are driving that net investment up to probably, roughly, $125 million.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

And then next year, in terms of what that holds into next year, is it a zero or is it a positive?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I think we'll see a significant reduction next year, and I think – I wouldn't view the increase this year as a carry through to next year. So, it should be a – should be incrementally positive tailwind next year.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

But don't want to size it right now?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I – we're still in the middle of our planning process. So, I don't want to size it specifically right now, no.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay. All right. Thanks. I will take the one.

Operator

The next question is from Sam Pearlstein with Wells Fargo. Your line is open.

Samuel J. Pearlstein - Wells Fargo Securities LLC

Good morning.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Hi, Sam.

Samuel J. Pearlstein - Wells Fargo Securities LLC

Patrick, on that cash flow, can you also talk about – you had talked about CapEx being about $200 million, that would imply you need to get something like $67 million in the fourth quarter. Why would we expect to see such a large ramp-up?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Well, that's a good question, Sam. I think there may be a little bit of opportunity in our CapEx number. We typically – if you go – you have to go back a couple of years, but if you go back a couple of years, we've typically been a little bit more backend loaded on our CapEx. I don't think that's been true over the last couple of years, but typically, it has been backend loaded. But is there a little bit opportunity in CapEx? I think there might be.

Samuel J. Pearlstein - Wells Fargo Securities LLC

Okay. And can you size that unfavorable development program adjustment in Government Systems?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Yeah. It was about $6 million and related to the, I would call it the wind up of a international development program we had some unanticipated cost on.

Samuel J. Pearlstein - Wells Fargo Securities LLC

Okay. Thank you.

Operator

The next question is from Carter Copeland of Barclays. Your line is open.

Carter Copeland - Barclays Capital, Inc.

Hey, good morning, gentlemen.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Good morning, Carter.

Carter Copeland - Barclays Capital, Inc.

Kelly, just wanted to see if you could expand a little bit on that – the business jet market comment you made. Do you think that the sort of summer season furlough weakness is one of these moves that's kind of sufficient to get right sized or is your thought process here, we're still looking for whatever comes next behind that?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, Carter, I can't see any conditions at this point to say, hey, that's it, we're at the bottom, the market continues to struggle. What I said in my opening remarks was it's not clear to us yet how these adjustments that we just recently received are going to impact their long-term or particularly their 2017 production rate. My assumption sitting here today would be if we don't see some sort of a market improvement, that these adjustments are going to set us – set to go in – production rates going into next year. Hopefully, that will at least give us a stable base going forward, unless the market conditions continue to erode.

Carter Copeland - Barclays Capital, Inc.

So is it safe to say that you're planning accordingly given that lack of visibility to have the flexibility in case it needs to be lower as well?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah, as Pat said, we're in the middle of putting together our 2017 plan right now. I think we're going to be pretty conservative in our outlook, which I thought we were coming into this fiscal year, we've put the discount there, and it turned out even that was too optimistic. So, yeah, we're all looking for the bottom. I think when you're looking for the bottom, you're going to tend to plan pretty conservatively and hope for upside.

Carter Copeland - Barclays Capital, Inc.

All right. Thanks for the color, Kelly.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah.

Operator

The next question is from Jason Gursky with Citi. Your line is open.

Jason M. Gursky - Citigroup Global Markets, Inc. (Broker)

Hey, good morning, everyone. Kelly, I was wondering if you could just spend a few minutes and talk a little bit about your mid- to longer-term revenue earnings goals in the context of all the puts and takes that you're seeing. Maybe highlight for us – we talked here on this call about some of the downside risks, but maybe provide a little bit of an update on the key drivers for growth that may allow us to get to that mid- to long-term growth targets that you've got for both revenue and earnings.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Sure. I think, first of all, the linearity of that long-term outlook certainly hasn't been what we expected. And there have been puts and takes, both positive and negative. I think we're, in the short-term, dealing with a lot of the negative, which is delays in entry into service of programs, a lower aftermarket MRO component than we originally expected, and a much, much weaker business aviation demand than we anticipated.

On the positive side, we've gained additional share on the 777X. We've seen increases in production rates in narrow body aircraft, significant increases in production rates on narrow body aircraft. Of course, we've got the new, a lot of new positions with the MAX and the 777X are cutting in. That's not necessarily new, but continue to be growth drivers for us. And then we planned our defense business at that time at a sequester level, and currently, the budget environment is clearly better than that. So, our ability to grow for our Government business is certainly a little bit better.

I think as I look at that outlook and how are we doing against it, obviously, 2016, we're not achieving that, the top level numbers. 2017, I think we're going to have to take a hard look at business aviation; it's the wild card for us. If we can just get that business to stabilize, I think we can grow the company. If you – you put it in perspective, business aviation, OEM is about 20% to 25% of our commercial revenues or about 10% of the company revenues. And so, if we can get that to flat, we can grow the company. The challenge is, quarters like this one where we've got 22% decline in business aviation is offsetting a lot of really good growth for us. And the Information Management business, I think, continues to track pretty well to our original plan.

Jason M. Gursky - Citigroup Global Markets, Inc. (Broker)

Okay. Great. Thank you.

Operator

The next question is from Cai von Rumohr with Cowen & Company. Your line is open.

Cai von Rumohr - Cowen & Co. LLC

Yes. Thank you very much. I have a two-part question on business jets. First, all of the manufacturers reporting have cited pricing as being particularly weak because of the erosion in the pre-owned market. Are you seeing any negative pricing pressures?

And secondly, usually, when OE is off and prices of pre-owns come down, you start to see a pick-up in pre-own sales that tends to bolster the aftermarket. Are you seeing any positive signs or potential positive signs in biz jet aftermarket?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, the biz jet aftermarket has been pretty good for us for the whole year. We continue to see good retrofit activity in avionics, which I do view as a positive sign. Last year, it was probably more focused on cabin upgrades and nobody was upgrading the frontend of the airplane, but now, we're seeing that and that's continued through this quarter. Regarding pricing pressure, I think our near-term pricing is pretty fixed relative to the market. So, I think the OEMs have to deal with that. They're certainly turning around and looking to the supply chain to help them in any way, but that's not unique to the business aviation market.

Cai von Rumohr - Cowen & Co. LLC

Thank you.

Operator

The next question is from Seth Seifman with JPMorgan. Your line is open.

Seth M. Seifman - JPMorgan Securities LLC

Thanks very much, and good morning. I wonder if you could talk a little bit more about the – in the air transport aftermarket, what happened at Intertrade in the quarter, and also, what the contribution was from the acquisitions that you did in 2015? Just to get a sense of kind of where the organic business is. It seems we've faced some pressure here before and we've talked about some of the causes, but it seems to be gathering some strength, and just kind of wondering if you have any insight into why that's the case.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah, if you look at the – if you peel the onion way back, I'd say in air transport, our MRO – just core MRO, not used components – was down low single-digit, and that was offset by some Intertrade growth for the quarter. As far as the inorganic growth, it's primarily coming out of our ICG acquisition, which is the – a satellite-based communications equipment. I think about $4 million of ICG growth was in the air transport and another $2 million was in biz jet.

Seth M. Seifman - JPMorgan Securities LLC

Okay. Okay. And just, does – do you get a sense that the structural pressure that you've talked about in the commercial air transport aftermarket has been gathering steam? Just because it seems like retirements have been moderating and traffic growth has been fairly solid, but it does seem like these headwinds have been increasing.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. I think they have for – certainly, for our portfolio, if you look at our installed base, it's heavily leveraged on 757, 767, and 747-400. And while we have seen retirements abate a bit, it's been propped more in the narrow bodies, which is not as significant of an installed base today for us because we don't have flight decks in the narrow bodies. So, our portfolio is feeling probably a little bit more of the impact of recycling, and that's coming in two ways. We don't get the repair action through our service center, but also, we're seeing lower, what I'll call legacy spares where someone's just buying a legacy product because they're able to fill that spare with the used component.

Seth M. Seifman - JPMorgan Securities LLC

Great. Thank you.

Operator

The next question is from George Shapiro with Shapiro Research. Your line is open.

George D. Shapiro - Shapiro Research LLC

Yes, Kelly, I just want to pursue a little bit more of the business jet market, because while Bombardier and Embraer's deliveries are down, Cessna actually had quite a decent increase in their deliveries in the second quarter. So, is some of your comments related to the fact that on the newer Cessna products, you don't have the market share that you used to have?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. I think at Cessna, you do have to go look at the mix. I think we have a mix – I think they were – King Air deliveries were reported down quite a bit. And, of course, we have the King Air position. So – and we don't own some of the new growth platforms down there. So, I do think that's a little bit of a mix issue at Cessna.

George D. Shapiro - Shapiro Research LLC

Okay. I just wanted to clarify that. Thanks.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah.

Operator

The next question is from Robert Spingarn with Credit Suisse. Your line is open.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Good morning. I had a question and clarification. Patrick, on the clarification on the cash flow, is there any component of that, that is on the commercial side maybe in terms of receivables from some of your OEM customers in terms of timing on their payables? And then, Kelly, on the cabin retrofit and some of the weakness there, could you speak a – talk to that a little bit, where are you seeing that and what's the dynamic behind that?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Let me take the first part of your question, Rob. I think it's fair to say that we always have puts and takes with respect to cash flow timing, particularly at yearend, because it – a day or two days can mean quite a bit in terms of our cash flow. So, that's always a risk and an opportunity. I wouldn't say that we have anything specifically baked in with respect to commercial OEM, I'll say, paying behavior. So, – and, yeah, we'll continue to monitor it, but no, there is nothing specific to commercial payment practices.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

No one has made an effort, Patrick? No one's made an effort to change payable terms?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I didn't say that. I think we have a couple of our larger customers have been very active in terms of talking to us about cash flow payment terms and we're continuing to negotiate that. But I would tell you that we're still working it.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Look, Boeing, we do not have a Boeing re-plan in terms of their payment strategy in our full year outlook. That's not in accordance with our contracts that we have with them, so we're expecting them to withhold that. I will say quarter-to-date, Boeing is delinquent and Boeing has contributed to some of our underperformance here this quarter in cash flow, which is disappointing, but we're working that with them.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay. Okay. And then just on the retrofit.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Rob, yeah, Rob, on the retrofits, I don't know whether I can point to anything marketwise. It truly is we're just seeing when the airplanes are coming in for engine mods or maintenance actions that we're selling more avionics and less cabin. It appears to be they kind of have a fixed amount of money, and the money is shifting a little bit towards the avionics upgrades. I don't know if that's because they think they need those avionics upgrades to sell the airplane. Some of them are mandated kind of things and they're just saying, let's go ahead and do them right now; might be indicative of them keeping the aircraft longer. Now, cabin upgrades haven't gone away. They were just particularly strong last quarter, and they're not as strong here through this year.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thank you.

Operator

The next question is from Howard Rubel with Jefferies. Your line is open.

Howard Alan Rubel - Jefferies LLC

Thank you very much. I want to shift a little bit towards some new products, Kelly. Two things; one is you highlighted the simulator business and demand. Is there something that's changed permanently, I mean, given the pilot shortage? And then just very briefly touch on, you have 737 MAX, you have C Series and A350 all ramping fairly substantially next year. Could you elaborate a little bit on the trajectory?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. If you look at the ramp-ups next year, you're right on the ramps. If you look at 737 MAX, that's going to feather in over probably about three-year timeframe as they transition from NG to MAX. At Boeing next year, while I'm not – I don't have a plan yet that I'm sitting in front of, I would expect that we'll see the MAX tailwind be offset by declines in the 777 and the 747-8. So they'll tend to mute themself in fiscal 2017, but then we'll see the incremental growth in 2018 and 2019 as we continue to feather in the MAX.

I think we're all watching Airbus's ramp-up on A350. Right now, we're pretty well aligned with their public guidance there, but I think everybody is watching to see if they're going to be able to achieve that going forward. So hopefully, we'll get some more clarity before we have to provide any guidance on 2017.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

And as it relates to the simulator products, I would say those products tend to be a little bit lumpy just in terms of the timing of the deliveries. I wouldn't read into it in terms of a, I'll say, a permanent change to the trajectory of that business. It still remains to be a pretty good business. We still anticipate good growth in that business, but I think it was a little bit unusual this quarter.

Howard Alan Rubel - Jefferies LLC

So, there is no share gain or anything else that you can point to, Patrick?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

No. I think there are probably a fair amount of deliveries across the board. Actually, there were a lot of deliveries in the Commercial side of the business for some simulator products. I don't think there was a lot of share gain, though.

Howard Alan Rubel - Jefferies LLC

Thank you.

Operator

The next question is from Ken Herbert with Canaccord. Your line is open.

Ken Herbert - Canaccord Genuity, Inc.

Hi, good morning. Just wanted to shift gears again to the Government Systems. You had good growth in the quarter and I know it's consistent with what you've been talking about and it sounds like the full year outlook remains on track. Can you specifically, two parts, specifically highlight any more detail on specific programs you saw ramping this quarter or any other color on the specific strength here? And then second, can you provide an update on the Manpack opportunity? I know the radios are getting tested now and any further detail on when you are looking for the potential down select there and any update on the testing process? Thank you.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. So, let me hit Manpack first of all. Yeah, we've delivered the units, as have the competitors, and they're in the test process. I'm probably not going to be providing you much detailed information. It's highly competitive between now and the down selection, so, I'm not going to be speaking too much anymore about what's going on relative to Manpack.

We do expect the down select to be towards the end of the second quarter, early third quarter of next fiscal year. As far as government programs, if you look in the third quarter, we saw some pretty good growth in military simulation and training. Our E-6 program had some good growth, and international P-3s also. We saw continued decline year-on-year in rotary wing, primarily driven by the oil and gas challenges that we've been dealing with. If you look towards the fourth quarter, I think you're going to see pretty good growth across our entire Government portfolio. In fact, I think our COMM/NAV portfolio will probably exceed our avionics portfolio in terms of overall growth, where key programs there are international C-130s, and we've done a good job of booking those.

You may have seen a press release where we won a Black Hawk simulator program down in Mexico. That was one of those that we had planned to win and convert in the year. We've got growth in F-35, continued growth in E-6, and then some simulation and training products that we're expecting to grow. So, again, a pretty big fourth quarter, abnormally big fourth quarter for us in our Government portfolio, but pretty much the majority of that is booked and now executing, and I expect that we'll have really a bang up quarter here for our Government business, which is good. This is the first, this Q3 was the first quarter of growth in quite a few quarters here for our Government business. So, it's good to get that finally turning in the right direction.

Ken Herbert - Canaccord Genuity, Inc.

Great. Thank you very much.

Operator

The next question is from David Strauss of UBS. Your line is open.

David E. Strauss - UBS Securities LLC

Thanks. Good morning.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Hi, David. Good morning.

David E. Strauss - UBS Securities LLC

Kelly, want to see if you could touch on this trajectory of company funded R&D as we head into 2017. I think you had – you spoken previously about 2017 looking a lot more like fiscal 2015 rather than 2016 in terms of company funded R&D. If you could touch on that and then also touch on, assuming that on the company funded side, along with the increase in preproduction amortization, it looks like it's going to be tough for Commercial Systems EBIT to grow even if you were to assume that business share were – was flat in 2017. If you could just touch on that. Thanks.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. So, the first half of this year has been a low half in terms of Commercial Systems' company funded R&D, and you're seeing us ramp that up here in the third quarter. You'll see additional ramp-up in the fourth quarter. So, I think while, again, I don't have 2017's detailed plan, I think 2017, you can expect us to be spending kind of more at the rate at which we're ramping to right now. Obviously, the more expensed R&D that we spend on the year, the more challenge that places on our Government revenues. I wouldn't say that's necessarily – I'm sorry, Commercial margin. I wouldn't necessarily say that's new. We've always known that we were going to be ramping back up the R&D, and we've got to go drive the good news out of the product profitability in order to offset that R&D ramp.

David E. Strauss - UBS Securities LLC

Thank you.

Operator

The next question is from Michael Ciarmoli with KeyBanc Capital Markets. Your line is open.

Michael F. Ciarmoli - KeyBanc Capital Markets, Inc.

Hey, good morning, guys. Thanks for taking my question. Kelly, maybe if we could just go back to the Government Systems, you were hitting on it. Best quarter of growth, I think, since fiscal 2011. Fourth quarter looks to be strong, you've got some easy comps in the first half. I mean, are we out of the woods here based on current visibility, what you're seeing in the pipeline programs? I mean, can we expect Government Systems to start putting up consistent year-over-year growth at this point? Or from your perspective, is it too early to call?

Kelly Ortberg - Chairman, President and Chief Executive Officer

No. I think you can't start to see that we're going to have consistent year-on-year growth coming out of our Government portfolio. Now, it – we – this year is strange because we had the first half, second half. I don't think you should assume that we're going to continue to grow at this second half rate. But what we've said was to get flat in 2015, low single-digit growth coming out, and I think the budget environment is going to allow us over the next couple of years to move that growth rate to a low single-digit to mid single-digit growth out of our Government portfolio, which is upside from our long-term outlook, as I talked about before.

Michael F. Ciarmoli - KeyBanc Capital Markets, Inc.

Got it. And just if I may, are there headwinds out there when I think about maybe the Brazilian economy, the KC-390? Are there specific programs you might be more worried about creating some unforeseen headwinds in Government?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, I think the KC-390 is going to go through some challenging times going forward. I think that we've got that baked into our overall outlook. I think oil and gas continues to be a question mark for civil helo. But the areas where we're expecting growth, I think that's why I highlighted KC-46, really important growth program for us; F-35 appears very solid and that's a good growth program for us. And then back to the comment on the Manpack program, that's an important program that we'll start driving growth here probably towards the end of next year and into the following year. So we've got the programs and the opportunities ahead of us to have this business on a continuous growth trajectory.

Michael F. Ciarmoli - KeyBanc Capital Markets, Inc.

Got it. Thanks a lot, guys, helpful.

Operator

The next question is from Richard Safran with Buckingham Research. Your line is open.

Richard T. Safran - The Buckingham Research Group, Inc.

Thanks. Kelly, Patrick, Ryan, good morning.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Good morning.

Richard T. Safran - The Buckingham Research Group, Inc.

So, I wanted to ask about mandates. If I missed your comments about this when you made it before, I apologize. I know that MRO activity isn't generally a big revenue driver for you, but I believe it could drive cockpit mandates. So, I wanted to get a sense from you, how things like D-checks are trending. Are you seeing more D-check schedules? If you're more expecting more mandate activity in the future, how things are looking there?

Kelly Ortberg - Chairman, President and Chief Executive Officer

I probably can't comment because I haven't looked at specifically on D-check schedules. The only thing I can say is that we – for mandates, we do typically – especially for the large fleet operators, they try to get those mandates incorporated into their scheduled maintenance outlook. And we saw that with the TCAS, changes here in the past two years. We've got the ADS-B mandate mostly ahead of us. We're actually expecting some initial revenues in both their transport and government biz jets out of ADS-B here in the fourth quarter. So, that's just picking up.

But again, these are mandated with a particular time, so if they don't get them done during their normal scheduled maintenance, then they effectively have to take the airplanes down to do the mods. And unfortunately, we do see a lot of people wait till the very end and a flurry of activity at the very end before the mandate effectivity date hits.

Richard T. Safran - The Buckingham Research Group, Inc.

Thank you.

Operator

The next question is from Noah Poponak with Goldman Sachs. Your line is open. Noah Poponak with Goldman Sachs, your line is open. Please go ahead.

Noah Poponak - Goldman Sachs & Co.

Hi, good morning, everybody.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Hi, Noah.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Good morning.

Noah Poponak - Goldman Sachs & Co.

Sorry, I was on mute. I wanted to ask you about commercial margins on a pre R&D basis. I guess – I think you've cited mix as the key driver of the year-to-date compression. And I guess you've pointed to that being business jet driven, and I guess also the customer funded development sales. But could you talk about how much different the business jet margins are versus the rest of original equipment and versus aftermarket in the Commercial business?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Yeah. No, I think what we're trying to describe in terms of the year-over-year headwind on margins due to the mix is the biz jet OE compared to customer-funded NRE. So what we're really thinking about it, we're staying flat, but we're trading some pretty high margin biz jet OE for low to no margin customer-funded engineering. That's the big mix change.

Noah Poponak - Goldman Sachs & Co.

Okay.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Now, as it relates to biz jet OE compared to the entire Commercial portfolio, I'd tell you it's among the more profitable businesses we have. I think it's probably – we've always said biz jet margins are higher than air transport margins. Aftermarket tends to be a little bit higher than OE, but I think the biz jet OE tends to be a pretty good margin product for us.

Noah Poponak - Goldman Sachs & Co.

So, business jet OE is higher than aftermarket on average?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

No, I'd say biz jet is probably on par with it.

Noah Poponak - Goldman Sachs & Co.

Okay. And what's your sense for your...

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I just want to clarify. The real impact though is the fact that we've got low to no margin customer-funded NREs coming in to the portfolio.

Noah Poponak - Goldman Sachs & Co.

So what's the net mix impact 2017 versus 2016 pre-R&D?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Well, the net mix impact should actually – pre-R&D should be good because I think we're going to see customer funded NRE coming down, and we'll see some product sales coming up. So, the pre-R&D impact is going to be good. The issue then is, okay, what happens with customer funded – or company funded R&D, and Kelly has already referred to it. That may tick up. Pre-R&D margin should benefit from mix.

Noah Poponak - Goldman Sachs & Co.

Got it. Okay. Thank you.

Operator

And your next question is from George Shapiro with Shapiro Research. Your line is open.

George D. Shapiro - Shapiro Research LLC

Yes. I just wanted to follow up some on the cash flow, Patrick. I mean, receivables year-to-date are up $160 million, net in towards up $160 million, and customer advances down $100 million. And you mentioned that you're waiting for a Boeing payment. I don't know whether you would quantify how much that is and whether that's related to some contract you haven't signed with them yet or what it was. But the bottom line to me when you add all this together, you need like over $500 million cash flow in the fourth quarter to get to the low end of your guidance, and I'm just trying to put some pieces together as to how you might get there.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Yeah. I think you've touched on a few of them anyway, George. As it relates to Boeing, yeah, we've got probably between $30 million to $40 million of receivables that we are awaiting collection on Boeing. And it's not really a contractual issue, it's just they haven't paid us. So, that's out there. We do need to collect that. We have a very large ramp on the Government Systems revenue side. So, you said, receivables have spiked up, they absolutely have. Getting those billed and collected, the ones that exist as of June 30 is important, and also, the ramp into the fourth quarter and getting that ramp accomplished early, billed and collected, I think those are the sort of the keys to getting to that cash flow number. We've always had a backend loaded cash flow, but kind of like the Government Systems sales this year, it's even more backend loaded than it has been in the past.

George D. Shapiro - Shapiro Research LLC

Yeah. No, that's very observant. And I mean, you always had a strong cash flow, Q4, just much stronger this year.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Yeah. Yeah. And I think you've touched on a number of the key drivers to getting that cash flow in the fourth quarter.

George D. Shapiro - Shapiro Research LLC

Okay. Thanks very much, again.

Operator

The next question is from Pete Skibitski with Drexel Hamilton. Your line is open.

Peter John Skibitski - Drexel Hamilton LLC

Hey, Kelly, I got a question on commercial rotorcraft? Can you size that for us and maybe give us some color on, I'm just guessing, it's probably down double-digits this year in Government just given the market, and I'm wondering if you see that being another headwind into 2017.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, so, again, the commercial rotorcraft is booked in our Government portfolio. And it's not all of the commercial rotorcraft that we're seeing being impaired right now. It's the aircraft that are supporting the oil and gas component of the market. Pat, do you have...

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Yeah. Well, what we typically say, it's about 15% of our portfolio in Government Systems is helicopters, about a third of that is commercial helicopters. And as Kelly mentioned, some of that's civil kind of paramilitary helos, some of it's oil and gas, probably about half and half maybe. So it gives you a size as to what the impact of the oil and gas piece is.

Peter John Skibitski - Drexel Hamilton LLC

Okay. Great. Thank you. Thank you. And just one last follow-up. On your strategy to be more service oriented in terms of the non-aviation businesses at IMS, could you give us some color there maybe in terms of how far along you are with that and how much traction you can get there do you think?

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. Probably the first area that we're making progress in that is in the rail business, where we're providing positive train control software as a service. We've got that now into the market and we're starting to transition. This isn't going to be a switch to where one day, we just flip over and that we move from project to subscription revenue. But I think in both the airport business and the rail security business, we'll be able to move to more subscription based over the next several years. I think you ought to continue to view this though as it's project based, at least in the near term, it's going to be project based, and tend to be a little bit more lumpy in terms of overall timing.

But I am pleased some of our investment strategies that we've put in place, particularly in the airports area, have started to bear fruit. We've got growth this quarter. I'm expecting that we'll grow again that segment of the business in the next quarter. So, I think we've got some good plans to get the trajectory of that. So, it's not offsetting the good growth that we've consistently seen in the core aviation. Also, remember that it is less profitable than the core aviation component of the business. So, I don't think we're going to see significant changes in the overall profitability of that segment. The incremental margin performance really comes out of the core aviation growth.

Peter John Skibitski - Drexel Hamilton LLC

Okay. That's great. Thank you.

Operator

The next question is from Myles Walton with Deutsche Bank. Your line is open.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Thanks for taking the follow-up. In your investor marketing deck, the range of R&D has gone to 16% to 18% of sales, and back at the Analyst, or the Investor Day back in 2014, you rolled out a 18% to 20%. Looks like this year, you'll be above that 16% to 18% range; next year, I think you might be below that range. Can you talk about why that range moved and kind of what's the sustainable rates at a company level for R&D?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I still think the, yeah, I still think the 16% to 18% is a reasonable long-term range. I think we are going to be a little bit above that range this year. I think I'd characterize a couple of different things. One is the deferred balance is still very high. We'll see that come down. We'll see company-funded and customer-funded maybe change over time, but I think the big thing that's going to drive that down back into the range of 16% to 18% is the reduction in the deferred.

Now, why did the range change? Big change for us was adding the sales of IMS. And if you look at the IMS portfolio, we really don't have much in the way of R&D at all. The investments in IMS tend to be capitalized software mostly. So, that does more capital expenditures. So that's hopefully, that gives you a little bit of color. So I do feel longer term comfortable with that 16% to 18% range, and I think it will come as the deferred winds down.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Got it. And, Patrick, the amortization pre-production next year, is it still about a $30 million headwind? Is that what it will say in the Q when it comes out?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I think that's about right, yeah.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay. Thanks.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Right, it hasn't changed much.

Operator

The next question is from Noah Poponak with Goldman Sachs. Your line is open.

Noah Poponak - Goldman Sachs & Co.

Hey, Patrick. The earlier contract of company-funded R&D in 2017 looks more like 2015 than 2016. Is that a Commercial comment or a Government comment or a total comment?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I'd call it total comment.

Noah Poponak - Goldman Sachs & Co.

Okay. So, is that sort of Commercial up, Government down?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Well, I think Government, I'd say Government, Commercial up, Government probably flattish.

Noah Poponak - Goldman Sachs & Co.

Okay. The reason I'm asking is just that construct – I mean, the Commercial side of company-funded R&D year-to-date is down 30%. So I guess it depends where the fourth quarter shakes out, but that construct would imply a pretty significant increase in the Commercial side in 2017 versus your comment earlier that it would tick up.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

I would say, yeah, I would expect an increase. Now again, Noah, I want to make it clear, we're still in the teeth of our annual operating plan cycle, and that involves a lot of discussions around investments and a lot of tradeoffs, and those have not been completed yet. But do I expect an increase in customer-funded? I absolutely do. I would hesitate to quantify it right now just because we're so early in the planning process.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Yeah. And fundamentally, Noah, I think you got to remember that we did not defer the development of the 777X, we're spending that. So, we're just in the preliminary design phase here, mid this year, and now we'll ramp up, and next year will be a peak spending year for us in 777. So, if we aren't deferring these and we're expensing these, you will see a little bit more quarter-to-quarter dynamics as we're managing through the development of the programs.

Noah Poponak - Goldman Sachs & Co.

Okay. That helps clarify. And then one other follow-up. On the Boeing delinquency, how abnormal versus history is that, and what levers do you have to pull to get paid?

Kelly Ortberg - Chairman, President and Chief Executive Officer

That's abnormal to history. They've normally been paid good. I hope it's just a blip. Our avenues are to work our strong relationship with them and get that resolved, and we're in the process of doing that.

Noah Poponak - Goldman Sachs & Co.

Okay. Thank you.

Operator

The next question is from David Strauss with UBS. Your line is open.

David E. Strauss - UBS Securities LLC

Thanks for taking the follow-up. Kelly, can you talk about the ability for you to do some additional restructuring to offset what looks like a more challenging than expected biz jet OE side? And then, Patrick, one follow-up. Based on the change in guidance, was there any adjustment to your comp accrual for the year? Thanks.

Kelly Ortberg - Chairman, President and Chief Executive Officer

Well, as far as restructuring, we're always looking to size the business to the end market demand. So if the end market is less, then there's all sorts of things that we can do to either shift resources to where we've got growth or to consolidate activities, and that's a part of our planning process as we're in the middle of that right now. I think particularly around the manufacturing, if we're not going to be delivering as much in business aviation, we're going to have to really take a hard look at our overall cost structure around that, especially if we don't see signs that this is temporary. If this is a long-term phenomenon, which right now it looks like, I think we've got to make sure we've got the overall cost base pretty well sized. I think you can look from historically, we're pretty aggressive in that regard. We'll take all the action we need to make sure we stay lean and mean in spite of challenging market conditions.

Patrick E. Allen - Chief Financial Officer & Senior Vice President

And as it relates to the comp accrual, the biggest dynamic over the course of the year has been cash flow. If you remember, we raised it $50 million when we got the R&D cash credit; now, we're lowering it $50 million. So it went up to a little bit over 100%, and now, it's down closer to right around 100% for the year. Now, as we look at it quarter-over-quarter, it was not a big driver. I think it may have been $1 million or $2 million.

David E. Strauss - UBS Securities LLC

Thanks.

Operator

The next question is from Jason Gursky with Citi. Your line is open.

Jason M. Gursky - Citigroup Global Markets, Inc. (Broker)

Hey, good morning, and thanks for taking the follow-up. Just a quick one back on biz jets. Are you actively bidding on any new platforms? And secondly, are you aware of the – whether there are any new competitors in this space or new entrants in the biz jet avionics in particular?

Kelly Ortberg - Chairman, President and Chief Executive Officer

No, I'm not familiar with any – what I'll say new major competitors in the biz jet avionics. There is always a number of competitors that we deal with, and they have relative strengths and weaknesses just like we do. What was the first part of your question, I'm sorry?

Patrick E. Allen - Chief Financial Officer & Senior Vice President

Any new pursuits.

Jason M. Gursky - Citigroup Global Markets, Inc. (Broker)

Just what are you setting on any new platforms?

Kelly Ortberg - Chairman, President and Chief Executive Officer

I really can't comment on that. Normally, if there's new platforms, we usually sign a non-disclosure agreement with the OEM so that they're not disclosed. Sorry. All right. Operator, we have time for one more question.

Operator

Certainly. The final question is from Ken Herbert with Canaccord. Your line is open.

Ken Herbert - Canaccord Genuity, Inc.

Hi. Good morning. Just a final follow-up on, I think, Kelly, you mentioned initial provisioning on commercial transports maybe have been a bit of a headwind. Specifically, are your A350 provisioning in general, is it running the whole plan? And if so, is that due to just the slowness in deliveries from Airbus on that program or are you seeing anything else structurally that's causing you more concern on initial provisioning?

Kelly Ortberg - Chairman, President and Chief Executive Officer

No, we are seeing pretty well, our planned initial provisioning at Airbus, and I don't see any delays in initial provisioning associated with the current ramp-up challenges. Most of the provisioning that we have there, well, it's not as large as 787 provisioning because we don't have the flight deck, and I think we've been pretty transparent. Also, a lot of the initial aircraft are going to fewer numbers of airlines, which is driving the provisioning plan, but I would say we're pretty well tracking on A350 to what we originally expected.

Ken Herbert - Canaccord Genuity, Inc.

Okay. Great. Thank you.

Operator

This concludes the question-and-answer session. I'd now like to turn the call back over to Ryan Miller for any closing remarks.

Ryan D. Miller - Vice President-Investor Relations

Well, thank you, Chris. So, we plan to file our Form 10-Q later today, so please review that document for additional disclosures. Thank you for joining us and participating on today's conference call.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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