Spirit AeroSystems Holdings Inc (SPR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2006 Spirit AeroSystems Holdings Earnings Conference Call.

My name is Lisa and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Mr. Phil Anderson, Treasurer and Vice President of Investor Relations.

Please proceed, sir.

Good morning and welcome to Spirit's fourth quarter and full year 2006 earnings call.

I'm Phil Anderson and with me today are Jeff Turner, Spirit's President and Chief Executive Officer and Rick Schmidt, Spirit's Chief Financial Officer.

After comments by Jeff and Rick about our performance and our outlook, we will take your questions.

We have provided detailed information in the press release issued earlier today.

As a reminder, you can follow today's broadcast and slide presentation on our Web site at spiritaero.com.

Before we begin, I need to remind you that any projections and goals we may include in our discussion this morning are likely to involve risks, which are detailed in our news release, in our SEC filings and in our forward-looking statements at the end of this presentation.

I will now turn the presentation over to Jeff Turner.

Thank you, Phil, and good morning everyone.

Let me welcome you to Spirit's first earnings call.

This morning, I will take you through some of our 2006 accomplishments.

I'll then have Rick review the financials, and then I'd like to make a few comments on our strategy going forward, prior to taking your questions.

Let me begin with slide two. 2006 was a year filled with accomplishments for our Company and our people.

Our operational performance was strong across the Company.

We successfully increased our unit deliveries to meet the increased customer demand and we made significant progress on our components of the 787 program.

Our customers also had another very successful year for orders and deliveries.

Demand for commercial aircraft remained strong and the market continues to be robust, as deliveries in 2007, 2008 and beyond are expected to increase.

Backlogs increased again in 2006, as new orders exceeded deliveries.

This is great news for our customers and great news for Spirit.

In 2006, we won new business from existing customers and new customers, in existing markets and in new market segments.

We accomplished this by listening to our customers, understanding their needs and requirements, and applying our unique design and build capabilities in fuselage, propulsion, and wing systems to meet those requirements.

We established international operations and expanded our customer base with the Spirit Europe acquisition.

We worked diligently to strengthen and grow existing customer relationships, while fostering new relationships across the industry.

We continue to invest in next generation technologies, materials, and processes.

While much of our R&D expenditures in 2006 were for the development of the 787, we continue to focus on advancements in material application and processes that will ultimately increase our competitive advantage in the aerostructures business.

The capability of our people and our processes and the application of technology, combined with the competitive cost structure have this Company well positioned going forward.

Our 2006 was a very successful year for our industry, our customers, and our business.

Spirit also successfully conducted an Initial Public Offering for our common stock.

As you know, this is no small task.

We are very proud of the team of people that made it happen.

Now, let's talk about some of the specific accomplishments across the business.

On slide three, our fuselage systems are our largest segment and we executed well, increasing margins and accomplishing a number of milestones in 2006, some of which you see here on slide three.

They did an outstanding job of increasing production to meet their customer's need, while introducing a new 737 derivative and incorporating design improvements.

The 777 product line delivered 600th unit and supported the customer's increase in deliveries of over 60% during 2005 and 2006.

The lean design of the 737 and 777 production systems continues to yield improved operational efficiencies and improved profitability.

We continue to invest in capacity enhancing equipment and tools.

We are well positioned to support our customers increase deliveries.

On slide four, you see the propulsion team also increase margins, while successfully increasing production to support increased customer deliveries.

The team had a great year by winning additional work from existing customers and gaining a new customer.

Delivery of our 787 engine pylons was also a highlight.

Our propulsion system team continues to lead the industry in the application of technology and materials.

We are seeking the benefit -- we are seeing these benefits by winning new business and new market segments.

On slide five, the wing systems segment performed well, while increasing production on the A320 and supporting the 787 program.

The acquisition and integration of Spirit Europe provided significant revenue growth for this segment in 2006.

The fourth quarter margin increases were mainly higher as favorable cost trends and higher production rates, along with improved fringe benefit rates, generated favorable changes in contract estimates.

Improving operational margins in this segment continues to be a focus item.

Our wing systems team also successfully passed a major milestone in November, with our delivery of the first 787 Wing Fixed Leading Edge.

On slide six, we talk about our 787 program.

We are pleased with our progress on the 787.

We have completed three contoured test fuselage barrels and currently have production units number one and number two in process.

These will be the initial forward fuselage sections for flight test aircraft.

Additionally, we delivered the first wing leading edge in 2006, and as of yesterday, we had delivered four engine pylons for the program.

All of these items have been delivered on or before our customer need dates.

The technology and processes we are using to produce this airplane are performing well and we feel good about where Spirit is on the program.

To date, we are meeting the commitments to our customer and we expect to do so going forward.

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

Rick?

Thank you, Jeff.

Good morning everyone.

Slide eight summarizes our financial results for the fourth quarter and the total year.

In the fourth quarter, we delivered 53% revenue growth versus the same period last year, an increase of almost $300 million in absolute terms.

About 60% of the growth resulted from higher chipset deliveries, the remainder from the Spirit Europe acquisition.

In the quarter, our pre-tax margins continued to improve.

Excluding the impact of the IPO, which I'll discuss in a moment, pre-tax margins exceeded 10% for the quarter and 8% for the full year.

Our balance sheet also continued to strengthen in the quarter.

Cash liquidity exceeded $180 million at year-end.

We retired over $100 million in debt during the year and our shareholders' equity grew by over $530 million.

In conjunction with our recent IPO, both Moody's and S&P upgraded the Company's credit ratings based on this positive performance.

In this presentation, we'll also discuss our guidance for 2007, which projects that the strong overall performance we experienced in 2006 will continue into 2007.

Let's turn to slide nine and review our results in more detail.

On revenues of $852 million, we delivered double-digit pre-tax margins of 10.4% in the fourth quarter after adjusting for the impact of $334 million in IPO related costs.

This represents a sequential improvement over the 8.8% pre-tax margins recorded in the third quarter and a significant improvement over the pretax loss recorded in the fourth quarter of 2005.

Profitability in the fourth quarter was assisted by $22 million of favorable changes in contract estimates, matching approximately the amount recorded in the third quarter.

These changes in contract estimates have been driven by favorable trends in our material, labor, and overhead costs, and increasing volumes within our contract blocks.

For the full-year 2006, pretax margins excluding IPO-related costs were 8.2%, as margins in the second half improved over the first half, due largely to the completion of our R&D efforts on the 787.

On slide 10, you'll see the impact on our full-year net income of $0.15 per share from two one-time items recorded in the fourth quarter, the two items being our recent IPO and the release of tax valuation reserves.

I will describe both in a little bit more detail.

First, the IPO.

As you know, on November 21, 2006, Spirit completed an initial public offering of its common stock and commenced trading on the New York Stock Exchange under the symbol SPR.

Total IPO related costs reduced pre-tax earnings by $334 million and net income by $209 million or $1.81 per basic share for the full-year 2006.

Most of this cost relates to our Union Equity Plan, which was triggered by the IPO and is discussed in more detail in our earnings release and in the S1 filing.

Following the successful offering, the Company used the net proceeds of $249 million to reduce debt by $100 million and fund part of the obligation of the Union Equity Participation Plan that was triggered by the IPO.

Total cash costs for the IPO in the fourth quarter, including the Union Equity Participation Plan, were $191 million.

Also in the fourth quarter, we released previously established tax valuation allowances.

This favorably affected net income by $75 million for the fourth quarter and $42 million or $0.36 per basic share for the full-year 2006.

The valuation allowances were established under the guidelines of SFAS Number 109, which required the establishment of an allowance against 100% of Spirit's net deferred tax assets over our first five quarters of operation.

With the necessary earnings history established as of the fourth quarter 2006, the tax valuation allowances were released in the fourth quarter.

Slide 11 summarizes the 2006 changes in our cash and debt balances.

Cash balances at year-end remained healthy at $184 million, but did decline about 24% from year-end 2005, largely due to funding the $145 million acquisition of Spirit Europe from available cash without taking on new debt and also funding about $42 million of IPO-related cost in excess of the net proceeds.

During the year, we also strengthened our capital structure by retiring over $100 million of debt, improving the size, cost, and flexibility of our revolving credit agreement and issuing new equity as part of the IPO.

Overall, Spirit continues to have well over $500 million of liquidity available to fund future growth initiatives.

At year-end, Spirit's net debt-to-capital ratio was below 34% and our net debt-to-projected 2007 EBITDA ratio was below 1, both indicators of a financially strong Company.

The combination of improving profitability, a stronger balance sheet, and a robust industry outlook resulted in ratings upgrades from both Moody's and S&P in the fourth quarter.

Slide 12 details our annual cash flow in 2005 and 2006.

Cash flow from operations was $272 million in 2006, including an outflow of $191 million for IPO related expenses and increases in working capital.

Capital expenditures continued to be high in 2006 as we put the production capacity in place for the 787 program.

In 2005 and 2006 combined, Spirit has invested over $600 million in R&D, working capital, and capital expenditures for the 787 program.

Customer advances from Boeing, which will be repaid over the first 500 chipset deliveries, have funded $600 million of this cash requirement to date.

I would now like to move to slide 13 and our financial outlook for 2007.

Spirit's revenue guidance for 2007 is between $4.0 billion and $4.1 billion.

This represents approximately a 25% increase from 2006 and reflects increasing shipset deliveries to Boeing and Airbus to support the continued strong demand for commercial aircraft.

This guidance is based on 2007 delivery estimates recently provided publicly by both Boeing and Airbus.

Operating income margins are expected to be between 9.8% and 10.5% in 2007, reflecting higher unit deliveries, continued productivity, and cost reduction initiatives, and reduced expenses for R&D, stock compensation and transition-related items.

Spirit's fully diluted earnings per share guidance for 2007 is between $1.80 and $1.90 per fully diluted share, driven by the higher revenues and improving operating profits.

We expect our cash flow from operations to be in a range around $280 million, approximately the same amount as 2006.

This guidance reflects anticipated future growth in working capital, as Spirit commences production of the new 787 forward fuselage, pylons and wing components ahead of aircraft certification.

I would now like to turn it back over to Jeff for some closing comments.

Thank you, Rick. 2006 was by all accounts a very successful year for Spirit and 2007 will be another exciting year as we execute our strategy.

Our top priority is delivering on our commitments to our customers and executing our $19 billion backlog.

Doing this well enables the execution of our strategy and facilitates our long-term value creation.

Commercial backlogs are expected to continue growing in 2007 and the commercial aviation industry remains robust.

Along with executing our four to five-year backlog, we expect to have many opportunities to grow in current markets with existing customers and in new market segments with new customers.

As we grow, we will do so thoughtfully using our core competencies, capabilities, and market knowledge as our guide.

We will have a heightened focus on productivity in all areas of our Company and in all aspects of our business, as we continue to strengthen our competitiveness and seek to benefit from our competitive cost structure.

We will continue to invest in next-generation technologies that enhance Spirit's competitive position in the near-term as well as the long-term.

As we move forward, we are committed to delivering financial results that reflect the ability and quality of our team.

Our focus on customer satisfaction, execution and growing the business profitability remain our top priorities, and we indeed to do all three of them equally well.

We will now be glad to take your questions.

Operator, we are ready for the first question please.

[OPERATOR INSTRUCTIONS] The first question comes from the line of Heidi Wood of Morgan Stanley.

Please proceed.

Good morning.

A question on the margins on the wing systems, those looked a little light.

Can you talk to us about what were the puts and takes over there?

Rick, would you like to answer that?

Sure.

Good morning, Heidi.

Actually the margins in wing systems, if you look at them sequentially from the third quarter to the fourth quarter, were actually quite a bit higher in the fourth quarter.

One of the reasons for that, that we noted in the press release, was that a portion -- a disproportionate share of the favorable change in contract estimates that we had in the fourth quarter were focused in the wing systems business.

But, overall, with increasing volumes and some of the productivity initiatives that we have got in place, the margins are increasing in wing systems and increased nicely in the fourth quarter.

But, if I take that out, Rick, I guess I was looking for something closer for the year to be somewhere in the 9% and you reported a 7.9.

So, I am just wondering -- how should we think about margins going forward in wing systems, is kind of the 9% range through '07 going to be achievable?

I think, as Jeff mentioned in his comments, certainly improving the margins in the wing systems business is a top priority for us.

And I do believe that you will see margins in that business increase over the next couple of years.

Right.

And one question and I will let someone else get on.

But, the delivery outlook for '08, is there a reason why you have not given us any initial color?

The aircraft OEs have provided some '08 delivery guidance.

I am just wondering why you haven't given us some sense directionally there.

I think our thought process, frankly, Heidi, is [push it] right out of the box here and I think one year we felt was what we were comfortable giving.

Okay, good, thanks very much.

Thank you, Heidi.

The next question comes from the line of Howard Rubel with Jefferies.

Please proceed.

Thank you.

A couple of items.

First, you have had a couple of inception to date adjustments, Rick.

Could you -- or Jeff, could you address when you think about the outlook, how you are trying to factor in some of the productivity benefits you are likely to incur?

I mean, will we -- if things go well, will there be any more inception to dates or things go a little bit better than planned, then I would assume there might very well be some additional pick up.

So, could you address that issue please?

Sure, the -- I would characterize it this way, Howard.

I think, as we all know this, Spirit is a relatively new company and early on, obviously, there were still a lot of moving parts within our cost structure as we set up the Company and determined what the ultimate cost structure would look like.

As we have now had six quarters of operating experience behind us, obviously, we have much better visibility into that.

So, I think we have a very solid handle on our cost structure and what impact that has on our contract estimates.

I certainly would not expect, going forward, to see the kind of changes that we had -- changes in contract estimates that we had in 2005 -- in 2006, sorry, repeating themselves in 2007.

We continue to work hard on our cost structure.

Things certainly that we are aware of and focused on are included in our current contract estimates.

So, again, I would expect the kind of margins that we saw in the fourth quarter, excluding the favorable changes in contract estimates, I think are the kinds of margins that we would typically expect to see looking forward into 2007.

So, as I said, all of the things that we are focused on, that we know about are currently reflected in our contract cost estimates and I would not expect to see the kind of favorable adjustments that we had in 2006 to repeat in 2007.

Okay.

The second thing is that when you talked about cash from operations and CapEx, I believe in the S1 there was also some additional payments for capital expenditures.

Was that included in this net number, so, would we then see slightly positive free cash flow or was this CapEx number essentially a net number, and so we would see a slightly negative free cash flow number?

In our guidance, we laid out the three major elements of free cash flow.

Obviously, cash flow from operations, capital expenditures and then the amounts that we get advanced from Boeing under the original agreement -- if you net the three items, you will see that we would expect free cash flow to be slightly positive in 2007.

And that clearly does include the, whatever funding we would expect to get from customers.

And then, one last thing.

I believe in the past you provided us with unit deliveries.

Are you going to do that for the current quarter and going forward?

Yes, we will provide specific unit delivery numbers in our 10-K.

But, as you know, our deliveries follow very closely with the deliveries of OEs.

So, you wouldn't expect to see a lot of change.

But, there will be some rate breaks during the course of the year that would show some further increase.

Right, Rick?

That's correct.

Thank you very much.

Thank you, Howard.

Your next question comes from the line of Cai von Rumohr with Cowen and Company.

Please proceed.

Yes, thank you very much.

Guys, $22 million in June catch-ups, I presume that's versus all prior periods, not year-over-year.

And could you give us a little more color on how much of that was stuff like pension, which is not true manufacturing floor operation, and how much was operation, a little more color on what's in that $22 million?

Sure.

The $22 million does represent the accumulative adjustment to date, so it covers the prior five quarters of Spirit's history.

And we indicated in the press release that $8 million of the $22 million relates to revenues that were recognized in 2005.

So, you subtract the two, $14 million relates to the first three quarters of 2006.

There was actually relatively little in the way of things like pension adjustments in the cume catch for the fourth quarter.

There was a little bit of fringe benefit true-up in our wing systems business, but most of it was operationally oriented.

And then, it was a little bit confusing because I think you said, for the full -- is this correct, for the full year, the changes are $59 million and 22 , which would save 37 for the first three quarters?

And as I remember, you had said that was the nine months versus the year, so can you walk us through, if it is 22 in the fourth, 59 for the year, what the first three quarters were?

Those are cume catch-ups versus all prior periods, is that correct?

No, the $59 million just relates to the sum of the cume catch-ups that we recognized in '06 that relate to 2005.

So, as I said, if you look at the proportion, $8 million of the 22 was '05.

So, again --

I understand it.

I understand it.

That's very clear, fabulous.

And then, your CapEx here you are saying is going to be $300 million, am I wrong?

Was that number something like 225 to 250 before, so has that number gone up?

It has gone up a little bit, Cai.

For a couple of reasons, we did shift some CapEx from 2006 to 2007.

So, there are some timing impact and there is also some capital for some new programs included in there.

Okay.

And then, I guess, I would like to reiterate Howard's request.

It would be great to be able to get the historical comments like how many deliveries you had in the quarter as well as if you can kind of give us any guidance for '07.

You have given us that in terms of what you are assuming in chipsets.

Okay, we'll take a look at that, Cai.

Fabulous, thank you.

The next question comes from the line of Ronald Epstein with Merrill Lynch.

Please proceed.

Yes, good morning, guys.

Good morning.

Just a couple of questions.

One -- sorry, I am having a technical problem here.

One, the revenues in the quarter were a little bit lighter than at least what I was looking for.

Were there any sort of timing issues in terms of revenue, maybe some revenues that fall over into '07 or something that wasn't delivered during the quarter that maybe you were thinking when it is going to be?

Ron, those lighter revenues were -- they were timing issues.

They are primarily attached with non-recurring payments on new programs and we have -- we anticipate those in our '07 plan.

Okay.

And then, in terms of -- I guess a question for Jeff, opportunities on the horizon, is there anything that you feel comfortable talking about, some potential?

Is there a laundry list, things on the horizon or anything we can think about as we look out into '07 and '08?

Nothing that I can talk specifically about, Ron.

But, I can say that we have a number of opportunities.

We are working with several OEs, looking at new opportunities, feel good about our capability and certainly our cost structure, our ability to bring value to the customers, as well as to Spirit and our shareholders.

So, we will continue to look at that.

The opportunities remain robust and we are very excited about the point in time when we can make some announcements.

Okay.

And then, I guess just one last question, again for Jeff, when we look into '07 and '08, what are your top-three priorities as CEO?

Well, certainly, executing on the increase in production that our customers have announced.

We will put our major focus on that and of course, that implies all the operational issues, as I mentioned, in all aspects of our Company, our overheads, our support, our direct labor, all areas as we drive continual productivity improvement there.

So, that's our number one priority.

Number two is executing on new business that we have won and continuing to go out and seek new business.

Great, thank you.

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Please proceed.

Good morning, guys.

Good morning.

Hi, Rob.

Question on '08, I know that you've addressed this earlier and your response was clear that you are not really -- you want to talk about '07 more so than '08.

But, as we went through the IPO process and looked at the outlook clearly, the upside case that you all have talked about, clearly, hinges on primarily what Boeing has adjusted in 2008.

And they certainly put a robust production schedule the other day.

And could you talk perhaps, if you don't want to get into specific numbers, what kind of incremental margins we can think about in '08, to extent the 787 -- ?

Let me -- let me just first say that, I mean we certainly are encouraged.

I think I stated in my more formal remarks, we are encouraged with what we see in the industry.

And certainly, the outlook that -- that Boeing is giving bodes -- bodes strongly for us and for our base.

We would seek to drive incremental margins in the 25% range as we get better productivity of our [hardwares] and our overheads, and our fixed cost.

And we are talking about operating margins here or gross?

Gross margins.

Okay.

And then, perhaps, Rick, you could talk a little bit about the moving parts within the working capital assumption for this year.

Sure.

Obviously, the big influence in 2007 is going to be the introduction and the production of the 787.

So, we would expect a fairly significant increase in working capital associated with the 787.

You might recall from our earlier conversations, the arrangement that we have with the 787 is that our actual -- we begin deliveries in the second half of '07, but we actually don't start receiving cash payments until the aircraft certifies in the second quarter of '08.

So, that will result in a buildup in our accounts receivable.

We will recognize the revenue and bill it, but it will be actually not due until the airplane certifies.

In addition to that, we will have obviously just regular inventory, production inventory, as we start to gear up production there.

And we are continuing to capitalize some of our pre-production costs and the inventory as well for the 787.

So, all of those together, we estimate should drive an increase in working capital for the year in the order of $250 million.

Okay.

And then, while we are on the 787 topic, there is no lot of talk about weight issues, fairly development stage aircraft are heavier than those that get delivered to customers.

Boeing has talked about the fact that the first six airplanes are going to be heavier.

But, where do you stand on weight?

You said you have been on time.

And how much different, from a weight perspective, are these first six aircraft than the final aircraft, than the seventh airplane?

Well, I think -- well, the right way to think about it is every partner and every part of the airplane is working hard to reduce weight.

That's certainly true of all of our pieces.

And I think you could take the percentage of the total airplane and just think about each piece in that respect because, as we balance the air -- the airplane has been balanced by a program, each area carries a weight improvement target, which we are working hard to achieve.

So, it's a pretty balanced picture across the whole aircraft.

Are you at spec for the first couple of airplanes on weight at this point?

We have weight improvement targets on all our components.

And to what extent does that reflect your own objectives versus the need say for other parts of the airplane that maybe are heavier than were first expected?

Well, I think -- again, I think the fair way to look at that is, as the airplane goes through development, its demands get balanced.

And so, I think it's fair to say that it reflects our contribution to the airplane, which we feel very willing to make and be a part of.

Okay.

And my final question -- I will drop out -- is, Rick, could you just update us on R&D with regard to or R&D planning with regard to 787 derivatives?

What's in your plan at this point?

We have - you'll notice in the -- in one of the schedules in the appendix to the presentation, we provided a little bit more detail on our guidance for '07 for both R&D and for SG&A expense.

So, our estimate for R&D for '07 is around $60 million.

But, that certainly includes any R&D that we would expect to do on 787 derivatives as well as other new programs that we have already won.

I saw that slide, but it's not just the first version.

Right.

To the extent that there is any R&D required for derivatives in 2007, we believe it's captured in our guidance.

Thank you very much.

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

Please proceed.

Thank you, good morning.

Good morning.

Hi, David.

Rick, on SG&A, touching on what you were just talking about, you have got it coming down pretty significantly in '07.

Can you just talk about a long-term target, what you are looking at SG&A as a percent of sales out -- further out than that?

Yes, I think long-term, as we have talked about during the road show, we would expect that SG&A would be in the 4.5 to 5% of revenues.

If you look at 2007, we are at about the 5% range.

So, we are kind of at tail end of that range.

But, as we see volumes continuing to expand in the out years, obviously a lot of what's in SG&A expense tends to be either fixed or hard to vary.

So, you are not going to see the same proportion of increases, as perhaps you might, in our top line.

So, we would expect over the next couple of years that SG&A as a percentage of revenues would continue to ramp down to perhaps the lower end of that range.

Okay.

In your S1, when you spoke of the 787, your total investment, I think you were targeting around $850 million if you look at R&D, capitalized R&D, and CapEx.

Is that still a number that looks pretty good?

Yes, that's kind of a number that we were using for the base models, for the Dash 8.

Obviously, things like derivatives and potentially higher production rates could change the capacity component, the capital component of that to some degree.

But, for the -- the base airplane, that's very much in line with our current thinking.

Okay and last one.

Can you discuss anything you are doing on, as far as talking with Airbus on the A350, how that might be progressing?

Nothing specific to report.

Again, I think the general philosophy that we espouse is we believe we can bring value to virtually any airplane out there that the OEMs would be contemplating.

So, we have looked at that airplane.

We see that as a fit between our capabilities and the needs of that airplane.

And so, it's certainly a customer that we are pursuing.

Rick, one last one for you.

Cash taxes for '07, what are you assuming there?

We think cash taxes would be a little bit below book taxes.

Okay, great.

Thanks a lot.

Thank you.

Your next question comes from the line of Anoop Prihar with GMP Securities.

Please proceed.

Yes, good morning.

Good morning.

Good morning.

Earlier on in your comments, you made reference to the fact that you had been adding some production capacity over the second half of '06.

Could you give us a sense as to what kind of production capacity you are running at right now on the 777 and the 737?

Sure.

We are running, at the moment, fairly high on those lines.

I don't have an exact percentage, but you can consider it's running pretty close to capacity.

We have a little bit of slack in those lines.

What we are in the process of doing now is adding constraint relieving tooling and production equipment that will allow us to meet the kind of -- the kind of demand that you are seeing coming from our customers.

So, at this point in time, you can basically do what you need to do without putting up new walls or ceilings?

Right, that is correct.

What's in our plan today to meet what you are seeing from our customers, we will be there based on what's in our plan.

Okay, thank you.

Operator, we have time for one more question.

Yes, sir.

The next question comes from the line of George Shapiro with Citigroup.

Please proceed.

Good morning.

Good morning.

Good morning, George.

The lower revenues that were asked about earlier, you also had had lower revenues in the third quarter.

Were they both from the same issues?

Yes, they are, George.

We get that process working.

Because the feeling after the third quarter was that some of those revenues would recover in this quarter.

So, I am just wondering what's now pushing them off to next year.

Well, it's really a couple of things.

It's a continued level of activity there in getting our process move, so that we get -- to get that revenue into the timing we want it in.

Okay.

And Rick, on 787, can you give us how much R&D was capitalized in the quarter?

In the quarter itself, we capitalized about $47 million.

So, our balance of capitalized cost at the end of the year is $143 million.

Okay.

And what was the thinking, right now, as to how much gets capitalized in '07?

Roughly another $80 million to get us to the end of the -- kind of the end of our pre-production effort.

And that's fully reflected in the guidance, the cash flow guidance that we have provided.

Okay.

I think, Jeff, you had mentioned in response to Rob's question early, you would expect incremental margins of around 25% in '08.

Now, given the negative mix from the 787, how much of an impact would that have?

Is that incorporated in the 25% you threw out?

I think what I did is mention that that was the area for just in general what we strive for on incremental.

Rick, can you answer the question on the --

Yes, I think that would be oriented more towards our legacy programs.

Obviously, the 787 is a new program.

At this point, we are uncertain as to what kind of incremental margins might come from that because we haven't -- we are just starting production now.

So, I think that comment relates more to our legacy margins.

And it's also more focused, remember, we discussed this in some of our prior meetings that it's more focused on cash margins because contract accounting tends to smooth and average those margin improvements but -- over any specific year.

So, you tend to see the improvements over the contract blocks or those years.

So, but on a cash basis, which is obviously more reflective of the absorption that you get from higher volumes, the 25% margin is about what we are targeting for the legacy programs.

Okay.

But, the overall margin is going to be impacted by the fact that you got the pool in the 787 being negative.

So --

That's right.

You are absolutely right.

As the 787 becomes a larger component of our overall revenues, that will create a slight downward bias on our book margins.

Right.

Okay.

And then, Rick, one further, I think you talked about the $22 million in cume catch-up and you gave couple of numbers with it.

Could you tell us, of that $22 million, how much was actually related to just the fourth quarter versus the prior three quarters?

I mean you said $14 million effectively was all of '06 of the 22?

So, how much of that 14 was in the fourth quarter?

Yes, I just got to do the math.

It's pretty linear.

Okay.

And how much of the SG&A drop in '07 is due to option expense drop at this point?

It's not really option expense.

For us, it's restricted -- the amortization of restricted stock vesting.

But, it certainly contributes a portion of it.

The bigger impact is in things like reductions in our transition expenses, but we'll continue to incur transition expenses this year that will tail off dramatically next year.

So, I think just the stock-based comp case is, as I recall now, is 15 to $20 million.

Okay.

Okay, very good.

Those are my questions.

Okay.

Thank you, George.

Thank you.

Bye-bye.

Operator, that concludes our call.

Yes, sir.

There are no additional questions at this time.

I would now like to turn the conference back over to Mr. Phil Anderson for closing remarks.

We appreciate everybody joining us today and have a good day.

Thanks very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.