Spirit AeroSystems Holdings Inc (SPR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 Spirit AeroSystems Holdings Earnings Conference Call.

My name is [Shaquana,] and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will facilitate a question-and-answer session towards the end of this conference.

(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 afternoon, and welcome to Spirit's second quarter 2007 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 regarding 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 website at spiritaero.com.

Before we begin, I need to remind you that any projections and goals we may include in our discussions this afternoon 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 Web presentation.

This afternoon, Jeff will present our second quarter 2007 accomplishments, Rick will review the financials, Jeff will make some closing comments, and then we will be happy to answer your questions.

I would now like to turn the call over to Jeff Turner.

Thank you, Phil, and good afternoon.

This afternoon, I will take you through some of our second quarter 2007 accomplishments and I will turn it over to Rick to review the financials.

Let's turn to slide two.

We have had a good second quarter and continued our year-to-year growth in revenue and profitability.

Our revenues were $959 million, an increase of 12% over the same time period of 2006.

We achieved this topline growth primarily through increased volumes on Boeing products.

We delivered shareholders $0.49 of earnings per share, up from $0.25 per share a year ago.

Second-quarter 2007 EPS results include $0.05 per share of expense related to the follow-on offering for Spirit common stock completed during the quarter.

Operating performance continues to be strong across the Company.

We expanded our operating margins from 6.5% to 10.6% quarter over quarter, and successfully met our commitments to our customers delivering high quality products and services on time.

Our backlog grew approximately 10% from the first quarter to the second quarter, as Boeing and Airbus combined booked over 900 net orders, outpacing second quarter deliveries by almost four to one.

The 787 program remains on track as we move into production, and began increasing the rate to support first flight test and then entry into service.

Bringing the 787 supply chain online and managing the tightness in the supply base across all programs remains challenging.

Aggressively managing these supply lines will continue to be a key focus item as we progress through the second half of 2007 and into 2008.

During the quarter, we were pleased to win the systems development and demonstration contract from Sikorsky to build the cockpit and cabin for the United States Marine Corps CH-53K heavy lift helicopter.

The win demonstrates the value of our design and manufacturing capabilities, and the value they are bringing to our customers.

In addition to the SDD contract, this program has the potential for significant future sales opportunities.

And as you know, during the quarter, we successfully completed a follow-on offering for Spirit common stock.

The offering was all secondary, and as such, the Company received no proceeds from the offering.

As a result of good performance in the first half of 2007, we are increasing our operating margin and earnings per share guidance for 2007.

The increase reflects the confidence in our ability to continue to perform well in a challenging environment.

Now, on slide three, let's talk about some of the specific accomplishments across the business during the quarter.

Fuselage Systems, our largest segment, continued to execute well, increasing revenues by 9% from the second quarter of '06.

Operating margins were strong 18.3% in the second quarter, including a modest increase in R&D expense for new programs.

Revenues were stable across all segments from the first quarter to the second quarter of 2007, as expected.

The stability reflects the consistent volumes of production flowing through the factories from quarter to quarter.

Fuselage team continue to execute well and to win new business during the quarter.

They delivered the 500th 737 fuselage to Boeing for Southwest Airlines and won the SDD contract for the CH-53K cockpit and cabin.

One slide four, you see the propulsion team also increased revenue from the same quarter last year, while production volumes and revenues were stable from Q1 to 2Q 2007.

Margins expanded from 13% to 17% from the second quarter of 2006 to 2007, as a 15% increase in volume and continued operational efficiency gained improved profitability.

787 pylon deliveries and test programs are under way and progressing nicely.

During the quarter, the propulsion team successfully completed an industry audit of Spirit's composite and metal bonding processes.

The audit was conducted by the National Aerospace and Defense Contractors Accreditation Program, NADCAP.

The audit resulted in a perfect score, with no findings.

This is one in a series of regulatory audits and industry reviews we have successfully completed Company-wide over the past year.

I am very pleased with our operational team, as they continue to perform and excel.

The Propulsion Systems team continues to lead the industry in the application of technology and materials, with the development of a one-piece inlet for the Boeing 747-8.

The technology is designed to further improve noise abatement and to reduce manufacturing time.

On slide five, you see the Wing Systems team also increased revenue for the same quarter last year.

Margins expanded from 6.5% to 11.6% from the second quarter of 2006 to 2007, as higher volumes and continued cost improvements increased profitability.

Wing Systems is on track on the 787 program, continuing to make good progress on the fixed leading edge and the movable leading edge products, and is also on track preparing to support Airbus rate increases.

One slide six, the 787 program continues per plan, with Boeing rolling out the first aircraft in July as the program moves toward first flight test and entry into service.

We continue working closely with our customers and supplier partners as we move toward full production on forward fuselages, pylons, and wing components.

Today, we have delivered two forward fuselages and a number of pylons and wing components.

As I mentioned earlier, our supply base is coming online and up to speed.

This continues to be an area of intense focus for us.

There is a great deal of work to do as we ramp up this program.

These challenges are typical of new program start-ups, and we have deep experience in the processes required.

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

Thanks, Jeff, and good afternoon, everyone.

Slide eight summarizes our financial results for the second quarter, starting with revenues up 12% over the prior year period, driven primarily by higher delivery rates to Boeing.

Operating margins improved significantly year-over-year in all segments, increasing by 410 basis points, largely due to higher unit deliveries, productivity initiatives, and lower R&D expense.

The improvement in operating margins was achieved despite expensing almost $10 million -- or about $0.05 per share -- related to the follow-on stock offering completed in the quarter.

Most of this expense represents acceleration of non-cash stock compensation from future periods into the second quarter.

Cash flow from operations of $14 million and capital expenditures of $72 million were in line with our expectations and reflect our continuing investment in the new 787 program and other new programs.

Despite the significant reinvestments in our core business, our balance sheet continues to strengthen, and we continue to have substantial liquidity available for future growth initiatives.

I will describe all of these items in more detail in the upcoming slides.

Slide nine highlights our progress on key P&L metrics, both year-over-year and sequentially versus the first quarter of 2007.

As I mentioned, revenue grew 12% year-over-year and 1% sequentially over the first quarter.

The year-over-year growth is largely attributable to higher unit deliveries to Boeing, as can be seen in the unit delivery chart at the end of this presentation.

Sequential quarterly revenues were up only modestly as no major changes in production rates occurred during the quarter.

Airbus deliveries out of Spirit Europe were actually down slightly from Q1, due to the timing of the A320 shipset deliveries between the quarters.

Operating income margins continued to expand, reaching 10.6% in the quarter.

This represents a 410 basis points improvement over the prior year period, largely driven by higher sales volumes, various productivity and cost reduction initiatives, and lower R&D spending.

On a sequential quarterly basis, operating margins were down slightly, due to the $10 million of non-recurring equity offering expenses mentioned earlier that reduced margins by about 100 basis points.

Lastly, fully diluted EPS grew significantly year-over-year from $0.25 in the prior year period to $0.49 this year.

This improvement is driven by the combination of higher volumes, improving cost and productivity, and lower R&D expense.

EPS was down slightly from the first quarter, due again to the equity offering related charges that lowered our reported EPS by $0.05.

R&D expense in the second quarter was $14 million, 50% below the prior year level as a result of the completion of the R&D phase on the 787 program last year.

These reductions in R&D expense have contributed to improving the overall Spirit operating margin.

R&D did grow sequentially versus Q1 by $4 million, or about 40%, as we are beginning to recognize the additional expense for new programs.

SG&A expense for the quarter was $54 million, which included the $10 million of equity offering related expenses that I mentioned earlier.

Excluding this charge, SG&A was about flat with the first quarter, representing continued tight expense control despite a growing sales base.

Slide 11 summarizes the P&L for the second quarter and year-to-date versus the same periods in the prior year.

In addition to the items mentioned previously, Spirit did recognize about $3 million of favorable changes in contract estimates during the quarter.

These changes in contract estimates have been driven by favorable trends in our material, labor, and overhead costs, and represent a continuation of improvements reflected in prior quarters, but to a lessening degree, as we had expected.

The prior year's second quarter was also favorably impacted by cume catch adjustments of approximately $15 million.

One year-to-date basis, revenues are up 25%.

A portion of this growth represents the acquisition of Spirit Europe, which closed on April 1, 2006, so the prior year first-half only includes one quarter of Spirit Europe revenues.

Year-to-date, operating income and EPS are up 93% and 130% sequentially, reflecting the favorable impact of revenue growth, productivity improvements and lower R&D spending.

Slide 12 summarizes the changes in our cash and debt balances during the quarter.

Cash balances at the end of the quarter of $127 million remains substantial, but declined about $30 million or 19% from the first quarter levels due to expected negative free cash flow in the quarter that I will describe in a minute.

Debt balances declined slightly in the quarter due to some minor scheduled repayments.

With improving profitability, Spirit's balance sheet continues to strengthen.

At the end of Q2, our net debt to capital ratio was below 32%, and our net debt to projected 2007 EBITDA ratio was well below 1.

Additionally, the Company continues to have over $500 million of short-term liquidity available through our existing revolver and available cash balances.

Slide 13 details our cash flow for the first half versus the prior year.

Operating cash flow for the quarter was $14 million, in line with expectations but heavily influenced by working capital increases of approximately $90 million.

The working capital increase was largely driven by inventory growth, primarily for the 787 as it begins to ramp up production levels.

Offsetting the inventory growth to some degree were higher accounts payable levels.

Inventory growth includes an increase in capitalized development costs of $38 million for the quarter, again primarily for the 787 program.

At the end of the quarter, capitalized development costs were $227 million.

One a year-to-date basis, operating cash flow was $64 million, down approximately 70% from the prior year, due largely to a reduction of $146 million in customer advances, the increase in working capital that I just mentioned, and the reclassification of certain tax benefits that I will describe in a moment.

Capital expenditures at $72 million for the quarter remained at high levels as we complete the installation of production capacity for the 787 program, but were down slightly from the prior year period and from the first quarter level.

Over half of our capital expenditures year-to-date were to support the 787 program.

Overall, the net aggregation of cash flow from operations, capital expenditures, and customer reimbursement of capital expenditures was $58 million negative in the quarter, driving the reduction in our cash balance from the end of quarter one.

I would also like to highlight another item in the financing section of our cash flow statement.

That item is titled excess tax benefits and represents almost $33 million in the second quarter and $35 million year-to-date.

This represents favorable tax benefits resulting primarily from our second quarter equity offering.

Most of these benefits will be realized in the second half of 2007 in the form of lower cash tax payments.

In the second quarter, however, this item negatively impacted reported cash flow from operations due to its reclassification from operating to financing cash flows in accordance with FAS 123R.

Moving to slide 14.

Here, we highlight several increases in our guidance for the full year based on our year-to-date results and our expectations for the second half.

To reiterate some of the highlights, we expect revenues between $4 billion and $4.1 billion, unchanged from our prior guidance.

We expect operating income between $410 million and $430 million, or up about $10 million from our -- to reflect our improving profit margins in the first half, and fully diluted EPS to be between $1.90 and $2, up $0.10 from our prior guidance, to reflect higher operating income, lower interest and other expense, and a slightly lower effective tax rate and fully diluted share count.

As we've mentioned in previous calls, cash flow continues to be a management focus, with projected working capital increases and further capital expenditures in support of the 787 program.

Overall, we have not changed our cash flow guidance and continue to expect free cash flow or the net aggregate of cash flow from operations, capital expenditures, and customer reimbursement of capital expenditures to be break-even to slightly positive for the year.

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

Thank you, Rick.

On slide 15, I will make a few closing comments before taking your questions.

We had a good second quarter and a successful first half of 2007.

Our team has performed well, increasing profitability, and we are raising our 2007 financial guideline guidance accordingly.

We remain well positioned within the aerospace industry.

Good financial performance and new business wins validate our ability to grow and diversify.

While we are executing well across the business, we remain concerned about the tightness in the supply chain, which could affect our ability to execute future rate increases as smoothly as we would like.

We will be managing this area closely over the next few quarters.

The Spirit team remains focused on the execution of our strategy.

We will now be pleased to take your questions.

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Troy Lahr with Stifel Nicolaus.

Please proceed.

Thanks.

Could you guys talk a little bit about the growth rate in the quarter here?

It's a little bit lighter than I guess kind of what we were expecting, and also relative to the full year.

Is there a timing issue going on?

You mentioned a little bit about the A380, could you give us some color on that?

I think we mentioned, Troy, the A320 -- a little bit of timing on the A320 delivery.

Okay.

But, typically, our revenues are driven primarily by production rate, and the production rates were steady between first quarter and second quarter.

We will see, in the -- later on this year, we will see the 787 as it begins to ramp up, and I think you know that both Airbus and Boeing have announced higher rates for next year, and we will see our -- you will see some implications of that back into Spirit in the last half of this year.

Okay.

And can you help me understand a little bit about -- the Boeing shipset units were up about 16%, yet fuselage was up only 8%.

Can you help me kind of understand that?

That's primarily timing and the way that we manage the equivalent shipsets, so it's all the way that our production and the Boeing production schedules fair into each other.

Okay.

Thanks, guys.

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

Please proceed.

Hi, good morning, guys.

Hi, Ron.

How are you doing?

I should say good afternoon.

Good.

How are you doing today?

Just a couple of questions for you.

Something I think came up in a conversation we had at Paris, just wanted to follow up.

How is 787 production process going?

I think at that time, it said there had been very little rework.

Is that still the case?

It continues to go well.

I think we continue to highlight the successes we have now got.

I think nine fuselages in the production facility.

Rework continues to be quite low.

The main issue is making sure that we get the supply chain moving smoothly.

There continues to be some fastener issues and some detail part issues to make sure we get those smoothed out.

Some raw material aggravations, if you will, but that -- the process is running well.

Now, can you elaborate -- and you brought - that's the second time on the call you brought up this year's supply chain concerns.

I mean, is there any more color you can give us on that?

I mean, what about it keeps you up at night?

Well, I think it's consistent with what we have been saying.

As demand increases in the whole industry, there is tightness in the supply.

The thing that we really remain focused on is there is a primary impact, which is to us the raw materials in fasteners that we consume.

There's a secondary impact to us, which is the raw materials and the other standard parts that our supply base itself consumes.

And so, we are putting a lot of attention on both of those.

Okay, great.

And then, just a financial question for Rick, if I may.

Margins in the quarter were, I think, pretty spectacular.

They are better than what we were looking for, and probably most analysts.

Were there any one-time things to think of, or is this sort of a new run rate going forward that we can model in?

You noticed, Ron, in the press release, we did mention that we had another favorable cume catch adjustment for the quarter.

In this case, it was quite modest, only about $3 million, so that certainly contributed to some degree.

But, other than that, there really wasn't anything unusual in the quarter.

Just a good product mix, so shift the right kind of product in the sense of higher margin products, and you are really just starting to see the aggregation of the favorable cume catch adjustments that we have had in prior quarters.

I mean, it means that our future profitability is going to be stronger, and I think that's what you are starting to see in our margins now.

Okay, great.

And then, just one last one for Jeff.

Can you give us an update on Airbus Power8, the A350, and any opportunities you see in front of you?

Nothing specific.

Only, Ron, to say that we talked about the 350 before, and we continue to look at that as an opportunity where our capability and the customer's needs match.

We continue to look at the design, the sourcing plan, the manufacturing plan for that airplane, and we will continue to do so.

And once we get a good sense for that, we will decide what delivers best value for ourselves and the customer.

And I don't really have anything to say on the other part of the question.

Okay, that's great.

Thank you.

Yes, thank you.

Your next question comes from the line of Peter Arment with JSA Research.

Please proceed.

Yes, good morning.

Just a quick question following up on the margin question.

It seems like your performance is sort of running very strong on the operating margin.

Can you give us a little more color why the range, I guess, from the bottom end of the range wouldn't be higher for the second half of the year?

I mean, is it 787 that much of a hit, or is it just more conservatism before the ramp?

Yes, Peter, it's a couple of things.

Certainly, the 787 is a major contributor.

You saw in our unit delivery schedule that we shipped one unit in the second quarter.

For the year, we expect to ship eight to 10 units, which obviously drives a significant amount of revenue, and as we have said that that revenue does have lower margins than our legacy business.

So, that is going to create some downward bias on our gross profit margins in the second half.

The other thing I would point to is R&D expense, is we are projecting, if you kind of look at our actual cost kind of year-to-date, and then compare that to our guidance, that would suggest that we expect higher R&D expense in the second half of the year, as that is going to be attributable to some of the new programs that we have already won and some things that we have got our eye on that we hope to win here in the second half.

So, that will cause a little bit of higher percentage of sales of R&D in total than we had in the first half.

And we are also, if you look at our guidance on our effective tax rates, we are also guiding some -- a little bit higher than what we experienced in the first half, so that would suggest maybe that our second half would be a little bit higher and that would cause a little bit of downward bias on our earnings per share as well.

So, it's really a combination of a number of smaller factors at this point.

Okay.

It's helpful, and nice quarter, guys, thank you.

Yes, thank you.

Thanks, Peter.

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

Please proceed.

Hi, guys.

Hey, Rob.

Hey, Rob.

I wanted to talk perhaps a little bit about something Boeing mentioned yesterday, which was higher 787 R&D, and we asked them about supplier participation, what exactly is going on.

One of the things they attributed the higher number to was helping to get suppliers where they need to be.

Is there any risk for you to have to up your own R&D here?

Not that we see.

So, the $36 million, I think that's the remaining amount from your guidance for the second half for R&D?

That is all non-787 at this point?

Yes, that is correct, Rob.

That would be for our core kind of ongoing R&D efforts, plus the -- some of the new programs that we have won to date.

Again, as I mentioned, plus some things that we are hoping to bring on board in the second half.

Should I infer then from all of this that, to the extent that they are spending some more money and it does involve suppliers, it doesn't involve Spirit?

I believe so, yes.

I think you can infer that, Ron.

Okay, fair enough.

And then, you mentioned your inventory was up about 150 million, and that was attributable to 787 and other programs.

Rick, any way to quantify -- divide that into those two categories?

Yes, absolutely.

Of the 150 million, about a little bit more than half of it was related specifically to the 787 program, and that includes both the capitalized development costs.

That was up about, as I mentioned, in the aggregate it was up $38 million, and most of that is -- the vast majority of that is for the 787 program.

So, that means that our legacy products, obviously, had some increase in inventory as well, and that as Jeff mentioned, in order to support higher production rates at both Boeing in Airbus in 2008, that will start to impact us given our lead times in the second half of 2007.

And that means that we have to start building some of that inventory already.

So, you are starting to see some of that flow through our books as well.

Okay.

And then, just finally, your sales were a little lighter than I had thought that they would be.

You have mentioned that the A320, there is some timing there.

So, you have got about 47% -- 46% of your guidance revenues in the first half of the year.

How should we think about the flow in the remaining two quarters with respect to some of the moving pieces, the A320 coming back up, the 787, et cetera?

Yes, I would think, Rob, that just given the ramp-up of 787 and our other core programs, that you would start to see an upswing in the third quarter and you will see the fourth quarter be larger than the third quarter.

Great.

Thanks, guys.

Thank you.

Thanks, Rob.

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

Please proceed.

Good morning, or good afternoon, guys.

You gave us the deliveries by aircraft.

I was wondering if you could it to us in a breakdown by product type?

By what, Heidi?

By product line.

You mean by segment, Heidi, or by --

No, not by segment, by the airplanes.

How many 737s go by the airplane types.

I think there is a schedule, Heidi, at the end of the presentation that shows our deliveries by platform.

Okay, I am sorry.

I missed that.

It's at the very back of the presentation that we just kind of went through.

It's the last page.

And it shows you kind of by quarter, by aircraft platform what our shipset deliveries to our customers were.

Fantastic, I appreciate that, Rick.

Sorry for missing that.

And then, can you give us some color on where Prestwick margins are now?

Yes, we have been obviously very happy on Prestwick, that you have seen kind of Wing Systems margins kind of expand generally, and Prestwick is about half of the Wing Systems business.

So, we have seen a nice margin improvement in the Prestwick business.

And we -- when we started originally, it was kind of in the mid, high single digits, and we are now into low double digits there.

Excellent.

And then, Jeff, a question for you, if we can go back to the production of 787.

Can you talk a little bit about what parts of this are you, on the manufacturing side, are you most dissatisfied with?

What are the glitches that are showing up on the production side, just beyond the issues of shortage of fasteners, et cetera?

I am just curious as to what kind of kinks you are trying to work out of the system?

Our production lines themselves have met our expectations.

There is a couple of points, we would like to see some improvement in productivity of the equipment and process.

I think inspection is one of the areas.

Probably the area we would like -- we need to see the most productivity in.

The rest is progressing really quite well.

Okay, thanks very much.

Your next question comes from the line of Ferat Ongoren with Citigroup.

Please proceed.

Good afternoon.

Hello, Ferat.

First, a couple of details from Rick.

What were the transition expenses and FAS 123 expense this quarter on top of the $10 million you mentioned?

I am sorry, Ferat, could you repeat the question?

Sure, what were the transition expenses?

I thought we had some residual transition expenses?

We did, yes.

We had about -- in the quarter, we had about $4 million in the quarter, and that's included in our SG&A expense.

So, that's down a little bit from what we had in the first quarter.

Okay.

That's on top of that $9.6 million, right?

Yes, it is, yes.

And then, what was the FAS 123 cost this quarter?

Total stock comp expense for the quarter was just under $14 million.

Under $14 million.

And that does include the part of the acceleration into the quarter.

Okay.

And that $3 million adjustment that we had, which segment that was in?

Actually, it was kind of spread out between the three of them.

It was really not material in any of them.

But it was slightly favorable in Wing Systems and Propulsion Systems, and slightly unfavorable in Fuselage.

So, that caused a little bit of the kind of the -- a couple of tenths tweak in Fuselage margins and the slight favorable -- unfavorable cume catch adjustment kind of caused a little bit of that.

Okay.

And it wasn't material for any segment in the quarter.

Okay.

Then, the question is, if I kind of look at the first quarter and the second quarter, we have these transition expenses amounting to maybe about $8 million, and then we have this $10 million extra expense that you mentioned.

And we have this $3 million benefit, so if I kind of net it out, it is $15 million or so.

R&D is only $12 million or so headwind in the second half, and if you kind of look at the margins, going back to the same issues, the low end of the guidance, it's pretty low, and 787 is not such a headwind.

Are you being conservative here or are you basically thinking about new opportunities that could significantly increase that R&D amount?

I think certainly, as Jeff alluded to, we have had a conservative bent in the past, and I would say we continue to have challenges in front of us and to reflect that in our guidance.

I would make one point about transitioning expenses.

We will continue to have some -- about the same level of transition expenses in the second half, because those are largely to complete our -- complete ERP systems transition, and that will be done pretty much towards the end of this year.

So, we will continue to incur some transition expense about on the order of what you saw in the second quarter.

I see, okay.

And another quick question on the Boeing agreement.

I thought there were some nonrecurring engineering work you were doing for them.

It seems like revenues are pretty flat with Q1.

That suggests there is no recovery there.

Are you talking to Boeing on that, or should we just forget about that issue altogether?

There is a level of nonrecurring activity that is fairly constant through our business, and there was no significant difference in that in the first and second quarter.

I think second quarter was down a little bit on billings on that, but it will continue to be part of our business, though at this point, nothing specific to talk about.

Okay.

And then, a bigger picture question, do you have any intention on some of these Airbus plans, and according to press, you do.

How do you see the process going on from here?

I have no specific comment on that, Ferat, but I mean, the process is highly publicized.

So, I watch with interest as you do, what's reported on it.

Okay.

Will we expect anything to be announced in the next couple of quarters, or do you think it will take longer than that?

I don't know.

I mean, clearly, it's been publicized that announcements are likely to be made sooner rather than later.

But my perception is those are not easy processes.

Okay, thank you very much.

Yes, thank you.

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

Please proceed.

I won't punish you with 42 questions.

I'm sorry.

We won't mispronounce your name either, Howard.

Thank you, yeah right.

Just a couple of things.

First, on 787, have you been asked by Boeing to do any additional work?

I mean, outside the original scope, and can you elaborate if there is?

I am not sure what you are referring to, Howard.

I mean, clearly, there is a lot of conversation on where this airplane's going and derivatives and things like that, but -- weight improvements as we go through time, things like that.

But, no specific -- nothing otherwise specific to that that there is to talk about.

I mean because -- I mean, okay, fine.

Second thing is, I know that you have sort of an open agreement with Boeing at the moment in terms of rate, and just -- I would just say allocation of some general work on -- on a number of items.

Where does the negotiation stand with that, and how soon do we think we might be able to see some closure?

Howard, I am not sure I know exactly what you are asking.

Could you give me another shot at it?

All right, I am sorry.

For example, as I understand the original agreement you have with Boeing coverage your production rate up to 28 a month.

Okay.

And you are now heading towards 31 or higher.

So, if we also look at pricing, it's my sense that we are facing a little bit of tough comps near term, but after that things get a little better.

Could you sort of address those two points please?

I will -- I will go back in general.

You are correct, we have -- we have certain rate protection agreements and pricing associated with that.

And as -- and that's true not only of just total number of aircraft in a time period, but it's also true of -- of the particular mix of airplanes.

As we bought one of those, we do enter into negotiations with Boeing.

And that's part of -- that's part of the ongoing dialogue.

I think clearly we see some of those things in our future as rates do increase.

I really don't have a forecast for how quickly we get through those.

Long-term forecast of rates and values associated with it sometimes take a fair amount of time to close.

Okay.

Two last things.

One is, how do -- since you have accelerated some of your FAS 123 expense this year, how do we think about it going forward, Rick?

Is it mostly in next year benefit or some other relationship?

Well, actually some of it is -- comes right out of the second half.

If you look at the detail of the -- just under -- it's about $9.5 million of expense.

About $7 million of that was directly related to acceleration of stock comps.

So, of that $7 million, about $2.5 million of it was really a pull forward from -- from the second half of '07.

So, it's kind of -- it doesn't make any difference for the year.

It just impacts the quarter.

And the rest of it -- most of it comes out of '08 and a little bit out of '09, out of what's left.

And then, just a follow-up on that.

When we look at where your run rate is for SG&A, I think you talked about it being $200 million.

And if we kind of just exclude the $10 million rough order of magnitude, and even if we add in some of the transition costs, you are not going to be anywhere near that.

I mean, what is it on the second half for the year we are seeing in terms of higher SG&A that will cause that to be the case?

Well, there are some things that where we do expect to add some expense again to support some of these new initiatives that we have talked about before.

We also are going well down the road of our Sarbanes-Oxley compliance, 404 compliance, where we have to be compliant by the end of the year.

That's going to drive some additional expense in the second of the year as well, as we go through that.

So, it's just again, nothing really individually that's material, but just the aggregation of a number of initiatives that -- that we believe will cause our SG&A to trend upward in the second half.

Now, whether or not it gets all the way to $200 million, I think that's obviously yet to be determined.

But, at this point, we didn't see it -- didn't see any reason to change our current guidance.

Thank you, gentlemen, for your time.

Thank you, Howard.

Thanks, Howard.

Operator, we have time for one more question, please.

Okay.

You have a follow-up question from the line of Troy Lahr with Stifel Nicolaus.

Please proceed.

Thanks.

Just a question on the R&D that you are talking about for the back half.

Is the R&D on the CH-53K, I mean that's going to be customer-funded, right?

That's right, Troy.

Okay.

So, when you are talking about increase, that you are not relating it to that program?

No, not at all.

You are exactly right.

Okay.

And when you say you are hoping to win more work in the second half, I mean can you kind of help us understand maybe what area?

I mean is that business jet, are there other helicopter opportunities out there, on the commercial jet side?

Can you just kind of frame it for us a little bit?

Well, I don't recall we said specifically --

But, you said you are hoping to win work --

We are going to spend more R&D on new programs that we primarily have won and some we may win.

We stay focused, Troy, on the segments we have talked about before, that commercial airplane market, the business jets, the large-to-medium business jets, and certainly military points of opportunity.

So, I think, I mean clearly those are areas that are pretty strong right now in terms of potential opportunities.

So, we will continue to focus on those.

Okay.

Thanks.

And certainly the A350 that we talked about earlier.

Okay, great.

Thanks, guys.

Okay, thanks, Troy.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.