Spirit AeroSystems Holdings Inc (SPR) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the fourth quarter and full-year 2007 Spirit AeroSystems Holdings earnings conference call.

My name is Fab, and I will your coordinator for today.

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

We will conduct 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 morning, and welcome to Spirit's fourth quarter and full-year 2007 earnings call.

I am 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 brief comments by Jeff and Rick regarding our performance and outlook, we will take your questions.

As always, we have provided detailed information in our press release issued earlier today.

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

And as a reminder, you can follow today's broadcast and slide presentation on our website at SpiritAero.com.

I will now turn the presentation over to Jeff Turner.

Thank you, Phil, and good morning.

Let's start with slide 2.

2007 was a year filled with accomplishments, focused on long-term value creation for Spirit stakeholders.

I would like to take a few moments this morning to highlight several of our teams' accomplishments in 2007.

First and foremost, we executed our current business well and our performance was strong across the company.

We grew 2007 revenues by 20% from 2006, as we successfully increased our unit deliveries to meet additional customer demand.

We expanded our full-year 2007 operating margins to 10.9% and grew earnings per share to $2.13.

These results include expenses the company incurred as part of the secondary stock offering that occurred in May and the expenses associated with the valuation of Airbus sites during the second half of the year.

These two items combined reduced 2007 earnings per share by $0.07 per share.

We continued to implement our strategy and build the Spirit brand across the industry, as we successfully executed our backlog, developed new products and continued to incrementally diversify our products and customer base, while expanding our global design and manufacturing capability.

In fact, yesterday we took another step forward in implementing our strategy with the announcement by Cessna that Spirit was selected to design and manufacture the fuselage and empennage for the new Cessna large cabin business jet.

The Cessna win and the Sikorsky win on the CH53K helicopter earlier in 2007, are good examples of the value Spirit's design for manufacturing and build capability is delivering across the aerospace industry.

I continue to be pleased with our performance on the 787 program.

Our team continues to work with the customer and suppliers regarding future production plans, while adjusting our near-term resources internally where appropriate to minimize cost and schedule risk.

Spirit's year-end backlog increased 38% over 2006, to $26.5 billion, as Boeing and Airbus combined booked over 2,700 net orders, outpacing 2007 deliveries by over 3 to 1.

The market for large commercial aircraft remains strong.

We expect backlogs to continue to grow in 2008, and the current backlog to remain stable, as international customers continue to expand and invest in their domestic transportation infrastructure.

Now let's talk about some of the specific accomplishments across the business, on slide 3.

Fuselage systems continued to execute well, increasing revenues by about 17% from the fourth quarter of '06, while delivering solid operating margins of 16.1% in the fourth quarter.

Although supply chain disruptions drove slightly higher costs.

The fuselage team delivered the 2,500th 737 fuselage and the 700th 777 forward fuselage to Boeing in 2007, and began production of the first P-8A aircraft during the fourth quarter.

The pictures on this page represent the capabilities and core competencies of our fuselage business.

From an integrated single-aisle structure on the 737, to a wide-body aircraft built using the large panel concept on the 777, to a one-piece composite structure with integrated systems on the 787.

The team's ability to manage scale and velocity while designing, manufacturing and integrating complex structures and systems, is unmatched in the industry.

This capability provided us the opportunity to work with Cessna on their new large cabin business jet.

This is a significant win for Spirit and the start of a new relationship with one of the market's leading business jet OEMs.

On slide 4, the propulsion systems team delivered consistent solid margins throughout the year, while increasing production volume.

The team continued throughout 2007 to execute their business well, manufacturing their large complex propulsion systems at unprecedented production levels.

While excellent performance is expected, the ability to achieve these results month after month, while increasing production volumes and developing new products, is a significant task, one that the propulsion team continually steps up to and does exceptionally well.

The team's performance on the 787 program is yet another example of the results oriented propulsion systems team.

On slide 5, you see the wing systems team delivered increased margins in the fourth quarter, as expected benefits from our global manufacturing and supply base efforts were incorporated into the segment's performance.

One of the cornerstones of this effort was the establishment of our Spirit Malaysia facility, which we announced in the fourth quarter of '07.

The Malaysian facility will allow Spirit to utilize local aerospace expertise to help improve our competitive position in the structures market and meet future capacity needs in metal and composites.

We also announced the formation of a new MRO Service Center in Prestwick, Scotland.

The facility establishes Spirit's MRO service capabilities in Europe, as we focus on growing the aftermarket business.

Development programs continue to move forward as work continues on existing business jet programs, the 787 and the 747-8.

Let's turn to slide 6, and discuss the 787.

The pictures on this page provide you a snapshot of our progress on the program.

From one-piece composite forward fuselage manufacturing in the top picture, to the systems integration area in the middle picture, to a view inside the airplane at the bottom picture.

We are making good progress in supporting our customers' requirements.

To date we have delivered one flight test unit on the forward fuselage, a static test unit and a fatigue test unit.

We have manufactured 17 composite forward fuselage sections and delivered 15 pylons and 9 fixed leading edges.

I am pleased with our progress on this program.

As you know, we are working with Boeing to assess future delivery plans and discussions involving working capital are progressing.

As I suggested to you last quarter, the 787 program is and will be a tremendous program for Spirit over the decades to come.

Near-term we are focusing on bringing the 787 supply chain on line and incorporating necessary engineering changes.

Managing the tightness in the supply base remains a priority across all programs.

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

Thanks, Jeff, and good morning, everyone.

Slide 8 summarizes our financial results for the fourth quarter.

Starting with revenues up 15% over the prior year period, driven primarily by higher delivery rates to Boeing and Airbus and higher non-production revenues.

Operating margins improved significantly year-over-year, increasing by 250 basis points, after adjusting for IPO related costs in the fourth quarter of 2006, and favorable cumulative-catch adjustments in both periods.

This improvement is largely due to higher unit deliveries, productivity initiatives, and lower SG&A and R&D expense.

Fully diluted earnings per share of $0.54 for the quarter, were significant improved over the loss of $0.58 in the prior year period, which included $334 million pretax for IPO related expenses and a $75 million reversal of certain tax valuation allowances.

Fourth quarter 2007 EPS included $5 million or $0.02 per share for expensing certain acquisition evaluation related costs.

Cash flow from operations of $73 million and capital expenditures of $60 million for the quarter reflect our continuing investment in the new 787 program and other new programs.

Despite the significant reinvestments in our core business, we continue to have a sound balance sheet and substantial liquidity is available.

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

Slide 9 highlights our progress on key P&L metrics, both year-over-year and sequentially versus the first three quarters of 2007.

Fourth quarter revenue grew 15% year-over-year and 1% sequentially over the third quarter.

The year-over-year growth is attributable to higher unit deliveries to Boeing and Airbus, as can be seen in the unit delivery chart included with the press release, and higher non-production revenues.

Sequential quarterly revenues were up only modestly, again, largely due to non-production revenues, as no major changes in production rates occurred during the quarter.

787 revenues in the quarter were approximately $23 million.

Operating income margins were 10.9% in the quarter.

On a sequential quarterly basis, operating margins were about flat, as the $5 million of acquisition evaluation related expenses more than offset the $3.5 million of favorable cum-catch adjustments.

The third quarter 2007 included an immaterial cum-catch adjustment on a net basis.

Lastly, fourth quarter fully diluted EPS at $0.54, grew significantly over the prior year period, due to the absence of the IPO related expenses and the reversal of certain tax valuation allowances, as explained in the Appendix to this presentation.

Sequentially, EPS was down about $0.06 from the third quarter, largely due to favorable adjustments to our effective tax rate in Q3 that did not recur in Q4.

R&D expense in the fourth quarter was $15 million, 24% below the prior year period, as a result of the completion of the R&D phase of the 787 program, and slightly up from what was expensed in the third quarter.

While the 787 R&D phase is now complete, Spirit continues to invest R&D dollars in other new programs won to date and new technology development.

SG&A expense for the quarter was $50 million, about 23% below the prior year, despite the inclusion in Q4 of the $5 million of acquisition evaluation related expenses I mentioned earlier.

The reduction is primarily due to lower non-cash stock compensation expense, lower transition expenses and the inclusion of $8 million in IPO related expenses in the prior year period.

Sequentially, SG&A was up about $7 million from the third quarter, largely due to the $5 million of acquisition related expenses I mentioned.

Declining absolute dollars of 4-year R&D and SG&A expense, combined with rising sales, is one of the contributing factors to Spirit's improving operating margins.

In the aggregate, SG&A and R&D declined from 10.3% of sales in 2006, to 6.3% in 2007, a 400 basis point improvement in operating margins.

Slide 11 summarizes the P&L for the fourth quarter and the total year versus the same periods in the prior year.

During the quarter, Spirit realized $3.5 million of net favorable changes in contract estimates.

Somewhat different from our prior experience, the cume-catch adjustments were favorable in the propulsion and wing system segments and unfavorable in the fuselage segment.

Negative variances in the fuselage segment resulted from modest declines in labor productivity on our mature 747 and 767 programs and a decline in labor productivity on the 737 program as we transitioned to higher production rates during the quarter.

We do not expect these variances to recur in future quarters.

Favorable variances in wing systems came primarily from Spirit Europe, but our Tulsa operations also contributed.

Spirit Europe benefited from expected savings in the current contract block from our recently announced Malaysia composites facility.

The fourth quarter of the prior year included almost $22 million of favorable cume-catch adjustments, which generated a 250 basis point improvement in gross profit, and along with the IPO related expenses serves to distort the year-over-year comparisons.

Slide 12 highlights the year-over-year comparisons for total 2007 versus 2006.

As Jeff mentioned, revenues are up about 20%, driven largely by unit ship set deliveries up 27%.

A portion of this growth represents the acquisition of Spirit Europe, which closed on April 1st, 2006, so the prior year includes only nine months of Spirit Europe revenues.

Year-to-date operating income and EPS are up significantly over the prior year, due to the impact of our IPO on 2006 results and improved operational performance.

A detailed reconciliation of the IPO charges in the prior year period is again included in the Appendix to this presentation.

2007 fully diluted EPS of $2.13 came in right at the middle of the $2.10 to $2.15 guidance range issued with our third quarter earnings release.

Slide 13 summarizes the changes in our cash and debt balances during the quarter.

Cash balances at the end of the quarter of $133 million, increased $28 million or 27% from the third quarter, the first quarterly increase this year.

Total debt balances declined slightly in the quarter, due to scheduled repayments.

Driven by consistent profitability and growing shareholders' equity, Spirit's capital structure continues to improve.

At the end of the year, our net debt to capital ratio was 26.7% versus 33.6% at year-end 2006, and our net debt to 2007 EBITDA ratio was well below 1.

Additionally, at year-end 2007, the company had just over $520 million of short-term liquidity available through our existing revolver and available cash balances.

With the uncertainty created by the recent 787 schedule shifts, we are evaluating alternatives for increasing our available liquidity.

Slide 14 details our cash flow for total year '07 versus '06.

Cash flow from operations for the quarter was positive $73 million, as reductions in Accounts Receivable and various customer advances and settlements offset further inventory builds.

Inventory build was largely driven by the 787, as it begins to ramp-up production levels and our projected deliveries have been rescheduled.

Inventory includes an increase in capitalized development costs of $20 million for the quarter, mostly for new programs unrelated to the 787.

At the end of the quarter, capitalized development costs were $279 million in total, including $238 million for the 787.

Capitalized development costs for the 787 were largely completed in the third quarter of '07.

On a year-to-date basis, operating cash flow was $180 million, down approximately 34% from the prior year, due largely to a reduction of $277 million in customer advances and the increase in inventory balances that I mentioned earlier.

While cash flow from operations was positive in the quarter, we were disappointed in not achieving our guidance for the year.

Unanticipated inventory builds, largely driven by the 787 and delays in negotiating certain contractual matters with our primary customer were largely responsible for the shortfall.

We expect resolution of these matters in 2008, which should benefit 2008 cash flows.

Capital expenditures of $60 million for the quarter were down 45% from the prior year quarter and down 13% sequentially, as we complete the installation of our production capacity for the 787 program.

Approximately half of our capital expenditures for the total year '07 were for the 787.

Overall, the net aggregation of cash flow from operations, capital expenditures, and customer reimbursement of capital expenditures was $36 million positive in the quarter, which when netted with the debt repayment drove the increase in our cash balance from the end of the third quarter.

Chart 15 details the 2008 guidance for revenue and EPS that we first published with the third quarter earnings release.

We continue to expect 2008 revenues to be around $4.7 billion, assuming the delivery of approximately 45 787 ship sets during the year.

With Boeing's most recent announcement on January 16th, 2008, of further schedule shifts in the 787 program, we are unable at the present time to predict what impact, if any, this will have on our Spirit deliveries.

We are jointly assessing this impact with Boeing and will revise our guidance accordingly if necessary.

787 deliveries below this level would obviously have a negative impact on projected '08 revenues and earnings.

On a $4.7 billion revenue base, we would expect fully diluted EPS of $2.30 to $2.40, assuming that our effective tax rate returns to a more normal 33 to 34% of pretax earnings.

The projected effective tax rate assumes federal research and development tax credits are available for the entire year.

We also continue to discuss with Boeing the impact of 787 delivery schedule shifts on Spirit's cash flow from operations.

When these discussions are concluded, Spirit will be in a position to provide '08 cash flow guidance.

Now I'd like to turn it back over to Jeff for some closing comments.

Thank you, Rick.

Let's go to slide 16.

We have a strong core business and a solid development pipeline with opportunities for additional growth.

2007 was a successful year for Spirit and 2008 will be another exciting year, as we continue executing our strategy.

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

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

Commercial backlogs are expected to continue growing in 2008 and the commercial aviation industry remains robust.

We will continue our focus on productivity as we strengthen our competitiveness and seek to continuously improve our cost structure.

We will continue to invest in next generation technologies that will 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 strength of our core business and the quality of our team.

Our focus on customer satisfaction, execution and growing the business profitability, are top priorities and we intend to do all three well.

We will now be glad to take your questions.

(OPERATOR INSTRUCTIONS) Doug Harned from Sanford Bernstein.

I'd like to talk about fuselage systems for a little bit.

The margins there, even after you make a cume-adjustment, were a little lower than you've seen earlier in the year.

Could you talk about why that is?

Sure, Doug.

The primary change there -- you mentioned one of the two major changes.

One was the cume-catch adjustment of about $4 million negative for the quarter.

But even larger than that was the increase in R&D expense.

R&D went up, more than doubled in the fuselage segment, so it created more than over a point of headwind in margins for fuselage.

As we've discussed in prior calls, R&D expense in this business tends to be somewhat lumpy.

We have started, you know, we made the Cessna announcement that you saw yesterday.

We had started already to spend some R&D money on the Cessna program in the fourth quarter, even though we hadn't announced it yet.

And there are a number of other programs that we continue to pursue as we diversify our business.

So again, the two factors, it's the increase in the R&D expense and the unfavorable cume-catch adjustment pretty much account for the entire difference between the quarter to quarter margins.

But you also mentioned seeing issues with the supply chain.

Is that having an impact there?

And then, what aspects of the supply chain are you seeing a problem that's constraining -- either if that's resulting in more cost or if that's constraining your delivery schedule?

Rick mentioned earlier I believe that probably the biggest issue there is preparing for the higher rates on the 737.

We also have the P8-A going through that line right now, which is a new derivative and requires a lot of extra attention and a lot of new parts coming in.

So, we see this as a bump in the road, not a long-term issue.

But are there any specific parts that are causing more of a problem than others?

No.

They tend to be vendor parts and new vendor parts, as we bring the new P8-A on line.

Carter Copeland of Lehman Brothers.

Rick, I wonder if you could clarify a little bit for me on the 737 negative cumulative-catch in the quarter.

Am I correct in characterizing this, the negative benefits from lower productivity on increasing rates I guess are showing up in this block, but the positive benefits of higher rates won't show up until the following block?

Is that correct?

Yes, that's largely correct, Carter.

As you know, our current blocks run through roughly mid-2009, so to the extent that we get disruption when we have kind of production breaks, rate breaks as we experienced in the fourth quarter, typically it takes some time for the factory to adjust to the higher rates.

You'll get some productivity inefficiencies in the quarter.

Those will get reflected in our estimate for the entire contract block.

And then typically once you've booked it it's behind you and you're moving on at the higher rate.

But your point is well taken.

When you have these kind of disruptions, these rate breaks later in your contract block, you're obviously taking some adjustments for a lot more revenues that are already behind you.

So when it happens late in the block, it tends to get more of the cost into the current block and you get the benefit in the future block.

Right, exactly, that's what I was getting at, was this a bottom line payment now, that's recognized that benefits we won't see until we get into the next block, which is 2009.

And I wouldn't overemphasize that all of these, you know, what you saw in unfavorable cume-catch is within fuselage were really focused on the 737.

It was really smaller dollars spread across a couple of programs that were really driven by some of the raw material issues that Jeff mentioned, that does tend to drive some labor inefficiencies in the shop.

But we've been able to cope with those pretty well up until now and we certainly expect to do that going forward.

And just a brief follow-on.

On 787, have you made any changes to the assumed margin on that program as yet or does that require finalization of the new schedule with Boeing?

Well, certainly the new schedule may have some impact, but at this point we did not have any material changes in our 787 profitability in the quarter, and frankly, aren't really expecting any.

I think, as we've said before, the 787 is a lower margin product for us than our legacy business and because it's a new product, we've factored in significant management reserves and contingencies in our profit estimate and at this point we see no reason to change those.

Great.

And lastly, on the inventory build and the cash flow for the year, presumably if this was 787, whether or not these were going to Boeing, the ship sets were going to Boeing, we would have seen the build in either inventories or Accounts Receivable.

So it sounds as if this is more related to the payment issue you highlighted.

Is that correct?

I'm just trying to understand what it was here in inventories that was incremental to your guidance?

I think primarily your points were absolutely right.

If we had to even ship the units they would have been sitting in Receivables as opposed to sitting in inventory, so that by itself was not a variable in our cash flow forecast.

I think where the variances arose was building more inventory than we'd expected on the 787, again to try to get ready for higher production rates in 2008, and our delays in negotiating certain contractual matters that relate to money that we've already spent in 2005, 2006 and the first part of 2007, that we were hopeful of getting those resolved in the fourth quarter and were unable to do that.

So now the resolution of those matters is going to fall into 2008.

Robert Spingarn from Credit Suisse.

Just following-up on Carter's question on the 787.

It's a $70 million difference from what you were forecasting for cash from operations.

How much of that was this old 2005, 2006 and is that a first quarter type item?

Well, it's difficult to predict when it's going to get resolved, so I'm not sure I'd identify it specifically as a first quarter item.

We're obviously focused on getting it resolved as quickly as we can.

But, I think your characterization, is that the majority of the missed?

I'd say that, combined with building more 787 inventory than we expected.

I think those two factors were clearly the vast majority of the variance.

Because I'm just having a little trouble reconciling the 787 component of this, because it seems to me, as was stated in the answer to the prior question, we're really moving cash between inventories and receivables, so it sounds like there was an effort to increase rate or accelerate something.

Is that the right way to think about this?

And then, Jeff, what kind of rate are you at?

You've got 17 shells built it sounds like.

How quickly can you build the shell at this point and then how much longer does it take to stuff it?

The shell build, Rob, is going very well and per the plan.

I don't have the actual rate in front of me, but it is obviously not the pacing item.

The pacing item is the systems to install, which I will emphasize, when they do arrive, goes very well.

So, I think the pacing item through time will be getting all the systems to begin to flow.

And so far, our ability to build the shells themselves has been per our plan.

Jeff, talking about the systems integration, the wiring, we're hearing a lot about this from you, from Boeing and others.

What specifically is not arriving on time?

Specifically, the wiring and some of the other systems are not arriving on time.

And then there is the issue that you have on any new program, which is some change activity that's required to support the first flights and the flight test aircraft, the first 6 airplanes being flight test airplanes.

So, it's managing the arrival of the systems and the wiring and incorporating change to support them at the same time.

So once you get the full compliment of innards, so to speak, for a particular shell, how long should it take to get those installed and then shipped out the door?

As you know, Rob, that will change through time as the production line speeds up.

But I'm sorry, I don't have that number right in front of me.

And it will change per the plan through time.

I would just think, Jeff, that I hate to focus--.

It is not a long laborious process.

Absent the change and the lateness, things fit and fit well and go in and they will go in per our plan once we get that supply chain smoothed out.

Okay.

And then just my final question, staying on the topic, but more for Rick.

You've been clear about saying there's down side on the revenues if the intake of 787 components slows at Boeing in 2008.

Can you give us some sense of your earnings sensitivity to this?

Well, as we've said, Rob, the 787 program has a lower book margin, a substantially lower book margin than our legacy business.

We'd characterize it as high single-digits.

And that's an EBIT margin?

That's a gross profit margin.

I think if you assume that that -- again, it's high single-digits.

We've been very clear about how many ship sets we originally expected to ship in 2008.

I think we've been pretty clear on our content on these first units.

So I think the math is there to do.

Where we've had difficulty -- I mean, obviously we'd love to give guidance and we'd love to characterize what we think is going to happen in '08, but at this point we're just not in a position to do that.

But even if you took a worst case of say we delivered half or two-thirds of what we'd originally expected, I think if you walk through the math on that, you can see that the earnings impact of that is not major, it's not material, given our overall earnings.

I think we shouldn't lose sight of the fact that the 787, even in '08, is going to be probably less than 10% of our overall revenues, and that the core business continues to be very strong and continues to have good margins.

And that's really what's driving our EPS growth, not so much the 787.

Yes, but logic would follow that the earnings impact would be less than 10% because the margins are lower.

That's exactly right.

That's exactly how we look at it, Rob.

And that would be losing all of the 787s in the year would be a 5-6% type of hit.

Yes.

You've obviously done the math.

And that would be a worst case scenario, I suppose, unless there was some kind of unexpected increase to R&D?

That's certainly true, although obviously when we project R&D, we always assume, given all the things that we've been working on, that there is room built into our R&D forecast for new programs that either we're currently working on that we haven't announced or new things that we expect to work on.

Are you ready to give us an R&D number for this year?

We have not.

We are not.

You mentioned last time you might have something by now.

No.

I think, again, once we have a better visibility into our cash flows for '08, we'll provide some greater granularity on our guidance.

But as I said, I believe we've fully incorporated into the existing guidance the impact of R&D on new programs for '08.

All right.

I do appreciate you giving us some window here on 787.

That's helpful.

Thank you.

Ronald Epstein from Merrill Lynch.

Going back to Doug's question, Boeing shipped a couple fewer 737s, you guys mentioned some supply chain potential issues.

Should we worry about this or is this just a one quarter kind of thing?

I mean, is there a shortage of fasteners or something?

Is this going to recur?

I just think my interest has peaked, because we saw it at Boeing, we're seeing it with you guys.

Ron, I don't think you ought to see this as the beginning of a trend.

There is right now, going through the fuselage, we had some 47 and some 67 issues related to the cume-catch that Rick talked about.

The 37, we're stepping up in rate.

We've got the P8-A going through right now.

747 freighter is going through our line right now and we're beginning work on the 747-A.

So, we have a little bit of disruption going through the line, but 37 should smooth out and is smoothing out.

In terms of the supply base and fasteners and those sorts of things, that is no worse in the aggregate, in fact, a little better for, if you will, normal production.

The real challenges we've got in the supply base right now are linked to those new products coming through the lines, which have a tendency to have a little bit of disruptive effect.

But, we don't see anything systemic in what you saw in the fourth quarter.

If we look at 73 production and all the derivatives you've got with the P8 and everything, what is the rate of 73 production right now?

We're at about 31 a month.

And then I guess a question for Rick.

Right at the end of the press release you mentioned that you guys might be looking into new opportunities to find sources of liquidity.

Can you give us more color on that, what you're thinking there?

Well, as we said in my comments, there continues to be some uncertainty around the 787 cash flows.

As you know, our existing agreement with Boeing specifies that we don't start to receive cash until the airplane certifies.

And as that date has continued to move to the right, that has caused us to build additional working capital, as you've seen in our results.

I think right now, as we said, we continue to discuss that matter with Boeing, but we're on a parallel path with the discussions with Boeing to look at where might we have opportunities to provide some additional liquidity.

And when we say that, we're not talking about significant new amounts of liquidity.

I think we're talking about tweaking around the edges of maybe increasing the size of our revolvers, things like that, just to provide a little bit more dry powder, not only for the 87, but for some of the other new programs that we've been working on and that we see in front of us.

Okay.

And then just I guess one last follow-on to my 73 question.

Is it safe to assume that the 73s that weren't delivered this quarter will be delivered next quarter?

On the 737s we met the production plan, so that was what was planned in the quarter.

There was one thing, Ron, that occurred as BCAs took improvements in their production lines toward the end of the year we had a couple of airplanes that were taken out of the line, if you will, because of improvements in [renint].

And that showed up in our fourth quarter.

So, we're hitting the drum beat exactly when Boeing wants the product.

So there's no delivery issues.

There was no falling behind the schedule.

We hit the schedule.

The short answer is, there's no additional 37, other than what the production rate would demand.

Dana Merber from GMP.

Just a couple of questions.

At the end of the third quarter, your 2007 guidance for revenue was $3.9 to $4 billion, and I guess you guys came in basically at the very bottom of that range.

And I guess let me ask the question this way, what could have happened that didn't happen that would have gotten you to that $4 billion number?

Simply two things, and the main one by far was 787 deliveries per the plan that we had earlier in the '07 year.

And the second would have been to have hit some of the negotiations that Rick talked about and completed those in the fourth quarter.

But by far, the major issue there is deliveries of 787.

And so was this something that happened post when you provided that last guidance at the end of the third quarter?

Well, we took the guidance -- I think we indicated the guidance toward the $3.9 billion end in the third quarter and then we had additional slippage in that schedule.

You might recall, we originally came out with the 3.9 to 4 guidance quite early in the year, before a lot of the 787 schedule changes were apparent.

So, I thought it was fairly clear that as the 787 moved out that our expectations for the year would start moving towards the lower end of our guidance.

And then reality, as Jeff said, that's exactly what's happened.

Okay.

And just secondly, just with respect to your negotiations with Boeing.

Would you classify this sort of as early stage or late stage?

Where are you on this discussion timeframe right now?

I would characterize it as ongoing.

And there are a number of issues, as you can appreciate, some of which we are hopeful we're moving to the late stages of, and frankly, some we're just beginning, because of the nature of the program, the nature of changes to the program, the nature of schedule issues and cash flows and those things.

There are new issues that arise in any airplane program, frankly, as you go through time.

So, it's not one big negotiation, it's a series of them.

So it's fair to say that an announcement on compensation or some sort of a cash deal is not eminent?

I wouldn't call it imminent.

Okay.

And just lastly, I mean obviously the Airbus situation is disappointing, just in terms of the production facilities that you guys were bidding on.

What other diversification strategies to you guys have your eyes on right now?

Obviously the announcement yesterday was positive.

But, what other kind of things are you guys seeing out there?

Sure.

A couple of things.

One is, I don't know that I would characterize the announcement on the Airbus facilities as disappointing.

I think we were clearly interested in that if the business case was closed for ourselves and for Airbus.

Clearly, we would have liked to have seen a business case that closed there that worked for all of us, and we did not, so I think we were very clear-eyed about our willingness to pass on an opportunity that didn't feel right to us, didn't meet our criteria.

We are still very active with Airbus on 350.

There's some additional work there that is, frankly, for just the 350 piece, as large as what was wrapped into the site discussions, or very nearly as large as what was wrapped into those discussions.

I mean, clearly we've got the Cessna.

Cessna is a brand new win for us.

We have some other wins we had announced previously that the customer is not yet ready to announce the aircraft.

So we're seeing a lot of opportunities that continue to grow in the airplane program side of the business.

Joe [Matos] from JP Morgan.

My first question is just back on the capital raise comment you made.

With 500 million of liquidity, it's really quite a bit.

Maybe the right way to ask the question is, is there a certain amount of liquidity you think you need to run the business?

Is there a number you can give?

Well, I think under normal circumstances, 500 million would be more than sufficient, given the nature of our business.

I think what we're just addressing here is the current uncertainty associated with the 787 program.

And in my mind, you can never have enough liquidity.

Obviously having liquidity available cost money.

It's not free.

But, as the CFO of a company, having available liquidity is one of the major responsibilities that you have and we're just being prudent to make sure that we have the funding that we need for pretty much any eventuality.

Again, not only directed at the 787 program, but also directed at some of the other new business that we might need cash for.

Okay.

Secondly, I know we've spoken a bit about the cash flow in the 787 already.

I guess I'm still not quite clear on the negotiations aspect of that, which seems to be the bigger part of the issue.

Is this tied in?

Was this with Boeing and is this tied in with all the other negotiations that you have on the program or is this a discreet matter?

As you go through any airplane program, you have issues of baseline, change to that baseline, disruption, all the other things associated with -- all the contractual matters associated with an airplane program.

And those unfold through time, from configuration, full engineering release, delivery of first product, flight test, all those sorts of things.

So, rates for future production rates, new derivatives, all those sorts of things.

So, it is an ongoing set of conversations and we have some that are more mature, as I mentioned.

Yes, I think that's the right way to think about it, Joe.

You know, we talk about the 787 as kind of a monolithic event.

The reality is that there are a number of different tenets to the 787 discussion over some of the contractual matters.

So it's not only the portion of it that deals with the slide and certification and what that means for our cash payments, but it also deals with things like engineering changes that have taken place.

It's disruption because of part shortages.

There's any (inaudible) derivatives, higher production rates.

I mean there's any number of elements that are part of the whole 787 universe of things that we're working on with Boeing.

And trying to negotiate some of them discreetly and some of them in the aggregate has proven to be a complex challenge, as you might imagine and it's taking longer than we expected.

Okay.

That's helpful.

And then finally, on A-350, any chance, given what happened, I guess the surprise, what happened with the divestitures, the Airbus divestitures, Jeff, any chance that you get some of that aircraft down the road here, I guess something significant, just with your existing facilities without having to buy anything in Europe?

We are, Joe, as I mentioned a little bit earlier, bidding on some additional work that would not have the strings attached that the previous work had.

How material could that get to, if you won everything?

It could get to, frankly, very close to the size of the 350 packages that we're bidding on as part of the facilities.

It's a significant piece of work.

Troy Lahr from Stifel Nicolaus.

I'm just wondering if you guys could frame a little bit the R&D at fuselage systems for next year in 2008?

I think excluding the disruption, you may be running at 17%.

Is that kind of a margin run rate that we could see going into next year?

I know you said it's lumpy.

And then could you maybe just say R&D is going to be up 10-20% in '08, just specifically at fuselage systems?

If you look at kind of our historical profitability in fuselage has been around 18%, which includes obviously kind of a normal run rate of R&D expense.

We were down from that, obviously in the fourth quarter, as we've discussed.

The cume-catch adjustments are extremely lumpy and we said we don't expect to see another unfavorable cume-catch adjustment within fuselage and R&D expense tends to be a little lumpier.

So I would say R&D, because it's driven by our involvement with new programs, R&D probably will go up from where it was in the last couple of years.

But, that's because we're obviously very engaged in diversifying our business.

But, I would not see R&D as being a major headwind in our margins in the fuselage business.

I don't see any reason why we can't continue to deliver solid 17 to 18% if not better, gross margins in our fuselage business.

That's the core of our business.

There are a number of very strong mature programs there that generate very reasonable margins and we've been achieving those margins in the past and we see no reason to not be able to continue that level in the future.

Okay.

But when you say 17 to 18%, still a pretty decent range in there.

I mean is that just going to be depending on lumpiness?

You have heavy R&D one quarter it could be down--?

Absolutely.

It's driven certainly by the lumpiness in the R&D.

The other factor that we've talked about in the past that hasn't come up on the call today, the 787, as we've said, the book margins on the 87 are lower than the legacy programs, so as the 787 becomes a larger percentage of our total revenues in all of our segments, that does create some slight downward bias on our margins.

So, I was taking that into account as well.

Okay, great.

And then also at wing systems, I guess excluding the cume-catch up you did a pretty healthy 12.5.

I mean is there any reason why you guys can't kind of sustain that level going into 2008, and then also as you ramp up the Malaysian facility and the MRO operations at Prestwick?

Are those two items going to have any factors at wing systems next year?

What I would say about wing systems is the wing systems was almost the flip side of fuselage on the R&D question.

Wing systems had substantially higher R&D expense in the third quarter and relatively little in the fourth quarter, because we'd finished up the R&D phase on one of these programs that we've mentioned previously that we've won, but have not been able to talk about specifically.

So wing systems R&D right now is probably at a low ebb.

But, we've said clearly that we felt that at higher margins in our wing systems business, where we're clearly within our sights in our ability to achieve.

And I think you're really starting to see those benefits flow through.

I'm not sure they're sustainable at the 14 to 15% range that we saw in the fourth quarter.

I think longer-term we've said that there's no reason that wing systems can't have the same kind of margins as our other businesses.

But, I'd say in the nearer-term, we certainly expect to continue to have double-digit margins in that business.

But I mean the 12.5, kind of excluding the cume-catch up, I mean kind of bouncing around in that range, maybe?

I'd say that's perfectly within our sights.

Okay.

And then so, is the Malaysia and the Prestwick operations, the MRO, is that going to factor in here next year or not really?

Well, obviously the Malaysia facility and the savings that we expect from the Malaysian facility, most of those savings will accrue to the benefit of our future contract blocks.

Again, we're coming to the end of our current contract blocks for the legacy programs.

So, we're seeing a little bit of a benefit of the expected benefit in our current blocks, but the majority of it will come in the next blocks.

Okay.

So more of an '09, kind of late '09 impact?

Yes, '09-'10.

And as you've noted, we've just recently started in Malaysia, so we're taking a very prudent and conservative view of the savings that we expect from Malaysia.

It would not surprise me if the savings that we get there are greater than what we've projected so far.

Okay.

And then just lastly, one quick question on the 787.

You talk about these product shortfalls on systems and wiring.

When do you think that this is not going to be an issue that I guess you're pacing items that you guys talk about?

And can you maybe say like how far you're behind?

Are you now six weeks behind schedule generally for these part shortages, where they once were three or four months or maybe could you just kind of frame it where we are in that part shortage process and how you're making headway there?

That's, Troy, quite a variable across the pipelines.

The hardware, the structure shortages that we had have pretty well begun to heal up with just a couple of exceptions.

But again, the measuring stick is moving as we move to the production schedules that we're working with Boeing.

So, I don't have a number specifically.

I can tell you that part of what the whole program is doing is to try to balance the rate build up with the availability of the hardware.

So, that is a moving target at this point.

All right.

So are we looking to get some update from you around April timeframe, similar to what Boeing has talked about, the next real update on build rates and part shortages, things like that?

Sure.

As soon as we know what's going on there, we'll be updating.

Certainly with the first quarter.

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

Howard Rubel from Jefferies.

I mean, is this one with 14 follow-ups?

No, but to be serious for a moment, two things.

One, on cycle times, as you look at your core products, could you address a little bit of what you're seeing, Jeff, in terms of productivity versus plan?

I mean, I know you forecast some improvement in productivity down the road, but are there some additional steps you can do to take margins to an improved level from where you are?

As we've talked before, Howard, we continue to work on all the lean manufacturing and all the associated improvements.

Clearly, on programs, once you make a production rate change, getting that stabilized, that's helpful.

A lot of that we have baked into our plan.

Certainly any additional volume would help productivity.

But, we continue to focus on the blocking and tackling on the shop floor and continue to work hard to get good productivity out of our supply base as well.

But I don't -- but just to answer your question, I don't see any silver bullets.

I think we'll just continue to block and tackle well and continue to perform well.

On the 78 though that's related to that, if instead of C-45 we see whatever the number happens to be, how do you deal with the overhead absorption that those products would have ordinarily absorbed in the quarter or in the year 2008?

Well sure, overhead absorption, when you get fewer units through you've got an issue with overhead absorption.

We have worked very diligently to balance the variable pieces, if you will.

We have some suppliers that we've throttled back and some suppliers that we've continued to work hard to get them to speed up.

We have balanced our staffing to the needs of the lines and fortunately we're able to use staffing in other places.

So, we manage that by balancing the variable piece to the best of our ability.

Rick, do you have something on that?

I would say overhead absorption, how it obviously is driven by how many units you build, not necessarily how many units you ship.

And we're still looking at an aggressive ramp-up in 787 production in order to meet the substantial backlog that the airplane has today.

So, we're going to continue to produce in order to fulfill our customers' requirements.

I think the real key for us is how many of those units -- how complete are they, how many of those units are we going to end up recognizing for the revenue purposes.

But the absorption side of it, again, is driven by what we build and we're continuing to target our build schedules to meet our customers' requirements.

And then you know you've talked a number of times about other business and it's consuming more as a percentage of some preproduction costs and inventory.

Where do we see that peaking and will we start to see revenues associated with some of these incremental programs, as the year unfolds?

We will.

On one of the programs particularly, the Sikorsky program, we have already recognized some modest revenues there.

We will continue to recognize revenues in 2008.

And I do think you'll start to see some modest impacts in 2008 on some of these other new programs.

But clearly, as we've said, new programs tend to be long gestation periods and the revenue recognition is going to be more in the out years.

It's going to be in the 2009-2010 kind of timeframe, rather than specifically in '08.

But obviously, we knew all that when we determined and published our 2008 guidance.

And then last, again to go back to some of these negotiated items, you've indicated it's in inventory.

Have you booked any of that as receivables or how have you thought about the level of profitability of that business?

Of the 787?

Well, no, it's a whole host of things that you talked about, whether it's--.

Well, it is.

It's engineering costs, it's all of those things.

Yes, typically, other than the 787 production, which we've said it is at a lower profit than our legacy businesses, some of the engineering buildings don't tend to have the same profitability as production rates.

But, I wouldn't see that as being dramatically different than our regular business.

So we don't have that as unbilled receivables in the numbers?

No.

It's all sitting in inventory, because we haven't -- we obviously don't transfer it to receivables until we actually send out an invoice.

That does conclude our Q&A portion of today's call.

I would now like to turn the call back over to Management for closing remarks.

Thank you and thanks, everybody, for joining us today.

That will conclude our call today.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.