Spirit AeroSystems Holdings Inc (SPR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings, Inc.

Third Quarter 2010 Earnings Conference Call.

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

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

We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator instructions)

I would now like to turn the presentation over to Mr.

Alan Hermanson, Director of Investor Relations.

Please proceed, sir.

Good morning.

Welcome to Spirit's Third Quarter 2010 Earnings Call.

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

After brief comments by Jeff and Phil regarding our performance and outlook, we'll be glad to take your questions.

In order to allow everyone to participate in the question-and-answer segment, we do ask that you limit yourself to one or two questions.

Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our news release, in our SEC filing, and in the forward-looking statement 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.

With that, I'd like to turn the call over to our Chief Executive Officer, Jeff Turner.

Thank you, Alan, and good morning.

Let me welcome you to Spirit's Third Quarter Earnings Call.

I'll begin with a look at our business and related performance, then Phil will walk us through the financial results.

After that, we'll be glad to answer any of your questions.

On slide two, our core business continues to execute through the third quarter.

As we move forward with the implementation of our diversification strategy, we are concurrently strengthening the portfolio of our core business with increasing demand for our core products.

While we see some investment required to support the increasing core business production rates in front of us, we are focused on prudent but strategic decisions that maximize our existing assets and drive value for our stakeholders.

With a core business that is solid and growing, we continued on our diversification path during this quarter with ongoing activities supporting our new programs.

With six airplane programs in their test phases, our teams remain cautious, yet focused on navigating through the near-term development challenges.

Program execution with a strong customer commitment continues to be our priority while moving these programs through the test and early production phases.

As we implement our long-term strategy and diversify our business, the long-term perspective for our company continues to brighten with core products that are desired in a growing industry.

Having said that we remain cautious as we closely monitor the market dynamics of certain segments of the business jet market.

Looking forward, Spirit's backlog at the end of the third quarter of 2010 was over $28 billion and growth of $1 billion from the second quarter.

This growth demonstrates the increasing demand for Spirit products, driven by an improving commercial aircraft market, particularly with single-aisle aircraft.

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

Fuselage Systems delivered operating margins of 13.9% on $485 million in revenue during the third quarter.

The primary strength of the Fuselage core business is the fast-paced 737 production line, which continues to perform well as the group has now delivered more than 3,400 ship sets of the next-generation fuselages.

The 787 team has also demonstrated continued progress by delivering airplane fuselage number 28.

Both the composite forward fuselage fabrication and systems installation production lines are full with work-in-process units as they continue to meet our customers' requirements.

As the pace of the factory gradually improves, our teams are internally focused on productivity and efficiency improvements while we ensure our supply chain partners are prepared for the production ramp-up.

Additionally, our 787-9 activities are progressing well as we work closely with our customer to ensure we support the design needs of this exciting new derivative aircraft.

Our fuselage team made further progress on the 747-8 program this quarter by delivering the second intercontinental forward fuselage, which brings the total number of 747-8 fuselage deliveries to 19.

The Sikorsky CH53K helicopter program continued development activities in the quarter.

Included in the results is cost growth for the program arising from additional work required to support test hardware schedules.

It is essential that we continue to demonstrate our ability to innovate high-strength, lightweight, producible composite structure during this systems development and design SDD contract.

Our Sikorsky development team is working aggressively with their customer to meet requirements while driving improvement as they begin the early stages of test hardware fabrication.

We'll continue to watch this closely over the next few quarters as we assemble the initial test airframes.

And on our Airbus A350 XWB program, the team is in the early stages of fabricating test units in our recently opened Kinston, North Carolina facility.

On slide four, you see the Propulsion team delivered solid operating performance with margins of 12.1% on $253 million in revenue during the third quarter.

The segment's core business continued to perform well and surpassed line unit 3,400 in the quarter for both 737 next-generation engine pylons and thrust reversers.

Additionally, our newer configuration pylon production hardware continues to mature as we delivered our 29th 787 and 15th 747-8 engine pylon ship sets in the quarter.

Support on the Rolls Royce BR725 [engine to sell] program continues with our team focusing on efficiency and cost improvement during initial stages of production while working closely with the customer during the G650 test phase.

And, finally, the pylon development teams continue to progress well in their early stages on the Bombardier C Series and Mitsubishi regional jet programs.

On slide five, you see the Wing System segment, which comprises our Spirit Europe, Spirit Malaysia, and Oklahoma operations.

The Wing team executed well on core production volumes, with operating margins of 9.8% on $264 million in revenue during the third quarter of 2010.

Spirit Europe continues to produce high volumes of hardware, surpassing line unit 4,500 for A320 wing component while also celebrating the delivery of the 50th A380 fixed leading edge wing assembly.

At our Tulsa, Oklahoma site, the [Aero stretches] team continued to produce newer derivatives of products as they delivered the 18th 747-8 fixed leading-edge wing section in the third quarter.

Our Gulfstream G250 and G650 wing program activities also continue in Tulsa.

With both of these programs in the airplane test phase, the teams are intensely focused on initial production start-up and efficiency.

It is exciting for our employees to be part of these new air frames, with both products recently displayed at Atlanta's 63rd annual NBAA meeting and the G250 accomplishing its first Transatlantic crossing en route to the show.

Also during the quarter, our aftermarket team continued to implement their strategic growth plan with a commitment to customer fleet support and a more global support presence.

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

Thanks, Jeff, and good morning.

I'll begin with a look at Spirit's key financial highlights for the last four quarters on slide number seven.

As you can see, we are consistently generating over $1 billion per quarter in revenues and consistently achieving operating margins in the 8 to 9% range while generating $0.30 to $0.40 of fully diluted earnings per share as we continue to perform well in our core business, invest in new programs, and execute our diversification strategy.

Our cash from operations and capital expenditures reflect the execution of this strategy as we invest in new Boeing airplane programs and commercial derivatives, including the 787 and the 747-8, as well as our investment in the Airbus A350 XWB, the Gulfstream G250 and G650 business jets, the Sikorsky CH53K military helicopter, the Bombardier C Series, and the Mitsubishi regional jet.

As a result, cash from operations continued to be lumpy from quarter to quarter as we liquidated 787 advancement payments, experienced normal timing difference in the accounts receivable and accounts payable, and while other new program inventory growth slows.

As for the quarterly results, revenues of $1 billion were down from the third quarter of 2009, largely driven by fewer large commercial aircraft deliveries and lower non-production revenues.

While 777 ship set deliveries are lower than the year-ago quarter, as expected, the lower A320 deliveries in the third quarter of 2010 are related to a customer delivery re-phasing by Spirit Europe.

Those deliveries are expected to be made up in the fourth quarter.

Partially offsetting these decreases were two additional deliveries of 787 fuselages as compared to the third quarter of 2009.

Operating margins for the quarter were 8.2% and included a $7 million pre-tax charge related to the IAM early retirement incentive that I mentioned last quarter, which was agreed to as part of the new 10-year contract.

Total cost of the program was finalized during the third quarter and, therefore, included in this period's results.

As included in this quarter's results -- also included in this period's results is an unfavorable cumulative catch-up adjustment on our Sikorsky contract of $6 million, resulting from cost growth associated with supporting test hardware schedules.

The fully diluted earnings per share of $0.33 for the quarter was affected by the lower revenue volumes but also includes a $0.03-per-share impact from the expenses associated with the IAM early retirement program and a $0.03 per share reduction associated with the performance of the CH53K program.

Additionally, the effective tax rate for the quarter was 35% above the 28% in the same quarter of 2009 and our 2010 guidance of 27%.

This higher rate reflects the absence of discrete benefits that were realized in the previous two quarters of 2010.

We continue to expect the full-year effective tax rate to be approximately 27%, which includes the anticipated benefit associated with the extension of the R&D tax credit.

Cash flow from operations for the quarter was a use of $122 million as spending on new program inventory continued primarily related to the engineering change incorporation and production ramp-up of the 787 while spending on other new programs slowed.

Capital expenditures were $52 million for the quarter, which is essentially flat through the third quarter of 2009, slightly lower than the second quarter of 2010.

Current year expenditures are primarily due to investments in our North Carolina facility, as well as sustaining programs.

On slide eight, R&D and SG&A expense in the third quarter reflect a consistent level of spend for the company.

As you know, we continue to make expense management a top priority.

Slide nine summarizes cash and debt balances.

Cash balances at the end of the third quarter of 2010 were $66 million as compared to the second quarter of 2010 balances of $118 million.

During the quarter, we utilized $125 million of our revolving credit facility.

Year to date spending of $428 million is made up primarily of $268 million growth in inventory and $183 million of capital expenditures as reflected on the nine-month statement of cash flows contained in our press release.

In October, we increased our revolving credit facility from $409 million to $650 million and extended the maturity date on the facility from 2012 to 2014.

We also extended the maturity of $437 million of our $569 million term loan B from 2012 to 2016.

These changes provide us with additional financial flexibility and capacity as we execute our strategy.

As a result of our credit line borrowings, debt balances increased in the current quarter and were offset by planned debt repayments.

At the end of the third quarter, our total debt to capital ratio was 37% and our US defined benefit pension plans remained fully funded.

Slide 10 summarizes our inventory balances.

We continue to manage our core business inventory well with improvements in the higher-volume programs being offset by investment in the 747-8 and carry some additional inventory on the A320 program.

787 and other new program balances reflect the higher engineering costs associated with the development effort and higher manufacturing costs related to an engineering change.

We expect to recover these higher costs as we execute the programs over the long term.

Slide 11 summarizes our updated financial guidance for 2010.

As you know, 2010 is a pivotal year for Spirit as we grow and diversify our business.

The core components of our business remain strong as we work to bring next generation of large commercial aircraft and business jets to market.

As we move into the fourth quarter, we are updating our financial guidance for 2010.

Our revenues guidance is now expected to be between 4 and $4.1 billion with fully diluted earnings per share between $1.50 and $1.60 per share, which was the middle to low end of our previously issued guidance range.

Cash flow from operations remains at approximately $75 million, and capital expenditures are expected to be approximately $325 million as we continue to invest in growth and diversification.

We have made good progress on our development programs year to date, and the programs we are investing in are truly the next generation of large commercial aircraft and business jets.

At this stage of development and additional production, these new programs, including the 787, continue to pose the most risk to our 2010 EPS and cash flow guidance.

Throughout the year, we have been developing plans to address the long-term profitability of our lower-margin programs, and as we move into the fourth quarter, we will continue to solidify these plans.

Some of these plans may include the need to recognize additional costs that could result in a forward loss on certain programs and therefore cause the company's consolidated full-year results to vary from the guidance we are providing you today.

In contrast, there are also many opportunities to improve profitability on core programs and new programs.

Let me assure you we are equally focused on improving profitability, managing risks, and improving cash flow through this development cycle.

We continue to expect the 2010 tax rate to be approximately 27%.

We intend to provide 2011 financial guidance as part of our fourth quarter and full-year 2010 results expected to be released in early 2011.

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

Thank you, Phil.

I'll wrap up on slide 12 with a few brief comments.

Our core business continued to execute well in the third quarter and remains the backbone for Spirit.

As we prepare for faster production rates in the future, our teams are intent on further strengthening our core business foundation.

Our team's development activities have progressed as we continue to navigate through the near-term challenges remaining in the test phases and transition the factory areas through initial production.

Our primary focus continues to be on solid execution and delivering on customer commitments while maintaining cost and driving productivity and efficiency improvements.

While we continue to implement our diversification strategy, Spirit's core product lines continue to show strong and growing demand.

With this improving outlook for large commercial aircraft, our company remains well positioned for growth.

As we move forward, I'm confident that we have the right team in place designing and producing the right products, targeting the right markets, and making the right investments to ensure the long-term value that our customers, our shareholders, and our employees expect and deserve from us.

We will now be glad to take your questions.

Ladies and gentlemen, at this moment, we will begin our question-and-answer session.

(Operator instructions)

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

Thank you very much, and good review.

Phil, you alluded to the potential for forward losses.

I think in the second quarter you kind of put up a yellow flag on the G250.

Reading your 10-Q, you suggested that the 747 program was at breakeven.

Could you tell us which of your programs are at breakeven today and maybe give us some color on the ones that have the greatest risk of the forward loss and also the ones that maybe have the most opportunity to do better than they currently look?

Sure.

Look, I think all of them have opportunity.

Let's start there.

They're in the early phases of -- late development phase, early production phase, so they're a long way to go, so therefore, I believe there's a lot of opportunity.

That's one of the challenges as we manage through multiple development programs.

So the ones I'm most concerned about, and I've spent quite a bit of time this year looking at all of these, is the 250 still.

I mean (inaudible) [Cosgrove] as we move through.

Again, this could be a great airplane in the marketplace.

There's no doubt about that.

But our engineering effort continues to be a little more expensive than what we planned.

The BR725, which has been the sell package for the Rolls Royce engine that is on the G650 airplane, which we've disclosed, continued to have some (inaudible) [Cosgrove], and we also looked at our recurring bill plan on that product, and so that gives me a little bit of pause as we move into the fourth quarter.

And the Sikorsky, clearly, we've had some [cume] catches as we move through that program this year.

We are right now in the throes of building the first test article for the customer.

That's going okay, but I still remain cautious and watchful as we build the additional six test units, which will be required over the next, I think, 12 to 18 months.

So I think that kind of probably wraps up -- I guess I didn't mention 747-8.

Particularly looking at that one on the wing segment, we build the midsection of the fuselage, the 44 section components.

We don't design them, but we build -- we manufacture them.

And that's been a heavily impacted area of the redesign of the 47-8 that's given us some challenges.

We continue to work with Boeing to negotiate some of this, but that one remained a watch item into the fourth quarter, as well.

Of course, I haven't mentioned the 78 yet.

Can't forget the big one in the room.

Let's talk about the 78.

So we're clearly still working with Boeing on the assertion packages and claims we have.

Boeing publicly acknowledges continually that they're working with suppliers.

I would say they absolutely are doing that, and it's a big program with lots of complications, and in the midst of working to certify the airplanes, there's a lot of things going on right now, but we continue to move our discussions with them forward is how I would describe it and look forward to wrapping that up at some point here in the near future.

Thank you very much.

Yes, thank you, Cai.

Is there another question?

Your next question comes from the line of Doug Harned from Sanford Bernstein.

Hi, it's actually [Thinbar Shi] calling in for Doug.

Hey, Thinbar.

How are you guys?

Hey, to follow up on the 787 just for a minute, could you give us an idea about the flow of design changes at this stage?

Are they still coming in, or are we now talking about things that are essentially coming to a close?

Thinbar, a little bit of both.

So there continues to be, and we expect there will be throughout the remainder of the test phase, some changes.

A lot of the changes are, of course, coming to a close and getting implemented.

I would say the severity, if you will -- severity's really the wrong word, but the complexity of the change is abating substantially.

So still a lot of change and a lot of work to get done but not in the level or the amount of work that we've seen in the past.

And then as we think about how some of this will translate into cash, you're drawing on your line of credit now.

When would you expect that the advanced payments for the 787 in terms of timing would be liquidated so that you would shift over to positive cash flows coming in on deliveries?

And then how much of that cash coming in would actually just turn around to go to working capital as you ramp production?

Yes, the liquidation of the advance -- again, just for clarification, there's two advances we have today with Boeing.

I think the one you're referring to, Thinbar, is the one that's the advanced payment's for the first 45 to 50 aircraft.

Yes, the second one.

Yes, the second one.

That liquidates in 2011, really dependent on whenever we deliver the final unit that's part of that package.

Probably second or third quarter is my guess.

I don't have it specifically in front of me right now.

But so next year, cash -- positive cash flow restarts.

Working capital is going to build for a while.

I mean to the extent we're going to build deferred production on the initial units, that will break over at some point.

We'll start relieving that deferred production.

It's probably somewhere out in 2012 if the schedule holds.

And then as we move into higher-rate production volume on the program, that will build some working capital naturally.

Okay, thanks.

Sure.

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

Good morning.

Good morning, Rob.

Hey, Rob.

You know, my question goes back to the cash flow, as well, and the timing issues.

So, Phil, can you walk us through the mechanics to get you to your full-year cash flow guidance in the fourth quarter?

What needs to happen?

Sure.

The first thing that has to happen is we just continue to deliver the core business, which is a great cash generator for us, by the way.

But everything else is really centered around getting non-production payments accomplished.

So there's really, I would say, three programs that are the balance there.

787, of course, is one of those where we're continuing to work on that negotiation with Boeing.

On the 747-8, again, we're trying to settle up on that program, as well.

And then the A350 would be the third one of significance.

It's a milestone-based program, so to the extent we accomplish the milestones and get them agreed to with the customer, we would get payment on those.

Look, they're all subject to timing, though, right?

It could move over into 2011.

So we've got -- (inaudible) we want to get some of it done in '10, but to the extent we've not, then it would move into '11.

Can you give us some sense of a range of where your cash flow would be if you don't hit those three program milestones?

Well, I mean the sensitivity, it could probably be 100 million [down, I suspect] if you collected them all three up.

And of those three, where do you have the greatest visibility that you can get it done in the quarter?

I mean the Boeing thing's been going on forever on the 787.

Yes, it has, but let's keep in mind we tend to get tilted on the 787 because it overwhelms the system for all of us sometimes, but we do a lot of discussion with Boeing on multiple programs, and we have a lot of success in getting things settled out.

So don't ever forget that.

Okay.

The 787 is one that we're be working on, and it's kind of hanging out there.

So the 747-8 we actually have pretty good success on, and so I think the A350 and 747-8 are lower risk but not risk free, and the 787, of course, I think there's a commitment on both sides to try to get that accomplished.

Okay.

And just a clarification, Phil, on something you said before, and this is also 787-related, but the liquidation of the first advance, so this is roughly the $400 million advance you just spoke of, that only makes the company cash flow positive overall.

It doesn't do that to the program itself because I would assume the cash cost of an individual 787 is still well above the selling price at that point.

That's true.

Can you quantify that?

No, I can't quantify it today, but clearly, these are the things we're discussing with the customer as far as a price, repricing and what timeframe that would be effective over.

So I wouldn't scope that in for you right now, but I think your math and your concept is correct.

When does that cash cost match the revenue price?

What's the timeframe for that?

Well, I think if you -- if the program had gone on schedule, you would normally -- a normal learning curve, you'd break across that cost line of about 125 to 150, I think, is probably the industrial engineering answer.

But, of course, there have been other challenges on this program that could impact that particular event.

Okay, thanks.

Sure.

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

Morning, Howard.

Howard, I think you're on mute.

Howard, if you're there, we can't hear you.

Is that better?

Oh, there we go.

All right.

Well, thank you, sorry.

I want to go back to, Phil, you're kind of -- you're calling out that you're not happy with performance.

I mean if you kind of shake it all out.

I mean, Jeff, what do you think you need to do in order to get back to a high-teens gross margin?

Well, I think we've talked in previous quarters that the days when we've had those particular kinds of margins, we had a number of tailwind items that -- some of which are not going to come back for us.

For example, we were growing production rates into existing capacity.

Now, we're growing production rates into a more constrained capacity and where we'll have to add capacity.

We had some very strong pension tailwinds that we don't see.

So rate increasing environments, as you know, give opportunity to expand our margins, so we see that coming.

And I think that we're entering in a period where some of the headwinds we've been facing are going to fall away from us.

Clearly, 787 margins at the level they're at forecast forward with the volume associated with those are going to continue to be somewhat of a headwind for us but continued productivity improvement across the board, strong expense control, and then I think doing a good job managing the rate increasing environment that we're going to be going into here will be helpful.

Frankly, our biggest challenge has been the execution of the new business through the development and getting it into production.

A lot of issues.

Clearly, the program's stacked up on us not per the plan at all, and that drove, I think, a fair amount of inefficiency in our development cycles.

And those are just going to have to work their way through.

There's no magic bullets to shoot to fix those.

But I think we're clearly entered -- come from a time where we had tailwinds to a time where we've got some headwinds, and I think that's beginning to shift and we're going to see some improvement.

And then just to follow up, and I'm done, is on both the 37 rate increase and on the triple 7, I'd say return to the higher rate.

Doesn't that -- I mean how are you (a) managing that and (b) won't that make up for some of these problems elsewhere?

Yes, clearly, those give us opportunity to expand some margin.

The 77's probably one of the better ones because it comes back to a rate that we've been at before.

You're going right back in to tools and equipment.

You have a workforce that is knowledgeable in the area.

If we have to add a few folks in there, it will be in with very seasoned crews.

So those are good things.

The 3-7 increases, we've got to do some rate or some constraint-relieving capital and tooling, but again, it's in a more known area.

It's not out of the realm of what we've done and done successfully before.

Remember, we do have -- with any rate increase, we've still got some volume-based pricing issues that give us a little bit of headwind.

We share that value in that particular algorithm.

But, again, I think you're right.

We're entering into rate-increasing time periods, and we're excited about that.

The only cautionary note I would sound here is that because of our block -- when our blocks begin and end, most of that will be seen in the follow-on blocks, not the current blocks.

Thank you.

Yes, thank you, Howard.

Our next question comes from the line of Troy Lahr from Stifel Nicolaus.

Thanks.

I'm wondering if you can talk a little bit about the revenue guidance of 4 billion to 4.1.

Kind of assumes a material fall-off in revenues in the fourth quarter.

Can you kind of help me understand that especially given that some of the Airbus revenues slipped into the fourth quarter from the third quarter?

Sure, Troy.

I think the biggest element to bring the guidance down, to top it off by 100 million down, was really the 78, where our original forecast, to get us to the higher end of the range, included more 787s in the mix than what I think will turn out to be the case.

But that's the biggest mover.

And then some of the non-production things we talked about in cash also have revenue impact, as well, so to the extent they would move into 2011, that would be some pressure, as well.

Okay.

So I mean down 11, 12% is kind of what we should think for the fourth quarter that seems realistic?

Well, I think if you -- our run rate into the third quarter was a billion.

You add another billion to that, you get to the lower end of our range, and to the extent we do a little bit better on 78 deliveries and get some of this nonrecurring in, we could move it to the higher end.

Okay, thanks.

And then just on capacity expansion -- you guys talked about this a little bit -- how should we think about your plans to progress to handle to 35 a month and then getting up to 38?

Do you do that all at once, or do you -- when does the investment really start kicking in?

Do you do a little bit next year and then more in 2012?

You should think of that as some of that investment is underway as we speak.

If you went on a factory tour this morning, you'd see some areas where we're putting constraint-relieving capital and/or tooling in place.

So over the ensuing months between now and when we break the 35-a-month rate, those will come online and be ready.

So those are -- the 35-a-month investments are underway as we speak.

Going above that, you should think about it in terms of a little bit longer-range planning where we look at the efficiency we think we can gain again.

Where we would need to do constraint-relieving equipment or (inaudible) or partnership, frankly, we've got to watch what we do internally as well as what's in our supply base.

So there may be some things for us to use the capacity we have that we may need to get some partner help with.

And all that type of planning is underway now and will unfold in terms of how it impacts our financials as we go forward.

But CapEx should still come down materially next year?

We should be thinking about that?

I don't think I said that.

But, again, those plans are still -- they're still fluid at the moment.

We're looking at, again, whether we make those as internal -- some of those as internal capacity increases or if we can find that capacity capability in our partner base.

So all the things are still up in the air.

And, of course, we still have some of our development programs and the implementation of those new programs.

So I don't think we're going to see substantial reductions in the investment required.

Okay, thanks.

Yes, thank you.

Our next question comes from the line of Robert Stallard from Royal Bank of Canada.

Morning.

Good morning.

Hey, Robert.

Jeff, I was wondering if you could comment about this latest chatter on the 787, that Boeing may be obliged to delay some more of their deliveries next year and what the impact could be on you?

I'll be glad to comment on potential impact.

I think chatter's probably a good description.

I know there's a lot of give and take out there in the airwaves about where the program is, and I think, frankly, will be until all the [cert] issues are complete and the airplanes delivering.

As we look at them, clearly, we're excited the airplanes are in the air, they're flying, they seem to be doing their mission.

Test programs, by their very nature, kick up some issues that have to be resolved.

We've seen that.

We had the question earlier about changes, changes flowing through, and I stand by the statements I made earlier in terms that we still see some but they tend to be less complex.

So we're going to see those through the completion, I'm sure, of the test portion of the program.

I would say for us -- what's really important for us and how that translates back to our financial performance on the program is what, if anything, do those -- does this chatter turn into in terms of production rate?

If we see production rates continue where they are and begin to rise per the plan or close to the plan that we have in the window, then it's going to be okay for us.

If there's something out there in all this that would delay the production ramp-up, then that puts a lot of pressure on us and on our accounting block.

We've gone through, as you know, substantial elongation of that planning block, and that has taken us from a decent margin on the first block down to a pretty thin margin on the first block of airplanes.

So if that block were to elongate, then we'd have a fair amount of pressure on that -- on our ability to keep that block in the green zone, if you will, the positive side of the ledger.

So those are the things we watch.

At this point in time, we're not seeing that.

If we were seeing an elongation, of course, we'd be talking about it, but we're anxious to see the airplanes certify and begin to deliver and the production rates begin to increase, and that's what's important to us.

Yes, thanks for that.

And just as a follow-on, assuming there is no material change on the 787 here, with your extended bank and credit facility, do you think you have enough firepower financially to pay for the 737 expansion CapEx?

Yes, we do, Rob.

I mean, clearly, we look -- took all that into account when we were sizing the revolver.

So, yes, we feel like we're well set to go be able to do that.

Okay, thank you.

Um-hmm.

Thank you.

Your next question comes from the line of Carter Leake from Davenport and Company.

Good morning.

Hi, Carter.

Can we go to Airbus deliveries and just provide some color on that?

I'm struggling with where that revenue actually ends up.

It looks like it would be in Fuselage, but that's the only -- I would've thought it would've been in Wing.

But just walk me through sort of what it is, how it happened, where the revenues are -- actually flow through.

That'd be a great start.

Sure.

It flows through the Wing segment.

But so what's -- I see around 45 million in revenues on those slips, but yet Wing, I don't -- sequentially, it's only down 3 million.

Well, I think you're way too heavy on your revenue estimate there.

Oh, on the ship set estimate?

Yes, I mean the ship set of A320 is kind of in the $1 million range per ship set.

You didn't see that kind of slippage out of quarter.

Ultimately what happens is we just needed to re-phase the [Spirit Euro] factory to match up with our customer a little bit better.

So that all happened in the quarter.

We entered the year not really expecting that, but nonetheless, it unfolded in the third quarter, and we intend to make up that volume in the fourth quarter.

So the A320, I mean I show in my estimates I was just down 25 ship sets and then 19 A330s, so that's around 40 aircraft.

Is that the magnitude of the shift?

No, no, it's nowhere near that.

It's more like 20, I believe, right?

A320?

Yes, 20 A320s, yes.

So 20 A320s is what you -- and then what about A330s?

Yes, I don't have the number there on those.

But our ship set value on the 330s, pretty negligible.

Yes, it's pretty small.

Out of Prestwick -- the main issues on Prestwick are 320, and it's not a big magnitude.

Well, then I guess that goes back to fuselage revenues then.

So what drove -- is it just triple 7s on the fuselage revs being (inaudible)?

Yes, that's the big one, absolutely.

That's the big one.

Got a couple 7-3s, I think, were in the mix, but primarily, it's triple 7s.

Okay, thank you.

You bet.

Thank you.

Your next question comes from the line of Richard Safran from Buckingham Research.

Hi.

Good morning.

Good morning.

I think you may have covered a little bit of this generally from the top level on your development programs.

So in your remarks you noted you're starting to build test hardware for the 350.

I wanted to know are there lessons -- relative to the development programs and the issues that you've had now, are there specific lessons learned that translate to the A350, or is it such that the technology is either new or different enough that this program is likely to have the same level of risk as the current development programs that you're working on now?

Ultimately, program risk is all wrapped around weight, schedule, performance, and the integration of all those at the airplane level tend to be the biggest risk.

Now, we can manage some of that risk ourselves by the contributions that we make on our pieces of the airplane to be very diligent internally and with our customer interfaces on schedule or weight or technical performance, whatever it is, but ultimately, the big issues tend to revolve around the overall integration of the airplane, and that will drive schedule adherence.

So there's some of those risks that we can help mitigate and some that we cannot.

Internally, when -- if programs remain well spaced and we can move our key resources around to the key points on the program, that can help us mitigate our risk.

We've had more ability to do that lately than we did in the past.

So there's -- and then, of course, there's lessons learned on everything from program management to use of tools to just the maturation of your workforce.

So all those things tend to mitigate risk, but there still remains -- in these big complex airplane programs, there still remains a huge amount of integration risk.

Okay, thank you.

Your next question comes from the line of Ronald Epstein from Bank of America Merrill Lynch.

Yes, good morning.

Good morning.

Hey, Ron.

Hey, Phil, so what's the risk that we get into Q4 and you don't earn any cash?

Well, I think I tried to describe it as thoroughly as I can.

The $75 million of cash from operations still feels reasonable to me as I sit here today with the risk we talked about earlier.

And then CapEx at $325 million is really going to revolve around a tooling on the A350 program, kind of when we bring it into service fourth quarter or in 2011.

So that along with the other risk I described between 78, 747-8 and A350 milestones, when I wrap it all up and look at it, I still feel pretty good about cash [mops], the CapEx, and ultimately the free cash flow numbers that generates.

Okay, okay, and maybe one other follow-on if I can.

I think one of the things that investors have been worried about is 787 profitability.

When you look out over the 787 program, and maybe let's just look at the dash 8 variant, do you expect that program to make money for Spirit?

I would say absolutely we do, Ron, and we work very, very hard to make that come true.

One of the challenges, clearly, is the question of when.

I mentioned earlier the first block of 500 units for us has got some pretty thin margins in it, and frankly, that's got a balance of opportunities for us to make improvements and clearly our view of what an equitable settlement is, but I think once we focus on drumbeat in the factory, things will present themselves that we can make improvements on that aren't currently on our list of things to do to make improvements.

But we clearly have in our sight a profitable long-term program on the 87 and intend to make that happen.

And the settlement, you would expect to get that with Boeing in terms of the change orders and so on and so forth.

Would you expect that before the end of the year?

I mean what kind of timeframe?

Because it really seemed to have been dragging on and on and on.

Yes, you could put one more "and on" there if you'd want to.

But I would say that we are under detailed, intense conversations.

I think it's clearly something that's got a lot of complexity to it.

As the production rolls, we all have more information to use.

I think -- I don't think we'll have it totally settled this year or next, frankly, simply because of the complexities that are associated with higher rates and derivatives and all those things associated with it.

But I will be -- I will tell you, I will be disappointed if we don't have some level of movement between now and the end of the year.

Okay, great.

Thank you.

Yes, thank you.

Your next question comes from the line of Joe Nadol from JPMorgan.

Thanks.

Good morning, guys.

Good morning, Joe.

Hoping to get a couple of specifics on some of the questions that have already been asked, but just maybe narrowing this down to some numbers.

In your press release, the first sentence of the 2010 outlook, it says that non production contract settlements have been moved out of 2010 in your plan.

Is that 787 -- some of the 787 assertion settlement specifically, or if not, what is it?

Well, I'm not going to attach it to a program, Joe, but I think there are -- all the non-production programs which I mentioned, 78, 747-8, and A350, would all fall into that category right now as far as the biggest movers of non-production revenue.

Okay.

And then just on the cash flow profile, I know you don't want to give guidance until January for a variety of reasons, including getting out in front of Boeing, but I'd have to imagine that besides the sort of the partnering that you mentioned earlier, Jeff, a lot of your investments next year and a lot of the cash flow profile is kind of baked in already.

So I was wondering if you could just help us out a little bit on CapEx.

I mean is there any movement at all on the down side, or do you expect a similar year to this year?

And then on the inventory situation, you had kind of a stable billion dollars of revenue, Phil, as you pointed out the last several quarters, but that's going to be ramping up over the next couple of years pretty materially.

It's not going to have a consequential impact on WIP.

And then what do you expect on the development programs in terms of further inventory growth next year?

Thanks.

Oh, one long question, Joe.

It's all getting at cash flow.

Yes.

So let me take it on.

So CapEx, Jeff described it to you.

We haven't completed '10 yet, so to the extent some of it could move into '11, that's why I'm not really going to guide you right now to what I think it is.

Let's let the fourth quarter play out, particularly on the A350 spend, and then we'll assess 2011 as we move through January.

But I think it's still -- to Jeff's point is we're still in investment mode on new programs, and now that the new dynamic in the last quarter is we're investing in our core business, which is actually a fantastic place to be, if you ask me, because it gives a greater return as long as we sustain these production -- higher production rates for some period of time, which we all think that's likely.

All that said, but 2011 will be -- will look similar to probably 2010 at this point.

Inventory --

CapEx specifically, sorry.

That's CapEx, right, Phil?

That's CapEx.

That's correct.

Okay.

On the inventory, there's a lot of moving parts to it as we have a lot of deferred production that's building now.

We get out into probably the '12 timeframe, we start moving and burning off that deferred production as we go, and as you say, we build volumes.

So if I looked at total inventory over the next couple of years, I previously described it as modest growth, probably a little bit above that at this point in time, but I don't see it growing dramatically.

I mean we're about 2.5 billion of inventory right now.

Kind of expected to stay in that range for the next several years until we start really burning down deferred revenue or deferred inventory on 78 and some of the G programs.

Did I get to them all, Joe?

Yes, no, I think that's very helpful.

I just -- as we think about the cash flow, there's one more kind of critical component, and that's a settlement with Boeing.

So, Jeff, you haven't really offered us much in the past on this, and I understand certainly why, but can you help in terms of framing what we might see in terms of a settlement?

Are you talking about a cash payment and a pricing adjustment separately?

Any kind of color?

It's the biggest area of discussion in the investment community.

Any kind of color, even framework, you can provide, I think, would be really helpful.

Yes, I'm sure it would.

Let me see.

I think what's fair to say is because of the length of time it's taken to work our way through here, we have a number of things that are behind us.

We have an environment that we're operating in right now, and then we have the future projections of what we can do with the program.

I would say the key in my mind is -- and then, of course, we have it across Fuselages and Wings, so you could get a fairly complex matrix.

I think what's fair to say is that we'll work -- we're trying to work those pieces of that matrix that we have clarity on and try to figure out a way forward on those that still have ambiguity as to how they will resolve and then come up with a solution that works for all of us.

Understood.

Yes, that makes sense.

I hope that's helpful without being too specific.

It is.

Thank you.

Thanks, Joe.

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

Thank you.

And our final question comes from the line of Heidi Wood from Morgan Stanley.

Yes, hi, guys.

I want to also ask questions on the 787.

It looks like there's a series of design changes on the 787-8 that will take place over the course of various units, and I'm just wondering how does that impact your thoughts about the learning curve in 2011 to 2012?

A couple thoughts, Heidi.

Part of the improvement curve for us is making things -- part of it is just learning, right?

Just knowing how to do the job and finding better ways of doing the job.

Another part of the learning curve is making some design changes that make producibility enhancements.

So any time there's a change -- when we get into a mode where changes are coming through in kind of an orderly block pointed fashion, we try to take that opportunity to add producibility into the configuration of the airplane.

So in some ways, that can be good for you depending on what the change is.

If it's -- there are things that drive cost into the airplane and there's no other way around it other than to just, for functionality's sake, get it done.

But it's an opportunity, as well.

Now, the flip side of that is pure learning curves love continuity.

I mean they just -- they love a lack of change.

So you've got to balance those two, and sometimes to get the change you want, you have to make -- to get the improvement you want, you've got to put some change into the system.

So we try to balance between a continuity and appropriate levels of change and accommodate airplane-level requirements change at the same time.

But as I look through this, Jeff, I mean I'm glad you acknowledge that because as we go through these block points, these are some pretty substantial changes as best I can understand it, so that's sort of antithetical to the continuity that you're talking about and that makes sense.

So based on the skyline of the units ahead, when do you start producing 787-8s that are substantially the same?

Well, in some ways -- in some ways, we're there now.

There isn't a lot of structural change to what we do.

Most of the change we're talking about is in the installation side, so heavy structure's been relatively stable.

Again, though, we look at the supply chain.

Is there a material change or is there an improvement we can make that will drive the cost to us down?

And those will come in with block points.

But most of the change we've been accommodating here, really for quite a while now, have been of the systems installation vintage.

So in the answer to the "when," is that in 2011, 2012?

Well, I think we'll continue to see improvement in that.

And, frankly, the amount of change right now isn't as bad as it was in terms of -- bad in terms of the number of times we had to make changes.

So I think we'll see stability increase through '11 into '12, and then, of course, the dash 9 -- what will drive forward the dash 9 is to make as much of that retro to and exactly the same as the dash 8.

The more we can get commonality established, the more we'll get the kind of learning that you're talking about.

Okay.

And then, Phil, just one last follow-up.

I just want to dot the "I" on an answer you gave someone else earlier on the call.

You said within -- in response to the question of when does the cash cost match the revenue lines, I thought I heard you say kind of normally crosses at the $125 to $150 mark, but that's if it has been on schedule, so obviously it's not on schedule.

So how do we think about the answer in today's world?

Yes, I think you have to put it in an algorithm and factor into what Jeff just described to you because the change really needs to conclude and allow you to get repeatability in the factory, and that enables you to come down the curve quicker.

So I think as that trails off in, we think, 2011, you may or may not hit the standard IE answer, but you might get close.

Okay, great.

Thanks very much, guys.

All right, Heidi.

Okay.

Thank you, all.

Ladies and gentlemen, this concludes our question-and-answer session.

I'd like to hand the call over for closing remarks.

Thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.

Have a great day.