Spirit AeroSystems Holdings Inc (SPR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Spirit Aerosystems Holdings Incthird quarter 2011 earnings conference call. (Operator Instructions). I would now like to turn the presentation over to Mrs. Colleen Tabor, Director of Investor Relations. Please proceed.

Good morning. Welcome to Spirit's third quarter 2011 earnings call. I'm Colleen Tabor and with me today are, Jeff Turner, Spirit's President and Chief Executive Officer and Phil Anderson, Spirit's Senior Vice-President and Chief Financial Officer. After brief comments, by Jeff and Phil, regarding our performance and outlook, we will 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 question.

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 and our SEC filings and in the forward-looking statements at the end of this web presentation. As a reminder, you can follow today's broadcast and slide presentation, on our website at www.Spiritaero.com. With that, I would like to turn the call over to our Chief Executive Officer, Jeff Turner.

Thank you, Colleen and good morning. Let me welcome you to Spirit's third quarter earnings call. I will begin with a look at our business and related performance, and then Phil, will review the financial results. After that, we will be glad to take your questions. Let's begin on slide two.

Our core business continued to demonstrate, solid operating performance in the third quarter. As we are successfully transitioning to higher rates, and benefited from model mix. This quarter marked a number of important milestones, including the certification of the 787-8 and 747-8 Freighter, along with, the initial delivery of a 787-8 to an airline customer. The certification and delivery of these programs, are critical milestones, that enable us to move on to the next phase of production, where we can begin to realize their long-term value.

The announcement of the 737 MAX, is another important decision point, that extends the life of this very successful program. High volume derivative programs are a core competency for Spirit, and we have the expertise and capability to bring value to our shareholders as we play a significant role, in the future of this airplane. In the quarter, we successfully transitioned to 35 per month on the 737 program, and continued to deliver higher volumes with incremental margin improvement, across our core programs.

Throughout the quarter, we remain prepared to resume talks with our technical and professional workers in Wichita, to negotiate a fair and competitive contract. Our objective, with all of our union partners, has been and continues to be, to keep our company healthy, and our team for the future intact. Our backlog is now over $30 billion, demonstrating the strong demand for our core products and our development programs transitioning to production.

As the large commercial aircraft market continues to be positive, we remain watchful of global economic and political dynamics, while closely managing our capital spend, to support increased demand for our products. Let's talk about some of the specific accomplishments across the business, during the quarter, beginning on slide three.

Fuselage Systems delivered solid operating margins, of 14.7% on $542 million in revenue, during the third quarter, as volumes across core programs increased. The Fuselage segment 737 high rate production line, continues to perform well as the team delivered its 3,800th ship set, of the Next Generation Fuselage. The 787 team made progress by delivering five airplane fuselage sections in the quarter, including the forward fuselage number 49.

The Fuselage team also continued its progress on the 747-8 program this quarter, by delivering two freighters and two intercontinentals, bringing the total number of fuselages delivered to 34. Though early in our efforts to implement cost improvements on the 787, the joint Boeing and Spirit teams, are tracking per plan to identify and implement cost improvements, across the program on the current product structure, its producibility, efficiency, and productivity.

On slide four, you see the Propulsion team delivered strong operating performance, with margins of 17.1% on $309 million in revenue, during the third quarter, as volumes across the core programs increased and we saw additional aftermarket volume. We are seeing improvements, across the Propulsion production programs, with the exception of the BR725, where we continue to see cost pressure and are working closely with our customer, to identify and implement cost improvements to reach our goals for this program.

The segment's core business continued to perform very well, as we transition to higher rates for both the 737 Next Generation engine pylons and thrust reversers, surpassing line unit 3,800, in the quarter. The Propulsion team has been working closely with our customer, in the early design phase, of the 767 Tanker. I'm pleased with the team's progress, that will extend the life of this -- of this core program.

On slide five, you see the Wing Systems segment, which primarily consists of our Europe, Malaysia and Oklahoma operations. The Wing team reported operating margins, of 8.2% on $277 million in revenue, during the third quarter, as volumes increased across core programs. Spirit Europe produced high volumes of hardware, for our Airbus customer. Reaching line unit 5,000 for the A320 Wing components.

The Oklahoma team continued producing, on derivative programs, as they delivered the 33rd 747-8 Fixed Leading Edge Wing section, and the 51st set of 787 Wing Slats, in the third quarter. We remain focused on meeting customer commitments, as early production efforts continue on the Gulfstream G650 and G280 Wing programs, and development efforts progress on the A350. Now, let me turn it over to Phil, who will provide more details on our financial results and outlook.

Thanks, Jeff andgood morning. I will begin, with the key financial highlights for the third quarter on, slide numberseven. Revenues, for the third quarter, were up approximately 13%, as compared to the third quarter of 2010, on increased deliveries of large commercial aircraft and stronger aftermarket sales. Operating margins for the quarter, were a strong 10.7% ,compared to the 2010 third quarter margins of 8.2%.

Third quarter 2011 operating margins, reflect year-over-year improvement, associated with the increased volumes, model mix and disciplined expense management. These results reflect contributions, from the core business, as the Fuselage and Propulsion segments realized favorable cumulative catch-up adjustments, totaling approximately $6 million. Partially offset by unfavorable $2 million, of cumulative catch up adjustment, due to modest cost growth, in the Wing segment. The quarter also included, an additional $10 million of forward loss, on the CH53K program, associated with the change in the make-buy strategy.

Fully diluted earnings per share, for the quarter, was $0.47 per share, reflecting margin expansion on higher volumes, a lower effective tax rate and higher interest expense. Excluding the net unfavorable impact, of $0.03 per share, associated with new program charges and the cumulative catch-up adjustments, EPS for the quarter, would have been $0.50 per share. Cash from operations, for the third quarter of 2011, was $66 million source of cash, as working capital reflects increased inventory, offset by favorable accounts receivable and timing of payables.

During the quarter, we satisfied our repayment obligation, in full, associated with the 787 customer advance of $396 million. This is a significant milestone for Spirit, as the 787-8 Airplane is now certified, in service, and our 787 ship set deliveries to Boeing Commercial Airplanes is now on a cash basis. Capital expenditures, were $80 million for the quarter, compared to $52 million, for the third quarter of 2010. As investments in new programs and capacity expansion continues.

On slide eight,third quarter R&D and SG&A expenses reflect, our continuing disciplined expense management and lower new program related R&D.

Slide nine summarizes cash and debt balances. Cash balances at the end of the third quarter , were $138 million, as compared to the second quarter of 2011, of $154 million. At the end of the quarter, our total debt to capital ratio was 38%. The Company's liquidity position and balance sheet, remain strong as we invest in new programs and capacity expansion for our core programs.

Our US defined benefit pension plan, remains fully funded while we continue to make modest cash contributions to our UK plan. Slide ten summarizes net inventory balances, which increased by $132 million, during the third quarter. This growth in inventory, reflects increasing production volumes in our core programs, along with inventory management improvement initiatives and investment in new programs. As you can see, slide ten business jet wing programs, the 787 and A350, were the primary contributors to inventory growth, this quarter.

787 deferred production balances, continue to increase as we expected. 787 deferred production growth per unit, in the third quarter of 2011, was modestly higher than the year-to-date 2011 unit average. As programs' scheduled pause impacted the cost of current quarter deliveries. Inventory is expected to continue to grow modestly, through the fourth quarter, as we prepare for increased production on our core and new programs.

Slide No. 11 summarizes, our updated 2011 full year financial guidance. Based on current customer demand, our revenue guidance is updated for 2011, and is now expected to be approximately $4.7 billion. Fully diluted earnings per share is unchanged, and expected to be between $1.40 and $1.50 per share.

Cash flow from operations for 2011, is being updated to reflect the expected change in timing of development program milestones, and additional resource requirements for business jet programs. Cash flow from operations is now expected to be, between a negative $50 million and zero. Capital expenditures are being updated to reflect the change in investment timing. Capital expenditures for the full year of 2011 are now expected to be, approximately $250 million.

This change reflects a $50 million reduction in previous guidance, as we continue to prudently manage cash investments, associated with new programs and capacity expansion. Our updated 2011 tax rate is now expected to be, approximately 31%. Combined R&D and SG&A is now expected to be, between 4% and 4.25% of revenue for the full year of 2011.

We continue to expect 2012 revenue, to grow above the 2011 guidance, as demand increases for the core products and new products enter the production and delivery phase. We continue to expect cash flow from operations less capital expenditures, to be positive into 2012, as cash advance repayments decline and working capital investment stabilizes. I would now like to turn it back over to Jeff for closing comments before we take your questions.

Thank you, Phil. I will wrap up on slide 12 with a few brief comments. Our core business executed well in the third quarter, and continues to be the operating engine for Spirit. Our transition to higher rates across our core programs, is progressing in a systematic manner, that further strengthens our operating base. As we meet customer commitments and achieve critical milestones, on our development program, our focus remains fixed on execution and managing costs, for long-term value.

Looking ahead, we expect to continue to benefit from the expanding demand for commercial aircraft, while achieving productivity and efficiency improvements across our business. Our content on the best selling commercial and business jet platforms, in production, combined with our execution of our strong backlog positions, will help us to deliver long-term value. We will now be glad to take your questions.

(Operator Instructions). Your first question comes from the line of Ron Epstein, from Bank of America Merrill Lynch. Please proceed.

Good morning, Ron, are you there?

Hello? Do we have another question?

Your next question comes from the line of Troy Lahr, from Stifel Nicolaus. Please proceed.

Thanks. I wondering if you guys could talk a little bit about how much risk remains in fourth quarter on some of these development programs? Do you think some of these charges that we have seen, could potentially creep into the first half of next year or do you think most of these are kind of lined up where you want them to be?

A couple of ways to think about that, Troy. I mean, clearly, we talked a lot about 2011 being a pivotal year, and the continued risk that exists on some of our development programs. I mean, clearly, we have program plans established and forward-looking forecasts. Some of these programs are still, as you know, in test mode, so there is still risk associated with finishing the engineering and making sure that those are production ready.

There is also, of course, the forecasted cost curves that will be able to come down. Any disruption in the engineering end of it, the definition end, delays our ability to come down the curves. Again, we have taken a look at them. We know there is risk associated with them. We have tried to categorize that, in all of our public statements. But at this point and time, we have program plans that we are executing, and hope to continue to do that without major disruption. Having said that, there is risks that remains and we will continue to work off that risk register.

Okay. Thanks.

Thanks, Troy.

Thanks, Troy.

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

Well, I will try another way to get what Troy was after. Jeff, the margins were okay, a little over 10.5% in the quarter. How do you think about trying to achieve that sort of level of operating performance going forward? I know you have got some mix issues that will hold it back, but triple 7 and 37 sort of help.

Sure. I think you characterized it right, Howard. In a way, we think about it is, we have the core programs that have quite a bit of uplift associated with them as we manage volume and efficiency, and drive that side of the equation. Then we have got, the obvious new programs, early in their production, trying to manage the fact that we overspent the development side of it. Most of those programs look like they are going to be able, to be in the envelope of what your production plan was originally.

The real issue is to try to burn off some of that extra development cost that we had. We have a split portfolio, if you will. We have some very, very good actors, and some that we are going to have to spend an awful lot of energy on making improvement. Overall, they look like they are going to come in to the original production cost lines, if you will, and we think we have got some opportunity to improve some of those, and eat off some of the extra money we spent in development. But like I said earlier to Troy, the risk remains on some of the programs.

So I'm just, put you -- push a little bit. So would -- what kind of margin number would you consider satisfactory?

Well, I think, clearly our objective is to improve overall and use the base that we have. I'm not going to state a specific number. I mean, clearly we are driving the business to achieve higher margins on our core programs, and to improve the zero margin programs where we can, and get those on the positive side.

Your next question comes from the line of George Shapiro of Access 342.

Good morning.

Good morning, George.

Phil, I was wondering if you could, actually, provide how much the 87 deferred went up, and also try and quantify how much of the work stoppage in the quarter, would have impacted that, so you can kind of get a real look at how much the deferred for the 787 might have changed?

Sure, George. The full year average for the deferred growth, is about $7.1 million per unit, for the full nine months of this year. The third quarter, you will see it coming in right at around $7.5 million, so we had about $400,000 or $500,000 growth per unit. Mainly associated with, as I said, the production pause that have been implemented, mostly into the third quarter. The longer the units sit around, the most costs they collect. It is not really too scientific. That is kind of the scope of it.

I think the curves, you know, I think 787 more broadly, George, we feel very good about how it is going. You know, it is great to see the airplane certified, in service. It is good to see our payments on the $396 million, fully repaid, as we enter the production cycle and delivery cycles and the service cycle from the airplane. So very optimistic about where it is at in the market. Our activity with our customer, focused on cost reduction is right on plan, which it is early, as I would categorize it and I think Jeff would agree. It is early in the process, but going very well and on plan. I think we like the 787 quite a lot, and looks like it going to be a good program for us.

Let me just ask it a slightly, different way. Was there in the deferred production in the quarter, was there whip from units that were pretty much completed, but not delivered?Because I notice your deliveries of five were one or two less, than I would have thought.

Yeah, George, I think that is, correct.

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

Good morning.

Good morning, Rob.

Going back to the margin question from a moment ago, I don't know, Jeff, if this is for you or maybe or Phil, but forward basis, should we be more like these 10% type margins that we saw in this quarter, 10.5% or is it more like the first half of this year, given the risks that are still out there?

Well, Rob, I will take a shot at it, and then Jeff can add some color commentary. I think where we sit, given the strong core business, and the growing market, and then our diversification programs which are in development, high single digits, low double digit margins, over the next couple of years, feel about right as we move through this period of time. And that is in the face of 787, which we are continuing to book at zero gross margins, for the time being. I think that is a decent way to think about it, in terms of total company consolidated margins, taking into account, kind of all the risks and opportunities with new programs and the 787.

Sounds like you need to be at that low double digit number, in the fourth quarter, in order to at least hit the higher end of your guidance, I would think. If you slip into the single digits, it is tough to get there, especially with a sequential down tick in revenues that's implied by the number. By the way, is that just mix at Boeing?

It is a little bit of mix. More on new program milestones and deliveries. And, of course, the 787 is in that mix as well.

Thank you for your question. Your next question comes from the line of David Strauss, from UBS. Please proceed.

Good morning.

Good morning, David.

I guess, whoever wants to take this. On 2012 cash, you reiterate free cash flow positive again, but a lot of things moving around in 2011. You also had the settlement with Boeing, which reduced the advance payback to them. Can you maybe talk about, do you feel better about that statement on 2012 cash, being positive today? Does it look better relative to how it looked, maybe three or six months ago?

I would say, David, we feel about the same. There is some moving parts, we had some things that will move out of 2011 and into 2012. We have expenditures, as the rates have continued to increase, so I think on balance we feel about the same. We feel confident 2012 looks like a positive cash year.

Okay. Follow-up on blocks, on the 37 and triple 7 block, looks like you will be in a new 37 block, probably this month. Have you set the block and if so, can you tell us the size?

Yeah, David, you are exactly right. There was a wrap-up here this quarter, and we basically have the next block set for 24 months worth of production. And triple 7 mainly concludes in the first quarter of next year, and will be consistent with about this 24 months of production as well.

Thank you for your question. Your next question comes from the line of Joe Nadol, from JPMorgan. Please proceed.

My question is on the MAX. Where are you guys, at this point, in determining the implications for the 737 for your business? How much -- how similar is your fuselage going to look on the MAX, relative to where we are today? What is going to be the investment requirement? All those sorts of things. Any color commentary you can give, would be great.

Sure, Joe. I will start by, I think reiterating what we said last quarter, which is, we view this development as a choice to re-engine the 37 and for the 737 MAX, very, very positively. I mean, clearly, we are a key partner and supplier, on the 737 Airframe, Wing components, Pylons, Thrust Reversers, all those things. We anticipate that we will play substantially the same role on this derivative that we have on the NG to date, and frankly, we did on the classic before the NG.

We think there probably is some opportunity for us to grow that work statement, as we look as efficient flows, but we will see as time goes on. Clearly, the objective is to build the airplane, as a derivative, which means a great deal to us in terms of, the use of tools and processes and plans and automated riveting equipment. So we all -- we see that in a very positive light.

We are highly engaged with our customer in the early stages of full definition of the airplane, so full definition for us in terms of the details that we need to execute are not yet clear, and they will emerge as the program goes through its cycle. But for us it is a derivative.

We are -- our experience on derivatives, most recent one on the 37 was the P-8A, which went very well and delights the customer. I think we are, clearly, right in our wheelhouse, and we are excited about it. We know how to analyze the designs, and we know how to do it in a way that utilizes our invested base. I feel good about where we are. The intimacy that we have on the program, and as those details emerge, I'm sure that the customer and then we will be talking a lot more about that.

Jeff, when do you nail down pricing and the CapEx profile on that program? Is it sometime next year? Is it after that? Are they nailed down at different times?

It will be -- you know, clearly, it will be after firm configuration. Again, it is a derivative program and we have very clear processes we use for derivative pricing, and for derivative development.

Thank you for your question. Your next question comes from the line of Heidi Wood, from Morgan Stanley. Please proceed.

Good morning. It's actually Mike Sang in for are Heidi. A little more on the CapEx guidance this quarter. A little surprised to see that come down again, especially' head of the production rate increases. I know you talked a little about the timing of investments. Can you talk about how much of that comes back in 2012, and how we should think about capacity in 2012, given deferral?

I think there is two issues here and then I will let Phil talk about it. First is, CapEx plans, of course, are established based on anticipated efficiency and requirements for additional capital, and on timing of development programs and rate buildups. Any deferral -- deferral out of 2011, some of which defers into 2012, but when it is based on an improvement in efficiency, which some of this is, then it is a deferral to even later in the cycle.

Some of it is an efficiency and some of it is timing. And then of course, if you push it out of one year into the next, there is often things you put out of the next year into the subsequent years. That is the way to think about that. Phil, do you have anything to add to that?

The only thing that I would add to that is, you can take a lot of comfort away from -- we are timing these investments very carefully. Whether it is core business volume expansion, the efficiency aspect , which Jeff talked about, or the new programs , because some of the volatility in the schedules we have seen, over the last several years, so we are being very, very prudent on how we deploy the capital. A lot of it does move from year-to-year, from 2011 to 2012, even in some cases from 2012 into 2013, from my vantage point. I think the comfort you take, is we're going to deploy the capital, only as we need to and, certainly, when we need to.

Thank you, guys.

Your next question comes from the line of from Finbar Sheehy, with Sanford Bernstein. Please proceed.

Good morning.

Good morning.

I just want to go back to touch on the 787 for a minute. We were talking about the growth and deferred inventory. Do you have visibility now to when you expect that will peek? Are you facilitized for 10 per month, at this point? Are you, sort of, confident that you can do that with your current facilities, or will you need to spend more capital to get there?

Let me answer the first question first, and then I will kick the first part of that question back to Phil. We have said consistently, that we have a footprint for ten per month, and equipment for seven in our plans, and we will bring on tools and equipment, as required to make the rate buildup.

We do, as you know, on all of our programs a very comprehensive rate readiness planning and management, and our rate management plan for ten a month, is green across the board. That doesn't mean we have all the equipment and tools in place, but we clearly have the time, and our lead time away in managing that closely.

Yeah, Finbar, on the first part of the question on deferred production balances, the curve, we think, looks much like a traditional program. Where we're steeper at the front of the program, it's much steeper, and then it breaks over to a flatter curve as we move into sustained and higher rates of production. 787 has those same characteristics, of course.

Pauses, starts and stops do not help the cause from a cost standpoint. So we are dealing with that, in the current time frame. As we go through time, historical program we think, breaks across this curve, and you only start relieving deferred production sometimes, roughly, it's kind of 100 to 150 unit range, and we still think 77 follows that pattern.

Could I just clarify a little bit on the first answer, I guess the second part of the question? Which was on whether you are facilitized to produce it I guess, strictly speaking, with equipment and tooling for 7 per month. Is the rate of through-put that you are seeing now, consistent with that plan?

Well, clearly, we are not at 7 per month, but it is consist went the rate buildup plan and our capability to produce faster is there, and all the plans required to get to ten a month are there.

Thanks you for your question. The next question from the line of Sam Pearlstein, from Wells Fargo Securities. Please proceed.

Thank you. This is Gary Liebowitz for Sam.

Hi, Gary.

Morning. Could you just talk about your pension sensitivities for next year? What kind of head winds you might face, given where rates are and asset returns are? How you're thinking of pension contributions?

Sure, Gary. We have a very enviable position, when it comes to US defined benefit plans, where we are fully funded right now. We have been fully funded, since the company was formed. We don't foresee any cash contributions to that plan. We do make modest cash contributions to our plans in the UK, and I think from an asset management standpoint, the assets are in a fixed cost type of investment or liability driven scheme, which helps protect us from the cash contributions. But there is really -- we are well funded and don't have any designs, or don't see a need to contribute anything to those plans.

On a reported earnings basis, I would thing the change in interest rates alone, is a little bit of a headwind?

A little bit, but it is not too overwhelming for us.

Thank you for your question. Your next question comes from the line of Richard Safran, from Buckingham Research. Please proceed.

Good morning.

Good morning, Rich.

I just wanted to ask you a question about the follow up on your comments on the aftermarket. Recognizing it is not a large piece of your business, can you just comment on how much your aftermarket business is contributing to volume and margins, and can you tell us about how much your aftermarket business has grown year-to-date, and what your expectations were?Any kind of color that you could give on that would be great.

Sure, the volumes, were not -- it is not the biggest contributor. The volumes are up 30% to 40% this year, from last year. Most of it, I would say two thirds of that volume, comes through our Propulsion segment, where the Propulsion hardware has the higher tendency for after-market activity, and it tends to be like most after-market businesses the margins, are fairly attractive, and we certainly would like to see more of that coming through. That said, it isn't a big swinger for our revenue line or our profit line, but it has improved very nicely this year. We are very pleased with that.

I would just say parenthetically though, the improvement that we are seeing in the Propulsion business, though impacted by after-market, is driven by core improvement in margin on core programs.

Yes. Good point.

Thank you very much.

Of course, thank you.

Thank you for your question. Your next question comes from the line of Michael Callahan from Auriga. Please proceed.

Good morning, guys and thanks for taking my question. I was hoping we could dig down a little deeper on the A350 program, I guess just specifically, where it stands, whether or not you guys think we are still on target for the first delivery schedule? Then also, I guess, as you are talking about new program development risks, and some of those may be winding down as these programs go into production, how much risk do you think still stands on that program specifically?

So, the A350 -- the A350 we have four contracts, on the A350. Two nonrecurring, one for the fuse Fuselage and one for the Wing and then two recurring. We have talked in the past, about the nonrecurring contract on the Wing, and that is the area where we are most stressed financially. That is due to some extra engineering activity that is underway. The other three, continue to look solid.

Having said that, we have delivered our first hardware ship sets for the Wing Spar, and, in fact, at an Airbus announcement several weeks ago, the Prime Minister stood in front of the Spirit hardware, to make the announcement. So it is in the Airbus factory, and being incorporated into the Wing as we speak.

The Fuselage, we have delivered our first Fuselage panels into France, into our final assembly building in Saint-Nazaire. The plan is for that to be delivered yet, this month, to Airbus. That program is producing hardware, finishing up designs and driving forward.

Thank you for your question. Your next question comes from the line of Cai von Rumohr, from Cowen and Co. Please proceed.

Yes, thank you. You've talked a bit about, kind of a new programs and I guess the impression we get, is that the 787 and 47 are doing some what better. Give us a sense maybe, rank by degree of risk, going forward where the risk is?Kind of sounds, from what you guys are saying, it is the G280, G650 and A350, but maybe give us a little more color and rank them, by the degree of risk we have going forward?

Sure, Cai, I would be glad to do that. Let me start by, if you rank it by, most dollars at risk, you would rank 787 clearly, and then follow that with the A350. If you rank it by uncertainty in making the curves, if you will, then I would put this particular block, that we are in for the 747-8 because we had a lot of delays and we are back up the curve on the 747-8 because of the major derivative. Not that many airplanes left to build in that block. And followed by the, probably the BR725, which is finishing up, it's not certified yet, got some engineering change in it and have got to drive it down a substantial cost curve. Then, of course, the 280 would be next, I guess.

Having said that I like the momentum that I'm seeing. I will speak a little bit about the 280, specifically, and the 650, which you guys know, have been challenging programs for us. We've got -- I like the momentum that I see, I like the management team we have in place. I think we we've seen major improvements in flow, on the 280.

We have seen an increase in demand, which is both a challenge and an opportunity. We will -- I think we will see continued improvement through time, on those programs. The real issue is the amount of money that we spent over in the development, and trying to earn some of that back. Whether we will be able to do that or not.

Thank you.

Yeah.

Thank you for your question. Your next question comes from the line of Eric Hugel, from Stephens. Please proceed.

Good afternoon, guys.

Hi, Eric.

Can you address the guidance cut in the terms of cash flow from operations?It looks like you cut about $50 million to $150 million out of cash flow from operations for this year. Can you sort of talk about what you are driving at or is that a slip out into next year? Also, can you talk about on the CH53K, I guess you sort of took some charges, re-baselined the program back in the first quarter, can you, sort of talk about what issues you were facing this quarter that you took this incremental charge?

Sure, the cash flow from operations change, it is really driven -- it is timing fundamentally. Timing on some of the new programs. Developmental milestones mainly. It is an extent, we have changed it. It is mostly moving into 2012. The CH53K -- the perspective on the development programs too, is very dynamic from quarter to quarter.

It is not static, we are making decisions, changing things and the thing that really drove us this quarter, was the make-buy shift. We decided to bring parts in house to produce, and they were significant pieces of the structure. To make the schedule and support the customer requirements. That wasn't really in full view, back in the first quarter and we would need to do that. e decided to do it, and drove some more costs in the current EAC.

The interest is $19 million sort of a good run rate, going forward?

That is a pretty standard run rate. That reflects the debt that we are servicing, sure.

Thank you for your question. Your next question comes from the line of Ron Epstein, from Bank of America Merrill Lynch. Please proceed.

Hey, good morning. Sorry about that, I had a technical issue before.

We thought it was us, Ron.

No, it was my end on the phone. My apologies about that. You talked a little bit about this, could you give us an update where we are with the A350 program and if you do happen to run into overruns, is that structured? Does it fall on you guys? Do you share it with Airbus? How that works? Where do we stand with the facility in North Carolina? How's tat doing?

The facility in North Carolina is up and running, producing hardware. Beautiful hardware. We need to have an investor conference there, and let you guys see that. It is doing well. The program is -- the program is progressing well. The hardware build, we got as we often do on programs, we got behind on engineering relief, but when we got the parts, they went together really well.

I think, I mean clearly, all development programs have risk associated with changed traffic. As you know, the profile on this program has partner investment, Spirit investment and customer investment. The profile on this, is it is structured, it is structure only hardware, with no systems in it. So it is -- I mean it is a pretty straightforward package, although it is composite structure and it is brand new design, so it has got that risk associated with it.

But we are progressing through it with, I would say the normal issues that you have with a developmental program, and have begun to deliver hardware. The risk now is if that hardware design stays stable or if there are issues that we discover in test, or the whole program discovers that would require change. That would then begin to drive change control mechanisms, that we would have to work our way through.

Okay. And then maybe let me one more follow-up on 787. I think that Boeing is out reiterating today, to book it to three and a half per month by spring, and when you think about your supply chain and what is going on, what worries you about the program?Are there any long tent poles in the 787 right now, that you are keeping your eye on, that may or may not be in your control?

There are, of course, a number of things that we pay a lot of attention to. Our labor, our supply chain and their readiness, to make the rates. I would say the main issue for us on this program -- I think the main issue for the whole program, is getting it to a predictable drum beat and I see that coming. It has been slow in coming, but I think as we got the certified airplane, we are delivering it, so the configuration is solid.

We don't have any big major tent poles, that we are worried about right now. There's all the normal things of, supply, and working the improvement curves, and labor and all those things. But it is pretty much -- it is pretty much straightforward now . As we go above seven, we have got some equipment and some tooling to bring in, but again, it is things we have done and do, I think pretty well, so my main issue is just to get the overall program to a steady drum beat.

Thank you for your --

I would just add, our condition of assembly is extremely good. It is right at 100% complete with the functional tests. and all of the hardware it is supposed to have. The key is to minimize the disruptions and to make the steps.

Thank you for your question. Your next question comes from the line of Michael Callahan, from Auriga. Please proceed.

Thanks. Just one follow up I wanted to ask on the cash flow guidance for the balance of 2011. Looks like a takes a dramatic swing positive, into the fourth quarter. You said the 787 is on a cash basis. I assume that helps a lot. Could you just walk through a little bit of the mechanics of what changes in 4Q and then I guess what will continue into the next year and what will kind of trail off to be, maybe free cash flow neutral for -- neutral to positive in 2012?

Sure, The swings really, 787 is exactly one of them. The other one, revolves around the lumpiness of development programs and milestone payments, as we accomplish the engineering effort. So those, if you'd go back a couple of years, you'd see we tend to have , pretty robust fourth quarters, driven mainly by non-production programs. Similar to how 2011 is unfolding.

There are no further questions at this time. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.