Spirit AeroSystems Holdings Inc (SPR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings, Inc.'s third-quarter 2012 earnings conference call.

My name is Dawn and I will be your coordinator today.

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

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

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

Coleen Tabor, Director of Investor Relations.

Please proceed.

Thank you and good morning.

Welcome to Spirit's third-quarter 2012 earnings call.

I am Coleen 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 statement at the end of this web presentation.

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

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

Thank you, Coleen, 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.

As we discussed last week, I am extremely disappointed we have not better managed the complexity surrounding our new program that has resulted in the previously announced pretax $590 million charge this quarter.

Understandably, many of you are also disappointed and focused on how we are managing these programs to turn them cash positive as soon as possible.

As I shared with you last week, we are doing this by strengthening our leadership team, our development disciplines, and our management operating systems.

The leadership alignment that drives this performance includes a significant infusement of skills in program management, supply-chain management and engineering leadership.

The development disciplines include program management, change management, contractural rigor, and engineering management tools application.

Finally, the management operating system that enables us to drive cash generation on these programs is through shop floor operating performance, supply-chain cost improvements, and overhead management.

Turning to our core program results in the third quarter, the strong operating performance of our core programs is evident as revenue grew by 21% and we saw the sixth consecutive quarter of year-over-year increases in deliveries.

Additionally, as we announced last week, we finalized the settlement with our insurers for all claims related to the April 14, 2012 severe weather event at our Wichita, Kansas facility.

Due to the quick response of our team and partners, we were able to mitigate the damage caused by the severe weather and ultimately reduce the final insurance claim significantly below initial estimates.

The strength of the large commercial aircraft market continues as global demand and order volumes for the next-generation derivative airplanes like the NEO, A320-NEO and the 737 MAX drive clear line of sight into Spirit's backlog of approximately $34 billion.

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

Fuselage Systems had strong topline growth and operating performance with margins of 17% on $660 million in revenue during the third quarter as volumes across the core programs increased.

The Fuselage segment's high-volume 737 production line continues to perform well as the group has now delivered more than 4,200 chipsets of the Next-Generation fuselage.

During the quarter the fuselage team continued to make progress on the A350 program, having delivered the second composite center fuselage to our Airbus customer.

The 787 team remains focused on supporting our customer and delivered the 84th forward fuselage section.

Additionally in the quarter, the fuselage team demonstrated continued success in producing 737 derivatives by delivering line unit 20 of the P-8A Poseidon fuselage.

Translating our success with derivative products to the next generation of airplanes is one of our strategic priorities and we are proceeding well on the 737 MAX and the 767 tanker programs as we move through our customers' gated process.

We are pleased with the continued momentum on the 737 MAX.

On slide four, you see the propulsion team reported operating margins in negative 27% on $358 million in revenue as the quarter was impacted by the forward loss on the BR725 program.

The segment's topline growth continues as both core and new program deliveries continue to increase.

Propulsion's core business is anchored by the 737 next-generation engine pylon and thrust reverser teams, who continue to perform well as the groups have now delivered more than 4,200 units of hardware.

The propulsion team also demonstrated its effectiveness in another of our core programs, delivering the 1,050th 777 nacelle and pylon packages in the quarter.

Additionally, we continued to progress as the 787 shipped pylon line unit 87 in the quarter.

The propulsion team continues to successfully meet major design milestones on the 737 MAX, the Bombardier C Series and the Mitsubishi Regional Jet as they work to develop the next generation of aircraft.

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 negative 118% on $345 million in revenue during the third quarter, reflecting the forward losses recorded.

I would like to begin this segment discussion by complimenting our customer on achieving the important milestone of type certification on the Gulfstream G650 and G280 programs in the third quarter.

We are pleased for our customer and look forward to seeing these business jets perform in the market.

This milestone is significant for Spirit as it sets the configuration to build and signals the ramp-up to full rate production.

However the challenges is, it tends to limit the opportunity to design and cost improvements.

As I have described, as we have moved to full rate production on the business jet programs, our cost improvement unit by unit isn't fast enough to achieve our cost targets, resulting in the forward losses this quarter.

We have adjusted the anticipated cost curves and I expect to continue to come down these curves over the block and drive to positive cash generation.

Also in the quarter, our Spirit Europe operations continue to produce significant volumes of hardware for our Airbus customer, surpassing line unit 5,400 for the A320 Wing components.

Steady core program performance continues across the segment as the Wing team in Tulsa delivered the 4,200 Next-Generation 737 slats and flaps in the quarter.

And at both of our North Carolina spar production and our Prestwick assembly facilities, progress continues to be made on the A350 program as early production hardware is delivered to our customer.

Additionally, the 787 team delivered the 86th slat in the third quarter.

While our schedule challenges and constant improvement delays on the 787 have contributed to the forecast cost growth in the quarter, the team is performing well to meet our customers' needs.

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 will begin with the key financial highlights for the third quarter on slide number seven.

Revenues for the third quarter of 2012 were up approximately 21% as compared to the third quarter of 2011 on higher volume of large commercial aircraft deliveries.

Reported operating margins for the quarter were a negative 15.4%.

Excluding the previously announced new program for loss charges totaling pretax $590 million, the net insurance benefit of $219 million and the favorable program adjustments totaling $18 million in the quarter, adjusted operating margins were 10.5%.

The loss per share for the quarter was $0.94 per share.

Cash from operations for the third quarter of 2012 was $103 million as the current quarter includes an additional $50 million customer cash advances related to the A350 fuselage program.

Also last week, we completed an amendment to our senior secured loan and credit facility in order to adjust the senior secured leverage ratio through the first quarter of 2013 and the remaining financial covenant ratios through the second quarter of 2013, after which time the financial covenant ratios will revert back to pre-amended ratios.

Also in the third-quarter results, is the previously announced finalization of a settlement with our insurers for all claims relating to the April 14, 2012 severe weather event at our Wichita, Kansas facility.

The settlement of approximately $235 million reflects claim estimates that were significantly lower than the initial estimate and resolves all property damage, clean-up, recovery and business interruption costs.

The gain associated with the insurance settlement was recognized in the third quarter, net of the current period expenses, and cash proceeds from the settlement less the $105 million previously paid will be received in the fourth quarter of 2012.

We expect to recognize the majority of expense in cash outlay associated with the repair work over the next 12 to 18 months.

Capital expenditures were $67 million for the quarter, which includes $7 million related to severe weather compared to the $80 million during the third quarter of 2011.

And investments in new programs and capacity expansion continues.

On slide eight, third-quarter R&D and SG&A totals approximately 3.5% [see slide presentation] of sales and reflects our continuing disciplined expense management and stable new program-related R&D.

Slide nine summarizes cash and debt balances.

Cash balances at the end of the third quarter were $222 million as compared to the second quarter of 2012 balances of $180 million.

At the end of the quarter, our total debt to capital ratio was 38%.

We continue to proactively manage the capital structure of the Company and our liquidity position remains strong.

Our US defined benefit pension plan remains fully funded while we continue to make modest cash contributions to our UK plan.

Slide 10 summarizes net inventory balances at the end of the third quarter of 2012.

You will notice a new presentation for inventory this quarter as the forward losses year-to-date is shown -- is now shown as a distinct category.

This same presentation will flow to our financial report in the 10-Q in a tabular format.

The forward losses will not be reflected as reductions in individual categories of inventory, allowing for better analysis of performance.

Physical inventory balances increased as we increased rates on new programs in the quarter.

This increase was partially offset by continued strong inventory management on core programs.

Deferred inventory balances increased by $118 million driven by A350 XWB production, increased business ship deliveries and nine 787-8 deliveries which contributed $11 million in growth or approximately $1.2 million per unit.

787 deferred inventory growth rates continue to moderate as we continue to improve our overall current period unit cost performance.

Nonrecurring inventory balances decreased as we reached certain development milestones in the quarter.

Slide 11 summarizes our full year 2012 and 2013 full year financial guidance.

Slide 12 summarizes our financial guidance, excluding our forecasted expenses and capital expenditures associated with the recovery efforts from the April 2012 severe weather damage at our Wichita, Kansas facility.

Global market demand for commercial airplanes remains strong as our customers continue to see a robust order intake trend and we continue to increase production rate to meet the demand.

Based on current customer demand, our revenue guidance for 2012 is updated at $5.2 billion to $5.3 billion.

Fully diluted earnings per share guidance for 2012 is now expected to be approximately $0.19 to $0.24 per share.

Excluding the net insurance benefit, the Company is expected to have a loss per share of between $0.38 and $0.43 per share.

2012 cash flow from operations is expected to be between $500 million and $600 million.

This includes customer cash advance payments of approximately $250 million and net insurance proceeds.

Excluding the net insurance settlement, 2012 cash flow from operations is expected to be between $400 million and $500 million.

Cash flow from operations guidance has been adjusted for certain milestone payments that are now expected in 2013.

Capital expenditures in 2012 are expected to be approximately $250 million.

Our revenue guidance for the full year of 2013 is expected to be between $5.8 billion and $6 billion as our core business grows and new programs enter production.

Fully diluted earnings per share guidance for 2013 is expected to be between $1.90 and $2.10 per share.

This includes (technical difficulty) with approximately 40% of the after-tax charge impacting cash in 2013, 30% in 2014, and 15% in 2015.

The balance is expected to be -- impact 2016 and 2017.

This cash impact is included in the financial guidance we are providing you today.

[Slide 13 shows our] revenue growth, our solid earnings per share outlook and recent free cash flow trend.

While our new program challenges have delayed our move towards more robust positive cash flows, our cash flow generation trend is improving although at a slower rate than previously anticipated.

We are well-positioned for the future on the next generation of commercial aircraft and expect to generate long-term value for our customers and our shareholders.

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

Thank you, Phil, and I will wrap up on slide 14.

As the global [expand] for our customers products continues to grow and is supported by global air-traffic and load factors, long-term growth trajectory of the commercial aerospace industry is clear.

The growth in the industry and popularity of the next-generation of commercial aerospace products drives revenue, earnings and cash for our core business to support our growth.

As we transition our new programs to full rate production, our focus is on leveraging the learning that comes with volume and stabilizing production to drive performance on these programs and generate cash.

We are strengthening our leadership, our development and our management operating systems that are driving this performance on our new programs and will deliver results.

In summary, with a strong balance sheet and liquidity, a significant backlog and an excellent position on the best platforms in the industry, we are well-positioned to drive performance and cost improvement to create long-term value and generate cash.

We will now be glad to take your questions.

(Operator Instructions).

We ask that you limit yourself to one question and one follow-up question.

(Operator Instructions).

Carter Copeland, Barclays Capital.

Good morning.

Just one quick one around the contractual terms you have on some of these forward loss programs and the latitude you may have for any sort of relief.

How should we think about that?

And are there -- is there a reason or do you have a contractual way to exit some of these programs if the terms are not sufficient to derive any sort of value relative to your current forecast?

(multiple speakers).

Are these contracts you can get out of?

Well, most of our contracts are assumption of performance and are based on the assumption that we will perform to the requirements on the contract.

They are requirements-based contracts.

Having said that, we have to look at everything to generate the cash and performance in the future.

So I would just say categorically nothing is off the table as we look forward to improving our performance.

But at this point, we are fully committed to executing the requirements of our contracts.

I think I would just tag onto Jeff's comments and clearly these contracts that we took a loss on, they were all -- we were booking them as zero margins historically.

And so while they are not going to generate earnings given where they are, we do see them as cash generators we move through time.

I think Jeff mentioned that in his opening comments.

So we do expect them to generate cash as we move through time and execute the contracts.

But presumably buried into the expectation of the cash generation is some sort of relief on some of these contracts presumably and if you didn't get that relief, I'm wondering is this a path you might go down and it sounds like the answer is yes.

I think, like I said, I think clearly it is an ongoing process and to talk specifically about each one is not appropriate.

But there are always puts and takes with any customer-supplier-partner relationship.

Okay.

And another quick one just as a follow-on, you mentioned briefly, Phil, milestone payments that shifted from 2012 into 2013.

Can you tell us what that was and how big it was, what sort of impact it had?

Yes.

The -- it's regarding the development work on several different programs.

Again it's not -- it's actually we could still accomplish the milestone yet this year, but the timing of the payment is likely to slide into 2013.

The A350 is one of them and then there are a couple of others we are working with, on even some of the traditional legacy programs we are always negotiating things with our customers, whether it is too lean packages or things like that.

So sizewise it is $50 million to $100 million that's that risk that we have included in the guidance.

David Strauss, UBS.

Good morning.

In terms of cash flow 2012 to 2013, if I adjust for the impact of the tornado, it looks like it is going to get a little bit better.

Maybe could you break that down by bucket between the core business, what is going to happen with 787 and what is going to happen with all of the Bowman programs?

And then on 787 still specifically, obviously the situation with defer per unit continued to get a little bit better here this quarter.

Could you just square that up with the forward loss charge that you took on the program?

Sure.

I will take your second one first.

Yes so we continued to in aggregate on the 787 well -- I think we're at the curve.

We are approaching unit 100 in production here.

At some point the learning curve kind of breaks over and flattens.

And so the learning is not as drastic as we move into the more mature production program.

So we're currently doing well in aggregate, but the forward loss on mainly on the Wing was really a reflection of not being able to achieve our cost charges in the future over the remaining units to deliver.

And so that's that -- that kind of has squares up because we can actually be doing reasonably well near term again in aggregate on all three products.

But the Wing got to a point where we didn't think we could achieve the cost targets.

And then on the cash flow around breaking out between core and 7A, I would just tell you that the core business continues to do very well.

I think you see that reflected through the operating performance, is generating obviously very good cash flows for us.

787, I think the cash flow breakeven is pushed out a little bit based on the Wing performance, but again we feel still very excited to be on that program and we will be building it for the next 30 years.

So, while it is pushed out a little bit, in the scope with the longer-term nature of the program we feel pretty good about it.

Myles Walton, Deutsche Bank.

Just a quick one on CAPEX first.

The jump in the 2013 [flight] guidance, is that as a result of the reevaluation of the programs or was that always the plan and what does the profile look like beyond 2013 for CAPEX?

That is reflects the -- the 2013 reflects what was in the plan.

It is not impacted by what has happened here in terms of our forward look.

It is primarily driven by rate increase and then capitalization for the big development programs getting ready for the [87] to A350.

So it was pretty much an increase required for 2013.

We will of course watch that very closely and determine exactly when we need to spend -- when we will need to spend that money.

But it was pretty much the plan going forward.

And I would say it, frankly, was everything that is on our plate.

It looks like our peak year.

The current work statement in front of us.

Sam Pearlstein, Wells Fargo.

Good morning.

Phil, I just want to make sure I understand.

Before, you had talked about cash flow from operations in previous guidance before the advances and before the insurance recovery spending.

Now you are including that.

So it looks like about $50 million to call it $150 million got shifted out of 2012.

Is there anything in there besides just the milestone payments?

And why is none of that $590 million cost that were taken as part of the charge, why are none of those affecting cash in 2012?

Sure.

Yes, I think you've got the -- the milestones are certainly the main driver.

The majority of the loss, really, is 2013 and on again because that loss reflected higher costs in front of us.

A bit of it could impact Q4 2012, but certainly the way the profile I gave you of kind of 40, 30, 15 over the next three years encompassing as the bulk of that, frontloaded as I described it last week.

So it really is around '12 shifting that is really around timing of milestones, not a degradation of cash flow.

Just a timing.

Again once you get into -- you can accomplish milestones in November and December, but basing your payment terms, you don't really receive the cash until earlier in 2013.

So that is really the shift you are seeing in the guidance.

I would also add that there is strong performance in other parts of the business, and that offsets some of the issues that we have tackled.

And in 2012, that resulted in the forward reach in terms of the loss.

Again, the solid performance of the core was a little bit masked this quarter.

Carter Leake, BB&T.

Good morning.

The comment on peak year of CAPEX for 2013, does that assume that you are going to [42] a month or would you need another step to get to 42?

It would include everything within the forecast.

So if falling stocks it is say 38, that number would go down?

It would depend on the timing obviously.

If it had been capital that had already been laid in because the constraint relieving capital, Carter, is put in place prior to rate changes.

And I would add to that, Carter, we don't look at capital spend on a minute by minute basis.

Even if we laid in the additional capital for 42 a month in the market for whatever reason no longer support of that, given the max that is on the horizon and the transition of that program, we may well go ahead and lay all of that capital in just to make that transition as smooth as we possibly can.

Thank you.

Howard Rubel, Jefferies.

Thank you very much.

I want to shift a little bit to the next year.

With respect to your guidance for revenues, how did you factor in some of the negotiations you have ongoing with your customers?

Yes, we just tried to take a conservative approach.

I think the contract blocks actually are somewhat timed to coincide with the conclusion of our pricing agreements.

But we -- I think we took kind of a neutral position on the outcomes of any discussions and so as we move in through the year, right now as we sit here today, I don't see that as being a big risk to our revenue guidance.

Just a follow-up on that, Phil.

Would you say that some of the ongoing issues or drive by your customer at a lower cost is either going to give you an opportunity to expand scope or give you some other opportunity?

And how did you -- I mean so this would seem to me that you are very close to feeling comfortable with where your negotiations are.

Yes, I think we -- clearly we hear a big customer talking about we have been involved in the discussions on how we make this industry frankly more cost-competitive and so we are deeply involved in that effort with them.

And in our discussions with them on all -- many matters, but these matters specifically are doing quite well.

I mean there's a lot of -- we know each other well.

We have a lot of similarities in our cost profiles.

So we are working together quite closely to try to find the solution because we all need each other to make this successful.

So I think there is a lot of agreement in how we are going to do this in the air.

Robert Spingarn, Credit Suisse.

Good morning.

Jeff, how should we gauge the robustness of your new assumptions on the troubled programs beyond the fact that the cash earnings are more negative now?

Might -- should we conclude that you are at the targeted 2013 cash loss levels today?

In other words, your production costs today are what you are expecting to generate what I calculate from Phil's comment is a $230 million cash loss next year?

You are talking about on the new programs?

Yes, I'm talking that -- yes, so we take the [575] or so cash component of the [590].

And then we take 40% of that and lay it in in 2013.

And we then have to ask you if you know how robust that number is, what is the risk?

And then the follow-up question to that is if there is more risk, and it sounds like there is, if you can't achieve cost savings beyond that, is the right way to think about these blocks through '18 that they are a straight line loss of $230 million for six years?

Is that the worst-case scenario?

I would -- let me just start and then let Phil chime in on the numbers.

So what we've done, what we've done is look at the cost curves that we had been forecasting.

We look at the cost curves that we are achieving and saw that we could achieve in the third quarter.

And we projected those cost curves.

So it is not a flat line across.

But it is a much more achievable cost curve.

And in my mind significantly derisk where we were and certainly for 2013 and 2014, but it continues as any program does early in its production with an assumption of cost curve improvement.

Phil, you want to add anything to that?

Sure.

Just a bit.

Yes, if you straight-line it I think this just is not -- it is far too conservative.

I mean, the history of this business -- not just Spirit, the history of the industry tends to -- you run reasonably good cost curves.

So I don't think that is a reasonable assumption to take a worse case.

We do expect it to get improvement in the cost as we go through time.

We do expect them to generate cash a little bit later than what we previously expected.

But they are not going to generate as much cash, but we still expect them to be cash generators.

That would include improving the cost profile as we go through time.

And I would add again, as we have stated, we are seeing cost curve improvement on all these programs.

What we saw in the third quarter was the cost curve improvement wasn't sufficient to hit the forecast we had in the window.

So we anticipate the actions we have in place will continue to drive costs down and we believe we have identified the appropriate curves that we will hit.

Doug Harned, Sanford C. Bernstein.

Good morning.

I am trying to understand a little bit the origin of these issues.

Because at first I know in the past you had some issues in Tulsa and in Illinois, and there was change in leadership there.

And this time we are looking at the problems, Wing systems problems also in Tulsa and you have made a leadership change again there.

But what I don't -- what I am trying to understand is the BR725 which is in Wichita, is there something going on that is a common issue that extends across Wichita and Tulsa?

How does this all come together?

Is there a single thing driving these problems?

I would say there, again, there are multiple issues.

I mean, clearly, challenges that we had put on ourselves believing we could meet the cost curves associated with the programs, we took probably obviously too risky a curve.

We had early on some design issues that have driven a higher cost into the supply chain than our experience has shown our ability to get out of the cost -- out of the supply base.

But I would say our biggest challenge across the programs that we had was certainly the business jet side has been in the supply base.

We had forecast the ability to come down a cost curve and we have not been able to achieve that, the aggressive curve we had set.

We are coming down a good cost curve but not to the extent we had forecast.

So BR725 is primarily on the cost curve on the buy, on the 280 and the 650, as well.

So on the 787 in Tulsa, the issue there is got some buy in it but it's also got the curve we were forecasting in terms of our own internal waiver and our own internal shop support costs.

Joe Nadol, JPMorgan.

Good morning.

First question is on the revenue outlook.

You guys have tightened the lower end of the range your revenue outlook for this year.

And I see now for next year, we are looking at $5.8 billion to $6.0 billion and you laid out a little more than $6.0 billion on your slide at your Investor Day earlier this year.

So is this related to the milestone slips on some of these things?

And if that is the case, why would we be looking at less sales next year as well than you thought?

Yes, you are right on the trimming of the 2012.

That is what it is related to.

I think 2013 is -- we are just looking at some of the market dynamics and that is not really the bigger airplanes, but some of the smaller airplanes.

And there is a milestone we are going on in 2013 also with some of the [Nash] 1,000 courses still on the drawing board.

So I think it is just -- it is a bit more of a conservative view at this point in time as we look out across 2013.

Okay.

And then just for the follow-up, you had mentioned in your Q last quarter that you had not fully evaluated the A350 delays and that was a risk and, obviously, that didn't show up in your loss announced last week.

So could you give maybe, particularly in light of the announcement last week, maybe a fuller more detailed explanation of where you think you are in the program and how you evaluate the risks here?

Sure.

Let's just talk about A350.

Go back to the risk profile on the 250.

It has got similarities to other development programs.

The way we have contracted it and partnership and the development of it, derisked that from some other programs we have had in terms of its magnitude, and its percentage, we have four blocks if you will that we look at.

One of those, the A350 nonrecurring Wing, is in a forward loss.

The other three are not and are, we believe, adequately reserved.

We are in the throes of building the first few units on the section 15.

We have a lot of work on -- especially on the first four units that we are behind in the process.

So we have got a lot of travel work and a lot of extra work being done to stay ahead of the customer and help the customer get those airplanes through their production line.

The Wing is in a little bit better position.

But again, we see those as well reserved and conservatively forecast at this point in time.

Clearly early in the program, with just a handful of units being built and built in the typical development program mode.

And we will have learning curves or cost curves associated with those that we have clearly on focus about what we need to do for, again, the internal labor, the supply chain, and the overhead associated with running those programs.

George Shapiro, Shapiro Research.

Two quick questions for you, Phil.

With the 747 block ending in the fourth quarter here, do you have any profit for that program in your guidance for 2013?

Yes, it depends on the components.

We build -- we have some 747 contents going through all three segments in Wichita and in Tulsa.

Some of them are in better shape than others.

So I think as we move into the next block, we are in a little bit better shape, but nothing to write home about, I can assure you.

So we have got a lot of hard work to keep working on to keep the 747-8 on a path to improved profitability.

Really across the board.

Okay.

And then the other one.

If you didn't before the charges, you would have had what looks like cash flow next year, $500 million to $600 million plus.

Could you give some glimpse at how much you would think that would have increased in 2014 or would increase in 2014 before the charges that you have detailed for us?

Well, we are not in a position to forecast 2014.

But I would say we anticipate, given everything we know today, we anticipate continued improvement.

Ron Upstein, Bank of America Merrill Lynch.

(technical difficulty).

has been talked about in certain (technical difficulty) for the last couple of weeks.

Excuse me.

You are very garbled.

We can't hear the question.

Can you hear me better now?

A little bit.

Let's try it.

(technical difficulty).

How did this happen?

On this scale?

And how can you guys be in a position now where you really can't offer any guarantees going forward that won't happen again.

How (technical difficulty) for you, Jeff, how does this happen?

Ron, you were quite garbled.

I think what you asked was how in the world could something like this happen on this scale.

And I would just answer that by saying we have tried to detail the changes that we saw as we came into the third quarter, and it was program by program, the fact that we had reached a certification milestone on the Gulfstream programs.

That -- it became clear to us that it closed off some of the opportunities we had for -- not close them off entirely, but make them more difficult in terms of getting design changes in for produceability.

The biggest element in those programs was, again, where we were performing in our supply chain cost curves and, frankly, we were making substantial improvement, but again not to the level forecast.

And when we took that cost curve and projected out what we believe, after looking at it hard in the third quarter, we believed it yielded on a program by program basis.

And so there were three of them that were in that mode on supply-chain.

And the 777, again, we were running that and in Tulsa specifically, we were running that as lean and efficient as we knew how.

We frankly didn't achieve some of the labor curves on that and, again, we looked at that and said hey, we have got to reset that curve.

So, a combination of things coming together.

And we think we have got it squared to balance the opportunities that we have to come down the less aggressive curves on these programs.

Michael Ciarmoli, KeyBanc Capital Markets.

Good morning.

Two questions.

Phil, maybe first, just if I look at the implied midpoint of earnings guidance next year, it would seem your operating margins are maybe going to trend down a little bit, maybe below 9%, kind of just above type margins and these charges shouldn't have had an impact.

So is there anything going on?

You had talked about some of the milestones.

But, is there anything hitting the legacy or core margins next year that you made some assumptions about?

No, nothing specifically on the core.

I think it really revolves around the volume of low to no margin programs as we move through time.

Aerospace is an interesting industry, but early days of these programs, they are going to be built for 20 and 30 years, we have got a lot of volume coming on on 78 as it ramps up.

350 starts its slower initial production phase and then I can just go down the list of 280s, 650s, BR725.

So really the ability to offset lower margin programs, we are working pretty hard to do that.

But I think we are just being appropriately conservative as we look out into 2013, relative to margin guidance.

No and that is fair.

Has anything changed with your longer term 12% operating margin outlook (multiple speakers)?

Absolutely not.

Absolutely not.

Thanks for bringing it up.

We are driving the Company to achieve that.

You know that is a weigh point, I think, as we think about it.

It is not the end game, but even in light of the higher volume, lower margin programs initially and their life cycles, we are -- we think this Company should deliver 12% operating margins as we move through time.

And then, just the last, obviously cash is the focus here.

It seems like if everyone was comfortable at one point with the 87, how did we get comfortable -- I know you have got obviously a different contract in place on the A350 for contracts, different risk sharing.

As we move through the calendar for the month here, the likelihood that a charge sneaks up which, seemingly, could be a pretty sizable magnitude, I could imagine $200 million.

How do we get comfortable with the cash picture going forward with that program hanging out there in the potential unknown risks?

Well, I think clearly be A350 is going to continue in its development cycle and be a use of cash until we get it through its development and tasks and into production.

I think I've mentioned multiple times the number of process improvements that we have implemented and have underway and I think much more aggressive look at -- a much more aggressive look at the program.

We are very active now in making sure all the details are in place or coming into place for the labor curves, the overheads and the supply-chain and the program.

We are driving real-time change control conversation, all the things that are appropriate on the program that, frankly, I don't think we did as good a job on on some of these earlier programs as we are now doing.

Operator, we have time for one more question.

Lucy Guo.

It's Lucy calling for Cai.

Good morning.

Just one question.

As a result of the Q3 program charges, when do you expect to reach cash flow breakeven on the 87, the biz jet programs?

Yes, the 787, we described it in -- we've talked about in the unit 125 range and given the Wing performance in aggregate, we have -- it's probably pushed out a little ways.

So certainly expect it to generate very good cash flows in the current block and, of course, our current block is only 500 airplanes as you will recall and this airplane is going to deliver thousands of airplanes through time.

So we expect it to be a nice generator in the first block.

It's just pushed out a little bit here with some of the challenges on the Wing.

Business jets are all a bit further out.

Of course they are slower rate programs.

So we think cash, cash generation to them is further out in time and the '15 -- 2015 range is our best view of it right now.

And I would just add to that by saying I think we've -- I mean, we have got them, we think in the point again where their costs are improving.

And the question will be how rapidly will they improve and how quickly can we do the crossover from the cash used to a cash generator.

And clearly the sooner we can pull that in, the better.

Thank you, ladies and gentlemen.

This concludes today's conference.

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