Spirit AeroSystems Holdings Inc (SPR) 2012 Q4 法說會逐字稿

Welcome to the Spirit Aerosystem Holdings Inc fourth-quarter and full-year 2012 earnings release conference call. My name is Sandra and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question & answer session. Please note that this conference is being recorded.

I will now turn the call over to Ms. Coleen Tabor. Ms. Tabor, you may begin.

Thank you and good morning. Welcome to Spirit's fourth-quarter and full-year 2012 earnings call. I am Coleen Tabor, and with me today are Jeff Turner, Spirit's President & Chief Executive Officer, and Phil Anderson, Spirit's Senior Vice President & 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 releases 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'd 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 fourth-quarter and full-year 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. 2012 saw strong top line growth and core operating results as deliveries grew by more than 13% over 2011, and annual revenues increased 11% to record levels. In 2012, we successfully implemented production rate increases to unprecedented levels on our core programs, and continued to deliver strong core operating results while managing both the financial and operational impacts of the severe weather event at our facility in Wichita, Kansas.

While the Company's strong core business generated the profitability and cash that we expected, these results were overshadowed by cost challenges on development programs in the year. Our results, along with several significant accomplishments during the year, demonstrate the complexity of our business. A few of the highlights from 2012 include -- we delivered initial A350XWB production units to our customer; we celebrated with our customers as they achieved type certification and delivery on the G650 and G280 programs; we successfully executed rate increases on the 787 program ending the year at five per month; we delivered the first flight test C Series pylon to our customer; and we strengthened our workforce partnerships by finalizing long-term agreements with SPEEA's Wichita Engineering Unit, and the IAM unit in North Carolina. While we remain watchful of global economic and political dynamics, we're closely managing our capital spend to support increased demand for our products, including the derivative and next-generation airplanes like the 737 Max, the A320neo, the 787, and the A350, that drive clear line of sight into Spirit's backlog of approximately $35 billion.

Now let's talk about some of the specifics across the business during the quarter beginning on Slide 3. Fuselage systems had strong top line growth and operating performance with margins of 14% on $680 million in revenue during the fourth quarter. That's volumes across both core and new programs increased, including the anticipated increase in zero margin revenue. The fuselage segment's high rate 737 production line continues to perform well as the team delivered its 4300 ship set of the next-generation fuselage. During the quarter, the fuselage team delivered the third A350XWB composite center fuselage to our Airbus customer. And we congratulate our customer as they achieve the important milestone of the first structurally complete A350XWB flight test aircraft late in the year. The 787 team continue to support our customer by increasing deliveries in the quarter to 15, more than twice the number of deliveries compared to a year ago, demonstrating our successful rate increase to five per month. Milestones in the quarter delivered -- included the delivery of the 99th 787 forward fuselage sections and the celebration of the rollout of the 100th unit.

On Slide 4, you see the propulsion team delivered solid operating margins of 13% on $368 million in revenue, as volumes across core and new programs, as well as after market, increased. Current quarter margin was impacted by the restart of the 767 Pratt & Whitney nacelle, and increased revenue from zero margin new programs. The propulsion team's core business is performing well at higher rates as we delivered the 4300th 737 next generation engine pylons and thrust reversers in the quarter. Additionally, we continued to progress as the 787 team shipped pylon line unit 102 in the quarter. The team also deliver the 1075th 777 nacelle and pylon packages. In addition to continued development on the 737 Max and the 767 Tanker, the team delivered the first flight test C Series pylon and continued to make progress on the design effort for the MRJ pylon in the quarter.

On Slide 5, you see the wings systems segment, which primarily consists of our Europe, Malaysia, and Oklahoma operations. The wing team reported operating margins of 5% on $375 million in revenue during the fourth quarter, reflecting the forward loss recorded. Margins were impacted in the quarter, but a G280 forward loss, and the increased volumes of zero margin programs. During the quarter, the G280 team made progress on cost improvements. However, in the fourth quarter we experience supplier performance issues resulting in a further reset of the costs in front of us for schedule recovery and timing of supply chain cost improvements.

Spirit Europe produced higher volumes of hardware for our Airbus customer, surpassing line unit 5500 for the A320 wing components. The wing team in Tulsa showed steady core program performance delivering the 4300th next-generation 737 slats and flaps in the quarter. The group continued to make progress on the A350, delivering the third production unit fixed leading edge from the North Carolina spar production and Prestwick assembly facilities. In addition to delivering the 99th slat ship sets in the fourth quarter, the 787 team made progress in our transition of the fixed leading edge assembly to our Malaysia facility as they completed the first 787-8 fixed leading edge assembly at that site.

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 fourth quarter and full year of 2012 on Slide 7. Revenues for the fourth quarter of 2012 were up approximately 17% as compared to a year ago with higher volume of large commercial aircraft and business shed deliveries. Operating margins for the quarter were 6.9% compared to 2011 margins of 8.4%, and fully diluted earnings per share were $0.43 compared to $0.42 a year ago. Fourth-quarter 2012 operating income included $18 million of severe weather related expense.

The fourth-quarter tax rate benefited from a state and federal tax credits and a release of reserves in our UK business. The current quarter results reflect positive contributions from the core business that Spirit realized favorable cumulative catch up adjustments totaling approximately $10 million or $0.06 per share, primarily associated with the productivity and efficiency improvements on core programs. The current quarter results also reflect the forward loss charges totaling $34 million or $0.19 per share associated with the G280 wing, 767 propulsion, and the 747-A fuselage program.

The G280 program experienced additional cost growth during the quarter associated with late vendor shipments that significantly impact the production schedules, and the re-phased supply chain contracting plan. We are continuing our efforts to stabilize and improve this program. Revenues for the full year of 2012 grew 11% from 2011 as deliveries increased across the majority of our programs. Operating margins for the full year were 1.7% compared to 2011 margins of 7.3%, while fully diluted earnings per share were $0.24 per share driven by the new program charges partially offset by the net gain from the severe weather events at our Wichita, Kansas facility.

The core operating engine of the Company continues to perform well, excluding forward loss charges, the net insurance benefit and favorable program adjustments in 2012. Adjusted operating margins were 10.3% compared to 9.5% in 2011 after excluding forward loss charges and favorable program adjustments in the previous year. Cash from operations for the fourth quarter was a $309 million source of cash as core programs generated strong cash flows and we received the final $130 million payment associated with the insurance settlement. Capital expenditures were $79 million for the quarter, which includes $6 million related to severe weather, compared to the $86 million during the fourth quarter of 2011 as we continue to proactively manage investments in programs and capacity expansion as we rebuild severe weather -- from the severe weather damage.

Slide 8, fourth quarter R&D and SG&A totaled approximately 3.8% of sales and reflects our continuing discipline cost management. Slide 9 summarizes cash & debt balances. Cash balances at the end of the fourth quarter were $441 million as compared to the third quarter of 2012 balances of $222 million. At the end of the quarter, our total debt to capital ratio was 37%. Our liquidity position remains strong as we continue to proactively manage the capital structure of the Company. 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 fourth quarter 2012. Physical inventory balances were relatively stable from quarter to quarter as we continued to increase rates on new programs in the quarter and continued strong inventory management on our core programs. Deferred inventory balances increased by $71 million driven by the A350XWB production and increased business jet deliveries. In the quarter we delivered 15 787-A units which contributed approximately $17 million in growth or approximately $1.1 million per unit. While 787 deferred inventory growth continues to moderate with our current period unit cost performance, we are seeing expected lengthening in flow times associated with the Dash 9 derivative introduction which could flatten this improvement curve for a period of time. Nonrecurring inventory balances decreased as we reached certain development milestones on derivative programs in the quarter.

Slide 11 summarizes our full year 2013 GAAP financial guidance, and Slide 12 summarizes our financial guidance, excluding our forecasted expenses and capital expenditures associated with the recovery efforts from the April 12 -- April 2012 severe weather event at our Wichita, Kansas facility. Global market demand for commercial airplanes remains strong as our customers continue to see robust order intake, and we continue to increase production rates to meet the demand. New and development programs continue to pose certain challenges and financial risks as we design and produce these products. Our current guidance assumes that the 787 and A350XWB will continue on the schedules issued by our customers and we continue to execute our cost reduction plan. Business jet products continue to pose financial risks. Our guidance reflects our current cost estimates with an appropriate view of potential future risks. Based on the current customer demand and risk profiles, our financial guidance for 2013 is unchanged.

Our revenue guidance for 2013 is $5.8 billion to $6 billion. Fully diluted earnings per share guidance for 2013 is expected to be approximately $1.90 to $2.10 per share. Excluding the severe weather spend, the Company is expected to have earnings per share of between $2.20 and $2.40 per share. 2013 cash flow from operations is expected to be between $250 million and $350 million. Excluding the severe weather spend, 2013 cash flow from operations is expected to between $300 million and $400 million. Capital expenditures in 2013 are expected to be approximately $400 million, which includes approximately $50 million related to severe weather rebuild.

For perspective, Slides 13 and 14 show our revenue, earnings per share, and free cash flow trends. As you know, our revenues are growing as we increase production rates on core programs and bring new programs into full rate production. Our earnings and cash flows continue to reflect the strength of our core business while new and development program challenges have impacted profitability and extended the cash investment period. As we execute our strategy and move through 2013 and on, we are intensely focused on continuously improving our strong core business while managing the financial risks of our new and development programs.

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

Thank you, Phil. I will wrap up on Slide 15. The operating engine of Spirit continues to be strong, driving the underlying cash and earnings from core programs, while post storm rebuild continues through 2013. The catalyst continues to be the market demand for single aisle aircraft and growing demand for wide body products as well. In 2012 we supported this demand by successfully implementing rate increases across the business and our plans for 2013 and beyond build upon this success as we support our customers in extending the life of these programs well into the future.

While the cost challenges on development programs overwhelm 2012 financial results, we are moving these programs and the full rate production and leveraging the opportunity to improve cash flows that comes with production stability and volume. Our primary goal in 2013 is to continuously improve operational and cost performance across the business and manage the risk profile of development programs. Looking forward with a strong balance sheet and liquidity, a significant backlog, and our role on the best-selling airplanes, we are well positioned to drive performance and cost improvements to improve cash flows and create long-term value.

We will now be glad to take your questions.

Thank you.

(Operator Instructions)

Doug Harned, Sanford Bernstein.

Good morning. I'd like to understand if we went back to Q3 and at that time you took the charge for the four programs the G280, G650, the BR725 nacelle, and the 787 wing. If you look at those four programs today, how do you see the risk with them going forward? You did take an additional charge on the G280, but could you talk about where you stand with respect to your supplier agreements and which ones are perhaps more difficult than other ones to ensure you can stay within the charge you took before?

I would look at it like this. Not a lot has changed in the environment over the ensuing quarter, so the risk profiles remain about the same. We did, in order to keep that risk profile from escalating on the 280, we took the charge on some specific issues we had with the 280 in the quarter. And I would say that we continue to progress on the supply chain front. As Phil said in his remarks, the challenge is probably greater in the business jet part of the market. But I would say relatively the same as where we were about a quarter ago. We've seen some improvement on the BR725, and then we saw some issues on the 280 and took those in the quarter.

And then on the 787, I know, Phil, you mentioned that when you go to the Dash 9 there may be some flattening in production, but could you talk about what the issues are ongoing to the Dash 9? Boeing has said they at a final assembly level are able to go to 7 a month and stay at that, they expect, through the summer, but that some of their suppliers who are running Dash 9s down the same line as Dash 8s, that, that's going to be a slower process. Could you talk about where Spirit stands with respect to that? Is this something that is slowing you down, and if so, what aspects of the program are causing that?

Well, I would just say categorically, Doug, every derivative or every major change takes more hours, more energy to get that major change through. We are in the process of moving the Dash 9 through our lines and we actually have that in our plan. We will be able to meet the pull demands from the customer, so I think it is prudent and appropriate that extra time is planned into the production schedule any time there's a major change. And certainly a derivative counts as a major change.

Doug, just to amplify, normal course of business when you introduce a new derivative, it has longer flow times to the factory. So when you are flowing it on the same line as a current derivative, you end up losing a little bit of efficiency as you move the new derivative with longer flow times through the factory.

Thank you.

Robert Spingarn, Credit Suisse.

Good morning. Jeff, since the third quarter, your Q3 report, Airbus noted that Spirit is a risk on A350. Can you interpret that for us on a more specific basis, and perhaps frame that risk? And to what extent do unsettled LTAs with suppliers in Kinston limit your future cost visibility?

Well, a couple thoughts. One is anytime we build a new product, send it through the production line, my experience is there is always traveled work. There is always late breaking changes. Certainly, the issues on the A350 are not unique. I think it's fair to say there's always frustration with whoever it is that you are waiting on to get something done. In our case with Airbus, we are working very closely with Airbus. We've got traveled work in their factory.

They've got some folks working with us to help us understand their processes. And, frankly, help us move some late breaking changes, all of which not driven by Spirit, through our factory. So all of those things add to the complexity of the early production programs, and we certainly have it on the A350. We have delivered six units now, two test units, four that are intended to be flying units. And Airbus, a very dynamic company continuing to drive hard on their schedule.

But Jeff --

Now, that does give us some issues in the supply base, and we're working hard to stay on top of those. The ones that we have closed so far we're closing inside our plans.

But is there a similar situation there that we saw in Tulsa with Gulfstream and some of the other development programs where the LTAs are not yet in place because a similar approach was taken in North Carolina and, therefore, we could see a repeat -- maybe not of the magnitude, but could you talk about that?

Sure, sure, Rob. I think there are similarities on every development program, and certainly if it -- and we didn't manage it as well in Tulsa at all as we need to. We are taking those lessons learned through the Company, putting a lot more emphasis a lot earlier on getting those things worked.

Ron Epstein, Bank of America.

Hi, this is actually Kristine Liwag calling in for Ron. Our question is, would you consider doing something strategic for Tulsa so you can focus more on core operations?

Well, I think we have said in the past in response to that question that we continually look at the strategy of the Company, what makes sense. So, of course we are continually looking at it and deciding what does make sense. Clearly, we would consider it. But again, we are a structures builder, when we stick to structures, we do well. We have struggled where we had got outside a little bit. The more systems we have, the more challenge, especially on new development programs. Again, once we get things into production, they tend to flow well and we tend to be able to make significant improvements.

I will just amplify that. We are currently focused on improving and helping Tulsa overcome the growth profile that they have over the last several years, and making those programs cash positive. That's the current intense focus in the Company.

Yes, absolutely. But again, I'd say strategically we are open to the things that create value for Spirit and Spirit shareholders.

Great. Thank you.

Sam Pearlstein, Wells Fargo.

Good morning. Can you talk a little bit about how the quarterly progression in 2013 unfolds when it comes to revenues and cash flow, because we've got the 787 ramping up, you've got things like the 767 ramping down. Trying to think about how that plays out over the course of the year.

Yes, Sam, I'm not sure about the 767 ramping down. Maybe a little bit, okay. I think it follows, really, the normal trajectory where our second and third quarter tend to be the stronger revenues on a concert run rate basis. But with the current planned production increases on the 737, 787, faster business jet production, good chance you will see that, that growth, second, third and fourth quarter, picking up through the year.

If I can follow up with something, back in November you talk about $5.2 billion to $5.3 billion in revenues. It looks like you came in almost a $100 million above the high end. What did you deliver more of? What came in ahead of plan?

I think we actually just got a few more core business models in the plan and a few more of the business jets.

Okay. Thank you.

Myles Walton, Deutsche Bank.

Thanks, good morning. The first one is a clarification. The 747-8 forward loss in the quarter. I think you had a block change in the quarter as well, and so was that a forward loss on the block you are exiting or the block you are entering?

Actually, the block changes in the first quarter of '13, so it was the end of the previous block. And let me just amplify a little bit on that. The 747, frankly, is one of our most challenging programs to build. It's mixed media, that means part of the airplane as it's gone through its derivative life is on digital definition, and some of it is still on the old mylar's from, frankly, the 1960s. So the building of that is challenging. Adding to that, it's a relatively slower rate production, it is a slower rate production program, so the learning curve on it takes longer to get through the learning on the process, both for us and for our supply base.

We are about to enter the next block. We're going to see improvement, we believe, from the current block to the next block. But again, we are still pretty early on the Dash 8s as we've moved from the Dash 400s to the Dash 8s.

So to follow-up though, as you enter the new block. Would the size of the new block, would I imagine be a couple of years and would you effectively walk into the new block in a forward loss?

No, we will not walk into the new block in a forward loss.

Okay. The real question was on volumes in the 787 in '13. You talked a bit about the step up in rates, but I'm curious what you actually expect to deliver in terms of ship sets.

We expect to deliver in the mid-60s on a pull from our customer, and that fits the production schedule and also the phase in of the Dash 9.

Okay. Thanks again.

Joe Nadol, J.P. Morgan.

Thanks, good morning. My first question is, you guys noted a few times the strong core results on the core programs. Wondering if you would mind specifying what the EBITDA was on core programs in 2012, and then what's embedded in your 2013 guidance?

Phil?

Well, I will be just be blunt, Joe - no, I wouldn't mind -- I would mind specifying. Yes, we just don't break it out between the core and new, as you know. So it's just consolidated view. And the guidance, of course, is strong revenue growth this year. And if we exclude the severe weather $2.20 to $2.40 per share.

Right. If you note that you are doing well, and it looks like it, for those of us that are looking at trying to value the stock thinking about separating those, it might be -- I think it would be helpful. But the second question was just on the CEO transition. Jeff, anything new on timing there, or internal versus external? If you are leaning -- or if the Board is leaning one way or the other. Finally, on that point, with regard to the supply agreement with Boeing, how the Company is handling negotiating that? Is this something that the new CEO will have to sign off on or is this something that you can sign off on before a transition? Thanks.

Okay, sure. On the transition itself, I'm not going to provide a great deal of color other than to say it's a rigorous process, as you would expect, disciplined. We are using outside support to do it and do it thoroughly. We are looking at both internal and external candidates thoroughly. We have reviewed a number of candidates, a lot of good candidates, and we are moving through the process. I would say on the issue of the -- really not just the pricing issue that you brought up but really all major issues facing the Company, we keep our Board fully involved in that.

Certainly, anything as major as the reset of the pricing, the Board is not only highly involved in but will ultimately have the authorization authority on that. So this is under no circumstances would it be a one person issue whatsoever, but our internal team supported by our Board and certainly myself are progressing ahead with that. Timing will be what it is. Business will progress. I continue to have my hands on the reins and will do that until an appropriate transition has occurred.

Okay. Thanks, guys.

Carter Copeland, Barclays.

Good morning, guys. Just a couple of clarifications, actually. First, on the 787, the flattening of the deferred production cost curve for Dash 9. Can you clarify if that's simply related to absorption, overhead absorption, or is there any kind of impact from price discounts for particular volumes or contractual breakpoints, or is it just absorption?

Just absorption, Carter.

Okay, great. And on the 767 forward loss, I think it was a bit of a surprise given the maturity of the program. Was that related to the longer production flows for the Tanker, or was it related to the restart of the Pratt propulsion? How should we think about what surprised you there?

You should think of that as an anomaly. We have Pratt & Whitney and nacelles, certainly, in our catalog. And they are orderable at a price, frankly, that was established at the divestiture point. I think the one we built in the quarter was the first one we built in well over a year. I think we've gone as long as three years at a time without building them, so when they come in, they are a challenge to restart. And that's what occurred there. The Pratt and Whitney's will be the Tanker, the nacelle for the Tanker.

So when we get into production where we have a group of them to build, we should see much better performance. But think of it as a one-off that hadn't been built for quite a while.

So it's part learning -- the remedy is part learning and part pricing, or just learning?

Well, it can be both.

Basically, Carter, we are restarting a coal production line. And the last time we built a couple of airplanes' worth of hardware was in 2011.

Okay. And one last quick one if I may. On the 747-8, as you enter this next block, what are you assuming in terms of production rates? Are you leaving yourself any room? Bowling was pretty clear in their recent filings that there are some unfilled slots beyond 2013 that could pressure that rate. So how are you thinking about what sort of production rate you are going to assume in that block?

Right now we are assuming that those are going to fill in.

Okay.

But either way, it's a pretty slow production run.

Okay. Thanks, guys.

Cai von Rumohr, Cohen & Company.

Yes. Thank you very much. So, as you look at your programs given the large losses we experienced in the third and now we have some more in the fourth, if you were to rank your programs in terms of risk, in terms of which would be the one or two or three that would still have the greatest risk for charges from this point forward, how would you rank them?

Rather than say the risk for charges, Cai, let me say volume risks in terms of hitting the learning curves. We have said all along, the A7 because of its size is the greatest risk. We like the process that we are using with the customer to identify it and make improvements on it. That's got opportunities out in front of it because of derivatives and rates and those sorts of things. The next biggest volume, simply because of the size, the risk that would be on the A350 because of the size of the program. I would say in terms of what would have risk for further charge, you'd have to put the 280 in that category just because of its pedigree.

And some of the challenges we've had on it, especially when you think about it's a relatively -- it's a small low rate production program going into a pretty full supply base. So that's been a challenge for us. We think we've got that scope, but I would say there's risks on it. I would put it probably in the business jet piece in terms of the most risky to the execution of our plan and then to the size that I've already talked about.

Thank you very much. And if we go back to the 787, I believe you said mid-60s is what you expect to deliver this year.

Yes, I think that 60 to 65 is what's in our plan, and that's responding to the pull from the customer.

But have they changed that pull? Because my understanding was this was going to be bigger, and at one point, you also mentioned crossover on the deferred. It looked like it was going to be in 2013. So is that 60 to 65 lower than you thought six months ago? And has the time at which you would cross over, which I believe was around mid-2013. Has that pushed out into 2014?

Let me address the schedule and then I will let Phil address the financial impact. The schedule has been pretty steady for us for quite a while. Again, we talked a little earlier about it, part of that is rate, but it's also planning in some time to bring the Dash 9 through the line. It's pretty much what we've been planning, I don't think we cut a change on it for several quarters now.

No, it's been very stable, Cai. To the deferred, we do see introducing the Dash 9 is going to cause some level of extension out on the cash flow break over, but, no, I still think it's in '13. I think of the total 787 program is going to be cash flow negative this year, but it's mainly driven by our investment now in the 10 per month capital. So on a per unit basis, we still think that program starts to generate some positive cash yet this year.

Okay. Last one. The Boeing master contract, it expires in April, so we are approaching it. What are your expectations for having that negotiated before the contract expires?

It actually expires in June, I believe. We are very active in that conversation and hopeful we will be able to close it. There is wording in the original contract that contemplates that if it isn't closed, there's a continuity of business agreement as well. We are diligently working on it with Boeing and hope to have it closed. But again, it may or may not.

Terrific. Thank you very much.

Carter Leake, BB&T capital markets.

Good morning. Let me circle back to the rate because it's going to come up. If you do the mid-60s, how can we reconcile what Boeing is saying on the 10 per month rate? What am I missing there?

I think a couple things. One is production rate and delivery rate. And again, you've got to think about it as having some slower flow in the middle of faster flow in order to accommodate the Dash 9s as they come through. So published rate, rate we can hit, and then stepping up the faster rates but having some, we call them non-scheduled days in the process so that we can accommodate the change packages coming through. So we can be moving through at a faster rate and then be ready to deliver in, say, 2014 at an even faster rate.

Carter, we are fully aligned with the customer on the schedules, but as you know, Boeing could actually deliver more units based on some of their inventory that's been built up over the last several years that may not match Spirit's. But the overarching goal of the program is to keep the production lines flowing for efficiency and continued cost improvement. And I think by all standards we are on the mark to support that.

Okay. The, this is a small point, but you've done it before. Is there any chance on the regional deliveries to give us any color on 280 versus 650 deliveries?

I'm not sure what you are referencing to regional, these are the business jets.

Right, right, on the business jets. Any kind of break out against that?

Frankly, we are moving to full rate production. And we let our business jet customers talk to production rates.

Finally, if we could, on the 280, if we could go into more specificity on the issues here. The question I have is in such a short period between a large charge, which I would've thought would have exhausted most risk, what would cause an additional charge in such a short period of time from --?

Sure, let me talk that. We, as you know, we are in the process of moving some product around, some supply around to get better value. In the process of doing that, some pretty major parts of the wing we moved to a new machining supplier. That supplier had some yield issues, and those yield issues drove a schedule problem for us in that we didn't get delivery of key product and had to move to some alternative supply, including billing some of it in-house ourselves. But it put us significantly behind our production plan, drove expedite cost for both the delivery of the wings to the customer but also delivery of the parts that we needed internally.

We elected to not take that out of management reserve that we had established on the program. Actually, the management reserve on that program is a bit higher today than it was a quarter ago. So we took that in the quarter in order to keep from compounding risks there. And that's what happened to us. So, showed up some challenges for us in our work movement process that we've shored up. But it's one of those things that on a longer run, big production program where we do a lot of movement, wouldn't have had the same level of impact but on the slower rate, lower volume production, lower value production it showed up.

Carter, I do think it also speaks to just the nature of this industry. When you get behind in your factories by two or four weeks, it takes somewhat of -- more a longer time to recover. It's just the nature of this business. It also speaks to why when there is short-term events from other customers that they tend to try to use the balance sheets to keep the factory flowing because it is so disruptive to slow down and gap production. So Jeff's point of a late supplier coming in to us and the cost and getting us behind schedule, it takes months to recover from these things at some point.

George Shapiro, Shapiro Research.

Yes, Phil, if you take a look at Accounts Receivable, they are up year over year over 50%, well above what revenues are up. If you could discuss what's going on there. And the second part of it is, in your cash flow guidance for 2013, whatever you assumed happens to the receivables?

Yes, sure, George. The biggest piece I think you're seeing there, we have some retainers from a customer that we've been disclosing now for well over a year. That we are -- we're continuing to work with them on that based on some of the performance issues that we've had. That's what that is, and I think '13, as we move to full rate production on all of these, these new slash development programs, we're working pretty intensely with our customers to try to get these things squared up through the year.

So are you assuming that receivables line in '13 would come down some and so be a source of cash or kind of what is your assumption in there?

Yes. That's the reasonable assumption, is it would come down some, yes.

Okay. And then just one other quick one. 747-8, with the new block, why wouldn't you sit there and be able to accrue some small profit on that new block?

Well, I think, again, you look at the volume. You look at risk on the program. Look at where you are on the cost curves. Again, remember, we're pretty early on the cost curve on the Dash 8, with a fixed price over a long period of time on the product. We will work hard at being prudent.

Okay. Thanks.

Thank you. Michael Ciarmoli, KeyBanc Capital Markets.

Good morning. Thanks, guys, thanks for taking the questions. Maybe just a couple clarifications first. Phil, I'm back to Rob's question the LTAs for the A350. Would you be willing to disclose what percent of those LTAs are already in place?

Well, I don't know that I know off the top of my head, Michael. What I do know is we are very early in the process. I think we are well ahead of the point in time where we were on some of the other development programs. I think we have the right level of intensity focused on managing those LTAs and applying our lessons learned to it.

Fair enough. And then on fixing Tulsa, you say that's the first priority. At what point does the simple financial equation or an MPV analysis enter in to say, maybe it's more beneficial to walk away or sell those assets back to Gulfstream? What does the sheer math tell you about the financial benefits of fixing Tulsa?

One of the things to bear in mind is that Tulsa has about, I think, it's six major programs. Four of the six are -- well, three of the six are production, and three of the six are coming into production mode. Part of the challenge, frankly Michael, is -- we have gone through the travails of the development. And then the question, it becomes pretty straightforward. What's the cash value of these programs going forward? It's pretty straightforward, if you look at it as a strategic question.

Okay. Fair enough.

Again, good, good underlying cash generating on some of the programs and all the challenges of the development on some of the others.

Fair enough. The last one, quickly, if you can. On the business regional deliveries, I think you are almost at the '08 levels this year. What you have build into your plan for '13 for those platforms?

I think back to one of my previous comments, unfortunately, is we don't guide, because it's mainly business jet deliveries at this point. We will let you talk to our customers about rates and things.

Okay. Fair enough. Thanks a lot, guys.

Operator, we have time for one more question.

Thank you. Karl Oehlschlaeger, RBC.

Yes, thanks for taking a question here. Can you give me a little color on next year's Cap Ex? It seems like it's still going to be high after stripping off the severe weather impact. Where is that money going?

Sure. If you think about a -- I think we have talked in what, Phil? $100 million, $120 million range for maintenance level? But we've got rate increases on the A350 and rate increases on the 787 coming. And so that's really the prime driver, although there is some rate increase for production as well, but the two big drivers of those big programs.

Okay. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.