Spirit AeroSystems Holdings Inc (SPR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings Inc., third-quarter 2014 earnings conference call.

My name is Christine, and I'll be your coordinator today.

(Operator Instructions)

Please note that this conference is being recorded.

I would now like to turn the presentation over to Mr. Ghassan Awwad, Director of Investor Relations.

Please proceed.

Good morning.

Welcome to Spirit's third-quarter 2014 earnings call.

I'm Ghassan Awwad.

In the room with me today are Spirit's President and Chief Executive Officer, Larry Lawson, and Spirit's Senior Vice President and Chief Financial Officer, Sanjay Kapoor.

After opening comments by Larry and Sanjay regarding our performance and outlook, we will take your questions and then Larry will share some closing comments.

In order to allow everyone to participate in the question-and-answer segment, we 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 earnings release in our SEC filings and in the forward-looking statements at the end of this web presentation.

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results.

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

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

Thank you, Ghassan, and good morning, everyone.

Welcome to Spirit's third-quarter earnings call.

This was an eventful quarter with a number of accomplishments worth highlighting.

I'd like to thank our employees across the globe for their focus on performance and continuous improvement.

We can see the benefits of your efforts as we retire risk and make progress on our commitments to both our customers and our shareholders.

It's been a good quarter for the industry as aerospace has seen a number of significant milestones.

Boeing announced an increase of 737 production rate to an all-time high of 52 per month beginning in 2018 following a previous announcement of 47 per month in 2017.

Global demand for these highly efficient aircraft remains robust; 737 backlog stands at over 4000 units.

I'm pleased to report that our 737 team will be delivering six extra units over the next few months, to backfill the fuselages that made their way into a Montana river last July.

It is important for us to find ways to solve these challenges in support for customers.

Another significant highlight this quarter was Airbus' achievement of two important milestones.

Time certification of the A350 and the first flight of the A320neo.

We would like to congratulate Airbus on these accomplishments.

Our performance on the A350 continues to track as planned.

We delivered 11 A350 units to Airbus this year, a total of 22 units overall, and you can see the improvement in our financial results with a 50% reduction in deferred costs per ship set versus last quarter.

The improvement was primarily driven by a reduction in traveled work and engineering change [traffic].

I'll continue to stress it's early and we have a lot more work to do.

On the topic of cost, we continue our comprehensive cost reduction efforts as we raise the bar on performance.

We are driving the business operations for better alignment between what is made in house and what is purchased.

The analysis is still ongoing and it does track both ways.

There are some parts that were outsourced that make better sense to bring in house and other activities we engage in may become [buy] items.

The big picture strategy is the focus on our core capabilities and the markets where our economies of scale position us to where we are or reasonably can become best in class.

On the topic of maximizing our internal capabilities more effectively, this quarter we continued to consolidate our global engineering resources, have better workforce stability, improved main expertise, and lower costs.

We also the final stages of centralizing our procurement activities which is already yielding improvements in both performance and cost.

In terms of progress on the defense this quarter, we delivered the first Sikorsky CH-53K [test start up] which met all of its customer and delivery requirements.

Just for context, we delivered seven units previously and successfully restarted the production line after a 1-1/2 year shutdown.

Our other defense programs, the Boeing PA and the KC-46 tanker and the Bell V-280 prototype continue to make great progress.

Spirit's capability and affordability in materials, processes and tools make us a natural fit for future defense programs.

This quarter, Onex completed the sale of its shares of Spirit common stock.

Onex has been a great partner, and we certainly appreciate their contribution to our Company.

Now let's turn to our financial guidance and results.

We've tightened our revenue guidance to between $6.8 billion and $6.9 billion for the year, and we've increased our earnings per share to a range of between $3.35 to $3.45 up from $2.90 to $3.05, and we raised our free cash flow guidance to $275 million up from $250 million.

For the third quarter, we reported revenues of $1.7 billion which was up 13% year over year, operating income of $260 million.

Operating margins were 13%.

We reported earnings per share of $1.20 or $0.90 excluding a partial release of the deferred tax valuation allowance.

Operating cash flow was $119 million and free cash flow was $[17.5] million.

Our backlog grew roughly $3 billion to $44 billion on the strength of new orders which is over six years of sales visibility.

So, with that, I'll turn the call over to Sanjay and he can walk you through the details.

Sanjay.

Thank you, Larry, and good morning, everyone, and of course happy Halloween.

I am looking forward to sharing our quarterly results and updating our outlook for you today.

So I want to start with where I left you last quarter when we recounted the actions taken over my first year of building a strong leadership team, obtaining a reliable operating rhythm, resetting our cost structure, mitigating risks, and of course identifying additional opportunities.

While this is an ongoing process, and we always have more work to do, our third-quarter results represent another step towards achieving our vision for the Company of delivering consistent and predictable financial results.

Now, let's start with the consolidated results in the quarter, then I'll review the quarterly segment results, and finally will wrap up with our updated outlook for 2014.

So, let's turn to slide 3 for the consolidated results of the Company.

Overall revenues for the third quarter were up 13% as compared to the same period last year, driven by higher deliveries across multiple programs.

Operating margin for the quarter were a solid 12.8% compared to 3.4% in 2013 which was impacted by [forward] lost charges.

Earnings per share for the quarter was $1.20 and included $0.30 associated with the partial release of the deferred tax asset valuation allowance.

As we've previously communicated, we will continue to follow accounting guidance and assess the need to maintain our valuation allowance against our US net deferred tax assets.

Operating performance was strong and includes the benefit of $33 million or $0.16 of cumulative catch-up adjustments which are the realizations of some of the actions I mentioned earlier undertaken to mitigate risk and reduce cost.

A portion of the cumulative catch-up adjustment was on the recently closed 777 [block].

The partial release of the deferred tax valuation allowance in the quarter was approximately $42 million.

Cash from operations for the third quarter was $119 million source of cash, capital expenditures of $44 million for the quarter as we continue to adhere to disciplined decision-making processes.

And while I can assure you these processes will continue in the future, going forward stand will be lumpy as we invest in our facilities in support of the rate increases as well as to improve our efficiency and cost.

Free cash flow for the quarter was $75 million and includes $109 million cash tax payment in the quarter.

Year-to-date free cash flow is $194 million which is a $187 million improvement over the prior year.

Let's move to slide 4 that summarizes our cash and debt balances.

Cash balance at the end of the third quarter grew to $453 million and is net of approximately $150 million cash related to our share buyback and debt refinancing that we executed earlier in the year.

At the end of the quarter, our total debt-to-capital ratio was 39%, and our US defined benefit pension plan remains fully funded.

Slide 5 summarizes net inventory balances at the end of the third quarter for 2014.

Deferred inventory balances increased by $54 million driven by the A350 and the Gulf Stream Wing partially offset by mature programs and the 787; $37 million of the deferred growth is on the A350 as we delivered four shipsets in the quarter.

As you can see, we continue to substantially reduce our deferred cost per ship set each quarter.

We are reducing the amount of travel work which is inefficient and expensive as well as some of the engineering work that is typical in the early stages of a new program.

We are pleased with our team's progress at this early stage of the program, but at the same time we have a lot more work to do.

The 787 program realized a net decrease of $12 million in deferred inventory on 26 deliveries, or roughly $450,000 per unit.

The lower number of deliveries was driven by a planned two-week Boeing shutdown.

Full-year deliveries are on track.

Now, let's discuss our segment performance on slide 6.

Fuselage segment revenues rose to $804 million in the quarter and operating income was $142 million on higher delivery and cumulative catch-up adjustments on mature programs and no forward losses in comparison to third-quarter 2013.

The Fuselage segment 737 program continues to drive performance contributing to the $10 million in positive cumulative catch-up adjustment.

In our propulsion segment, revenues grew to $442 million and operating income was $82 million driven by higher delivery and cumulative catch-up adjustments on mature programs.

The propulsion segment 737 and 777 production line had solid performance contributing to $8 million in positive cumulative catch-up adjustments.

The team delivered another strong quarter while progressing on the design of key new derivative programs, the 737 MAX and the 777X.

And our Wing segment revenues also grew, reaching $446 million on higher deliveries in the quarter.

Operating income was $63 million as the segment benefited from no forward losses as compared to the same period last year.

Our 777 [slat] production line in Tulsa and the A320 Wing program in Prestwick had strong performance in the quarter, both contributing to the $15 million positive cumulative catch-up adjustments.

And the A320 Wing team continued their dedicated support of the A320neo as Airbus celebrated its first flight in the quarter.

Now let's move to slide 7. As I have mentioned in the past, taking into account our year-to-date results and our forecast, we have updated our guidance for 2014.

This guidance includes the impact of lower work days in the quarter compared to approximately 64 days on average in the first three quarters.

The fourth quarter has 56 days.

And also consistent with my comments from previous quarters, the guidance includes possible modest charges in the short-term because of initiatives that result in long-term benefits such as the impact related to the recently offered voluntary retirement program which we will account and absorb in Q4.

This is another example of us resetting our cost structure.

For our full-year 2014 guidance, revenue range is tightened to $6.8 billion to $6.9 billion.

Earnings per share increased by $0.40 at the top end to a range of $3.35 to $3.45 to reflect mitigating risk and the realization of cost reduction activities.

After increasing our (inaudible) cash flow guidance to approximately $275 million to reflect the improvement in operating cash as well as projected capital expense in the year.

Full year effective tax rate remains in the range of 30% to 31%.

I'll remind you of some of the important notes to our guidance.

It excludes any potential impact related to the divestiture of Tulsa.

And, two, it excludes the impact of the year-to-date valuation allowance release which is $0.55 and any potential future adjustment to the deferred tax asset valuation allowance.

And, lastly, early next year when we discuss our fourth-quarter earnings we will also provide you 2015 guidance incorporating the team's work and our vision for meeting our commitments.

We are happy to take your questions now.

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Please limit yourself to one question and one followup.

And our first question is from Carter Copeland of Barclays.

Please go ahead.

Hey, good morning all.

Morning, Carter.

Congrats on a good quarter.

Just a couple of couple of quick ones.

One kind of bigger picture question, Larry, related to all the detail you gave around the cost front, whether it's the engineering resources that make [by] and all of that stuff, if you take a step back and say where you are in the timeline of attacking costs, what inning would you say you're in?

And have you gotten through the low-hanging fruit yet on this set of initiatives or is there still a lot more to go?

I think it's certainly the question we're asking ourselves.

As I look at it, it depends on what component of cost we're talking about, but we probably have captured most of the majority of certainly the low-hanging fruit and probably the things that are obvious to folks who run operations.

That doesn't mean that it's yet manifest in the financials because most of these decisions, they're reflected in future periods.

I would say probably the area where we are -- so, as I kind of look at overhead I made some pretty significant moves early on with I think probably with second quarter I know 1000 head reduction mostly in the overhead arena.

That was a pretty significant cut.

Continue to challenge the team and we continue to work that.

The attack from there really kind of moved to nonlabor and we've really been looking at, you name it, everything from cell phones to drill bits.

It's amazing.

To the freight, but we've got a pretty comprehensive plan.

Again, Carter, I'd say most of that's in front of us in terms of the pay off, but I think the work in terms of what we know we have to do is laid in.

So in those particular areas I would say, hey, look the plan's set and as we go forward you'll see the benefits of that and maybe some continued marginal improvements over time.

We've really worked hard, kind of turned our eyes over to supply chain.

We've been working that all along.

But we're really now kind of thinking about the larger strategic approach in terms of consolidation on the supply chain side of things and what opportunities are manifest there.

Our agreements expire over a period of time ranging year to year to year to year where the majority of those agreements expiring by 2018.

So, again, as we work our way through that, you're going to see us make improvements in those things which will continue to manifest over quite a long period of time.

Because not all those contracts are immediately available to us to renegotiate.

I hope that answers your question.

That's great color.

It's just tough for us to get an appreciation of how much you've done and how much we've seen of it yet.

As a follow-up, just quickly on the 787 and the deferred cost there, you hinted at price step downs at some point, perhaps eliminating or reducing the deferred cost reduction per unit but obviously we haven't seen that.

Had another I would say respectable, maybe good is the right word, quarter on that front again this quarter.

Is that indicative of performance that's better than you had originally planned or we just haven't seen those pricing dynamics influence the P&L yet?

How should we think about that?

Yes, there really isn't -- we haven't -- we're on plan I guess would be that way I would describe where we are on 787.

When we laid the plan forward when we declare the forward loss, I don't know how many quarters ago that was, and so we laid the plan in and we're executing to that plan.

And so I really don't have any additional -- I would say we're not doing better than or worse than the expectations we laid out in that timeframe.

And we will continue to drive hard on 87 to try to beat the cost line down below obviously the price step downs, but that's the challenge in front of us.

Okay, great.

Thank you all.

Thank you.

Our next question is from Howard Rubel of Jefferies.

Thank you very much.

Larry, it seems as if you have worked very hard and Boeing has worked very hard to improve the working relationship between the two of you.

Could you talk a little bit about some of the shared initiatives that have led to both of you benefiting?

Well, I will -- I can certainly tell you that I don't think I've seen really a more important relationship in the industry than the one between these two companies and it's an impressive thing.

As we -- probably the best example I have is when you look at these decisions to take the rates up, the Boeing folks have been incredibly helpful in bringing in their expertise and the work that they've done in their factory and work that they've done in other parts of the business to bring it in and work with us and trying to optimize both our ability to, well frankly, reduce the cost of producing these but also and that cost being really manifest in two categories, reducing the cost of the capital needed but also reducing the cost of the build itself.

And so that partnership has been really I mean extraordinary in figuring how to do that.

Is not just a 37-related phenomenon, by the way.

The same dialog is going on, on 777, and I really should not leave any of the other programs out.

I mean the working relationships, the teams were quite well together.

Probably a near-term area that I think we've seen a lot of success as well is where we've pushed hard on we have a mutual cost reduction plan that we work together with Boeing.

And there's been some significant improvement that not only reduce the cost of the aircraft but actually reduce the weight.

And I probably don't want to get into details but just say that I think there's some real great success stories there as it relates to our partnership and our working relationship.

And then, Sanjay, there are two items that kind of create a lot little bit of odds and ends.

One is I noticed that charge and other around $8 million or thereabouts, and then you talked about some restructuring actions in the fourth quarter.

Can you put some brackets around the latter point and a little description on the first point?

Sure, Howard.

The other expense, basically its foreign currency impacts.

We have a small revolver with our Prestwick operation and, as you know, we have to value that market to market at the end of the quarter.

The dollar has been appreciating, so this quarter we had a small impact because of that.

Quite frankly on a year-to-date basis that's much smaller.

So that's what that $8 million or $9 million.

Your second question, we did announce voluntary retirement program and obviously there's a fairly sizable portion of the population that's eligible but as with most programs like this, we expect a small modest percentage that will accept.

And based on who accepts some time in this month we will then calculate the cost off that.

But it's very modest.

It should be in the low single digits in terms of EPS, but again like I tried -- this is a what we are trying to build, an organization here so that all of these kinds of decisions that have long-term benefits may have an impact in the near term.

We want to do and we will include that in our guidance so those are decisions that we make consciously and we are accountable for those decisions and it's all part of the guidance we gave you.

So, it's a small number but it's in there and it's in my guidance for the year.

Thank you very much, gentlemen.

Thank you.

Our next question is from Joe Nadol of JPMorgan.

Please go ahead.

Thanks.

Good morning.

Hello, Joe

Good morning.

Very good progress on A350 this quarter.

I wanted to ask you if first of all that if you think that this is a new baseline and that we won't see any backsliding?

In other words, was there anything that helped this quarter that might hurt in future quarters?

And then secondly if you could bracket for us the amount of traveled work in sort of negative impact on the results in the A350 that still has yet to bleed off?

Joe, I'll take that question.

I tried to explain a pretty complex set of contributors to the deferred inventory.

And so the answer -- the direct answer to your question is not that I believe there's anything that would take us back the other direction in terms of increasing the amount of deferred inventory per shipset, I don't see that.

I see us actually, as I told you, there's been a backlog of work that's discrete that we've been working down.

And so what I would probably say is minus a major discovery, which haven't been forthcoming on a flight test that would drive a significant modification to an aircraft, both aircraft built or weapon flow or future aircraft, I don't see that kind of thing happening right now.

What I see us doing is working through that backlog and I think I had told you previously you asked for kind of a skyline on that.

I think I said that that would be complete by the end of fall, beginning of winter, and we're still on that path.

And so my expectation is as we continue to work off those discrete items next quarter you'll see improvement once again.

Okay.

That's great.

Second question is for Sanjay.

You've been under running your plan I think a little bit on CapEx, but you mentioned during your prepared remarks that it's going to be lumpy going forward.

Obviously we had the rate news this quarter for Boeing in the 37.

Could you update us on how we should think about the profile of CapEx going forward into next year and the following years just given the announcements and how you've been running year-to-date?

Joe, as you can imagine in any business there some amount of core capital that is required just to replenish activity that we have in our factory and that of course continues.

And then, like you said, the lumpiness will come because of the rate increases that are in front of us.

But as you can imagine, the rate increases whether they be on the Boeing programs or the Airbus program, the capital on that is driven by the timing of when those rate increases require the facilitation of that work.

And by its very nature each quarter it can be a little bit lower and a little bit high.

I will tell you one other thing because I think I've been talking about this for the last two or three quarters since I got here that in line with what Larry had laid out, we do make very disciplined decision-making.

And so I do sit and review with the operations and with our P&L leaders the investments that we make in our facilities both for rate increases as well as to reduce our cost of goods as well as to improve our profit.

And even though you're seeing a slightly lower CapEx so far, I just want to make sure you understand it's not got anything to do with you are not investing in our facility or we're not investing in our business.

We're making these decisions based on the turn on investments and of course that will continue.

Going forward, yes, you'll see a little bit of an uptick in capital going forward, some of it in the fourth quarter and some of it next year and so on, but that's all baked into our plan.

Of course we talk about 2015 like I said in my prepared remarks in the first quarter call for next year.

But we're investing and we make very good decisions in the capital just comes in based on when programs require that requires some.

You will notice we lowered the number for CapEx for 2014 by about $10 million and likewise we upped our free cash flow guidance by $25 million.

So, that's what I see.

Sanjay, are you willing at this point -- I know you're going to give guidance in January, but are you willing to at this point say that CapEx will be -- our prior expectation is that CapEx will be down next year?

Are you willing to say that it will be down or flat or up or just given the things that have changed?

Yes.

Joe, I'd rather wait until January.

I'll give you a much better -- rather than me give you trends here on just CapEx, I think we've always told you that 2015 cash flow is better than 2014.

I'd rather just stay there and we will certainly talk about capital for 2015 as we get -- as we talk about all the opponents of cash flow for next year.

Okay thank you.

Thanks, Joe.

Thank you.

Our next question is from Cai von Rumohr of Cowen and Company.

Please go ahead.

Yes, thank you so much.

Could you update us on where you ended the quarter on deferred production credits on the balance sheet?

And maybe give us some color on how the Gulf Stream programs each of those did in the quarter in terms of deferred production cost?

Alright, Cai.

Thank you.

On the deferred production credits on our mature programs, again, let's just make sure everybody understands our process at the end of each quarter and particularly I think I may have even mentioned this in a prior call where we changed our processes a little bit to do more sort of bottoms up comprehensive [ESE] reviews two quarters, in Q2, Q4 and we kind of do a scrub in the others.

The deferred inventory of the balances on our mature programs didn't really change.

We assessed that based on risk and we assessed that based on where we are in the current block, so there was a negative deferred inventory number and that really hasn't changed.

That's the deferred inventory on 350 and 787 I talked about.

So, now in second question in terms of how did we do on the 650 and the 280?

I will tell you we are tracking well on plan on those, very similar to what we talked about in the third quarter.

Our deliveries are on track, the teams are very focused on making sure there are improvements in our cost, in our deliveries, in our quality.

And we continue to make good progress like we did the last quarter we continue that progress in Q4 as well -- I'm sorry, Q3 as well.

And then the second one, your accounts receivables spiked up in the third quarter.

Explain that and where should they be going, going forward?

Cai, that's good.

Listen, accounts receivables is a timing issue.

If you look at our working capital, Cai, and I was looking at it earlier as well, I mean look at our physical inventories it's pretty flat.

We've done a good job there.

Receivables are up, tables are up, and again you see our business has been growing a lot just quarter-over-quarter with a 13% increase in our revenue with a full year it's higher than that.

And as you can imagine, working capital does change with that.

Our DSO, our returns haven't really deteriorated.

Some of the receivable increase is purely timing at this stage, so there's nothing more than that in that number.

Thank you very much.

Thank you.

Our next question is from Doug Harned of Sanford Bernstein.

Please go ahead.

Yes, good morning.

I wanted to get back to the 787 for a minute.

It looks like for the year you delivered 90 so far through the third quarter.

So it looks very much unplanned.

Can you comment on how the 787 Dash 9 is impacting you, and Boeing specifically talked about pulling forward inventory in the last couple quarters.

Is that a strategy that has affected you in anyway?

I'll take that, Doug.

We saw some of this impact actually last year where when we were building Dash 8 and Dash 9 simultaneously and it did create both a labor disruption as well as some inventory impacts because the configurations are a little bit different.

In our piece of the airplane it only represents a fraction of what Boeing would be dealing with in the larger context, but there was some impact affiliated with that.

Most of that all absorbed last year.

This year the bigger challenge wasn't a Dash 8, Dash 9, it was more around the rate transition and I know it sounds like we went from say the 8 to 10 or 7 to 10.

But the truth is when we were doing the mix of the 9's and 8's and there was a little bit of slowdown in the plan, it really was quite a big step for us.

And so we're really pleased we were able to absorb all that this year and be able to track our plan, but it was pretty challenging early in the year and we're tracking right along, so we're pretty pleased.

So, the Dash 9 it sounds like that is smooth at this stage?

For us, yes.

Yes, it's pretty smooth at this stage.

I don't know, Sanjay, do you want to add anything or did I miss anything?

Doug, again the quantity is small at this stage.

We are early in the Dash 9, but like Larry talked about, we saw a big increase both in terms of physical inventories associated with the switches as well as the natural inefficiencies that you have when you have a sort of model mix change online but for us our team has been quite focused and have worked that thing very well.

I think one thing I should point out is obviously we tend to lead Boeing, so something that might have hit us in 2013 might not be an impact to Boeing until 2014.

So, but you said the rate increase was more of a challenge and just going back to the previous question about investment and the future.

When you look at the rate increase ahead of you, the 2012 and the 2014 on the 87, and then to 47 and 52 on the 37, is there one of those or another one looks particularly challenging to you?

Are they all pretty routine?

I will tell you I think the bigger one was really getting to 10.

And I think that we -- I'd say we're pretty tight in terms of working the details of all this, so I just say we're in the process of working with the details on increases to 47 and 52.

Those are obviously the larger in magnitude in terms of its facilitation and we're working hard to make that happen.

But that's kind of a conversation that's an ongoing conversation between us and our customers.

Okay.

Great.

Thank you.

Thank you.

Our next question is from Sam Pearlstein of Wells Fargo.

Please go ahead.

Good morning.

Morning, Sam

Larry, can you talk a little bit about your thoughts in terms of what you do with the cash that you've been generating?

Every quarter this year you've certainly been increasing and I know you bought some of the stock when Onex sold some.

But can you just talk about as this cash improves and it seems like it's going to continue, how you balance that and think about returning that to shareholders?

Be happy to.

It is probably certainly one of the things that early on, Sam, we were really in the I'll say focus on performance, drive the operational side, reduce cost of goods sold, really kind of just driving the enterprise to what I'll say kind of world-class efficiency.

I certainly wouldn't say that we're there, kind of back to Carter's question at the beginning, but we're driving hard every day.

We've become a lot more thoughtful about what we would do with future cash.

As we look at our liquidity, we're generally satisfied with the liquidity we have.

We've done a lot of analysis in terms of what we think we need to have in terms of liquidity and I think we're in pretty good shape.

We look at paying off our debt and truth is we're not highly leveraged, so there's not a big payoff there.

I mean we can invest a lot of money to try to improve our rating, but it isn't a huge again cash flow generator.

So then that kind of leaves us with the normal things that businesses consider.

Share repurchases, dividends, obviously and I've been saying this for a couple quarters is investments and Sanjay was just talking about capital as it relates to these two big rate increases.

Capital investments that are just reducing cost of goods sold, that will be -- we are thinking very hard about where we would make investments to improve our overall -- or reduce our overall cost and goods sold over the long haul, and so those are the areas, and then growth.

We're going to do all of these things.

There's always a lot of emphasis on share repurchases and share repurchases will become part of our nominal go-forward as well all the other things that I just talked about.

And finding a balance of what those things are is exactly what we're doing right now.

The growth type side tends to be opportunistic.

And so we'll be agile as it relates to as we look out and see what opportunities happen.

The Company needs to grow and we're going to grow and we're going to continue to refine our thoughts around that.

There's a lot of time and energy going into exactly how we go forward with this and we'll disclose more of that as we kind of move into the future quarters.

Thank you.

And then, Sanjay, can I just ask.

The deferred tax valuation allowance, you had mentioned compliant with whatever the rules are.

Is there a point where that could all go away or do you see this kind of coming back every quarter and were to continue into 2015 as well?

That's a great question.

I never dreamt of becoming a tax expert on particularly the deferred tax asset valuation allowances.

But the accounting principles and the way you compute this depend on trying to calculate so your last three-year cumulative losses compared to and then of course your last one-year cumulative losses.

And you compare that to going forward what kind of projections we have, and each one of these categories has a different weightage.

Obviously the losses for the near-term have more weightage than your projections do and so on, so we go through this calculation pretty much every quarter and depending on our performance then we release the valuation allowance.

And that, quite frankly, is one of the reasons why when I started this year I wanted to keep it out of my guidance because it's difficult to predict.

What do I see going forward?

Depends on our performance clearly.

Can I see a scenario where at some stage based on the calculations that I mention we get to sort of a binary event that says okay take it all to the bottom line.

I could see one, but not for the near term and again this is something that we will see towards the end of this year and probably in Q1 of next year I'll talk about it.

Okay.

Thank you.

Okay.

Thank you.

Our next question is from Jason Gursky of Citi.

Please go ahead.

Good morning.

Sanjay, just a quick clarification.

Can you tell us which line number you're working on today on the 787 and remind us of when those price breaks to Boeing kick in, lines 300 and 400 respectively?

Jason, I'm not sure we've given out details specifically on line units where we have price step downs other than to tell you guys that there are price step downs in the contract.

We haven't given specifics on that.

In terms of specifics again, we delivered 26 in the quarter.

I think -- I'm trying doing the math in my head very quickly here, Jason, as to what that number would be in terms of line unit delivery.

I think at the end of last year we were at 217, if I recall, but I don't have that at the top of my -- it's probably somewhere around 275, 280, something like that Jason.

That's where we are today, but in terms of step downs, we haven't, that's not something that we have given out in the past I don't believe.

Okay, fair enough.

And then, Larry, can you just give us an update on the opportunity set in expanding the work that you do into the defense world.

I think you mentioned in passing in the past there are some opportunities that your capabilities line up well potentially with the needs of the prime contractors.

Can you just kind of give us an update on where you think we are and whether we're going to convert any of these opportunities into revenues over the next couple of years?

I wish I could.

I could say that in general -- I'm going to talk in general terms here for a moment and just say that -- in general what I would say is there are two categories defense acquisition.

They really break into two groups, that is modernizing current products so that they apply to kind of -- you lengthen the life of the product by injecting technology into that product.

That's really what a CH-53K is.

You go back and look at a CH-53, I believe it's origins are 1957, something like that.

And aircrafts are all [on time].

I'm very familiar with this because, as you know, I used to run the C-130 program.

It used to be one of my programs, and so the C-130J obviously was a similar kind of technology injection for an aircraft that's been around since the late 50s.

So there is you know really that kind of thing going on.

The other side would be kind of -- I want to say a middlebrow would be the tanker where Boeing very smartly offered up a solution that leveraged an existing production line to introduce a product or the PA for that matter, again another plan of similar idea and.

By the way, the P8 was here last week and what a spectacular aircraft that is.

And/or then kind of the other end of the book is the V280 which is looking at -- it's a whole new product with a new niche.

So, if you look at defense spending and defense acquisitions and you say, okay, where are the opportunities where a new products are being introduced or there is an opportunity to modify an existing product, that's where our opportunities lie.

We're not going to be the prime.

We don't have an aspiration to be a prime in the defense business or, for that matter, other businesses.

We're going to stick to our knitting and -- but we think we're the ideal partner.

And so if you're off developing a new product and it's a new acquisition that kind of fits in our niche, you'd think we'd be the partner of choice.

A natural kind of one that sometimes we chat about here often is something like a UAV, something like this where people are trying to take a technology that's been around.

You introduce advanced capability and reduce costs simultaneously it's, again, one of those kinds of ideas we think would make a great partner to somebody.

But, again, that's the best I can do in terms of kind of getting you a sense of where we think we fly.

Okay.

Great.

Thank you.

Jason, if I can.

We have, at the end of the third quarter, delivered 254 shipsets on the [7s].

Great.

Thank you.

Thank you.

Our next question is from Robert Spingarn of Credit Suisse.

Good morning.

Larry, low-hanging fruit came up before and Sanjay talked about the deferred credits and just the strength of the mature programs.

And you look over the last few quarters you've had those contribute EACs or favorable cash in the mid teens each quarter.

This quarter the $16 million and similar type numbers last couple of quarters.

Now, I know notice that's a mix of 73 and 777 I guess, but how do we think about that going forward?

Is this a recurring opportunity or do you get to the point where you've really matured the line so much where the price step downs come in from whatever types of agreements you have with Boeing?

How do we think about that on a forward basis?

Well, I think you said a pretty well actually.

Our plan of course is to -- so there's always this -- you set your -- really it was a year ago today or in this timeframe where we're sitting down trying to figure out what we think or project for 2014.

So in 2013 if you recall it was still a bit volatile situation in terms of making predictions.

We did a reasonable job but obviously in 2015 we'll have a much more refined view.

What the benefits were of the efforts we made, now what are some examples of that.

When you look inside and how we manage the cystic productivity, for example, we had good productivity enhancement based on a number of initiatives we have underway that were difficult to predict what the value of those things were when we laid in 2014 projections.

But I think we have a much better sense of that now, so when you get our 2015 guidance and when you see over quarter-to-quarter performance for 2015 you should see probably fewer of these.

It will be in the EAC's that kind of get locked down and in our guidance it kind of gets laid in for 2015.

Okay.

That will certainly make it a little bit easier.

I'm going to try with a high-level question for Sanjay.

Your cash flow conversion, depending on how you want to look at it, and there's some I guess anomalies in here, we've got the extra, the advanced deferral from Boeing.

But you're in that 40% free cash flow conversion neighborhood, let's call it.

What kind of timeframe or how do we think about the point at which you can convert closer to net income?

I don't know, Sanjay, if that's for you or for Larry.

Think long-term.

Let me try, Robert, because this has been, and either of us can answer, but I'm going to -- I think I've been pretty -- this has been really the predominant area of focus for us.

It is the question on the table for us is at what point do we reach our destination and what is our destination.

Now, I think you probably figured that I'm generally a dissatisfied CEO.

So when we look at our peers it's pretty easy to see you can kind of calculate what you think a lot of our peers do as it relates to their ability to convert revenue to cash and what that percentage looks like and we certainly have studied that.

We studied our own business and so when we look at that we kind of say, okay, how does that look like to us?

And the interesting thing is you could lay in what you think is the time that you're going to recent that destination, which we did and I kind of told you I thought this was a three-year plan.

And then all of the sudden other things happen, rate increases, other kinds of things that are good news.

Frankly, it's not bad news but then it kind of creates an impact to your overall free cash flow, so then you say, okay, well I'm going to pay that bill.

And then there are other things that you may do in terms of your financials.

So I don't know.

I keep saying to the folks, hey, look, we have a projection of where we're going to be year-by-year in that conversion in terms of improving, but I sure hate to say we ever make the destination.

I'm going to keep probably raising the bar a little bit so there's always an expectation to do better with the realization that in any given year -- right, in any given year there may be more investment made.

And I think we're probably -- you have it dead on right, we're at 4% right now and clearly we want to better than that, our peers are doing better than that, our customers are doing better than that.

And we want to be there, but I don't want to kind of get in to -- certainly don't want to get into a quarter-by-quarter conversation.

Even a year-to-year conversation is a little tough given the dynamics in the industry.

And the dynamics, by the way, isn't necessarily a bad thing.

I mean the thing we love about the business is its cycle.

A lot of times the thing we hate about the business is it's capital intent.

Larry, just on that basis though without asking you to pinpoint it though even though given what you've got on your plate at this point what you know about rates and so on, is there a particular moment in time where you see a real inflection?

No, not big, but some years are more challenging than others given just kind of the dynamics of -- again, there's a lot of living parts.

There is advance repayments, there's capital investments, there's a lot of things.

You want to be agile as it relates to frankly a desire regarding who knows, you may want to make an investment.

And so, no, there isn't any all say significant inflection.

We're on the journey.

It's just the question is what year do you arrive or is that even a reasonable idea to say that you've never arrived.

Right.

I guess it'd be easier for you to answer this if you weren't growing and you weren't adding new work and with rate increases so that is good news and it makes it a little harder to do.

Yes, that's a very good way to look at it.

I appreciate that summary.

Okay.

Thank you very much.

Thank you.

Our next question is from George Shapiro of Shapiro Research LLC.

Please go ahead.

Yes good morning and good numbers.

I wanted to pursue on the Gulf Stream programs, Larry.

It seems like based on what you're saying, the deferred which went up like $30 million in the last quarter was probably up at least that much, maybe a little bit more.

So I guess it could be due to higher deliveries of those planes, but that's the one thing that I want to pursue from the standpoint of when that deferred starts to come down.

And then also get into where that may stand in terms of the potential sale?

Also, the arbitration that is supposed to start in Q1 2015 with Gulf Stream, is that still going?

And last in response to an earlier question about receivables.

Did the receivables increase in the quarter have anything to do with Gulf Stream receivables going up more?

Thanks a lot.

Wow, let me see.

I didn't write all that down, so I'm going to do the best job I can as we approach the end of the our here, George.

So as it relates to the Wings, I mean the good news, and then Sanjay said this, is that we're on contract schedule.

We had -- if you recall, we had some really significant material issues that popped up at the end of 2013 that really frankly created some challenges for us.

So we were marching along but we've just seen great progress, but we've been running hot.

And we been running hot frankly to get ahead of schedule which is kind of where we are today, 280 we're doing -- actually we're probably, I think we're a little ahead of schedule on 280.

We had a lot of deliveries, back to your point, as it relates to inventory on the 650, but we're satisfied.

This has been an area where we've applied a lot of resources, a lot of focus, so our best folks and we're very pleased.

Sale update, okay.

On the sale update all I can say is I think you got some color on this yesterday, George, if you were on TGI call.

And I'll just say the process is moving along smartly and I will leave it at that.

Sanjay, I'm going to throw receivables to you.

George, no.

The quick answer on the receivables there's no material impact and change in receivables quarter-over-quarter because of Gulf Stream.

Again, like we said, we delivered to our plan and the better you get at that you get paid accordingly.

So, there is no change or impact because of Gulf Stream on that number.

The arbitration that's supposed to start --.

The arbitration is ongoing, the process is ongoing.

Okay thanks very much guys

Time for one more question please

Thank you.

Our last question will be from Ken Herbert of Canaccord Genuity.

Please go ahead.

Hi.

Good morning.

Good morning, Ken

I just wanted to see, Larry and Sanjay, just one followup on the fourth quarter.

You've got the I think you said sort of low to mid single-digit EPS impact from the potential early retirement plan.

You got give or take 10% or 11% fewer working days.

Is there anything else that the guidance implies in the fourth quarter or anything else we should be thinking about specific to that?

No, Ken, no.

That's why I kind of highlighted those two.

Again, they are small but they are meaningful and I just wanted to make sure.

Listen, all throughout the year we try to give you our best and updates on our forecast and again like you see, I tightened my guidance for the year.

I just want to make sure that as some of you are trying to do run rates, et cetera., that you at least incorporate the impact of the lower working days in the very modest amount on the VRP program but, no, nothing outside of that.

Okay.

Great.

Well, thank you very much.

I'll now turn the call over to our president and Chief Executive Officer, Larry Lawson, for some closing comments.

Well, thanks to everyone for participating on the call and the questions.

They were very good.

I'll just close with a few comments here.

I usually say this, I don't know if it's worth saying, but we really do believe in our value proposition and we continue to refine it and improve on it.

We believe we're an affordable and reliable partner in the design and manufacturing of aerosystems and I think we're in a good position, a unique position in the industry.

We also believe in the market that we're in.

We believe that the fundamentals driving air travel and aircraft replacement are lasting.

The aircraft, the demand for aircraft it's a global demand and today when you look at where the demand is coming from, it's not coming from one market, it's coming from multiple markets and it's important perspective to take when you're thinking about the cycle.

Correspondingly, I know that the price of fuel is down, but airline planners around the world have to consider current as well as future expectations as it relates to fuel prices and frankly even today these are aircraft are attractive in terms of their contribution to the airlines.

So in conclusion, 2014 looks to be a good year.

We continue to drive performance and cost and remain agile as it relates to deployment of capital.

Will always have in mind acting in a way that brings best value to our shareholders and to our employees, and just say thank you and I look forward to speaking to you again next quarter.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.