Coleen Tabor – Director-Investor Relations Larry Lawson – President and Chief Executive Officer Sanjay Kapoor – Senior Vice President and Chief Financial Officer.

Jason M. Gursky – Citigroup Global Markets Inc. Carter Copeland – Barclays Capital Inc. Howard A. Rubel – Jefferies LLC Doug Stuart Harned – Sanford C. Bernstein & Co. LLC Robert M. Spingarn – Credit Suisse Securities LLC David E. Strauss – UBS Securities LLC Peter J. Arment – Sterne, Agee & Leach, Inc. George D.

Shapiro – Shapiro Research LLC Myles Alexander Walton – Deutsch Bank Securities, Inc. John Godyn – Morgan Stanley & Co. Joe Nadol – JPMorgan Chase & Co. Sam Pearlstein – Wells Fargo Securities Kenneth Herbert – Canaccord Genuity Inc. .

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings Incorporated Second Quarter 2014 Earnings Conference Call. My name is Vanessa, 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. And I would now like to turn the presentation over to Mrs. Coleen Tabor, Director of Investor Relations. Please proceed..

Thank you, Vanessa, and good morning. Welcome to Spirit’s second quarter 2014 earnings call. I’m Coleen Tabor, and 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 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 news release, in our SEC filings and in the forward-looking statement 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. And as a reminder, you can follow today’s broadcast and slide presentation on our website at spiritaero.com.

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

Thank you, Coleen, and good morning, everyone. Welcome to Spirit’s second quarter earnings call. Before we begin I’d like to thank all our employees across the globe, you continue to bring outstanding capability and teamwork as we delivered all-time high rates and continue our transformation.

An important milestone for the quarter was the delivery of the 5,000th 737 NG to Boeing. The 737 production rate has doubled since divestiture and looking forward, in less than two years we’ll celebrate 6,000 units delivered. We’ve also delivered 18 A350 units to Airbus and made significant progress on the remaining traveled work.

I’ll add that the 737 team is pleased to have a plan in place to rebuild the fuselages, that made their way into a Montana river last month. This was what our customers count on from Sprit. Relative to the numbers, I’ll give you my thoughts about our progress on the number of fronts now that we’re halfway through the year.

Our efforts are beginning to manifest positive results, and there’s still plenty of opportunity in front of us. I think it’s fair to say we’re more disciplined in our decision making, focused on the right measures and just as importantly customer align. We’re applying a rigor to our internal processes as well.

Our focus is on current execution as well as long-term growths. Whether it’s in our operations, supply chain efforts, make versus buy decisions, or use of cash. With respect to cash, during the recent secondary offering by Onex, we took the opportunity to execute a 4 million share repurchase, the first in our history.

The number of shares we repurchased is roughly equal to the dilution in our stocks, since divestiture. We also refinanced our debt in the first quarter. We will continue to be agile and opportunistic in how we deploy our cash going forward.

We recently announced the new Board member, John Plueger, John is the President, COO, and a Board member of Air Lease Corporation. John is a thought leader in the world of large commercial aircraft, and we welcome his contribution to the board.

He also saw us continue to recognize the natural opportunities in the commercial aerospace up cycle, as we added talent and transformed our aftermarket business model with the recent addition of Bill Brown is the leader of our renamed Global Customer Support and Services.

Bill is an experienced and proven leader with a great background in commercial aftermarket. We made the name change to more accurately reflect what we do in the segment of our business.

Meanwhile the rest of teams had more time to drill deeper into the details of our business and I’m pleased with how we are working together on the common view of the future. Now to discuss our financial guidance and results. We have upped our guidance for this year in sales, earnings, and cash flow.

We are now guiding revenue of $6.7 billion to $6.9 billion. Earnings per share of $2.90 to $3.05, a free cash flow of $250 million. Sanjay will go into greater detail on our full year guidance. For the second quarter, we reported revenues of $1.8 billion, which was up 19% year-over-year, and operating income of $216 million.

Operating margins were 12%, and we reported earnings per share of $1.01. Operating cash flow was $165 million and free cash flow was $128 million and improvement of $123 million over a year ago. Our backlog continues to be strong at $41 billion and further supported by recently bookings.

To wrap up, we are halfway through 2014; we are seeing good operating performance and improvements associated with the changes we made in 2013 to create program aligned teams, acutely focused, with strong accountability.

We have a real conviction about our value proposition and the market, and will continue to challenge ourselves to do better as we move forward. At this point I’ll turn the call over to Sanjay, and he can walk you through the details.

Sanjay?.

Thank you, Larry. Thank you very much. And, good morning everybody. I’m looking forward to sharing our quarterly results and updating our outlook for you today. But before I being, let me take you back to when I joined the company late last year, our financial guidance was suspended as we conducted a strategic and financial review.

We were building the leadership team. We were beginning to identify the opportunities and taking actions to reset our cost structure. There was much work to be done and significant uncertainty. Now almost a year later the review is complete, we’re slowly, but surely getting into our operating rhythm.

We’ve identified additional opportunities that we are working on. And more importantly, we’re mitigating our risk. We are working together to execute the plans we put in place to deliver consistent results, all of which is generating the strong results that you see today.

As I promised last quarter, we’ve also considered our performance to date and our future projections to provide you with an updated outlook today. Now let’s start with the consolidated results in the quarter then I’ll review the quarterly segment results, and finally, we’ll 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 second quarter were up 19% as compared to the same period last year, driven by higher deliveries. Operating margins for the quarter was a solid 12%, compared to negative 15.7% in 2013.

The quarterly results include positive contributions from our mature businesses and in overhead cost focus, as well as some favorable cumulative catch-up adjustments for periods behind us. Earnings per share for the quarter were $1.01, driven by strong operating performance and the benefit of $19 million or $0.09 for cumulative catch-up adjustments.

Again this quarter it includes the partial release of the deferred tax asset valuation allowance of roughly $0.03. As we previously communicated, we will continue to follow accounting guidance and access the need to maintain our valuation allowance against our U.S. net deferred tax assets.

The partial release of the deferred tax valuation allowance of about $4 million in the quarter, represents the realization of certain deferred tax assets based on demonstrated performance within the quarter. Cash from operations for the second quarter of 2014 was $165 million source of cash.

Capital expenditures were $37 million for the quarter as we continue to make disciplined decisions on the deployment of our investments.

Free cash flow for the quarter is $123 million improvement year-over-year, and free cash flow year-to-date is up $241 million improvement over the prior year, reflecting operational improvements, lower capital expenditures and also the signing of cash taxes.

As you can see, we continue the process of resetting our cost structure through overhead reductions; balance capital spending and data driven deficiens in areas like supply chain our make versus buy strategies, as well as our uses of cash. While we have taken steps in the right direction, we still have a lot more work to do.

Let’s move to Slide 4 that summarizes our cash and debt balances. Cash balance at the end of the second quarter was $382 million, flat as compared to the previous quarter, reflecting the repurchase of 4 million shares for the first time in the company’s history, for $129 million of cash on hand.

At the end of the quarter, our total debt to capital ratio was 41% and our net debt to total capital ratio was 32%. Our U.S. defined benefit pension plan remains fully funded. Slide 5 summarizes net inventory balances at the end of the second quarter for 2014.

Deferred inventory balances increased by $91 million, driven by A350 program and the Gulfstream programs, partially offset by mature programs and the 787. $90 million of the deferred growth is on the A350 program as we delivered five ship sets in the quarter.

And as I have reminded you in the past, while we are making very good progress, work completed on a customer’s pre-final assembly and final assembly sites on previously shipped units is included in this number. and it also includes engineering that winds down as we move through the year.

The 787 program realized a net decrease of $13 million in deferred inventory on 33 deliveries, or roughly $400 per unit. Now let’s discuss our segment performance on Slide 6.

Fuselage segment revenues rose to $905 million in the quarter and operating income was $132 million on higher deliveries and cumulative catch-up adjustments on our mature programs. The fuselage segment 737 continues to perform well at all-time high rates, contributing to the $3 million in positive cumulative catch-up adjustment in the segment.

And as Larry shared, the A350 team is tracking to the plan; we laid out for ramping down work on previously delivered units and reducing the impact on deferred inventory build quarter-over-quarter.

In our propulsion segment, revenues grew $461 million and operating income was $86 million, driven by higher deliveries and cumulative catch-up adjustments on our mature programs. The propulsion segment 737 and 777 production lines had solid performance, contributing to $5 million in positive cum catch-up adjustments.

Also in the quarter, the team achieved a significant milestone, delivering the first MRJ pylon flight test unit to Mitsubishi. And our wing segment revenues also grew, reaching $438 million on higher deliveries in the quarter. Operating income was $71 million as the segment benefited from no forward losses, as compared to the same period last year.

Our 777 slats production lines in Tulsa and the A320 wing program in Prestwick had solid performance in the quarter, both contributing to the $11 million of positive cumulative catch-up adjustments. As highlighted by the current quarter’s results, the segment is intensely focused on execution across a wide variety of programs and end items.

And consistent with what we have said before, we continue to work with potential buyers for a divestiture of our Oklahoma operations. Let’s move to slide 7. This quarter is a second step in the right direction and we still have work to do.

In the quarter, we saw consistent performance across on mature programs, along with development programs adhering to plans, as we meet our customers’ needs. We transacted our first-ever share repurchase and by realizing deferred tax assets, we also released a portion of our DTA valuation allowance back to income.

Given our performance in the first half and our outlook for the rest of the year, we are updating our full year guidance with a revenue range of $6.7 million to $6.9 billion, at halfway through the year, we have delivered two plans on the production side and at the high end of our non-production estimates.

Earnings per share is increased by $0.40 to a range of $2.90 to $3.05 to reflect the improvements we are seeing as we steadily realign our cost structure across the entire business and achieve an operating rhythm.

And we are increasing our free cash flow guidance to $250 million to reflect the improvement in operating cash and lower capital expense in the plan. Full year effective tax rate is updated to 30% to 31%. I’ll remind you of some important notes to our guidance.

It includes all of the Oklahoma operations for 2014, and two, it excludes the impact of the year-to-date valuation allowance release, which is $0.25 and any potential future adjustments to the deferred tax asset valuation allowance. While our guidance is not risk-free.

We are actively monitoring our performance and driving to consistently deliver on our commitments. In conclusion, I can tell you the teams excited about the opportunities in front of us, and appropriately are tuned to managing the risks that are inherent in our industry and our business. We are happy to take your questions now..

And thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Jason Gursky with Citi..

Good morning, everyone..

Good morning, Jason..

Good morning..

Sanjay, I have a quick question for you on something you mentioned earlier in your prepared remarks, which is that you have identified several new opportunities with regard to the restructuring or costs, but I was wondering if you might provide a little bit more detail on either a) what those might be and what you view to be the timing of those opportunities?.

.

So whether it be in our perishable tools, in our shop supplies, in our freight, it be in even in our over time and the way we manage the productivity on the shop floor, every one of those accounts is being looked at. And as you can imagine in every one of those, there is always opportunity for us to go and do better.

And that’s what we are trying to find and that’s what we are trying to bake in..

Okay. That’s helpful. And then my question just is on cash flows, because it’s a good quarter obviously.

I just was wondering if you could talk a little bit about the sustainability of cash flows and what we might expect from the cadence perspective, for the last quarters of the year?.

Yes. Traditionally Jason, the last two quarters are our stronger quarters and as you can – and I think we’ll continue to see cash flow in the balance half of the year.

I think, again last year and again this year we’ve set ourselves some, kind of set to you cash flow is the focus for the company, the focus not only for the leadership team, but across the board.

And what that means is we’re looking at every aspect of cash whether it be through capital expenditure, whether it be through our cost of goods, and our sourcing and so on so.

I think you will see good cash flow in the rest of the year and that’s one of the reasons why we feel comfortable in raising our guidance as we’ve done for the second quarter in a row here to $250 million..

That’s helpful. Thank you..

Thank you. Our next question comes from Carter Copeland with Barclays..

Hey, good morning all and good quarter..

Good morning, Carter..

Thank you..

Just a question for you on the A350 on the deferred 18 million a unit you talked about there, can you help us understand sort of how much the relative differences are between the engineering work that you called out Sanjay and what you might think of the recurring costs per unit that we looked at on the 787? It’s my understanding the contracts and what you report is a little bit different.

Can you kind of help us with the apples-to-apples comparison there?.

Sure, Carter. So again, first of all kudos to the team because as we had mentioned to you.

I think Larry has talked about this even in the last quarter, we had been giving you the messaging that we are working really hard to drive down not only engineering cost, but also the work that’s being traveled which is very inefficient and as you can see in the first quarter like you point out, we were basically two units and we had a deferred growth of about $28 million per unit.

This quarter it’s got quite significantly down to 18, now partly that’s due to the volume clearly because there is an absorption impact of higher rate, but the engineering component is significant portion of that as well and so as some of the travel work, and the efficiencies which we are producing and shipping our units from our Kinston facility.

The quality of those units, the quantity of travel work is sharply getting down and this is what we’ve been talking about for the last – for the first six months and we expect to see this going down continuously as we work through these issues through the rest of – by the end of the fall.

So we see that, it’s hard for me to give you specifics in terms of how much is engineering versus how much is sort of travel work versus efficiency and absorption, because very few units had go through just based on our accounting systems, which are based on standards, there is a fair amount of volatility, and I’d recommend that we stay on a sort of a – look in terms of $6 per unit at the higher level..

Yeah, what I’m trying to say Carter, look we understand the three components of the cost. I mean we actually have a pretty good understanding of it, specifics of the three components of cost. It’s why last quarter, I could tell you, again I think what Sanjay, really says we don’t want to give you a projection for next quarter although.

We have a pretty good idea, the three elements of the one that Sanjay just discussed, and once I brought up before there is three elements that contribute to the deferred. One element I kind of talk about was the travel work. We are making progress there. The second piece is another non-recurring element, which is tied to engineering.

And that engineering is mostly around changes, that continue to go into the units and there is – even though change that is diminishing there has been quite a bit of work done there. And frankly, we’ve invested some money in building our quality.

So it does occur in the non-recurring piece, and then the third part is the recurring element of the cost and so as you see this and track towards the end of the year you’ll see those non-recurring pieces reduced – frankly you won’t see it, but they’ll reduce at higher rate and then you’ll get more visibility kind of into what the recurring pieces as time goes on..

And so the recurring numbers will be more or like, we’ll see that improvement next year, this non-recurring improvements that will be the….

Yes, this year is – right, you’ll see both; we’re coming down on good learning curve. And I think, what I’d probably say about the 358, maybe say somebody question is we are on plan.

The plan, it’s always interesting with all these things, we are on plan that doesn’t exactly – there is always a twist here or there, but in terms of we’re doing better in some areas and little more challenged temporarily in another but, net-net we are on our plan..

Okay, great. That’s good color. And then just as a follow-up, quickly.

On the favorable, cum catch adjustments you had in the quarter, can you tell us if that was related to one of the mature programs more than the other that I believe you finish the 777 block in the quarter, was that more of a 73 or 777 impact in the quarter?.

Sure, it was both those programs, Carter, 73 and the 777, and you’re right, we did have a close look into some. But it was both of those two programs..

Okay, great. Thank you both..

Thank you. Our next question comes from Howard Rubel with Jefferies..

Thank you very much. To follow on your guidance, a $200 million increase is a pretty significant when normally we get a pretty good idea of production rates. While I realize the Montana fuselages might be $40 million or $50 million, the rest of it is probably either engineering, some other work.

Could you elaborate a little bit, Larry?.

Sure, you hit right on it. If you look at the three segments, you can see a variation in the revenue growth and so that probably gives you a pretty good indication of what’s rate related revenue growth.

And then we have a lot of I mean truthfully we have a lot of derivative development work going on right now, and it gets reflected in those revenues as well that causes maybe more revenue growth in one segment than another.

And so if you think about whether it’s the Dash 1000, or the MAX, in case of the MAX it’s not just the non-recurring engineering, but it’s the tooling as well. You take you had 777 or the Dash 10 in there.

And that’s why you kind of see an uneven kind of growth, but if you look at those three numbers that might gives you a pretty good indication and there is other moving parts as well that.

I mean frankly there is – some quarters you pay bills, you make settlements that cost you money, and some quarters you make settlements that earn you money and those are also in those numbers as well.

I just say Howard there is a lot of moving parts in there, but I hope that helps you get a better sense of rate related versus other contributors to our revenue growth..

Obviously, I can just add to Larry’s. It’s just a matter of things, we do have some improvements in our global customer support and services, it’s small, but it’s there. It’s largely the revenue recognition and some of the tooling activity that Larry talked about clearly to lot of the non-recurring stuff.

So it’s a whole bunch of little stuff and I understand it adds up to that much, but that’s what it is..

No, that's great. And just as my follow up, I describe the wing business as you crush the numbers. Could you for a moment, I know you tried to call out a couple of specifics, but these numbers are really a sharp departure from anything you have ever done there.

Can you provide a little more color as to why it is going to be sustainable?.

Well, when you say numbers I’m not sure what you are talking about I mean when we talk about for 100 margins I think the conversation we’ve had with regard to margins is when we look at the total margins, we’re talking about 12%, is our total operating margin and I’ve said people, this is kind of the recurring question.

what do you think your long-term outlook is on margins and my answer always is not too far away from our customers’ margin? So obviously, we have to have some margin room, north of that to pay bills that we may in any part of the cycle, but that’s where long-term, my view is.

It’s the sustainability of our business, I mean again, this is fundamentals are pretty good, I mean it’s an 80/20 business I can, then I’ve kind of talked to you about in the past, the 80% of the business grows pretty decent margin 20%, then to use good amount of that and we have to work our way through that, the challenges are laid to the 20%.

and all I can tell you is there were just making progress, kind of marching along quarter-after-quarter, taking on these challenges, I mean the things that we can do is reduced our cost of goods sold.

Now I’ll tell you, I mean we’re attacking all the elements cost that Sanjay referred to, I’ll tell you, I haven’t run the few businesses and looked at levels, and I’ll say right now overheads are not out of line, we are actually pretty reasonable, but that’s not a reason, not in probably I think it’s the first time I say, if you’ve ever heard we say that.

So I’m kind of perpetually to satisfy. but what I would say, so I don’t want to leave people in depression that were kind of out of sake, but what I would say is I think there is always opportunity and as we dig down into the [minusha] (ph), it’s a lot of small things that allow to, I think make a material difference in the long-haul year.

So our plan is really on all fronts and audits to reduce cost of goods sold. it’s to address kind of, going forward contracts and take advantage of every part of the business that we can.

and so I would say that don’t look at the one point I was trying to make there Howard was any one quarter, don’t look at the margins, and anyone segment and anyone quarter and draw conclusion, because there’s a quite a bit of moving parts in anyone of those particular segment, kind of look at the total bottom line and make your judgments from there.

Sanjay? Thank you..

No..

Thanks..

Thank you. Our next question comes from Doug Harned with Sanford Bernstein..

Yes. Thank you..

Good morning, Doug..

I wanted to go back to the A350. just to understand a little more about how this is proceeding. In particular, I think the supply chain has been some what an issue in the past, could you talk about where that stands today? And what you’ve done there and what you’re doing to ensure that that’s no longer an issue going forward..

Doug, I guess when you say an issue, are you referring to performance or are you referring to cost?.

Well.

If you could comment on each of those, I know that Airbus has been in the past helping you with supply chain and so forth more I think timing of deliveries and things like that?.

Yes..

So, perhaps, if you could just speak across the board?.

Yes. Let me talk about performance. On the performance front, the supply chain has been a big component of our challenge. I think I would describe it in two fashions. One was actual – the actual performance, this is shortages coming out of supply base.

And the other one would be what I would call certifications having actually all the suppliers certified. I think we made, let me take the second one first, on the certification front, I think we’re gosh we’re most the way through that. We are kind of winding down to the last few folks.

As it relates to the ability to produce it right, we still have a few outliers that continue to challenge us. We’re working those; we have strategies in place to mitigate our risk there. There will be some bumpiness, but we’re actually doing quite well.

In general there, I would say, as I’d say how I kind of the address the supply basis? In general, where we have a strategy for the guys that are struggling, the numbers are struggling, the number suppliers struggling actually quite small at this point. And on the cost front, we were doing a considerable numbers as spot buys.

This was driven a lot by and today, what a little bit of spot buys we have are mostly driven by change traffic. We are still early and 18 units is not in a lot of aeroplanes. And frankly, I am not going to complaint too much about the change traffic. I think it’s happening for the right reasons.

It does create concurrently does create some real challenges though in terms of schedules. And especially, as you’re going up in rate. And so we worked really, really closely with the entire supply basis the robust trying to meet all of that, in the way that makes thrilling work. So I know that adequate, Doug, if that answers your question.

But I’d just say in general, we’ve kind of diminished most of that down. We still have a few challenges out there. And I’d say the biggest thing right now that we struggle with in terms of shortages. As probably changes with exception of I’d say one or two suppliers..

Well, that is helpful. And as a follow-up, as we head into the next 12 months and you mentioned it briefly before Dash 1000 work will be increasing.

Can you comment on from your standpoint, how much difference you see in the work of the Dash 1000 and how you see that potentially impacting your path forward over the next two years?.

Yes. Well, the Dash 1000 is substantially different. That is – it’s a much different, especially for us, given that there are kind of the center of the aeroplane, we’re probably more impacted by the Dash 1000 change than anyone. But the good news is we’re on schedule.

And so we feel really good, I think we learned a lot of lessons and I hope you learned them Doug, instead of experienced them. I talked to my team a little time about lessons learned versus lessons experienced, we certainly had some pain. And on the Dash 900, so the 1000, I’ll just tell you right now, we’re generally on schedule.

You always have a little stick out here and there. But in general, we’re doing fairly well and doing extraordinary well by comparison to kind of the experience that we had a year earlier configuration so..

Because there would be some differences on the wings bars as well, wouldn’t that?.

Actually, on the spar itself, I am not familiar with a change on the spar. there are differences on the components of the wing, but I’d have to tell you. I have to – I am not aware of a change on the spar itself. Other than….

The other than leaving what the trailing is….

Yes, well. We’re leaving. So, yes..

Okay. Thank you very much..

Thanks, Doug..

Thanks, Doug..

And thank you. Our next question is from Robert Spingarn with Credit Suisse..

Good morning..

Good morning, Robert..

Larry, just staying with that for a minute. You have talked a lot about the A350, a lot of questions on it. Clearly, you are improving. Your customer called you out as improving at Farnborough, which is one of the more important signs, I suspect.

At what point can we get comfortable that we are through the risk window where we could see a meaningful charge on this program? How do we think about that? And then, Sanjay, I have a margin question afterwards..

Okay. Robert, I think I’m just trying to get a better sense. I told that 18 units has been, it’s difficult to draw a conclusion at the 18th unit. I mean my own experience I’ve built a few airplanes, has been that you have probably your best solid assessment about 100 airplanes. What I would say is that there is still work in front of us to be done.

I think that you’re going to see us continue to work on the – what we’re building and how we build it, and to improve where we are, and we’re making, as you can see, we’re making good progress. and I really don’t have anything, it’s not really anything I could tell you definitely other than we’re on plan.

I think that’s probably the best I could say that we’re tracking to the plan we’ve laid on. And that plan is mix of work and non-recurring and attacking recurring and on the attack on the recurring side, there is a piece that is tied to the supply chain and there is a piece tied to our in-house execution.

so far we’re moving right to that plan and as we move into next year and as we move towards the 100th unit, I think we’re going to have much more solid idea about exactly what the numbers will be going forward. and at that point, we’ll figure out at how to disposition if we need to, any deferred that exist at that point.

My recommendation the best I can offer you, whatever it is you watch us quarter-to-quarter and we’ll continue to comment on this..

Okay. but that’s a very helpful milestone, the 100th unit. And then just moving to the margin, Sanjay, your segment margins ex cum catches have been firmly in the mid-14% here. And when I think about $1.50 or so, you earned in the first half and the implied guidance is like $1.40 at the low end, and frankly you don’t need mid-14% margins to get there.

How should we think about the conservatism in the guidance, or is it instead reflecting some price step downs or a mix or something else?.

Thanks Robert. Hey, this is a fair question, I think let me try the fact, and look from the guidance perspective, because I think that’s where I want to go. If you remember, we’ve come to a pretty couple of tough years in our company, not years that one wants to remember, will be proud of.

we had a very good first quarter, we had a very good second quarter. I think I even talked about this is the last time that we’re trying to create a culture here that always meets our commitments to you and to our shareholders. We want to make sure; we’ve set our bars, so that so we can always achieve that.

So we had a first good quarter and we had a second quarter. We’ve upped our guidance like I told you in the first quarter we would. we’ve gone up $0.40. I will also tell you our guidance was fairly clean, I kind of only two things that I have caveated out of them was one, one was the DTA and the other one was Tulsa.

Outside of that, everything else was in my numbers including and I’ll give you a couple of examples where – for example in the first quarter, we refinanced our debt and it cost me about $20 million, or about $0.10 a share. But I wasn’t going to change guidance, because of things like that.

these are good things to do, I think as a business, we are expected to do the right kinds of trade-offs between short-term and long-term. we did those things. and so what I see in terms of where we are today and where we are comfortable for the rest of the year, that’s the number I put out there, it’s a pretty good growth.

and clearly, our teams I’m real proud of the entire space organization, we’ve delivered two healthy quarters. And we will continue to do better, our internal plans are always to do better, and there are really two ways to sort of manage this thing, one is to like Larry said, we are managing our risks.

the other way is we are trying to come up with additional opportunities, so that if risks do materialize, we’ll offset them with the opportunities that we are working on and as we do better, then I will keep you updated, but I’m quite comfortable with the guidance and that’s where we are..

Okay, so just understanding that, but based on the balance you just talked about, is there any reason to believe that the segment margins, again mid-14% ex cum catches, that there would be any reason for different performance in the second half than what you’ve done in the first?.

No. so again, I would take off again, I think me and Larry was talking about, if each quarter we will have some puts and takes, I mean we have some assertions this quarter, particularly in our wing segment. you see that spike up a little bit.

that’s more consistent with the normalized margins that we have seen in the prior quarters, likewise on the fuselage, you saw some pretty healthy growth and margins improved, because of the team catches, but it’s all about diluted because of the growth in our sort of 787, 350 programs, I would recommend you look at up margins, sort of in the first quarter, they were more representative, but even with that I think, we’ve got good guidance for you guys..

Okay. Thank you very much..

And thank you. Our next question is from David Strauss with UBS..

Good morning..

Good morning, David..

Good morning..

I wanted to ask about the 787. Obviously, we’re kind of two quarters or so past the big charge. Deferred continues to come down.

Can you just talk about kind of progress that you’re making relative to when, what was assumed in, in the charge and have the big kind of pricing step downs that you’ve assumed are baked into that charge? Have those already come through? Are we now seeing those in the numbers?.

So on 787 what I would say and just are probably distributed the big answer is that we’re tracking to plan. And so we’re right on the plan that we put forward last year. And did it come out exactly the way we thought it would now we had to do some things. I mean there getting to the 10 rate was a bit more challenging.

We didn’t miss any of our deliveries or anything, but it took a lot more energy to get the turn. and again, it kind of the basics of that were – for the most of our manifesting our supply.

We had a couple suppliers that were struggled with our yields, we’re able to go correct that and stabilize all that, and again, we didn’t miss any deliveries, but took a lot more energy. Now we thought it would. on the other hand, we had some opportunities were able to avail ourselves of. And so put and takes, I mean we’re dead on plan.

I mean we haven’t changed anything. As it relates to – in fact we’re right back down on the lines we lay down. So that gives probably all I really can say as it relates to 70 to 77. So it’s we’re tracking right to what we disclosed was 4Q I guess..

Okay. As a follow-up, Sanjay, on cash, it looks like you received a cash tax benefit this quarter. Can you talk about what you are assuming for cash taxes for the year? And then also, you’ve talked about cash overall, cash generation improving 2015 and 2016.

Is that still the case off of these higher numbers that we’re seeing come through in 2014? Thanks..

Sure, David. Sure, sure and you are right. We did a get a cash tax refund this year, but I will tell you my guidance for the full year, $250 million guidance, we’ve assumed cash tax payments, quite consistent with what we need to do, as well as consistent with the numbers that we had for example 2013.

So that’s all baked in, and we are not taking any relief or bondage, because of that. For 2015 and 2016, David, I think we’ve given you directional input couple of times now that we intend every quarter to do better, every year to do better.

And of course, I’m not going to get into 2015 cash guidance right now, other than to say that that’s the direction, Larry I set for us in the team. And we have starting to layout plans to achieve those goals. And that’s what we will show you when we discuss that early next year..

All right. Thank you..

And thank you. Our next question is from Peter Arment with Sterne Agee..

Yes. Thank you. good morning Larry, Sanjay..

Good morning..

Good morning..

Just first, Sanjay, just on CapEx. I know you mentioned it in your prepared remarks; it seems to be running a little bit of a lower run rate.

I mean, what is the assumption we should be using for 2014?.

So I think I – Peter, I think we do call that out in our press release and we did lower the CapEx numbers for the year by about $20 million, and that’s a number you should use. Now again, cash CapEx, I will tell you.

we have a very stringent process in terms of how you measure our sales to a return on investment on each project that we have to make investments on. and we are very careful and intelligent about how we do that. I also want to make sure that you understand that there is no, we are not underinvesting, or anything like that in our business.

any need that the business has either for rate increases, or for efficiency improvements over this natural replacement. we are obviously, we have the capacity tool and we have the capability to make those investments.

So some of this is just a lumpiness associated with capital as you know, some of these projects sometimes get launched later than you had anticipated, or in other cases bills come due at different times. So some of that is just a little bit of timing.

but overall, capital we guided you in our press release of between $210 million to $235 million and that includes all CapEx that includes anything there was some very small remnants of our Tornado spending very, very small, but that is all included in that number..

Thank you. And as a follow up, just, Larry, if I could ask about kind of productivity gains in the base business? You’ve given us a lot of color on the development programs.

But could you maybe talk about what you’re seeing in terms of the productivity gains in the base business? Because it seems like that continues to be a positive contributor to the cash flow?.

Right. And so this may – this is always needed to be redone and I apologize if I am. When I kind of looked at our strategy, showing up here in kind of, give me a sense of this kind of A320 MAX. and then it was clear that to work our way through this. we couldn’t kind of pass on the opportunity to attack the 80% of the business, as well as the 20%.

and so you have to do both, so obviously 10% improvement in 20% is 2% and 10% improvement and 80% is 8%. so first said number that the 80% of the are contributing. And so what we’re seeing is, I think for us, as we kind of break the parts of the business down, and it’s pieces, where all the moving parts are, obviously, we have to go look at that.

now just to be clear, our direct labor content has put a part of our total cost structure, it’s not gigantic, but its collateral benefits are huge.

So for example, improving quality has a benefit, not only to your direct labor cost, whether that’s manifested reduction of scrap or rework, but it also has an indirect impact in your overhead in terms of the number of people required to go disposition those things, or into your supply base, as it relates to the cost there.

if the origins of the problem exist for the suppliers and we want the suppliers to make sure that they are responsible for their quality.

And so as we kind of go of this, what we’ve done is, even though the direct labor is not the biggest percentage of the business, it’s actually, probably up, relatively I know I’ll say small chunk, but as we attack that with metrics and it’s pretty tight, I mean to be answered, every Monday in my office, the teams in there, we work all weekend on the metrics, the book comes out, it actually comes out, it takes some three days of chunking and then they want, Sunday I get it, and then Monday morning in the office.

And we’re talking about how many heads we’re going to add or subtract to the 737 or the 777 or 350 or you name it. it doesn’t matter whether the heads are in Malaysia, or Prestwick, or Tulsa tells our, which are tight, doesn’t – we are really tightened.

And I think we’re really getting to the point, where we’re kind of getting a rhythm and probably a squeeze, a good portion of the juice out of that part of their equation. And then so that’s why Sanjay said, hey look, we’re just as quickly energized than looking at what our opportunities are over on the overhead piece.

Again, I don’t want to leave them with the impression that, I’m going to roll out businesses and we’re leaving and the question that we’re kind of heavy, but I think all of us could afford to lose a few pounds. And so I – we’re going after that. we are also looking at frankly the things that we do versus the things that we could buy.

and whether those things are core to our business, whether they are important to our customers and we are in the value proposition and so we’re attacking that part of the business model as well. And then on the supply chain, which is nearly half of our – overall structure of our company.

We’re working very, very hard, not just on the individual product negotiations, but on the overall strategies, it relates to who we’re going to do business with. How we’re going to do business, because frankly, I’m a believer in the organic value of scale. And so we’d like to aggregate what we do and find out how to get some leverage of that scale.

As we pass it on, we’re potentially offered up to the supply base..

That’s good color..

Obviously, the last thing you do is, you get rid of your bleeders. And so we have a few bleeders here or there, we just work those little guys off and we attack those as well. So, sorry for the long answer, Peter, but it’s a lot of moving parts..

No, thank you. I appreciate that..

And thank you. Our next question comes from George Shapiro with Shapiro Research..

Hi, good morning..

Hi, George..

Yes, good performance..

Thank you..

I wanted to ask, Larry, given the wing margin was much better this quarter and comparable to the other sectors, does that mean you have got less incentive or less desire to sell it?.

Yes. well, just to be clear. So there is – our ring business really has two pieces to it. There is an Airbus portion and then there is a Boeing portion, actually the three in a Gulfstream portion.

And George, we were trying to allude to the margin than the quarter, they’re a bit higher than you normally see in this principally, because there’s some things that occurred in the quarter as opposed to kind of a recurring thing. But we are doing better, there is no doubt, we’re doing better.

And so as we look at the business, we kind of – we always reflect on this. We put Tulsa after sale; I’m not changing my mind about that. We’re going to finish off this cycle and see when happens, will obviously, I want to make deals that are in the interest of our company.

If we find out that the deals aren’t interested, aren’t in the interest of our company, then we’ll make a decision about whether we hold onto those assets, or we go for cycle two, because frankly there is a lot of interest in those facilities. and likely, there is an opportunity to do this again, if we wanted to. So we’re going to keep doing it.

George, I’m always astounded at how long these things take. I’m sure you are as well. I would say I think the timing of these deals are exponentially proportional to the number of stakeholders.

And so it looks some, we’re – we made a decision, we’re going to stick with the decision, we’re going to the cycle and then we’ll make a decision from there, but that’s kind of where we are, George..

And then a follow up, if I look at the Gulfstream programs specifically, and Sanjay, I didn’t give the exact number, but it looks like the deferred probably went up $30 million maybe $40 million, comparable to last quarter deliveries looked like they’re somewhat comparable.

So do I assume that Gulfstream is not doing much better in this agenda, or do I have some of the numbers off or if you provide some more good color on Gulfstream?.

George, what I would say is we’re executing to the plan, that’s probably all I could say that we’re on the plan that we laid out, and we’ve not – we’ve not lost any ground I think we’re doing quite, I mean, go to the details, I mean, we’re doing quite well on 280, we’re probably I’d say ahead of plan, 650 has been more challenging mostly kind of lay over George from – if you remember those shortages we had at the end of last year, and they couldn’t hit at a worse time, because we were actually going up in rate.

And really banged as hard in the first quarter, we’re still, I would say, we would have been further along on 650 minus those hard numbers, it’s kind of a combination of them, so those shortages and going up at rate. But we’re executing a plan and moving along smartly and I don’t think there is anything really I’m working to add to that..

Okay, thanks very much..

Yes..

And thank you. our next question is from Myles Walton with Deutsche Bank..

Thanks. Good morning and good quarter. Thanks for bringing a little sunshine in an otherwise murky rainy season..

Yes. well, we – Myles, we – I was thinking about this yesterday. I think you all had seven calls yesterday. and so we thought this might be the rest, but just one call to deal with..

Yes. and it was good news as opposed to the others. So one question I have for you, just maybe go back and revisit the topic of this insourcing versus outsourcing, make versus buy.

I was hoping, Larry, you can put a construct around? Maybe in sizing it, whether that’s in gross COGS or absolute dollars? And then how far along you are, and I know it’s a journey, how far you’re along in your process versus where maybe the prior approach stood? And the last piece of it is, it looks like a lot of the benefit comes through capital expenditure avoidance to some extent, or least that's what I would imagine.

And then you would have a fall through of cost benefit realization, as well.

And so, can you just talk about each of those three items as they apply to date?.

Yes. Myles, I probably can’t say the size of it. But it’s a healthy piece of the business and it’s well executed. I mean we’ve really a big team; we do a good job on the things. We are still in the – I’d say when I see in the early phase, we are in the phase of going out and testing the market is what I would say.

And no decisions have been made because we are testing the market. And so, we are out there looking to see what the economics looks like overall and frankly be able to answer the questions you asked for ourselves.

And the benefits are as you described I mean the net-net effect is less cost, whether that’s a reduction and – again the terms of the deal have to be worked out. So the question will be what are we, and how does this workout, but for sure, it would be lower capital requirements. And certainly would require less management on our part.

And then, of course, the most important piece for us, really the two most important factors in any considerations to make sure we don’t take on risk. And I don’t mean financial risk. I mean execution risk. We can never, ever, ever, ever in any of our customers at risk. That is not in our DNA nor we’ll not let that happen.

And then, finally, whatever it means to the company in terms of however it translates to the bottom line, whether that’s cash or in reduced prices. So we’re just exploring right now and really that’s where we are..

So just to underline that there, if I looked at the internal plans of CapEx two years ago, they would have probably had projections running $300 million plus.

The run rate you are at now does not yet reflect your make-buy strategy is what I get from this?.

It doesn’t, but Myles look it’s not in the scheme of things, it’s not in significant against that number, but it’s not a large piece either, it’s not the biggest piece of that number. I mean the annual bill, recap bill there is fraction of that number, but it’s not a big fraction..

Got it. Thanks, guys..

Okay. .

(Operator Instructions) And our next question comes from John Godyn with Morgan Stanley..

Hey, thank you for taking my question and I’ll just have one question. Larry and Sanjay, I was hoping you could update us on the thoughts on capital allocation from here, now that you are generating free cash flow there? Larry, you have used the words agile and opportunistic deployment of cash.

Just trying to think about M&A versus buybacks, capital returns? How do you think about these issues?.

Yes. I guess, we’re first of all happy to have some cash.

Step one was to start generating cash and as you saw in the quarter we actually used it and that was the kind of point I was trying to make and then we use in use our way, we thought it was some healthiest way to return value back to the shareholder given the opportunities we had right there at the time.

Timing was good for us and I thought it was a good decision for our shareholders.

We have not yet committed to a share buyback plan I’ll see on an annual basis that’s not, we’re not that far along in our thinking, that’s not on the agenda’s, that is not discussed with the board, but it certainly we have not formalized on an annual basis, we’re going buyback this many shares, but it’s certainly one of the top in terms of our list of things that we would consider in terms of deployment of cash.

Look, we are very – when we think about, I’ve talked about reducing cost of goods sold; there will probably some investments required to do that. And so we look at the factory and when we do, we look at I guess probably shouldn’t get into the details, but we look at where our opportunities are to invest in ourselves.

And that’s certainly something that we’re going to do because we’re going to invest in our future and frankly in our customers view of the future. And then finally, the question about growth is, will you grow organically or through M&A.

And I think, you’ll see some above, what we’ll do on the growth side, we didn’t really talk much about the sense today. It’s a small piece of our business today. I think there’s some natural opportunities. I would say, most likely you would see probably organic growth there.

If opportunistic so what that means is from our standpoint is, you are going to pick and choose or people are going to pick and choose us. We’re going to, if we were to invest, it’ll be in things that we’ve high confidence that’s going to come to provision, we’re not going to kind of just make a gamble, to go play in defense.

Especially given that, I think overall, I’ve said that view is the defense spending is on a downturn, so any kind of move we make in that direction will be in things with high probability.

And we have some good – we’ve got a good start I mean whether it’s tanker of the P-8 or V-280, the CH-53 those are good starts, it’s still not big overall, but we have a number of irons on the fires I can’t really talk about that I think offer some good upside.

On M&A in commercial, yes, that’s certainly going to have to be something we think about next year. And then the question really becomes, what make sense. You won’t see us pretty far from what we do; I can assure you that, we’re not going become. If I think about my prior job, I mean I used to have to develop software.

I’m not interested to develop software anymore. I’ve live through that, I’ve got the bruises. I don’t want to do that. I use to write algorithms, sensor fusion, sensor intelligence, and all that kind of stuff, probably not going to do that.

So you are not going to see us to do things just because I have some experience in it, you’ll see us stay pretty close to home and it will be things related to aerostructures either becoming more vertical or just expanding the products that we build. Is that, answer your question? Oh god, I guess all right..

Thank you. Our next question comes from Joe Nadol with JPMorgan..

Thanks. Good afternoon, here, East Coast time now. So I say this only partially in jest. But I have been ticking along here on the call and listening to your update on A350 and 787 and Gulfstream and they're all on plan. But we don't know what the plan is.

So it's great to hear that, and you had a great quarter here, but at some point, Larry, will you feel comfortable sharing exactly what that plan is as we look out into the next couple of years? And really, in particular, I'm interested in the A350.

Does the plan contemplate a charge? We know you are on plan, but what is at the end of the plan?.

You want to be perfectly candid I mean if it did I don’t have to declare it. So currently our estimate complete shows that obviously there is not a charge of their word.

I’ve disclosed it in and Joe, worked pretty hard, try to clean the books, the best get all the stuff out there, but the truth is when I look at it there is nothing in there that you say as grossly unreasonable, now that’s the doing, and so when we go back and we take a look at it and we say okay, and you do – there is actual execution.

And part of the 350 plan, as you know, obviously substantial amount of cost reduction both in our labor as well as in the material we buy. And so as time goes on, we go do that. So that’s all I can really tell you I mean on 350 as we built 18 airplanes and there is a lot of work yet to be done.

On the 787, I mean I think the best that we able to do for you is that when we get to 2015, we are going to give you guidance on the enterprise in general and you’ll see the specifics for that year on the 87. But we are probably not going to layout the details of the estimate complete. So other than that, I don’t know what to say.

So when I say I’m on plan – and your skepticism I understand. So when we say we are on plan….

I would not call it skepticism, I'm just trying to understand exactly what it is? Because you clearly have a defined internal plan that everyone is tacking towards. It would just be great if we knew a little bit more about it, that's all..

Yes. I understand. I guess I don’t know what else to say. I mean other than watch this quarter-to-quarter and I’ll talk to Sanjay about what we can say and not say here, kind of going forward in terms of more detail, more color on those programs. Other than that I don’t know what else to say, Joe..

Thank you. Our next question comes from Sam Pearlstein with Wells Fargo..

Good afternoon..

Hey, Sam..

I wanted to go back to a question on the margins. Just if I back out all of the cum adjustments this year and last year, especially in the fuselage, there really wasn't much in terms of a profit gain on the revenue.

And so, I'm just trying to think through how did these, whether it is the tooling or milestones or other payments, kind of flow through? And is that a factor in the sequential margin degradation? And is this a better level? You mentioned wing was not sustainable.

But is this one a better level with regards to fuselage?.

Sure, Sam. So fuselage is again it’s our largest segment and it has two things going on right. Yes, we are making improvements in our mature businesses and that’s the cumulative catch-ups. But its also impacted, because we are seeing growth in revenue associated with the 787 program, which is doubled and A350 program, which is doubled.

And I mean the reality is that those programs are zero margin programs. So there is a dilution affect associated with the revenue growth in the fuselage segment, because of those two programs. Now, again, our goal here is to continue down the plan that we have laid out for those two programs, Larry just talked about it.

And then, find ways to trying improve our mature businesses. So that we can continue to create some catch-ups and so on, but yes, that’s really what’s happening in the fuselage cycle..

And I’d say Sam, again those are zero margin programs and we’re going to continue that kind of the tax, again that’s part of the strategy that trying to address cost of goods sold as well as frankly address the open negotiation that we have..

No, I understood the mix. I guess you had mentioned when you look at the percentage change year over year, where that would imply some of the tooling and other pieces were.

And it would have seemed to have implied significantly more was in fuselage than the others?.

No, I don’t know. I’d say that probably is a higher tooling bill on the MAX and fuselage than in proportion. So yes, there could be, some of the non-recurring pieces could be probably, but most likely heavier in fuselage and that would be – that certainly than they would be in vein..

Okay. Thank you..

Thank you, Sam. We have time for one more question operator..

We lose the operator..

Thank you. Our last question comes from Ken Herbert with Canaccord Genuity..

Hi, good morning. Just quickly, Larry, it's been just a few months now since you put the pricing agreement in place with Boeing. I'm just wondering if you can comment if there has been anything that has surprised you since you put the agreement in place.

And then, specifically, as you start to ramp the 787 Dash 9 and the pricing agreement on that, is there anything you can comment in terms of how that learning curve should look relative to what you have accomplished on the Dash 8?.

Yes, well, okay. So there is no surprises as it relates to the operation and master agreement. So things I’d say that’s all positive, it relates to 787, Dash 9 versus Dash 8.

It’s actually when I said tracking the plan, I mean it’s following our predicted model, we’ve delivered 200 – how many?.

228..

Larry Lawson:.

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And thank you. Thank you. we have no further questions. At this time, I would like to turn the call back over to Coleen Tabor..

Thank you, Vanessa. and I’ll now turn the call over to our President and Chief Executive Officer, Larry Lawson for some closing comments..

Thanks Coleen. well listen, I know you all had, it’s a busy season, and thank you for your questions. I’m pleased, I mean we’re halfway through the year and I can say we’re pleased with the fact that we’re making progress in our transformation.

I do think the question comes up, how do you feel about the cycle and I know that was one of the great questions coming out of the air show. And my sense is that when I talked to folks and do my homework that the cycles is strong and the fundamentals under that are you’re saying it about 5% annual growth in travel.

And in the fleet of 22,000 airplanes, the replacement rate looks like a turnaround, 1,000 airplanes a year, it doesn’t appear that..

And so my view is we’re making progress, more work to be done and that was another step on the right direction. And I look forward to seeing some of you know soon, and certainly, talk speaking with the rest of you before the next quarter. Thanks..

And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect..