Ghassan Awwad - Director, Investor Relations, Corporate Strategy, and M&A Larry A. Lawson - President, Chief Executive Officer & Director Sanjay Kapoor - Chief Financial Officer & Senior Vice President.

David E. Strauss - UBS Securities LLC Ronald Jay Epstein - Bank of America Merrill Lynch Howard Alan Rubel - Jefferies LLC Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Doug Stuart Harned - Sanford C. Bernstein & Co. LLC Carter Copeland - Barclays Capital, Inc. Jason M. Gursky - Citigroup Global Markets, Inc. (Broker) Seth M.

Seifman - JPMorgan Securities LLC Ken Herbert - Canaccord Genuity, Inc. Myles Alexander Walton - Deutsche Bank Securities, Inc. Cai von Rumohr - Cowen & Co. LLC Samuel J. Pearlstein - Wells Fargo Securities LLC.

Good day, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Incorporated Third Quarter 2015 Earnings Conference Call. My name is Ethan, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded. I would now like to turn the presentation over to Mr. Ghassan Awwad, Director of Investor Relations. Please proceed..

Good morning. Welcome to Spirit's third quarter 2015 earnings call. I'm Ghassan Awwad. 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. 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 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 would like to turn the call over to our Chief Executive Officer, Larry Lawson..

Good morning, everyone. Welcome to our third quarter earnings call. I'd like to start today's call by highlighting several key accomplishments on our development programs that were achieved throughout the third quarter. We delivered the first composite fuselage for the Bell V-280 Valor from our rapid prototyping facility in Wichita.

We went from a concept to product delivery in just 22 months. We were very proud to have met our customer's quality, cost and schedule expectations. The 737 MAX team continues to meet all program milestones. The first fuselage was delivered to Renton, Washington in August, which enabled Boeing to start final assembly on schedule.

In addition, the 777X and the 787-10 development efforts are progressing to plan. Our team is working very closely with Boeing to identify best practices in the design and assembly of these state-of-the-art aircraft. Another significant milestone in the quarter was the delivery of the first A350-1000 fuselage to Airbus.

We also continue to make progress on reducing cost as we improved productivity and quality while ramping up production rates. Preparing for production rate increases has been one of our top priorities this year. We are executing to plan on rate increases for the 737, the A320, the 787 and the A350.

We're managing the ramp-up with great detail to address the full value chain and to protect our gains in quality. As always, we continue to take a comprehensive view and act on cost items, whether measured in terms of productivity, supply cost or quality. We are confident about the long-term outlook of our business and the health of our balance sheet.

Our consistent financial performance has allowed for the release of $189 million of the deferred tax asset valuation allowance with $9 million remaining in the fourth quarter. With regard to capital deployment, in the second quarter, we announced a share repurchase program of $350 million.

We returned $46 million to our shareholders with the purchase of 924,000 shares. We believe our stock is a very good value, and we will continue to press forward. Now let's take a look at third quarter's results. For the quarter, we reported revenues of $1.6 billion, operating income of $192 million. Operating margins were 12%.

Also in the quarter, as part of our continued drive to reduce risk, we resolved a few legacy matters. Operating cash flow was $240 million and free cash flow was $139 million. The cash balance at the end of the third quarter was over $1 billion. Our backlog remains strong at $46 billion.

And at the end of the third quarter, this provides seven years of sales visibility.

With regard to 2015 guidance, we are raising our earnings per share guidance to a new range of $3.80 to $3.95 and continue to support the guidance provided last quarter for sales to be between $6.6 billion and $6.7 billion and free cash flow of between $700 million and $800 million.

With that, I'll ask Sanjay to lead you through the financials, give you more specifics about the third quarter, and then we'll be happy to take your questions.

Sanjay?.

Thank you, Larry, and a very good morning, everyone. It's been another good quarter and we've progressed enough in the year that Larry and I are comfortable raising our EPS guidance after having raised our free cash flow guidance last quarter. So now let me walk you through some of the financial details.

Let's begin with slide two, which shows the third quarter consolidated sales of the company.

Overall revenues for the quarter were $1.6 billion, a decrease from the third quarter of last year, primarily due to the Gulfstream programs, which were divested at the end of last year, and as we mentioned last quarter, also lower 787 revenues as a result of a price step-down. Operationally, we continue to deliver to our customers' requirements.

We delivered 127 737s, 115 Airbus A320s, 31 Boeing 787 and 8 Airbus A350 shipsets in the quarter. Our backlog remains strong at $46 billion, which provides seven years of sales visibility and planning horizon. Investing in our business, preparing ahead and executing on the rate increases efficiently remain our top priorities.

This will allow us to capitalize effectively on the continued robust demand for commercial aircraft that we see ahead. Please turn to slide three. Adjusted EPS for the quarter was $0.89 compared to $0.90 in the third quarter of last year. Year-to-date adjusted EPS now stands at $2.97.

In the third quarter, the company resolved historical customer and supplier claims. The majority of the issues occurred in the timeframe between 2008 and 2013. While the nature of these and the terms of these resolutions are confidential, in total, they resulted in a one-time pre-tax $26 million charge or $0.12 per share.

Adjusted EPS excludes the deferred tax asset valuation allowance release, which is consistent with our guidance. We released the majority of our remaining valuation allowance in the third quarter, as we followed accounting guidance in the evaluation of all available positive and negative evidence resulting in $1.35 of EPS.

We expect to release an additional $9 million of valuation allowance in the fourth quarter, which amounts to approximately $0.06 to EPS. And even though after eight quarters of practicing, the term deferred tax asset valuation allowance now rolls off my tongue, I look forward to no longer discussing this item as part of next year's results.

Turning to operating margins, in 3Q, Spirit reported 12% margins, which includes the one-time historical claims resolution. Excluding these resolutions, operating margins were 13.5%.

These reflect the Gulfstream divestiture, a better mix of mature programs, low non-recurring revenues, as well as cost reduction activities undertaken by the team over the last year. Turning to slide four. Free cash flow was $139 million in the quarter and $753 million year-to-date.

So let me bridge the gap a little between our guidance for the year of $700 million to $800 million and the strong performance year-to-date. Year-to-date cash flow includes cash received under our 787 interim pricing agreement with Boeing and is being recorded as deferred revenue. This cash is not included in the full year guidance.

Capital expenditures increased in the third quarter to $101 million in preparation for the number of aircraft rate increases we have ahead.

There are still a number of moving parts to free cash flow for the full year, but we feel good about the guidance we've given you, and the underlying results show the improving trend in what remains a top initiative as a company.

Our intense focus on cash generation and balanced approach to cash deployment are flowing down to you, our shareholders, as we repurchased $46 million of shares in the third quarter. Turning to slide five, let me take you through the segment results.

Fuselage segment revenues were $820 million in the quarter, compared to $804 million last year, primarily due to the increased 737 and Airbus A350 deliveries. Operating income was $131 million, representing 15.9% margins, which were impacted by the historical claims resolution.

And as we have guided you in the past, we still see core margins in the range of 16% to 17% for the year. Turning next to our Propulsion segment, revenues were $430 million, a decrease from the same period last year, driven by the timing of non-recurring revenue on development programs and fewer BR725 deliveries in the current quarter.

Operating income was $95 million, representing 22.1% margins, driven by strong mature programs, versus $82 million a year ago and 18.5% margins. Wing segment revenues were $341 million versus $446 million a year ago. The decrease was primarily attributable to the Gulfstream divestiture and lower 787 revenues.

Operating income was $46 million, representing 13.4% margins, down from $63 million a year ago, which included $15 million in positive cumulative catch-up adjustments as compared to $3 million in the current quarter.

Many important milestones were accomplished in the quarter across the segments, including first customer shipment of the 737 MAX, the V-280 Valor program, and the Airbus A350-1000 program.

A few other notes worth mentioning about the quarter; the 787 program realized an increase of $25 million in deferred inventory on 31 deliveries, or roughly $800,000 per shipset. As we mentioned last quarter, this increase in the deferred is attributable to the planned 787 price step-down, and is in line what we were expecting.

The team remains focused on reducing cost in partnership with suppliers and our customer as we prepare for rate increases on this program. On the A350, deferred inventory grew by $16 million in the third quarter, as we shipped eight fuselage units to Airbus, including one A350-1000 unit, or $2 million per shipset.

We are meeting our customer's demand and improving operational performance, but we have more work to do to continue down that learning curve and drive cost reduction initiatives. And now on slide six. We are updating our full year guidance. Revenues continue to be forecasted between $6.6 billion and $6.7 billion.

Earnings per share is increased to the range of $3.80 to $3.95. The increase is due to continued strong operational performance and risk reduction efforts throughout the year. Free cash flow continues to be expected to be between $700 million and $800 million. And these results are based on an effective tax rate in the range of 32% to 33%.

Our 2015 guidance excludes the year-to-date and fourth quarter impact for the valuation allowance against the U.S. net deferred tax asset. With that, we are happy to take your questions now..

Thank you. We will now begin the question-and-answer session. And our first question comes from David Strauss from UBS. David, please go ahead..

Good morning..

Good morning, David..

Sanjay, as it relates to free cash flow this year, obviously, there are a lot of moving pieces, a lot of non-recurring items in there.

Can you just help us with maybe laying out all the non-recurring items that are what you consider non-recurring that's running through the numbers this year so we can kind of get level-set to the right place as we think about 2016 free cash flow?.

Sure, David, absolutely..

Thank you..

There are sort of at least three major one-time events in 2015. The first one is, as you know, as a result of our divestiture on the Gulfstream business, we are picking up roughly about $221 million of cash tax payments in the year.

We got a majority of that in the first quarter of this year, and then the last payment on that we will receive is in the fourth quarter. The second one-time event, obviously, was the settlement that we had on the Gulfstream business with GD. We shared with you that we achieved a fair and an equitable arrangement around that.

Obviously, I can't divulge the amounts, but I think everybody has a pretty good idea as to what that number was. And then the third thing was that, if you remember, in the first quarter of the year we were suspended from the 787 advance payments that were being refunded to Boeing.

That restarted itself in Q2 of this year, but we did have the first quarter benefit of that. So those were the three one-time benefits in 2015.

The other thing I keep reminding you all about is that if you really look at the year-to-date cash, I remind you that we do have an interim arrangement on the 787 where we are getting certain pricing, which we are treating as deferred revenue, and that's something that we are not counting on till such time as we achieve a resolution with Boeing.

And so that's showing up in my short-term deferred revenue accounts in my balance sheet. So those are the one-time things and I think hopefully that helps..

Thank you..

And our next question comes from Ron Epstein from Bank of America. Ron, please go ahead..

Yeah. Hey. Good morning, guys..

Good morning, Ron..

Can you give us an update on progress on the A350 program? And I remember back, it must have been almost a year ago now, that Larry said something like once you guys get to about 100 airplanes, you'll have a better understanding of where you are on the learning curve.

And if you could just give us an update on that?.

Sure, Ron. Well, first of all, I think I've kind of been getting to this point that we're actually making really good progress. If you think back that, as you point out, a year ago we were – I mean at the beginning of 2014, I think our deferred per unit was $28 million a unit.

We're now down – I told you that we would kind of make our way down the curve where you would see a lot less of what I would call non-recurring kind of charges or historical costs regarding fixing airplanes, recovering traveled work, et cetera. And now we're down in the $2 million range, so made a lot of progress there.

And so I think that our costs actually have been quite predictable. The way this really works then is, as you're looking forward, you're really looking at I'll say three factors.

The first factor is, okay, are your material – and I'm talking about the supply chain part of your cost, you're looking at your costs going forward, you're looking at your cost reductions, you're looking at your changes that – change the cost of the basic unit and what's your confidence in those. And of course, it's risen.

We're not done, but I think our confidence is much higher there. And we have a very definitive set of plans, most fairly well laid out with the individual suppliers and with Airbus. The second part of it's your labor. Our labor curves are coming down.

And what you see on the labor side always is kind of an interesting thing because you'll see it coming down and you'll have a rate jump and you'll see a little bit of an inversion and it starts back down again. So quarter to quarter, it's really hard to get visibility really to be too discrete about what is happening in any given quarter.

As a matter of fact, to be honest with you, at these low rates, you can have a small non-recurring bill and it biases the number quite substantially. But we're making good progress on both the labor side, whether it's touch or whether it's support cost. And we feel pretty confident with the plan.

And then the last part is we have an ongoing negotiation going on. That negotiation's going – it's very data driven. I think it's a great conversation. I think it's been very productive.

And so is it 100 units? I think my sense is that we're going to beat that substantially and that, frankly, we're not there all the way, but that we're getting a very good sense about all of this and should be able to certainly beat the 100-unit airplane stability point..

Okay, great. Thank you very much..

Thanks, Ron..

And our next question comes from Howard Rubel from Jefferies. Howard, please go ahead..

Thank you very much.

Now that you've settled some of these litigation items with Boeing, does that open the door to the discussions you need to settle on both 78 and on MAX pricing?.

Well, there's not really. I mean we had a number of items that we've settled this year.

To be honest with you, Howard, if you were to – if I think back two and a half years ago, or even a year ago to where we are today, and I think you can probably even see this in our disclosures in terms of reserves that we've taken, I mean we've just continued to work off most of these items.

And so the number of folks that we've worked through, and you know how these go, some are – as we were – I think Sanjay was talking a few minutes ago, some of them, Go-R-Direct (21:00) are positive to us, and then some of them are just de-risking the company.

But I wouldn't say any of them have had any impact on any negotiation, whether it's been with a supplier or been with any of the OEMs. I wouldn't say there's any connection whatsoever. This is just normal business of kind of clearing up things that have been sitting out there for a long, long time and needed to get resolved..

I understand that, but are you at this point where you can see line of sight to some of these items that you would like to get behind you so you don't have another year of deferred revenues?.

Well, certainly I think all the parties – I think both parties are motivated to get this done. And I think the only thing I can say is that it's a lot to negotiate. There's a lot of material there. There's a lot of details involved. And we're going to be very deliberate in how we handle this.

I think from our standpoint, the terms provide us the ability to be patient and I think both parties want to get this on. I don't want to see deferred continue on beyond what we've planned. The deferred on 87 is pretty much it, I mean it's right on the plan that we laid out over two years ago.

It's quite encouraging that we continue to be able to march to plan. But we're just going to continue to be very deliberate. We meet on a regular basis and we meet at the working level and at the high levels, and this is a relationship that's vital to both of us and the business is important and we'll get there..

Thank you very much, Larry..

Thanks, Howard..

And our next question comes from Robert Spingarn from Credit Suisse North America. Robert, please go ahead..

Good morning..

Good morning..

Good morning..

So I have a similar question, but first I wanted to ask Sanjay to walk through the mechanics of the deferred on the 78. And if you adjust for that, how did the revenue perform? What was the real revenue performance in the quarter? Because it seems like that's a little tough to discern with this $800,000 going on to the balance sheet..

Yeah. Robert, so the 787 price step-down obviously impacts the revenue and you're seeing that. There's one other thing, I should probably have mentioned this, but the settlement that we had on the historical claims was also contra-revenue because it related to non-conformance work from history.

So you can add that $26 million as a one-time downer on revenue in the quarter. But other than that, as far as the 787 is concerned, the price step-downs obviously impact the revenue line.

Now if you really looked at our deferred balance on the 787, we started the year at about $550 million and right now we are at about $567 million or so, and you'll see that in the Q when you get it. And over the course of the year, that's the impact of the price step-down and the costs that Larry just talked about.

We continue to work on costs with our suppliers, with Boeing, internally to our company, and we are absolutely meeting our plan..

Okay..

But you'll see that in the revenue line and then you'll see that in the cost line, and obviously the delta is what you see growth in the deferred..

Okay. Thank you, Sanjay. Larry, when you look out, we're all aware of the fact that we could see a rate reduction on 777, your customer talked about a floor of seven per month, we're at 8.3 now.

How disruptive would that be? How does that factor into your numbers?.

Well, I guess what I would say, I mean, obviously, 777 is a – it's a fraction, and you could probably do the math yourself and see what percentage of our profitability is tied to 777, but it's a fraction, so we're talking about a fraction of a fraction. But my overall sense is that we're talking about a 2018 conversation here.

I think there's been there some question about is this a 2017 situation. I mean, they're halfway there on 2017. 2016's in good shape, halfway there in 2017. They've been making good progress. And so my sense is this is kind of a 2018 conversation.

And so will we dip down, will we see a 8.3 to 7 rate reduction in 2018? We may, but there's a lot of time between now and then and lots of opportunities for Boeing to work in the marketplace. I mean, this is a very unique airplane. I mean, it's not an airplane – I mean, it sits in its own class, really.

And so it's not like it's going head-to-head against another product. It's just been one of those kind of iconic airplanes, and so we'll see. I don't want to do the math here, but it's a fraction of a fraction, Robert..

Okay. And then just what I wanted to touch on, sort of follow-on to Howard was when you think about the accounting approach that you and Sanjay take, the cum catches, we got the deferred revenue, you're sort of in a constant state of negotiations on a number of your major programs.

When you put all together, we can get to a point where you're no longer adjusting to get back on the curve every quarter, where there's more predictability in that curve and more, if you will, transparency in each quarter on what your real profitability is rather than tuning up in the future to correct for divergences..

Yeah. I think if you're talking about cum catch-ups, you see a lot fewer of those quarter-to-quarter than you have historically, principally because we really do have a pretty good handle on this business. Especially if I reflect back, I've built a lot of airplanes, but when you reflect back, every business is different.

And so in the last couple of years, we've had a chance to really, really drill down. And so you see a lot fewer of those, principally because we're, I mean if you were to look at my metrics book that we go through every week, I can tell you we're tracking heads on 737 down to three to five heads.

And the great thing is not only does management know what's going on, but actually the people all the way down to the floor are learning this process. It's kind of creating then the ability, as the team looks forward, to take some of that out and put it into the EACs, and we see that as part of the overall performance.

I don't know, Sanjay, you probably want to talk about cum catches, I....

No, Robert, I.....

...a good question..

Yeah. No, it's a fair question. And I would tell you, I think we've actually dampened down the volatility. In fact, as I've been telling you guys for the last year now, if I look at our segments and look at the margins inside those segments, we've kind of given you good ranges, we always fall within those ranges.

Listen, we continue to work on cost reduction, and as we realize those benefits we do a much better job in our sort of EAC process to make sure that we capture those benefits. And therefore you do see some cum catch-ups from time to time.

But I would tell you, our goal has always been de-risk the company, get balanced, work on not just the 20%, but the 80% and work across the board. And I think you're seeing the benefit of all of that in a lot more de-risk and a more stable sort of portfolio. Yes, we do have negotiations.

Yes, we have to work on the A350 and the 787, but that's a continuous journey on that..

I was going to say, is the issue here – it's obviously a predictability thing and you're trying to be conservative.

But is the issue here not so much the predictability in the costs, which I think you have a good handle on, but now the predictability in the pricing?.

I don't know. I guess we won't – look, I don't think, Robert, we can probably get into the details of the negotiations. But, I mean it's a big package, so everything goes into the discussion, whether it's – in the whole portfolio.

And so it becomes a discussion about all the elements of the business, and we're obviously maneuvering for a good win-win equitable situation and we're in a good place to negotiate. So I think we probably have to stop there..

All right. And our next question comes from Doug Harned from Sanford C. Bernstein. Doug, please go ahead..

Thank you. Good morning..

Good morning, Doug..

On the 737, when you look at the things that Boeing is trying to decide here regarding rate, if you were to see rate go up to say 60 per month, what would that mean for you in terms of physical steps you would need to take? And certainly, I wouldn't expect it to be acceptable if that only lasted for one to two years.

So are there contractual things that you can do to give you confidence that if you take rate up you'll be fairly secure for a longer period of time?.

Yeah, Doug, everything obviously goes on the table and is negotiable. As it relates to our ability to go up in higher rates, I think we've been pretty clear, we have the ability to support our customer. And they give us exercises, obviously. They're looking at what their options are. And so we go do this work for them and give them the confidence.

And I'm telling you, they do an extraordinary job. They really get into the details. It's an impressive thing to watch and to watch the teams work together frankly is an impressive thing. And so we work really closely with them and we've done numerous exercises as you know.

And so I think from that standpoint, our ability to support them isn't really in question. What makes sense is a whole other thing, and that's something that you'd have to talk to them about in terms of where they think the market's going or those kind of things that relates to the ultimate decision.

Now, of course, again this is a function of well, are you investing, what are you doing? If you're making investments, then you want assurances, and that obviously is always part of the conversation..

Yeah.

But what are the kinds of assurances typically that you would get in something like this?.

Well, obviously it just depends on your investment. You'd like to be able to obviously create an ROI around your investment that makes sense and you have to give some of that a period of time. And so that's a conversation, but to be honest with you, that's not been something that we've had to talk about..

And I mean not having to talk about a proposed rate increase, or just it's very comfortable in terms of how you would ultimately work that out?.

I think we're in a good place as it relates to the discussion. And if we get up there, we feel perfectly comfortable working – negotiating reasonable terms, whether it's around our investment or whether it's around guarantees. But look, that's all kind of conjecture. We're not having that conversation today..

Okay. Very good. Thanks..

Yeah..

And our next question comes from Carter Copeland from Barclays. Carter, please go ahead..

Hey. Good morning guys..

Good morning, Carter..

Good morning..

I won't ask about negotiations. I'd rather learn more about cost. The 350-1000 and the impact it had on the A350 deferred, I wondered if you might help us understand that a little bit, and maybe put it in terms of progress you made on the 900, if you can strip that out.

And I know you said you were going try to bundle some deliveries, which got you some benefit on the transport cost, but any color there would be really helpful. Thanks..

Yeah, that's insightful, because yes, we're actually pushing our third 350-1000 through the line. So to your point, the very first one that goes through, whether it's around the Wing side or whether it's in the Fuselage side, the first time it has a disproportionate impact because it just takes substantially more hours to build the first one.

You're checking out your automation. You're marking off all your drill marks. You're dealing with all those things. So it has a higher incurred cost, and the first is pretty substantial.

It turns out, in our case, the second one has been similar to, and principally because we've made a number of tooling changes and a number of automation changes that we had to revalidate on the second 350-1000. Third unit's going through the line right now, looking really smart. We made some good progress there. So yes, it does.

And that's why I was saying, at these low production rates, it's really kind of hard, especially like with the 350-1000 coming through or other change-related traffic, one-time events, it makes it really hard to tie it straight down to, okay, here's what's going on from a recurring standpoint. I don't think we have the math. We haven't done the math.

I mean we know the math, but I mean we haven't laid that out..

Yeah, Carter, again, the way – I know it's a very macro perspective that you guys get to see, which was about $2 million of deferred growth, that includes eight shipsets, that includes the 350-1000. Like Larry was saying, it's some unique capital and tooling that influences in a particular quarter, just because we had one shipset on the 350-1000.

It does. But again, we're trying to take you down, I think the perspective we're trying to give you is we're working across the board on cost on the A350 program. We're actually making very good progress. Again, the rate does matter, and as rates pick up in the future you'll see that benefit.

But the 350-1000 does create a little bit of a incremental churn, but we're not quantifying that for you guys on the outside, specifically..

Yeah. I guess the only thing I would point out along that line, it's kind of an interesting thing I think, we delivered eight. We would have delivered nine. We delivered the ninth unit the next day..

Yeah, yeah..

One day outside the quarter. We ship those units when Airbus calls on them. Next quarter, we'll have the largest number of deliveries in any quarter. So we're making, I think, very good progress. It's not without surprises every once in a while in terms of introduction of any new thing, as you mentioned the 350-1000. But we're marching on.

The quality gets better, costs are reducing and performance is far more predictable today as we kind of move forward..

All right. Thank you, gentlemen..

Thanks..

Thanks, Carter..

And our next question comes from Jason Gursky from Citi. Jason, please go ahead..

Yeah, thanks. Let's start with business development and growth opportunities. Larry (37:58) talked a little bit about the types of things that you might be able to do to accelerate revenue growth, including work on defense side. And then, Sanjay, I think you recently talked about some additional work that could be coming out of Airbus.

Can you provide some updates on your efforts on both of those fronts and any additional new biz development opportunities you see out there?.

Yeah, sure. Inside the kind of organic part of the business, we have opportunities. And I think Airbus has been, I think, somewhat transparent about their initiatives to second source a number of their supply chain, and we're obviously out there competing for that. So there are opportunities there.

There are some opportunities, obviously, for growth as we transition product, say, from the NG to the MAX. The MAX is a bit more sophisticated of an airplane and, of course, we're looking for opportunities there to help Boeing reduce cost and improve performance. And so there are a number of things there that we can do.

There is the work that we're doing on the defense side I would say, that again growing any business from organically, kind of growing it up takes a bit of time, but our value proposition is being very well received. And I think – I don't know that we really were branded as kind of a prototyping house.

I wouldn't say that would be part of our branding, but the work that we did both on the CH-53 as well on the V-280, I think people are getting a better sense about how agile we are in terms of our ability to design a product and then go out and manufacture it very rapidly. And so whether that's in defense or some other arenas, there's that.

Now when you look at the magnitude of all that, you have your core organic growth, you have your new business opportunities, and you kind of go, hey, is that enough to satisfy us in the long terms in terms of growth? And I think the answer is, and I've said this, I get different receptions to this from time to time, but I think that over time we will look at acquisitions.

And that will be part of the overall approach to growing our portfolio, because I don't think we feel satisfied with the growth, not that it's bad, I mean, it's tremendous to be able to see these increasing rates on all these programs.

A lot of people would be very happy to trade places with us for this kind of transparency and this kind of market growth, but we want to grow even beyond that. And so we're looking hard at what our long-term opportunities are. And you should expect that that will be part of our portfolio going forward. Hope that answers your question, Jason..

No, it does. I appreciate that.

And then, Sanjay, if you could just humor me with just a clarification question on the CapEx outlook for this year?.

Sure..

Where do you think we're going to end up and what does that tell us about next year?.

Sure. And just on our CapEx, the guidance we haven't changed. We told you it's somewhere between $325 million and $375 million. And CapEx, by its very nature, is a little lumpy, and so it's harder for me to shrink that any further, but it's in that range.

And the other thing on capital that you should remember from our discussions earlier in the year, some of that capital is for the rate increases on the 787 as we are ramping up on that.

And that was part of the interim arrangement that we had with Boeing, where we had an agreement on some payments that we were going to get, and I've told you that that was net neutral. So CapEx for the year somewhere between $325 million and $375 million, and we are on track to that. This quarter was relatively healthy.

We spent a little over $100 million on capital in this particular quarter. And if you look at Q1, Q2, we basically ramped up, but that's ramping up because of rate increases, investments are ramping up. And if you do the math, we should see a pretty sizable amount of CapEx in Q4 as well.

But all of that, again, guys, all of that is also baked into our cash flow guidance, so that's all on track..

And does that continue to ramp into next year?.

So the rate increases continue and, like I just mentioned, the capital, like Larry just mentioned, we are in constant dialogue with our customers in terms of the variety of rate increases that we're looking at and how you achieve that.

And so we should see somewhat of a similar kind of numbers going forward, but we talk about all of that when we talk about our guidance for 2016 and beyond..

Yeah, I think, look, on the capital side, I think the thing that gets confusing, as Sanjay pointed out, is that there's a number of one-time events that occurred year-to-year in terms of how you performed on capital and who makes what investment.

Our capital in 2016 is a little bit down, a little bit lower than say 2015, and then 2017 it's just got a little bit of some lumps and it pops up a little bit. That said, you have to be careful about drawing too many conclusions about a reduction in capital given how payments are made. And I don't want to not be transparent on this.

You will see the numbers when we guide and we'll give you all of that, but that's what you're going to see, is you're going to see 2016 capital is just a little bit lower than 2015 and a little bit lower than, I can tell you, than 2017..

Great. Thanks, guys..

Yeah..

Thanks, Jason..

And our next question comes from Seth Seifman from JPMorgan. Seth, please go..

Thanks very much. Good morning. Larry and Sanjay, it feels like the tone you've tried to set overall with regard to a lot of things has been one of consistency.

Should we think about the pace of share repurchases falling in that category as well?.

Well, we don't – I would just – I'm going to just leave you with the statement that I made, which is we think our share price is a great value. And so however you would like to interpret that. We did get started and we expect to move along at a good pace..

And Seth, if I can just add to that, you're absolutely right. We want to more predictable. We want to be more consistent. We are more balanced in everything that we do. We continue to de-risk. And like you saw, as we demonstrate performance, we raise our guidance.

So all of that stuff that Larry has been working with the team, that's exactly what we want to do in the long term..

Yeah. I guess that is probably the one thing that – all these initiatives that we do, they've become quite detailed in the planning, but they don't manifest discretely.

It's not like you're flipping a switch and you're seeing these things, because these initiatives that we have, I mean today we're seeing the benefit of actions taken two years ago and we continue to progress. And I think we feel much more positive about the specifics of our plans looking forward and we have lots of options.

I think the thing that I feel good about is that we have quite a few options, when we look to the future, about other opportunities we can use to address our cost. Some of those require investments, but the ROIs are good. And we have a lot of dry powder. So we have a lot of work to do.

I don't think I ever come to work and don't feel like there's nothing to do, but quite the opposite. I am, every day, kind of, okay, we've got to go do this and do that, pretty passionate about moving quickly. But I do recognize that, even when we move at a relatively high pace, that the results of these changes manifest incrementally over time.

I'd hate to be described as steady, but in reality that's kind of where we are..

Okay. I apologize..

No, I think that you're absolutely right..

And our next question comes from Ken Herbert from Canaccord Genuity. Ken, please go ahead..

Hi. Good morning..

Good morning, Ken..

Sanjay and Larry, just a clarification, I know you've talked about this in the past, but you're still looking at, I think, it's 57 working days in the quarter and 787 deliveries I think stepped down sequentially. But it sounds like, Larry, you're able to ship, I think you said you're looking for the highest number of A350 deliveries in a quarter.

Did I get that correctly?.

Yes, that' s true on both counts. And I think about it in the case of the A350, it's kind of on a, I'll say, a continuously ramping profile. And so that is certainly our expectation. Now we build the units, and, of course, Airbus has to call for them.

But, as I just pointed out a while ago, we missed the quarter by – we expected nine, it was eight, but it was only off by a day, so we're in a constant conversation with them in terms of what they believe their demand is for the quarter. And our expectation's we'll deliver more 350s in the last quarter than we have in any prior quarter.

And again, just remember though, we're not at a steady rate, we're at a ramping rate. So what you're seeing is the WIP, the work-in-process, is manifesting in final product as we go forward..

Okay. And just to follow up on an earlier comment you made regarding the 100 unit and the symbolic nature of hitting that.

When you do hit that at some point next year, does the layering in of the 350-1000 – I know, obviously, it's been planned – the cost savings you're able to achieve on that program, is that maybe what's giving you a little more confidence about, perhaps, hitting some of these milestones a little sooner on that program? Is there anything else you specifically....

No, I wouldn't say that. I wouldn't say it's unique to the 350-1000. I would say that just like we saw, I think we have an expectation that we will move quickly down the learning curve on the 350-1000 just like we did on the 787-9. But you should see similar kind of performance. But no, I wouldn't say that's the origins of our confidence.

I think the origins of our confidence are the kind of incredible detailed, incremental build-up that we have as we looked at our unit cost and we differentiate all the different parts that make up that cost, material being the most predominant piece.

And so you're constantly looking at are you buying from the right people, do you have the right overall structure. We do what we call clean sheet analysis, in effect of should cost.

We're looking at aggregation deals where we take and look for people who have – where we can put product together for people who have excess capacity, which means there's not a large capital investment for them. And matter of fact, it's all upside and we will certainly negotiate those deals. We try to lever the buying power of the OEMs.

And so there's a lot of things. And then there's a lot of – we're still early, which means there's lots of opportunity for re-design. And so those cost reduction opportunities are important.

And normally what happens on these things is that in the early days of production, transition from development to production, everyone is so focused on just getting that – it's a very difficult transition to make.

They're so focused on making that transition that it's all consuming, it's very hard to have a conversation about changes, change traffic as it relates to cost reduction because you can hardly handle the changes as it relates to just getting to where you need to be.

And so, today, with the change traffic down, again, you talk about this confidence, with the change traffic diminishing and now we're seeing kind of the nominal day-to-day performance, again, that's kind of the stability that moves you down the curve and kind of gives you confidence.

But listen, I would tell you, labor is important, but frankly touch labor is 10% to 15% of your unit cost. Support is actually a bigger piece. You have overheads. You have commodity pricing of materials. And then you have your value-added materials, which is by far the biggest piece.

And so you attack those really two different ways, to the design and then finding the right supply partners. And both of those things are underway and I think we're going to do better than shipset 100..

Okay. That's helpful. And then just one final clarification on your comment on the materials side. I know some of the cost of the carbon fiber was an issue with 787 and some of the charges you've taken there in the past.

Is it fair to say that the cost of that component on the materials side with the visibility in contracts, you don't see that maybe altering the equation moving forward?.

No, I don't see that as the most significant variable. I would have – obviously with oil prices down, you'd love to see those come down, but you know how that works. You negotiate these long-term deals. Frankly, we typically buy our commodity material through the OEMs. And so you hedge the upside and the downside and you just go from there.

But it's not a major variable in terms of our ability to either get our costs down or reach an agreement with Airbus ultimately..

All right. Well thank you for all the color..

And our next question comes from Myles Walton from Deutsche Bank. Myles, please go ahead..

Thanks. Good morning..

Good morning, Myles..

Good morning..

A quick one for maybe Sanjay.

On the accounting block rollover of the 87 in 2016, should we think about the 87 in your mind now being mature program that will follow kind of an accounting block sizing standards of two years? And then also as it relates to margin, pre-production rolling off, looks like at a minimum your starting point is five points of margin.

Just can you verify those?.

Sure. Myles, we'll make the decision on the size of the block sometime next year. I don't want to walk into that at this moment in terms of whether we continue to look at it as another block of 500 or something different. That's a decision we'll make next year. And you're right about the pre-production.

The pre-production does collapse at the end of this current block. And so that benefit does flow into future deliveries. What that means in terms of margins and so on for future will obviously depend on our negotiations, the size of the block. In the past, I think I've told you it will depend on the 787-9, 787-10 pricing, those kinds of things.

And so that's a little while away at the moment, Myles..

Okay. And then Larry, on business development, you guys were once on the Cessna Columbus back when it existed and it sounds like they'll be launching a new larger jet, not the Columbus revisited, but something probably pretty close.

And we're just curious about your attitude towards that market in general and maybe if you want to go there specifically..

Yeah, I think the folks who are in that market are good at being in that market. We have some, as you know, still do some nacelle work, I think that people really – it's kind of funny, as I go out and talk to folks in the bizjet marketplace, they really like our products.

I think for us it's a difficult, given the low production rates, it just isn't our best opportunity to generate ROIs. We can get a lot better ROIs. And recognizing that it's not – by the way, it's hard to drive the top line with – unless you have a lot of content, it's hard to drive the top line.

But when we look at our opportunities to change our cost structure, we can quickly find incredibly high returns on investments that we can make in ourselves that kind of swamp any of the returns, especially kind of these very heavy upfront investments required to kind of enter into any one of these new ventures because most of the time, especially in the bizjet side, most of the time it's, hey, would you like to do our wing? And it's usually a heavy up-front investment or, would you like to build nacelles? And we have – I will just be honest, we get a lot of calls from a lot of different folks.

They're very credible people and they're great discussions, so we're listening. We're talking and listening and having the conversation. But I would just say it's not right now. It's one of the more difficult investments to make..

Okay that makes sense. Thanks..

Yeah..

And our next question comes from Cai von Rumohr from Cowen. Cai, please go ahead..

Yes, thank you very much. So I think on your second quarter call, Larry, you made a big deal about how getting to rate on the A350 was going to be key to kind of really turning the corner.

Is Airbus on the rate ramp that you expected as of mid-year? And are we still looking at delivering, given you missed by one in this quarter, something like 12 units in the fourth quarter?.

Yeah, Cai, I know that Airbus has their call in just, what is it, a few days or so here. So we don't normally comment on our customers' profiles. But you're absolutely right.

Ultimately, your ability to achieve rate is the factor that makes the biggest determination in terms of – or one of the biggest determinations in your recurring costs, because you're amortizing your fixed cost against a much bigger base. So it's an important factor for us. That said, I think that the backlog on the airplane is solid.

The demand for the product, I think it's done well in the marketplace from what I hear. And so the question is, and this would be a great question for you to ask them in terms of where they are, but the question's simply about the trajectory to get there, not, I don't think, with regard to the market in its whole..

Okay. And then I guess I'm a little confused, Sanjay, with your cash flow guide. If I look at your short-term deferred revenue, it looks like it's $196 million at the end of the third quarter.

If you don't achieve a master contract negotiation, does that number go to zero and, therefore, your cash flow is zero in the fourth quarter? That kind of is the way it looks like..

Yeah. So Cai, the way I would look at it is really look at the balance in that particular account at the start of the year and that's when the interim arrangement kicked in. And you really see the growth, I would say, not all, but a majority of that relates to – most of it relates to the interim arrangement.

And yes, if you subtract that from my year-to-date cash flow, you get a pretty good idea as to what we've truly performed and what we need to perform in the fourth quarter just operationally to achieve the guide that I gave you of the $700 million to $800 million.

I'm assuming that till such time as we don't have an agreement that that cash flow is not in my guidance and will be returned. And yes, that number will come down to very close to the number it was at the start of the year, the $20-some-odd million. And yes, that will go down..

Thank you very much..

Okay. Operator, we have time for one more question please..

All right. And our next question comes from Sam Pearlstein from Wells Fargo Securities. Sam, please go ahead..

Good morning. Just to follow up on that one question, I just want to make sure I understand.

The amount of the $290 million to-date is not included in the cash flow, so we should take your free cash flow number and add that $290 million just to kind of get a sense as to what the reported number will look like this year?.

Sam, I'm not sure I (01:00:55)..

I'm sorry, on the deferred revenue, I should take....

Right..

...what the balance is and add that to the free cash flow guidance?.

No. So in my current year-to-date cash flow number of $753 million includes cash that I'm currently receiving from Boeing associated with that interim arrangement. The delta between the start of the year and where we are at the end of the third quarter in my short-term deferred revenue, the delta is about $170-odd million.

We started the year at about $23 million. We are right now a balance of $196 million. You'll see that in my press release. Most of that, not all, but most of that relates to the interim arrangement. It's in my $753 million. But if I don't achieve a settlement by the end of the year, all of that will go back.

It's not included in my guidance of $700 million to $800 million for the year. I hope that helps..

Okay.

And then just in terms of the 737, you did start a new block this quarter, is that right? Is there any way to kind of isolate what the core margins in terms of just thinking about volume versus pricing and how that flowed through in terms of the overall performance?.

Sure, Sam. So the answer to your first question is yes, we did start a new block. And like our margins and our performance, I think I've mentioned this a few times in the past, a large part of what we are working on now is cost reduction across the board. It's in our overhead accounts.

It's in our – that manifest themselves into appropriately and get allocated into a variety of our programs, whether it be the 737 or other programs. So I don't want to get into program-by-program margin. They're very consistent with what we have been performing, and our goal, obviously, is to continue to do better..

Okay. Thank you..

Thanks..

Thanks, Sam..

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

Well, thanks, Ghassan. And we're over time I can see, and I know it's a very busy day. Listen, I always thank you for your questions. We do the best we can to answer those. Looking forward to talking to you again in the fourth quarter. I'm guessing, I was surprised I didn't get any question about the Royals or the Mets.

I'm presuming most of you are Mets fans, and I'd just say go Royals. And thank you all..

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