Jeffrey Turner - Chief Executive Officer, President, Director and Member of Government Security Committee Philip Anderson - Chief Financial Officer and Senior Vice President Coleen Tabor -

Cai Von Rumohr - Cowen and Company, LLC Robert Stallard - RBC Capital Markets, LLC F. Leake - BB&T Capital Markets Joseph Nadol - JP Morgan Chase & Co Douglas Harned - Sanford C.

Bernstein & Co., Inc. Michael Conlon - Wells Fargo Securities, LLC Carter Copeland - Barclays Capital Robert Spingarn - Crédit Suisse AG Myles Walton - Deutsche Bank AG Elizabeth Grenfell - BofA Merrill Lynch Troy Lahr - Stifel, Nicolaus & Co., Inc.

David Strauss - UBS Investment Bank

Good morning. Welcome to Spirit's Second Quarter 2011 Earnings Call.

I'm Coleen Tabor, and with me today are Jeff Turner, Spirit's President and Chief Executive Officer; and Phil Anderson, Spirit's Senior Vice President and Chief Financial Officer. After brief comments by Jeff and Phil regarding our performance and outlook, we'll be glad to take your questions.

[Operator Instructions] 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. 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, Jeff Turner.

Thank you, Coleen, and good morning. Let me welcome you to Spirit's Second Quarter Earnings Call.

I'll begin with a look at our business and related performance. And then Phil will review the financial results.

After that, we'll be glad to answer your questions. Our core business continued to perform well in the second quarter as we delivered on increased volumes and realized productivity and efficiency improvements.

As the recent order flow has signaled, we continue to see strong demand for large commercial aircraft and improving demand in business jet market. With an increased backlog over $29 billion, not including the recently announced orders, the long-term growth perspectives for Spirit continues to be strong.

As the core operating base grows, we continue a disciplined transition to higher production rates across our sustaining products. Throughout this transition, we are focused on productivity and efficiency to drive long-term value.

With 5 of our development programs progressing towards certification in 2011, our priorities continue to be meeting customer commitments and positioning all of our programs for long-term value. We recently completed our go-forward plan on the 787 program, celebrated the rollout of the first CSeries test pylon for Bombardier and announced our plans to establish program management and production for the Gulfstream G280 program in our Kinston, North Carolina, facility.

While the outlook is positive, we remain watchful of global economic and political dynamics as we execute our growth and diversification strategy. Now let's talk about some of the specific accomplishments across the business during the quarter, beginning on Slide 3.

Fuselage Systems delivered operating margins of 12.3% on $773 million in revenues during the second quarter, which includes the impact of deferred revenue associated with the 787 program. The Fuselage segment's rate increasing 737 production line continues to perform well as the team delivered its 3,700th ship set of the next-generation fuselage.

The 787 team also made further progress by delivering 7 airplane fuselage sections in the quarter, including the forward fuselage number 44. We are pleased with the progress of our joint Spirit and Boeing 787 teams.

We are pleased with the progress they are making as they work together closely to identify and implement cost improvements for the program. The fuselage team also continued its progress on the 747-8 program this quarter by delivering the 31st forward fuselage.

Additionally, the A350 XWB fuselage team continues to mature the engineering on the program, and panel production is nearing completion for the first article. On Slide 4, you see the propulsion team delivered solid operating performance with margins of 15.2% on $318 million in revenue during the second quarter, as margins continued to improve through productivity and efficiency improvements and some additional aftermarket volume.

The segment's core business continued to perform well while transitioning to higher rates, surpassing line unit 3,700 in the quarter for both the 737 Next Generation Engine Pylon and Thrust Reversers. In addition, progress on newer configuration pylon production hardware continues as we shipped our 46th 787 and 28th 747-8 engine Strut ship sets in the quarter.

The propulsion team recently achieved a significant milestone as they rolled out the first test pylon for the Bombardier CSeries. This milestone is the latest example of our successful diversification strategy and focus on meeting customer commitments.

The team continues to support development activities for the Rolls-Royce BR725 engine itself [ph] and design activities on the Mitsubishi Regional Jet program. On Slide 5, you see the Wing Systems segment, which primarily consists of our Europe, Malaysia and Oklahoma operations.

The wing team reported operating margins of negative 8.4% from $373 million in revenue during the second quarter, which includes the impact of deferred revenue associated with the 787 program and the previously announced $53 million charge on the G280 program. Spirit Europe continued to produce significant volumes of hardware for our Airbus customer, surpassing line unit 4,800 for the A320 wing components.

The wing team continued producing on new programs in our Tulsa, Oklahoma, site as they delivered the 30th 747-8 Fixed Leading Edge Wing section and the 46th set of 787 slats during the second quarter. Early production efforts continue in Tulsa on the Gulfstream G650 and G280 wing programs as we prepare to establish production for the G280 in our Kinston, North Carolina, facility.

As you can see from the picture on the slide, the Global TransPark location represents an opportunity to shift our footprint, to leverage our capacity and allow our management teams to focus on the success of all our programs. Now let me turn it over to Phil, who will provide more details on our financial results and outlook.

Thanks, Jeff, and good morning. I'll begin with a look at Spirit's key financial highlights for the second quarter on Slide #7.

Revenues for the second quarter of 2011 were up significantly as expected compared to the second quarter of 2010 as we successfully finalized and incorporated results of the 787 contract amendment during the quarter. Deliveries to Boeing Commercial Airplanes were up almost 10% over the same quarter last year, while Airbus was essentially unchanged and business jet deliveries increased.

Excluding the impact of the 787 contract amendment, revenues grew by approximately 7% over the same period last year. Operating margins for the quarter were 4.3% compared to 2010 second quarter margins of 8.1%.

Second quarter 2011 operating margins included a 3.6% negative operating margin impact associated with the previously announced G280 charge and were further impacted by the 787 program revenue which we continue to book as 0 gross margins. While the quarterly reported results reflect these 2 significant items, the core business and operating engine of the company continues to perform well as we expand capacity and increase production rates.

During the quarter, both fuselage and propulsion segments realized favorable cumulative catch-up adjustments as these programs achieved -- these segments achieved productivity and efficiency improvements. Fully diluted earnings per share for the quarter was $0.21 per share, reflecting the $0.26 per share impact related to the G280 program, lower R&D, higher interest expense and a higher effective tax rate as compared to the $0.39 per share second quarter of 2010.

Second quarter 2010 results included a $0.10 per share impact associated with the International Association of Machinists' ratification of a 10-year labor contract. Cash from operations for the second quarter of 2011 was $114 million use of cash, and a net reduction in inventory was more than offset by cash advance repayments and higher ARAP [ph] balances related to the timing and production rate increases.

Capital expenditures were $43 million for the quarter compared to $61 million during the second quarter of 2010. Quarterly capital expenditures are expected to increase as we invest in new business and capacity expansion throughout the year.

On Slide 8. Second quarter R&D and SG&A expenses reflect our continuing disciplined expense management and lower 787-related R&D.

SG&A expenditures increased slightly, driven by stock and incentive compensation increases when compared to 2010. Expense management continues to be a top priority for the company as we expand our core programs and bring new programs into production.

Slide 9 summarizes cash and debt balances. Cash balances at the end of the second quarter were $154 million as compared to the first quarter of 2011 balance of $311 million.

At the end of the quarter, our total debt-to-capital ratio was 39%. The company's liquidity position and balance sheet remains strong as we invest in new programs and capacity expansion for our core programs.

Slide 10 summarizes net inventory balances, which decreased by $212 million during the second quarter of 2011. Physical inventories decreased by $26 million, largely driven by improved inventory management practices and factory efficiencies.

Deferred production inventories decreased by $195 million related to the settlement of the 787 contract amendment and offset by increases in new programs. Preproduction inventories decreased by $34 million during the second quarter as we incorporated the G280 forward loss.

Non-recurring inventories increased by $43 million, driven primarily by our continued investment in the A350. And over the year, inventories are expected to grow, though more modestly, as we continue to increase production rates and invest in new programs.

Slide 11 summarizes our revised 2011 4-year financial guidance. Based on current customer demand, our revenue guidance is unchanged for 2011 and is expected to be between $4.5 billion and $4.7 billion.

Fully diluted earnings per share is now expected to be between $1.40 to $1.50 per share. The updated range includes the $0.26 per share impact from the G280 program and a lower profitability outlook on certain development programs as they progress through the design and test phases and enter initial production and volume ramp-up.

Cash flow from operations from 2011 is now expected to be approximately $50 million, and capital expenditures are now expected to be approximately $300 million as we invest in core program capacity expansion and new program growth. Our updated 2011 tax rate is now expected to be approximately 30%.

The R&D and SG&A accounts together are now expected to be between 4.25% and 4.5% of revenue for the full year 2011. We continue to expect 2012 revenue to grow above the 2011 guidance range as demand increases for our core products and new products enter the production and delivery phase.

We continue to expect cash flow from operations, less capital expenditures, to be positive in 2012 as cash advance repayments decline and working capital investment stabilizes. I'd now like to turn it back over to Jeff for some closing comments before we take your questions.

Thank you, Phil. I'll wrap up on Slide 12.

As we transition to higher production rates across our core business, and with some of our new programs as well, we remain focused on execution and systematic ramp-up. We will continue to strengthen our core operating base through productivity and efficiency across the business.

As many of our development programs continue to mature into early production, our teams are focused on transitioning them into stable, full production. Looking forward, we will continue to benefit from the expanding demand for commercial aircraft while acting on lessons learned.

As we execute our growth and diversification strategy, we will create long-term value for our customers, shareholders and employees. We'll now be glad to take your questions.

On the free cash flow situation, you said you expect it to be positive next year. When would you think you'll feel comfortable about giving some sort of framework of how positive you expect free cash flow to be next year?

Rob, I think as we move through the second half and we mature several new development programs, get them certified, get the production footprint set for the G280, and then get some of the initial capacity installed in other programs, I think we get much more comfortable talking about it, probably in the fourth quarter. So that's kind of where it is.

Okay. And then as a follow-up, I was wondering if you could give us a reminder of when the blocks on your largest programs roll over next year?

Yes, sure. The 37 block actually concludes later this year and the 777 block moves to the next contract in the first quarter of next year.

So the 737 block that expires this year, has that included all the production rate increases that have been announced by Boeing?

Well, it certainly includes our current view. So yes, I mean, the answer is yes.

But most of that volume is in the next production block. So what we're seeing right now, you're seeing some of the capital being laid in place to expand the capacity.

But the actual -- the return on that income is in the next accounting block, which we'll talk about when we roll out 2012 guidance.

Phil, the deferred revenue from the 787, was that $250 million or so in the quarter?

Well, David, that's -- you can kind of look at the balance sheet. And the majority of the deferred revenue account change was driven by the contract amendments, yes.

Okay. And can you tell us what 787 deferred production did -- the deferred production balance did in the quarter both -- I know it came down because of -- but what did it -- what would it have looked like x this -- x the deferred revenue adjustment?

Yes, well, I mean, this whole incorporation of the amendment, David, it obviously reflects 4-plus years of activity in the program all flowing through here in the second quarter, reflecting the amendment that we put in place. So I think you really got to -- to the program, maybe Jeff has some comments, but the program is doing quite well.

You've seen the deferred production coming down nicely, and so all that effort continues today. It's going to be a little bit tough to get to that number here in the second quarter given all the moving parts.

But I would just suggest to you that it continues to improve, and the third quarter will be probably a little bit of a proxy for the overall improvement curve that you're trying to get to.

Okay. And one last question.

The guidance -- if you look at the revenue guidance, what it implies for the second half is that it looks like revenues x the deferred revenue in the second quarter, it looks like the rate steps down almost from where you -- like the $1.2 billion or so you were at x the deferred revenue. And then on the margin side, is it correct, roughly, you're at something about 11% margins in the back half of the year, and is really the main upper there just related to the move to the new block on 37?

So the volume line, I mean, I think that you're relatively calibrated on that. The biggest volumes -- variable in the second half is 78 really.

So it going to depend on where we end up on deliveries for the year. I think we've got, what, 13 so far this year.

We kind of expect that to double as we move to the second half. Your margins, I think I'll just make a comment as far as if you look through the volume here in the second quarter, which I mentioned earlier, the growth over the 2010 quarter was about 7%.

If you look at that revenue adjustment, you see very consistent margins for us after you kind of get through the 280 and the cum catch. I think you're actually seeing margin expansion across propulsion and fuselage.

And the wings got a solid, kind of solid 9%, 10% path in front of it. So that's kind of how to think about the margins.

First question is just on the EPS guidance. It looks like you took close to $0.10 out in addition to after you factor out the charge that you took.

And in the last call, I think Jeff -- I think, well, one of you guys had mentioned that the top end of the prior range was still attainable. So I'm wondering what changed here besides the charge.

Yes, there's really 3 things, David -- I'm sorry, Joe. The things I mentioned in my comments, the G650 is one of the programs -- we actually have lowered the profit outlook on that program for the second half.

And so there's volumes coming up on that program. We've taken a more conservative profitability look at that, as well as the 350 wing piece in the 747-8.

All 3 of those programs, as you know, are in the design or test phase and even in early production in some cases. So the lowering of the top end of the range really reflects the more conservative view on those 3 programs in the second half.

Okay. I just want to clarify because you gave the 7% gross number x the deferred revenue.

But that gets you to more like $335 million of impact from the deferred revenue. And I know it's an important difference especially when you start looking at margins and thinking about the model going forward.

So what's the number?

Yes, I know, I mean, that guidance is -- largely reflects the amendment. And so there's a number of moving parts there on the amendment.

I don't want to go in too much detail on it. But the deferred revenue was one aspect of it.

There were other aspects of the amendment which were affected. The R&D, treatment of the R&D is probably the most significant where we're actually instead of expensing that or moving it to advanced payments, we'll be putting that to cost of sales going forward.

And that's probably the piece that you probably haven't picked up on yet.

Okay. And then just finally, as we look to volume, just getting on that again.

In the second half of the year, you have a step down from Q2 levels even if you x out the sales impact of the deferred revenue hit. Why should anything step down?

I mean, rates are going up. I assume, presumably, you have a little bit of a lead time on that.

Is there anything going on in the aftermarket? Is there -- are 787 volumes supposed to decline for some reason?

Or maybe just a little help on that one.

Yes, sure. No, I think the aftermarket has picked up this year compared to last.

Volume is certainly helping out on the margin side of things as well. It's not a large piece of our business, but it certainly is a piece we like.

The 787 is the biggest variable on the top line, Joe. So it's really, what volumes we hit on that program, then there's the nonrecurring aspect of this business, which the A350 certainly has big nonrecurring costs.

So between the 78 and the A350, those -- how those move around in the second half of the year can affect the top line.

Joe, in general, as you can appreciate, production rates are stable and increasing. Just a little bit of anomaly with some of the lumpy items that kind of mask that underlying strength.

Can you delve a little further into -- Phil, you just mentioned the 650, the 350, and the 747-8 as being the 3 items that account for the additional $0.10 or so in guidance decrease. Where are we -- a little more detail, how close is 650 to a forward loss?

What can you tell us?

Let me address that. 650 is a long, long ways from a forward loss.

We made some more conservative assessments of our labor productivity and our cost curves. We think that getting the 280 moved and freeing up some space and some resources will help that, but -- help that program, but not immediately.

There's some ramp-up activity going on where we're bringing in additional resources in terms of people and training them so that the learning curves that we had hit historically were not hitting on that program. But that's a great program with a solid run.

We're clearing the decks to be able to do that effectively and efficiently in the facility. So that one, that one's very solid.

The 350, as you know, is in the throes of that part of the program where you're building the first sets of hardware. You're driving -- we're driving into the supply base to get the parts.

This part of the schedule is highly compressed and challenging for us. So it's hard to be highly optimistic.

We see the things coming together and coming together well. But with a great deal of expedite required to get it done.

And the third one is eluding me -- 47-8 again is a new program. You know where the program is in terms of certifications and first deliveries.

We're building there, supporting the pull schedules. They're a bit choppy, so we need to get that solidified.

There's some issues that have popped up on that program just due to our production media, if you will. It's a mix of brand-new media and old engineering and manufacturing engineering media.

We're having to spend extra effort to clean that up that wasn't in our original plan. So those are the ones that we're fighting through for the remainder of this year that pose a little bit of risk to us.

Phil, I think you talked about inventory on one of the slides. But the things that Jeff just talked about, how much of that excess effort and cost is going through the P&L versus the balance sheet?

Yes, I mean, some of it's -- you can lay it [ph] on the balance sheet as well. Clearly, the excess costs, as we look out in front of it, we think it's still recoverable through the current profitability rates.

But yes, it certainly is grossing up the balance sheet as well.

Okay. And then just to finish up, Jeff, what do you see rate-wise on 787?

What's your plan as we go forward the next few quarters?

Well, I think Phil mentioned the number of units that we had intended to ship. It's pretty steady for us right now, and we're ready to ramp.

But again, we're pacing ourselves through the pull and are prepared and ready to deliver at an increasing rate. But we're not going to anticipate that until the pull begins to come.

How about the break points in the rate? Do you see yourself at 6-month rates?

We're certainly capable of doing that. We're capable of doing it quicker here at the early part of the program.

But again, it all depends on the pull.

Just a couple of quick ones. I hate to beat a dead horse here, but it looks like if you look at the guidance change at the top end in excess of the $0.26 charge, and you got a $0.04 upper from the tax rate, we're talking a pretax revision here of sort of high 20s millions of dollars.

And as you think about changing profit rates on programs like the 650 and the 350, I wouldn't have expected those to have much in the way of revenue that you could see a revision this big. And even the 47 should be pretty light.

So as you think about that sort of revision, how much of this is period expense or R&D or something that's going -- that fall in the back half of this year that's not repeatable next year? Can you provide any color on how much of that might be a 2011 rather than a go-forward number?

Yes, it's really, it's the addition of all those together that really brings the top end of the guidance range down. Jeff talked about the 650, and any one of them by themselves certainly are not that big.

But it really is a view of the forward look, the profitability on the 650 given where it's at in the production and in the design and test phases. Long term, these programs tend to be very good programs.

And the 650 is very well-positioned to be that for us as well. The A350 is the nonrecurring part of the wing contract.

And we simply -- just taking it down to a -- we had a little bit of profit being [ph] booked on that. We've taken that to 0, which gives us a little bit better risk profile going forward given -- as we look at all the development programs, Carter, they tend to move to the right at some point in their design evolution.

So we're looking at that as well on the 350. So it's really not about R&D at all here.

It's just really about the profitability on the contracts and our updated view.

Is there any cushion in that to protect against one of these slipping into a forward loss position?

Yes, no, absolutely. I think as we moved through the last year, we've -- given the amount of development we have in the pipeline, we've really tried to get them all structured where they have a much better risk profile, given what our experience curve has been.

And I think the 650 and the 350 fall into that category as well.

And I would give you a little more color on that, Carter, on the -- especially the wing piece. We have shipped the first spar out of our Kinston facility, where it was fabricated.

It's in our Prestwick facility. It's going together and going together well.

The key, though, is that it is a development program, and we've shown that we can build it. We can deliver the test unit.

Now the risk comes in, are there changes that'll have to be made to it? What will the tests show?

So right now, we're feeling good about that piece coming through. It doesn't have as much reserve in it probably as we would like, but it's got significant reserve.

And we'll see now how it matches up with the rest of the program. And if it can flow through the test in good order, it'll be just fine.

If there are major issues that come out of the test, then we'd have a bigger challenge on that part of the program. We don't see that now.

But we won't know until it gets through the test phase.

Okay. And one follow-up.

With respect to the amendments, and the impact there, it's sort of 250, 300, depending on what's being counted. It's not very clear.

But I wondered if you might provide some color about how we should think about the composition of that. How much of that is, in general terms, a compensation for nonrecurring cost?

I mean, you talked about the aggregation of 4 years of expenses you've incurred. And how much of that is for repricing of the units as part of the sort of go-forward agreement?

Is one comprising the majority of that adjustment or amendment? Or are they sort of evenly split?

Well, I'm not really going to comment on the split, Carter. I mean, is kind of is what it is at this point.

I think there's clearly been some acknowledgment of the price adjustment needed near term, with us all focused on getting the cost and better pricing on the outer units. So it's clearly a component of both but I'm not going to really give you a sense of what's what.

Well, I will give you -- Carter, I'll give you just a little bit of color, though. We have, and I said this in my comments earlier, we have our joint teams working very effectively.

A number of improvement activities have been identified, quite a number of them driven into the -9 configuration, more that will -- that are on the drawing board. So we're right where we need to be in generating the improvement activities that have to go into that program to keep us on the curves required to manage it to what we forecast right now and to make improvements to that through time on the program.

So is it fair to say that under the terms of the new agreement and as you move into 2012, the price you'll receive is going to be a lot closer to the cost of the units you're realizing?

Well, it's fair to say that it still has a learning curve approach where the initial units are higher-priced because of the cost. And then as you come down, the learning curve really matches up.

And I'm not trying to be too cryptic here with you guys. This is obviously an issue that I respect my customers' desires on.

And frankly, we can't really talk about too much of it.

But I would say philosophically, when we started the program, we started it with the concept that we would have a pricing model that followed the learning curve. And we are remaining true to that philosophy.

I'm wondering if you can tell us how much of that deferred revenue was in fuselage versus wing. I mean, I don't know if you want to give dollar amounts or maybe just a rough ballpark percentage.

Yes, I mean, it's roughly kind of 2/3 fuselage and the remainder in the wing. I should make a comment on propulsion.

We work with Boeing closely. Even now, probably over a year ago, we got the propulsion aspect of the contract worked out.

So the amendment we could finalize this quarter was largely focused on the wing and the fuselage pieces.

Okay. And then just one thing on your guidance.

The high end of the range, can you still hit the high end of the range if you have some unfavorable contract adjustments going forward or is that -- would that move you to the low end? I guess, modest contract adjustments?

We -- it accounts for some modest contract adjustments in that range. Certainly, it doesn't account for anything that we experienced in the first half here.

Right. Okay, but...

I would say -- let me just weigh in on that as well. We did see, as Phil mentioned, some improvement in our base programs from our productivity and efficiency activity.

We'll watch that very closely and continue to manage it. We could see some improvement there, and if we do that, that's clearly got some upside.

Okay. But just so I'm clear, you said you could hit the high end of your range if you took even some modest charges in the back half of the year not just hitting the guidance range?

Well, the reason we give a range is because of the uncertainties, obviously, associated with it. So we believe that we've got a solid hit in the range.

To go back to kind of the 787 nonrecurring impact, so it's $335 million, but we can tell by looking at your deferred revenues, which are down $250 million, that, that's probably $250 million of it. Phil, you mentioned treatment of R&D.

What are you talking about? I mean, are you now -- you being paid for R&D so that you're no longer expensing it as a line item paid over the contract?

Can you give us a little help there?

Sure, yes. Part of the arrangement is previously we were -- you'd get advances and then liquidate the advance through the R&D line.

Now we are simply going to get paid for it and get revenue as we develop the -- as we do the emission [ph] improvement activity.

Okay. So looking forward, we'll see less on the R&D line because it's now going through the cost line.

Is that correct?

That's correct, Cai.

We're just moving the deck chairs? So can you also give us some explanations, you have this $11 million of warranty rework reserve and UAW reserve.

Kind of what was all of that for? And are we going to see any more of that stuff?

Well, I mean, it just reflects some settlement we had we had with some of our customers and suppliers during the quarter. It's pretty normal activity.

And when you settle them up, you have to look and make sure we have the appropriate balances in the margin reserves. And that's what is reflected in this quarter.

Right. Well, you say it's pretty normal, but actually excluding the IAM, you haven't had it for the last...

No, normal being there's always customer/supplier things you work through. And when you settle them up, you settle.

And then you have to make sure you have the right margin [ph] reserves in place if you get settled up. So that activity, it's not normal every quarter, but it's normal activity that happens.

Okay. And at one point, you were fairly comfortable with the A350 fuselage work, in fact, talking of booking a profit on that development.

Is that still likely or expected in the second half? And maybe give us some color.

Are you assuming more positive cum catches in your guidance range or nothing? Give us some color there.

Well, I am assuming, Cai, that our productivity and efficiency activities will continue. We'll see them more likely in the larger, higher volume production programs.

And so I look forward to that. Also, as we go from the blocks that we're in today to the future blocks, we should see improvements in those blocks.

The A350 development for the fuselage, there is -- there remains appropriate reserves on that. But that program, at this point in time, is the piece of the program most compressed for us and where we are spending extra right now to bring that first set of production units through the very compressed manufacturing piece of it and supply chain piece of it.

So as I mentioned earlier, there's some risks there, but it's adequately reserved, I believe.

But you did assume at some point you would put development profits in the second half. It sounds like that opportunity is less -- is more remote at this point.

Yes, on the wing effort, I believe that's correct.

Wing -- and it's [indiscernible] in fuselage. And I think there's still an opportunity, but it's got more risk in it now than I think it did several months ago.

Before we talked, I think when you gave guidance, you spoke of a management contingency for further delays on the 78. And it doesn't look like that's going to happen.

Can you speak anyway to whether there is a possibility that we could see positive cum catches on the 78?

I would just say categorically, not soon. That is a very long run program and significant work to do to get the derivatives in place and to get the production stabilized once we get to that stage.

And frankly, it'll be a number of units, probably a couple of years, I would guess. And we're right on the plan that we set.

It's still early in that process, but we're optimistic about our ability to do that, Carter, but not in the short term. We think we've set that program in a position where it can be very successful long term.

But it's going to take us and a focused effort that we have underway with our customer to get that where we could be talking about positive cum catches on it. And it's a pretty long block.

I think the first block goes into 2015, 2016 time period.

Let's switch to the 747-8. I wouldn't have necessarily grouped that airplane in with the G650 and the 350 with regards developmental risk.

Can you give more color on what's going on with the -8? I mean, Boeing yesterday came out and said that program is on track.

What are your challenges again on this program? I'm not real clear.

Well, I think a couple of issues there on the 47-8, the first being, as you know, the delivery, the certification delivery of that has had some delays, the customer has talked about. That tends to ripple back into the production demand.

We've seen some of that. And then we've had some issues on the program that deal with the fact that it's, like I mentioned, mixed-media airplane.

It's a design that we're putting CATIA into. And we've got some challenges to make sure that all of our -- all the pieces of the puzzle, if you will, are done effectively and efficiently.

We've had to spend extra energy on that to make sure that we got it all right. And we're going to spend some -- we are spending some money to go back and retro some of the production plans and some of the engineering drawings to close that gap between a drawing airplane and a CATIA airplane.

To Rob's question on the 650 when you were sort of saying -- like, how far are you away from a forward loss than you -- it was a comforting answer. Can you answer the same way on the -8 as far as your longer-term confidence on that program?

I don't think so. I don't think I can.

Here's another part of the puzzle, Carter, is -- this is relatively short block and a significantly changed airplane. Is the -- and the pricing on the new changed airplane is an average pricing over a longer flow, not just over the block.

So what we've got is high-changed airplanes that drive us back up the learning curve, if you will, back up the cost curve in a relatively short block and then at that a disruptive block. With production flows not being -- and the pull, frankly, not being as smooth as we had anticipated.

So I think what we'll see is -- the long-term health of the program is good. We got a block issue here and some disruption associated with bringing it fully into production in the way we like to operate.

So you'll see some curve base in there. And I don't think it's got the same -- it's got a higher risk profile in my mind than the 650 does.

This is Mike Conlon in for Sam. My question is can you talk about some of the moving pieces between the current 73 block and the follow-on block that starts later this fall?

I mean, just directionally in terms of the pension costs, the production ramp, volume price discounts. Any color you can give, maybe material prices?

Well, largely, I mean, it looks -- I think what separates the block is sometimes is one unit, right? It's just where you draw the line at.

So it's very consistent from block to block. Where we're at now, I mean, pension, pension income is -- we have a little bit of pension income these days.

So it's not a big factor. Certainly, the program, as we put more capital into it, which we're having to do with capacity expansion, you're going to pick up some costs associated there.

But we're also getting leverage out of the business, too, on the -- we think the labor and the capital has a good -- has the right return profile. And certainly, the overhead, the way we're managing the overhead, helps a lot.

So look, this is a volume-driven business. Think we've been pretty clear about that over time.

And we expect as we move through the next several years and these higher volumes come at us, we see a real opportunity to improve the profitability in the program.

This is actually Elizabeth in for Ron. Two questions.

Just to clarify, did you say that the 787 margin is 0% on a gross margin basis?

Correct.

So what about on an operating margin basis?

Yes, well, it would certainly, probably be somewhat negative there, right? Yes.

Right. On any order of magnitude?

Let me be very consistent. Whenever we talked about the 78, for years now, when we talked about the margin of the program, we were consistently talking about the gross margins.

So there's really nothing new there.

Okay. And then are there any opportunities for you on the re-engined 73?

Absolutely. I am -- I've got to tell you, I am very, very optimistic.

The last -- I mean, we spent most of this call talking about some of the nuances of this year and this quarter, which I understand. But I think it's kind of masked what happened in the last couple of weeks.

And it is, for us, it's very, very exciting time. I mean, you guys, many of you have seen our factories here.

We've got equipment, tooling, capability, and what's been talked about here is a derivative on our current airplane. We and our supplier base are very good at doing derivatives, especially on high-volume programs.

Our best development program in the last 5 years has been the P-8A, which is a derivative of the 737. So we've got volume coming at us.

We've got a supply base that knows what they're doing. We've got a great airplane that's getting an uplift.

I think we're a valued partner on the 737. We know the airplane intimately.

We know what to do. It's got to have some things done to it that we know how to do.

And it's going to need pylon for a new engine. It's going to need a nacelle for a new engine.

It's going to have some, I'm sure, some upgrades to parts of the fuselage to handle the loads. That is right.

I mean, that is a change of pace down the middle of the strike zone for us, and we anticipate it. And we know exactly how to deal with it.

So I am extremely excited about the -- about being a very significant part of this airplane and extending the capability and the life of the 37.

First, I'd like to just touch again on the development programs. And when you've talked about them with respect to nonrecurring costs, how do these look in terms of the actual unit costs when you look forward now?

In other words, are the issues you're having something that once you get to the nonrecurring period, you think you're going to be fine in terms of unit production?

That actually depends, Doug, on many of them. Some of the newer programs in particular, we have split the development contracts, if you will, from the production contracts.

Some of the -- which is, in my mind, one of the lessons learned on the programs. Some the programs, you clearly have -- when developmental issues arise, then it has implications across the production because the development is amortized over the -- usually the first block.

In some of our instances, we see our production costs rising because of some of those developmental issues. In others, we see a good, solid production cost staying in the ballpark.

I would say by and large, especially when we get into these where we've had to do forward losses, we'll bring the costs down or the profit down on them, it's developmental issues or startup issues that have contaminated, if you will, the first block.

Well, can you say which programs that you've seen more risk on the unit cost side and which ones are more localized to nonrecurring?

Well, I think, I mean, clearly, we've talked the biggest elephant in the room for us is the 87. And we've talked about that.

We've talked a little bit about the 47. And it's early block issues.

We've talked about the 280. We've talked about the early part of the block on the 650.

Those are the ones that have -- and we've brought a couple other programs to 0 margin, some smaller ones. Tends to be those that we've had -- that we kind of -- early in our development cycle that we ran into challenges on.

But what you're saying, does that mean that those 4 programs, and we certainly have -- we know a lot about the 787 at this stage, but are each of those 4 programs now ones that you expect that your actual margin on unit production is going to be less than you had originally thought as opposed to not being able to recoup the investment going into this?

Doug, it's Phil. I think the one that's the most risky or has the -- probably the most challenging profile remains the 250.

That's why we've made -- or the 280, that's why we've made some of the decisions we've made recently to get it to a different geographic location and allow everybody to focus more on some of these development programs in North Carolina and in Tulsa. The rest of them, on a unit cost basis, I feel pretty good about them.

I mean, I think they're in a place where there's adequate contingency for the risk we've seen out there given where they are in their development cycle. And I think once you get the aerospace programs out into production, it tends to go flying well.

And so I think I feel pretty good about the balance of the program, even the 650, while the nearer-term view is a little more risk-adjusted in my mind. Longer-term, it is going to be a great program on a unit cost basis.

So I think there's just a couple of them that are going to be more challenging to any further be [ph] one of those.

And then when you look over -- when I look over the last couple of years, you've done -- you've had very good performance on the core, more traditional Boeing programs. But you've obviously had a lot of challenges in some of these new ones.

Jeff, you just recently made a number of management changes. Are there any specific initiatives you have underway that change the way the company operates with respect to how you're dealing with these development programs?

Yes, yes, absolutely, Doug, there are -- let me just speak to them. Clearly, what you've seen is us make some promotions, bring some key resources in from the outside.

I think we have a great balance of internal talent and some new external talent. By the way, that's something we've done consistently, and I think blended a team that is continuously improving.

We've talked a little bit in the past, I think, about program management disciplines and some engineering management disciplines. So we've strengthened our core functional oversight in that and manufacturing.

But I think if you really back up a ways and take a look, 11 concurrent development programs with the number of different customers that we're talking about, is too many. Now we didn't plan to be in that mode, but we are.

And we're slugging our way through to completion on. I would say, as we look forward, I don't see us on as many concurrent, and we'll probably be more conservative in our estimate of program's ability to hold schedule.

So those are some systemic things that we've done that we look at. And we've also gone out and really looked hard at some partnerships to help us through the early part of programs, some partnerships with some engineering companies.

Because what happens to us is we end up with a finite number of people, and we have to add skills from outside the company. And we're going to do that in a little bit different model going forward.

As you roll into the 37 and 777 next accounting blocks, Phil, will those accounting blocks be a similar size to your current accounting blocks? Or will they extend out further?

And I wonder if the 2013 repricing is going to prevent you from extending it out further without visibility there?

No, we're -- they look -- be roughly the same size and cover the same period of time as the current ones do, which will take us right up to that price point you're talking about.

Is that the reason for it? Or is it just that you'd like to keep the blocks contained?

Because obviously you have pretty good visibility, I would imagine, on the 37 beyond 2 years.

Right, yes, we do, right? And I think it reflects back, again, when we started the company with a long accounting block.

As we going, and I think as we moved through the first block, we came into the time frame and felt more comfortable going to a kind of a 2-year type of a block, given -- it's just easier to predict costs for material and labor out in those time frames versus a 4- or 5-year block. So that's kind of the strategy.

And I think it's worked out pretty well here in this current block. And I think that's the strategy going forward.

All right. And just a clarification, why were the warranties and rework not allocated to a segment?

Just kind of curious why that didn't occur.

Yes, well, it was a -- there are several things in there going on that were really handled at the corporate level.

Okay. But you're recording the expense at the segment level, I would imagine.

Yes.

But the reversal occurred at unallocated?

Right.

Okay. And then the 280, you're moving the location of the work.

And can you give us some -- and you've clearly made a point that there's still risk there. Can you give us some timeline as to kind of when you'll feel comfortable that the transition risk is at least realized relative to the sort of cost estimates you've made at this point, kind of the timeline of the relocation?

Sure. I mean, like, I think it's something like roughly a 24-month window is how I think about it.

Then we get -- when we just announced that all the wheels are turning, we get things in place at North Carolina, we get a transition. But then we get a nice production ongoing in North Carolina.

And again, this takes a little bit of time.

Okay, okay. And then the last one is on CapEx.

The CapEx coming down, is that a push forward into next year? Or is that a cost avoidance?

Yes, I think, we're just -- it's a little bit of a cost avoidance. But when we look out into '12, we're still laying in capacity for -- I think we're talking about one capacity expansion of the core business and we have new business we are facilitizing for.

So 2012, whether it's the exact numbers, certainly it's going to be a healthy CapEx year for us.