Ghassan Awwad - Spirit AeroSystems Holdings, Inc. Thomas C.

Gentile - Spirit AeroSystems Holdings, Inc. Sanjay Kapoor - Spirit AeroSystems Holdings, Inc.

George D. Shapiro - Shapiro Research LLC Lucy Guo - Cowen & Co.

LLC Douglas Stuart Harned - Sanford C. Bernstein & Co.

LLC Greg Konrad - Jefferies LLC Rajeev Lalwani - Morgan Stanley & Co. LLC Samuel J.

Pearlstein - Wells Fargo Securities LLC Seth M. Seifman - JPMorgan Securities LLC Richard T.

Safran - The Buckingham Research Group, Inc. Jonathan Raviv - Citigroup Global Markets, Inc.

(Broker) Kenneth George Herbert - Canaccord Genuity, Inc. Hunter K.

Keay - Wolfe Research LLC

Good morning, and welcome to Spirit's third quarter 2016 earnings call. I'm Ghassan Awwad.

In the room with me today are Spirit's President and Chief Executive Officer, Tom Gentile; and Spirit's Executive Vice President and Chief Financial Officer, Sanjay Kapoor. After opening comments by Tom and Sanjay regarding our performance and outlook, we will take your questions.

In order to allow everyone to participate in the Q&A segment, we ask that you limit yourself to one question. Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks which are detailed in our earnings release, in our SEC filings, and in the forward-looking statements at the end of this web presentation.

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at spiritaero.com.

With that, I'd like to turn the call over to our Chief Executive Officer, Tom Gentile.

Thank you, Ghassan, and good morning, everyone. Welcome to Spirit's third quarter earnings call.

As we discussed last quarter, we continue to believe that our shares have been undervalued at current valuation relative to our peer group, and that buying back our own shares is an efficient method to return capital to our shareholders. As a result, we were active in the market this past quarter and completed our share repurchase program of $600 million which we announce in January.

In the third quarter, we used the remaining balance of $332 million under this previous authorization to buy 7.4 million shares at an average price of $45 per share. During my first few months as CEO, we completed a thorough review of our business and reviewed outcome with our Board of Directors as part of our annual strategic planning process.

Our strong performance this year and our five-year financial outlook give us a high degree of confidence in our business. After discussions with our board about capital allocation, we are pleased to announce a new share repurchase program of $600 million and the initiation of a quarterly dividend of $0.10 per share.

As promised, we remain committed to a balanced and disciplined approach to capital deployment by utilizing several different mechanisms in an opportunistic and timely way. As it turns out, we will be celebrating 10 years as a public company on November 21.

While it's totally coincidental, initiating a $0.10 quarterly dividend seems like a good way to celebrates Spirit's 10th anniversary as a public company. Let's turn now to the major accomplishments in Q3.

In the quarter, we celebrated the successful delivery of key components to Boeing for the 500th 787 Dreamliner, including the fully integrated nose section of the fuselage which is called Section 41. We're extremely proud of our collaboration with Boeing and work we do together to build the 787, the fastest twin-aisle airplane to reach this key milestone.

The 500th delivery represents a monumental accomplishment for Spirit which has been involved in the 787 program since its inception. Another key accomplishment in the quarter was the delivery of the 100th A350 shipset to Airbus.

For the A350, Spirit supplies both the middle section of the fuselage called Section 15 as well as the fixed leading edge of the wing. Having reached a long-term agreement with Airbus last quarter, we've been working to stabilize the program and execute on our cost quality and delivery commitments.

Year-to-date, we've delivered 50 A350 shipsets and remain focused on meeting Airbus' requirements. In addition, we are making the necessary investments to achieve future rate increases.

Spirit is very fortunate to have work packages on all 12,500 commercial aircraft in the Boeing and Airbus backlogs. We have been working extremely hard to digitize our shop floor, optimize our footprint, improve our flow efficiency and train our staff to meet the rate increases on the 737, the 787, the A320 and the A350.

We are confident that we can meet all of our customer's rate requirements. Another area of focus is the supply chain.

Over the last quarter, I've had the chance to meet with a number of our suppliers around the world. They are critical partners to our future success and we have been working actively with them to help improve their performance.

We've also been actively working with them using our clean sheet process to achieve world-class cost competitiveness. We have been able to conclude a number of supplier negotiations, and will continue this process.

World-class cost competitiveness in our supply chain will remain a priority. Now let's take a look at Q3 results.

In the third quarter, we delivered 368 ship sets compared to 347 ship sets in the same quarter last year. The number includes 30 787s, which transition from the first accounting block to the second; 16 A350s; 126 737s; and 119 A320s.

For the quarter, we reported revenue of $1.7 billion, up 7% compared to the same period of 2015. Operating income was $214 million and net income was $145 million.

Reported earnings per share were $1.16, which is a 30% increase to our adjusted earnings per share in 3Q 2015. Operating cash flow was $266 million and free cash flow was $214 million, a 182% increase over 3Q 2015's adjusted free cash flow.

Given the strong performance year-to-date, we are increasing our guidance. Revenue guidance increases by $100 million to a new range of $6.7 billion to $6.8 billion.

Earnings per share guidance increases to $3.65 to $3.80 per share, which reflects the $0.86 per share impact of one-time items we announced in the second quarter. Our adjusted earnings per share guidance is $4.50 to $4.65 per share.

Free cash flow guidance increases to a new range of $400 million to $425 million from $350 million to $400 million. Finally, as I mentioned earlier in this call, we recently concluded our annual strategic review with our board.

If I could summarize the output of that discussion in two words, it would be trusted partner. Spirit aspires to be a trusted partner to all of our stakeholders – trusted to deliver with quality and competitive cost to our customers, trusted to maintain a safe and compliant work environment, trusted to create next-generation aerostructures, trusted to meet our financial commitments, trusted to create challenging opportunities for employees, and trusted to be a positive contributor in our communities.

Our board is completely aligned with our strategic direction. Their approval of the new share repurchase program and the initiation of a quarterly dividend is a strong reflection of their confidence.

With that, I will ask Sanjay to lead you through financials and give you more specifics about the third quarter. Sanjay?

Thank you, Tom, and a very good morning, everyone. So let me take you through our third quarter financials, summarize our full year outlook and then we will take your questions.

So starting on slide 3, the revenue for the quarter was $1.7 billion, which is 7% higher compared to 3Q 2015. The increase was primarily driven by higher production deliveries on A350 and the 767 programs, as well as higher revenue recognized on certain non-recurring Boeing programs, and slightly offset by lower production deliveries on the Boeing 747 program.

In the quarter we delivered 126 737s, 26 777s, 30 787s as well as 119 Airbus A320 and 16 Airbus A350 shipsets. Production rates on the 737, A320 and A350 are projected to increase throughout the rest of the decade as we execute on our healthy backlog of $46 billion which is almost seven years of sales.

As Tom mentioned, with three quarters of strong deliveries across all our programs, we are now comfortable in raising our revenue guidance by $100 million to a new range of $6.7 billion to $6.8 billion. Moving to slide 4.

We reported earnings per of $1.16 compared to $0.89 in 3Q 2015, which was adjusted for the impact of the deferred tax asset valuation allowance. This represents a 30% year-over-year increase.

Our performance in the quarter demonstrates the benefit from our relentless focus on cost and numerous initiatives to improve our efficiency and manage our overhead expenses. The entire Spirit team is meeting some very challenging internal goals that we established for ourselves earlier in the year.

EPS is benefiting from operational improvements as well as from a lower share count as we have aggressively and opportunistically executed our share repurchase program in 2016. As a result, we are comfortable in also raising our earnings per share guidance to a new range of $3.65 to $3.80.

Turning to free cash flow on slide 5. For the quarter, we reported free cash flow of $214 million compared to $76 million of adjusted free cash flow reported in Q3 last year.

Capital expenditure in the quarter was $52 million compared to $101 million in 3Q 2015, which included the 787 rate ramp-up investments. While CapEx was lower in the quarter compared to last year, it is lumpy in nature and some of this is just timing.

We are investing in a number of rate-related and efficiency projects that we expect will drive further improved performance in the future. We also continue to absorb the natural high working capital requirements from the A350 program as it ramps up in deliveries.

Our focus on core cash flow improvement is steadfast. We continue to see year-over-year improvement in this metric.

As a result of our continued performance to improve core cash flow, we are raising our 2016 free cash flow guidance to a range of $400 million to $425 million. As we have always stated, our long-term goal is to achieve 6% to 8% revenue to free cash flow conversion.

And now our guidance implies that we will be at the starting end of that range in 2016. Turning next to capital deployment on slide 6.

As Tom mentioned earlier, we remain committed to our disciplined and opportunistic capital deployment strategy. In 3Q 2016, we completed our existing share repurchase program by purchasing 7.4 million shares for $332 million.

In addition, our Board of Directors has approved a new share repurchase program of up to $600 million. Year-to-date, we have already repurchased a total of 14.3 million shares for $650 million, and we continue to view our shares as undervalued compared to our peer group.

Since we started buying back shares in the second quarter of 2014, we have repurchased 23.9 million shares or 16.6% of outstanding shares when we started and returned over $1 billion to our shareholders. Our Board of Directors also approved the initiation of our first-ever quarterly dividend of $0.10 per share.

We view this as an important next step in the evolution of our company and a demonstration of the confidence we have in Spirit's future. For our Fuselage segment results, let's turn to slide 7.

Fuselage segment revenue in the third quarter was $880 million, up from $820 million for the same period last year due to higher production deliveries on the A350 and the Boeing 767 programs, partially offset by lower production on the Boeing 747 program. Operating margin for the third quarter of 2016 was 16.2% as compared to 15.9% during the same period of 2015.

And as Tom mentioned in his opening remarks, we are very proud to have delivered the 500th unit on the 787 program in the quarter, as well as the 100th unit on the A350 program. On the A350 program, we delivered 16 shipsets in the quarter and our deferred inventory decreased by $14 million or $870,000 per shipset.

This is a reflection of the continued progress the entire Spirit Airbus team is making. While this is great progress and we are making improvements in our core performance, just a little caution that this measure is subject to timing of one-time events and during the quarter we did, in fact, record some benefits that had a positive impact on the improvement.

Irrespective, we remain committed and on track to remaining cash positive on this program as we have stated in the past. But obviously, there is a lot more work to do.

Now, turning to slide 8 for our Propulsion segment results. Propulsion segment revenue in the third quarter was $453 million compared to $430 million for the same period last year, driven by higher revenue recognized on certain non-recurring programs, higher production deliveries on Boeing 767 program and the Rolls-Royce BR725 program.

This was partially offset by lower production deliveries on the Boeing 747 program. Operating margin for the third quarter was 17.1% as compared to 22.1% in the third quarter of last year.

This year-over-year change is driven by significant cumulative catch-up adjustments in 2015, ongoing implementation of supply chain initiatives and higher revenue recognized on certain lower margin non-recurring Boeing programs in 2016. On a normalized basis, the year-to-date Propulsion segment margin was 18.1%, which is within the range that I have always provided to you as reference.

For our Wing segment results, let's turn to slide 9. Wing segment revenue in the third quarter was $377 million, up from $341 million for the same period last year due to higher production deliveries on the A350 and the Boeing 737 program, partially offset by lower wing-related activity on the Boeing 777 program and lower production deliveries on the Boeing 747.

Operating margin for the third quarter was 13.6% as compared to 13.4% during the same period last year. And finally turning to our 2016 guidance on slide 10, our revenue guidance for the full year of 2016 has increased to be between $6.7 billion and $6.8 billion.

On EPS, we are also increasing our guidance to $3.65 to $3.80, and finally we're increasing our cash flow guidance to a new range of $400 million to $425 million. Our guidance continues to be based on an effective tax rate of approximately 31%.

So now, let me hand it back over to Tom for some closing comments.

Thanks, Sanjay. In closing, I want to reiterate three key messages.

First, we had a strong performance year-to-date, and we raised full-year guidance to revenue, earnings and cash; second, we completed the $600 million share repurchase program, and we announced a new $600 million program; and finally, we initiated our first quarterly dividend of $0.10 per share. So now we're happy to take some of your questions.

Yes. Good morning.

Good morning, George.

Sanjay, can you tell us where the 87 pool wound up and what the new block size is and what kind of margin you are accruing under new block size? Thanks.

Sure, George. George, as we've always said in the past, we laid out a plan in the first block if you remember back in 2013.

And throughout the number of quarters that we've been providing information, we've been on track on that plan. You saw that all the way through last quarter.

This quarter, as we closed out that block, we were very, very close as we closed out that block. There was no material impact that changed.

So that's the answer to the first block. As far as the 787 – the second block is concerned, what we've established initially today is very similar to our first block and we've established a block of 500 units.

That seemed the right thing to do. And so that's what we have established today.

Like I have said to you many times in the past, we will not get into program-by-program margins, so I am afraid I can't talk about margins on the 787. What I can tell you is we've got appropriate and conservative accounting application of our guidance and that's what's included in our current year guidance.

Okay. I'll stick with the one question and I'll get back in the queue.

Thanks, Sanjay.

Thank you, George.

Lucy is on for Cai. Good morning.

Hi, Lucy.

Hi. Can you maybe just talk a little bit about the one-time benefit you had on the A350 program?

What was that attributable to and how do you see that program turn cash positive in 2017, the trajectory there?

All right. Lucy, let me talk and then I think Tom will also talk a little bit about some of the things that we're doing very actively on that program to manage our costs.

So as we've always said, in fact when we talked about the establishment of the forward loss last quarter, I think we told you that over the next 700 units we expect to recoup about $450 million which is about $650,000 shipset on average. And we are making really, really good progress on that.

And again, Tom will talk to you a little bit about some of the operational things we have been doing. Now, that measure though has some lumpiness associated with it because sometimes you have certain transaction costs like supplier, payments for supplier corrections.

Sometimes you'll also have lumpiness associated with certain expediting or certain air freighting and things like that. So there are a number of things that go into that measure.

And last but not least, it's also subject to the number of units that you deliver in the quarter, and some of them can just be a timing of one or two days inside or outside the quarter. So it's a good measure.

It's an appropriate measure for you guys to keep up – keep track up of how we are doing. But it does have some lumpiness in it.

And a few of those things did happen this quarter that gave us a little benefit. But the more important point here is that we are absolutely on track.

The teams are making good progress on the A350 program. We continue to work on our cost reduction initiatives, on our rate ramp up initiatives, on certain engineering and other kinds of changes that we try and manage our costs with.

So that program is on track and we expect do exactly what we laid out in the second quarter long-term.

Let me just add to that, Sanjay. Because the performance this quarter was good, and you saw that it was positive, but there were some one-timers.

The good news though is as we look forward operationally, we're going to be positive on that program by the end of this year going into early next year. And we've made a lot of operational changes that are driving that improvement.

I think one thing is we put one of our most senior managers – a very experienced guy – Terry George, as leader of Kinston, and he's introduced a lot of disciplines. He's really an expert in composite fabrication, and he's brought some new operating metrics, new dashboards, new processes on the floor.

He's also been able to identify some specific improvements. For example, we use bladders in the stringers as we make the composite panels.

And what he's been able to do is help us get a new source of supply for that. They are less apt to leak, they last longer, more cycles, they're cheaper.

So overall that's driving a lot of improvement. The other thing he's doing is introducing new inspection processes.

And – for each panel there is between 80 and 90 different layers of composite resin that we apply. And we have to do an inspection for each of those layers.

And what Terry is doing is introducing new methods to do that so it can be done faster and more efficiently that will take a lot of time out of the process. So we're already to rate 8.4 on the A350, and that's going to continue to go up as rate increases for Airbus.

And so the team down there is really doing a strong job operationally. I'd also say, I'd like to point out, that in the aftermath of Hurricane Matthew this year, there was a lot of rain storms.

The area around Kinston experienced a lot of flooding, and the team did a terrific job in addressing that. We lost power for a little while but they got back on track and they've been really working extra hard to make up all of those deliveries and keep Airbus on track.

So, really, just like to call out that the team down in Kingston for a great performance that they did.

Very helpful. I'll pass it on.

Yes. Thank you.

When you look at what you did on cash this quarter in terms of completing the share repurchase authorization, issuing a new one, doing the dividend, it appears as though things are going much better than even you thought it would be on a long-term cash basis. You mentioned the A350, but can you talk about it, Tom, when you look at the outlook right now compared to what you saw a quarter ago, what is different and what gave you more confidence to make these moves on cash deployment?

All right. Well, as we talked about, first off, when you look at the rate increases that are coming up on some of our core programs like the 737, the A350, the A320, that gives us a lot of embedded organic growth.

And so that is very positive. The other thing is, as Sanjay mentioned, we've been really pushing hard on our cost reduction programs.

And so as we look at our supply chain and the work we've done with our clean sheet process and help we've provided in buying material to our supply chain, we've been able to negotiate with our suppliers, in a very mutual way, some long-term improvements. And that is driving down cost reduction, which is improving our cash flow in the out-years.

So, it's really those – those are the two main drivers. And then the other thing is as we look at the business, it's performing very well in terms of some of the new ideas in terms of programs that we are bidding on.

And so we have a lot of, I'd say, confidence in the growth outlook over and above the rate increases that we see.

And when you talk about that, does that include potentially some new content at Airbus?

Yes, that would be one of the goals. We signed the deal with Airbus last quarter and, I think as I mentioned, the relationship is improved.

They're asking us to bid on a number of new work packages. And so as we look at Fuselage, Wing, and Propulsion, all three of those are areas of interest, and we have some active discussions going on with Airbus.

We had a lot of exchange of technical information and we're going to bid aggressively to win some of those work packages. The other thing is we're going to look inorganically at horizontal expansion for companies that already have work programs with Airbus.

So, that will be one of the areas as we think about inorganic expansion that we focus on as well.

Okay. Great.

Thank you.

Thanks, Doug.

Good morning.

Good morning, Greg.

I just wanted to go back to – you finished the last question talking about inorganic growth. When I think about this quarter, you initiated the dividend and stepped up share repurchases.

How should we think about capital allocation going forward and allocation for M&A, share repurchase, and dividend policy going forward?

Well, the good news is we felt very confident with our cash flow this quarter after doing a thorough review of the business. But we continued to see our shares as undervalued throughout the quarter.

So that's why we were buying, and we exhausted the previous authorization of $600 million by spending the $332 million this quarter. So the Board felt confident to initiate a new share repurchase program and also to initiate the dividend.

So, as we've always said, our goal is to generate 6% to 8% free cash flow per year as a percent of revenue and to be disciplined and balanced in terms of capital allocation. That includes the share repurchase program and now we've added a dividend to that.

Now we started off fairly modestly at about $0.10 a share per quarter, that's about 0.8% yield. Our goal would be as we get stabilized is we'll look to increase that on a regular and consistent basis going forward.

And we have some targets in mind in terms of allocation of the free cash flow. In terms of other things, we are going to of course continue to fund our internal needs for capital and facilities to meet rate requirements.

So that's always going to be priority. In addition, as we think about investing in the business there are some R&D programs, and that's a way that we differentiate ourselves, so that's a priority.

Really, the last thing is, opportunistically, M&A. As I mentioned, we look at horizontal expansion in terms of expanding work scopes with Airbus, we'll also look at some military opportunities.

And I think also importantly as we look at our business, we are very good at fabrication of components, in addition to making large structures. We're one of the biggest in the world at that.

Tier 2, Tier 3 aerostructures businesses tend to be very good margins, and that's an area that we will also look. But I think it's important to realize that as we consider M&A, the returns will have to meet our target thresholds.

Buying our own stock right now is a very good investment because we continue to think we're undervalued. So if we do look at M&A, it will have to be something that targets a strategic priority like getting us into a low-cost country, expanding work with some key suppliers, moving, perhaps, into military or vertically integrating.

But anything that we do would have to meet our return thresholds and be better than alternative uses of the cash.

Thank you.

Hi. Thanks for the time.

Good morning, Rajeev.

Good morning Sanjay. Actually, Sanjay, a question for you.

In terms of the updated free cash flow figures, you noted that you are within that 6% to 8% target. Do you see that new level as a place to grow off of as we look forward?

And then maybe just some color on some of the building blocks for free cash flow going forward. So CapEx, I think, you talked about the A350 already, but advanced payments and anything else I may have missed?

Sure. So, Rajeev, I am almost going to go back three years since I joined, I mean, we were barely producing any cash.

And so our first step was to sort of stabilize sales, focus on cash flow, then lastly we started talking about this being good metric not just that we shared with you, we shared this internally inside our company, in our internal goals and things like that. So I think it's a strong foundation.

And first, we have to get to those 6% to 8% and stabilize at that 6% to 8% and then we will talk about improvement beyond that. But, right now the 6% to 8% is the right place for us to be, particularly when we benchmark ourselves against our peer group or benchmark ourselves against some of the best players in aerostructures.

How do we get there? Again, like Tom just talked about, there has been a lot of focus on cost.

And if you remember going back two or three years we started off with everything from labor, then we started focusing on overhead and all aspects of overhead, things like centralization activities that we launched. And then we have been – for the last year and a half been very actively working on our supply chain and all the things that we buy.

And, yes, that manifests itself in improvements on programs like the A350 as well as all of the existing programs that we're currently performing well on. At some stage towards the end of next year our advances that we owe Airbus will also conclude and that will be another part of the step in that journey.

So, overall, we've tried to take costs down in every aspect whether it was financing and interest expense, whether it was overhead, whether it is labor, supply chain, and so on and so forth. And we've also tried very hard to make sure that our investments in ourselves and our CapEx is done with a good return on investment.

So all of these things are the foundation of why we believe we can get to that 6% to 8%.

And just a brief follow-up to that. In terms of being able to grow off of the level that you end up at this year, do you feel comfortable that you'll be in that position, Sanjay?

I think we have said this Rajeev, in the past, that we're not going to give guidance for 2017 other than we have said that we believe that 2017, in cash, will be better than 2016 because we are on this journey.

Another thing I would add to that, Rajeev, is that as we look at our cash flow going forward, even with the share repurchase and the initiation of the dividend, we still feel like we have enough dry powder in the event that we need to do an acquisition or that an opportunity presents itself. So based on our leverage and our cash position, even with the capital allocations that we have in place, we still see a lot of dry powder to do acquisitions if the opportunity presents itself.

Very helpful. Thank you, gentlemen.

Good morning.

Good morning, Sam.

Good morning, Sam.

If I can just follow-up on one of your comments, Sanjay. You said that the supply chain, you've been going after it for about a year and half, I guess.

Can you just talk in general supply chain where are you in the process in terms of how far along, what are you asking for? Is it just price or are you changing terms?

And then if you can somehow talk about the magnitude of any impact of concluding agreements in the third quarter as to what it did on the P&L this quarter?

Okay. Well, Sam, we've talked about this at length.

And unfortunately or fortunately – firstly, supply chain is the biggest bucket and so it presents a huge opportunity. Unfortunately, it's not something that you see massive and immediate sort of step down because it involves thousands of part numbers and then hundreds and hundreds of suppliers that have current contracts that take some time to migrate into improvements and lowering costs.

So one of the initiatives that we started a year and half ago was to try and establish what we call as clean sheet. It's not a new or novel process, it's just merely deconstructing the value of what we are buying into its various category of labor and material and make verses buy verses fly ratios and so on and so forth, so that's a huge endeavor.

Try and imagine thousands and thousands of parts where we've gone back and done very detailed analysis in terms of what would be an ideal machine to machine things on, what would be the amount of – what would be the rate at which we take material off, what the material should cost, what the labor should cost in various parts of the world and so on and so forth. What that allows you to do is to have a really honest conversation with suppliers and then work through a process to not only convince them but work with them to make sure that we achieve close to those goals.

Now as we do that, you see the benefits as we execute some of these contracts but as you know we execute in blocks and as those new pricing becomes in effect, it gradually works its way into our performance. Now, I talked about in my prepared remarks that we continue to make investments in certain of our segments, those will be investments.

The investments are in doing a clear sheet; the investment are in working with suppliers, sometimes with inventory, sometimes with moving parts, sometimes with helping them. And that's the kind of stuff that's going on right now.

We have a long way to go, Sam, this is nowhere near done. It does have a lot of opportunity and we're working really hard on this process.

Sam, let me just add to that. In terms of these clean sheets, I think of it as reverse engineering.

I mean, Sanjay was describing it, we go back and look at every part we buy and we reverse engineer to look at how much material is in it, how many hours does it take to make it, what type of machinery do you need, what sort of overhead is required. And we're able to get to some pretty good estimates of what the cost should be.

And then, we can validate that by comparing it to some of our own parts. And that gives us a real strong basis for starting the discussions with our suppliers.

And to give you an example of the types of actions that we've been taking. So, for example, with one complex assembly there were a few different suppliers.

We were able to consolidate the volume to one and get a very significant decrease. So, about 35%, 40% decrease.

In another situation, we moved a part from an existing supplier to one in a low cost country and got about a 40% savings. A third example would be where we would go to a supplier and they buy a lot of material, but they buy it on a smaller scale than we do at Spirit.

And so, we're able to actually leverage our sourcing scale to provide them assistance. And another thing we've done is we've in-sourced some work.

As I mentioned, we have some very strong internal fabrication capability. And if we see a supplier struggling on quality or getting up to rate, we can in-source it and augment that.

So, through all those things we're able to drive this because I'd say we're probably 30%, 40% into this journey. We've got a very disciplined gated process to track all the projects.

And when we do start to transfer work, and this is important to both Boeing and Airbus, we have an even more detailed gated process with specific deliverables that we track on a weekly basis to make sure that any work we transfer goes through a very thorough process. There is a lot of discipline and rigor, so that we don't make mistakes and don't put the supply at risk.

So those are some of the methods that we've been using to drive this. This is an important process for us both operationally and strategically.

Thank you.

Thanks very much, and good morning.

Good morning, Seth.

Sanjay, you talked a little bit earlier about the 787, the new block. I was wondering if you can talk a little bit about the cash flow profile of that block over the next couple of years that we've seen.

There were price step downs toward the end of the first block that led to a little bit of cash burn as you had long anticipated. Are we kind of through those and you have an opportunity to generate a little bit of cash at the beginning of the second block or what sort of the cash flow profile there?

That's a good question, Seth. And again, listen, the 787 program is an important program for us.

We continue to work on our costs very hard along with Boeing. And I've got to tell you we worked very collaboratively with them, and we're making good progress on this.

Not to completely duck your question, Seth, but like margins, I'm not going to get into program-by-program cash flow, that's not what we are going to try to do. I can tell you that the second block, we've made the right estimates on our cost, we made the right estimates on our revenue.

Those will be factored into our guidance that we gave you as a company. And you know at this moment you saw how we performed on the first block that should give you a good indication about how we continue to manage our costs down.

But going forward, it's like any other program. It's a program that we continue to perform on and whatever the cash it generates or burns in the period of time will be based into our guidance.

Let me just add some more to that. This is a program where, obviously, improving performance is going to be important in driving down cost.

And just since January this year, the 787 team and Spirit has been able to take out almost 22:00 hours out of the production process, which is about 17% of the direct labor, so we've been making progress. We have monthly calls with senior Boeing leadership.

Sanjay and I both sit at them along with the program manager and the Boeing leader at Spirit. And we go through all the different elements of cost on the program to continue driving it out.

And I'd say, as Sanjay mentioned, it's been very collaborative, a lot of effort on both sides at very senior levels to drive down cost that will improve the cash flow as we get through the second block.

Great. Thank you very much.

Thank you. Tom, Sanjay, Ghassan, good morning.

Good morning.

Good morning.

Tom or Sanjay, I wanted to follow-up on the remarks you were making about acquisitions, M&A in the motivation there. From your remarks, Tom, if I got it right, it seems that you're looking for assets to buy that just add technology to your portfolio.

Is that so? Or is there a need here in your view to have a larger scale?

I'm trying to get a sense of the scale and size of the opportunity you are considering, and if you prefer you'd consider something very large? And lastly, is the intent here maybe to expand your footprint in Europe?

I would say the interest on M&A is not just to grow for the sake of growing; it's to add capability and strengthen ourselves as a company. So, if you think about the focus areas, in terms of horizontal expansion in the core, if we can find a company that would enable us to get on a very attractive program in the commercial aerospace or even in military that would be one criteria that we'd look at.

Another thing we'd be looking at is does it help expand our footprint into a low cost country? So Southeast Asia or Mexico, those would be other considerations particularly as we think about, as I mentioned, building out our fabrication business and vertical integration both to secure our own supply and drive down costs but also to take advantage of good margin opportunities in that segment of the industry.

So those are some of the criteria that we're focused on. In terms of the size, we'll be opportunistic.

My expectation is that it will be bolt-on type acquisition opportunities that would be of more immediate interest. Something bigger and more transformative, perhaps in the future.

But right now we're really focused on execution. We think of ourselves as an aerostructure business and acquisition opportunities that will be of interest will expand our capabilities in aerostructures, either core bolt-ons, horizontal expansions into military or vertical expansions into fabrication.

That's great color, Tom. Thanks very much.

Hi, Good morning. It's actually Jon Raviv on for Jason.

Good morning.

Tom, can you just address some of the organic growth opportunities that you have beyond rate and beyond the defense programs that you're already on, perhaps some opportunity to expand aftermarket as a profit lever?

Organically, as I mentioned, we're bidding on a number of programs with Airbus, also with some of the business jet makers, as well as military. So the good news is that there are a number of packages that are out for bid, and we have some significant capabilities and we're actively bidding on those.

But you mentioned aftermarket, and that's a good point. We have, because of our advanced structures capabilities as well as our composite fabrication capabilities, some really unique repair functions and capabilities.

And so that gives us an opportunity to look at the MRO segment. Now as you know, earlier in the year, we came to an agreement with Boeing, is we no longer sell spare parts that we make directly to airlines.

We sell those to Boeing. That's still going to a big business for us though.

But the opportunity we see is really in the repair and the MRO activity that goes beyond spare parts. And so that could be with airlines, it could be with mod shops, it could be with structural repair organizations, a number of different opportunities.

I mean as you know, aftermarket is a fast growing area. It tends to be good margins.

We have some unique capabilities and we do see growth opportunities in that area over and above the work that we do with Boeing to sell them spare parts.

Thank you.

Hi. Good morning.

Good morning, Ken.

Tom or Sanjay, I just wanted to ask a question on the 737. Deliveries were down slightly in the quarter compared to last year.

Can you just refresh us on what your rate is today on the 737? Was there anything unusual in the quarter?

And then specifically what rate you're capitalized at and how we should think about the CapEx to support, obviously, rate 57, assuming Boeing ultimately gets to that rate and you get to that rate over the next one to two years. Does CapEx for this program – does it imply a step up into 2017 at least directionally, how should we think about that?

Right. Well, first of all, for the quarter, 737 deliveries were on track and according to plan.

So, nothing there to look at the variation. We're right now building at a rate of 42 per month, which interestingly is almost double to what it was when Spirit first carved out of Boeing 11 years ago.

So that's just an interesting fact, we're double the rate. We are on track to get to 47 by early next year, and the capital for that is already well into place in terms of tooling and capital equipment as well as facilities.

And we've also – really are deep into the planning for 52 and 57, and have already incorporated the capital requirements for that into our long-term plans. Now, we're in discussions with Boeing about some of the specifics of that, but we're well into the planning and very much on track to be able to meet Boeing's targets in terms of schedule for 47 later this year, early next year, 52, and then 57 after that.

And can you at least comment directionally? Does CapEx on this program step up in 2017 relative to 2016?

I know you're not giving 2017 guidance yet, but at least directionally on that program?

Ken, I won't get into program-by-program CapEx. I think what we have commented to in the past is that our CapEx that you've seen, the $250 million to $300 million of guidance that we have given for this year, it's probably likely to be in that kind of a range for a couple of years, because there are two aspects of this.

If you remember we are also investing in our defense programs, and the second aspect is – CapEx is quite lumpy and that's why we give a fairly wide range. You've seen our CapEx in the third quarter was only about $52 million, but like again, when I was – in my prepared remarks, I kind of mentioned to you that the fourth quarter is likely to be a heavier CapEx quarter, so we'll see.

But it's in the same range as what we have today, and that's how we want to manage our process.

And again, as we looked at our long-term financial forecast and presented it to the Board and made the decision about capital allocation, we incorporated the rate requirements through 57.

Great. Thank you very much.

Hi. Thank you.

Good morning.

Good morning.

Tom – good morning. When you talk about bidding aggressively for some Airbus work or even moving into some more adjacencies, how do you leverage some of the lessons you learned from your aggressive bidding on 78 and some of the Gulfstream products to not repeat the same mistakes by maybe getting a little bit ahead of yourselves (47:59)?

It's a great question. Certainly we made some mistakes early on and we've learned a lot.

And part of it is estimating in terms of how we estimate the cost of a program over time. But also some of it is based on program management after we get into a program and also change control.

I think as we look at some of the early contracts that we signed and we look at the terms and conditions, they weren't really optimal and it was just a level of inexperience back then because it was new to us. But we've learned from that.

And so we are probably better at estimating; we're better at terms and conditions on contracts; we're better at change control, which is a key element; and we're better at program management. I think the combination of those things should enable us to perform better as we go forward.

So those were some painful lessons, but the good news is that we learn from them and we'll be able to apply that earning in the new programs that we win going forward.

I Got it. So it's not too much execution, so much as it is – well, a little bit execution but also knowing what you're getting into ahead of time?

Exactly. By the way – and I am not trying to criticize the people at Spirit at the time because they really expanded the Company, got us into some great programs that we are on today that are going to be really foundational for the future of Spirit – but we had some hard lessons and the good news is we have been able to learn from those.

Okay, Tom. Thanks.

And then, Sanjay, I apologize for this basic question, but just to clarify did you extend the 87 block rather than close it out? I mean, obviously, you extended to 350.

What happened to the 590 some odd million of deferred that existed on the existing – the prior 87 block? Thanks.

Sure. No – Hunter, we did close out the first block and we started a new block with 500 units initially established on the second block.

And like I've said earlier on the first block, our cost estimates came in very close to what we had established. So I think like we had been performing through several quarters where we – you saw that, we closed the block very close to where we had anticipated to be closing it.

Ghassan, I think everybody seems to be down in Orlando today enjoying themselves on some kind of a holiday or Halloween party because I'm going through the long list here. So I don't know, Tom, if you have closing comments because I think we are closing out on some of the questions here?

Okay. Well, again, really very pleased with the strong quarter.

And we were able to, as a result, increase our guidance on cash flow, on revenue, and earnings. In addition, because our stock continues to be undervalued, we bought back shares during the quarter at an average of about $45 per share.

And we exhausted the share repurchase program that we had announced in January. So as a result, we talked to the Board and we announced a new $600 million share repurchase program.

And then in addition, we feel confident about our long-term health as a business and the Board has approved the initiation of our first-ever quarterly dividend of $0.10 a share. So those would be the three points that I think are the main takeaways from this quarter, and we appreciate the opportunity to lay that out to you, and thank you very much.

Thank you, Tom. That concludes our earnings call for today.

Thank you for your participation.