Spirit AeroSystems Holdings, Inc. (SPR) Q1 2024 Earnings Call Transcript
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Overview
The earnings call reveals significant financial challenges, including a high forward loss of $495 million primarily from Airbus programs, negative EPS, and increased cash flow usage. Despite a 19% revenue increase, the lack of specific financial guidance and ongoing pricing negotiations with Airbus create uncertainties. The Q&A highlights unresolved issues with Airbus and unclear management responses, contributing to negative sentiment. Given the market cap of $3.8 billion, these factors suggest a negative stock price reaction of -2% to -8% over the next two weeks.
Key Financial Performance
Revenue $1.7 billion, up 19% from Q1 2023; primarily due to higher production on Commercial programs and increased Defense & Space revenues.
Earnings Per Share (EPS) Negative $5.31 compared to negative $2.68 in Q1 2023; adjusted EPS was negative $3.93 compared to negative $1.69 in the prior year, driven by higher unfavorable changes in estimates and significant forward losses.
Operating Margin Lower compared to Q1 2023; primarily driven by higher unfavorable changes in estimates, with net forward losses of $495 million and unfavorable cumulative catch-up adjustments of $39 million.
Free Cash Flow Usage of $444 million compared to $69 million in Q1 2023; primarily caused by disruption to the 737 production and delivery delays.
Cash Balance $352 million at the end of the quarter; reflects unfavorable impacts of the disruption experienced on the 737 production and delivery process.
Debt Balance $4.1 billion; includes cash advances from Boeing totaling $425 million to address high levels of inventory and contract assets.
Commercial Revenue Increased compared to Q1 2023; primarily due to higher production across most programs, despite 737 disruption impacts.
Defense & Space Revenue $251 million, increased due to higher activity on development and classified programs; operating margin of 13% increased compared to Q1 2023.
Aftermarket Revenue $96 million, up slightly over the prior year; primarily due to higher spare parts sales.
Operating Highlights
New Inspection Process: A fundamental change in the inspection process has been implemented, aligning Spirit and Boeing efforts into a joint inspection, which was industrialized in 34 days.
Leadership Change: Gregg Brown has joined as SVP for Global Quality, bringing extensive experience in airline safety and quality.
Boeing Production Rate: Boeing has deliberately slowed 737 production below 38 per month to incorporate improvements to quality and safety management systems.
Airbus Negotiations: Ongoing discussions with Airbus have yet to result in a commercial agreement, impacting delivery targets.
Cash Advance from Boeing: Boeing advanced Spirit $425 million to offset the lack of payment for completed fuselages due to the new inspection process.
Production Rate Adjustments: Current production rate for 737 is approximately 31 aircraft per month, with 787 deliveries expected to be 55 units in 2024, down from 80.
Governance Changes: A new governance model is being implemented, moving authority and resources to the factory floor to enhance safety and quality.
Risk or Challenges
Supply Chain Challenges: Boeing is modifying 787 deliveries due to supply chain challenges, which affects Spirit's ability to meet delivery targets.
Production Rate Adjustments: The current production rate for the 737 is at 31 aircraft per month, which is lower than planned, impacting cash flow and inventory levels.
Financial Losses from Airbus Negotiations: Significant losses were booked due to ongoing negotiations with Airbus, particularly on the A350 and A220 programs, leading to forward losses of $373 million.
Inspection Process Delays: Changes in the inspection process have delayed delivery acceptance, resulting in a buildup of undelivered units and negatively impacting cash flow.
Increased Operational Costs: Factory and supply chain costs have increased due to alignment with higher production rates that are now delayed, further straining financial performance.
Liquidity Concerns: The company is focused on liquidity due to high levels of inventory and contract assets, lower operational cash flows, and decreased deliveries.
Cash Flow Usage: Free cash flow usage for the quarter was $444 million, significantly higher than the previous year, primarily due to disruptions in the 737 production.
Guidance & Outlook
Operational Stability: Spirit's primary objectives include stabilizing operations, delivering on customer commitments, and strengthening the company financially.
Quality Improvement Initiatives: Implemented a new joint inspection process with Boeing to enhance product conformity and quality.
Leadership Enhancement: Gregg Brown appointed as SVP for Global Quality to strengthen leadership and governance.
Supplier Coordination: Close coordination with suppliers to mitigate short-term disruptions and ensure optimal inventory levels.
Defense and Aftermarket Performance: Strong performance in Defense and Aftermarket segments, executing commitments operationally and financially.
737 Production Rate: Current production rate at approximately 31 aircraft per month, expected to remain lower than planned throughout the year.
787 Deliveries: Anticipating approximately 55 deliveries in 2024, down from the original plan of 80.
Free Cash Flow: Negative free cash flow usage of $444 million in Q1 2024, primarily due to 737 production disruptions.
Debt and Cash Position: Ended Q1 with $352 million in cash and $4.1 billion in debt, with a $425 million cash advance from Boeing.
Future Financial Outlook: Expect continued negative cash flow impacts throughout the year due to production and delivery delays.
Shareholder Return Plan
Cash Advances from Boeing: In April, Spirit entered into a Memorandum of Agreement (MOA) with Boeing to provide cash advances totaling $425 million. This advance is intended to address Spirit's high levels of inventory and contract assets, lower operational cash flows, decreased deliveries, and higher factory costs attributed to the change in the product verification process.
Key Q&A
Earnings Word Cloud
SPR Transcript
The earnings call reveals significant financial challenges, including a high forward loss of $495 million primarily from Airbus programs, negative EPS, and increased cash flow usage. Despite a 19% revenue increase, the lack of specific financial guidance and ongoing pricing negotiations with Airbus create uncertainties. The Q&A highlights unresolved issues with Airbus and unclear management responses, contributing to negative sentiment. Given the market cap of $3.8 billion, these factors suggest a negative stock price reaction of -2% to -8% over the next two weeks.
The earnings call shows strong financial performance with significant revenue and EPS improvements. The Boeing MOA positively impacted margins and cash flow. However, management's refusal to provide specific 2024 guidance introduces uncertainty. Despite this, the positive financial results, including record high revenue and improved margins, suggest a positive stock price movement. The market cap indicates a moderate reaction, likely in the 2% to 8% range.
SPR Report
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