Q2 2020 Spirit AeroSystems Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Spirit Aerosystems Holdings Inc.'s second quarter Twentytwenty earnings Conference call. My name is Debbie and I'll be your coordinator today.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event is being recorded I.
I would now like to turn the presentation over to Ryan Avi Director of Investor Relations. Please proceed.
Thank you Debbie and good morning, everyone. Welcome to spur second quarter 2020 earnings call I, My Navy Director Investor Relations and with me today, our spirits, President and Chief Executive Officer, Tom Julie.
<unk> Senior Vice President and Chief Financial Officer, Mark such and ski.
After opening comments my Telemark regarding our performance and outlook, we will take your questions in order to allow everyone to participate in a question and answer segment [noise].
We ask that you limit yourself to one question. Please before we begin I need to remind you don't any projections or goals. We may include in our discussion today are likely to involve risks, which are detailed in our earnings release in RCC filings in the forward looking statement you know this web presentation.
In addition, we refer you to earnings release in presentation for disclosures and reconciliations.
Non-GAAP measures, we use when discussing our results and as a reminder, you can follow today's broadcast in slide presentation on our website under investor dots Cordero Dot com without I'd like to turn the call Overdrawn, Chief Executive Officer, Tom Dooley.
Thank you Ryan and good morning, everyone welcome to spirits, 2022nd quarter earnings call.
We continue to see the impact of the do challenges of the Max grounding in Cobot 19 on the global aviation industry.
While still grounded was encouraging to learn about the successful Max certification flights and the subsequent comments issued by the Epay that demonstrate progress toward returning to Max safely to service.
It's very in a proud partner on the Max program, we supply 70% of the structure of the Max and it has historically represented 50% of our revenue.
On June 19th Boeing directed us to produce 72 units this year down from the previous rate of 125 for 2020, and the 606 units that we produced in 2019.
We continue to monitor rates closely with our customer.
Since the Max is safely back in service and Boeing has a better view of their delivery schedule, we will work with them to determine the right level of production in 2021 and beyond.
Covert 19 remains a significant challenge to the aviation industry.
It's been a major impact to airlines with a steep drop in global passenger traffic that fell by more than 90% in April and may compared to last year.
Currently most industry analysts expect recovery to take several years with domestic travel rebounding first.
Followed sometime later by recovery in international travel.
According to IMS data airlines around the world have lost more than $415 billion of revenue in 2020 and more than 85 billion in profits at one point more than 16000 or 65% of the global installed fleet was grounded.
Airlines are deferring deliveries given their economic position, which is impacting production rates on all programs for both Boeing and Airbus.
In the short term, we're likely to see continued turbulence and we'll have to navigate our way through the uncertainty.
However in the long term, we believe the aviation industry is resilient and will return to robust growth.
Projections for long term air traffic are still strong and both Boeing and Airbus each retain a significant backlog.
Well many layers of uncertainty remain the impact of the cobot 19 pandemic continues to be felt on many industries and ultra is everyone's lives.
Given the very dynamic nature of what we're experiencing and the fact that both Boeing and Airbus completely stopped all production for a period of time during Q2, our Q2 Q2 deliveries decreased by 88% from 2019 and 51% from Q1 2020.
Just had a negative impact on our financial condition. In response, we have focused significant energy on reducing our cost to align with these lower levels of production and preserving liquidity.
Since the beginning of the year around the world, we have reduced the head count of our commercial aviation programs by more than 8000 people or about 44%.
Earlier in the year, we announced layoffs in Wichita in Tulsa, a 3200 employees.
We also eliminated more than 200 contractor positions.
In addition, we implemented a voluntary retirement program, which reduced our workforce by more than 850 employees.
We've also put salaried employees on a four day work week through the remainder of the year.
And reduced executive compensation by 20%.
When Boeing and Airbus announced full production suspensions in March April in June we initiated furloughs for thousands of hourly workers associated with those programs.
We also announced permanent layoffs for an additional 1400 people in May.
In July we also decided to reduce the Kansas and Oklahoma workforce by an additional 1100 people.
These were all difficult decisions. In addition, we have cut non labor cost significantly in line with the production cuts.
We've also been assessing our global footprint and machine capacity.
In mid July we made a difficult decision not to renew the San Antonio Texas facility lease. This site was acquired in July 2019 for me ITD manufacturers parts for the 77 in the Max programs as well as for other defense and commercial customers.
Over the next few months the team will work to ensure an orderly transition using our established transfer processes to move work to other spirits sites or suppliers.
We will continue to assess our remaining capacity and take the necessary actions to adapt to the current environment.
In total on an annualized basis labor and non labor, we have taken out more than $1 billion of costs or 40% of nonmaterial base of our business.
During this period when production rates are low we're also taking additional actions to drive productivity and efficiency.
One major initiative is our new global digital Logistics Center, which has consolidated more than 450000 square feet of warehouse space on our campus into a highly concentrated area of 156000 square feet.
The facility can hold more than 2 million parts for all spirits, which topped based programs and will be a key asset capable of processing thousands of parts and kits per day when production returns to higher levels.
A second major initiative is an effort to reconfigure our 737 final Assembly line.
We are shifting sub assembly work out of our main production facility into different locations that enable more lean and efficient operations. One example is the wing box of the 737 fuselage, which we are transferring to our Tulsa facility.
Second example is a 737 forward few slides, which will move into a forward fuselage center of excellence on our Wichita campus.
Both of these moves will free up space and our main production production facility and enable more lean operations.
We're also developing a new automated production line using spirit proprietary technologies to improve the assembly of single aisle airplane floor beings.
The project is estimated to take a current cycle time of more than seven days per assembly down to just hours for that same assembly.
The project will also facilitate a significant reduction in work in process inventory and reduce the required footprint by more than 6000 square feet.
And our Airbus operations, we are implementing and enhanced composites oil production line that saw the completion of its first preproduction chipset. This quarter. Each athree hundred 20 has 10 spoilers.
This highly automated line is expected to reduce the cost of each spoiler shipset by 30%.
The press were team is targeting to have first part qualification component started in August followed with a trial fit of the spoilers at the Airbus Bratton facility at the end of September.
On the quality front, we also have a number of exciting initiatives in various stages of development that will drive many benefits as we increased production rates.
One example is a blue light scanner that is capable of inspecting the fuselage skins for many attributes including faster location whole location and fastener had high.
The scanner method is estimated to reduce the 767 fuselage skin inspection time by over seven hours from the manual process and will allow us to send data digitally directly to our customer.
Another example, where technology will enhance our inspection processes over large surface area is assistant being developed on top of spirits cognitive robotics platform.
The system will scan entire sections of a fuselage stronger results in a database in general automated inspection results that can be used for predictive analysis and process control.
We're also taking this time of lower production to improve our inspectors were constructions. We're overhauling our instructions to develop clear visual guidelines to highlight what should be inspected the tools needed for that inspection and the location on the air frame.
The new visual instructions are a great improvement that will drive a reduction in inspection cycle times.
Our plan is to continue to evaluate and implement similar initiatives in this time of lower production rates. So that when commercial air travel does begin to recover we will be able to maintain spirits position as a leading aerostructure supplier to Boeing Airbus and our defense customers.
We also continued to grow and diversify.
The spirit team continues to demonstrate our strong value proposition to our defense customers.
For example, we recently achieved a production milestone with the 10, CH 50, Threek K production fuselage delivery.
The team continues working at a steady pace. During this low rate initial production phase to fabricate the composite Ford fuselage and assemble the whole fuselage with parts from other suppliers. We are proud Sikorsky partner in support of the Marines and their missions required transport of more than 27000 pounds of payload with us.
Heavy lift helicopter.
In June we hosted a visit by the US Air Force Secretary Barbera.
That same day spurt was awarded in $80 million contract allocation through the defense production Act Titlethree funding provisions the contract will allow spirit to expand its domestic production capability and capacity for advanced tooling composite fabrication and metallic machining as well as enable us to maintain and protect critical work.
Force capabilities caused by the cobot 19 disruption.
We've been able to start work on projects related to the $80 million and we'll see some benefit in 2020, However, we'll see a larger impact over the next few years.
The defense pipeline is strong and we continue to be actively engaged in different in discussions with the defense primes and how to leverage the available capacity at spirit to support them.
We are position and ready to compete for new growth opportunities to support the spirit defense business.
We also recently announced two exciting new agreements. The first agreement was with Virgin Hyperlink.
This collaboration will leverage spirits engineering certification supply chain fabrication and assembly capabilities to assist in burgeon hyper loops development of a new mode of transportation that can travel at speeds of up to 700 miles per hour using electric propulsion through a low pressure too.
The second agreement was with Ariane, which expanded our partnership for design to production of the forward fuselage for the last two supersonic business jet.
This partnership is another exciting opportunity for spirit to work with the company on the leading edge of development in the aviation industry.
Our composite engineering and production leadership fits well with the development of the forward pressure few slide for the Aireon asked to program. We look forward to continued collaboration and innovation with both companies to move these products forward in their development.
Also I wanted to share an update on how we are helping our nation combat the global Cobot 19 pandemic.
We're working with by Air the largest pure play respiratory company in the world to produce ventilators for global distribution.
Today, we have produced and shipped thousands of ventilators to the U.S strategic stockpile us customers and customers around the world. We now have over 800 workers assigned to the project and the capability to produce over 300 ventilators per day.
The new factory that we have established will help by air fulfill their order a producing over 22000 ventilators for the U.S. government.
And fulfilling other orders around the world.
Spare continues to increase our ventilator production rate on a steady pace. This project demonstrates the transferability of spirits capabilities in design engineering Industrial engineering supply chain management fabrication complex assembly and functional system and testing to the manufacturer of other highly sophisticated products.
Our other efforts to grow and diversify our the two acquisitions that we have announced.
We continue to see the long term strategic value in both the ASCO and BARDA Aerostructures acquisitions and remain engaged in discussions with both parties on the conditions needed for closure of those deals.
The long stop date of the ASKO acquisition agreement is October Onest, we're still working to meet the conditions of the European Commission on that deal.
The last update for the move from BARDA acquisition agreement is October 30, Onest, we continue to work with them Bharti eight to meet those conditions precedent some of which remain outstanding.
With that ill ask Mark lead you through a detailed second quarter 2020 financial review Mark.
Thanks.
Good morning, everyone.
I hope, everybody as well and staying safe.
As Tom mentioned in his opening remarks spirit as well as the overall aviation industry has been significantly affected by Covance nineteens impact to global passenger traffic and demand for aircraft.
We've continued to adjust as our customers have reduced their production rates and we will continue to make every effort to adapt our cost structure to lower production levels to ensure that spirit remains financially healthy during this crisis.
Now, let's move to our second quarter results.
Please turn to slide four.
Revenue for the quarter was 645 million.
Down 68% from the same quarter last year.
This reduction was primarily due to the lower production rate on the 737, Max resulting from the continued grounding of the program.
And the significant impacts of coal with 19 pandemic.
Production rates across all of our commercial programs were negatively impacted by cobot 19, and the shutdown of commercial airplane production at Boeing and Airbus facilities for several weeks during the second quarter.
We delivered 19 737 Shipsets this quarter.
Compared to 147 in the same period of 2019.
Overall deliveries decreased to 159 shipsets.
Compared to 449 Shipsets in the same quarter last year.
Let's turn to earnings per share on slide five.
In the quarter, we reported earnings per share of negative $2.46 compared to a $1.61 per share in the same quarter last year.
Adjusted EPS was negative $2.28 per share compared to positive EPS of $1.71 in the same period of 2019.
Second quarter adjusted EPS excludes the impact of planned acquisitions restructuring costs.
And the noncash voluntary retirement plan charges.
The second quarter operating margins declined as a result of costs incurred related to the Boeing directed 737 Max production suspension.
And subsequent low rate of production.
As well as impacts of Coven, 19, pandemic and the associated production shutdowns at Boeing and Airbus.
We recognized excess capacity costs of $83 million.
A normal production costs related to cope with 19 of 19 million.
Restructuring expenses of 6 million for cost alignment and head count reductions.
And loss on disposals of 23 million related to certain long lived assets on the Boeing 787, and Airbus Athree hundred 50 programs.
Further we recognized a noncash charge of 15 million, resulting from the voluntary retirement program that was initiated during the first quarter of 2020.
In addition to the expenses I. Just described we also recognized forward loss charges of 194 million during the quarter.
Primarily driven by lower future production rates announced on the 77, and Athree 50 programs as well as unfavorable cume catch adjustments of 38 million related to the recently announced production rate cuts on the majority of our other commercial airplane programs.
You may recall.
As part of the last quarters earnings review, we provided preliminary forward loss estimates, resulting from the lower production rates announced by Boeing and Airbus.
These estimated forward losses were based upon data, which became available after the first quarter balance sheet date of April 2nd 2020.
Throughout the second quarter that dynamic of demand for wide body aircraft continues to evolve from the facts and assumptions originally made as a result of the uncertainty regarding the timing and resolution of Coven 19 in the ultimate impact on the aviation and travel industries.
We evaluated additional schedule and production demand information as well as other market and analysts data and as a result, adjusted the expected results on the 77 and Athree hundred 50 programs to include a lower rate of production.
For a longer duration compared to the previous forecast.
This change in judgment from the first quarter, resulting in a negative impact of fixed cost absorption on the 787 and Athree 50 programs and as a result, the forward loss recognized for the second quarter of 2020 were 103 million on the 77 program and 84.
Moving on the Athree hundred 50 program.
Our year to date tax rate is approximately 38%.
As a result of the passage of the Cures Act, we have an opportunity to carry back our anticipated 2020 net operating loss two years, where we paid tax.
At a rate of 35%.
The Cures Act net operating loss benefit and the impact of state tax credits, resulting in a favorable year to date tax rate compared to our expected normalized rate.
Now turning to free cash flow on slide six.
Free cash flow for the quarter was the use of 249 million.
Compared to a source of 192 million in the same period of 2019.
This year over year decrease is primarily due to the negative impact of working capital requirements and significantly lower deliveries across all of our commercial airplane programs.
Excluding the 215 million of Boeing advance payments received in the first quarter.
Free cash flow improved by $325 million from the first quarter.
This quarter over quarter improvement was the result of a decrease in working capital requirements a reduction in capital expenditures as well as the cost reduction actions, we've taken throughout the first half of the year.
We expect to realize further benefits from these cost mitigation actions, which were required to align our cost base to the new lower production rates.
We anticipate cash flow usage to continue to improve in the third and fourth quarters.
However, as a result of lower production rates due to covert 19, we expect our cash used to continue for the remainder of the year.
As Tom mentioned, we have focused significant energy on reducing our cost to align with lower levels of production.
And to preserve our liquidity.
In addition to the actions already discussed.
We are taking advantage of the cares act to provide.
Additional liquidity flexibility as we have elected to defer the payment of employer taxes payroll taxes of which 50% is required to be paid in 2021 and the remainder in 2022.
We will continue to evaluate and take the necessary steps to adjust our cost base in order to minimize cash spend in light of the challenging environment.
Additionally.
We previously announced the need to revise our debt covenants as we projected a potential breach in the fourth quarter of this year.
Over the last few weeks, we've worked tirelessly with our banking groups and finalize the amendment on July 30 Onest.
The amendment provides covenant relief through 2022.
Additionally, as part of the terms of the amendment the available revolver decreases to 500 million and we've paid down 100 million of the term loan.
We appreciate our bank group support throughout the process of amending our credit facilities.
We ended the quarter at 1.9 billion of cash.
We believe our liquidity is sufficient to complete the acquisitions.
If the commit conditions of both deals are met and fund our operations over the next 12 months.
Now, let's turn to our fuselage segment performance on slide seven.
Fuselage segment revenue in the quarter was 327 million down compared to the same period of 2019.
Primarily due to lower production volumes on the 737, 77, and Athree hundred 50 programs.
Operating margin for the quarter was negative 77% compared to 12% in the same period of the prior year.
The segment recorded 31 million of unfavorable cumulative catch up adjustments and 105 and.
155 million of net forward losses.
The decrease in segment profitability and operating margin was primarily a result of for losses recognized in the 77 and Athree hundred 50 programs lower profit recognized on the 737 program, including excess capacity cost of 100 or of 51 million.
As well as a normal cost related to covert 19 of 11 million and loss on disposals of 23 million related to certain long lived assets on the 77 and Athree 50 programs.
If we turn to the propulsion segment performance on slide eight.
In the second quarter propulsion revenue was 170 million down compared to the same period of the prior year, primarily due to lower production volumes in the 737 program.
Operating margin for the quarter was negative 10% compared to 19% in the same quarter of 2019.
The segment recorded 5 million of unfavorable cumulative catch up adjustments and 16 million of net forward losses.
The decrease in that segment profitability in operating margin was primarily a result of forward losses recognized in the 77 program lower margin recognized on the 737 program, including excess capacity cost of 18 million.
As well as of normal cost related to covert 19.
Okay.
Now, let's turn to wing segment performance on slide nine.
During the second quarter Weve wing revenue was 123 million down compared to.
The same period last year.
Primarily due to lower production volumes on 737, Athree hundred 20, and the Athree hundred 50 programs.
Operating margin for the quarter was negative 35% compared to 14% in the same quarter of 2019 to segment recorded $2 million of unfavorable cume catch adjustments and 23 million of net foreign losses.
The decrease in segment profitability was primarily a result of forward losses recognized in the 77 program lower margin recognized on 737, including excess capacity costs and abnormal costs related to covert 19 of $19 million.
In closing.
These last several months have been very challenging and we have had to make some very difficult decisions.
While the dual challenges of the Max grounding and Coven 19 are out of our control we are taking the necessary actions to adapt to the rapidly changing environment.
As we have demonstrated throughout this year, we quickly implemented cost mitigation actions and we are constantly assessing our business against the current environment and potential future scenarios.
Identifying areas of improvement in developing plans for various scenarios.
The second quarter was one of the toughest quarters in our history.
As we continue to move forward our focus is on addressing the challenges that remain ahead of us over the next couple of years.
With that I will turn it back over to Tom for closing comments. Thanks, Mark. The Cobot 19 pandemic has resulted in a significant reduction in air traffic that has had a major impact on airlines and aircraft production. It will take several years for production to resume to the previous levels of 2019.
We will also continue to support Boeing as they work with the Epay to return the Mac safely to service in the meantime, our focus remains on managing our cost to align with the lower production rates and preserving liquidity through these uncertain times in our commercial business.
Our team is making great progress to adapt with new better ways of working while continuing to keep all of our employees safe and healthy.
We also see opportunity to expand our defense business and leverage some of our open capacity to demonstrate our unique capabilities to customers willing to partner with the team that has decades of design and manufacturing experience.
While we will have course corrections as we navigate through the turbulence of Covance, we're confident in the resilience of the spirit team our focus will be to maintain sufficient liquidity and continue to adjust operations to the evolving environment with that we'll be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using his speakerphone. Please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
Please limit yourself to one question.
If you have further questions you may reentered the question queue.
At this time, we'll pause momentarily to assemble our roster.
The first question comes from Jon Raviv with Citi. Please go ahead.
Hi, Ken are you on near me.
Yes, I was wondering are sorry about that.
Thank you.
Well Mark can you just go over some of the things we talked about in terms of liquidity. So first of all cash breakeven I think previously you were talking about mid 21.
Should we expect cash use to continue through all of next year as well now and also you mentioned that you know you show good about liquidity for supporting operations for the next 12 months.
What I will point over the next 12 months do you have to decide if you have to do something more from a liquidity perspective and go back to the market.
And then does renegotiating M&A plan a role in that I know your covenants changes I mentioned that topic as well. So so the question on cash and liquidity. Thank you.
So I'll start and mark and add on but in terms of.
Cash flow, we did say at the last call based on the production levels that we had at that time that we thought we would start to get into cash flow positive in 2021 with the reduction on the 737 from what was 125 down to 72, it's going to push that out. So we expect next year the.
Cash burn will be significantly less than it was this year, but it will still be a cash burn.
But we are looking at 2022 as when we will be cash flow positive again.
Now in terms of cash operations and liquidity position Mark did mentioned that our liquidity position is good for 12 months. We don't expect that we will get to a position where we would need to raise additional capital based on the current projections in the scenarios that we have.
We have a very clear line of sight to the 12 months it actually goes beyond that.
But we just wanted to bounded by saying, it's very solid for the next 12 months. Even if we included the full amount of the deals that are currently under consideration.
Mark anything else that.
No I think Tom covered it.
We we have a line of sight to the liquidity needs over the next 12 months or so.
We do have access to capital markets if needed.
And that's a lever that we can pull if if if we need to at some point time in the future.
But based on the current production rates I think Tom Summarizer situation pretty well.
Thank you.
Thanks.
The next question comes from Greg Conrad with Jefferies. Please go ahead.
Good morning.
Given the number of initiatives in the prepared remarks, I mean, if we look at Q2, there are several costs around forward losses abnormal costs in excess capacity costs with these initiatives how do we think about areas such as the latter to going forward is there a normalized margin target at these lower production rates.
Right well, we did have all of these abnormal events based on the lower production, which drove the forward losses and with this 737 in a much reduced production capacity that also drove some abnormal costs.
The cost actions that we've taken are meant to offset that and to really align the business to these lower levels of production.
And our goal with all the initiatives that I described is to continue to improve the productivity and the efficiency of our operations. So that when production rates do return to higher levels will be more productive and be able to achieve higher levels of margin all things being equal. So if you recall.
Last year, when we were at 52 rate of a production.
Our targets for margins were 16.5% and our cash flow targets were 79%.
Our goal would be to get back to those levels of margin and cash flow when say the Max gets back to the the forties in terms of production rate.
Now that's about where we were in 2016 course in 2016, we also had much higher rates of of seven of Triple seven production, which we won't have this time around but again the goal of all those productivity initiatives was to reset the business. So that we can be more profitable with better margins at lower rates of production and.
We would see a return to our previous targets when we get into the Fortys on Max production, along with all of the other projections for the different programs of Boeing and Airbus in defense.
Thank you.
The next question is from Seth Seifman with JP Morgan. Please go ahead.
Hey, good morning, this has actually been arnstein on for Scott.
Hey, good morning.
Hey, I was wondering if you could kind of give us a little bit more color add some insight into how you're thinking about the mass production ramp that production rate through the end of year is implied at about five to six units per month. So.
So I guess, how do you kind of thinking about your ramp back up and your production system for a target maybe one or two years.
Great well one of the things as we've aligned to our 737.
Employment levels to a production rate of about seven so the 72 aircraft order that we have from Boeing for 2020. When you look at the months that are involved in it aligns to about seven aircraft per month, now Boeing announced its own production rate targets on its earnings call.
We will lag them a little bit because as you know we have ship sets that are stored on our campus fuselages plus thrust reversers pylons wing slas and flaps and so forth. We've got about 130 of those Stuart the goal is to burn that buffer off over the next 24 months, which will mean that will lag.
Following by about five aircraft per month during this ramp built but they the good news is that buffer will give us a chance to manage our production increases in a in a more methodical way. So Boeing has some pretty sharp production rate increases over the time period, because we have that buffer, we'll be able to smooth it out.
Out a little bit the goal is at the end of that 24 months, we'll have about 2025 units remaining in buffer that will create a permanent cushion for the production system, but but that's basically the the rate ramp that we expect as we're going to lag Boeing over the next 24 months as we burned down our own inventory, but that buffer will allow us to go up and.
Great and manage that more smoothly and efficiently.
The next question is from Myles Walton Lithia. Please go ahead.
Good morning. This is the low said along for miles.
When you look good morning.
Just wanted to do it at the 77 I guess.
Previously you said you thought it would be.
You.
Fortune five in 2023, I guess any updated thoughts around when that might be now.
Yes, so with the.
The lower production rates that were that were announced by by Boeing.
Obviously, what we've done is.
We've looked at our our contract accounting estimates over over that timeframe.
And so the accounting contract or or block, if you want to call it that extended.
And because of the lower production rates and that's going to drive some additional fixed costs into into the block, which obviously caused.
More pressure.
As it relates to the current block that we have and so we've updated that and as a result was that we recorded a forward loss of about $103 million due to the.
The block extension.
A lot of that cost is noncash, it's it's depreciation expense that we're going to incur.
On the units over the next several years.
So I would say 20 or 30% of that is cash burn over the next couple of years, so fairly minor.
But we still do have a good line of sight at line unit Fortino five.
To hit our breakeven target.
On on the 77 program and so really a couple of things it allows us a little additional time.
To further develop the.
Cost reduction initiatives that we have we have a variety of different projects that were being implemented over the next couple of years and that's going to give us.
A line of sight to breakeven, but this lower production rates are going to put some pressure and thats why we recorded before loss, but I'd just say that the original projection was we were going to hit Fortino five mine unit to 14 of having about the 2023 timeframe, that's going to get pushed out to the 2024 timeframe. So that's what my.
That said is we'll have additional time now to get to our cost reduction targets. So that byline unit to 14 of five price is exceeding cost. The other thing I would say is before then there's 77 program is burning cash for every unit so by reducing the number of units between now and mine unit to fortune of five we actually burn less cash.
As a result.
Okay, great. Thank you.
Thanks.
The next question comes from Carter Copeland lift Meli. Its research. Please go ahead.
Hi, guys good morning.
When you heard harder.
Sorry for I'm trying to listen to calls here. So I apologize if I, if I Miss something here, but the on the Bharti a transaction I think you said that there were still some closing conditions to be satisfied.
I'm not giving elaborate on on what those are a give us some color on what remains bright.
So that will be appreciated and then secondly.
On the Triple seven.
And the push out there I don't know if theres any.
Difference and working capital there versus your prior plans or.
Help us think about where things stand on that program with respect to the revised schedule. There. Thank you.
Okay. All right. Thanks, Carter and we are aware that there are a couple other aerospace companies going at the same time, so apologies for that conflict, but thanks for joining us.
With regard to the deals the contracts for both the ASCO annual Vardy deals are public. So you can see the conditions as a as we have discussed there are conditions to close both deals and if the conditions are met we are obligated by those contracts to close the deals.
However, the conditions are not met by the long stop dates the deals will terminate by their terms. So we're working with both them Bharti and ask go to meet all of the conditions.
The conditions are not yet met for either deal and as I mentioned in my remarks, the long stop date for Ascos October Onest and along stop date from BARDA is October 30 Onest.
So that's where we're with regard to the deals with regard to Triple seven Boeing has announced now that the triple seven dash nine will push out in terms of its entry into service and that they will have lower production levels for the triple seven program. So that does weak because we have our fixed cost already in ERP.
Place that does create.
More fixed cost for the program at lower numbers of units.
So we've taken that into account in terms of our forward projections and in terms of our cash flow projections and so we're comfortable with with those projections and we've built in to our plans what we have heard from Boeing in terms of what they are expected production rates are for the Triple seven program and further entry into service for the Triple seven Dash nine.
With respect to your working capital balances I'm, just curious if you're running ahead.
And that stretches out is there a working capital burn off.
That needs to happen as rightsize that just trying to get a sense of as you step from 20 to 21.
There is something that we should be aware of well in general on working capital Carter.
We did accumulate more inventories, particularly over Q1 in Q2, just because everybody had been set at 52 and for the 737 and for higher rates of of of production on across all the programs. So the inventory has built up through the first half of the year. It will now start to burn down because we've adjusted all the peos for the disc.
Accrete purchase orders and all the min Max levels for inventory.
Because the production levels are lower that inventory burn down will take longer than we had previously planned but that's the that's the working capital equation based on the production rate. So it rose up during the first two quarters of this year, we'll start burning it up but the burn off will be slightly slower because production rates now are lower across all programs and we have previously forecast.
Carter's specific to working capital on Triple seven X., I think thats, where you're going.
I would tell you that.
We've been shipping product to Boeing so we're not can we're not carrying a significant amount of work in process or parts inventory specific to triple seven acts the will be a little bit of a drag into 2021, and we won't be able to fully burn that off until 2022.
And the lower production rates next year will be a bit of a headwind to both gross profit and cash.
We're still coordinating with Boeing and trying to get the final schedules and as Tom indicated that at a macro level, we've kind of factor that in but.
I wouldn't anticipate any significant carrying costs as relates to working capital.
Related to the Triple Sevenx weren't.
We're in pretty good.
Concert with Boeing as it relates to what their needs were.
We'll just factor than it will be a little bit of a headwind for us.
Great Thanks to the color gentlemen.
The next question comes from George Shapiro with Shapiro Research. Please go ahead.
Yes, good good morning.
George.
When you make a statement that you'll be cash positive in 22, what are you assuming in terms of rates going up on that on the Max I guess, particularly.
Right, we just really built in out what boeings projections are in terms of what they've committed publicly and how that will translate for us. So we're really just taking their there theres their forecasts and plugging it in.
Yes, George I think what.
Be little bit more specific Boeing on their earnings call said that they would be at 31 a month in the early part of 2022.
And so as Tom indicated we do have fuselage stored here, so we're going to lag them, a little bit by five or six shipsets.
But if they if they go to the 31 at the beginning in 2020 to the back half a 22 will be higher than that and and so think about those types of production rates in 2022, which will give us line of sight too.
Slightly positive cash flow in that timeframe and as I mentioned are working assumptions are that we burn off our excess buffer by middle of the 24 months. So middle of 22, and so the back half of 22, we would be basically back in lockstep with Boeing on rate.
Okay that helps forge.
Yes, just a follow up on a separate subject the receivables were down like a little over $200 million. It in the quarter I assume that you still been selling receivables at what point is that end or is it just keep going going on because this is a significant.
Amount of dollars that helps to cash flow in the quarter.
Yeah, George just.
I think if you look a little little deeper at the numbers our revenue in the second quarter was roughly 40% lower than the revenue we recorded in the first quarter our receivable balances were.
The drop in the receivables from the first at the end of.
March to the end of June.
Receivables were down 39.7% so the drop in receivables were in concert with the drop in revenue.
And.
We've we've communicated with with you guys publicly we do take advantages the supplier financing program that Boeing offers us.
But the reason I would say that the receivables dropped in alignment with the revenue there was no nothing different from that perspective.
Okay. Thanks, very much mark.
Sure.
The next question is from David Strauss with Barclays. Please go ahead.
Hey, good morning, guys assessing that acres on for David.
Hey, good morning.
Hey can you.
Thanks on the forward loss charges for 70, 70, 350 year forecasting in Q3 why is that there's so much smaller than.
What you saw Keith I think you said.
Remarks, there something about adjustment for at a lower wide body demand and you saw thank order is added or anything else going on there yet so.
Basically what happened is.
We we took into consideration.
In the first quarter earnings call Boeing said that they were going to change their production. They were going to go from 12 to 10, and then they updated and said production rates and eight seven would be 10 for the remainder of this year and then they would move to seven a month middle of next year.
In their second quarter earnings release, Dave indicated that that the production rate will now dropped faster than that and that 77 production rates starting the middle of next year will be down to six so post our balance sheet data was a subsequent event what we've done as in the out years, we've kind of updated our forward loss.
Yes.
And it's just the disclosure will book it in the third quarter. It's just the one unit, it's going from seven a month to six month and so that's why the 77 forward loss that we'll book in the third quarter is lower than what we just book now and Athree hundred 50 is the same way.
Airbus indicated that for the balance of this year and next year instead of producing Athree hundred fiftys at six a month or going to produce in that five month. So the forward loss again that was announced after we closed our quarter.
And we've come up with initial estimates of the additional for losses to go just to tweak the system in factor in the lower production rates.
Okay got it thanks, and I guess, just a quick follow up how do you think about.
When you could get to those new.
Production rates on 77, Athree 50 are you, there yet or sort of how long the take to get down there.
Yes, so on Athree hundred 50, we're right now producing roughly at five airplanes per month delivering to our customer schedule.
And.
I would say in the.
We're going to be producing about 10, a month on eight seven between now and the ended the year and then as we move into January production will shift on the six month.
Got it thanks guys.
The next question is from Doug Harned it.
Bernstein. Please go ahead.
Good morning, Thank you.
Hey, Doug.
Hi.
If we go back to when the world those more normal.
You would work through accounting blocks on each of your programs you negotiated pricing on these.
Talked earlier about the 1400 five block on the 787.
Can you give us a sense of what are the what are the discussions like now with Boeing and Airbus in other words.
All of the predictability that was there before has changed.
How do these accounting block Steven.
Stay the same and.
And from the two Oems when do you typically.
Get an idea of when a rate change or some change in the program structure would happen how much lead time do you get.
Well.
Doug you're right that times are definitely not normal and the accounting blocks, if just become longer the accounting blocks on the 737 for example for assay six so six or about 200 units and last year, we were doing that in less than a quarter now that accounting block could take us all the wait till the end of next year. So.
So the accounting blocks of just spread out.
The dialogue with both Boeing and Airbus I would say has been very strong both of those companies have held number of of supplier calls and they've even held some calls for the bigger suppliers, which are smaller which allow for more discussion and questions and on those calls they.
They they obviously can't disclose information that's not public but what they can do is talk about scenarios and asked for feedback and give their impressions of the market and what they're doing in order to estimate production one of the things that they've been doing both of the company's is having detailed discussions with airlines and essentially rebuilding their delivery.
Schedule aircraft by aircraft airline by airline based on what aircraft Airlines can take and when they can take them.
And so they've been very open and transparent with with us and with the other suppliers. So that we get some indication of when they might make some rate changes.
What to expect so.
They they they've got their disclosure requirements. So they can't disclose things that are not public information, but they can discuss scenarios with us and they have done that and then they have provided us with in this environment with as much lead time as they practically Ken.
And then we've had to adapt and as you've seen when we get production rate changes, we've adapted very quickly to adjust our cost base to those with announcements of of employment reductions or facility closures or or the reduction of of of non labor costs. It does the only thing I would add to what Tom said is.
Yeah.
Yep constant communication I think coated provide I mean has resulted in a lot of uncertainty and so we have received more production schedule changes. This year that I think we've seen in the last five years. So it's really challenging from a financial planning standpoint, where you.
Go through and new model, what the what the impacts of that are and then a few weeks later you get another update and so it's a constantly changing scenario for mustn't scenario planning and so as Tom indicated we are moving very quickly to reduce our head count we started that back in January but.
But there's always a lag between when you become notified of production schedule change and then implementing the whether to head count reduction or some other action that you have so we're continuing to chase the costs down and it's always a lag between when we become aware of the production schedule change and our ability to take those costs out.
Out in some instances via the Warren process Theres, a 60 day notification process. So were the cost reduction activities lag a little bit and so we're chasing that cost down, but I think we've gotten pretty close to the bottom on 737 for the remainder of the year. So the cost reduction activities that we've taken we should see.
The some level of stability at least for the next six months I think next year is still.
A lot of uncertainty out there, but I think that will allow us and time to really start taking the benefits of the of the cost reduction activities that Tom just talked about and we should see a little bit more stable performance in the back half of the year and but it's a dynamic environment, we understand that and we just have to be agile. So when we do get the if.
Patient is take the appropriate action to adjust the production rate and also addressed our costs to the new productions level, but.
It would seem so hard here is when.
You were talking about the steps, you're taking with totally makes sense with related related to lean manufacturing. So when you're back up that should lead to better performance, but how do you do that and that was what.
What kind of rates are you thinking though for the 737 of the 320, because where we're not going to be back at 57, a month for the 737 or 63 month for the 320 for quite some time I would expect.
That's right I mean, Boeing has indicated with their scheduled for next year Airbus has done the same.
Based on what they currently no, but I would say, Doug Theres still lot of uncertainty in the market in terms of the Max's not back into service yet still don't know how the whole cobot 19 pandemic will play out I think as those things get better understood.
Boeing and Airbus, both will be able to project their production schedules better and therefore, our production schedules.
But we just have to stay agile in the meantime, it's a dynamic environment.
Okay. Thank you.
The next question that's been Mariana Perez Nora of Bank of America. Please go ahead.
Hello.
So my for any questions going on the related to the assumptions on that.
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Well those patients with the aircraft are Navios, Paul how can you manage.
Yes, that's often long term relationship that fine to identify I tend us like offset solve indicate chart.
On the site that did not sell.
I'm sorry could you could you repeat the question again I didn't quite get sure so based on that as.
Right now.
Is there anyway that you can.
And then indemnified spirit in the future.
Okay.
Right well.
As Tim.
So.
We we work closely with our customers in this case Boeing.
On all of the changes that that come our relationship is governed by a contract a sustaining contract that went into effect when spirit split from Boeing back in 2005.
One of the things that we did negotiate a while back was in extension of our pricing agreement and now it goes all the way out to 2033.
And with it with Boeing on the 737, it's essentially index to rate. So as the rates go up Boeing gets more of a discount but as the rates go down than spirit gets a higher price and that's one of the ways that we've been able to insulate the 737 Max program from these production changes.
And if I went to think about the cash margins you dead on San for 10, now starting to that agreement what is the.
Range.
Well, we don't really talk about margins for individual programs, but again on an overall basis spirit has indicated that our target for for margins as 16.5%.
And obviously, the Max being half our revenue has a big influence on that as I mentioned earlier, our goal would be to be backup to that range of margins. Once the productions get back into the Fortys per month 42 per month.
Okay, and then the last line.
Yeah, we're on their learning platforms so far.
How do you think.
Yes, so dependent on buying what are the plans.
Super Thank you.
On the cycle.
Thats right.
Yes, I am in terms of diversifying from Boeing.
Yes, well first of all bones, our largest customer and we are very proud to be allowed one of their largest suppliers and we've always worked extremely well with Boeing and want to continue to grow with them. They are very important customer and we have one additional work over the years at the same time it.
It's clear that that concentration is something that we want to change and we want to have a more diverse and broad based customer group and so we have been working over the years to diversify to grow our Airbus content and that was one of the reasons that we announced the acquisition Tabasco under the BARDA Aerostructures assets, but we've also been working too.
When new work packages with Airbus and we have been successful in doing that on some wink components and the spoilers that I mentioned earlier.
And in addition, we've been growing our defense business and our defense business. This year is going to grow about 20%.
We have had some significant new wins with the defense primes, we did get that titled Free Award from the Department of defense for $80 million and after the after my acquisition that we completed at the beginning of this year, we're very well position to be a leader in areas like hypersonic weapons. So we see significant opportunity on the defense business and then.
The probably the last area of diversification that I mentioned is aftermarket.
We've always had a relatively small aftermarket MRO as well as spare parts, we see opportunities for that to grow in the future.
And we have made a number of of changes in that part of the business in order to facilitate the growth.
The next question comes from Robert Springer with Credit Suisse. Thank you.
Please go ahead.
Hi, Good I guess, it's good afternoon here anyway Robert.
Hi, guys, Tom I'm I might've missed this in your monologue and maybe you could get piece together, but I was wondering if I could ask you at a high level.
To maybe give us a reset.
And reconcile.
What you have and I'm talking about.
All of your major Boeing programs, so 3787.
Triple seven to reconcile.
How many shipsets you have on hand, whether they're yours or their boeings.
So we get some kind of sense as to what level of underproduction you need to do on the non next programs right because I imagine.
Word has it there's 57 eight sevens.
In Everett I'm sure some of those are taken but others aren't.
And I imagine now with the change in the Triple seven rate, we're going to have a timing issue there as well. So we could just level set this whole thing.
Yeah, it's fairly straightforward on the on the Max as I mentioned, we had about 130 shipsets in in buffer, but Boeing owns all of those so our terms and conditions were fob. When we finished the product they took possession of it they paid us after the payment term.
Period, and then we start them in place and we do that on behalf of Boeing but Boeing owns those so all of the buffer is owned by Boeing on the seven in Triple seven we essentially ship those products as we produce them, we don't hold any inventory at all at spirit in Wichita on those programs.
Okay. So that.
So there's nothing there is theres no cash to release anywhere.
Not not on those Boeing programs in terms of inventory that that spirit is holding yeah, I mean, Robert we actually have.
Product work in process in the factory just based on the flow of the factory, but no. We don't have any completed units just sitting here waiting to be delivered.
We produce what Boeing ask us and we deliver and for the most part all of our product is fob our plant.
The origin.
So.
As Tom indicated we're not hearing a lot of finished goods inventory.
Because of the production slowdowns correct, Okay fair enough, but they are so the question you already addressed on the Youre difference in production between your rate Boeing's rate on the Max how would we think about that same question on the other two programs eight seven and triple seven other words, if we look out there.
We just ship to their demand there is no buffer at all.
Yes.
Well, except for the fact that again.
They have inventory clearly have inventory so.
Your rates and there's won't match.
Well again, Robert I guess, let's just talk about eight seven specifically so we have a production schedule from Boeing.
Starting in the third quarter, we're delivering at 10 airplanes per month.
Our accepting 10 airplanes per month that plan continues until the end of the year starting in January of next year.
The plan is for us to produce at six aircraft per month and deliver to Boeing six aircraft per month.
Our production system is tied to the delivery schedule.
I would say, it's our production system is tied to their production system. So you probably should just differentiate between deliveries and production yeah. So our production on ATM and Triple seven is absolutely lockstep with Boeings. The delivery may be differ if they are have they have their own finished goods, but our production schedules are absolutely lockstep with them.
Thats built and you're being paid for production so you're fine there.
Correct.
Okay, and then same applies to triple seven.
Yes.
Okay.
Thank you.
Okay.
The next question is from Hunter Kiang with Wolfe Research. Please go ahead.
Thank you everybody for forget may on.
Tom You mentioned the calls with Boeing and the scenarios that you guys consider on these calls when you talk about these scenarios to the extent, obviously you can share those conversations with us.
Is there a scenario where the triple seven axis is delayed indefinitely or maybe permanently and I know you mentioned market, though the work in process you have there being not particularly significant but how many other investments or even assets do you have tied up in the trip Sevenx program right now thank you.
Well.
We have not had any discussions with Boeing about anything on the triple sevenx other than that what they have release publicly now so nothing nothing different there in terms of the working assets we have invested in.
The appropriate capital for and infrastructure for the Triple Sevenx.
Boeing owns the tooling on those programs as the sustaining program.
But we are basically set up to produce to their production levels in the future.
And that investments has already been made so thats past us and when the production rates do increase on that program. We will have the capacity to meet the demand.
Hunter I would also say that.
The majority of the production assets are common for us.
Across the triple seven in the Triple Sevenx, obviously, the big difference on for Boeing is a composite wing.
So we don't have a significant set of production assets just for the triple seven versus a triple Sevenx Theres a lot of commonality, there and lot of interchange so.
I don't I don't think that there would be anything significant if Boeing decided not to do the x.. We would just continue to produce the.
The historical Triple subs.
Okay. Thanks.
The next question is from Michael serum locally with Suntrust. Please go ahead.
Hey, good morning, Thanks for taking the questions.
A little bit late here, but just on the on the two acquisitions, both the ASCO and bombarded can you give us a sense of what the current revenue run rates are quite a lots changed since those have been announced and then even with bomber obviously.
Not having them to sell contract anymore, just does that.
Capital gain anything regarding the contract terms the price being paid just just looking for a little color on those those deals and the trajectory.
Yes, well.
The ESCO deals that when we announced at the public information as revenues were about 400 million Lombardi, a little over 1 billion.
Obviously like the rest of the aviation industry with co bid those numbers will be impacted and we continue to monitor it but it's it's in line with what you'd expect in terms of of the cobot impact, but with the opportunity to recover as production rates recover.
With regard to specific work packages, we've obviously, we keep track of everything.
On the one you mentioned.
Airbus hasn't made everything completely public yet so we're we're watching it carefully and talking to from BARDA about about what the potential impact could be.
Okay would that change any of the terms I mean, what's that presumably those where in the financial projections that button to sell opportunity and granted it was going to be competed I think with with Raytheon so but.
If once you get more clarity from Airbus I mean could that materially changed the the financials valuation and potential price being based so those assets.
Well, we're going to monitor it carefully I mean, there's nothing there is no specific trigger that ties one guy to another.
But it's all about meeting the overall conditions of the dealing as I said earlier, we're working with both ESCO and Lombardi a to meet the conditions are the deals.
Got it thanks guys.
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