Q3 2021 Spirit AeroSystems Holdings Inc Earnings Call
Spirit worked closely with Lockheed Martin to demonstrate our digital design and manufacturing capability and how we can integrate with Lockheed on the development of an advanced demonstrator.
The collaboration and experience gained from this effort will form the foundation for how we bring new products to the market in the future.
Research and development activities are key to our defense and space business growth.
Last month, we opened the National Defense prototype center in partnership with Wichita State Universities National Institute for Aviation Research Nair.
U S. Senator Jerry Moran was on hand for the big event the.
The New center has more than 125000 square feet of manufacturing and lab space covering a wide range of capabilities, including advanced composite fabrication hi.
High temperature testing and non destructive inspection we.
We expect that the development prototyping and industrialization capabilities. The center offers will be key enablers for spirits defense and space growth.
Another defense research and development effort is spirits Belfast role as the prime for the UK as loyal Wingman program called project Mosquito.
The UK selected spirit Belfast in late 2020 for this $42 million program.
With these initiatives in place we remain on track to achieve $1 billion in defense revenue by 2025 at typical defense margins.
Now, let's shift to our aftermarket segment.
The Bombardier acquisition doubled our aftermarket activity.
We were able to combine our repairs for flight control surfaces in the cells for Boeing and the United States with similar lower activities for Airbus in Europe.
Our acquisition of applied aerodynamics added radome repairs that we can now do in both locations.
Then our JV with <unk> provides us a base in Asia in Taiwan, where we can do all of these Boeing and Airbus repairs.
We are targeting aftermarket growth to $500 million in revenue by 2025 at accretive margins.
The addition of these new business activities opens up significant new growth opportunities for spirit in the future.
In addition to capturing that growth we made the decision to align our organizational structure around these three new business segments commercial defense and space and aftermarket.
We also announced that we will change our external reporting structure to these three segments beginning with the 2021 fourth quarter results.
This new business focus will accelerate spirits diversification.
Aspirational, we remain committed to achieve our revenue split in the future. A 40 40 20 across the three segments now.
Now I'll turn it over to Mark to take you through our detailed financial results Mark.
Thanks, Tom and good morning, everyone I hope everybody is doing well and staying safe.
We believe we're taking the right actions to put spirit and are positioned to emerge stronger and maximize the benefits of the recovery is narrow body production rates continue to rise.
Despite the challenges over the last couple of years Spirit has maintained focus on our strategy to diversify and grow.
The three new segments that Tom detailed earlier will position us well and with a sharp focus on how we go to market with new products and services.
We are excited for the change.
And how they will move us forward and our diversification journey.
For the fourth quarter results, we will begin reporting in these three new segments now.
Now, let's move to our third quarter 2021 results.
Please turn to slide seven revs.
Revenue for the quarter was $980 million up 22% from the same quarter of last year.
The revenue increase was primarily due to higher production rates on the 737 program.
As well as increased revenue from the recently required <unk> hundred 20 wing and Bombardier business jet programs.
These increases were partially offset by the lower wide body production rates, resulting from the continued impacts of the COVID-19 pandemic on.
International Air traffic and Boeing's pause.
The 77 deliveries.
Turning to deliveries overall deliveries increased to 250 ship sets compared to 206 chipsets in the same quarter of 2020.
The third quarter 737 deliveries have increased to 47.
Compared to 15 chipsets delivered in the third quarter of last year.
We remain on track to deliver roughly 160 ship sets this year.
Let's now turn to earnings per share on slide eight.
We reported earnings per share of negative $1 nine.
Compared to negative $1 50 per share in the same period of 2020.
Adjusted EPS was negative $1 13.
Compared to negative EPS of $1 34 in the third quarter of 2020.
Adjusted EPS this quarter excludes deferred tax asset valuation allowance and pension curtailment gain.
Looking at our operating margins, we saw improvement in the third quarter to negative 16% compared to negative 22% in the third quarter of 2020.
The cost reduction actions, we've taken over the last year, along with increasing production rates have contributed to the improved result, with lower costs and expenses, including excess capacity and restructuring costs.
We also recognized lower forward loss charges compared to the same period last year.
In the third quarter, we recognized $70 million of forward loss charges compared to $128 million in the third quarter of 2020.
This quarter's forward loss was primarily driven by $46 million in the 787 program.
Most of which was related to the reduction in bowling schedule as well as additional forward loss on the <unk> hundred 50 program also related to the scheduled changes.
Also during the quarter, we recorded 27 million of charges related to litigation reserves as well as an additional noncash valuation allowance of $35 million on deferred income tax assets.
Additionally, other income increased primarily due to a curtailment gain of $61 million, resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition the.
The shorts pension is expected to close to future accruals benefits for all employees, who are members of the plan.
Sector at the end of the year.
Yes.
Now turning to free cash flow on slide nine.
Free cash flow for the quarter was positive $174 million compared to negative $72 million in the same period of 2020.
Free cash flow benefit benefited from $228 million income tax refund.
An additional $70 million income tax refund was received in October which completes the expected full year refund of approximately $300 million.
The $70 million will be reflected in our fourth quarter financial statements and.
In addition, during the quarter, we received $38 million of the $75 million award from the aviation manufacturing jobs protection program.
We continue to expect free cash flow for the year to be between negative $200 million and $300 million.
Let's now turn to cash and debt balances on slide 10.
We ended the third quarter with $1 4 billion of cash and $3 6 billion of debt.
In terms of our de levering, we remain committed to paying down $1 billion of debt over the next three years.
In October we completed the syndication of a $600 million.
Term loan, replacing the existing $400 million term loan due to market conditions, we were able to achieve a reduction in our term loan interest rate of 175 basis points.
Given the lower interest rate environment, we upsized it by about $200 million with the plan to use the incremental proceeds to repay higher interest debt like liabilities.
Third quarter financials do not include this new activity, we expect to close on the term loan in November in the fourth quarter of 2021 financials will reflect the new cash and debt balances.
Now, let's turn to our segment performance on slide 11.
In the third quarter fuselage revenues were up 14% compared to the same period of 2020 pre.
Primarily due to higher production volumes on the 737, and Bombardier business jet programs, partially offset by lower production volumes on the twin aisle programs.
Operating margin for the quarter was a negative 11% compared to negative 23% in the same period of the prior year.
The segment recorded $2 million of unfavorable cumulative catch up adjustments.
And $50 million of net forward losses during the quarter.
In comparison during the third quarter of 2020. This segment recorded $9 million of favorable cumulative catch up adjustments and $92 million of forward losses.
Propulsion revenue in the quarter improved by 45% compared to the same period.
2020.
It was primarily due to higher revenue on the 737 program.
And higher aftermarket sales, partially offset by decreased volume on the triple seven 787 programs.
Operating margin for the quarter was a positive 9%.
This is compared to negative 9% in the same quarter last year.
Increased 737 production and the resulting decrease in that excess capacity costs were the main drivers to the improvement in segment profitability.
The segment recorded $2 million of favorable cumulative catch up adjustments and $6 million of forward losses.
In comparison during the third quarter of 2020, the segment recorded $5 million of unfavorable cumulative catch up adjustments and $15 million of forward losses.
Wing revenues were up 44% compared to the same period of 2020, primarily due to higher production volumes on the 737 and <unk> hundred 20 programs, partially offset by decreased production on the 730 <unk> on the 787 production program.
Operating margin in the quarter was negative 7% compared to negative 14% in the third quarter of 2020.
The increases in segment profitability and operating margin were primarily a result of 737 production volumes and the resulting decrease in excess capacity costs, partially offset by higher cost on the eight 320 program.
The segment recorded $15 million of net forward losses compared to $22 million during the third quarter of 2020.
Beginning with the 2021 fourth quarter results, our reported segments will reflect spirits financial results based on the three new divisions commercial defense and space and aftermarket.
For full year 2021, we expect the commercial segment to make up approximately 75% of our revenues defense and space, 20% and aftermarket approximately 5%.
In closing our collective efforts to overcome the adversity, we have faced over the last few years is starting to take hold and set us up for.
For better times ahead. Despite the turbulence we have faced we are holding course to reach our cash free cash flow target set at the beginning of this year.
Our flight path to a better future is dependent on reaching key way points like growing our defense and aftermarket business and achieving higher narrow body production rates with a sharp focus on execution.
We believe the new segments will give us the proper perspective to navigate through the recovery and position us so that we can emerge a stronger company.
With that I will turn it back over to Tom for some closing comments.
Thanks, Mark the past couple of years have reinforced the need to transform our business and we are excited about the launch of our three new business segments commercial defense and space and aftermarket.
Our commercial segment continues to recover from the dual crises of the Max grounding and the COVID-19 pandemic. These.
These two crises have created the largest disruption in the history of our industry.
During this time our primary focus has been on the safety of our employees vaccinations are a critical part of staying safe and hydro vaccination rates will help accelerate the recovery of air traffic and the global aviation industry.
As a federal contractor, we are working to comply with president Bidens vaccine mandate for federal contractors, which applies to all of our U S workers we.
We are actively encourage all of our workers to get vaccinated or to apply for a medical or religious exemption to date, we are making good progress towards this goal and we will continue working with our Union partners and our employees to avoid disruption to our operations.
With domestic travel around the world recovering faster, we are starting to see narrow body production rates at both of our OEM customers begin to increase we have been working closely with our own supply chain to ensure that we are ready to meet the production targets they have slowed down to us the.
The recovery of narrow body production will benefit spirit since 85% of our backlog.
As narrow body aircraft.
International Air traffic and widebody aircraft production will take longer to recover in the meantime, we will continue to repurpose excess wide body capacity to help grow our emerging defense and space business, which we target achieving $1 billion in revenue by 2025.
With our recent acquisitions of Bombardier aftermarket business as well as applied aerodynamics and the JV with eager.
Our aftermarket segment is on track to achieve $500 million in revenue by 2025.
We also remain committed to paying down the debt we took on during the pandemic and regain our investment grade credit rating.
Our objective is to delever by $1 billion over the next three years and that remains on track.
This past quarter, we refinanced our term loan b to take advantage of lower interest rates and we will use proceeds from that refinancing and cash from our balance sheet to pay down other high cost liabilities.
We also continue to invest in innovation and productivity projects to improve our operations. We expect the actions that we have taken will contribute to our objective of achieving 16, 5% margins as narrow body production rates continue to recover with that we will be happy to take your questions.
If you would like to ask a question. Please this is followed by one, particularly keeping US now if you turn your mind. Please press as possible to what those will help Jerry I was wondering line. Please.
One pivoting to ask a question. Please ensure your phone is on mute locally.
Our first question comes from David This trials from Barclays. Please.
David go ahead.
Okay.
Okay.
Thanks, Good morning.
Good morning.
Hey, Mark could you could you maybe touch on the implied fourth quarter cash flow I think you talked about the $70 million.
Tax refund you Guy you've still got I guess, the $130 million or so pension payment it looks like kind of at the midpoint youre, implying that maybe the cash burn actually is a little bit higher in the fourth quarter than what we've seen in Q2 and Q3 adjusted.
Adjusting Q3 for the tax refund.
Yes, David you've got that right in the fourth quarter, we've got.
I would say two onetime items that will impact our free cash flow.
As you indicated we've got the remaining.
As I discussed around 70 $71 million.
Cash income tax refund that we received here at the end of October.
And so that will definitely be a.
A tailwind helping the quarter, but we will also as we discussed in the past as part of the Bombardier acquisition, we had a commitment to.
To make a.
Onetime payment as part of the acquisition.
And that that's in the ballpark of 135 or so million.
Normal.
Catch up pension payments that are normal in the fourth quarter and so overall we're expecting.
A headwind in the quarter of around $150 million to $155 million right and so.
If you look at.
Where things are at now.
We feel comfortable that we can hit the $2 million to $300 million Theres still some level of uncertainty primarily around 787% in the fourth quarter that could potentially have an impact on the quarter on a free cash flow. So we really haven't tightened that down more I think over the coming week.
We will get a better handle on where where we think that things will end up.
But we're very comfortable that.
Including the cash tax of $300 million that now has been fully received we expect the full year free cash flow to to hit the $2 million to $300 million.
And part of some of the cash headwinds that we saw in the third quarter were as we started the ramp up on the 737 program.
We had to hire workers start building within the line and that drove up some of our contract assets, which which will consume some cash and then as we move into the fourth quarter. We are will start to deliver higher on the 737 program, but one negative is we've got the Thanksgiving holiday, we've got the Christmas holiday in there.
That has a reduction of delivery dates so we won't be seeing the full benefits of the rate break in the fourth quarter will obviously deliver more than the 47, we delivered.
And that will help that will help some in the fourth quarter, but I.
I think that's the way I would summarize it for you.
Okay. Thank you and just as a quick follow up on the on.
On the Max as we think about next year just based on Boeing.
Boeing talking about gain of 31, a month, you're talking about drawing down your buffer inventory too.
<unk> 20 by the end of next year should we think should we be thinking about deliveries in the range of $2 75 to 300 for next year.
On Max.
Yeah. So David this is Tom if you do the simple math, it's in that ballpark, maybe a little higher.
But we'll wait to see where bowling ends up what they have communicated publicly is that they will get to 31 aircraft per month by the beginning of the year will lag them and we will burn down our inventory as we've said we think it will get to 20 by by Q4 of next year.
And so if you add up all those numbers I think the math you indicated gives you a ballpark of what production could be but it really depends on what point does after the first quarter, Yes, I think thats a good directional assumption that you've got there David as Tom said, maybe a little higher when we come back and talk to you. After the first of the year, we'll give you guys more more.
Specifics on.
On our narrow body deliveries, particularly 737% to <unk> hundred 20.
Thanks very much.
Okay.
Thank you David the next question comes from say save money from Jpmorgan.
Your line is now open.
Yes.
Thanks very much.
Good morning.
I Wonder if you could toggle on the 787%.
Two related questions.
Sure.
First of all are there now excess capacity costs.
Related to 787, given how low the rate has has come down to you and then when we think about the fourth quarter and some of the cash impact you talked about there.
What is it related to 787.
<unk> deliveries as an additional rework.
Whats the driver of fourth quarter cash flow there.
Sure Seth.
Yeah.
Specifically on the on the 787, what I was referencing the fact is we're.
We still have product that we're building in the line, we've got work and work in process.
And pray.
Prior to the pause here, we were producing in the factory was flowing at at five aircraft per month.
You saw the number of deliveries that we had in the quarter.
So what that means is where we weren't able to ship that product, although a lot of it is complete.
To collect the cash from Boeing.
And and so the impact of not being able to deliver and collect the cash while still having the work in process and the line is definitely had an impact.
On our third quarter and end with where things are standing in the in the fourth quarter.
When we set the year, we were expecting approximately 15 deliveries per quarter, obviously with the challenges on the program, that's not where we're going to be.
We've dialed down things in accordance with the direction from Boeing to try to minimize minimize the cost.
But I think it's just going to take between now and when Boeing makes the decision to as they are working with the FAA to make decisions to resume deliveries.
That has an impact on our factory and our flow and what we deliver and there is still some level of uncertainty on that and so if we can't.
If we can't get the product starting to flow out of our factory and making deliveries that will continue to provide some level of headwind in the fourth quarter that we were not anticipated when we set our guidance for the full year.
And then on the side of the excess on the side of the excess costs.
I wouldn't say that 787.
Resulting in true excess costs, but obviously anytime you go from producing at roughly five aircraft per month and reduce that to something less than that there is an overhead drag with that and so that has a negative impact which has been which flowed into our 787 forward loss, but I'll also tell you that.
We not only produce fuselages, but we also produce wings and pylons and the slowdown of production. There then has a negative impact on many of our other Boeing programs, which did cause margins to be slightly more depressed in the third quarter.
Probably from where you guys thought things would be.
Alright, Okay alright.
Alright, guys.
Thanks very much.
Sure.
Yes.
Thank you. Our next question comes from Myles was done from UBS. Please go ahead.
Hey, you've got lower federal on for Myles.
Mark if I could just come back to you actually I think you mentioned the litigation charge of $27 million I'm, just wondering where that flowed and if that had anything to do with why the SG&A cost looks so high in the quarter.
Yes.
Youre spot on the additional litigation reserve of $27 million was booked and recorded in SG&A in the quarter.
And so that's the reason why it seems so out of line compared to where SG&A costs were.
In the second quarter. The other factor on SG&A was the Belfast operations are now included in SG&A and they werent there in Q3 last year.
Okay. That's great and then just you mentioned this a little bit of tougher third quarter margins being a little bit lower I guess, how do we think about those margins going into <unk> and then into two.
2022.
Well as production volumes pick up on the 737 and the <unk> hundred 20 programs that will obviously.
Help improve the margins it'll it'll reduce excess cost because production volumes will be absorbing more overhead.
It'll help us on the on the top line and on the bottom line. So as we progress through the fourth quarter with the higher narrow body rates fourth quarter is always a.
Little challenging because of the holidays that you have there.
But clearly as we move into 2022.
<unk>.
As long as the narrow body production rates continue to track to what Boeing and Airbus as communicated on their calls.
We feel very comfortable that we'll see continued expanding of margins as we move into 2022.
But obviously it.
It's going to take us a little bit of time to get back to our pre pandemic Maher.
Margins.
And really what we're targeting based on the current projections are that recovery will cap will occur in 2023, what we've said is we'll be breakeven on an operational basis in terms of cash flow in 2022, and our goal is to get back to normalized margins in the 16, 5% once narrow body production rates increase in for.
The Max that would be at about 42 aircraft per month.
Great. Thank you.
Thank you. The next question comes from sale of <unk> <unk> from Jefferies. Please go ahead.
Thanks, Good morning, guys.
Just following up on David's question.
About the Max ramp into next year, how do we think about the operating margin and free cash flow margin on that program and maybe as a follow up to that I think.
<unk> previously.
Previously talked about hiring.
Net employee.
By 2024 can you remind us where your head count is organically on the Max today, where it was at the peak and where you kind of expect it to go just given labor shortages.
Alright, well in terms of the Max ramp up what we've said is that once we get to a level of 42 aircraft per month, which is about where we were in 2016 is the whole company would get back to the margin targets that we were targeting which is 16, 5%.
So and next year as we've said the goal is really to get back to breakeven from a cash flow basis on an operational level.
So next year is still a.
A transition period.
As the rates recover.
And in the future when they get up to levels like 42 aircraft per month for the Max that's when we would start to see the margins in that 16, 5% level in terms of employees overall.
Overall in Wichita, we have about 10000 employees right now.
Obviously, a lot of those are focused on on our Max production line, but Theyre also working on other Boeing programs, we don't really break out employees by by program.
We did say we are going to re hire 4600 employees over the next three or four years and that really has to do with the fact that we laid off in just Wichita 5200 employees during 2020 with the crisis of the Max grounding and the pandemic. We've recalled to date about 200 of those folks already.
And our goal is to get all of them back as production rates continue but thats, where we are right now the other thing I would say is that that group of employees that we can recall.
We will ensure that we have mitigation to any any fallout we might have from the vaccine mandate as I said, we're working to avoid disruptions and we do have employees that we can recall to help ensure that we don't have disruptions.
Thank you Tim just to follow up quickly the breakeven for 2022 is that a full year number or by year end.
It will be full year.
Okay.
On an operational basis. The one thing I'll just point out Sheila is that we have a $123 million advanced repayment to Boeing that's due next year.
I don't think we're gonna be able to offset all of that so we're just focused on excluding that.
Breakeven excluding.
Got it thank you.
Thank you. Our next question comes from Bill Ahmed from <unk>.
Your line is now open.
Okay, great. Thank you good morning.
Okay.
Going back to the 787, there's so much uncertainty around this right now could you.
Describe to us kind of what your base case assumption is four 787 over the next 12 months because you must have just trying to understand what youre planning assumption is knowing that it might change.
And then also are you what is your involvement in Boeing's work and the inspection and repair on the forward pressure bulkhead for the 787.
Great well in terms of base case, where we're really guided by what Boeing has said, which is they want to get back to five aircraft per month going forward now obviously, they have to restart deliveries and they have to work their way back up to that but we go by with what they provide us in the schedule and.
And that is what they have.
Indicated publicly.
With regard to rework as we've mentioned in conjunction with Boeing and other partners on the program we've done extensive engineering analysis.
To look at the production process on the 707 and basically validate that we're building at two engineering specifications.
And in some cases, we've identified areas, where there is rework that's necessary and we have been starting on that and it's a couple of areas and in the few slides section that we build the forward fuselage.
And that includes this part that you mentioned are forward pressure bulkhead, we've identified what the issues are related to that and we are.
We are preparing to do the rework.
And we've already started it we've already produced the parts that are needed and it's going right on schedule.
If I can just one follow up when you talk about getting to the 16, 5% margin.
One of the things you've stressed is that going through this whole downturn is allows you to take costs out and presumably youll be able to perform.
More efficiently on the other end can you.
Give us a sense of.
Of where those opportunities are in other words, what will be different when you come out you talked about automation at Prestwick. For example, but is this something we should expect to be more in propulsion system fuselage systems, if I want to use the old segments weighing systems is it more at one facility or another.
How should we look at.
Where are these improvements should come out over time right.
The improvements are really across many of our facilities. So.
So for example in Wichita, Sam mentioned, the global Digital Logistics Center.
Our brand new warehousing system that increases our efficiency. We've got 8000 kits for 90000 parts that we can deliver to the factory floor much more efficiently.
We've also changed the flow in Wichita.
I've mentioned it before but our plant two which is our biggest plant about one 3 million square feet of manufacturing, which is where we build a $700 seven fuselage. We've taken some of the big sub assemblies out a plan to so for example, the entire forward fuselage and the entire wing box and move those to other facilities on our campus and across spirit.
So that they'll come in as completed units that makes a much leaner flow. It helps eliminate any traveled work at <unk>.
Creases productivity and efficiency and it also improves quality.
And we've added a lot of digitization as well to the factory floor working in conjunction with different partners. We've added workflow solutions that leverage our SAP system, and our mes system or manufacturing efficiency system. So that we can track product flow through the factory.
So those are examples in Wichita over in Prestwick, We mentioned some of the work that we did on our new advanced resin transfer molding spoiler line. So those are examples of how we're driving efficiency there, but the one thing we haven't talked about which is probably the biggest driver is work. We've continued to do in our supply chain and our make buy and we've continued to.
Work on the different initiatives to drive competitiveness in our supply chain, particularly with the addition of Belfast. They brought in a lot of new <unk> hundred 20 work both on the wing and on the fuselage and we've been able to leverage our global supply chain to drive it.
Improvements in competitiveness in that area. So it's a combination of all those things that are driving the improved performance as we go back and those are offsetting some of the headwinds. So for example, the headwinds are going to be that way.
My body production is going to be at a much lower rate for the next few years than it was before.
Triple seven if you go back to 2016 was an eight but even as recently as 2019. It was about five aircraft per month 787 was at 14 aircraft per month, it's going to be five going forward.
<unk> hundred 50 was at 10, it's going to be at about five or six as you heard <unk> say in his earnings call last week.
So we have to offset those headwinds and the initiatives that I described are helping us to offset those headwinds and still get back to the 16, 5% margins that we had back in 2016.
Okay very good thank you.
Thanks, Dave.
Thank you. The next question comes from Robert as pillar from that because we said please go ahead.
Thanks, very much and good afternoon.
Just a couple from me first of all there were some press reports earlier this week that reckon that half of your workforce is not vaccinated.
In Wichita I wondering if you could comment on whether that's even vaguely accurate, but perhaps more broadly what youre trying to do to mitigate this risk.
The next few months and there was also a few weeks ago. This report about an Italian sub supplier who seem to have a.
Slipped through the quality net I was wondering if there had been any implications from this thank you.
Great.
So with regard to vaccinations, we were at 54% a few weeks ago, but as a result of a lot of the communication and working with our union and our employees that number is substantially higher now.
And it includes people who have also applied for religious and medical exemptions, but we expect that we will be much higher even before we get to the December eight deadline and as I mentioned, we have a number of things that we can do to mitigate that.
First of all we have a lot of recall employees that we can recall in Wichita, we laid off 5200, we've recall 200 of those already but we still have at least 3000 or so on a recall list we've been in contact with them.
And the vaccination rates are quite high with them. So that's one source of employees that we can bring back. We've also opened up some new acquisitions for new hires and we've looked at contract agencies as well. So we don't expect a major issue in terms of disruption.
The vaccination rates are increasing our employees are getting onboard with either getting vaccinated or applying for an exemption.
And we expect that we will be in very good shape, when we get to December eight.
Now with regard to the Italian sub supplier this.
This was a processing house.
Spirit does not buy anything directly from that particular supplier, it's called NPS, it's located in Italy.
We did have some of our sub suppliers, who did some processing work in that facility, but we were able to quarantine those parts analyze and assess them in conjunction with Boeing and disposed of them.
In the appropriate way after that so there really is no no ongoing issue with regard to that supplier in spirit.
That's very helpful. Thank you.
Okay.
Thank you. Our next question comes from Sofie <unk> from payroll resets.
Your line is now open.
Yes, good morning.
Hey, Mark I, just wanted to follow up.
So in the second quarter, you had said cash flow in 'twenty, two would be positive excluding the Boeing payment and now you're saying breakeven is the difference related to lower 787 build next year. If you could just.
I'll give some explanation on what caused the change.
Okay.
Yes, George I would say that.
Mentally there is not a significant change from what we communicated in the second quarter and where we are now.
We have definitely a line of sight based on where we where the production rates are are unfolding at this point in time.
There is no significant change in our assumptions as it relates to free cash flow next year.
As Tom indicated when we talked about excluding the one time repayment back to Boeing from an operational execution standpoint, we continue to drive to.
Breakeven too.
And.
Focusing on doing better than that getting positive.
We definitely see a line of sight in the back half of next year third and fourth quarter being cash flow positive based on those production rates.
But at this point in time, we're not going too deep into <unk>.
Guidance for 2022, we'll be able to disclose more specifically revenue and capex and cash flow targets next year. When we talked in early January but I would say fundamentally.
There are some deliveries moving around a little bit we'll have to go factor all that in but I would say our viewpoint on cash in 2022.
Right now isn't dramatically different from what we communicated and so again George I apologize if I gave the impression that we were trying to somehow change something even suddenly it was just terminology when we say we will be.
Cash flow positive next year better than breakeven. That's all we were saying so nothing has changed in our outlook and as Mark said, we're not giving guidance yet we'll do that next year, but I didn't mean to give an impression that anything had changed it was just terminology that I used.
Okay and then one quick one for you Tom you had mentioned that you'd have headwinds because of the wide body production rates being lower but in reality I thought that would be a tailwind because you're really not making any money on the 87 or the $3 50, maybe make a little bit yet on the triple seven so I think I'll just comment on that.
That's exactly it.
It's.
787, and <unk> hundred 50, as you know are both in forward loss situations. So less production on that would help its really the triple seven and the fact that that's lower is the headwind, yes, George and I would just final comment on that is you are right. If we deliver less if we're in a situation where you have a forward loss that means.
<unk>.
Delivering less will help on the cash flow, but also if we produce less that has a negative impact on overhead absorption and so there is a pro and con.
You know a benefit on the cash flow side, but it puts a little bit of pressure on overhead.
And so.
On balance if we deliver less forward loss units. It's good on the cash flow side, but there is a little bit of a drag from a production standpoint, because of if were producing less than what we were producing before.
Okay. That's clear thanks very much.
Sure thing.
Thank you and our next question comes from Tim <unk> from RBC. Please go ahead.
Yeah.
Hey, good morning.
Good morning, Ken wanted to add back I wanted to asked thank.
Thank you. Thanks, Tom I wanted to ask about the supply chain if I could.
How would you characterize the risk in your supply chain.
Do you think about 31 on the Max and are you seeing anything yet in terms of either lead times or quality that you are having to address this changing from your suppliers and then as you think about beyond 31 after after 'twenty two.
Where's the risk as you think about going up on the Max and are you having to take steps now to maybe further mitigate that there could be incremental to what you thought you were doing.
Alright, well on 31.
We are.
Quite confident that were in line in terms of rate readiness across our supply chain. We've been working very hard with the suppliers are doing a lot of site visits and surveys and reviews of the raw material purchases they're hiring.
And the float so the good news is we spirit and all of our suppliers have already been up at these levels and already at much higher levels. So the infrastructure capital and tooling is already there the employees, where there maybe have been furloughed, but can be recalled and so so that is as <unk>.
On the other thing is.
As Mark said last year, we took on a lot of inventory.
Because rates were going down we couldnt, we couldnt turn off the spigot fast enough, but while that was a bit of a headwind for us in terms of working capital. It really benefited our suppliers last year and gave them cash when they when they needed it but.
But this year as we get into these new rates we have that.
<unk> that we can draw down.
That gives us a little bit of cushion and in terms of the rate readiness as we go beyond that the issue is going to be making sure that people can hire the people they need as rates go up and you've heard about some shortages of employees in certain areas around the whole country affecting many industries, but.
We know in Wichita, we have our recall pool that we can we can tap. The other issue is long lead time materials, especially things like forgings and castings and those need to be placed early.
We've been working with our suppliers to make sure that they do that that they are way in advance of when the scheduled increases are going to take place. So overall I'd say, we're fairly confident and optimistic in terms of meeting the 31, and then anything that comes beyond that.
On the Boeing side and on the Airbus side.
<unk> situation, we've been to the higher rates before.
We've really.
<unk> has talked about getting up to 65 aircraft per month on the <unk> hundred 20 by the summer of 'twenty three.
We've already been at that rate, we validated that we can produce at that right now and we're actually protected up to as high as 70.
Great. Thank you very much Tom.
Thanks, Ken.
Thank you again. The next question comes from Cai von <unk> from Cowen.
Go ahead.
Yes, thanks, so much so 787.
A number of suppliers are saying they've totally shut down their production. So you've mentioned that you have a build in whips. Just how many are you producing because you only basically delivered five and how do you deal with the fact that you know to kind of burn off your inventory given we don't know exactly how many Boeing is going to.
Liver.
What sort of rate profile should we look for.
Seven next year.
Great and irrelevant for the fourth quarter.
Right. So so we've taken a pause on our new production as well right now.
In line with Boeing and.
And the other suppliers, so we're not producing new ones right now.
We do expect that we'll make some deliveries to Boeing before the end of the year just in line with the current schedules and that has nothing to do with them resuming deliveries. It's just the normal flow back and forth between spirit and Boeing.
And with regard to production next year again as I as I mentioned before Boeing has talked about getting back to rate five.
And so thats, what we are aligning with as well as what they are giving us in terms of the schedule.
So nothing new to add other than what Boeing has already communicated in terms of their schedule for next year.
So if you actually are pausing deliveries pausing deliveries, but.
Maybe pausing production, but are going to ship some deliveries I would assume that the 787 inventory hit in the third quarter would reverse somewhat in the fourth giving an opportunity to have maybe cash flow toward.
The lower end of your loss projection.
Yeah, Cai I mean that that's exactly exactly right.
But again.
There is a lot of moving parts in the 787 program.
We do think based on what we believe will deliver in the fourth quarter, there will be some level of cash relief by liquidating some of those some of that inventory in the fourth quarter.
But again I think everything is tied pretty tightly with Boeing.
Them working with the FAA.
And getting on with making deliveries to their airline customers as Tom indicated we have a schedule on deliveries that is not dependent on them, making deliveries to the airlines.
We've got a line of sight to that.
And at this point in time.
We expect to make more deliveries in the fourth quarter than we did in the third quarter, we're not going to get all that specific now but that if that holds that should provide a little bit of cash lift in the fourth quarter.
Thank you very much.
Thank you. Your next question comes from Hunter Keay Wolfe Research.
Thank you.
Okay.
Thanks for getting me on.
First personal kind of a quick one can you elaborate on the <unk> hundred 20 cost increases that you mentioned or what are those and then.
Why couldn't you collect cash for the 87 that you built like that you could for the masses.
Is there something different even though you were starting to Max are you still collecting still deliver then my son collected cash is there something unique about that contract or does this particular situation.
Well, let me let me take that one first there is no difference when we ship a product to Boeing they've always paid us including on the Max So all the ones that are stored here in Wichita.
We've shipped to Boeing and they've paid us for those so they are stored here in Wichita, but there, but Boeing has already paid for them and similar with the 787 whenever we ship up unit to Boeing they've they pay for it.
So no difference. Your first question was on <unk> hundred 20 cost increase.
I'm a little confused what yes, typically yes, so on that Hunter, we're seeing specifically on the <unk> hundred 20 program, we're seeing some pressure on freight costs.
Shipping costs coming out of Asia.
Times on the water have extended dramatically and container costs have gone up significantly.
Significantly.
I think we've all read about some of the supply chain challenges.
And so that those costs have put some pressure on our margins on the <unk> hundred 20 program. We don't think that they are long lasting.
But like many other companies across the world, we're seeing freight cost.
Have a negative impact on our <unk> hundred 20 program.
But I think as we move into 2022 2022.
We will we will see some relief from that as things start to get back to normal and maybe just a little bit more clarity I think what you were insinuating on 87 and $3 seven is.
We stored a bunch of fuselages on 737 for Boeing as they were dealing with the Max situation.
They wanted us to continue to produce.
Store them, so that they could resume production fairly quickly.
The 77 is a different situation.
They have 100 units that they haven't yet delivered and so they're not really wanting us to build more aircraft and take on more inventory.
So that causes a slowdown in production and therefore, we don't deliver we don't get to relieve the inventory and book the revenue and collect the cash I think it's too specific two separate situations.
Okay, Alright, thank you Mark appreciate it.
Okay.
Thank you. Your next question comes from Kristine <unk> from Morgan Stanley.
Go ahead.
Thanks, Tom.
More than you did three in this segment.
Aside from reporting can you discuss what this means for changes to underlying operation and organizational alignment and ultimately with Christine Im sorry could you could you repeat that I didn't get the first part of the question.
Oh sure where the three new segments aside from reporting can you discuss what this means for underlying operations and organizational alignment and with this change in reporting.
<unk> and restructuring expenses later on.
Right.
So the answer on the restructuring is no.
What we've done is in the past, we did have a defense and space group already and we had a leader for that gentleman named Duane Hawkins and so that has stayed.
Separate and continues to report to me aftermarket previously reported into our Chief operating Officer, Sam Monarch, we've pulled that out as an entire group and it's got some additions because of Belfast and because of this new applied aerodynamics, but it now as a Standalone group and then the commercial group.
Which Sam Arctic will now lead.
Combine that in terms of the Airbus Group, our Boeing group, our business jet group.
In our E Vitol group as well as our make buy organization, which includes our supply chain.
So that was more reorganizing the way we are structured now will drive synergies as we go forward in those different areas, but we don't expect any restructuring costs. As a result of this but we have aligned our organization to the three reporting segments and we have a leader for each of those reporting segments and Thats, how we will report our.
Revenues profitability and cash flow as we go forward.
Great and if I could follow up in terms of suppliers I mean, you go for your.
Positive free cash flow for 2022.
Peanut back to Boeing what are you factoring in there for additional supplier help right because of the labor issues that we're facing inflation and even you guys are facing higher freight costs, presumably your suppliers are facing something similar are you anticipating that they would need more help in 2022 and your free cash flow outlook.
No. We don't have anything specifically built and we did do a lot of support during 2020 with suppliers, we provided helping assistance to over 600 suppliers that totaled over $2 billion worth of value and a lot of that was contract extensions, which we provided so that it could be basically.
Back to back with the contracts that we have with our Oems.
And so so.
So thats, how we are thinking about.
2022 is we're not providing any specific support but all of our contracts with suppliers tend to be five years and so we do have some expiries during 2022, but it's actually quite a low year of expiries and so for the most part our contracts are in for US and we will stay in force for next year and the prices are.
<unk>.
Thank you very much have a nice day.
Thank you.
Thank you. Your next question comes from Ron Epstein from Bank of America. Please <unk>. Your line is now open.
Hey, Tom.
Good morning, good afternoon.
Maybe two questions for you the first one on the defense business with the goal of.
I'm trying to get to $1 billion by 2025.
That seems like you need to grow that business by on the order of maybe $300 million of my math right.
How do you propose to get there I mean is that just program pickups of stuff that you already have.
So it would be organic.
And to do more M&A in the defense space, how should we think about that.
Well first of all yes.
The growth that we're anticipating to get to the $1 billion by 2025 is organic so it's the current programs. We're on as they achieve their program of record we will grow to that level and this includes some new programs that we've won that are classified but it's all organic it's things that we have already won and that they just carry out.
And it doesn't include programs that we are on but are competing so for example, the V 280 <unk>.
Which is the.
With Bell and that is for the Florida program in the future long range assault aircraft, so, we havent anticipated or put that into our outlook.
If we did win that that would be in addition, and incremental to what we're looking at.
But everything else is just organic based on the programs of records of the programs that we've won.
Yes, Ron just some color.
On that and we'll talk more about defense and our future earnings but back in 2016, we on this on the defense side, specifically, we had three programs with $1 million or more in annual revenue.
Currently we have in excess of 21 programs that generate more than $1 million.
On the program level, so as you.
Those are just some quick facts and we didn't.
Based on our previous product driven segment segment.
We have been doing a lot to grow on the defense side over the last couple of years, we continue to grow somewhere between.
10, and 20% per year and that is organic wins.
The acquisition of <unk> has opened a lot of doors, Tom and Tom talked about the the teaming agreement we have with Lockheed.
We're doing a lot of really good stuff on the defense side. Our defense team has done a great job of winning new platforms, Tom talked about the five areas that we're growing on the defense side.
But that $1 billion is going to come through it's based on the programs that we have we've got a few in the hopper a few that could really make a bigger difference the one that Tom just mentioned, but.
But we're really excited about defense and space and we continue to add programs. Our team has done a great job. We've got a great relationship with the defense primes and I think Youll continue on future earnings call, we will be sharing a lot of successes with you as we win more work.
Unfortunately, sometimes it's classified or our top secret we can't get into those details.
But we're really pleased with where defense is.
And where we are where we see those topline revenues going over the next couple of years.
Gotcha Gotcha, and then maybe a related question.
So youre your one of your biggest customers about your biggest customer has caused all kinds of issues for you guys right I mean, seven three problems problems.
Where do you see yourself I mean, just big picture.
Five years 10 years down the road are you going to be so beholden to them right, because they're making their life really really hard so.
As you manage this business I mean, what's your ultimate goal in terms of how much youre going to be kind of subject to.
Other People's mistakes.
Well. This is one of the things that we've said is that during the pandemic. It was very clear that our concentration.
It made us more vulnerable so our concentration in commercial aerospace and original equipment.
Obviously, a lot of work with with Boeing and with the Max.
And by the way, we think Boeing is a great customer we love the Max program and we want both to grow.
But that said, we know that we need to diversify to ensure spirit's future and what we said is our aspiration. Ultimately in 10 years. If you said, where do we want to be we'd like to be 40, 40, 20, 40% commercial 40% defense and space and 20% aftermarket and we have a long way to go to get there that would include organic growth that would.
Probably have to include some inorganic growth as well, but that's the aspiration is that will be a much more diversified design and manufacturing champion in the aerospace industry.
Got it got it got it.
May I ask one more okay sure.
So previous management team. So I don't want to pin you kind of that color, but have tried to diversify and it hasn't really worked well.
So as you go down this diversification.
Path.
How can we feel better as outsiders looking in that you won't fall in the same trap that happened in the past.
Right well.
The diversification sometimes work sometimes didn't.
But all of it helped build a foundation in the base and we learned from every single situation and I would say that's really the key is we did learn I mean, we can look back and say where did things work where did they network and what was key to that and one of that is learning how to program management different programs with different customers and understanding the dynamics.
A mix of how those work we've got a lot more experience for how to do that we know how to.