Q4 2021 Spirit AeroSystems Holdings Inc Earnings Call
Speaker 1: I'll turn it over to Sam now to talk more about the commercial segment. Sam? Thank you, Tom. And good morning, everyone. In the commercial business segment, we're focusing on three priorities in 2022.
It over to Sam now to talk more about the commercial segment Sam. Thank you Tom and good morning, everyone in.
In the commercial business segment, we are focusing on three priorities in 2022.
Speaker 1: First, execution on our narrow-body production programs to meet the coming increases in production rates. Second, continued progress on productivity projects to help SPIRT achieve the 16.5% margin once the max reaches 42 aircraft per month, and a renewed focus on growth for the future. But first, let's look at the results.
First execution on a narrow body production program to meet the coming increases in production rate.
Second continued progress on productivity projects to help spur achieved a 16, 5% margins once the Max reaches 42 aircraft per month, and our renewed focus on growth for the future.
First let's look at execution in.
Speaker 1: In 2021, we made many changes to our operations so that we can be ready to meet the high and narrow body production rates that our customers will need in the future.
In 2021, we made many changes to our operations. So that we can be ready to meet the higher narrow body production rates that our customers will need in the future.
Speaker 1: Improvements are partly based on our experience from the last series of 737 rate increases.
Improvements are partly based on our experience from the last series of 737 rate increases.
Speaker 1: Now, while some of the complexities, like simultaneously producing multiple models of the NG and the MAX, whilst adding tooling and other equipment are behind us, we are putting measures in place to help us meet challenges we might face.
Now while some of the complexities like simultaneously producing multiple models of the engie and the Max whilst adding tooling and other equipment are behind US we are putting measures in place to help us meet challenges we might face.
Speaker 1: These changes will help us achieve solid execution in the commercial segment. For example, the new automated 737 floor payment assembly line, which reduces the number of hours required to fabricate and assemble those structures, will improve our productivity and quality execution.
These changes will help us achieve solid execution in the commercial segment.
For example, the new automated 737 floor Assembly line, which reduces the number of hours required to fabricate and assemble those structures will improve our productivity and quality execution.
Speaker 1: The advanced digitization on the production floor and improved production flow in many areas is expected to result in better efficiency, such as reduced wait times between workstations.
They advanced Digitization on the production floor and improve production flow in many areas is expected to result in better efficiency, such as reduced wait times between workstations.
Speaker 1: The launch of the Global Digital Logistics Center consolidates thousands of square feet and parts kits to a centralized location at our Wichita site.
The launch of the global digital Logistics center consolidate thousands of square feet and parts kits to a centralized location our Wichita site.
Speaker 1: And at our Prestwick site, our new automated A320 spoiler line is a state-of-the-art system to produce hundreds of spoilers at peak rate.
And at our Prestwick site, a new automated <unk> hundred 20, <unk> boiler line is a state of the art system to produce hundreds of spoilers up peak rate.
Speaker 1: In looking at our rate readiness preparations, we have established a team of specialized employees to plan for spirits and our supply chains rate readiness.
And looking at our rate readiness preparations we have established a team of specialized employees to plan for spirits in our supply chain right readiness.
Speaker 1: The team has been preparing plans for the production increases ahead to be ready to react to emerging pressures.
The team has been preparing plans for the production increases ahead to be ready to react to emerging pressures.
Speaker 1: Additional capacity in our fabrication area and new capacity we gained with our Bombardier asset acquisition may be used to help mitigate risk.
Additional capacity in our fabrication area and new capacity, we gained without Bombardier asset acquisition may be used to help mitigate risk.
Speaker 1: Our 2022 production plan factors in a reduction in the 737 ships at inventory, which is currently at 97.
Our 2022 production plan factored in a reduction in the 737 ships that inventory, which is currently at 97.
Speaker 1: By the end of 2022, we expect to see the level reach approximately 20 ship sets, which will remain as a permanent buffer inventory.
By the end of 2022, we expect to see the level reached approximately 20 ship sets, which will remain as a permanent buffer inventory.
Speaker 1: We are also planning for increased production on the 737 and will remain aligned with Boeing's communicated 31 aircraft per month production rate.
We are also planning for increased production on the 737 and will remain aligned with Boeing's communicated 31 aircraft per month production rate.
Speaker 1: We believe the rate-increase preparations we have in place will help to drive the execution of narrow-body programmes in 2022 and beyond.
We believe the rate increase preparations we have in place will help to drive the execution of narrow body programs in 2022 and beyond.
Speaker 1: Now, as we move to higher narrow body production rates, we also remain focused on driving our costs down and margins up. The team is working on a number of initiatives to reduce costs.
Now as we move to higher narrow body production rates. We also remain focused on driving our costs down and margins up.
The team is working on a number of initiatives to reduce costs.
Speaker 1: We have a team that regularly reviews what we make at our factories versus what we purchase from suppliers so that we can have a cost-effective mix based on what we see in our production plan.
We have a team that regularly reviews, what we make our factories versus what we purchase from suppliers. So that we could we can have a cost effective mix based on what we see in our production plans.
Speaker 1: Another closely related initiative is our regular review of asset utilisation. We have teams in place to optimise our footprint to improve overhead costs and repurpose space for new work ahead. We closely watch the available hours of our equipment capacity for opportunities to maximise our usage and margin improvement.
Another closely related initiative as a regular review of asset utilization, we have teams in place to optimize our footprint to improve overhead costs and repurpose space for new work ahead, we closely watch the available hours by our equivalent capacity for opportunities to maximize our usage and margin improvement.
Speaker 1: And turning to growth, we are pleased that in 2021, Spirit won two new business jet programs, including the nacelle for the new Dassault Falcon 10X.
Turning to growth.
We are pleased that in 2021 spirit, one two new business jet programs, including the nacelle for the new to Sofia component.
Speaker 1: The team also began work with an emerging electric vertical take-off and landing, or eVTOL, company that promises exciting future potential.
The team also began work with an emerging electric vertical takeoff and landing or EBIT toll company that promise is exciting future potential.
Speaker 1: We have many new opportunities that the team is evaluating and we intend to build a pipeline of new commercial opportunities.
We have many new opportunities that the team is evaluating and we intend to build a pipeline of new commercial opportunities.
Speaker 1: In summary for 2022, we expect to see our narrow body production and deliveries to continue to increase.
In summary for 2022, we expect to see our narrow body production and deliveries to continue to increase.
Speaker 1: The improvements we have put in place and the team we have assembled have been anticipating the higher production rates and we look forward to the opportunities we have for our new commercial segments.
The improvements we have put in place on the team we have assembled have been anticipating the high production rates and we look forward to the opportunities we have brought new commercial segment.
With that I'll turn back over to Tom.
Speaker 2: Thanks, Sam. Our commercial business segment has a strong position on current Airbus and Boeing programs. We have made a number of changes to enable us to meet the expected rate increases on narrow-body programs, but we also have many other growth opportunities, as Sam described.
Thanks Sam.
Our commercial business segment has a strong position on current Airbus and Boeing programs. We've made a number of changes to enable us to meet the expected rate increases on narrow body programs, but we also have many other growth opportunities as Sam described.
Speaker 2: Our defense and space business has also been very active in setting us up for future growth.
Our defense and space business has also been very active and setting us up for future growth earlier.
Speaker 2: Early in the year, we announced that NASA had selected our FMI business in Maine for a contract to provide thermal protection systems to support several of their emerging projects.
Early in the year, we announced that NASA has selected our <unk> business in Maine for contract to provide thermal protection systems to support several of the emerging projects.
Speaker 2: Along with the NASA award, our defense and space team also won several new classified contracts.
Along with the NASA Award our defense and space team also won several new classified contracts in the summer we joined Lockheed Martin to unveil Polaris, a digital engineering and advanced Assembly demonstrator that will help our customer reduce cost and improve quality.
Speaker 2: In the summer, we join Laheed Martin to unveil Polaris, a digital engineering and advanced assembly demonstrator that will help our customer reduce cost and improve quality.
Speaker 2: Then in October , we opened the National Defense Prototype Center in partnership with Wichita State University's National Institute for Aviation Research, or NIAR.
And in October we opened a national Defense prototype center in partnership with Wichita State Universities National Institute for Aviation research or <unk>.
Speaker 2: We continue to win new defense business and now have 24 development projects over a million dollars that could lead to significant future revenue. In 2016, we had just one such program over a million dollars.
We continue to win new defense business and now have 24 development projects over $1 million that could lead to significant future revenue in 2016, we had just one such program over $1 million.
Speaker 2: One of the ways we have been able to win new programs recently is by repurposing wide-body capacity, which is available due to the slow recovery in international air traffic and lower wide-body production.
One of the ways, we have been able to win new programs recently is by Repurposing wide body capacity, which is available due to the slow recovery in international air traffic and lower wide body production rates.
Speaker 2: We have plans for our defense footprint to expand from about 500,000 feet today to almost a million square feet.
We have plans for our defense footprint to expand from about 500000 feet today too.
To almost 1 million square feet over the next two years.
Speaker 2: In addition, we continue to execute against $6 billion in funded programs of record and are increasing and finalizing new additional multi-year contracts that will grow that funded amount.
In addition, we continue to execute against $6 billion and funded programs of record and are increasing and finalizing new additional multiyear contracts that will grow that funded them out.
Speaker 2: Moreover, our new business pipeline for defense in space is extremely strong.
Moreover, our new business pipeline for defense and space is extremely strong.
Speaker 2: We have many additional projects and opportunities that the Defense and Space team is actively shaping.
We have many additional projects and opportunities that the defense and space team is actively shaping.
Speaker 2: we remain on track to grow our defense and space business to a billion dollars in revenue by 2025 at typical defense margins.
We remain on track to grow our defense and space business to $1 billion in revenue by 2025 at typical defense margins.
Speaker 2: Turning to our aftermarket segment, we built upon the foundation from our Bombardier asset acquisition and added applied aerodynamics to the Spirit portfolio early in 2021.
Turning to our aftermarket segment, we built upon the foundation from our Bombardier asset acquisition and added applied aerodynamics to the spirit portfolio early in 2021.
Speaker 2: The applied aerodynamics acquisition gave us radome and wing component repair capability to add to our Airbus and Boeing engine, nacelle, and flight repair, flight control surfaces for overhaul and repair. The two acquisitions gave us a large presence in Dallas, and we have decided to center our aftermarket headquarters there. We also set up a JV with EGAT in Taiwan to expand our services in Asia.
The applied aerodynamics acquisition gave us radome and wind component repair capability to add to our Airbus and Boeing engine nacelle, Lasalle and flight repair flight control surfaces for overhaul and repair.
The two acquisitions gave us a large presence in Dallas and we have decided to center our aftermarket headquarters there.
We also set up a JV with <unk> in Taiwan to expand our services in Asia.
Speaker 2: In 2021, we saw aftermarket revenue of about $240 million and plan to grow the business to $500 million by 2025 at a creative margin.
In 2021, we saw aftermarket revenue of about $240 million and plan to grow the business to $500 million by 2025 at accretive margins.
Speaker 2: We believe our new segments and organizational changes help us become a more diversified company.
We believe our new segments and organizational changes help us become a more diversified company.
Speaker 2: In 2016, approximately 95% of our business was commercial.
In 2016, approximately 95% of our business was commercial and.
Speaker 2: In 2021, 79% of our revenue was from our commercial business, 15% from defense and space, and 6% from aftermarket.
In 2021, 79% of our revenue was from our commercial business, 15% from defense and space and 6% from aftermarket.
Speaker 2: In the future, our aspiration is that our revenue will be a 40-40-20 split across the three segments.
In the future our aspiration is that our revenue will be a 40 40 20 split across the three segments.
Speaker 2: We are aggressively pursuing a path to cash flow break even in 2022, net of the $123 million advance repayment to Boeing. But of course, this is highly dependent on the production rates that Boeing decides on finally for the MAX.
We are aggressively pursuing a path to class cash flow breakeven in 2022 net of the $123 million advanced repayment to Boeing but of course. This is highly dependent on the production rates that Boeing decides on finally for the Max.
Speaker 2: Now I'll turn the call over to Mark to take you through our detailed financial results and more on our 2022 expectations. Mark will also provide further details on our efforts to delever and recover our investment grade credit rating. Mark? Thank you, Tom.
Now I'll turn the call over to Mark to take you through our detailed financial results and more on our 2022 expectations. Mark will also provide further details.
On our efforts to Delever and recover our investment grade credit rating Marc.
Thank you Tom and good morning, everyone.
Speaker 2: Despite the challenges over the last past couple of years.
Despite the challenges over the last past couple of years Spirit has maintained focus on our strategy to diversify and grow especially during 2021.
Speaker 2: Spirit has maintained focus on our strategy to diversify and grow, especially during 2021, which provided me a very transformative.
Which provided to be a very transformative year for spirit.
Speaker 2: The integration of FMI, the Belfast, Morocco, and Dallas site from Bombardier and applied aerodynamics have expanded spirit's capabilities. Global footprint and customer
The integration of <unk>, the Belfast, Morocco, and Dallas site from Bombardier and applied aerodynamics have expanded spirit's capabilities global footprint and customer base.
Speaker 2: With that, we saw the need to form three new segments, commercial, defense and space, and aftermarket.
With that we saw the need to form three new segments commercial defense and space and aftermarket.
Speaker 2: These new segments position us well and encourage us to really sharpen our focus on the unique products and services that we provide to our customers.
These new segments position us well and encourage us to really sharpen our focus on the unique products and services that we provide to our customers.
Speaker 2: Looking ahead to 2022 and beyond, we are focused on the execution of the increasing single owl production rates as well as our key three priorities.
Looking ahead to 2022 and beyond we are focused on the execution of the increasing single aisle production rates as well as our key three priorities.
Speaker 2: which are to diversify revenue, de-lever by a billion dollars over the next three years.
It's hard to diversify revenue de lever by $1 billion over the next three years driver segment margins to the 16, 5% target.
Speaker 2: driver segment margins to the 16.5% target. Now with that, let's move to our 2020.
So with that let's move to our 2021 results.
Please turn to slide four.
Speaker 2: Revenue for the year was $4 billion, up 16% from 2020.
Revenue for the year was $4 billion up 16% from 2020.
Speaker 2: This improvement was primarily due to higher production rates in the 737 program as well as increased revenue driven by the acquisition of the A220 Bombardier program or A220 Airbus program and the Bombardier business jet programs and further growth in aftermarket.
This improvement was primarily due to higher production rates in the 737 program as well as increased revenue driven by the acquisition.
Of the 820 Lombardi.
Program are <unk> hundred 20, Airbus program, and the Bombardier business jet programs.
Further growth in aftermarket.
Speaker 2: These increases were partially offset by lower wide-body production rates resulting from the continued impact.
These increases were partially offset by lower wide body production rates, resulting from the continued impacts of the COVID-19 pandemic on an international air traffic as well as Boeing's pause and 77 deliveries.
Speaker 2: COVID-19 pandemic on international air traffic, as well as Boeing's pause in 787 delivery.
Speaker 2: As we turn to deliveries, overall deliveries increased to 1,028 ship sets compared to 920 ship sets.
As we turn to deliveries overall deliveries increased to $1 28 chipsets compared to 920 ship sets in 2020.
Speaker 2: 737 deliveries more than doubled to 162 compared to 71 ships that's delivered in 2020 while 787 deliveries decreased to 37 shipments compared to
737 deliveries more than doubled to 162 compared to 71 chipsets delivered in 2020, while 787 deliveries decreased to 37 shipments compared to 112 in 2020.
Speaker 2: Let's turn now to earnings per share on slide five.
Let's turn now to earnings per share on slide five.
Speaker 2: We've reported earnings per share of negative $5.19.
We reported earnings per share of negative $5 19.
Speaker 2: compared to negative $8.38 per share in 2020.
Compared to negative $8 38 per share in 2020.
Speaker 2: The adjusted EPS was negative $3.46 compared to negative $5.72 in 2020.
Adjusted EPS was negative $3 46.
Compared to negative $5 72 and 2020.
Speaker 2: 2021 adjusted EPS excludes cost-related M&A restructuring, the deferred tax asset.
2021, adjusted EPS excludes costs related to the M&A restructuring the deferred tax asset valuation allowance.
Speaker 2: curtailment gain, and pension settlement loss.
Curtailment gain and pension settlement losses.
Speaker 2: 2020 adjusted EPS excludes M&A and restructuring costs.
2020, adjusted EPS excludes M&A and restructuring costs expenses related to the ERP offered in 2020, and the deferred tax asset valuation allowance.
Speaker 2: expenses related to the VRP offered in 2020 and the deferred tax asset valuation.
Speaker 2: Looking at operating margins, we saw an improvement to negative 12% compared to negative 24% in 2020.
Looking at operating margins, we saw an improvement to negative 12% compared to negative 24% in 2020.
Speaker 2: reflecting the cost reduction actions we have taken over the last two years along with the increasing production
Reflecting the cost reduction actions, we have taken over the last two years, along with the increasing production rates.
Speaker 2: In 2020, we recognized lower expenses, including excess capacity, COVID-19 charges, and restructuring costs.
In 2020, we recognized lower expenses, including excess capacity, COVID-19 charges and restructuring costs as well as lower changes in estimates, including forward losses, and cumulative catch up adjustments compared to 2020.
Speaker 2: as well as lower changes in estimates, including forward losses and cumulative catch-ups.
Speaker 2: Despite the improvement of single-owl rates during 2021, full-year profit was significantly impacted by the continued lower production rates on the twin-owl programs. The wide-body program.
Despite the improvement of single aisle rates during 2021 full year profit was significantly impacted by the continued lower production rates on the twin aisle programs.
The wide body programs, especially the 787.
Speaker 2: Recognize significant overhead and forward loss charges during the year which more than offset the execution and benefits
Recognize significant significant overhead and forward loss charges during the year, which more than offset.
The execution and benefits on narrow body programs.
For losses in 2021 totaled $242 million, primarily driven by lower production rates announced by Boeing and Airbus on the 787 and <unk> hundred 50 programs.
Speaker 2: Ford losses in 2021 totaled $242 million, primarily driven by lower production rates announced by Boeing and Airbus on the 787 and A350 programs.
Speaker 2: In addition to, and in addition, some additional engineering analysis and rework costs from the 787 program. In 2020, we recorded $370 million of forward losses, primarily driven by
In addition to.
And in addition, some additional engineering analysis and rework cost for the 787 program.
In 2020, we recorded $370 million of forward losses, primarily driven by lower production rates on the 787 and <unk> hundred 50 programs.
Speaker 2: In 2021, we also recognize an increase in other income primarily driven by a curtailment gain of $61 million resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition and a pension settlement spinoff loss on a U.S. plan of $11 million.
In 2021, we also recognized an increase in other income primarily driven by a curtailment gain of $61 million, resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition and a pension settlement spinoff loss on our U S plan of $11 million.
Speaker 2: 2020 was impacted by expenses of 87 million related to the Voluntary Retirement Program. All of these items are non-cash.
2020 was impacted by expenses of $87 million related to the voluntary retirement program. All of these items are noncash in nature.
Speaker 2: Additionally, during the year, we recorded a non-cash valuation allowance of $204 million on deferred income tax assets compared to $150 million that we recorded in 2020.
Additionally, during the year, we recorded a noncash valuation allowance of $204 million on deferred income tax assets.
Compared to a $150 million.
That we recorded in 2020.
Now turning to free cash flow on slide six.
Speaker 2: Free cash flow for the year was a use of $214 million compared to a use of $864 million in 2020.
Free cash flow for the year was a use of $214 million compared to a use of $864 million in 2020.
Speaker 2: free cash flow usage for the year was in line with the range that we previously have communicated.
The free cash flow usage for the year was in line with the range that we previously have communicated.
Speaker 2: Free cash flow benefited from higher deliveries, lower restructuring costs, and positive impacts of working capital, as well as $350,000.
Free cash flow benefited from higher deliveries lower restructuring costs and positive impacts of working capital as well as $300 million of income tax refunds.
Speaker 2: These were partially offset by a payment of $154 million towards the Belfast Pension Plan made during 2021.
These were partially offset by a payment of $154 million towards the Belfast pension plan made during 2021.
Speaker 2: Additionally, 2020 free cash flow included $215 million received as part of the February 2020 MOA that we negotiated with Boeing.
Additionally, 2020 free cash flow included $215 million received as part of the February 2020, MLA that we negotiated with Boeing.
Speaker 2: With that, let's now turn to our cash and debt balances on slide seven.
With that let's now turn to our cash and debt balances on slide seven.
Speaker 2: We ended the year with $1.5 billion of cash and $3.8 billion of debt.
We ended the year with $1 5 billion of cash and $3 8 billion of debt.
Speaker 2: In terms of de-levering, we remain committed to paying down $1 billion of debt.
In terms of Delevering.
We remain committed to paying down $1 billion of debt.
Speaker 2: through the end of 2023, which we believe will enable us to regain our status of investment grade.
Through the end of 2023.
Which we believe will enable us to regain our status of investment grade.
Speaker 2: We initiated progress on this commitment in February of 2021 when Spirit prepaid $300 million of floating rate notes.
We initiated progress on this commitment in February of 2021, when spirit prepaid $300 million of floating rate notes.
Speaker 2: Then in October , we took advantage of the lower interest rate environment and refinanced our term loan, which lowered our interest rate from 5.25% to 3.75%.
Then in October we took advantage of the lower interest rate environment, and refinanced our term loan, which lowered our interest rate from 5.25% to 375%.
Now, let's discuss our segment performance.
Speaker 2: This is the first time we've reported the new segment structure, including commercial, defense in space, and aftermarket. So let's begin on with commercial.
This is the first time, we've reported the new segment structure, including commercial defense and space in aftermarket.
So let's begin with commercial on slide eight.
Speaker 2: In 2021, commercial revenues increased 15% compared to 2020.
In 2021 commercial revenues increased 15% compared to 2020 Pri.
Speaker 2: primarily due to higher production volumes on the 737, A220, and Bombardier business jet programs, partially offset by lower production volumes on the Twin Owl programs.
Primarily due to higher production volumes on the 737, <unk> hundred 20, and Bombardier business jet programs, partially offset by lower production volumes on the twin aisle programs.
And in particular, the 77 program.
Speaker 2: Operating margin for the year was negative 7% compared to negative 23% in the prior year
Operating margin for the year was negative 7% compared to negative 23% in the prior year the.
Speaker 2: The improvement in operating margins were primarily due to higher volumes on the 737, as well as lower expenses related to forward losses, restructuring, COVID-19, and excess capacity in 2021 as compared to 2020.
The improvement in operating margins were primarily due to higher volumes on the 737 as well as lower expenses related to forward losses restructuring COVID-19, and excess capacity in 2021 as compared to 2020.
Speaker 2: This segment recorded 6 million of unfavorable cumulative catch-up adjustments and 227 million of net forward losses.
The segment recorded $6 million of unfavorable cumulative catch up adjustments in $227 million of net forward losses during 2021.
Speaker 2: In comparison, during 2020, the segment recorded $29 million of unfavorable cumulative catch-up adjustments and $367 million.
In comparison during 2020, the segment recorded $29 million of unfavorable cumulative catch up adjustments and $367 million of forward losses.
Speaker 2: Now let's move to defense in space, which is on slide 9.
Now, let's move to defense and space, which is on slide nine.
Speaker 2: Defense and space segment revenue in 2021 improved by 19% compared to 2020, primarily due to increased activity on the P-8, KC-46 tanker.
Defense space segment revenue in 2021 improved by 19% compared to 2020, primarily due to increased activity on the P. Eight KC 46 tanker and.
Speaker 2: and classified program revenue growth. In 2021, operating margin for the year was 8% compared to 10% in 2020.
And classified program revenue growth in 2021 operating margin for the year was 8% compared to 10% in 2020.
Speaker 2: Margin was negatively impacted in 2021 by higher forward losses and a one-time charge of approximately $9 million on a non-classified program.
Margin was negatively impacted in 2021 by higher Ford losses, and a onetime charge of approximately $9 million on a non classified program.
Speaker 2: This segment recorded $14 million of forward losses compared to $4 million in 2020, primarily driven by an investment on the V-280 program made during 2021.
The segment recorded $14 million of forward losses, compared to $4 million in 2020, primarily driven by an investment on the V 280 program made during 2021.
Speaker 2: For our aftermarket segment results, let's now turn to slide 10.
For our aftermarket segment results, let's now turn to slide 10.
Speaker 2: Aftermarket revenues were up 19% compared to 2020, primarily driven by the inclusion of full-year MRO activity from the Belfast and Dallas sites, which were acquired late in 2020, partially offset by lower spare parts sales compared to the prior year.
Aftermarket revenues were up 19% compared to 2020, primarily driven by the inclusion of full year MRO activity from the Belfast and Dallas sites, which were acquired late in 2020 Pars.
Partially offset by lower spare parts sales compared to the prior year.
Speaker 2: Operating margin for the quarter improved to 21% compared to 18% in 2020 driven by favorable product mix and lower restructuring costs.
Operating margin for the quarter improved to 21% compared to 18% in 2020, driven by favorable product mix and lower restructuring costs.
In closing we saw air traffic begin to recover in 2021.
And expect it will continue to improve as we progress throughout the year.
In addition to our three key priorities to diversify Delever and drive margins our focus over the next 12 months will be on the execution of increasing single aisle production rates.
Speaker 2: In addition to our three key priorities to diversify, de-lever, and drive margin.
Speaker 2: Our focus over the next 12 months will be on the execution of increasing single-ow production.
Speaker 2: Our productivity and efficiency improvements made within our factories over the last couple of years should enable us to meet production rate increases in a more cost-effective manner. If we look ahead to 2022, our performance will be driven by the commercial market recovery.
Our productivity and efficiency improvements made within our factories over the last couple of years should enable us to meet production rate increases and a more cost effective manner.
If we look ahead to 2022.
Our performance will be driven by the commercial market recovery.
Specifically, the 737 and <unk> hundred 20 programs.
Speaker 2: As a result, we expect to see improvement in our financial metrics, including deliveries, revenue, margin, and cash flow.
As a result, we expect to see improvement in our financial metrics, including deliveries revenue margin and cash flow.
That said, we anticipate the first quarter to be the lowest quarter of the year for deliveries revenue earnings and cash flow with meaningful improvement throughout the year.
Now, let me turn it back over to Tom for some closing comments.
Thanks, Mark 2021 was a transformative year for spirit, we continued.
Our recovery from the dual crises of the Max grounding and the COVID-19 pandemic by investing in productivity and innovation to ensure we emerged a better company coming out of this period than the one that went in.
We also made substantial progress on our diversification efforts, which culminated in new reporting segments and a new organization aligned to those segments. We are excited about the launch of these three new segments commercial defense and space and aftermarket.
Even though commercial air traffic continues to have some volatility with the recent COVID-19 variance demand for domestic travel around the world remains robust and narrow body production rates at both of our OEM customers continue to increase.
85% of Spirit's backlog is narrow body aircraft.
We have evaluated our operations and our supply chain. So that we are ready to meet the narrow body production targets from both of our customers.
We will also continue to evaluate options to retire a total of $1 billion of debt over the three year period ending in 2023.
Made good progress starting with paying off $300 million in floating rate notes in February of 2021.
This year, we also refinanced our term loan b to secure a lower rate and upsized alone to give us flexibility to repay other higher interest obligations, we remain committed to regaining our investment grade credit rating.
Our investment in innovation and productivity projects to improve our operations will help us ramp our narrow body production rates. The same actions will contribute to our objective of.
Achieving 16, 5% margins once Max rates reached $14 42 aircraft per month.
2022 will bring continued improvement in our financial results and our cash flow generation with the expected increase of narrow body production rates and the growth of our new defense and space and aftermarket segments with that we'll be happy to take your questions.
Okay.
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The first question comes from Myles Walton of UBS. Your line is open. Please go ahead.
Thanks, Good morning.
Tom or Mark I'm, not sure nurture, which could you talk about the trends in underlying margins, excluding excess costs. Excluding forward loss charges, you've re segmented. So it's a little tough to ask by the segments. So I'm just gonna ask are at the high level company level. It doesn't look like the margins are really improving as you're going through the <unk>.
For the year underlying could you just explain that and then maybe give us a roadmap as to why they start to really inflect.
In 'twenty, two and then into 'twenty three.
Yeah, well I'll start with that miles.
First of all we did start to see margins improve throughout the course of last year and it really is linked primarily to rates on the narrow body aircraft as those rates go up.
We get better fixed cost absorption, we lower some of those excess costs that we've had in the past couple of years and overall that has a positive benefit on margins in the commercial segment, let's let's focus on that and coming into 2022 again. The same thing will happen, we're going to see rates.
Rates continue to improve on both the Max and the <unk> hundred 20, and that will drive better fixed cost absorption and ultimately lead to better margin performance. This year and getting into next year as we said when we get to 42 aircraft per month on the Max that's a stable amount that's a good surrogate and thats. When we think we can get to the 16, 5% margins.
Yeah, Myles I would I say Todd.
It's.
It gets a little difficult for you guys as you try to do that.
Clean or dig through the numbers.
The fourth quarter was a little bit messy with dish.
Additional for losses on 787 with the.
Lower expected production volumes, particularly in 2022.
A couple of one off charges in the defense area.
So I think if we strip out the forward loss items, which.
Mainly.
Have been related to lower volumes on our twin aisle programs and those are the programs where we're in a in a forward loss situation.
Those programs along with a.
A few one off items as we as we look at the third and fourth quarter. Once you kind of normalize those out.
We see our our excess costs starting to get more in alignment with the higher rates.
I think underlying when we look at actually our gross profit we're starting to see the benefits of the higher production rates and I think as we move into 2022.
And we get past the we're now at a low stable twin aisle rates.
We will start to see the 737 and the <unk> hundred $3 20 benefits show up in our overall margins.
And you know we're planning to execute here in 2022, and so some of that noise will be behind US you know we've seen a lot of ups and downs in 2020 . One a lot of schedule changes a lot of things that have impacted us and we've really tried to react to those accordingly.
Youll start to see the incremental margin growth that youre expecting as we move throughout 2022, but as I said in my opening comments.
Our first quarter will be our most challenging quarter.
From a revenue and an earnings and a cash flow standpoint, and we should see things start to really improve in the second and third quarters.
But youll see a nice margin tick up here in the first quarter compared to what you've seen here in 2021.
And I would just add that if you look at the segment margins for aftermarket Youll see theyre north of 20%.
Defense you really got to go back a couple of years to a normal year, but they're going to be in the as we said the 12% to 14% range going forward. So.
Those will also contribute in the future.
Okay alright, thank you.
Yeah.
The next question comes from Doug Harned of Bernstein. Your line is open. Please go ahead.
Good morning, Thank you.
Sure.
On the 787.
Boeing has talked about the need to get enough sense enough volume of through enough volume of inspection and repair.
So the FAA can look at this in a sense from a statistical standpoint.
And when you look at Spirit's role.
Because forward pressure bulkhead.
Overall section 41.
When you look at where you're at now both in terms of of new production and then there was being able to make sure that the nonconformity are gone and that it meets the requirements and then also.
The number.
The work you've been doing to get through the ship sets that you've been delivered you have delivered and are being inspected and repaired in the completed aircraft at Boeing can you give us a sense of where you are now on this.
Road to recovery and delivery on the 787 from our spirit standpoint.
Yes.
On the new production.
We've been through all the engineering analysis, and we've completed that and we know now what changes we need to make to production going forward and all of those changes are incorporated and we are executing those as we as we start to produce again.
In terms of the rework again, we've also identified the rework that needs to be done and in fact, I would say, we're about 40% complete with all of the rework that we need to do on the 110 units that Boeing still has some storage because we've had access during different points of last year to those and we were able to get in and do them and we will complete.
That rework as we get access to those aircraft and.
And so we know what has to be done.
We've already started the work as I said, we're 40% complete and in terms of new production.
We know how we will build that going forward and the teams are now.
Essentially perfecting that and putting it into operation as we as we resume production on the 77.
And then given given that insight.
Do you have any updated sense of when we might see deliveries happen.
Nothing beyond what what Boeing indicated in their earnings call last week.
So we are waiting for them to give us more information there obviously in close contact with the regulator and end customers.
I would just defer to the comments that Dave Calhoun made last week on when they'll resume deliveries.
Okay, great. Thank you.
The next question comes from David Strauss of Barclays. Your line is open. Please go ahead.
Yes.
Thanks, Good morning.
Yeah.
Maybe for Mark good morning.
Mark can you just talk about the.
The pathway in terms of burning off or coming down in terms of these excess capacity costs.
I think previously you had said.
25% lower you did 218 million. This year. So is that is that does that 25 presents the right do we get by the end of the year based on what Youre thinking about for Max rates are those.
Are those excess capacity costs pretty close to zero and are you actually also taking excess capacity costs on each seven at this point.
Okay. Good good question.
So on our excess capacity, we've got multiple programs.
That you know have where we're seeing much lower production rates and so we're we're period costing.
737 is one of them as you mentioned.
<unk> hundred 20 is another one and <unk> hundred 20.
We do have the negative impacts of the lower production rates on 787 that has a what I'll call collateral impact to our twin aisle programs. Because there is a shared costing rate and the lower the production is on 787. It has a negative impact on our our bowling twin aisle programs. So.
In 2020, we incurred $280 million worth as excess capacity costs, mainly.
737, and <unk> hundred 20 in 2021 with the integration or with the acquisition of Bombardier. We included excess some additional exit costs related to 820.
On our way to higher production rates. So in 2021, where we ended up roughly call it somewhere between $250 and $220 million.
And I expect based on the rate ramp.
In 2022.
That we should see Rx is cost to be.
Half of what we saw in 2021.
Yeah.
Okay.
The next question comes from Robert Spingarn of Malaise Research. Your line is open. Please go ahead.
Good morning.
Sam you opened your comments on cost initiatives and I wanted to get a sense of how much more cost reduction work is still needed to get the company.
Two to 16, 5% margin at rate 42 or are these initiatives accretive to that.
So what I would say is that it.
It's part of getting to that 16.
5% of these initiatives.
We spent a lot of a lot of time this path probably year and a half getting these in place will really start to.
See the benefit of those as rates start to increase and we'll really see what efficiencies that we can gain.
Additional to that is as we as we go out here into the future and we do eventually get to the 42 aircraft a month whatever point, Matt is there are a number of other initiatives that were constantly looking at that that are not baked into that for example, as you look in out years as you look at what you might do with their supply chain.
By the initiatives I talked about in terms of what we've done so far in terms of the.
Autumn the automation the Digitization those are all part and parcel of getting us where we need to be on the $16 five yes, and I would say that of course like any set of projects, we always set our own internal targets higher.
Recognizing that there might be some some leakage, but also to offset other challenges are going to come up obviously inflation in material and labor. All of these things are going to be headwinds that we'll have to overcome and so we always say we have to run fast to stand still so the initiatives that Sam outlined are all built into.
Our plan to get to 16, 5% and we targeted to achieve more than that but we want to make sure that we achieve at least that and so our goal is to offset the headwinds that we already know are there and still deliver and execute to that to that target.
Okay. Thank you for that just a quick clarification for Mark if I could.
Mark how do we think about the net effect on cash flow in 'twenty. Two from 787, we've talked a lot about the slow ramp and the rework and so on some of these things I guess shipments being down is a positive on the given the negative cash margin on new builds but then of course, all the rework and engineering.
It goes the other way so what's what's the net effect in 'twenty two and.
Does that lead to 'twenty, three being a tailwind on a 7% headwind.
Yes.
Rob really good question, you know our program really well.
And so youre right since we're in a forward loss position.
We have negative cash flow on a unit by unit basis on the 787 program. So the lower production rates here in 2022.
<unk> will will be a benefit to us.
I would say that those benefits offset the additional rework and finalization of some of the engineering analysis that we're completing so overall I think the lower volumes.
The savings there offsets the rest of the rework the cash that is required to go.
Complete the remaining call it $55, 60% of the rework that is needed.
The one area that we're really focused on is we had from a production system standpoint.
Work in process in our system in the line along with.
With supply chain parts.
Expected at a higher rate in 2021, so if we do our jobs right.
There could be some tailwind here in 2022 from an inventory standpoint, getting the production system getting the number of units inflow at the lower rate more in alignment with the current rate of production and so that could provide a little bit of tailwind from a cash flow standpoint in 2022.
And we're very very focused on.
Supporting Boeing.
When they decide to start the production back up will be there for them, but we got a lot of work to go do there.
So multiple pieces, we're juggling I think you've got it right benefits by lower deliveries.
We still have some rework the majority of that we should complete this year.
And then maybe we get a little bit of tailwind here.
We can do a good job managing down our supply chain parts to lower levels of production and getting our production system back in sync with the product production rates.
When when Boeing starts to deliver aircraft to airlines.
I mean, I think another way to say it is.
We completed 40% of the rework on 707 last year.
But really spent 60% of the cost because it included engineering analysis, which we don't have to do this year.
The 40% of the cost this year for the rework it will essentially be offset because of the lower production rates on the 707.
Okay got it thank you all.
Thank you.
Our next question comes from Sheila <unk> of Jefferies. Your line is open. Please go ahead.
Hey, good morning, guys. Thank you for the time.
Wondering if we could talk about maybe.
Commercial profitability I appreciate the segment breakout, but theres really no historical context.
We have a little bit or.
And maybe on the Triple seven specifically what is 2021 profitability look like and how do we think about the profitability of that program as it maybe steps up in rate.
Alright, Hey, Sheila good morning, good to hear from you.
I would say this if you can give us just a few days here, we will be filing our 10-K.
And when we file our 10-K it will show three years' worth of results under our new segmentation and so Youll see 2021 results 2020 results in 2000 22019 results, you'll see a breakout between commercial defense space and aftermarket Youll see revenues you will see operating margins.
And operating profit and I think.
Really if you go back to 2019, and we should have this filed in the next few days I think that will give you a good feel for the segment margins when we get back to normal type production rates and so I don't really want to get ahead and get too specific.
I think it's pretty easy to see in our in our disclosures today. Our earnings release, you saw aftermarket margins in excess of 20%. We've always told you those were accretive and north of 20.
We've talked about defense margins, you know that are typically somewhere between 10 and 14% and then I think when you when you see the 10-K that we file here and I think 2019 is a good proxy from what you should expect as we move into what we'll call as normal production 2023.
I think that'll give you a good feel for what overall commercial margins.
Expect to be.
I would just add this is that as we look at the 737 in particular, because obviously that's still a big program for US it's still a major driver of our economics one of the things we're going to do is look at 2016 as a comparison and the reason we picked 2016 is because that was a time we were at about 42 aircraft per month.
And it was stable production in the sense of we were producing 100% <unk>.
So even in 2019, we were still.
Doing a little bit of both <unk> and maxes, but now we're 100% Max's and so we're using 2016 as a surrogate to say where do we need to get all of our operating metrics and in comparable <unk> in <unk>.
Order to drive the margins to get to the 16, 5% target overall.
I was actually going I know that it wasn't it's Paul.
Got it.
And then just on the Triple seven can you talk about profitability and how it works there.
Sure I mean, seven Triple seven has always been a really good program for spirit right.
Obviously.
Tom starts to talk about 2016 is a good benchmark year for us when we when we talk to our teams about cost and margins.
The headwind we have right back in the 2016 2017 timeframe, we were producing at a rate of roughly eight aircraft per month.
And that really that overhead absorption really helps supercharge margins.
You know as Boeing has indicated will be over the next couple of years looking at 234 aircrafts per month.
We liked the triple seven freighter that we have and triple seven X.
As Boeing has indicated hopes to start delivering at the end of 2023.
And as those rates start to go up.
That will help contribute and contribute nicely to our overall commercial margins. It's a good program for us its a profitable program for us and it's one that.
We're hoping Boeing continues to get more orders hopefully they can.
To deliver more freighters were ready to support them and hopefully.
They execute on the timelines and getting the airplane certified and we're excited to be on that and do you see a lot of customers in the marketplace are excited about that triple seven platform with Qatar looking to buy triple seven freighters. So it's a good program for us and it will be a contributor as we move into 'twenty, two and 'twenty three.
Okay. Thanks.
Thank you.
The next question comes from Pizza Aman of Bad Your line is open. Please go ahead.
Yes, good morning, Tom Sam Mark.
Hey, Mark maybe I can just follow up with you on just kind of defense margins.
You kind of commented that kind of a more normalized 10% to 14%, but you've got a lot of growth planned in front of you and I assume some of that is still in development. So how do we think about the pathway on those margins. If we're just thinking about 22 and 'twenty three going forward. Thanks.
Sure.
We had a couple a couple.
A couple of onetime items here.
In 2021 that really kind of depressed the margins.
Does it really show what our defense margins are I talked about a.
An agreement that we have with bell on the V 280 <unk>.
Call It a cost sharing agreement as we as we work with them to win that program.
That was a.
That was an $8 million investment that we made in 2021 that won't repeat as we move forward.
And then we had a one time charge on one of our non classified programs in the fourth quarter. If I exclude those two those two items in 2021, we'd be looking at.
12% to 14% margins on the defense side.
And when we look at 'twenty two 'twenty three.
Everything is lining up for that we have a nice mix of of <unk>.
Mature programs like the CH 53, K, we all know that we're on the B 21, which is still in development and.
And we've been winning some classified programs in the classified programs typically our development type programs cost plus type programs that enables you to to achieve.
A fair margin for the work that we're doing so we've got a good path into defense right. We're excited about it.
Almost 20% growth.
In 2021, and we really feel good about the another nice.
Our growth profile as we move into into 2022.
And we expect to achieve those types of margins.
In this year and as we continue to grow it's going to be a nice contributor to our overall book of business.
One way to look at the defense margins as you can think of it in three categories. Mark mentioned the core programs that are mature and in production CH 53, K and you could even include <unk> and KC 46, which are the military derivatives of the commercial aircraft. There and then we have these new classified programs, which are cost plus and then I would.
Say, we have some specialty programs, particularly that came out of our <unk> acquisition that are.
More targeted more niche.
Tend to be a little bit higher margin and those tend to be on things like thermal protection barrier space applications missile applications for very specialty type of materials and so the combination of those three things give us confidence that the defense and space segment can deliver the 12% to 14% margins consistently going forward.
I appreciate the details thanks Tom.
The next question comes from George Shapiro of Shapiro Research. Your line is open. Please go ahead.
Hi, good morning.
Mark if I want some clarification. The forward loss that you took on the 787 looks like it was just due to lower production rate. So one can you tell us what you're including in terms of the expectation for.
For the 787 rates as to when you get to your $14 five which you've kind of had is the magic number and then to the.
Costs incurred for the rework that you did on the 787.
That's not included in the charge you took can you spell out roughly how much those costs are going to be and then is there any agreement as to what you might have to contribute to Boeing in terms of the $3 5 billion charge that they took effect if any.
Yes.
Okay, well, let me let me answer the first two questions and then then Tom will address the third component.
And so.
Maybe let me attack the second component, which is the rework okay.
So during 2021, we recorded approximately $154 million of forward losses in total.
We did incur afford loss in the fourth quarter of $32 million.
And that $32 million in the fourth quarter was specific to <unk>.
Lower deliveries, which extended the block and those lower deliveries are primarily.
Isolated to 2022.
The fourth quarter of 2021.
But we have included in those forward losses.
Estimates.
As it relates to the rework both reworking Boeing aircrafts that are.
That are completed the 110 that Tom talked about reworking airplanes in their production system and rework in our factory.
And as as Tom indicated it's a combination of engineering work that we did plus actually touch labor replacement parts et cetera.
And when we look at.
Completing that work.
As Tom said, roughly 40% to 45% of the work itself. The number of units were completed in 2021, but we spent about 60% of that cost the remaining components. The remaining 40% of the cost will be spent in 2022 as we complete those units so that.
Cost is in the forward loss.
As reflected in our financial results.
60% of that cash cost is included in our free cash flow that we reported in 2021 and the rest of it will be spent in 2022.
The latest schedule change again, it was kind of isolated to.
Five five and a half quarters.
It means that our.
Our block now extends into 2025.
And so.
You know you talked about getting to line unit <unk>, six which is our next price increase there.
But.
The.
The airplane program.
We're working very closely with our customer.
Once they get it delivered.
That'll be good for us, but at this point in time 2020 in 2021 has had a significant impact on our block it extended the block buy almost.
By roughly two years and that includes two years' worth of fixed costs like depreciation property taxes insurance that now on load.
That same number of units. So it's a lot of it's a lot of headwind on us.
But we've got it all captured it's in our foreign losses, it's all booked.
So hopefully that helps George and I would say George the as Mark said.
The lower production rates are already incorporated into the forward loss as well as all the rework and engineering analysis. Those were part of the forward losses in 2021, and so we've taken a pretty conservative view of what the production rates are likely to be this year.
If you look back in time in 2020, we delivered 112 707 chipsets in 'twenty. One it was 37 and we are anticipating even fewer this year kind of in line with what Boeing has been communicated.
With regard to your last question on claims I will just say that we've not discussed any claims with Boeing we do have rework to do on some of the work packages that spirit provides for the 787.
On the undelivered units to 110 that I mentioned and we're about 40% complete with those.
Now we're doing all of that rework at our own expense with our own people in boeing's factories and all of the costs for that are reflected in the forward losses that we took mostly in Q3 of last year in 2021.
But I would say is that the spirit rework is not the sole cause for delays to the Boeing 707 deliveries and.
So we.
We will stay in close communication with Boeing on that but.
But we have not discussed claims with them.
Okay. Thanks very much.
Thank you.
The next question comes from Ken Herbert of RBC. Your line is open. Please go ahead.
Hi, good afternoon, Mark and Tom Thanks for letting me on.
I just wanted to ask a question if I could Tom about the supply chain I wanted to see sort of relative to the third quarter, if you've seen any incremental delays in the supply chain specifically around I guess the three seven.
Any incremental areas, maybe a pressure from the supply chain and I guess more importantly, as rates continue to go up on the $3 seven and eventually on the 87 are there any areas you'd highlight maybe as a greater financial risk either where you might.
<unk> be looking to inject capital into the supply chain or where you would expect suppliers that might need a little more support if there are issues to support the rate.
Great.
Well, Ken the answer is we have seen some pressure.
Everybody in the in the global supply chain.
On some parts. So for example, the California ports tend to be a little bit more backed up right now so some of the products that we have coming out of Asia, and we have suppliers in Malaysia, and South Korea, Indonesia amongst others.
We have seen some some pressure on that and some increase in in freight rates, but if you look at freight has a total part of our of our business.
It's it's about 2% of our total cost base. So even if it goes up some its a relatively minor total cost impact even if the rates go up quite a bit one of the things that we've been doing for example is doing some consolidated air shipments.
From from Asia, where particularly say from South Korea is we can load up a lot of parts onto one aircraft and basically skip over the the ports in la in California.
Get them here. So so we've been able to demonstrate that we can do that as rates go up we are working very closely.
The entire supply chain to make sure that we have access to the parts.
In many cases, we're looking at dual sourcing opportunities as you know we have a significant fabrication capability internally. So we can in source things and we're looking for local suppliers to provide backups, if we get into trouble. So we're actively working all of those things, we actually appointed a new vice president to lead supplier development.
The field and we have a fairly large team that we can deploy anywhere in the world.
To work with suppliers as we see situations in one of the situations. We're looking actively to mitigate any potential supply disruptions at the ports.
And so we're putting in place proactively plans to either dual source or in source some of that content. So that we don't experience risk. Obviously, the 737 is because it's the biggest program we have that's where we're seeing.
Some of the most pressure, but that's where we're spending a lot of time and the mitigation 787.
It's much less so I mean, the rates are much lower and we expect them to remain lower for this year. So we're not anticipating as much pressure there.
That's great and if maybe if you could just quantify what of your $3 seven supply chain, maybe how much is from domestic suppliers versus how much do you source internationally just roughly.
Right, well, we still source more than 60% domestically and even on 737.
Because.
We just have some of our big suppliers happened to be domestic and a lot of them in the Kansas, Oklahoma region. So it's.
We do source from international suppliers, but still most of our supply is coming domestically.
Great. Thank you.
Okay.
The next question comes from Cai von <unk> of Cowen. Your line is open. Please go ahead.
Yes, thanks, so much and I apologize I missed some of the early part of the call but could you.
Give us.
Where you are on the 737 I E. How much the inventory how much of the stored fuselages you have.
At your facilities now where the rate is now where you expect to be in terms of stored fuselages by year end.
How should we think of the profile of your rate versus Boeing as Youre moving up.
Well Sam did mention that we are at 97 units. This morning. So we've broken the 100 barrier at one point, we were up to 140 and so as we said we are lagging Boeing on production rates, we can burn off that inventory our plan is to burn off the inventory by year end.
<unk>.
Two two up to a level of 'twenty, which will become a buffer of permanent buffer to cushion the production system, but.
When we when we get to that point, we will no longer be wrapping aircraft and storing them out the ramp so by the end of third quarter into the fourth quarter, we expect the ramp across the street to be to be pretty much empty.
Right now we're at a rate of 21.
You heard on Boeing's call that they are at a rate of about 26. So that's what we always said is that we'd like them by about 5% to burn down those aircraft over time, and that's exactly where we are.
And then.
In terms of.
The rates going forward as will stay at a at a lower rate to Boeing until we burn off that inventory and then we will rethink with them at the same rate that they are whenever that occurs.
And I expect that that will that rethinking will happen, yes that rethinking will happen by the end of the year.
Thank you.
Okay.
The next question comes from Hunter Keay of Wolfe Research. Your line is open. Please go ahead.
Hey, Thanks for getting me on just a couple quick ones.
I just wanted to just clarify a question on the free cash flow for 2022, what are you targeting breakeven free cash flow after $123 million payment going on I thought you had said last quarter, you were targeting breakeven free cash flow before that.
Correct or.
An improvement from that commentary.
It's still it's after the 123.
After okay alright. Thank you and then of the 24 development projects. Tom has mentioned that are over $1 billion. How many those are outside.
The aerospace and defence realm.
Well they are all in the aerospace and defense are all defense project Okay.
Youre not youre not thinking so it's all of them are defense and space.
Gordon.
I was wondering if there was some sort of like how much. It could you could you repeat that I didnt hear.
Sorry, I was just wondering basically with or thinking about some sort of like Oh.
Adjacent market type concept in some of these development projects.
No Adjacencies, it's all pure defense and space work.
Thank you.
Okay.
The next question comes from Kristine <unk> of Morgan Stanley . Your line is open. Please go ahead.
Okay.
Mark.
Just talking about the.
The charge you mentioned that the non classified program can you provide a little bit more detail on exactly what that was.
Sure.
And is it really one time if you can.
Sure where you get that.
Confidence.
Yes.
I'll take that Chris.
Christina It was really just a an issue on a single unit. It's some rework that we have to do to be honest, we took a bit of a conservative view that we'd have to do more rework, we'll refine and clarify that as we go forward, but it was a one off thing.
And we're going to fix it and we don't expect it to repeat.
Great and I think we're all your defense business.
What's the normalized margin, we should think about going forward.
Then.
Is there I mean with the program that you mentioned is this related to future vertical lift.
And how should we think about that upside for you with <unk>.
The former.
Right well as we've said for defense, we want to get to $1 billion by 2025 at typical defense margins, which we say our 12% to 14%.
So as I was saying.
A little bit earlier.
If you look at the type of.
Of defense I think Peter asked his question is we've got our classified programs and those tend to be in development phase those are cost plus we've got a kind of core mature programs like the CH 53, K or the P eight or the KC 46, and those are typical defense margins 12, 40%, but then we have some specialty programs, which.
Can be higher margin. So overall, we're saying 12% to 14% on defense going forward now.
Now on the future vertical lift.
We are on the Bell team the valor for the V 280, and as Mark said there was some investment in 2021 in that program as they are getting ready for the decision, which which I think is expected to they're going to make the decision sometime in March of this year may be communicated by June perhaps there's some slippage on that but.
Those numbers.
Arent built into our our forward outlook its only the things that are in our outlook is the the work on the development program, but this is the Florida program the future long range assault aircraft.
And it is nominally going to be a replacement for the Blackhawks, which have about 2000 units in the field. So it would be a very big program, if that were to win it and our.
Our our work package would go forward, that's a very big program going forward, but that's not included in our in our current financials.
Great. Thank you guys.
Thank you.
The next question comes from Ron Epstein of Bank of America. Your line is open. Please go ahead.
Okay.
Good morning.
We haven't talked about.
Pretty much every other airplane program, maybe with the exception.
<unk> hundred 20 program.
Could you walk us through that in a little more detail, where do you expect those rates to go and.
How do you think the profitability in our program will proceed over time.
Alright, well, an 820 were at about four aircraft per month right now.
Airbus has indicated that by 2025 middle of the decade that they would be at around 14, So thats kind of our trajectory and as you know we did have a forward loss. When we opened that program up in the Q in Q1 of last year of about $375 million, but we said it would basically get to breakeven by 2020.
<unk>.
When they get to the rate of 14, so that is what's built into our financials. Obviously, we've got programs in place to try to do better than that but that's what's built into our core financials right now.
And then final word from the Bombardier acquisition of their Aerostructures components.
Where do you get profitability anytime sooner than 2025.
Well two places one is the aftermarket so mark mentioned that the aftermarket. This year is about $240 million a lot of that did come from the Bombardier acquisition.
And that was at very good margins. So you saw that it's north of 20%. The other the other area is business jets.
We did inherit quite a bit of business jet work for Bombardier. We're now one of their largest suppliers and those are at positive margins I mean, obviously suffered a little bit because of COVID-19 , but as the rates recover we expect those to normalize but those are two areas of Bombardier acquisition that are immediately profitable with good margins.
Great. Thank you very much.
Welcome.
The next question comes from Microcar, mainly of curious Securities. Your line is open. Please go ahead.
Hey, good morning, guys. Thanks for sticking around to get me on <unk>.
I was wondering can we go back to kind of supply chain, but what Ken was asking I guess.
Specifically, just looking at the labor market thinking about inflation, that's going to impact both labor and raw materials and I think you guys had planned to re hire 4600 people over the next three years, but how are you thinking about just labor availability and then the 16, 5% margins I mean.
We don't have a crystal ball. So I don't know what inflation is going to look like but if we have inflationary pressures you still think you can get to that 16, 5%.
The answer is yes, we do.
Let me go through the two aspects of the question.
In terms of labor availability just to give you some sense, we laid off about 5200 people in Wichita, We've recalled already about 'twenty 200 of those.
A number of other people.
Did permanent retirements or took part of retirement programs. So they wouldn't be available in the fourth we still have about 1000 left in the recall pool, and we think that'll take us through at least mid year.
And perhaps longer so so the labor availability is good.
Because we still have a pretty good recall pool to tap and we're in the process, but the good news is we should have everybody recalls.
By the end of this year.
In Wichita, and we expect and in our other locations as well in the U S. Now with regard to inflation, obviously, that's a concern but.
If you look at the different components.
Direct labor is only about 8% of our cost.
Indirect labor is a bit more but there we made a lot of cuts and we're looking at improving productivity. So that we can be more productive as we come back and we don't need to add as much cost the raw material.
It is obviously a bigger number.
And then you have the parts and let me let me just say on raw material, we're fortunate as a tier one suppliers, we buy a lot of our raw materials through the buying consortia that Boeing and Airbus had so for Boeing it's <unk> in for Airbus Its combat and particularly on the Tms side.
That those prices tend to be fairly locked with Boeing they buy a huge volumes and we benefit from that.
And so.
We feel we have a good way to manage the raw material costs by working with Boeing and Airbus are there they are buying consortia.
On the parts those come from our supply chain that represents typically about 66% of our cost and Thats a big a big chunk of it is from suppliers now there. What we have done is we've put in place a lot of back to back contracts.
With for example on the 737 program our pricing with volume goes out to 2033, so, particularly during the pandemic. We offered a lot of our big suppliers the ability to put their contracts out to 2033 and a lot of them took it up and so we have back to back contracts with our suppliers, which essentially gives us a natural hedge on part inflation.
For a big chunk of our of our direct cost.
And so we.
We worked very closely with our suppliers during the pandemic.
We provided support to about 600 suppliers in total it added up to over $2 billion in a lot of that where these contract extensions out to 2033. So that we had a back to back hedge on inflation. So that's the way, we're managing inflation and some of the different buckets.
Got it very helpful. Thanks, guys.
Thank you.
The next question comes from Noah <unk> of Goldman Sachs. Your line is open. Please go ahead.
Hello, everyone.
No.
So how many 700 or seven Max shipments chipsets are you anticipating in 2022.
Right well.
Boeing as you know has has indicated that they will get up to 31 aircraft per month in early 2022, and so we will work with them depending on what's right. They established.
We are going to align with our customer we don't want to get out ahead of our customer and I think they are trying to.
Just look at the market and understand it before they make any commitments and we will do the same.
Tom I think last quarter, you had indicated for your ship sets. This year it could be in the range of 275 to 300.
If you're if you're lagging Boeing by five a month for a few months or I'm, sorry until you until you link up with them.
And there are 26 for a few months here breakthrough 31, even if they were to stay there for the full year that would be in the zone of 304, you before even unwinding the inventory you've talked about so it put you over 300.
I mean, you gave that range last quarter can you, maybe just update that range from last quarter.
And we.
We just did a math equation and said if Boeing is at 31 and they stayed there the whole year, let's say, so 12 times 31 for them would be.
372, and we said we wanted to burn down 80 that were in our inventory across the street. So the $3 72 minus 80 gets us into the $2 90 range that we just saw was a math equation just running the numbers like that to give everybody a scenario, but it really depends on the outlook for narrow body market.
And Boeing is carefully watching that and what they've indicated as theyre going to get to 31 in early 2022, and they haven't provided any more public guidance in that and so that's really the best that we can provide as well.
Yes.
There always is.
Transparent as we can be with you guys I just think it's really difficult for US right now to get ahead of our customer what they've said is there are 26 theyre going to 31.
They talked about.
In the next few months not in the first quarter, but probably in the second quarter, making decisions on what they might do above 31 and until Boeing makes that decision.
It's very difficult for us to give you precisely what we're going to deliver this year. It's it's still it's still in flux right and we're really waiting for direction from our customer and where they think things are going in the back half of the year.
And so although I know you want the information we really want it provided you I think we need further direction from Boeing all of US do before we can really get too precise as it relates to where we think things are going here and we will give you another update next quarter and when we know information that we've got it solidly.
We will provide if you like we always have in the past.
Yeah, No that's very fair.
Is 2023.
Relatively normal free cash flow margin year.
I mean of course, it depends on narrow body production rates, particularly the Max but based on kind of outlook I would say that yes, that's exactly what we're expecting.
Yeah.
No we don't want to get too ahead of things.
But the market recovery is coming.
I think even if it.
It isn't as bullish as everybody says.
It will be a very good cashier for spirit.
Okay.
Sorry to stay on this but just before I leave the call.
As the narrow body plan.
Overall situation.
Worsened or improved or is it just that you are now we're now at the point in time, where decisions will have to be made about the back half of 'twenty. Two so your ability to discuss them with specificity has lessened.
Because of the nature of not wanting to be ahead of your customer.
Yes, I would say nothing has changed and we are here in 2022, our customer has given indications about what they expect and what their outlook is and we don't want to get ahead of that but nothing has changed in the outlook.
Still fundamentally no I would say the latter.
Obviously things around a bit.
Okay.
Yes that makes sense. Thanks, so much.
Okay. Thanks, Don.
Yes.
The next question comes from Seth <unk> of Jpmorgan. Your line is open. Please go ahead.
Thanks and okay.
Good morning, Thanks for sticking around.
Over time this morning.
I guess.
Tom just one question now that we have the segments.
And we think about kind of the long term targets and I guess the understanding of <unk>.
Mentioned before that there's probably an inorganic component to.
Reaching those targets over the long term.
Is there like.
Or are there things that kind of need to happen with regard to getting up to certain production rates or leverage levels or cash flow levels.
Before.
You start to think more about that inorganic component or is it kind of totally.
Opportunistic.
Well as you know I mean deals happen when they happen and they are actionable when they become available so.
Obviously, it would be better if we could wait until everything was fully recovered and we were generating lots of cash, but if the right deal came up that was strategic and met our financial hurdles.
We would look at ways to accomplish how we could do it I mean, we do have.
Capacity and opportunities to fund deals if they came up.
But again in an ideal world, we'd get everything stable and back but as you know in in the world of M&A deals are available when they are available and you've got to be prepared to move.
Okay. Okay, great. Thanks, Thanks very much.
Thank you Seth.
There are no further questions. We'll conclude today's call. Thank you for joining you may now disconnect your lines.
Okay.
[music].
Okay.
Okay.
Okay.
Yeah.