Friday, February 28, 2020
Spirit AeroSystems Holdings, Inc. reported fourth quarter and full-year 2019 financial results.
| Table 1. Summary Financial Results (unaudited) | ||||||
| 4th Quarter | Twelve Months | |||||
| ($ in millions, except per share data) | 2019 | 2018 | Change | 2019 | 2018 | Change |
| Revenues | $1,959 | $1,835 | 7% | $7,863 | $7,222 | 9% |
| Operating Income | $96 | $244 | (61%) | $761 | $843 | (10%) |
| Operating Income as a % of Revenues | 4.9% | 13.3% | (840) BPS | 9.7% | 11.7% | (200) BPS |
| Net Income | $68 | $178 | (62%) | $530 | $617 | (14%) |
| Net Income as a % of Revenues | 3.5% | 9.7% | (620) BPS | 6.7% | 8.5% | (180) BPS |
| Earnings Per Share (Fully Diluted) | $0.65 | $1.68 | (61%) | $5.06 | $5.65 | (10%) |
| Adjusted Earnings Per Share (Fully Diluted)* | $0.79 | $1.85 | (57%) | $5.54 | $6.26 | (12%) |
| Fully Diluted Weighted Avg Share Count | 104.6 | 105.6 | 104.7 | 109.1 | ||
“The grounding of the 737 MAX was a significant issue for Spirit in 2019, particularly after Boeing suspended production on December 16, 2019,” said Spirit AeroSystems President and Chief Executive Officer Tom Gentile. “After Boeing directed Spirit to suspend deliveries on December 19th, we took several actions to lower costs and preserve liquidity. We implemented a workforce reduction of 2,800 employees in Wichita and 400 employees in Oklahoma. We also negotiated an amendment to our credit facility providing for covenant relief into 2021 and secured a $375 million short-term delayed draw term loan facility. With these actions, we believe our liquidity position remains sufficient. In 2019, we generated $723 million in adjusted free cash flow for the year and ended the year in a strong cash position of $2.4 billion. Spirit remains a proud partner on the MAX program and we look forward to working with Boeing to ensure the long-term success of the program.”
737 MAX Program Update
On January 30, 2020, Spirit announced it had agreed on a production rate with Boeing to produce 216 Boeing 737 MAX shipsets in 2020. On February 6, 2020, Boeing and Spirit executed a Memorandum of Agreement (MOA) that memorialized the production rate agreement, subject to any changes in requirements by Boeing. In addition, the MOA provides that Boeing will pay $225 million to Spirit in the first quarter of 2020, consisting of (i) $70 million in support of Spirit’s inventory and production stabilization, of which $10 million will be repaid by Spirit in 2021, and (ii) $155 million as an incremental pre-payment for costs and shipset deliveries over the next two years. Other terms include extending the repayment date of the $123 million advance received by Spirit under the 2019 MOA to 2022, and extending the 737 MAX pricing terms through 2033 (previously, pricing was through December 31, 2030).
Accounting Review Results
On January 30, 2020, the Company announced it was conducting a review of its accounting process compliance and had concluded that the Company did not comply with its established accounting processes with respect to whether and when to accrue certain potential contingent liabilities received by the Company after the end of the third quarter of 2019. The review is now substantially complete and the Company concluded that it should have recorded an incremental contingent liability for the third quarter of 2019 of less than $8 million. Although the Company views this difference as immaterial and no restatement of financial statements is required, the matter led the Company to conclude that a material weakness in our internal control over financial reporting existed as of December 31, 2019. The Company has a corrective action plan in place and expects the material weakness in financial reporting to be fully remediated by the end of the year. Additional information on this material weakness will be described in the Company’s Annual Report on Form 10-K for 2019.
Acquisition of FMI
On January 10, 2020, Spirit closed its purchase of Fiber Materials Inc. (FMI) for $120 million. FMI is an industry-leading technology company specializing in high-temperature materials and composites for defense. The company’s main operations focus on multidirectional reinforced composites that enable high-temperature applications such as thermal protection systems, re-entry vehicle nose tips, and rocket motor throats and nozzles. Their unique capabilities have positioned them as a leader in 3D woven carbon-carbon high-temperature materials for hypersonic missiles, which the Department of Defense has identified as a national priority. FMI is based in Biddeford, Maine, and has more than 200 employees at two facilities in the state. Acquiring FMI aligns with the Company’s strategic growth objectives to diversify its customer base and expand the current defense business.
“FMI’s existing portfolio is an excellent fit with Spirit, and its capabilities will help us develop new composites technology for a number of aerospace applications,” said Gentile.
Revenue
Spirit’s fourth quarter 2019 revenue was $2.0 billion, up from the same period of 2018. This increase was primarily driven by higher production volumes on the Boeing 737, 787 and Airbus A350 programs, higher revenue recognized on the Boeing 787 program, and increased Global Customer Support and Services (GCS&S) activity, partially offset by lower revenue recognized on the Airbus A350 program in accordance with pricing terms. Revenue for the full-year increased to $7.9 billion, primarily due to higher production volumes on the Boeing 777, 787 and Airbus A350 programs, higher revenue recognized on the Boeing 787 program, increased GCS&S activity, and favorable model mix on the Boeing 737 program. (Table 1)
Spirit’s backlog at the end of the fourth quarter of 2019 was approximately $43 billion, with work packages on all commercial platforms in the Boeing and Airbus backlog.
Earnings
Operating income for the fourth quarter of 2019 was $96 million, down compared to $244 million in the same period of 2018, primarily driven by the forward loss recognized on the Boeing 787 program as a result of Boeing’s recently announced production rate decrease from 12 APM to 10 APM, performance on the Boeing 737 program, lower margin recognized on the Airbus A350 program in accordance with pricing terms and higher acquisition-related expenses. Operating income for the full-year was $761 million, down compared to $843 million in 2018, primarily due to higher acquisition-related expenses, reduced profitability on the Boeing 737 program largely resulting from the 737 MAX grounding, and the forward losses recognized in the third and fourth quarter driven by Boeing’s announcements to decrease the 787 production rate, partially offset by higher production volume on the Boeing 737 and 777 programs. Fourth quarter EPS was $0.65, compared to $1.68 in the same period of 2018. Fourth quarter 2019 adjusted EPS* was $0.79, excluding the impacts of planned acquisitions and the voluntary retirement program (VRP) offered during the second quarter of 2019, compared to $1.85 in the same period of 2018, adjusted to exclude the impact of the planned Asco acquisition. Full-year EPS was $5.06, down compared to $5.65 in 2018. Full-year adjusted EPS* was $5.54, excluding the impacts of planned acquisitions and the VRP offered during the second quarter of 2019, down compared to $6.26 in 2018, adjusted to exclude the impact of the planned Asco acquisition and debt financing costs. (Table 1)
Cash
Cash from operations in the fourth quarter of 2019 was $204 million, up slightly from $203 million in the same quarter last year. Adjusted free cash flow* in the fourth quarter of 2019 was $102 million, down compared to $145 million in the same period of 2018. Full-year cash from operations was $923 million, up compared to $770 million last year. Full-year adjusted free cash flow* was $723 million, up compared to $565 million in 2018. The Company fully drew its $800 million revolver at the end of the quarter in light of the uncertainty surrounding the Boeing 737 MAX production suspension, and the proceeds of that draw are included in the total cash balance. Cash balance at the end of the quarter was $2.4 billion. (Table 2)
On February 24, 2020, Spirit amended its credit agreement to provide relief from the prior financial covenants through the first quarter of 2021 due to the MAX production suspension and low 2020 production rate. In addition, Spirit entered into a short-term delayed draw term loan facility of $375 million, which is generally subject to covenants that are substantially similar to those in Spirit’s Credit Agreement. The $375 million facility, which will be available to be drawn until August 15, 2020, matures and shall be repaid in full (if drawn) on the earlier to occur of (a) September 15, 2020, and (b) the date that is 45 days after the date on which the FAA re-certifies the 737 MAX program.
* Non-GAAP financial measure, see Appendix for reconciliation
| Table 2. Cash Flow and Liquidity (unaudited) | ||||||
| 4th Quarter | Twelve Months | |||||
| ($ in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change |
| Cash from Operations | $204 | $203 | 1% | $923 | $770 | 20% |
| Purchases of Property, Plant & Equipment | ($113) | ($100) | 13% | ($232) | ($271) | (14%) |
| Free Cash Flow* | $91 | $103 | (12%) | $691 | $499 | 38% |
| Adjusted Free Cash Flow* | $102 | $145 | (30%) | $723 | $565 | 28% |
| December 31, | December 31, | |||||
| Liquidity | 2019 | 2018 | ||||
| Cash | $2,351 | $774 | ||||
| Total Debt | $3,034 | $1,895 | ||||
2020 Outlook
Given the continued uncertainty surrounding the timing of return to service of the 737 MAX, Spirit will not be providing guidance at this time.
Segment Results
Fuselage Systems
Fuselage Systems segment revenue in the fourth quarter of 2019 increased two percent from the same period last year to $1.0 billion. This increase was primarily due to higher production volumes on the Boeing 787 and increased GCS&S activities, partially offset by lower production volumes on the Boeing 737 program. Operating margin for the fourth quarter of 2019 decreased to 5.8 percent, compared to 15.6 percent during the same period of 2018, primarily due to the forward loss recognized on the Boeing 787 program as a result of Boeing’s announced production rate decrease as well as lower margin recognized on the Boeing 737 program. In the fourth quarter of 2019, the segment recorded pretax $(4.2) million of unfavorable cumulative catch-up adjustments and $(24.1) million of net forward losses. In the fourth quarter of 2018, the segment recorded pretax $(3.9) million of unfavorable cumulative catch-up adjustments and $4.9 million of favorable changes in estimates on forward loss programs.
Propulsion Systems
Propulsion Systems segment revenue in the fourth quarter of 2019 increased 20 percent from the same period last year to $532 million, primarily driven by higher production volumes on the Boeing 737, 777 and Airbus A220 programs as well as favorable model mix on the Boeing 737 program. Operating margin for the fourth quarter of 2019 increased to 18.7 percent, compared to 18.0 percent during the same period of 2018, primarily due to performance and favorable model mix on the Boeing 737 program. In the fourth quarter of 2019, the segment recorded pretax $(6.3) million of unfavorable cumulative catch-up adjustments and $(12.0) million of net forward losses. In the fourth quarter of 2018, the segment recorded pretax $(0.4) million of unfavorable cumulative catch-up adjustments and $(0.7) million of net forward losses.
Wing Systems
Wing Systems segment revenue in the fourth quarter of 2019 increased four percent from the same period last year to $391 million, primarily due to higher production volumes on the Boeing 787 and Airbus A350 programs. Operating margin for the fourth quarter of 2019 decreased to 10.0 percent, compared to 16.1 percent during the same period of 2018, primarily driven by the forward loss recognized on the Boeing 787 program as a result of Boeing’s announced production rate decrease, performance on the Boeing 737 program as well as pricing terms on the Airbus A350 program. In the fourth quarter of 2019, the segment recorded pretax $(3.0) million of unfavorable cumulative catch-up adjustments and $(5.6) million of net forward losses. In the fourth quarter of 2018, the segment recorded pretax $2.1 million of favorable cumulative catch-up adjustments and $1.4 million of favorable changes in estimates on forward loss programs.
Source:- Spirit Airlines
Friday, December 8, 2023
