Spirit AeroSystems Reports Q3 2019 Results; Announces Acquisition of Select Bombardier Aerostructure Assets and Adjusted Asco Purchase Price

Thursday, October 31, 2019

Spirit AeroSystems Reports Q3 2019 Results; Announces Acquisition of Select Bombardier Aerostructure Assets and Adjusted Asco Purchase Price Third Quarter 2019 Results and Highlights – Revenue of $1.9 billion, up 6% y/y – Announcement by Boeing to decrease 787 production rate to 12 aircraft per month (APM) resulted in $33 million forward loss, or $0.24 of EPS, due to fixed cost absorption – Earnings per share (EPS) of $1.26, down 21% y/y; Adjusted EPS* of $1.38, down 19% y/y – Cash from operations of $255 million, up 50% y/y; Adjusted free cash flow* of $219 million, up 68% y/y – Announces acquisition of select assets of Bombardier aerostructures and aftermarket services businesses in Belfast, Casablanca, and Dallas – Renegotiated purchase price on Asco acquisition to $420 million; Asco continuing to execute on conditions required by the European Commission; expected to close by April 2020 WICHITA, Kan.

“Spirit posted solid results in the third quarter driven by improved operational performance and the cost mitigation actions we implemented last quarter to lessen the financial impact of remaining at a rate of 52 aircraft per month on the 737,” said Spirit AeroSystems President and Chief Executive Officer Tom Gentile. “Adjusted EPS was $1.38. Excluding the impact of the 787 forward loss as a result of the decrease in rate, adjusted EPS for the quarter would have been $1.62. Segment margins continue to improve toward our goal of 16.5 percent, even as we invest to improve the quality and efficiency in our factories in a stable rate environment.”

Acquisition of Select Bombardier Aerostructure Assets
Spirit announced that on October 31, 2019, it entered into a definitive agreement to acquire select assets of Bombardier aerostructures and aftermarket services businesses in Belfast, Northern Ireland; Casablanca, Morocco; and Dallas, United States for cash consideration of $500 million. In addition, Spirit will assume approximately $300 million in net pension liabilities, and approximately $290 million of government grant repayment obligations, for a total enterprise valuation of $1,090 million, which equals 10 times the 2019 estimated adjusted EBITDA* of the acquired business. At closing, Spirit will pay $500 million to Bombardier and will make a cash contribution of approximately $130 million towards the pension liability, for total cash at closing of $630 million.

The acquired business is a global player in aerostructures and fabrication, delivering composite and metallic wing components, nacelles, fuselages and tail assemblies, along with high-value mechanical assemblies made out of aluminum, titanium and steel. The backlog of work includes long-term contracts on the Airbus A220 and A320 aircraft family, along with Bombardier business and regional jets.

“The Bombardier operations bring world-class engineering expertise to Spirit and add to a strong track record of innovation, especially in advanced composites,” said Gentile. “Belfast has developed an impressive position in business jet fuselage production, in addition to the world-acclaimed fully integrated A220 composite wing. This acquisition is in line with our growth strategy of increasing Airbus content, developing low-cost country footprint, and growing our aftermarket business.”

The acquisition is subject to regulatory approvals and customary closing conditions and is expected to close in the first half of 2020. “We expect to realize about $60 million in synergies from the acquisition, which values the acquisition on a post-synergy EBITDA multiple of 6.5 times,” said Gentile. Financial results will not include the acquired business results until the acquisition is closed.

737 MAX Program Update
Spirit continues to produce at a rate of 52 aircraft per month in accordance with its agreement with Boeing. “We communicate with Boeing regularly and will coordinate our production rates with them based on the timing of the 737 MAX returning to service. We remain very confident in the long-term outlook for the 737 MAX, and we are proud to be a partner on the program,” said Gentile.

787 Program Update
Following Boeing’s recent announcement that they will be reducing production rate on the 787 program in late 2020, the company has partially reversed the gain recognized in the fourth quarter of 2017 with a $33 million forward loss charge. This charge reflects the extended time it will take to complete the accounting contract through line unit 1405.

Asco Acquisition Update
The June 2019 cyberattack affecting Asco and its businesses has continued to result in delays to the data segregation process required by the European Commission to close the Asco transaction. Given the delays involved in closing this transaction and other considerations, the parties agreed on October 28, 2019 to an amended purchase agreement extending the long stop date to April 4, 2020 and reducing the purchase price from $604 million to $420 million, among other additional terms. Spirit continues to remain confident about the strategic fit of Asco.

Revenue
Spirit’s third quarter 2019 revenue was $1.9 billion, up from the same period of 2018. This increase was primarily driven by higher production volumes on the Boeing 777, 787 and Airbus A350 programs as well as higher revenue recognized on the Boeing 787 program. (Table 1)

Spirit’s backlog at the end of the third quarter of 2019 was approximately $44 billion, with work packages on all commercial platforms in the Boeing and Airbus backlog.

Earnings
Operating income for the third quarter of 2019 was $206 million, down compared to $223 million in the same period of 2018. This decrease was primarily due to the forward loss recognized on the Boeing 787 program as a result of Boeing’s recently announced production rate decrease and the absence of the recovery of legal fees in the same period of the prior year, partially offset by performance and favorable model mix on the Boeing 737 program and increased activity with Global Customer Support and Services (GCS&S). The third quarter EPS was $1.26, compared to $1.59 in the same period of 2018. Third quarter 2019 adjusted EPS* was $1.38, excluding the impact of the planned Asco acquisition and voluntary retirement program (VRP) offered during the second quarter of 2019, compared to $1.70 in the same period of 2018, adjusted to exclude the impact of the planned Asco acquisition and debt financing costs. Additionally, the effective tax rate during the third quarter increased to 24.1% compared to 17.9% in the same period of the prior year. (Table 1)

Cash
Cash from operations in the third quarter of 2019 was $255 million, which includes the $123 million cash advance received as part of the Memorandum of Agreement reached with Boeing in April 2019, compared to $170 million in the same quarter last year. The advance helped to offset increased inventories with suppliers required during the period of 737 MAX disruption. The advance repayment will be spread over deliveries in future years. Adjusted free cash flow* in the third quarter of 2019 was $219 million, up compared to $130 million in the same period of 2018. Cash balance at the end of the quarter was $1.5 billion, which includes the funds necessary to complete the acquisition of Asco. (Table 2)

As discussed during the first and second quarter 2019 earnings reviews, share repurchases are paused pending further clarity surrounding the timing of the 737 MAX returning to service. The share repurchase authorization remains at $925 million.

Segment Results
Fuselage Systems
Fuselage Systems segment revenue in the third quarter of 2019 increased slightly from the same period last year to $1.0 billion. This increase was primarily due to higher production volumes on the Boeing 787 and Airbus A350 programs in addition to higher revenue recognized on the Boeing 787 program, partially offset by lower production volumes on the Boeing 737 program. Operating margin for the third quarter of 2019 decreased to 10.5 percent, compared to 13.6 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 higher costs related to the Boeing 737 program, largely resulting from the impacts of the Boeing 737 MAX grounding. In the third quarter of 2019, the segment recorded pretax $(14.4) million of unfavorable cumulative catch-up adjustments and $(18.8) million of net forward losses. In the third quarter of 2018, the segment recorded pretax $(12.0) million of unfavorable cumulative catch-up adjustments.

Propulsion Systems
Propulsion Systems segment revenue in the third quarter of 2019 increased 18 percent from the same period last year to $521 million, primarily driven by favorable model mix on the Boeing 737 program and higher production volume on the Boeing 777 program. Operating margin for the third quarter of 2019 increased to 21.4 percent, compared to 17.2 percent during the same period of 2018, primarily due to performance and favorable model mix on the Boeing 737 program. In the third quarter of 2019, the segment recorded pretax $1.8 million of favorable cumulative catch-up adjustments and $(4.0) million of net forward losses. In the third quarter of 2018, the segment recorded pretax $(2.4) million of unfavorable cumulative catch-up adjustments and $(0.8) million of net forward losses.

Wing Systems
Wing Systems segment revenue in the third quarter of 2019 increased three percent from the same period last year to $391 million, primarily due to higher production volume on the Boeing 777 and 787 programs. Operating margin for the third quarter of 2019 decreased to 13.8 percent, compared to 15.5 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. In the third quarter of 2019, the segment recorded pretax $(0.4) million of unfavorable cumulative catch-up adjustments and $(6.0) million of net forward losses. In the third quarter of 2018, the segment recorded pretax $1.4 million of favorable cumulative catch-up adjustments and $0.3 million of favorable changes in estimates on forward loss programs.

Source:- Spirit Airlines

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