Tricky first quarter for Spirit Aerosystems

Spirit AeroSystems has booked a $617 million net loss for the first quarter of 2024 on a 19% lift in revenues to $1.703bn. Revenue was driven by higher production activities on commercial programmes as well as higher defence and space sales. The company’s operating loss of $528 million was driven by what Spirit called higher unfavorable changes in estimates during the current period, as well as the impact of Boeing's schedule changes in March and the investigation and quality audits resulting from the Alaska Airlines incident. ""The first quarter was characterized by several events, one of great significance was the partnership with Boeing to make improvements to the safety and quality of our production systems,” said Pat Shanahan, president and chief executive officer, Spirit AeroSystems. “We collaborated with Boeing to align 737 fuselage product inspection as close as possible to where the work is performed at our factories in Wichita. This is a significant accomplishment that we believe will enhance quality, eliminate rework, and benefit the entire production system between our companies.” As of March 1, 2024, Spirit and Boeing have performed joint product verification to ensure conformity prior to transportation to Renton final assembly. As a result, Spirit's deliveries to Boeing have been delayed and undelivered units have been built-up in Wichita, Kansas, resulting in higher levels of inventory and contract assets and lower operational cash flows. During late 2023, Spirit stated that it had prepared for expected increases in production rates but which have now been delayed. Spirit's current Boeing 737 production rate is approximately 31 aircraft per month, which the company anticipates remaining at through the end of this year. Spirit says that its ability to align factory costs, which include both internal and supply chain related spending, and to react to sudden changes in production rates “will have a material impact on results of operations and cash flows throughout 2024”. For the first quarter, Spirit’s overall deliveries decreased to 307 shipsets compared to 346 shipsets in the same period of 2023. Spirit's backlog at the end of the first quarter of 2024 was approximately $49 billion, which includes work packages on all commercial platforms in the Airbus and Boeing backlog. Spirit’s net forward losses were primarily driven by the Airbus A350 and A220 programs of $280.8 million and $167.0 million, respectively, due to the inability to reach a conclusion to pricing negotiations with Airbus, additional firm orders, and production cost growth. The forward losses on the Airbus A350 and A220 programs include net incremental losses for anticipated performance obligations beyond 2026 of $168.3 million in total. The Boeing 787 program drove $34.1 million of forward losses, due to supply chain and labour cost growth. Unfavourable cumulative catch-up adjustments were primarily related to the Boeing 737 program. Cash from operations and free cash flow during the first quarter of 2024 were negatively impacted by the disruption to Boeing 737 production and delivery delays. Although not confirmed, Spirit said it had received “indications” from Boeing to expect slower production and deliveries of the 787 program, which would incur a incremental forward loss of $50-60 million in the second quarter. Spirit’s total debt stands at $4.072bn. The company stated that events so far this year had caused “significant reductions in projected revenue and cash flows” noting that management “has developed plans to pursue various options to improve liquidity as needed and expects these plans will sufficiently improve the company's liquidity needs”. In the first quarter, Spirit produced 89 units and delivered 44 units prior to implementing the new strengthened inspection process that slowed production. The result was an increase of 45 fuselages to Spirit’s work in process. To offset the lack of payment but recognising the completion of fuselages, Boeing advanced Spirit $425 million to be repaid in the third quarter as the production system returns to equilibrium. Spirit is currently producing 31 aircraft per month on the 737 program, and expects to deliver 55 787 units during 2024 down from the 80 originally planned. During the earnings call, Shanahan commented that discussions with Boeing regarding a possible acquisition were ongoing but he refused to comment further.