Spirit AeroSystems Holdings, Inc. (NYSE:SPR) is a leading global aerospace manufacturer, providing design and manufacturing expertise for a wide range of fuselage, propulsion, and wing products and services. The company's headquarters are in Wichita, Kansas, with manufacturing and assembly facilities across the United States, Europe, and Asia.

Financials

In the fiscal year 2023, Spirit AeroSystems reported annual net income of -$616.2 million and annual revenue of $6,047.9 million. The company's annual operating cash flow was -$225.8 million, and its annual free cash flow was -$373.8 million. These financial results reflect the challenges the company has faced in recent years, navigating a complex and dynamic aerospace industry.

The first quarter of 2024 saw Spirit AeroSystems' revenue increase by 19.0% to $1,702.8 million, compared to $1,431.4 million in the same period of the prior year. This growth was primarily driven by increased production on the company's Boeing and Defense & Space programs. However, the company reported a net loss of $616.6 million for the quarter, a significant increase from the $281.3 million net loss in the first quarter of 2023.

The primary driver of the increased net loss was higher unfavorable changes in estimates, which totaled $534.6 million in the first quarter of 2024, compared to $121.9 million in the same period of the prior year. These changes in estimates included $495.4 million in net forward loss charges and $39.2 million in unfavorable cumulative catch-up adjustments.

The forward losses were primarily driven by a change in strategic pricing conversations with Airbus, incremental orders Airbus secured, foreign currency impacts, and supply chain cost growth on the A350 and A220 programs, as well as additional labor and supply chain cost growth on the B787 program and increased costs related to factory performance on the B767 program. The unfavorable cumulative catch-up adjustments were primarily related to increased production costs associated with changes implemented by Boeing to introduce a new product verification process in Wichita, Kansas.

Segment Performance

The company's Commercial segment, which accounted for approximately 80% of its revenue in the first quarter of 2024, reported an operating margin of -36%, compared to -4% in the same period of the prior year. This significant decline was due to the higher unfavorable changes in estimates recorded in the current period.

In contrast, the company's Defense & Space segment reported an operating margin of 13% in the first quarter of 2024, an increase from 10% in the same period of the prior year. This improvement was driven by higher revenues and margin on classified programs, partially offset by increased costs on the Boeing P-8 program resulting from the impacts of Boeing's changes to the quality inspection process and schedule changes.

The Aftermarket segment, which represented approximately 5% of Spirit AeroSystems' revenue in the first quarter of 2024, reported an operating margin of 18%, down from 20% in the same period of the prior year. The decrease in margins was primarily due to lower MRO activity during the current period.

Outlook

Looking ahead, Spirit AeroSystems faces a challenging operating environment, with ongoing supply chain disruptions, inflationary pressures, and customer-driven production changes. The company has taken several steps to address these challenges, including collaborating with Boeing on a new product verification process, negotiating with Airbus on pricing adjustments, and aligning its factory costs to react to sudden changes in customer-determined production rates.

Recent Developments

In April 2024, the company entered into a Memorandum of Agreement (MOA) with Boeing, where Boeing will advance $425.0 million to Spirit AeroSystems to support the company's liquidity. This advance will be repaid in installments from June to October 2024, based on expected production volumes and deliveries.

Liquidity

The company's liquidity position has been impacted by higher levels of inventory and contract assets, lower operational cash flows due to a decrease in expected deliveries to Boeing, and higher factory costs to maintain rate readiness. Management has developed a plan to improve liquidity, including evaluating additional strategies such as additional customer advances, negotiating changes to existing advance repayment arrangements, issuing incremental equity or debt financing, and restructuring operations to increase efficiency and decrease expenses.

Geographic Revenue Breakdown

Spirit AeroSystems' geographic revenue breakdown in the first quarter of 2024 was approximately 79% from the United States, 9% from the United Kingdom, and 12% from other international markets. The company's revenue is primarily generated from its two largest customers, Boeing and Airbus, which accounted for approximately 83% of its total revenue in the first quarter of 2024.

Business Overview

The company's business overview can be summarized as follows:

1. Commercial Segment: Designs and manufactures forward, mid, and rear fuselage sections and systems, struts/pylons, nacelles (including thrust reversers) and related engine structural components, wings, and wing components for large commercial aircraft and business/regional jets.

2. Defense & Space Segment: Designs and manufactures fuselage, strut, nacelle, and wing aerostructures for U.S. Government defense programs, including the Boeing P-8 and KC-46 Tanker, as well as fabrication, bonding, assembly, testing, and engineering analysis for fixed-wing aircraft aerostructures, missiles, and hypersonics work.

3. Aftermarket Segment: Designs, manufactures, and markets spare parts and provides maintenance, repair, and overhaul (MRO) services, repairs for flight control surfaces and nacelles, radome repairs, rotable assets, engineering services, advanced composite repair, and other repair and overhaul services.

Financial Ratios

In terms of financial ratios, Spirit AeroSystems' current ratio stood at 1.52 as of March 28, 2024, indicating a strong liquidity position. However, the company's debt ratio of 0.62 and debt-to-equity ratio of -3.73 suggest a highly leveraged capital structure, which may pose challenges in the current economic environment.

The company's liquidity situation has been a significant focus, as it has experienced net cash outflows from operating activities of $415.6 million in the first quarter of 2024, compared to $46.2 million in the same period of the prior year. This increase in net cash outflow was primarily driven by the build-up of contract assets due to the significant reduction in shipments of Boeing end items, as well as the impact of the excess pension plan asset reversion in the prior year period.

Conclusion

Spirit AeroSystems is navigating a complex and challenging operating environment, marked by supply chain disruptions, inflationary pressures, and customer-driven production changes. The company has taken several steps to address these challenges, including collaborating with its key customers, aligning its factory costs, and securing additional liquidity support. While the company's financial performance has been impacted in the short term, its long-term prospects remain tied to the recovery and growth of the global aerospace industry.