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Text: I'm Aaron Hunt, Director of Investor Relations.
We are pleased to see signs of recovery in global air traffic.
The U.S. air travel recovery has been strong and has come back faster than some expected.
TSA traveler throughput has exceeded two million passengers on multiple days during the past two months and some days in July where passenger screenings exceeded the 2019 levels.
A recent International Air Transport Association report indicates domestic passenger market show improvement, but with demand still down 22% versus June 2019 levels.
The situation remains dynamic.
We are monitoring the most recent reports of a spike of COVID-19 cases and what impact this may have on air traffic recovery.
However, the upward momentum of domestic air traffic over the past few months is an encouraging trend for our industry.
We are pleased to see the rebound of demand for the MAX and the news of large orders from United, Southwest, Alaska Air and Ryanair.
Ryanair took delivery of its first 737 MAX 8200 and had positive feedback.
With 85% of Spirit's backlog associated with narrow-body aircraft, we believe we are well positioned to benefit from this domestic air traffic demand and narrow-body recovery.
In the first half of this year, we delivered 64 737 shipsets compared to 37 in the first half of last year, a 73% increase.
We are also on track to deliver about 160 shipsets this year, a 125% increase over the 71 we delivered in 2020.
As we have discussed before, we are trailing Boeing in terms of 737 production rate to burn off the inventory of storage shipsets in Wichita and Tulsa.
This quarter, for example, we delivered 35 units but shipped 42 to Boeing.
We currently have about 125 units in storage, all of which Boeing owns.
We expect store units will decrease to about 100 shipsets by the end of the year.
Our plan is that we will reach 20 stored units by the end of next year, which will remain as a permanent buffer to cushion the production system.
Turning to the 787 program.
As a result of our ongoing engagement with Boeing, we identified an additional fit and finish issue in the forward section of the fuselage.
This issue is related to a part that Spirit receives from one of our Tier two suppliers, and we are working with Boeing and the supplier on a resolution.
We continue to coordinate with Boeing to ensure that we are performing all necessary rework.
Primarily driven by this issue, we have recognized a $46 million forward loss on the 787 program.
Despite this forward loss, we are maintaining our free cash flow target of negative $200 million to $300 million, as indicated on our last earnings call.
This amount is net of the $300 million cash tax benefit, which we expect to receive in the second half of this year.
Next, I would like to highlight the fact that we published our first sustainability report in June, outlining Spirit's environmental, social and governance strategy.
The report also includes a few of our notable 2020 achievements.
For example, by the end of this year, we intend to be 100% wind powered at our Wichita facility.
Now our Chief Operating Officer, Sam Marnick, will take you through updates on our acquisition integrations.
The integration workstreams for our recent acquisitions are progressing well.
We recently acquired the assets of Applied Aerodynamics, and we've already completed approximately 60% of the 323 identified integration tasks.
The integration of our other acquisition from Bombardier is also going well.
We have completed about 90% of the tasks required to integrate the Belfast, Morocco and Dallas site.
The remaining tasks are largely associated with the information technology transition services agreement, and we expect to complete it before the end of the year.
The estimated synergies we're expecting from the deal are tracking to plan.
We have seen good progress on A220 wing costs, supply chain improvements and infrastructure optimization.
Airbus continues to have confidence in this aircraft, and we expect production rates to continue to improve over time.
Turning to the Belfast pension plan.
We have ended our formal consultation with employees and the unions.
Subject to the completion of the process, we will close the plan to future benefit accrual and provide a defined contribution benefit plan before the end of the year.
The Bombardier asset acquisition significantly increased our business jet work statement.
We also secured the award of the engine nacelle on the new Falcon 10 times.
This new growth has established Spirit as a leading business jet aerostructure supplier, a market segment that is recovering rapidly following the pandemic.
These business aircraft inventories are down around 40% year-over-year, highlighting a strong demand.
Additionally, U.S. business jet flight activity is about 6% higher than prepandemic levels, another good indicator of a rebound in this market segment.
We believe our capabilities and business ship programs position us well to generate $500 million of revenue at accretive margins by 2023.
Another market segment, we are watching closely is urban air mobility, also referred to as electric vertical and take off aircraft or eVTOL.
We believe our expertise in composite aerostructure design and manufacturing bring unique capabilities in this future mode of transport.
We've been exploring opportunities with a number of companies in this exciting new area and have signed agreements that are already generating revenue.
These two acquisitions have helped us grow our aftermarket and business jet businesses.
We are also accelerating our revenue diversification efforts in defense, which we expect will grow by roughly 20% in 2021.
I hope everybody is doing well.
We continue to see 2021 as a bridge year for our Spirit and the commercial aviation industry.
Domestic air travel in the United States as well as many other regions of the world are starting to recover, which is encouraging, especially for narrow-body aircraft production rates.
We are cautiously monitoring the COVID variant and its impact on this recovery, particularly with international travel.
We expect international air travel will continue to recover at a slower pace, and therefore, wide-body programs will remain a headwind for the next few years.
As we work through the second half of the year, we are starting to see the benefits of increasing narrow-body production rates.
Now let's move to our second quarter 2021 results.
Revenue for the quarter was $1 billion, up 55% from the same quarter of last year and approximately 11% above the first quarter of 2021.
The revenue increase was primarily due to production on the 737 and A320 programs as well as increased revenue from the recently acquired A220 wing and Bombardier business jet programs.
These increases were partially offset by the lower wide-body production rates resulting from the continued impacts of the COVID-19 pandemic on international air traffic.
Overall deliveries increased to 243 shipsets compared to 159 shipsets in the same quarter of 2020.
The second quarter 737 deliveries have increased to 35 compared to 19 shipsets delivered in the second quarter of last year.
We still expect to deliver around 160 shipsets during the year.
Additionally, second quarter A320 deliveries increased to 96 compared to 69 shipsets delivered in the same period of last year.
Let's now turn to earnings per share on slide four.
We reported earnings per share of negative $1.30 compared to negative $2.46 per share in the same period of 2020.
Adjusted earnings per share was negative $0.31 compared to earnings per share of $2.28 in the second quarter of 2020.
Adjusted earnings per share excludes acquisition costs, restructuring costs, noncash voluntary retirement plan charges and deferred tax asset valuation allowance.
Looking at the operating margin, we saw improvement in the second quarter to negative 10% and compared to negative 57% in the second quarter of 2020.
The cost-reduction actions we have taken over the last year, along with increasing production rates, have contributed to the improved results with lower cost and expenses, including excess capacity, restructuring and abnormal COVID-19 costs.
We also recognized lower forward loss charges compared to the same period last year.
In the second quarter, we recognized forward loss charges of $52 million, primarily driven by engineering analysis and rework on the 787 program compared to forward loss charges of $194 million in the same period of 2020.
Additionally, the increase in other income is primarily related to Belfast pension plan and the absence of voluntary retirement expenses recognized in the second quarter of 2020.
I do want to mention that there was a revaluation of deferred tax assets during the second quarter of 2021 due to a future increase of the United Kingdom's corporate tax rate.
This resulted in an income tax benefit of approximately $55 million.
This benefit is included in both GAAP and adjusted EPS.
The revaluation of deferred tax assets, along with the adjustments related to tax law changes and other state tax impacts, resulted in incremental adjustments to the valuation allowance.
As a reminder, the valuation allowance is a noncash item.
Earlier this week, Spirit received the latest 787 program demand from Boeing.
Based on our preliminary assessment, we expect to incur an incremental forward loss of approximately $40 million to $60 million in the third quarter of 2021 due to the impact of reduced production volumes and the corresponding amount of fixed overhead absorption applied to lower deliveries.
Due to the timing, this is considered a subsequent event and is not reflected in our second quarter financial statements.
Now turning to free cash flow on slide five.
Free cash flow for the quarter was negative $53 million compared to negative -- $249 million negative in the same period of 2020.
This year-over-year improvement is primarily due to cost-reduction actions, increased production volume and favorable working capital management.
The second quarter cash from operations also reflect an improvement of $142 million as compared to the first quarter of '21.
Excluding the cash interest payments of approximately $80 million made during the second quarter, cash from operations was positive $51 million.
We expect the second half of this year to improve as single-aisle production rates continue to increase.
Despite the additional challenge of the 787 program, we continue to expect free cash flow for the year to be between negative $200 million and $300 million.
Let's now turn to our cash and debt balances on slide six.
We ended the second quarter with $1.3 billion of cash and $3.6 billion of debt.
In February, we paid $300 million floating rate notes early, and we remain on track to repay $1 billion in debt during the next three years.
The timing will be in line with air traffic and narrow-body production rate recoveries.
The cadence of the global recovery from the COVID-19 pandemic could result in fluctuations in our cash flows from period-to-period.
Now let's turn to our segment performance on slide seven.
In the second quarter, fuselage segment revenues were $492 million, up 51% compared to the same period of 2020, primarily due to higher production volumes on the 737 and Bombardier business jet program, partially offset by lower production volumes on the 787 program.
Operating margin for the quarter was negative 7% compared to negative 77% in the same period of the prior year, primarily due to increased 737 production volumes and the resulting decrease in excess capacity costs as well as less net forward losses in the absence of a loss on disposal charges.
The fuselage segment recorded $4 million of favorable cumulative catch-up adjustments and $36 million of net forward losses during the quarter, primarily due to the 787 program.
Propulsion revenue in the quarter improved to $242 million, up 43% compared to the same period of 2020, primarily due to higher revenue on the 737 program and aftermarket sales, partially offset by decreased volume on the 777 program.
Despite the challenging environment, operating margin for the quarter was positive 12%.
This is compared to negative 10% in the same quarter of 2020.
Increased 737 production and the resulting decrease in excess capacity costs as well as less forward loss charges were the main drivers to the improvement in the segment profitability.
The segment recorded $6 million of favorable cumulative catch-up adjustments and $9 million of forward losses.
High production volumes on the 737, A220 and A320 programs were the main contributors to the increase in wing revenue to $259 million.
Operating margin for the quarter was negative 6% compared to negative 35% in the second quarter of 2020.
The increases in segment profitability and operating margin were primarily a result of increased A320 production volume as well as less forward losses compared to the same period of 2020.
The segment recorded $8 million of net forward losses.
In closing, we are encouraged by the recovery in domestic air traffic demand.
We anticipate improved performance through the second half of the year as narrow-body production rates continue to increase.
Increasing narrow-body rates should also create positive momentum going into 2022.
Additionally, we are pleased to see the progress made so far on our aftermarket business jet and defense diversification efforts.
Integrating our acquisitions and expanding our diversification continue to drive long-term growth potential.
Cash flows remain a top priority for our team, and we are actively working on the execution of our cost and working capital initiatives.
We are also monitoring the remaining regulatory approvals needed for the 737 MAX return to service.
And in addition, we are encouraged by the domestic aerospace recovery from the COVID-19 pandemic.
We continue to see improvement in domestic air traffic, which has translated to improved production rates for our narrow-body aircraft versus 2020.
For the year, we expect to deliver 160 737 shipsets, up from just 71 in 2020.
This quarter, we also continued work with Boeing to address fit and finish issues on the 787 program, and we'll continue to coordinate with them to complete all necessary rework.
The recovery in narrow-body production is supporting better overall performance.
We're also encouraged by the continued growth in our aftermarket, business jet and defense programs.
We are maintaining our 2021 free cash flow guidance of negative $200 million to $300 million.

user
q2 loss per share $1.30.
q2 adjusted loss per share $0.31.
spirit aerosystems - as a result of ongoing engagement with boeing on 787 program, identified additional issue in forward section of fuselage.
recognized a $46 million forward loss on 787 program in this quarter.
spirit aerosystems - expects to incur incremental forward loss of about $40 to $60 million in q3 of 2021.

assistant