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Text: I'm Aaron Hunt, Director of Investor Relations.
A year ago, we were contending with the unprecedented disruption and uncertainty from the continued 737 MAX grounding and COVID-19 pandemic.
Since then, the FAA lifted the 737 MAX grounding order and shortly after that the aircraft resumed commercial service.
Today the 737 MAX is certified in the U.S., U.K., Europe and many other parts of the world.
Additionally, Boeing has secured several new orders from airlines, including large orders from Southwest, Alaska Air and Ryanair, who will take delivery of their first newly certified 737 MAX 8200 aircraft in the near future.
The COVID-19 pandemic has had a significant global impact.
The aviation industry saw more than 19,000 aircraft grounded and air traffic down more than 95% at the worst point last April.
We continue to see encouraging news on the return to commercial air travel with domestic routes, primarily flown by narrow-body aircraft leading the way.
In the U.S., the TSA checkpoint travel numbers have been consistently staying above the 1 million mark since early March and more recently, we have seen many days above 1.5 million travelers, including 1.6 million travelers last Sunday.
We have observed a similar domestic recovery in China.
We believe Spirit is well positioned to benefit from this trend of recovering domestic air travel in the largest aviation markets, given that 85% of our backlog is narrow-body aircraft.
In line with the improved narrow-body outlook, as we described in our 10-K, Spirit is planning to produce about 160 737 MAX aircraft in 2021.
This plan allows for us to burn down the Boeing inventory of 737 MAX shipsets stored in Wichita and Tulsa.
With the current outlook, we should be at our targeted number of a permanent buffer to cushion the production system toward the second half of 2022.
We have regular conversations with Boeing on the current environment and we'll work closely with them to make any necessary rate adjustments as the year progresses.
As for our Airbus narrow-body programs, we have plans in place to support the A220 and the A320 Airbus schedule increases, as the air traffic demand recovery continues.
International air traffic demand still remains at relatively low levels versus pre-pandemic times and is expected to take longer to recover.
Consequently, we have experienced and believe there will continue to be pressure on our wide-body programs.
The wide-body programs have created significant pressure on our overall performance, as the OEMs have adjusted production rates on those programs downward.
On the A350, schedule changes this year and next year contributed to the forward loss of $29 million that we announced this quarter.
The forward loss also included some charges for tooling and bill process improvements to improve product quality.
We decided to implement the improvements at our Kinston facility during this period of lower production rates.
Over the last few months, we have also been working with Boeing on the 787 program.
At Boeing's request, we conducted an extensive review and engineering analysis as a result of fit-and-finish issues that they had identified on other parts of the aircraft.
While there were no safety-of-flight issues, areas of rework were identified.
We have started the rework and Boeing has reinitiated deliveries of the 787.
The rework plan that we have put into place supports Boeing's 787 delivery schedule.
The engineering analysis and the projected rework will drive a forward loss of $29 million.
Mark will provide more detail on the forward losses in his comments.
The uneven recovery from the pandemic, created challenges during our first quarter.
During 2021, we expected to see performance start to normalize as we get into the second half of the year assuming air traffic recovery remains on track.
Overall, our 2021 free cash flow usage is expected to be between $200 million and $300 million after considering the $300 million cash tax benefit.
As we have previously indicated, we expect our cash flow to be positive in 2022 as production rates improve and we realize all the benefits of the cost reduction and productivity actions that we have taken.
Now I'd like to turn our focus to the integration process of our recently acquired Belfast, Casablanca and Dallas sites.
The integration of our three newest sites is progressing to plan.
To date, we have completed roughly 80% of the 450 tasks we have identified to capture synergies and integrate the operations into Spirit.
Some of the remaining tasks such as exiting the information technology transition services agreement will take longer by plan design.
A large part of our integration focus is capturing the synergies which we projected to be 6% of revenues.
Based on 2021 revenues that are expected to be $700 million, we estimate the synergies to be $42 million.
The areas we are focusing on include A220 wing costs, supply chain, infrastructure and engineering.
We are on target to achieve the $42 million and perhaps even exceed it by 2023.
In the period beyond 2023, we are identifying additional productivity opportunities.
In addition, as part of our integration, we are evaluating the Belfast pension plan and our informal consultation with the employees and the unions on this matter.
The current plan is close to new participants and we are evaluating closing the plan to future accruals and replacing it with a defined contribution benefit plan.
Another significant part of this acquisition was a strong aftermarket business.
Our Belfast and Dallas sites are now key pieces of our aftermarket revenue growth plan.
While we've seen some COVID-related headwinds to the aftermarket business in the near-term, the combined team is working to transfer repairs between sites and strengthen customer relationships as air traffic recovers.
In the first quarter, some of our activities including moving tooling and rotables to Belfast to support Boeing programs.
Our Belfast operations have recently completed their first Boeing 777 thrust reverser repair.
To grow the aftermarket business further, we recently announced that we acquired the assets of Dallas-based Applied Aerodynamics, which provides radome and flight control surface repairs.
We also announced the signing of a new JV agreement in Asia with EGAT in Taiwan, which enables us to provide our full suite of expanded repairs to that region.
All of these actions are contributing to our target of building the Spirit aftermarket business to $500 million in revenue at accretive margins by 2025.
In addition to diversifying into aftermarket, we've also been accelerating diversification into defense programs.
After growing almost 20% in 2020, we expect our defense business revenue to grow 15% in 2021.
The excess commercial capacity we have in our wide-body factories, especially those that produce composite structures provide us with immediate capacity that we can repurpose to defense programs.
We have been fortunate to win positions on several new classified defense projects.
We believe we are on track to achieve $1 billion of defense revenue by the mid-2020s with typical defense margins.
The programs of record for where we have work content will generate approximately $6 billion of future revenue.
In addition to diversifying our business, we've also been focused on delevering to reduce the additional debt we have accumulated during this pandemic period.
One step we took was to repay $300 million in floating rate notes in February.
Our next debt maturity is $300 million in 2023.
We also have other pre-payable debt that could be retired as part of our objective to repay $1 billion in the next three years as production rates recover and we start generating positive cash flow.
We believe these debt-reduction actions along with increased production rates will help us regain our investment-grade credit rating.
Our efforts to drive margins are also progressing well.
In Wichita, the new automated floor beam assembly line that we discussed in the last call, is now operational.
And in our Prestwick site, we produced the first shipsets of A320 spoilers using a resin transfer molding process and we'll ship those to Airbus in mid-May.
Both of these narrow-body manufacturing lines will help drive the margin improvement back to our target of 16.5% as production rates recover.
I hope everybody is doing well and staying healthy.
We continue to see 2021 as a bridge year for our Spirit and commercial aviation industry.
While the wide-body programs will remain a headwind for the next few years, domestic air travel in many regions of the world is trending in the right direction, which is an encouraging sign especially for narrow-body aircraft.
During 2021, we have or are planning to increase production rates on our narrow-body programs in order to support our customer delivery of new aircraft.
We expect the first half of the year to be the most challenging to our financial results and expect to see improvement in the back half of the year as the narrow-body production rates increase.
Now, let's move to our first quarter 2021 results.
The revenue decrease was primarily due to lower body rates which have been under pressure due to the reduced international air traffic resulting from the continued impacts of the COVID-19 pandemic.
In addition, our A320 production rate was lower in the first quarter of this year compared to last year.
Revenue from our recently acquired Bombardier business jet programs and the A220 wing program helped offset some of the wide-body revenue decrease.
Our defense programs continue to be a bright spot, up 41% as compared to the same quarter of last year.
Turning to deliveries, wide-body program deliveries were 48, down from 91 in the first quarter of 2020, which is a 47% reduction.
The narrow-body program deliveries in the first quarter of 2021 were also lower when compared to 2020 with 171 shipsets in the first quarter of 2021 compared to 221 in 2020.
The main driver of the decrease was the A320 program with 58 less deliveries than the first quarter of 2020.
The first quarter 737 MAX deliveries have gradually increased to 29 compared to 18 shipsets delivered in the first quarter of last year.
Overall, deliveries decreased to 269 shipsets compared to 324 shipsets in the same quarter of last year.
Let's now turn to earnings per share on slide four.
We reported earnings per share of negative $1.65 compared to negative $1.57 per share in the same period of 2020.
Adjusted earnings per share was negative $1.22 per share compared to negative earnings per share of $0.79 in the first quarter of 2020.
Adjusted earnings per share excludes the impacts of the acquisitions, restructuring costs, the non-cash voluntary retirement plan charges, and the deferred tax valuation allowance.
Operating margin for the first quarter was negative 14% compared to negative 15.5% in the first quarter of 2020.
The past actions we have taken have contributed to the improved first quarter of 2021 with lower cost and expenses including restructuring, excess capacity, abnormal COVID-19, and SG&A.
This was partially offset by additional forward losses on the 787 and A350 programs compared to the same period last year.
Additionally, the increase in other income primarily reflects the absence of voluntary retirement expenses recognized in the first quarter of 2020, partially offset by a loss on foreign exchange rates.
Interest expense and financing fee amortization in the first quarter of 2021 increased $28 million, driven by increased interest expense on debt and higher interest rates compared to the same period in the prior year.
In the first quarter, we recognized forward loss charges of $72 million primarily driven by engineering analysis and rework to support Boeing's resumption of 787 deliveries and lower A350 production rates, coupled with higher one-time costs for production system and quality improvements.
During the first quarter of 2021, an incremental $42 million valuation allowance on deferred income tax assets was recorded.
As a reminder, this is a non-cash item.
Now, turning to, free cash flow on slide five.
Free cash flow for the quarter was a use of $198 million, compared to a use of $362 million in the same period of 2020.
This year-over-year improvement is primarily due to favorable working capital management and cost-reduction efforts, partially offset by the absence of the $215 million received last February, as a result of the MOA with Boeing.
Excluding the $215 million of Boeing advance payments received in the first quarter of 2020, free cash flow improved by about $380 million.
For the year, we expect free cash flow to be between negative, $200 million and $300 million.
This includes a cash-tax benefit of approximately $300 million.
As mentioned previously, we believe that the first half of 2021, to be our most challenging and expect improvements as we progress into the latter half of the year, due to planned single-aisle production rate increases.
Let's now turn to cash and debt balances on slide six.
We ended the first quarter with approximately $1.4 billion of cash and $3.6 billion of debt.
In February, we prepaid $300 million floating rate notes that were due this year.
As Tom mentioned, we are planning to repay $1 billion in debt in the next three years, the timing of which will be in line with how air traffic and narrow-body production rates recover from the global pandemic.
We believe our cash on hand and cash flows generated from operations, coupled with our ability to vary our cost structure quickly will provide sufficient liquidity to address the challenges and opportunities of the current market.
However, unevenness in 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 first quarter, Fuselage segment revenues were $437 million, down approximately $115 million compared to 2020, primarily due to lower production volumes on the wide-body programs, partially offset by an increase in 737 MAX defense and the recently acquired Bombardier business jet program revenues.
Operating margin for the quarter was negative 14%, compared to negative 16% in the same period last year.
Increased 737 MAX production and higher defense revenues, helped contribute to the gross profit improvement.
We also recognized lower restructuring expenses, excess capacity costs and abnormal COVID-19 charges.
The Fuselage segment recorded $2 million of favorable cumulative catch-up adjustments and $55 million of net forward losses, during the quarter primarily due to the Airbus A350 and Boeing 787 programs.
Propulsion revenue in the quarter improved to $227 million, primarily due to higher revenue from the 737 MAX program and aftermarket revenues.
Operating margin for the quarter was positive 7%, compared to negative 2% in the same quarter of 2020.
Lower restructuring expenses, excess capacity costs, and abnormal COVID-19 charges were the main driver to the improvement in segment profitability.
The segment recorded $6 million of unfavorable cumulative catch-up adjustments and $5 million of net forward losses.
Lower production volumes on the 787 A320 and A350 programs, partially offset by revenue from the recently acquired A220 wing program were the main contributors to the reduction in wing revenue of $224 million.
Operating margin for the quarter was negative 8%, compared to positive 5% in the first quarter of 2020.
The decreases in segment profitability and operating margin were primarily a result of forward losses recognized on the 787 and the A350 programs and lower margin recognized on the A320 and A220 programs, due to increased excess capacity costs.
The segment recorded $13 million of net forward losses and $2 million of unfavorable cumulative catch-up adjustments.
The first quarter of 2021 provided to be a very challenging start to the year.
While uncertainty around the precise trajectory of the pandemic recovery remains, we are beginning to see positive signs in domestic air traffic demand.
We are pleased to see the progress made over the past few months on our defense growth and aftermarket diversification efforts.
Higher narrow-body rates in the back half of the year should create positive momentum into 2022.
Cash flow is a focal point this year and is a top priority for our team in our day-to-day activities.
Our 2021 cash flow is dependent on the planned delivery of approximately 160, 737 MAX shipsets.
We are closely monitoring the remaining regulatory approvals needed for the 737 MAX return to service, as well as the recovery from the global pandemic.
First quarter of 2021 was challenging, as we managed through the wide-body rate reductions and investments that we have made to improve quality.
As a result in the first quarter, we had a higher rate of cash usage than we expected.
With domestic travel recovering faster in the US and China, we expect that narrow-body production rates will continue to improve.
Spirit will benefit from this trend, since 85% of our backlog is narrow-body aircraft.
In 2021, we are planning to deliver about 160, 737 MAX shipsets as Mark just said, which is more than double what we delivered in 2020.
We expect our free cash flow usage for the year will be between $200 million and $300 million.
We also believe that we are still on course to be cash flow positive in 2022.
Our diversification efforts continue with growth in our aftermarket and defense businesses.
The acquisition of the assets of Applied Aerodynamics and the establishment of the JV with EGAT in Taiwan will help accelerate the growth of the aftermarket business to $500 million by 2025 at accretive margins.
We believe our defense business revenue is on track to grow 15% this year, after growing nearly 20% in 2020.
We also continue to make good progress on our efforts to delever and to continue driving toward margins of 16.5%.

user
compname reports q1 loss per share of $1.65.
q1 loss per share $1.65.
q1 adjusted loss per share $1.22.
spirit aerosystems holdings - full-year 2021 free cash flow is expected to be between negative $200 million and negative $300 million.
spirit aerosystems holdings - expect to deliver about 160 737 max shipsets in 2021.
increasing 737 max production rates in line with boeing's objective of 31 aircraft per month in 2022.

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