Spirit AeroSystems Holdings Inc., a major aerospace manufacturer and supplier of Boeing, saw its shares plunge the most in three years following the announcement that its cash flow recovery will be delayed. The company cited the cost of a recent work stoppage and the impact of inflation on some of its money-losing contracts as the primary reasons for the setback.
The company revised its forecast for Boeing's 737 deliveries for this year, reducing it by approximately 20 fuselages. This downward revision was a result of a strike that occurred at Spirit's main campus in Kansas. The costs associated with the work stoppage contributed to the negative free cash flow of $211 million during the period.
Furthermore, Spirit AeroSystems expects to face higher inventories due to disruptions in its supply chain. Additionally, losses on other Boeing and Airbus programs are projected to put further strain on the company's cash flow throughout the rest of 2023.
As Boeing's largest supplier, Spirit AeroSystems plays a critical role in the production of the 737 single-aisle aircraft. The company also manufactures major components for the 787 widebody jetliners, as well as Airbus' A350 and A220 aircraft.
Addressing the issue of profitability, Spirit AeroSystems' CEO, Tom Gentile, stated that contracts related to the 787, A350, and A220 programs were established prior to the current era of "hyperinflation" and will need to be revisited in the future.
The market was rattled by the discussion surrounding program profitability during the company's earnings call, resulting in a significant drop in Spirit AeroSystems' shares. Analysts have expressed concerns about the impact of these challenges on the company's ability to generate cash, especially with approximately $1.25 billion in debt due by 2025.
In addition to the increased labor costs associated with the new contract, Spirit AeroSystems also faces growing demands for higher quality, which will further drive up costs, particularly for the 787 program.
CEO Tom Gentile emphasized the importance of the entire aerospace value chain maintaining financial health. Despite the current challenges, Spirit AeroSystems anticipates a positive cash flow in 2024 and 2025, which would allow for debt repayment. However, refinancing a portion of the debt due in 2025 will be necessary.
To offset some of these challenges, Spirit AeroSystems plans to increase the 737 production rate to 42 jets per month starting this month. Moreover, the production pace may be further increased in 2024, providing an opportunity for improved profitability and cash flow for the company.