Spirit AeroSystems Holdings, Inc. Reports 2nd Quarter Results Including ($448) Million in Charges; Initiated Process to Divest Oklahoma Sites

Key Announcements from Ongoing Strategic and Financial Review

Initiating process to divest Oklahoma sites1
Aligning to support our customers and programs
Adding talent to our leadership team
Reducing costs
Spirit 2Q13 Consolidated Results – Revenue, EPS, Operating Margin, Cash Flow, Liquidity, and Backlog

Total revenues of $1.521 billion, up 13% y/y
Reports EPS loss of ($1.47), adjusted diluted EPS of $0.72*
Reports Operating (Loss) Margin of (15.7%), Adjusted Operating Margin of 11.7%*
Cash From Operations of $60 million, adjusted Free Cash Flow of $21 million*, YTD adjusted Free Cash Flow of ($90) million*
Records net pre-tax charge of ($448) million primarily on Gulfstream programs (per GAAP method of contract accounting)
Charge is related primarily to forecasted cost growth in years 2014-2019 with minimal cash flow impact in the current period
Cash and cash equivalents were $317 million
Total backlog ~$38 billion

Spirit AeroSystems Holdings, Inc. (NYSE: SPR) reported second quarter 2013 financial results reflecting continued strong demand for large commercial aircraft, strong mature program operating performance, and the impact of new program charges. Spirit’s second quarter 2013 revenues were $1.521 billion, up 13 percent from $1.341 billion for the same period of 2012, driven by higher production volumes and non-production revenues.

Operating loss was ($239) million, compared to operating income of $83 million for the same period in 2012, driven by new program pre-tax charges of approximately ($448) million, or ($2.61) per share, partially offset by a net pre-tax $41 million, or $0.24 per share favorable cumulative catch-up adjustment due to improvements in productivity and efficiency on mature programs.

The second quarter of 2012 included a pre-tax ($65) million, or ($0.31) per share charge for expenses related to the April 14, 2012 severe weather event at the Wichita, KS facility and debt financing, as well as a pre-tax ($7) million, or ($0.03) per share additional forward loss on the A350 non-recurring wing program.

Net loss for the current quarter was ($209) million, or ($1.47) per share, compared to net income of $35 million, or $0.24 per fully diluted share, in the same period of 2012.

“We made progress on the strategic and financial review during the second quarter of 2013, and have already taken several actions, including the previously announced initiation of the process to divest our Oklahoma sites,” said President and Chief Executive Officer Larry Lawson. “This is the result of a strategic decision to target our resources more towards value-added engineering and manufacturing where we have the strongest competitive advantage and potential for growth. Tactically, we’re aligning the company towards its customers and programs, we’re taking action to reduce our costs, and are adding talent to our leadership team.”

“These actions reflect a commitment to our shareholders, customers and employees to sharpen Spirit’s focus and generate cash. To that end, the decision to pursue a divestiture of our Oklahoma sites was a difficult one and has been the result of careful evaluation given the investment made to date and the capacity inherent in these high quality manufacturing sites,” Lawson continued.

“Spirit’s strong second quarter performance across the Fuselage and Propulsion segments demonstrates our capability to deliver solid earnings and cash flow. At the same time, Spirit will continue to invest in the next generation wide body products to support our customers and the long-term growth trends in this market segment. Future cost growth recognized in the quarter relates primarily to higher forecasted supply chain and labor costs on our business jet programs. I’d like to stress that with the pursuit of strategic alternatives for our Oklahoma sites, our focus on performance remains unabated.”

“Spirit’s robust $38 billion backlog represents the growing, globally-diverse demand for our industry-leading products and capabilities. As single-aisle products remain the major driver of large commercial aerospace market growth over the next twenty years, Spirit is well positioned with approximately 65 percent of backlog on the next generation 737 MAX and A320neo programs. Longer-term, we believe there are growth opportunities in large commercial aircraft as well as potentially in the defense market,” Lawson concluded.

Spirit’s backlog at the end of the second quarter of 2013 was approximately $38 billion. Spirit calculates its backlog based on current contractual prices for products and volumes from the published firm order backlogs of Boeing and Airbus, along with firm orders from other customers.

Spirit updated its contract profitability estimates during the second quarter of 2013, resulting in a net pre-tax $41 million, or $0.24 per share, favorable cumulative catch-up adjustment due to improvements in productivity and efficiency on mature programs.

Additionally, the company recorded net pre-tax charges of ($448) million, or ($2.61) per share. These include pre-tax charges of ($234) million, or ($1.36) per share, on the G650 wing program; ($191) million, or ($1.12) per share, on the G280 wing program; ($22) million, or ($0.13) per share, on the 787 program related to the wing content; and a net ($9) million, or ($0.05) per share, on the 747-8 and 767 programs combined. The BR725 nacelle program recorded a benefit from a charge reversal of $8 million, or $0.05 per share.

Approximately 15 percent of the $448 million charge in the Wing Segment is related to current year cost performance with the balance of the charge primarily related to higher forecasted supply chain and labor costs on our business jet programs in years 2014-2019.

In comparison, the second quarter of 2012 operating income included a pre-tax $6 million favorable cumulative catch-up adjustment, and a ($7) million additional forward loss on the A350 non-recurring wing program.

Cash flow from operations was a $60 million source of cash for the second quarter of 2013, compared to a $121 million source of cash for the second quarter of 2012. The same period of 2012 included insurance cash advances of $105 million associated with the severe weather event, and a customer advance payment of $50 million associated with a customer agreement on the A350 XWB fuselage program.

Cash balances at the end of the quarter were $317 million and debt balances were $1,173 million. At the end of the second quarter of 2013, the company’s $650 million revolving credit facility remained undrawn. (Table 2)

The company’s credit rating remained unchanged at Ba2 and negative outlook by Moody’s Investor Services, and was affirmed at BB and placed on negative outlook by Standard and Poor’s following the second quarter announcement regarding new program charges.

To address the charges in the quarter, the company has amended its senior secured loan and credit facility to suspend the existing financial covenants through the fourth quarter of 2014, after which time the financial covenants will again apply. During this period, the company will be subject to a liquidity covenant and any draws under the revolving credit facility will be subject to borrowing base limitations. No event of default has occurred.

• Non-GAAP financial measure, see Appendix for reconciliation

Financial Outlook and Risk to Future Financial Results

On May 2, 2013, Spirit announced a comprehensive strategic and financial review of the company’s development programs in Tulsa, Wichita, Kinston, and St. Nazaire and a suspension of financial guidance. The review is on-going and may result in additional strategic decisions and financial impact. Factors which are the subject of, and could impact our review include those described more fully in the “Risk Factors” section of our filings with the Securities and Exchange Commission. These factors include Spirit’s ability to achieve acceptable shipset pricing with its customers including as it relates to derivative airplane model pricing on the 787-9 and 787-10, our ability to achieve anticipated productivity and cost improvement for all of our airplane programs, the risk of higher than forecast non-recurring costs on new programs, and fluctuations in demand in the market for commercial and business jet aircraft.

Segment Results

Fuselage Systems

Fuselage Systems segment revenues for the second quarter of 2013 were $732 million, up 17 percent from the same period last year, driven by higher production volumes. Operating profits were $150 million, with operating margins of 20.5 percent as compared to 15.22 percent during the same period of 2012. In the second quarter of 2013 the segment recorded a pre-tax forward loss of ($5) million on the 747-8 program reflecting program performance, and a net pre-tax $28 million favorable cumulative catch-up adjustment as a result of improved productivity and efficiency on mature programs. In comparison, the segment realized a net pre-tax $1 million favorable cumulative catch-up adjustment in the second quarter of 2012.

Propulsion Systems

Propulsion Systems segment revenues for the second quarter of 2013 were $419 million, up 19 percent from the same period last year, driven by higher production volumes. Operating profits were $82 million for an operating margin of 19.5 percent as compared to 16.12 percent in the second quarter of 2012. In the second quarter of 2013 the segment realized a pre-tax forward loss of ($4) million on the 767 program reflecting program performance, a pre-tax benefit of $8 million on the BR725 program due to a reversal of previously recognized forward loss charge, and a net pre-tax $12 million favorable cumulative catch-up adjustment driven by improved productivity and efficiency on other mature programs. In comparison, the segment realized a net pre-tax $2 million favorable cumulative catch-up adjustment in the second quarter of 2012.

Wing Systems

Wing Systems segment revenues for the second quarter of 2013 were $369 million, up 3 percent from the same period last year, driven by higher production volumes. Operating losses of ($404) million reflects the ($448) million charges for an operating margin of (109.7) percent as compared to 7.92 percent during the same period of 2012. In the second quarter of 2013 the segment recorded pre-tax forward loss charges of ($234) million on the G650 program; ($191) million on the G280 program; and ($22) million on the 787 program primarily due to increased supply chain and labor cost estimates. Additionally, in the current quarter, the segment realized a net pre-tax $1 million favorable cumulative catch-up adjustment. In comparison, in the second quarter of 2012 the segment recorded a net pre-tax $3 million favorable cumulative catch-up adjustment and a pre-tax ($7) million additional forward loss on the A350 non-recurring wing program.