Spirit AeroSystems Holdings, Inc. Reports 3rd Quarter 2013 Financial Results; Revenues of $1.504 Billion and EPS of $0.65 Including ($124) Million in New Program Charges

Key Announcements from Ongoing Strategic and Financial Review

New team members added, including Sanjay Kapoor as CFO
Partnership with Bell Helicopter on the V-280 Valor, the next generation tiltrotor for the U.S. Army
Intent to sell interest in Russian Joint Venture
Continued cost reductions
Spirit 3Q13 Consolidated Results – Revenue, EPS, Operating Margin, Cash Flow, Liquidity, and Backlog

Total revenues of $1.504 billion, up 10% y/y
Reports fully-diluted EPS of $0.65, adjusted fully-diluted EPS of $0.77*
Reports Operating Margin of 3.4%, adjusted Operating Margin of 11.3%*
Cash From Operations of $185 million, adjusted Free Cash Flow of $141 million*, YTD adjusted Free Cash Flow of $51 million*
Records net pre-tax charge of ($124) million primarily on the A350 XWB program
Cash and cash equivalents were $436 million
Total backlog ~$38 billion

Spirit AeroSystems Holdings, Inc. [NYSE: SPR] reported third quarter 2013 financial results reflecting continued strong demand for large commercial aircraft, solid mature program operating performance, and the impact of new program charges. Spirit’s third quarter 2013 revenues were $1.504 billion, up 10 percent from $1.365 billion for the same period of 2012, driven by higher production volumes.

Operating income was $51 million, compared to operating loss of ($211) million for the same period in 2012. Spirit recorded pre-tax charges of approximately ($124) million, or ($0.54) per share, primarily related to new programs, partially offset by a net pre-tax $28 million, or $0.12 per share favorable cumulative catch-up adjustment due to productivity and efficiency gains on mature programs.

The third quarter of 2012 included a pre-tax ($590) million, or ($2.90) per share charge primarily related to new programs partially offset by net pre-tax benefit of $219 million, or ($1.08) per share due to the final settlement with insurers for all claims relating to the April 14, 2012 severe weather event at the Wichita, Kan., facility and a pre-tax $18 million favorable cumulative catch-up adjustment.

Net income for the current quarter was $94 million, or $0.65 per fully diluted share, compared to a net loss of ($134) million, or ($0.94) per fully diluted share, in the same period of 2012. The current quarter also includes a $57 million, or $0.40 per share*, positive tax impact primarily related to net losses driven by new program charges.

“We are making progress but there is more work to be done. In the fourth quarter, we will have concluded our strategic and financial review and we will provide 2014 financial guidance with our fourth quarter and full-year 2013 earnings report,” said President and Chief Executive Officer Larry Lawson. “We had a productive quarter as we reduced costs and remained on track for our rate increases, we added key new talent, and announced an important strategic teaming arrangement with Bell Helicopter on the V-280 Valor for the U.S. Army, as well as the intended sale of our interest in the Russian Joint Venture. These decisions support our goals of positioning the company for growth in the future, for reducing costs, and better aligning our resources towards value-added engineering and manufacturing where we have the greatest competitive advantage and potential for growth.”

“Spirit’s strong third quarter performance across the mature programs demonstrates the predictable and consistent earnings and cash flow capability of this business. While we’ve made significant investments on next generation twin aisle aircraft, these programs position Spirit on the products which drive the long-term growth trends in this market segment,” Lawson continued.

“Spirit’s position on the industry’s leading commercial aircraft translates directly to our $38 billion backlog as global demand for these products remains strong. Spirit is well-positioned to benefit from the long-lived commercial aerospace up-cycle,” Lawson added.

“Looking forward, given our capability and affordability, we see continued growth opportunities in the large commercial aircraft and defense market segments as both commercial and defense OEMs seek the capable, cost-effective engineering and manufacturing capabilities that Spirit brings to the market,” Lawson concluded.

Spirit’s backlog at the end of the third quarter of 2013 was approximately $38 billion. Spirit calculates 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 Gulfstream and other customers.

Spirit updated its contract profitability estimates during the third quarter of 2013, resulting in a net pre-tax $28 million or $0.12 per share, favorable cumulative catch-up adjustment due to productivity and efficiency gains on mature programs.

Additionally, the company recorded net pre-tax charges of ($124) million, or ($0.54) per share. These include pre-tax charges of ($112) million, or ($0.49) per share on the A350 XWB fuselage program which consists of ($79) million, or ($0.35) per share, on the A350 XWB recurring fuselage program and ($33) million, or ($0.14) per share, on the A350 XWB non-recurring fuselage program. In addition, the company recorded additional pre-tax charges of ($6) million, or ($0.03) per share, on the G280 wing program; and an additional net ($6) million, or ($0.02) per share on low volume large commercial programs.

In comparison, the third quarter of 2012 operating income included a pre-tax $18 million favorable cumulative catch-up adjustment, and pre-tax charges of ($590) million primarily related to new programs.

Cash flow from operations was a $185 million source of cash for the third quarter of 2013, compared to a $103 million source of cash for the third quarter of 2012. The same period of 2012 included a customer advance payment of $50 million associated with the A350 XWB fuselage program.

Cash balances at the end of the quarter were $436 million and debt balances were $1,170 million. At the end of the third quarter of 2013, the company’s $650 million revolving credit facility remained undrawn. (Table 2)

The company’s credit rating remained unchanged at the end of the third quarter 2013 with a Ba2, negative outlook by Moody’s Investor Services and a BB, negative outlook by Standard and Poor’s.

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 scheduled to conclude in the fourth quarter of 2013. Upon the reporting of its fourth quarter and full-year 2013 results, the company intends to issue financial guidance for 2014. The review 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 third quarter of 2013 were $710 million, up 8 percent from the same period last year, driven by higher production volumes. Operating profits were $26 million, with operating margins of 3.6 percent as compared to 17.31 percent during the same period of 2012. In the third quarter of 2013 the segment recorded net pre-tax forward losses of ($112) million on the A350 XWB fuselage program which consists of ($79) million on the A350 XWB recurring fuselage program reflecting early development discovery and changes and associated production inefficiencies, and higher test and transportation costs across the buy and ($33) million on the A350 XWB non-recurring fuselage program driven by engineering efforts on the -1000 derivative; and an additional pre-tax forward loss of ($5) million on the 747-8 program. The segment also realized a net pre-tax $20 million favorable cumulative catch-up adjustment in the quarter as a result of productivity and efficiency gains on mature programs. In comparison, the segment realized a net pre-tax $14 million favorable cumulative catch-up adjustment in the third quarter of 2012.

Propulsion Systems

Propulsion Systems segment revenues for the third quarter of 2013 were $389 million, up 9 percent from the same period last year, driven by higher production volumes. Operating profits were $70 million for an operating margin of 18.0 percent as compared to (26.9)1 percent in the third quarter of 2012. In the third quarter of 2013 the segment realized an additional pre-tax forward loss of ($1) million on the 767 program reflecting program performance and a net pre-tax $4 million favorable cumulative catch-up adjustment as a result of productivity and efficiency gains on other mature programs. In comparison, the segment realized a net pre-tax ($151) million forward loss on the BR725 program and a $4 million favorable cumulative catch-up adjustment in the third quarter of 2012.

Wing Systems

Wing Systems segment revenues for the third quarter of 2013 were $398 million, up 15 percent from the same period last year, driven by higher production volumes. Operating profits were $35 million for an operating margin of 8.8 percent as compared to (117.6)1 percent during the same period of 2012. In the third quarter of 2013 the segment recorded an additional pre-tax forward loss charge of ($6) million on the G280 program primarily related to the price of future airplane deliveries. Additionally, in the current quarter, the segment realized a net pre-tax $4 million favorable cumulative catch-up adjustment due to productivity and efficiency gains on mature programs. In comparison, in the third quarter of 2012 the segment recorded net pre-tax charges of ($439) million primarily related to new program charges.

1Warranty reserve of $2.8 million in 2012 reclassified from segment operating income to unallocated cost of sales to conform to current year presentation.