Spirit AeroSystems Holdings Inc
NYSE:SPR
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
25.28
36.26
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Spirit AeroSystems Holdings Inc
You don't have any saved screeners yet
Good morning, ladies and gentlemen. And welcome to Spirit AeroSystems Holdings Inc., First Quarter 2022 Earnings Conference Call. My name is Victoria, and I will be your coordinator today. [Operator Instructions].
I'd now like to pass the presentation over to Aaron Hunt, Director of Investor Relations. Please go ahead.
Thank you, Victoria. And good morning, everyone. Welcome to Spirit's first quarter 2022 results call. I'm Aaron Hunt, Director of Investor Relations. And with me today are Spirit's President and Chief Executive Officer, Tom Gentile; Spirit's Senior Vice President and Chief Financial Officer, Mark Suchinski, and Spirit's Executive Vice President, Chief Operating Officer and President of Commercial Division, Sam Marnick. After opening comments by Tom, Sam and Mark regarding our performance and outlook, we will take your questions.
Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our earnings release and our SEC filings and the forward-looking statement at the end of this web presentation.
In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at investor.spiritaero.com.
With that, I would like to turn the call over to our Chief Executive Officer, Tom Gentile.
Thank you, Aaron, and good morning, everyone. Welcome to Spirit's first quarter earnings call. We enjoyed meeting many of you at our Investor Day in March. Based on the positive feedback received from those who travel to Wichita, we are glad we had the opportunity to share with everyone some of the improvements we are making in our factories to prepare for the future.
Our recovery continues despite ongoing challenges from the COVID-19 pandemic, the Russia-Ukraine conflict, inflation and supply chain disruptions. Our factories continue to execute on deliveries to our customers, although we have seen some downward revisions in schedule to some programs. We continue to work with Boeing, Airbus and our other customers on production rate scenarios in this dynamic environment.
The Russia invasion of Ukraine adds a new element of uncertainty to the recovery. In terms of revenue, we only have a small amount of commercial and aftermarket sales for the ERCOT MC-21 that have been affected to date. In terms of supply chain, we purchased about 90% of our titanium through Boeing and Airbus pine consortiums, and both of them have sufficient stockpiles on hand to meet our immediate needs.
In terms of our other titanium requirements, we have been able to procure approximately 12 to 18 months of requirements. Both the Boeing and Airbus buying consortium and our own supply chain teams have been developing alternative sources for titanium.
The conflict is also accelerating inflation that had already begun earlier in the quarter. Increased logistics and utility costs have put pressure on our operations. Even though both of these items are a small percentage of our overall costs, we are working to offset the increases.
One of the ways we work to mitigate inflation in our supply chain is through long-term agreements. In some cases, our agreements with suppliers go out to 2033, which matches the term of our pricing contract on the 737 MAX with Boeing, providing a natural hedge to help mitigate short-term inflationary pressure.
In terms of pricing, most of our customer agreements have clauses that help address both labor and material inflation and provide the ability to offset some of the increase in costs.
As we start to produce at higher rates, we are beginning to see signs of stress at some of our suppliers. Skilled labor availability and challenges with OEM qualifications and approvals are leading us to take actions to secure parts supply in order to maintain a healthy production system. Sam will go over a few more details in her remarks on how we are addressing supply chain issues.
Despite the challenges we have faced, we remain sharply focused on progressing our three key priorities: diversifying our revenues, delevering $1 billion over 3 years, and driving margins to our 16.5% target.
Our Belfast site is a key contributor to our diversification efforts. Our Airbus work packages increased significantly from this acquisition with the addition of the A220 integrated wing and center fuselage and strengthened Spirit's position as one of the top external suppliers to Airbus. We also became a top supplier to Bombardier with the addition of significant business jet content on the Challenger and the Global Xpress.
One significant development recently is that we reached an agreement with the United Kingdom's Department for Business, Energy and Industrial Strategy to retire the launch investment associated with the A220 program earlier than planned. Mark will go into more details on this financial transaction in his remarks.
In early April, working with our two Belfast Union partners, we also negotiated a new pay agreement that covers more than 2,000 Unite [ph] and GMV represented employees in Belfast. The mutually beneficial arrangement, which runs through December of 2023 is an important element in our commercial segment's future.
On the 737 MAX program, we are just moving to a production rate of 31 aircraft per month and are planning right now to stay there for the rest of the year. Our expectation is that we will produce 315 737 MAX units during 2022. Given what Boeing has communicated about their production rate, it will now likely take longer than we originally expected to reach a permanent buffer of 20 units of the Boeing-owned inventory in Wichita that will help cushion the production system in the future.
Turning to the 787 program. We are currently expecting to deliver about 20 units in 2022, a reduction in schedule, which contributed to the forward loss this quarter and created some headwinds to inventory on the program. On Airbus programs, we are generally in line with expectations for the year. Airbus remains extremely bullish on demand for the A320 and the A321 and plans to hit the production rate targets that they have communicated publicly.
On the A350, we have begun engineering work on the new freighter, which Airbus has announced for entry into service in 2025. Our Defense & Space business showed solid growth in the first quarter and we expect to see that growth pick up in the back half of the year as current programs mature.
The Defense & Space team had some great wins in this quarter, including winning the development contract announced by Boeing, to support the B-52 Commercial engine replacement program. We will be responsible for the engine pylons and the cells on this program. An interesting note is that all of the B-52H currently in service today were built in our Wichita facility. We are excited to support the B-52's mission for many years into the future.
We have a strong Defense & Space pipeline, which is almost entirely focused around Department of Defense programs that are currently in development, but not yet fielded, offering significant long-term upside to our Defense & Space business.
Our Aftermarket business also had a very strong first quarter, growing 52% on the top-line and delivering 23% margins. The team achieved this growth even after offsetting the loss of MC21 aftermarket revenues.
Our aftermarket team has also been aggressively pursuing new opportunities. Just last week, Boeing Global Services selected Spirit as their partner for 737 MAX nacelle and flight control surface repairs. Our efforts to build a global MRO footprint enable us to serve Boeing's customers around the world with industry-leading turnaround times.
We were also pleased to announce a new partnership with Guangzhou Aircraft Maintenance Engineering Company, also known as GAMECO to serve as an authorized Spirit repair center in China.
I'll now turn it over to Sam to describe how we are driving productivity, rate readiness and growth in our commercial segment. Sam?
Thank you, Tom. We've seen some challenges in the first quarter. However, we're positioning ourselves to benefit from the air traffic recovery that appears to be gaining strength. The continued domestic air travel improvement in many parts of the world is driving narrow-body demand and will be favorable for Spirit as approximately 85% of our backlog is tied to single-aisle aircraft.
With that in mind, we remain focused on execution. The narrow-body production rates recently increased, and we're now producing the 737 at a rate of 31 per month. To date, we've been able to tap our recall list in order to meet all of our staffing needs.
In Wichita, we just recently issued the final recall for those that were furloughed during 2020, and we're recruiting new employees for future staffing needs, which it has a strong aviation labor pool of talent from which we can draw. The implementation of digitization and automation projects to drive productivity is tracking to plan, which will support higher rates and improved commercial segment margins in the future.
On our Airbus programs, we also have the staffing in place to meet the rate requirements Airbus has requested. We are also working closely with our suppliers to support their rate readiness. Just like the rest of the industry, our supply chain is experiencing some challenges. Examples of the types of support we are providing to assist include logistics, raw material sourcing and inventory management. And in some cases, we are also extending contract terms where the suppliers have demonstrated excellent performance. We're fortunate to have a world-class supply chain and fabrication team that can work with suppliers to mitigate risk and even Blue Street parts when needed. In some cases, we're also dual sourcing some parts to mitigate risk.
Our commercial team is also focused on growth. This quarter, we announced that we signed an agreement with Airbus for the development of the City Airbus NextGen prototype. We'll be responsible for developing and manufacturing the aircraft wings and supporting Airbus' exploration of disruptive aircraft design. We're also actively exploring other options to support the emerging eVTOL market. And in addition, as Tom mentioned, we have begun work on the Airbus A350 freighter.
With that, I'll turn it back over to Tom. Tom?
Thanks, Sam. As expected, the first quarter has been a challenging one on cash attributed partly to the additional working capital we consumed to support the rate break to 31 aircraft per month in the 737 and the increase in rate on the A320. When those programs stabilized at higher rates, our cash position will continue to improve throughout the year. As we have previously communicated, we will be repaying Boeing $123 million this year for the advance on the 737 program in 2019.
Given the current outlook, we now expect an additional $50 million to $100 million of pressure for all of 2022, which means that we expect cash usage for this year to be between negative $175 million and negative $225 million.
Mark will now take you through the details of our finances for the first quarter results. Mark?
Thanks, Tom, and good morning, everyone. As we discussed on last quarter's call, we anticipated the first quarter financial results would be the lowest of the year with meaningful improvements in the second half of 2022, driven by increased narrow-body deliveries, specifically the 737 and A320 programs. .
We expect to see this reflected in improvements to our deliveries, revenue, margin and cash flow throughout the rest of the year. At the start of 2022, we, like many others around the world, experienced surging COVID-19 cases which created some unexpected pressure. While case rates have declined in our factories, other parts of the globe continue to be adversely impacted by the pandemic, adding to near-term uncertainty.
Then the Russia and Ukraine conflict began, which created additional challenges, including the procurement of materials and the exacerbation of inflation that we were experiencing. These pressures along with the supply chain disruptions and customer schedule changes has impacted our business, and we are aggressively working on initiatives to help mitigate those impacts.
Now let's move to our first quarter 2022 results. Please turn to Slide 3. Revenue for the first quarter was $1.2 billion, up 30% from the same quarter of last year. This improvement was primarily due to higher production on the 737, A220 and A320 programs as well as increased aftermarket revenue. These increases were partially offset by lower production on the 787 program.
When we look at deliveries, the narrow-body programs in the first quarter of 2022 were 36% higher as compared to 2021, with 233 in the first quarter of 2022 compared to 171 deliveries in the same quarter last year. The 737, A220 and A320 programs each had increased deliveries.
The first quarter 737 MAX deliveries were 60 units compared to 29 in the first quarter of last year. Wide-body program deliveries were down 21% to 38 units compared to 48 in the first quarter of '21, driven mainly by the 787 program. Overall, deliveries increased to 321 units compared to 262 in the same period of last year.
Now let's turn to earnings per share on Slide 4. We reported earnings per share of negative $0.51 compared to negative $1.65 per share in the first quarter of 2021. Adjusted EPS was positive $0.03 compared to negative $1.22 in the same period last year. 2022 adjusted EPS excludes the deferred tax asset valuation allowance. 2021 adjusted EPS excludes cost related M&A restructuring as well as the deferred tax asset valuation allowance.
We focus on operating margin, we saw improvements to negative 4% compared to negative 14% in the first quarter of 2021 reflecting increasing production rates and lower costs associated with excess capacity and changes in estimates recorded during the current period compared to the same quarter last year.
Forward losses in the first quarter of 2022 were $24 million, primarily driven by further production rate decreases and cost of rework on the 787 program as well as increased cost of quality and production rate decreases on the A350 program. Unfavorable cumulative catch-up adjustments totaled $26 million and were driven by increased estimates for supply chain, raw material and other costs on the 737 program.
In comparison, during the first quarter of 2021, we recorded $72 million of forward losses driven by lower production rates on the 787 and A350 programs and $6 million of unfavorable cumulative catch-up adjustments. First quarter 2022 earnings included $50 million of excess capacity costs, a decrease of $18 million over the same period of 2021 and as well as abnormal costs related to COVID-19 of $10 million, an increase of $7 million over the first quarter of 2021 due to the impact of the COVID-19 cases that hit us at the beginning of the year.
Additionally, earnings included $33 million related to the Aviation Manufacturing Jobs Protection Program, which was awarded during the third quarter of 2021. Other income for the first quarter of 2022 was $25 million better than the same period last year, resulting mainly from foreign currency exchange gains.
Now let's turn to free cash flow on Slide 5. Free cash flow usage for the quarter was $298 million. Historically, first quarter free cash flow has always been impacted by the seasonality of cash receipts related to the year-end annual holiday shutdown as well as employee benefit-related payments. Cash usage was $100 million higher this quarter compared to the same period of 2021 driven by higher working capital due to increased production activities as well as quarterly cash repayment of $31 million related to the Boeing 73 advance we received in 2019.
We also made a payment on the repayable investment agreement with the UK Department of Business, Energy and Industrial Strategy and $15 million of that payment is reflected within free cash flow. The surge in COVID-19 cases at the beginning of 2022 resulted in cash outflows of $10 million. Then to address the conflict in Russia and Ukraine, we added additional inventory, including titanium to mitigate potential disruptions to our production system.
During the first quarter of this year, Spirit received $14 million of the AMJP program grant awarded in 2021 and the remaining $24 million is anticipated to be received in the remainder of 2022. Looking ahead, the recent downward revisions to production schedules for some of our programs will add additional pressures, specifically on earnings and cash related to the 737 program and slower inventory burn down than previously expected on the 787 program.
Given the customer schedule changes, supply chain disruptions, Ukraine and Russia conflict, and inflationary pressures, we are now expecting full year 2022 free cash flow usage to be between $175 million to $225 million, inclusive of the $123 million Boeing Advance repayment. This reflects estimated capital expenditures of $150 million to $175 million.
With that, let's turn to our cash and debt balances on Slide 6. We ended the quarter with $1.2 billion of cash and roughly $3.8 billion of debt. In April, we reached an agreement with the UK's Department of Business Energy and Industrial Strategy to retire the outstanding repayable investment agreement, which we acquired as part of the acquisition of selected assets of Bombardier in 2020. This resulted in a cash payment of $291 million made in April. This transaction will be reflected in our second quarter 2022 financials. I would add that this will reduce interest related cash outflows annually and into the future.
Now let's turn to segment performance, and we'll begin with commercial on Slide 7. In the first quarter of 2022, commercial revenue increased 35% compared to 2021, primarily due to higher production volumes on the 737, A220, A320, partially offset by lower production on the 787.
Operating margin for the quarter increased to breakeven compared to negative 12% in the same quarter of 2021. The improvement in operating margin was due to higher volumes on the 737, lower excess capacity costs, lower changes in estimates as well as income related to the AMJP program of $28 million. The segment recorded $26 million of net forward losses and $26 million of unfavorable cumulative catch-up adjustments during the first quarter of 2022. In comparison, during the same period of 2021, the segment recorded $68 million of forward losses and $8 million of unfavorable cumulative catch-up adjustments.
Now let's turn to Defense & Space segment on Slide 8. Defense & Space revenue improved by 3% compared to the first quarter of 2021 due to increased PA production and development program activity. Operating margin for the quarter was 13% compared to 8% in the same quarter of 2021. The improved operating margin was driven by solid execution, favorable changes in estimates and lower excess capacity costs compared to the prior year.
The segment recorded excess capacity cost of $3 million and favorable forward loss adjustments of $2 million compared to excess capacity costs and forward losses each of $5 million in the first quarter of 2021.
For our aftermarket segment results, let's now turn to Slide 9. Aftermarket revenues were up 52% compared to the same period of 2021, driven by higher spare part sales as well as higher maintenance repair and overall activity. Operating margin for the quarter improved to 23% compared to 21% in the first quarter of 2021, driven by favorable product mix recognized during the first quarter of 2022. Our aftermarket team continues to win new business, and we are excited about the growth potential of this segment.
In closing, the recent downward revisions to production schedules for some of our programs will add pressure, specifically on the 737 and 787 programs. We are also facing supply chain disruptions as well as geopolitical and inflationary challenges that are putting pressure on freight, utilities and logistical costs.
The Russia and Ukraine conflict has caused us to strategically increase some material inventory to minimize production pressures down the road. Although these challenges will have an impact in the near term, we remain focused on positioning ourselves to benefit from air traffic recovery, and we are remaining focused on execution and preparing for the various rate increases that we will see in the coming months.
Now let's turn over this back over to Tom for some closing comments.
Thanks, Mark. Our Spirit team has responded well given the challenging circumstances. The commercial business will continue to benefit from the narrow-body recovery and future rate increases. The 737 MAX programs increased to 31 aircraft per month is an important milestone, and we expect to sustain that rate through the remainder of the year.
The A220 and A320 programs continue to be in sync with Airbus, and we remain on plan to achieve the increased production rates that Airbus has announced.
Our diversification efforts had solid progress across all three segments. The commercial segment secured an important work package on the new Airbus eVTOL aircraft. Our defense team won work for the B-52 commercial engine replacement program and the Aftermarket business announced partnerships with Boeing and GAMECO.
As we expected, the first quarter was a challenging one. As the narrow-body production rates stabilized on the MAX, an increase on the A320 throughout the year, our financial results are positioned to continue to improve.
With that, we'll be happy to take your questions.
Thank you. We will now start our Q&A session. [Operator Instructions] And our first question comes from Robert Spingarn from Melius Research. Please go ahead. Your line is open.
Good morning. Either Tom or Sam, I wanted to ask you about inflation risk either in your fixed price contracts or contracts where protections may not keep up with inflation. And then as part of that, how should we think about your upcoming your expiring machines contract next year. I think it covers about 6,000 people. And how might that factor into your future costs and your ability to hit the 16.5% margin.
Well, on inflation, we have obviously lots of different contracts and all of them are somewhat different. But typically, on the Boeing contracts, the way inflation and escalation works is that we absorbed the first amount up to a threshold and then we split it above that.
But in both the Airbus and Boeing examples, they are responsible essentially for the raw material costs. And so we have these buying consortia that I mentioned, TMX for Boeing combed for Airbus. And they take care of buying all of the raw materials for their respective programs and that helps us protect against and mitigate inflation.
As I mentioned, we also have long-term agreements in place with a lot of our suppliers that go out as far out as our MAX pricing contract, for example, to 2033, which creates a natural hedge. So those are some of the ways that we mitigate inflation and the way our contracts work.
With regard to the IM, the contract is due in June of 2023. We extended that in -- at the beginning of 2020, and we've already been in discussions with our union partners about that, and we'll continue to work with them in anticipation of that. We have taken into account that contract as we think about our long-term projections and the 16.5% margins.
As I've always said, in this industry, you have to run fast to stand still. And even though we're driving productivity and supply chain and in our factory operations, we have headwinds in terms of labor increases, raw material increases, other inflation and things like logistics or utilities. And so we have to offset all those in order to achieve the 16.5%, and we are taking that into account as we make those projections.
And I guess the price step down as well on 37, if you get about 42.
Yes, we've taken that into account as well.
Okay. Thanks, Tom.
Because don't forget, when production goes above 42, we'll be obviously delivering a lot more units and generating a lot more revenue and total profit dollars -- even though we -- the pricing goes into a discount once we go above 42.
Got it. Thank you.
All right, thank you so much Robert for your question. Our next question comes from Seth Seifman from JPMorgan. Please go ahead. Your line is open.
Thanks very much. And good morning. I want to dig in a little bit more on this question of 737 profitability. Can you tell us how large the block size is for the 737 right now and how much of it is remaining?
And then I guess, to the extent that you have seen these cost pressures, how do you think about how enduring they might be versus how much of them are tied up in potentially temporary shortages of certain materials and thus we'll leave it there and with those two.
Seth, why don't I jump in and then Tom could add some color here. Our current accounting contract on the 737 that we just started here in April is roughly 200 ship sets. And so that's the typical size of our 73 accounting contracts, which are tied to purchase commitments by our customer.
Just a couple of comments for me. Obviously, when you -- we think about us holding 31 a month through the rest of the year. The majority of that contract should end up and close out before we get through the rest of the year. So any near-term inflation could put pressure on the 737 margins as we think about 2022.
And we're seeing it. I mean, we're -- it's obvious the month of March, we looked at the inflationary measures 8.5%. And so significantly higher sustained inflation over the next several months or the course of 2022 could put some pressure on labor costs and other costs that we mentioned.
But we're working hard on it. The rate increase from 21 to 31 is significant. It's a 33% production rate increase that will have a significant help on the revenue earnings, and we'll also absorb our overhead costs and significantly reduce excess capacity costs. So we're looking forward to it. We're delivering at that rate starting this week. We're excited the production system is ready for it. We invested heavily. We made some decisions in the first quarter to make sure that we protected our 31 a month rate increase.
And so where that thing that's where kind of things stand here in the near term.
Seth, I would just add to that. You asked about cost pressures this year. Most of our costs are really already locked up in long-term contracts with our suppliers, and then we have our customer contracts. And so in terms of raw materials and detailed parts, those are already locked up. And as we just talked about, our labor contract with our biggest union goes through June of next year. So those are fairly stable as we're looking at this year, where we see some inflationary pressures if we have to buy some commodities on the spot market incrementally or in some things like utilities and logistics.
And those are subject to some increases. But as I said in my comments, this was a relatively small percentage of our total cost even though we're seeing some inflationary pressures. So I would say overall, the cost pressures are mitigated just because of the long-term contracts that we have in place.
Okay, great. Thank you very much.
Welcome.
Thank you so much for your question. Our next question comes from Ken Herbert from RBC Capital Markets. Please go ahead.
Yeah, good morning. Tom or Mark, I'm wondering with the change in the free cash flow guide and the incremental costs, can you just talk about the key moving pieces sort of between the upper end and the lower end of the guide now for this year. And what's changed, obviously, over the last few months as you think about where the sort of the incremental risk, but sort of the -- what's helping to bracket the range there and the key pieces in the range?
Yeah. Ken, I'll start. The first thing is we have had some schedule changes from our customer, specifically on the 787 has come down as Boeing continues to work through getting it back into delivery. The other is on the 737 earlier in the year, we were looking at scenarios where there might be yet another rate break this year. We don't anticipate that now. We expect that we'll stay at 31% for the rest of the year. So those were a couple of initial headwinds.
The other is, as we've been discussing, some supply chain disruptions. We're having to help some suppliers that get into distress with raw material purchases or on-site support or moving parts as the case may be. So that is a challenge.
We have had some raw material buy heads especially on titanium to secure some stockpiles and make sure we had adequate supplies that was about $10 million in the first quarter, but we felt that was a good investment to protect the production system. As Mark mentioned, January with the Omicron variant was particularly heavy in January, and that created about $10 million of pressure. And then as I mentioned, some inflation on logistics and utilities. So all of those things are going to drive that additional $50 million to $100 million of headwind that we said.
Now we're going to continue to work on that, but we just wanted to give everybody the outlook that right now, we're looking at negative $175 million to negative $225 million for the quarter -- or for the year, which includes the $123 million payment to Boeing.
Great. So just to clarify, the delta between potentially the $50 million or $100 million in incremental use. It sounds like that risk is really supply chain as you should feel pretty good about visibility on MAX and 787 now.
That's correct.
Okay, great. Thank you.
Thank you.
Thank you so much for your question. Our next question comes from David Strauss from Barclays. Please go ahead.
Thanks, good morning. So Tom, I just wanted to follow up on the MAX comment because I guess it gives I'm a little confused because I think before -- or I guess today, now you're talking about 315 units delivered production to Boeing this year. And I think before you had kind of implied a similar level without specifically calling out an actual number, but you certainly implied something in the low 300 range, but you're setting these downward revisions, the MAX rate as a reason for taking down the free cash flow forecast. Thanks.
Yeah. Well, as I mentioned earlier in the year, at the last earnings call, we thought there might be yet another rate increase this year. We now don't think that will happen, and we're going to be at the 315 level for the year, as we stay at 31 aircraft per month for the rest of the year. So that's really the situation.
And any -- I guess, what is the expectation now in terms of drawing down your buffer inventory from, I guess, it's currently around 100 down to that 20 level. What do you think the time frame is on that now?
Yeah. Well, it's currently about 85. It's been as low as 75, but it's bouncing around a little bit. And I expect it's going to kind of plateau here for while we are at the same rate as Boeing. And so it's going to take longer. I expect it's going to go now into next year before we get down to the 20 level. Don't know exactly when it depends really on when Boeing increases their production rate above the 31 and we start to burn that down.
All right. Thanks very much.
Welcome.
Thank you so much. Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.
Hi. Good morning, guys. Thank you. Just sticking to the MAX, of course. When we think about the MAX at 31 a month stable for '22, how do you see that going up potentially in '23? Do you -- Tom, do you think that could be -- or Mark, do you think that could be potentially a supply constraint where you don't have the inventory available or the labor available or a demand constraint? Like what do you think about that? And if cost pressures, if you're eating 75% of the cost on those contracts, like how do you think about how you negotiate that?
Right. Well, first of all, we -- we don't know what the rates will be in '23 yet. Boeing hasn't communicated that. And so we'll wait to see. With regard to supply, we don't anticipate any supply constraints. We have some disruption in our supply chain, but we're mitigating it.
And one thing that we have is we have a very strong fabrication operation. We make over 32,000 parts ourselves. And we have a lot of what we call Blue Street capabilities. So if a supplier gets into trouble, we can quickly manufacture that part. Many of the parts we used to manufacture ourselves, and things always are moving in and out of our own fabrication shops.
So there is no constraint in terms of supply in meeting any production rate increases in the future. And we'll wait to see from Boeing what those will be. But right now, we're expecting we're going to be at 31 for the rest of this year.
Okay. Thank you.
Welcome. Thank you.
Thank you so much. Our next question comes from Doug Harned from Bernstein. Please go ahead.
Good morning. Thank you.
Good morning, Doug.
On the on the 16.5% margin, this has been tied -- you all have tied this to the 42-month rate on the MAX. But can you talk about what is also implied in terms of assumptions on your other programs to get to that 16.5% margin, the A350, 787. How do you get to that number, assuming the MAX goes as you expect?
Yeah, Doug. Well, for one, as you know, MAX still is a major driver of our overall economics. And so we just use 42 aircraft per month on a MAX as a surrogate for kind of long-term stability. But we're also just assuming more or less what the OEMs have communicated publicly in terms of their production rates.
So for example, on we try to give you some indication right now for this year, we're looking at '20. But once Boeing starts delivering it again, they'll increase the rates. And those are the kind of assumptions that we've incorporated into our long-term planning on the margin.
And on 777, Boeing made some announcements in terms of a delay on the introduction of the 777X, but some of that will be offset by freighters in the near term. So we haven't really changed any assumptions on the 777.
And then on the Airbus programs, we're really just in lockstep with where Airbus has communicated. So for example, on the A320, they've said they're going to be at 65 by mid of 2023, and so that's what we've incorporated.
And on the A350, they're planning to get up to about five or six aircraft per month as they get into 2023. So that's what we've included. And on the A220, we're right now at about between five and six aircraft per month, and they're planning to get to 14 by the middle of 2025. So those are the basic assumptions that we have built into that 16.5% projection. But again, the biggest driver is going to be the MAX. And what we've said is when we get to 42 at a sustained rate is that's when we think we can hit the 16.5% margins.
Well, and on the MAX, when you talk about the 31 a month through the rest of this year, what's the typical lead time in terms of a signal? In other words, if you were going to be looking to go a breakup to let's say, let's say, 42 at Boeing. How far in advance do you typically get that signal and are able to react to it?
Well, typically, it's six months. But there's nothing typical about the last couple of years. We've had much shorter lead times for both increases and decreases. So look, we've got to be agile and we've got to work with Boeing based on the market. And we are going to be agile, and we will listen to both them and Airbus and make sure we're ready to deliver on what their requirements are.
Okay, great. Thank you.
Welcome.
Thank you so much. Our next question comes from George Shapiro from Shapiro Research. Please go ahead.
Yes. Mark, I wanted to ask, if I take out all of the kind of excess costs and the AMJP in the quarter, the underlying margin in commercial was about 8% and I know you don't take out excess costs, so you would be around 3%. Going forward for the rest of the year, how would you expect that number to change?
Well, thanks for the question, George. I think we've talked about this in the past. As we talked here, we're now producing and delivering at 31 aircraft per month on the 737 program, which is our strongest performing program. And when you think about the lift from a financial standpoint, obviously, we're going to have the revenue. But we would expect that 33% production increase on an incremental basis to help our margins, help our profitability specifically on that program by somewhere in the ballpark of 25% to 30%.
Okay. So the incremental margin you're saying it would be 25% to 30%. Okay.
Yeah.
And the other question, just probably a minor one, but the tax rate of 17% this quarter seemed high to me and the deferred tax valuation was higher -- running a little higher than it runs some last year. So can you just explain what's going on between the deferred tax asset valuation and the tax benefits you got this quarter?
Sure, George. The nuances of tax get a little complicated, but let me just try to walk you through that. When we look at our tax rate, the old tax rules where you looked at your actual performance in the quarter you recorded your tax rate based on that. We have to look at our tax rate -- our effective tax rate based on a full year expectation of earnings. And so if we're in a situation, and this is just, call it, an example, if you lose money in the first quarter, but make money in the back half of the year, we have to then smooth out the overall earnings, the pretax income over the course of the year, and that can drive some real significant variation as it relates to what you actually book from a tax standpoint compared to what your true pretax income is.
So although it looks abnormal, I understand why you're asking that. The new rules expect force us to kind of look at it over the course of the year and then normalize the tax rate on a quarterly basis.
And so as we move through the course of the year and our earnings start to recover as we generate more revenue, you'll see that normalized tax rate, excluding the tax valuation reserve to make more sense to you.
Okay. Thanks very much.
Thanks, George.
Thank you so much, George for your question. Our next question comes from Kristine Liwag from Morgan Stanley. Please go ahead.
Hey, guys. Following up on the 737 negative cumulative catch-up. I mean -- should we think about that $26 million over the 200 airplanes in the accounting block? Because if we take that per unit, it sounds like it's about 2% margin headwind for the 737. Is that how we should think about it? Or is there something else we should consider?
Let me jump in here, Kristine, and then Tom may want to add to that. Really, what happened here, that unfavorable catch-up is related to our accounting contract that just closed at the end of the first quarter. And as you -- as we are building and establishing our production system to support 31 aircraft per month, there were costs that we incurred in the first quarter. Supply chain disruption costs, some dual sourcing, some costs incurred from an inventory standpoint to protect ourselves so that we can seamlessly take that rate increase from '21 to '31. And that added -- at least half of those costs were supply chain disruptive disruption type costs that ended up in the block and caused the pressure in the accounting contract that just closed.
Now as we move forward here, and we're at the higher rate, we've worked through some of those supplier disruptions. It doesn't mean that our supplier supply chain is in perfect health, but those were costs that we incurred in the first quarter to protect the production system. And then as we move forward into our current accounting contract, which we're delivering now, we should see that supply chain disruption costs mitigate or minimize as we move forward at the higher rates.
So it's really contained on our previous accounting contract, and I wouldn't expect a significant amount of that to recur. And it's our job to kind of manage through those challenges and protect our profitability. So again, it was protect the production system, protect our production rate. If we don't do that well, that would cost us a lot more than the $26 million.
Yeah, that's really helpful. And if I could follow up on the MAX production rate. Last quarter, you guys talked about producing at a five ship set rate less than Boeing to allow inventory burn off. Can you help us understand what's changed? And why 31 per month is now the 2022 production rate? I would have thought it'd just be a little lower?
Right. Well, this has been in the plans for a while. And I think Boeing wants to make sure that its supply chain is stable, and it has already given us the signal. So we have gone up to the 31 as planned. They're staying at 31 now. And so we're going to be at the same rate for longer. So it means that the buffer will get burned out.
But the good news is that we have the ability to manage those trade-offs in order to preserve the production chain health. And so that's what Boeing has decided to do, and we're matching it. But that's what happened is we've been planning for this break to 31 for a while. And Boeing has asked us to continue to do it, even though they're going to stay at 31 as well.
And in terms of protect the overall supply chain --
And just, I guess, for the free cash flow lower guide for the year, is that factoring in just a lower burn off of your inventory then?
No, Kristine. If you're talking specifically on 737 we were expecting a tick up in production rates in the fourth quarter. And our current schedules and our current expectations, we don't see that happening. And so as a result of that, there'll be lower revenue and earnings on the 737 program, which is going to cause lower cash flow than we previously expected.
Now on the positive side, is we're going to be staying at 31 for a longer period of time. We're going to drive a lot of stability and continue to work on our production system improvements. And I think we're going to see a lot of benefits as it relates to stabilizing at 31 a month helping our suppliers stabilize at 31 a month before we aggressively go back up in rate.
So I think near term, it's a little less revenue, a little less earnings and cash. But I think over the long term -- and we got to think about our business long term. We're a long-cycle business. I think over the course of the next 18 to 24 months, this is going to be positive for Spirit and for our suppliers as well as Boeing that we stabilized the production system. We get on a study drumbeat, right? And that higher rate is good for us. We're going to generate more revenue and earnings will drive stability. We'll work with our supply chain, and I think that will better prepare us for the next rate break when it comes.
Great. Thank you very much.
Thanks, Kristine.
Thank you, Kristine for your question. Our next question comes from Myles Walton from UBS. Please go ahead.
Thanks, good morning. I just wanted to put a little bit on the 727 production rate dynamic. Is it fair to think that you were previously assuming Boeing is going to liquidate previously booked revenue 737 MAXs and you're previously assuming that there was going to be another rate hike in the back half of the year? So presumably, you were thinking Boeing is going to get to a rate above 40 before the end of the year. And now basically, they're going to stay at rate 31 and you're not going to liquidate inventory. Is that the short of it?
Well, first of all, it's not our inventory because we've already delivered those units to Boeing, and we're just storing them here in Wichita. But just to answer your question is, yes, we did expect a rate increase in the fourth quarter, as Mark said, and we don't expect that now. And so that's the major difference.
And you were expecting to liquidate the units you had booked revenue against that were sitting in Wichita.
Correct. We expected that to burn off, and now it's going to be a slower burn out.
We expected higher and we expected to burn off. At the end of the day, we really can't opine on Boeing's production system. Right now, the systems are pretty disconnected. What Boeing delivers what we produce, what we're really focused on is what is our requirements, what do we deliver from. And at the end of the day, Boeing will deal with their production and they'll deal with their deliveries. And I think there's a lot of challenges here. So as it relates to what they produce and what's their new production, what do they deliver out of stored aircraft. That's really kind of something Boeing has to address.
We know what our obligations are and what our requirements, and we're trying to give you best color as we can over what we see over the next seven to eight months.
Got it. And now that you're above 31, should we expect excess costs to be de minimis how much of the excess cost is specifically the 37 and is everything above 31 no longer excess?
No. We'll still continue to see that. I think in 2020, we incurred about $280 million of excess costs in 2021 it was around 210 to 220. I would expect it to be 40% to 50% lower here in 2022 because of that rate increase.
Yeah. But Mark, the excess costs will continue until we get back to 52.
Right. It will go down again. We'll still have some excess costs in 2023. But we're expecting it -- if we go up in rate, it will go down again in '23.
Yeah. All right. Thank you.
Thank you.
Thank you so much for your question. Our next question comes from Cai von Rumohr from Cowen. Please go ahead.
Yes. Thanks so much. So you gave us your rate plan for the year for those two Boeing programs. What about the A320 and the A350. Because you seem to be gone pretty hot on the A320 in the first quarter.
Yeah. Well, on the A320 Cai, as you saw from our results, we delivered $155 million -- so we're -- right now, we're probably at about 55, and we're planning to go to the 65 by middle of 2023.
But if you just look at a total number, we're expecting just over 600 on the A320. And on the A350, we're expecting about 50 units. So it will be average a little bit over four -- between four and five for the year.
Very helpful. And then, Mark, you mentioned prepaid the UK royalty $291 million. I assume that's happening below the line because the Boeing advances are above the line. And what is the interest rate savings, the interest rate savings you're going to have on that retirement?
You're correct, Cai. It's -- the majority of the $291 million, the majority of it will end up flowing through our free cash flow statement in the financing section because it's a debt-like liability. And we talked about this the fourth -- in the fall last year, we increased our term loan by about $200 million at a base interest rate of about 3.75%. And I think we had told you guys that we were paying -- when Bombardier did this deal, it was cut at a 7% to 8% interest rate.
So effectively, we used $200 million of the term loan $100 million of cash off our balance sheet with the cash balance we have. And we're going from the $200 million from 8% to under 4%, and we expect to see roughly a little more than a $20 million benefit to cash interest expense on a go-forward basis.
Excellent. And the last one is when you look at where you're likely to be in terms of 737 in the second quarter, I mean, as I look at my model, it looks like pretty much all of the Q-to-Q increase first quarter to second quarter in revenues is the 737. So should we assume you get a big margin step-up in the second quarter? Or you still have gate up costs from going to 31 so that it's not going to be as big. How should we think about that step up?
Well, as I said, we're now at delivering at 31 here in the month of May. So if you think about it, April, we'll still at 21 a month. May and June will be at 31 a month. So we're not going to see the full incremental benefit of producing at 31 a month in the second quarter. I think you'll see -- still a little bit of trailing costs as it relates to breaking to that rate that we incurred in the month of April.
So you're going to see a nice pickup in revenue. You're going to see a tick up in earnings, and we'll -- and cash flow follows after that. I think really, you would want to measure us on when we get to the third quarter, at that point in time, we'll be fully delivering full up at 31 aircraft per month. We'll get the peak revenue in that quarter. And I'm really expecting revenue and earnings to be meaningfully improved, and we'll start to really see the benefits of those production rates flow through cash flow.
Terrific. Thank you.
Thank you for your question. Our next question comes from Ronald Epstein from Bank of America. Please go ahead.
Yeah. Hey. Good morning, guys. It seems like 73 has been sort of beaten to death there. So maybe change topics a little bit. So Tom, with what's going on in defense markets today? Do you expect kind of more flow through your defense business than you were previously anticipating maybe six to nine months ago?
Well, there's certainly been a pickup in activity and the defense budget has gone up to reflect some of the new requirements for what's going on in Ukraine, but just more broadly. What we have seen is a lot of activity in terms of bids and proposals. As we mentioned earlier, back in 2016, we only had four programs that were over $1 million and now we have over 30 such programs. So that's what's happening.
And as I've said before, we have a lot of capacity that used to be for wide-body for composite fabrication. So things like automated fiber placement machines, autoclaves, trim and drill, nondestructive inspecting, that kind of heavy capital equipment that we were able to repurpose to defense, and we're able to offer that immediately to the defense primes, and that's helped us win some new programs.
So we do expect, as I mentioned in my comments, we have a very solid pipeline. We've won some programs and those are classified programs that are in the development phase. But as those get through development phase and into production, that should drive continued defense growth. So we're very optimistic about the defense opportunity in the key areas that we're focusing on. So of course, next-generation aircraft but also missiles and hypersonics. And we have a very strong capability in hypersonics with our new FMI group out in Maine, which makes the 3D carbon, carbon that's used on the high-temperature surfaces.
And then we're also looking at things like attributable drones, which should be a big part of the force of the future and then space. All of these areas are heavily focused on structures and that's really where our expertise is. So we're very bullish on the defense and space market outlook.
Got you. Got you. Got you. And then maybe changing gears to business aviation and what you've got going on in Belfast, given what's going on in that end market, is Belfast doing better than you would have anticipated given demand for large cabin business jets.
Let me ask Sam to address business. She oversees that.
Thanks, Tom. So we're seeing a lot of -- from the growth side of things. We're seeing a lot of opportunities coming up for us to look at and to bid on. So that side of the business is staying pretty much, pretty stable in terms of rates and production. What I would say is that the opportunity pipeline has certainly increased. And second, kind of related to that market. We talked a little bit about the EBITDA emerging market, particularly on the technical consulting side of things, the engineering services side of the business that certainly started to pick up as well.
So what I would say at this point is it's kind of holding its own on the business jet side of it. There’s a lot of opportunities and work that we're chasing.
And we do have a couple of new business jet programs.
Yet to be announced. Yes.
Well one was -- the Falcon to.
Falcon Yes.
Got you. Great. Thank you.
Welcome.
Thank you. Our next question comes from Noah Poponak from Goldman Sachs. Please go ahead.
Hi, everyone.
Hey, Noah. Good morning.
Good morning. On the MAX, had Boeing given you the next rate break, it's timing and size and then reverse that on you? Or were you making your best assumption and having to manage your business?
It's more of the latter, Noah. As we've said, we are always working on rate scenarios and those change based on circumstances. So the schedules that we currently have right now with Boeing is we're going to stay at 31% for the rest of the year. Previously, we had expected a rate increase in the fourth quarter, but we don't expect that right now.
And so again, we're always working on different scenarios, but we have to be agile. This is a very challenging time right now, very dynamic, and so we're going to be flexible.
Yeah. Noah, I would just say, we get kind of a skyline update from, call it, Boeing and Airbus routinely. And with all the challenges in the marketplace as it relates to COVID and now Russia, Ukraine, we're seeing more skyline adjustments than we've ever seen before. And so you get a skyline, which kind of gives you an indication of where you think things are going, right? But at the end of the day, it's got to be the formal purchase order, right, that comes through.
And so I think we're coming on the back end of COVID. We're seeing a lot of recovery on the airline side of things and seeing more stability, but there's still a lot of uncertainty, right? I mean, Boeing is delivering out of their storage. They got the issue on the 787. So I think we still have some uncertainty. I think it's clear on the Airbus side where they want to go. But those guidelines adjust and change, and then we have to adapt to the purchase commitments that are flowed down to us.
And we wanted to give you clarity in terms of what we see now for the rest of this year, now that we're into May. And on the MAX, that's why we said right now, our plan is 315 units.
Yeah. Okay. That all makes a lot of sense, and it's helpful. There's a lot of focus on when China will resume deliveries on the MAX. And it almost seems like, to your point, Mark, their size as a percentage of the total MAX backlog, but then there's also just the issue of they're in the skyline. So even if there are enough aggregate customers to have a certain production rate, there's so much skyline movement that has to happen. You can't take it to a higher rate. Is that a fair take that, that's almost a bigger challenge in the near term than just the size of the customer?
I don't know. I don't have that deep knowledge of how Boeing manages their skyline and how they move slots and how they work with the airline customers. I think that's more of a question for them. I've not worked at an OEM. So I'm not quite sure how they manage it.
But obviously, there's a lot going on right now. And I think we're trying to do the best we can to support our customer. 37 is important to us, 37 is really important to Boeing, and we're trying to stay lockstep and make sure that we deliver on time and support their support them as they deliver to airline customers.
I could see the answer here also being -- it's a better question for Boeing, but just good to get mosaic of opinions, and it's a big part of your business. Does anyone anywhere in the system have any visibility on why and when China resumes deliveries of the MAX?
I would say, from our standpoint, we do not. We depend on what we hear from our customers, Boeing and Airbus and also what we read. But it's obviously a very complex situation with a lot of different dynamics. And so we don't have any clarity on that, no.
Okay. All right. Thanks so much for taking the questions.
Thanks, Noah.
Thank you. Our last question comes from Michael Ciarmoli from Truist Securities. Please go ahead.
Hey. Good morning, guys. Thanks for sticking on to take my question. Just I guess, Mark, just on the excess capacity costs, what specifically drove the $5 million sequential increase from the fourth quarter? And I guess now with the MAX at 31 for the full year and the 787, where it is. I mean looking into '23, I mean, if you're going to cut excess costs by, call it, 50%, I mean it still seems like there's going to be a pretty big drag into '23, given your lead times on brakes. I mean should we kind of just calibrate ourselves for some residual excess costs in the $40 million to $50 million range in kind of '23.
Yeah, I mean if you -- if we -- what I said it was around 210-220 in '21 we're breaking to 31%, and that's going to help reduce that to, call it, cut in half to 110-120. With that page a rate of 52 aircraft per month.
If we go back up in rate, you'll see another tick down. The higher we go up, the bigger benefit we see from an excess standpoint. And so you really didn't see a big drop first quarter compared to fourth quarter because we weren't delivering at 31 a month, you'll see that a nice tick down in excess costs in the second quarter as we start to deliver at the higher rate.
Yeah. But I would say the reason it went up $5 million is very simple. There were some costs during the first quarter to get ready for the rate increase. So that contributed to it. And also there was a small adjustment on the MC21 that I mentioned. And so those were the two factors that drove it from what was $45 million in Q4 to basically $50 million in Q1.
Got it. Got it. But even still, I mean, if the MAX goes up to 42-47, if I look at your narrow bodies getting to rate, I mean, it seems like the widebodies are still going to be under pressure. So that's going to be some residual costs excess cost regardless, even if we get 87 back to five and the A350 at six and 777 where it is, it still seems like you're going to have that wide-body drag, correct?
Well, Michael, there are specific accounting rules around how we treat excess costs, but the wide-body lower production rates those costs today, there is not a separate excess cost calculation for the twin aisles. Those are embedded in the profit rates that we have today. But lower production on our twin out programs obviously puts pressure on our twin margins. And in some instances, on a large site like Wichita, can have negative impact across the board. So there's definitely a headwind as it relates to those lower production rates.
Got it. Thanks a lot, guys.
Okay. Thank you.
Thank you, Michael for your question. At this time, there are no further questions. And our conference call has now concluded. I would like to thank everybody for joining today's call. You may now disconnect your lines.