Spirit AeroSystems Holdings Inc

NYSE:SPR

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Spirit AeroSystems Inc.’s Fourth Quarter and Full Year 2021 Earnings Conference Call. My name is Charlie, and I will be your coordinating your call today. [Operator Instructions]

I would now like to turn the presentation over to Mr. Aaron Hunt, Director of Investor Relations. Please proceed.

[Aaron Hunt, Director, IR]

Thank you, Charlie, and good morning, everyone. Welcome to Spirit’s fourth quarter and full year 2021 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 Suchinksi; Spirit’s Executive Vice President, Chief Operating Officer and President of Commercial Segment, 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, in our SEC filings and in 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.

[Thomas Gentile, President & CEO]

Thank you, Aaron, and good morning, everyone. Welcome to Spirit's fourth quarter and full year 2021 results call. Despite the challenges we faced in 2021 due to the ongoing COVID-19 pandemic, we successfully navigated the year delivering cash flow of negative $240 million due to the ongoing COVID 19 pandemic, we successfully navigated the year delivering cash flow of negative $240 million, which was within the expected range of negative $200 million to negative $300 million that we communicated last year.

Throughout the year, we remain focused on keeping our employees safe, meeting our customer commitments and progressing on our three main priorities, diversifying our revenues, delivering a $1 billion over three years and driving margins to our 16.5% target. During 2021 we made good progress on our diversification.

We substantially completed the integration of the assets we acquired from Bombardier in Belfast, Casablanca and Dallas, with only minor items remaining. The efforts included exiting the Information Technology Transition Services Agreement with Bombardier six months early and closing the defined benefit pension plan in Belfast to new participants.

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. The acquisition also increased our aftermarket business and established a good foundation on which we continued to build during the year.

In addition, the acquisition even help grow our defense business shortly after closing the deal we learned that the Belfast team had won the contract to build a loyal wingman demonstrator for the UK Ministry of Defense, known as Project Mosquito. The acquisition was a meaningful accelerator to our diversification efforts.

As a result, in the third quarter, we announced we would begin to report financial results in three new business segments commercial, defense and Space and Aftermarket. We also changed our organization to align with these three new segments and appointed Sam Marnick, Duane Hawkins and Kailash Krishnaswamy respectively to lead the new segments.

I'll turn it over to Sam now to talk more about the commercial segment. Sam?

[Samantha Marnick, EVP, President, Commercial Division & COO]

Thank you, Tom, and good morning, everyone. In the commercial business segment, we're focusing on three priorities in 2022. First, execution on our narrow body production program to meet the coming increases in production rate. Second, continued progress on productivity projects to help Spirit achieve the 16.5% margins once the MAX reaches 42 aircraft per month and a renewed focus on growth for the future. But first, let's look at execution.

In 2021, we made many changes to our operations so that we can be ready to meet the high-end narrow body production rates that customers will need in the future. Improvements are partly based on our experience from the last series of 737 rate increases.

Now, while some of the complexities, like simultaneously producing multiple models of the NG and the MAX, whilst adding tooling and other equipment are behind us, we are putting measures in place to help us meet challenges we might face. These changes will help us achieve solid execution in the commercial segment.

For example, the new automated 737 floor beam assembly line, which reduces the number of hours required to fabricate and assemble those structures will improve our productivity and quality execution. The advance digitization on the production floor and improved production flow in many areas is expected to result in better efficiency, such as reduced wait times between workstations.

The launch of the Global Digital Logistics Center consolidates thousands of square feet and parts kits to a centralized location [indiscernible] test site. And at our Prestwick site, a new automated A320 spoiler line is a state of the art system to produce hundreds of spoilers at peak rate. And looking at our readiness preparations, we have established a team of specialized employees to plan for Spirit’s and our supply chain readiness. The team has been preparing plans for the production increases ahead to be ready to react to emerging pressures.

Additional capacity in our fabrication area a new capacity we gained with our Bombardier asset acquisition may be used to help mitigate risk. Our 2022 production plan factors in a reduction in the 737 ships inventory, which is currently at 97%. By the end of 2022, we expect to see the level reach approximately 20 ships, which will remain as a permanent buffer inventory.

We are also planning for increased production on the 737 and will remain aligned with Boeing's communicated 31 aircraft per month production rate. We believe the rate increase preparations we have in place will help to drive the execution of narrow body programs in 2022 and beyond.

Now, as we move to higher narrow body production rates, we also remain focused on driving our costs down and margins up. The team is working on a number of initiatives to reduce costs. We have a team that regularly reviews what we make our factories versus what we purchase from suppliers, so that we could -- we can have a cost-effective mix based on what we see in our production plans.

Another closely related initiative is our regular review of asset utilization. We have teams in place to optimize our footprint to improve overhead costs and repurpose space for new work ahead. We closely watched the available hours for our equipment capacity for opportunities to maximize our usage and margin improvement.

And turning to growth we are pleased that in 2021, Spirit won two new business jet programs, including the missile for the new Dassault Falcon 10X. The team also began work with an emerging electric vertical takeoff and landing or eVTOL company that promises exciting future potential. We have many new opportunities that the team is evaluating, and we intend to build a pipeline of new commercial opportunities.

In summary, for 2022, we expect to see a narrowbody production and deliveries to continue to increase. The improvements we have put in place and the team we have assembled have been anticipating the higher production rates and we look forward to the opportunities we have for our new commercial segments.

With that, I'll turn back over to Tom.

[Thomas Gentile, President & CEO]

Thanks, Sam. Our commercial business segment has a strong position on current Airbus and Boeing programs. We have made a number of changes to enable us to meet the expected rate increases on narrowbody programs. But we also have many other growth opportunities, as Sam described.

Our defense and space business has also been very active in setting us up for future growth. Early in the year, we announced that NASA had selected our FMI business in Maine for a contract to provide thermal protection systems to support several of their emerging projects, along with NASA Award our defense and space team also won several new classified contracts. In the summer we joined Lockheed Martin to unveil Polaris, a digital engineering and advanced assembly demonstrator that will help our customer reduce cost and improve quality.

Then in October, we opened the National Defense Prototype Center in partnership with Wichita State University's National Institute for Aviation Research, or NIAR. We continue to win new defense business and now have 24 development projects over a $1million that could lead to significant future revenue. In 2016, we had just one such program over a $1 million.

One of the ways we have been able to win new programs recently is by repurposing widebody capacity, which is available due to the slow recovery in international air traffic and lower widebody production rates. We have plans for our defense footprint to expand from about 500,000 feet today to almost a 1 million square feet over the next two years.

In addition, we continue to execute against $6 billion in funded programs of records and are increasing and finalizing new additional multiyear contracts that will grow that funded amount. Moreover, our new business pipeline for defense and space is extremely strong. We have many additional projects and opportunities that the defense and space team is actively shaping. We remain on track to grow our defense and space business to $1 billion in revenue by 2025 at typical defense margins.

Turning to our Aftermarket segment, we built upon the foundation from our Bombardier asset acquisition and added Applied Aerodynamics to the Spirit portfolio early in 2021. The Applied Ergonomics acquisition gave us radome and wing component repair capability to add to our Airbus and Boeing engine, missile and flight repair -- flight control surfaces for overhaul and repair. The two acquisitions gave us a large presence in Dallas, and we have decided to center our aftermarket headquarters there. We also set up a JV with EGAT in Taiwan to expand our services in Asia. In 2021, we saw aftermarket revenue of about $240 million and plan to grow the business to $500 million by 2025 at accretive margins.

We believe our new segments and organizational changes help us become a more diversified company. In 2016, approximately 95% of our business was commercial. In 2021, 79% of our revenue was from our commercial business, 15% from defense and space and 6% from aftermarket. In the future, our aspiration is that our revenue will be a 40:40:20 split across the three segments. We are aggressively pursuing a path to cash flow breakeven in 2022 net of $123 million advance repayment to Boeing. But of course, this is highly dependent on the production rates that Boeing decides on finally for the MAX.

Now, I’ll turn the call over to Mark to take you through our detailed financial results and more on our 2022 expectations. Mark will also provide further details on our efforts to de-lever and recover our investment grade credit rating. Mark?

[Mark Suchinksi, SVP & CFO]

Thank you, Tom, and good morning, everyone. Despite the challenges over the last past couple of years, Spirit has maintained focus on our strategy to diversify and grow especially during 2021, which provided me a very transformative year for Spirit. The integration of FMI, the Belfast, Morocco and Dallas site from Bombardier in applied aerodynamics have expanded Spirit's capabilities, global footprint and customer base.

With that, we saw the need to form three new segments; commercial, defense and space and aftermarket. These new segments position us well and encourage us to really sharpen our focus on the unique products and services that we provide to our customers. Looking ahead to 2022 and beyond, we are focused on the execution of the increasing single aisle production rates, as well as our key three priorities which are to diversify revenue deliver by a $1 billion over the next three years driver segment margins to the 16.5% target.

Now with that, let's move to our 2021 results. Please turn to slide 4. Revenue for the year was $4 billion, up 16% from 2020. This improvement was primarily due to higher production rates in the 737 program, as well as increased revenue driven by the acquisition of the A220 Bombardier program or A220 Airbus program and the Bombardier business jet programs and further growth in aftermarket.

These increases were partially offset by lower wide-body production rates resulting from the continued impacts of the COVID-19 pandemic on international air traffic, as well as Boeing's pause in 787 deliveries. As we turn to deliveries, overall deliveries increase to 1,028 shipsets compared to 920 shipsets in 2020. 737 deliveries more than doubled to 162 shipsets compared to 71 shipsets delivered in 2020, while 787 deliveries decreased to 37 shipsets compared to 112 shipsets in 2020.

Let's turn now to earnings per share on slide 5. We’ve reported earnings per share of negative $5.19 compared to negative $8.38 per share in 2020. Adjusted EPS was negative $3.46 compared to negative $5.72 in 2020. 2021 adjusted EPS excludes costs-related M&A, restructuring, the deferred tax asset valuation allowance, curtailment gain and pension settlement losses. 2020 adjusted EPS excludes M&A and restructuring costs, expenses related to the VRP offered in 2020 and the deferred tax asset valuation allowance.

Looking at operating margins, we saw an improvement to negative 12% compared to negative 24% in 2020, reflecting the cost reduction actions we have taken over the last two years, along with the increasing production rates. In 2020, we recognized lower expenses, including excess capacity, COVID-19 charges and restructuring costs, as well as lower changes in estimates, including forward losses and cumulative catch up adjustments compared to 2020.

Despite the improvement of single aisle rates during 2021 full year profit was significantly impacted by the continued lower production rates on the [indiscernible] programs, the widebody programs, especially the 787, recognize significant overhead and forward loss charges during the year, which more than offset the execution and benefits on narrowbody programs.

Forward losses in 2021 totaled $242 million, primarily driven by lower production rates announced by Boeing and Airbus on the 787 and A350 programs. In addition to - and in addition, some additional engineering analysis and rework cost of the 787 program. In 2020, we recorded $370 million of forward losses, primarily driven by lower production rates on the 787 and A350 programs.

In 2021, we also recognize an increase in other income primarily driven by a curtailment gain of $61 million resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition and a pension settlement spin off loss on a US plant of $11 million. 2020 was impacted by expenses of $87 million related to the Voluntary Retirement Program. All of these items are non-cash in nature. Additionally, during the year, we recorded a non-cash valuation allowance of $204 million on deferred income tax assets, compared to $150 million that we recorded in 2020.

Now turning to free cash flow on slide 6, free cash flow for the year was a use of $214 million compared to a use of $864 million in 2020. The free cash flow usage for the year was in line with the range that we previously have communicated. Free cash flow benefited from higher deliveries, lower restructuring costs and positive impacts of working capital, as well as $300 million of income tax refunds. These were partially offset by a payment of $154 million towards the Belfast Pension Plan made during 2021. Additionally, 2020 free cash flow included $215 million received as part of the February 2020 MoA that we negotiated with Boeing.

With that, let's now turn to our cash and debt balances on slide 7. We ended the year with $1.5 billion of cash and $3.8 billion of debt. In terms of delivering, we remain committed to paying down $1 billion of debt through the end of 2023, which we believe will enable us to regain our status of investment grade. We initiated progress on this commitment in February of 2021, when Spirit prepaid $300 million of floating rate notes. Then in October, we took advantage of the lower interest rate environment and refinanced our term loan, which lowered our interest rate from 5.25% to $3.75%.

Now, let's discuss her segment performance. This is the first time we've reported the new segment structure, including Commercial, Defense & Space and Aftermarket. So let's begin with Commercial on slide 8. In 2021, commercial revenues increased 15% compared to 2020, primarily due to higher production volumes on the 737, A220 and Bombardier business jet programs, partially offset by lower production volumes on the [indiscernible] programs and in particular the 787 program.

Operating margin for the year was negative 7% compared to negative 23% in the prior year.The improvement in operating margins were primarily due to higher volumes on the 737, as well as lower expenses related to forward losses, restructuring, COVID-19 and excess capacity in 2021 as compared to 2020. The segment recorded $5 million of unfavorable cumulative catch-up adjustments and $227 million of net forward losses during 2021. In comparison, during 2020, the segment recorded $29 million of unfavorable cumulative catch-up adjustments and $367 million of forward losses.

Now, let's move to Defense & Space, which is on slide 9. Defense & Space segment revenue in 2021 improved by 19% compared to 2020, primarily due to increased activity on the P8 KC46 tanker and classified program revenue growth. In 2021, operating margin for the year was 8%, compared to 10% in 2020. Margin was negatively impacted in 2021 by higher forward losses and a onetime charge of approximately $9 million on a non-classified program. The segment recorded $14 million or forward losses, compared to $4 million in 2020, primarily driven by an investment on the V-280 program made during 2021.

For our aftermarket segment results, let's now turn to slide 10. Aftermarket revenues were up 19% compared to 2020, primarily driven by the inclusion of full year MRO activity from the Belfast and Dallas sites, which were acquired late in 2020, partially offset by lower spare parts sales compared to the prior year. Operating margin for the quarter improved to 21%, compared to 18% in 2020, driven by favorable product mix and lower restructuring costs.

In closing, we saw air Traffic begin to recover in 2021 and expect it will continue to improve as we progress throughout the year. In addition to our three key priorities to diversify delever and drive margins, our focus over the next 12 months will be on the execution of increasing single aisle production rates. Our productivity and efficiency improvements made within our factories over the last couple of years should enable us to meet production rate increases in a more cost effective manner.

If we look ahead to 2022 our performance will be driven by the commercial market recovery, specifically the 737 and A320 programs. As a result, we expect to see improvement in our financial metrics, including deliveries, revenue margin and cash flow. That said we anticipate the first quarter to be the lowest quarter of the year for deliveries, revenue, earnings and cash flow with meaningful improvement throughout the year.

Now, let me turn it back over to Tom for some closing comments.

[Thomas Gentile, President & CEO]

Thanks, Mark. 2021 was a transformative year for Spirit. We continued our recovery from the dual crisis of the Max grounding and the COVID 19 pandemic by investing in productivity and innovation to ensure we emerged a better company coming out of this period than the one that went in. We also made substantial progress on our diversification efforts, which culminated in new reporting segments and in a new organization aligned to those segments.

We are excited about the launch of these three new segments Commercial, Defense and Space and aftermarket, even though commercial air traffic continues to have some volatility with the recent COVID variants demand for domestic travel around the world remains robust, and narrowbody production rates at both of our OEM customers continue to increase. 85% of Spirit's backlog is narrowbody aircraft.

We have evaluated our operations and our supply chain so that we are ready to meet the narrowbody production targets from both of our customers. We will also continue to evaluate options to retire a total of $1 billion of debt over the three year period ending in 2023. We make good progress, starting with paying off $300 million in floating rate notes in February of 2021. This year we also refinanced our term loan B to secure a lower rate and upsized alone to give us flexibility to repay other higher interest obligations.

We remain committed to regaining our investment grade credit rating. Our investment in innovation and productivity projects to improve our operations will help us ramp our narrowbody production rates. These same actions will contribute to our objective of achieving 16.5% margins once MAX rates reach 42 aircraft per month. 2022 will bring continued improvement in our financial results and our cash flow generation, with the expected increase of narrowbody production rates and the growth of our new defense and space in aftermarket segments.

With that, we'll be happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from Myles Walton of UBS. Your line is open. Please go ahead.

[Myles Walton, UBS]

Thanks. Good morning. Tom or Mark, I'm not sure nurture which, could you talk about the trends in underlying margins, excluding excess costs, excluding forward loss charges if we segment it so it’s a little tough to ask about the segment, so I’m just going to ask at the high level company level. It doesn’t look like the margins are really improving as you going through the course of the year underlying. Could you just explain that and then maybe give us a roadmap as to why they start to really inflect in 2002 and then into 2023?

[Thomas Gentile, President & CEO]

Well, I'll start with that, Myles. First of all, we did start to see margins improved throughout the course of last year, and it really is linked primarily to rates on the narrow body aircraft. As those rates go up, we get better fixed cost absorption. We lower some of those excess costs that we've had in the past couple of years. And overall, that has a positive benefit on margins in the commercial segment, let's focus on that. And coming into 2022 again, the same thing will happen.

We're going to see rates continue to improve on both the MAX and the A320, and that will drive better fixed cost absorption and ultimately lead to better margin performance this year and getting into next year. As we said, when we get to 42 aircraft per month on the MAX, that's a stable amount, that's a good surrogate and that's when we think we can get to the 16.5% margins.

[Mark Suchinksi, SVP & CFO]

Yeah, Myles I’d just say that it's -- it gets a little difficult for you guys as you try to glean or dig through the numbers. The fourth quarter was a little bit messy with additional forward losses 787 with the lower expected production volumes, particularly in 2022, a couple of one-off charges in the defense area.

So I think if we strip out the forward loss items, which mainly have been related to lower volumes on our twin aisle programs and those are the programs where we're in a for loss situation. Those programs along with a few one-off items as we look at the third and fourth quarter, once you kind of normalize those out, we see our excess costs starting to get more on alignment with the higher rates.

I think underlying when we look at actually our gross profit were starting to see the benefit of the higher production rates. And I think as we move into 2022 and we get past you know, we're now at low stable twin aisle rates, we'll start to see the 737 and A320 benefits show up in our overall margins. And you know we're planning to execute here in 2022. And so some of that noise will be behind us you know we've seen a lot of ups and downs in 2020 and 2021 a lot of schedule changes, a lot of things that have impacted us and we've really tried to react to those accordingly.

I think you'll start to see the incremental margin growth that you're expecting as we move throughout 2022. But as I said in my opening comments, you know our first quarter will be our most challenging quarter from a revenue in an earnings and a cash flow standpoint. And we should see things start to really improve in the second and third quarters. But you'll see a nice margin tick up here in the first quarter compared to what you've seen here in 2021.

[Thomas Gentile, President & CEO]

And I would just add that if you look at the segment margins for aftermarket, you'll see they're north of 20%. Defense you really got to go back a couple of years to a normal year, but they're going to be in the as we said, the 12% to 14% range going forward. So those will also contribute in the future.

[Operator]

The next question comes from Doug Harned of Bernstein. Your line is open. Please go Ahead.

[Doug Harned, Bernstein]

Good morning, thank you. On the 787, I mean, Boeing has talked about the need to get enough -- sense, enough volume of through enough volume of inspection and repair, you know, so the FAA can look at this in a sense from a statistical standpoint. You know, when you look at Spirit's role, I mean, you're a forward pressure bulkhead, the overall section 41. When you look at where you're at now, both in terms of new production and then there was being able to make sure that non-conformities are gone, that it meets the requirements.

And then also the number, the work you've been doing to get through the shipsets that you've been delivering -- you've delivered and are being inspected and repaired in the completed aircraft at Boeing. Can you give us a sense of where you are now on this sort of road to recovery and delivery on the 787 from a Spirit standpoint?

[Thomas Gentile, President & CEO]

Yes. Doug, on the new production, we've been through all the engineering analysis, and we've completed that and we know now what changes we need to make to production going forward and all those changes are incorporated and we are executing those as we start that to produce again. In terms of the rework, again, we've also identified the rework that needs to be done and in fact, I'd say we're about 40% complete with all of the rework that we need to do on the 110 units that Boeing still has in storage because we've had access during different points of last year to those and we were able to get in and do them. And we will complete that rework as we get access to those aircraft.

And so we know what has to be done. We've already started the work, as I said, we're 40% complete. And in terms of new production, we know how we will build it going forward. And the teams are now essentially perfecting that and putting it into operation as we resume production on the 787.

[Doug Harned, Bernstein]

And then given that insight, do you have any updated sense of when we might see deliveries happen?

[Thomas Gentile, President & CEO]

Nothing beyond what Boeing indicated in their earnings call last week. So we are waiting for them to give us more information there, obviously in close contact with the regulator and customers. So I would just defer to the comments that Dave Calhounmade last week on when they'll resume deliveries.

[Operator]

The next question comes from David Strauss of Barclays. Your line is open, please go ahead.

[David Strauss, Barclays]

Thanks. Good morning. Maybe for Mark -- good Morning. Mark, can you just talk about the pathway in terms of burning off or coming down in terms of these excess capacity costs? I think previously you had said 25% lower, you did $218 million this year. Is that 25% still right ? Do we get by the end of the year based on what you're thinking about for max rates? Are those excess capacity cost pretty close to zero? And are you actually also taking in excess capacity cost on each seven at this point? Thanks.

[Mark Suchinksi, SVP & CFO]

Okay, good question. So on our excess capacity we've got multiple programs that have - we're seeing much lower production rates and so we're period costing that 737 is one of them as you mentioned A220 is another one and an A320. We do have the negative impacts of the lower production rates on 787 that has a what I'll call collateral impact to our twin aisle programs because there is a shared costing rate in the lower, the production is on 787, it has a negative impact on our Boeing twin aisle programs.

So in 2020, we incurred $280 million worth of excess capacity costs, mainly 737 and A320 in 2021 with the integration or with the acquisition of Bombardier, we included excess – some additional excess costs related to the A220 on our way to higher production rates. So in 2021, where we ended up roughly call it somewhere between $215 million and $220 million. And I expect based on the rate ramp in 2022 that we should see our excess cost to be about half of what we saw in 2021.

[Operator]

The next question comes from Robert Spingarn of Melius Research. Your line is open. Please go ahead.

[Robert Spingarn, Melius Research]

Good morning. Sam, you open your comments on cost initiatives. And I wanted to get a sense of how much more cost reduction work is still needed to get the company to the 16.5% margin rate $42 or these initiatives accretive to that?

[Samantha Marnick, EVP, President, Commercial Division & COO]

So what I would say is that it's part of getting to that 16.5%. These initiatives, we spent a lot of – a lot of time this past probably year-and-a-half getting these in place, we really start to see the benefit of those as rates starts to increase and we'll really see what efficiencies that we can gain.

Additional to that, as we go out here into the future and we do eventually get to the 42 aircraft a month, whatever point that is, there are a number of other initiatives that we're constantly looking at that are not baked into that. For example, as you look in the out years, as you look at what you might do with your supply chain with you make by the initiatives I talked about in terms of what we've done so far in terms of the automation, the digitization, those are all part and parcel of getting us where we need to be on the 16.5%.

[Thomas Gentile, President & CEO]

Yeah. And I would say that, of course, like any set of projects, we always set our own internal targets higher, recognizing that there might be some leakage, but also to offset other challenges that are going to come up. Obviously, inflation and material and labor, all of these things are going to be headwinds that will have to overcome.

And so we always say we have to run fast to standstill. So the initiatives that Sam outlined are all built into our plan to get to 16.5%. And we've target to achieve more than that, but we want to make sure that we achieve at least that. And so our goal is to offset the headwinds that we already know are there and still deliver and execute to that target.

[Robert Spingarn, Melius Research]

Okay. Thank you for that. Just a quick clarification for Mark, if I could. Mark, how do we think about the net effect on cash flow in 2022 from 788? We've talked a lot about the slow ramp and the rework and so on. Some of these things, I guess, shipments being down as a positive on the given the negative cash margin on new builds. But then of course, all the rework and engineering goes the other way. So what's the net effect in 2022 and you know does that lead to 2023 being a tailwind on 787 or a headwind?

[Mark Suchinksi, SVP & CFO]

Rob, really good question. You know our program really well. And so you're right, since we're in a forward loss position, we have negative cash flow on a unit by unit basis on the 787 program. So the lower production rates here in 2022 will be a benefit to us. I would say that those benefits offset the additional rework in finalization of some engineering analysis that we're completing.

So overall, I think the lower volumes of the savings there offsets the rest of the rework, the cash that is required to go complete the remaining call it at 55% 60% of the rework that that is needed. The one area that we're really focused though on is we had from a production system standpoint work in process in our system, in the line along with supply chain parts expected at a higher rate in 2021.

So if we do our jobs right, there could be some tailwind here in 2022 from an inventory standpoint getting the production system getting the number of units in flow at the lower rate more in alignment with the current rate of production. And so that could provide a little bit of tailwind from a cash flow standpoint in 2022. And we're very, very focused on supporting Boeing when they decide to start the production back up, we'll be there for them. But we got a lot of work to go do there.

So multiple pieces we're juggling. I think you've got it right, benefits by lower deliveries. We still have some rework. The majority of that we should complete this year. And then, maybe we get a little bit of tailwind here if we can do a good job managing down our supply chain parts to the lower levels of production and getting our production system back in sync with the product production rates when Boeing starts to deliver aircraft to airlines.

[Thomas Gentile, President & CEO]

And I think another way to say it is that we completed 40% of the rework on 787 last year. But really spent 60% of the cost because it included engineering analysis, which we don't have to do this year. And the 40% of the cost this year for the rework will essentially be offset because of the lower production rates on the 787.

[Operator]

Our next question comes from Sheila Kahyaoglu of Jefferies. Your line is open. Please go ahead.

[Sheila Kahyaoglu, Jefferies]

Hey. Good morning, guys. Thank you for the time. I was wondering if we could talk about maybe commercial profitability. I appreciate the segment break out. But there is really no historical context. So if you could give a little bit or maybe on the 777 specifically, what did 2021 profitability look like and how do we think about the profitability of that program as it maybe steps up in rates?

[Mark Suchinksi, SVP & CFO]

Hey, Sheila. Hey, good morning. Good to hear from you. I would say this if you can give us just a few days here, we'll be filing our 10-K and when we file our 10-K, it's -- it will show three years’ worth of results under our new segmentation. And so, you'll see 2021 results, 2020 results and 2019 results. You'll see a breakout between commercial, defense, space and aftermarket. You'll see revenues. You'll see operating margins and operating profit. And I think really if you go back to 2019, we should have this filed in the next few days.

I think that will give you a good feel for the segment margins when we get back to normal type production rates. And so I don't really want to get ahead and get too specific. I think it's pretty easy to see in our disclosures today or earnings release you saw aftermarket margins in excess of 20%. We've always told you those were accretive in north of 20%.

We've talked about defense margins that are typically somewhere between 10% and 14%. And then I think when you go, when you see the 10-K that we file here and I think 2019 is a good proxy from what you should expect as we move into what we call as normal production 2023, I think that will give you a good feel for what overall commercial margins are expected to be.

[Thomas Gentile, President & CEO]

And I would just add to this is that as we look at the 737 in particular, because obviously that's still a big program for us, it's still a major driver of our economics. One of the things we're going to do is look at 2016 as a comparison, and the reason we picked 2016 is because that was a time we were at about 42 aircraft per month and it was stable production in the sense of we were producing 100% NGs. So even in 2019, we were still doing a little bit of both NGs and MAXs. But now we're 100% MAXs. And so we're using 2016 as a surrogate to say, where do we need to get all of our operating metrics and comparables in order to drive the margins to get to the 16.5% target overall.

[Sheila Kahyaoglu, Jefferies]

I was actually going to ask about 2016. And then just on the 777, can you talk about profitability and how it looks there?

[Mark Suchinksi, SVP & CFO]

Sure. I mean, 7 -- 777 has always been a really good program for Spirit. Right? Obviously, you know, Tom starts to talk about 2016 as a good benchmark year for us when we talk to our teams about cost and margins. You know, the headwind we have right back in the 2016, 2017 timeframe, we were producing at a rate of roughly eight aircraft per month and that really -- that overhead absorption really helps supercharge margins. You know, as Boeing has indicated, we’ll be over the next couple of years looking at two, three, four aircraft per month.

We liked the 777 freighter that we have and 777X know Boeing has indicated hopes to start delivering at the end of 2023. And as those rates start to go up, that will help contribute and contribute nicely to our overall commercial margins. It's a good program for us. It's a profitable program for us and it's one that, you know, we're hoping Boeing continues to get more orders. Hopefully, they can deliver more freighters. We're ready to support them and hopefully they execute on the timelines in getting the airplane certified and we're excited to be on that, and you see a lot of customers in the marketplace excited about that 777 platform, with Qatar looking to buy 777 freighters. So, it's a good program for us and it'll be a contributor as we move into 2022 and 2023.

[Operator]

The next question comes from Peter Arment of Baird. Your line is open. Please go ahead.

[Peter Arment, Baird]

Yeah. Good morning, Tom, Sam, Mark. Hey, Mark, maybe I could just follow up with you on just kind of defense margins. You know, you kind of commented that they're kind of more normalized as 10% to 14%, but you've got a lot of growth planned in front of you and I assume some of that is still in development. So how do we think about the pathway on those margins if we're just thinking about 2022 and 2023 you know, going forward? Thanks.

[Mark Suchinksi, SVP & CFO]

Sure. You know, we had a couple, a couple of onetime items here in 2021 that really kind of depressed the margins. It doesn't really show what our defense margins are. I talked about an agreement that we have with Bell on the Z280 call it a cost sharing agreement as we work with them to win that program. That was an $8 million investment that we made in 2021 that won't repeat as we move forward. And then we had a onetime charge on one of our non-classified programs in the fourth quarter. And if I exclude those two items in 2021, we'd be looking at you know 12% to 14% margins on the defense side.

And when we look at 2022 and 2023, everything is lining up for that. We have a nice mix of mature programs like the C853K. We all know that we're on the B21, which is still in development and we've been winning some classified programs into classified programs typically are development type programs, cost plus type programs that enable you to achieve, you know a fair margin for the work that we're doing.

So we've got a good path into defense, right? We're excited about it. You know almost 20% growth in 2021 and we really feel good about another nice growth profile as we move into 2022 into 2022 and we expect to achieve those types of margins in this year. And as we continue to grow, it's going to be a nice contributor to our overall book of business.

[Thomas Gentile, President & CEO]

Yeah. I mean, I would say one way to look at the defense margins as you can think of it in maybe three categories. Mark mentioned the core programs that are mature and in production, CH-53K and it even include P8 and KC-46, which are the military derivatives of the commercial aircraft there. And then we have these new classified programs, which are cost plus.

And then I would say we have some specialty programs, particularly that came out of our FMI acquisition that are more targeted, more niche tend to be a little bit higher margin. And those tend to be on things like thermal protection barriers, base applications, missile applications and for very specialty type of materials. And so the combination of those three things give us confidence that the Defense & Space segment can deliver the 12% to 14% margins consistently going forward.

[Peter Arment, Baird]

Appreciate the details. Thanks, Tom.

[Operator]

The next question comes from George Shapiro of Shapiro Research. Your line is open. Please go ahead.

[George Shapiro, Shapiro Research]

Good morning. Mark, if I want some clarification. The forward loss that you took on the 787 looks like it was just due to lower production rate. So one, can you tell us what you're including in terms of the expectation for the 787 rates as to when you get to your 1405, which you kind of had as the magic number? And then two, the cost incurred for the rework that you did on the 787, that's not included in the charge. So can you spell out roughly how much those costs are going to be and then is there any agreement as to what you might have to contribute to Boeing in terms of the $3.5 billion charge that they took, if any? Thanks.

[Mark Suchinksi, SVP & CFO]

Okay. Well, let me answer the first two questions and then Tom will address the third component. And so maybe let me attack the second component, which is the rework, okay? And so during 2021, we recorded approximately $154 million of forward losses in total. We did incur a forward loss in the fourth quarter of $32 million, and that $32 million in the fourth quarter was specific to lower deliveries, which extended the block and those lower deliveries are primarily isolated to 2022, and the fourth quarter of 2021.

But we have included in those forward losses estimates, as it relates to the rework, both reworking Boeing aircraft that are completed, the 110 that Tom talked about, reworking airplanes in their production system and rework in our factory. And as Tom indicated, it's a combination of engineering work that we did, plus actually touch labor, replacement parts, et cetera.

And when we look at completing that work, as Tom said, roughly 40%, 45% of the work itself, the number of units were completed in 2021, but we spent about 60% of that cost. The remaining components, the remaining 40% of the cost will be spent in 2022 as we complete those units. So, that cost is in the forward loss. It's reflected in our financial results. 60% of that cash cost is included in our free cash flow that we reported in 2021, and the rest of it will be spent in 2022.

The latest schedule change, again it was kind of isolated to five, five and a half quarters. It means that you know our block now extends into 2025. And so, you know you talk about getting to line unit 1406, which is our next price increase there. But you know, the airplane program, you know we're working very closely with our customer, you know once they get it delivered, that'll be good for us.

But at this point in time, you know 2020, 2021 has had a significant impact on our block. It extended the block by almost by roughly two years and that includes two years’ worth of fixed costs like depreciation, property taxes, insurance that now unload on that same number of units. So it's a lot of headwind on us. But you know we've got it all captured. It's in our fort losses. It's all booked. So hopefully that helps George.

[Thomas Gentile, President & CEO]

Yeah. And I would say George as Mark said, the lower production rates are already incorporated into the forward loss, as well as all the rework and engineering analysis. Those were part of the Ford losses in 2021. And so we've taken a pretty conservative view of what the production rates are likely to be this year. You know if you look back in time in 2020 we delivered 112, 787 chipsets in 2021 it was 37 and we're anticipating even fewer this year, kind of in line with what Boeing has been communicating. With regard to your last question on claims, I will just say that we've not discussed any claims with Boeing.

We do have rework to do on some of the work packages that that Spirit provides for the 787 some of the work packages that that Spirit provides for the 787 on the undelivered units, the 110 that I mentioned, and we're about 40% complete with those.

Now, we're doing all that rework at our own expense with our own people in Boeing's factories, and all of the cost for that are reflected in the forward losses that we took mostly in Q3 of last year in 2021. What I'd say is that the Spirit rework is not the sole cause for delays to the Boeing 787 deliveries, and so we -- we’ll stay in close communication with Boeing on that, but we have not discussed claims with them.

[Operator]

The next question comes from Ken Herbert of RBC. Your line is open. Please go ahead.

[Ken Herbert, RBC]

Hi, good afternoon, Mark and Tom. Thanks for letting me on. I just wanted to ask a question if I could, Tom, about the supply chain. I wanted to see sort of relative to the third quarter. If you've seen any incremental delays in the supply chain specifically around, I guess the 737, any incremental areas, maybe of pressure from the supply chain. And I guess more importantly, as rates continue to go up on the 737 and eventually on the 787, are there any areas you'd highlight maybe as greater financial risk, either where you might be looking to inject capital into the supply chain or where you would expect suppliers that might need a little more support if there are issues to support the rate?

[Thomas Gentile, President & CEO]

Right. Well, Ken, the answer is we have seen some pressure like everybody in the global supply chain on some ports. So, for example, the California ports tend to be a little bit more backed up right now. So some of the products that we have coming out of Asia and we have suppliers in Malaysia and in South Korea, Indonesia amongst others.

We have seen some pressure on that and some increase in freight rates, but if you look at freight as a total part of our business it’s about 2% of our total cost base, so even if it goes up some, it’s a relatively minor total cost impact even if the rates go up quite a bit. One of the things that we've been doing, for example, is doing some consolidated air shipments from Asia where particularly folks say from South Korea is we can load up a lot of parts on to one aircraft and basically skip over the ports in LA and California and get them here. So, we've been able to demonstrate that we can do that.

As rates go up, we are working very closely across the entire supply chain to make sure that we have access to the parts. In many cases, we're looking at dual sourcing opportunities. As you know, we have a significant fabrication capability internally, so we can insource things and we're looking for local suppliers to provide backups if we get into trouble.

So, we're actively working all those things. We actually appointed a new Vice President to lead supplier development in the field, and we have a fairly large team that we can deploy anywhere in the world to work with suppliers as we see situations and one of the situations we're looking actively to mitigate is any potential supply disruptions at the ports.

And so we're putting in place proactively plans to either dual source or in source some of that content, so that we don't experience risk. Obviously, the 737 is because it's the biggest program we have. That's where we're seeing some of the most pressure and that's where we're spending a lot of time in the mitigation. 787, it's much less so. I mean, the rates are much lower and we expect them to remain lower for this year. So we're not anticipating as much pressure there.

[Ken Herbert, RBC]

That's great, And if maybe if you could just quantify what of your 737 supply chain, maybe how much is from domestic suppliers versus how much do you sourced internationally just roughly?

[Thomas Gentile, President & CEO]

Right. Well, we still source more than 60% domestically even on 737, because we just have some of our big suppliers happened to be domestic and a lot of them in the Kansas, Oklahoma region. So it's -- we do source from international suppliers. But still, most of our supply is coming domestically.

[Operator]

The next question comes from Cai von Rumohr of Cowen. Your line is open. Please go ahead.

[Cai von Rumohr, Cowen]

Yes. Thanks so much, and I apologize. I missed some of the early part of the call, but could you give us where you are on the 737, i.e., how much the inventory -- how many of the stored fuselages you have at your facilities now? Where the rate is now? Where you expect to be in terms of stored fuselages by yearend? And kind of how should we think of the profile of your rate versus Boeing as you're moving up?

[Thomas Gentile, President & CEO]

Right. Well, Sam did mention that we are at 97 units this morning, so we're broken the 100 barrier. At one point we were up to 140. And so as we said, we are lagging Boeing on production rates, we can burn off that inventory. Our plan is to burn off the inventory by year-end to a level of 20, which will become a buffer, a permanent buffer to cushion the production system. But when we - when we get to that point, we will no longer be wrapping aircraft and storing them out of the ramp.

So by the end of third quarter into the fourth quarter we expect the ramp across the street to be pretty much empty. Right now, we're at a rate of 21. You heard on Boeing's call that they're at a rate of about 26. So that's what we always said is that we'd like them by about 5 to burn down those aircraft over time. And that's exactly where we are. And then in terms of the rates going forward, is will stay at a lower rate to Boeing until we burn off that inventory and then we will re-sink with them at the same rate that they are whenever that occurs.

[Cai von Rumohr, Cowen]

Excellent. Thanks so much.

[Thomas Gentile, President & CEO]

And expect that that will – that re-sinking will happen – yeah, kind of that re-sinking will happen by the end of the year. Thanks, Cai.

[Operator]

The next question comes from Hunter Keay of Wolfe Research. Your line is open. Please go ahead.

[Hunter Keay, Wolfe Research]

Hey. Thanks for giving me just a couple of quick ones. I just want to just clarify a question on the free cash flow for 2022. Are you targeting breakeven free cash flow after $123 million payment to Boeing? I thought you'd said last quarter, you were targeting breakeven free cash flow before that payment. Am I incorrect or is there an improvement in that commentary?

[Mark Suchinksi, SVP & CFO]

No, it's still – it's after $123 million.

[Hunter Keay, Wolfe Research]

After. Okay. All right. Thank you. And then of the 24 development projects, Tom, you mentioned that are over $1 million. How many those are outside the aerospace and defense realm?

[Thomas Gentile, President & CEO]

Well, they're all in aerospace and defense. They're all defense projects.

[Hunter Keay, Wolfe Research]

Okay. All right. You're not thinking about…

[Thomas Gentile, President & CEO]

So it's all of them are Defense & Space. Pardon?

[Hunter Keay, Wolfe Research]

I was wondering if there were some sort of…

[Thomas Gentile, President & CEO]

Could you repeat that, I did hear?

[Hunter Keay, Wolfe Research]

Sorry. Yeah. I was just wondering basically if you were thinking about some sort of like adjacent market-type concept and some of these development projects.

[Thomas Gentile, President & CEO]

Oh, yeah. No adjacencies. It's all pure defense and space work.

[Operator]

The next question comes from Kristine Liwag of Morgan Stanley. Your line is open. Please go ahead.

[Kristine Liwag, Morgan Stanley]

Thanks. Tom or Mark, just talking about the defense charge you mentioned, it's a non-classified program. Can you provide a little bit more detail on exactly what that was, what that entail? And is it really one time? And if you could share where you get that confidence?

[Thomas Gentile, President & CEO]

Yes. I'll take that, Kristine. It was really just a an issue on a single unit. It's some rework that we have to do. To be honest, we took a bit of a conservative view that, you know, we'd have to do more rework. We'll refine and clarify that as we go forward. But it's it was a one-off thing and we're going to fix it and we don't expect it to repeat.

[Kristine Liwag, Morgan Stanley]

Great. And as you grow your defense business, what's been normalized margin we should think about here going forward? And then is there and with the program that you mentioned, is this related to future vertical list and how should we think about that upside for you with which team wins the summer?

[Thomas Gentile, President & CEO]

Right. Well, as we said, for defense, we want to get to $1 billion by 2025, a typical defense margins, which we say are 12% to 14%. So, as I was saying a little bit earlier, if you look at the type of defense, I think Peter asked this question, as we've got our classified programs and those tend to be in development phase, those are cost plus.

We've got a kind of core mature programs like the CH-53K or the P-8 or the KC-46, and those are typical defense margins 12% to 14%. But then we have some specialty programs, which can be higher margins. So, overall, we're saying 12% to 14% on defense going forward. Now on the future vertical lift, we are on the Bell team, the Valor for the V280. And as Mark said, there was some investment in 2021 in that program as they're getting ready for the decision, which I think is expected, they're going to make the decision sometime in March of this year, maybe communicated by June.

Perhaps there's some slippage on that, but those numbers aren't built into our forward outlook. It's only the things that are in our outlook is the work on the development program. But this is the FLRAA program, the future long range assault aircraft. And it is not only going to be a replacement for the Black Hawks, which have about 2,000 units in the field. So it would be a very big program if they were to win it and our work package would go forward that's a very big program going forward, but that's not included in our current financials.

[Operator]

The next question comes from Ron Epstein of Bank of America. Your line is open. Please go ahead.

[Ron Epstein, Bank of America]

Yeah. Good morning.

[Thomas Gentile, President & CEO]

We haven't talked more Ron.

[Ron Epstein, Bank of America]

[indiscernible] talked about much of other airplane program maybe with the exception of the A220 program. Could you walk us through that a little more detail? Where you expect those rates to go and how you think the profitability in the program will proceed over time?

[Thomas Gentile, President & CEO]

Right. Well, on A220, we're at about four aircraft per month right now. Airbus has indicated that by 2025 middle of the decade, that they would be at around 14. So that's kind of our trajectory. And as you know, we did have a forward loss when we open that program up in Q1 of last year of about $375 million but we said it would basically get to breakeven by 2025 when they get to the rate of 14%. So, that is what's built into our financials. Obviously, we've got programs in place to try to do better than that but that's what's built into our core financials right now.

[Ron Epstein, Bank of America]

And a word from the Bombardier acquisition of their aerostructures components where do you get profitability anytime sooner than 2025?

[Thomas Gentile, President & CEO]

Well, two places, one is the aftermarket. So, Mark mentioned that the aftermarket this year is about $240 million, a lot of that did come from the Bombardier acquisition, and that was at very good margins. So, you saw that it's north of 20%. The other area is business jets. We did inherit quite a bit of business jet work for Bombardier. We're now one of their largest suppliers and those are at positive margins. I obviously suffered a little bit because of COVID but as the rates recover, we expect those to normalize. But those are two areas of the Bombardier acquisition that are immediately profitable with good margins.

[Operator]

The next question comes from Michael Ciarmoli of Truist Securities. Your line is open. Please go ahead.

[Michael Ciarmoli, Truist Securities]

Hey, yeah, good morning, guys. Thanks for sticking around to get me on. Tom, I was wondering can we go back to kind of supply chain and what Ken was asking and I guess specifically just looking at the labor market thinking about inflation that that's going to impact both labor and raw materials and I think you guys did plan to rehire 4,600 people over the next three years but how are you thinking about just labor availability and then 16.5 % margins, I mean, we don't have a crystal ball, so I don't know what inflation's going to look like. But if we have inflationary pressures, you still think you can get to that 16.5%.

[Thomas Gentile, President & CEO]

The answer is yes, we do. Let me go through the two aspects of that question. So, in terms of labor availability, just to give you some sense, we laid off about 5,200 people in Wichita. We've recalled already about 2,200 of those. A number of other people did permanent retirements or took part of a retirement program, so they wouldn't be available in the full.

We still have about a 1,000 left in the recall pool, and we think that'll take us through at least mid-year and perhaps longer. So, the labor availability is good because we still have a pretty good recall pool to tap and we're in the process. But the good news is we should have everybody recalled by the end of this year, certainly in Wichita and we expect in our other locations as well in the US.

Now, with regard to inflation, obviously that's a concern, but you know, if you look at the different components, direct labor is only about 8% of our cost, indirect labor is a bit more. But there we made a lot of cuts and we're looking at improving productivity so that we can be more productive as we come back and we don't need to add as much cost. The raw material is obviously a bigger number and then you have the parts.

And let me let me just say on raw material, you know, we're fortunate is as a Tier 1 supplier, as we buy a lot of our raw material through the buying consortia that Boeing and Airbus had. So for Boeing, it's TMX, and for Airbus, it's -- and particularly on the TMX side, you know that -- those prices tend to be fairly locked with Boeing. They buy at huge volumes and we benefit from that.

And so we feel we have a good way to manage that the raw material cost by working with Boeing and Airbus through their buying consortia. On the parts those come from our supply chain that represents typically about 66% of our cost. And that's a big chunk of it is from suppliers now there what we have done is we've put in place a lot of back to back contracts.

So with for example on the 737 program our pricing with Boeing contract was up to 2033. So particularly during the pandemic we offered a lot of our big suppliers the ability to put that contracts out to 2033 and a lot of them took it up. And so we have back to back contracts with our suppliers, which essentially give us a natural hedge on part inflation for a big chunk of our direct cost.

And so we work very closely with our suppliers during the pandemic. We provided support to about 600 suppliers. In total it added up to over $2 billion. and a lot of that were these contract extensions up to 2033. So that we had a back to back hedge on inflation. So that's the way we're managing inflation in some of the different buckets.

[Operator]

The next question comes from Noah Poponak of Goldman Sachs. Your line is open. Please go ahead.

[Noah Poponak, Goldman Sachs]

Hello, everyone. so how many 737 MAX shipments chip sets are you anticipating in 2022?

[Thomas Gentile, President & CEO]

Right. Well, Boeing as you know has indicated that they will get up to 31 aircraft per month in early 2022. And so we will work with them depending on what rate they established. We are going to align with our customer. We don't want to get out ahead of our customer. And I think they're trying to just look at the market and understand it before they make any commitments and we'll do the same.

[Noah Poponak, Goldman Sachs]

Tom, I think last quarter you had indicated for your ships that this year could be in the range of 275 to 300. If you're lagging Boeing by five a month for a few months or sorry until you link up with them and they’re 26 for a few months here break to 31 even if they just stayed there for the full year, that would be in the zone of 300 for you before even unwinding the inventory you've talked about. So it put you over 300 and you gave that range last quarter. Can you maybe just update that range from last quarter?

[Thomas Gentile, President & CEO]

Well, we just did a math equation and said if Boeing is at 31 and they stayed there the whole year, let's say, so 12 times 31 for them would be 372 and we said we wanted to burn down 80 that were in our inventory across the street. So the 372 minus 80 gets us into the 290 range, that we just said was a math equation, just running the numbers like that to give everybody a scenario but it really depends on the outlook for narrowbody market and Boeing is carefully watching that and what they've indicated is they're going to get to 31 in early 2022 and they haven't provided any more public guidance on that and so that's really the best that we can provide as well.

We're always as transparent as we can be with you guys. I just think it's really difficult for us right now to get ahead of our customer. What they've said is they're 26, they're going to 31. They talked about in the next few months, not in the first quarter, but probably in the second quarter making decisions on what they might do above 31. And until Boeing makes that decision, it's very difficult for us to give you precisely what we're going to deliver this year.

It's still -- it's still in flux, right? And we're really waiting for direction from our customer and where they think things are going in the back half of the year. And so, although I know you want the information, we really want to provide it to you. I think we need further direction from Boeing. All of us do before we can really get too precise as it relates to where we think things are going here and we'll give you another update next quarter. And when we know information, we've got it solidly, we will provide it to you like we always have in the past.

[Noah Poponak, Goldman Sachs]

Yes. That's very fair. Is 2023, a relatively normal free cash flow margin year?

[Thomas Gentile, President & CEO]

I mean, of course, it depends on narrowbody production rates, particularly the MAX. But based on kind of outlook, I would say that, yes, that's exactly what we're expecting.

[Mark Suchinksi, SVP & CFO]

Yeah. We you know, we don't want to get to ahead of things, but the market recovery is coming. I think even if it isn't as bullish as everybody says, it will be a very good cash year for Spirit.

[Noah Poponak, Goldman Sachs]

Okay. And I -- sorry to stay on this, but just before I leave the call has the narrowbody plan overall situation worsened or improved? Or is it just that you're now -- we're now at the point in time where decisions will have to be made about the back half of 2022. So your ability to discuss them with specificity has lessened because of the nature of not wanting to be ahead of your customer.

[Thomas Gentile, President & CEO]

Yeah, I would say nothing has changed. And we are here in 2022. Our customer has given indications about what they expect and what their outlook is, and we don't want to get ahead of that.

has given indications about what they expect and what their outlook is, and we don't want to get ahead of that. But nothing has changed in the outlook. It's still fundamentally the same.

[Mark Suchinksi, SVP & CFO]

You know, I would say the latter. You know, obviously...

[Noah Poponak, Goldman Sachs]

Yeah. Okay.

[Thomas Gentile, President & CEO]

...things move around a bit, all right? Okay?

[Noah Poponak, Goldman Sachs]

Yeah, that makes sense. Yes. Thanks so much.

[Operator]

The next question comes from Seth Seifman of JPMorgan. Your line is open. Please go ahead.

[Seth Seifman, JPMorgan]

Thanks, and good morning. Thanks for sticking around over time this morning. I guess, Tom, just one question, now that we have the segments and we think about kind of the long-term targets and I guess the understanding of -- as you've mentioned before, that, you know, there's probably inorganic component to reaching those targets over the long term. Are -- is there like, you know, are there things that kind of need to happen with regard to getting off to certain production rates or leverage levels or cash flow levels before you start to think more about that inorganic component? Or is it kind of totally opportunistic?

[Mark Suchinksi, SVP & CFO]

Well, as you know, I mean, deals happen when they happen and they're actionable when they become available. So, you know, obviously it would be better if we could wait until everything was fully recovered and we were generating lots of cash. But if the right deal came up, that was strategic and met our financial hurdles. We would look at ways to accomplish how we could do it. I mean, we do have capacity and opportunities to fund deals, if they came up. But again, in an ideal world, we'd get everything stable and back. But as you know, in the world of M&A, deals are available when they're available and you've got to be prepared to move.

[Operator]

There are no further questions. This therefore concludes today's call. Thank you for joining. You may now disconnect your lines.