Good morning, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings, Inc. First Quarter 2024 Earnings Conference Call. My name is Candice, and I will be your coordinator for today's call. [Operator Instructions] I would now like to turn this presentation over to Ryan Avey, Senior Director, Investor Relations and FP&A. Please proceed. .

Thank you, and good morning, everyone. I'm Ryan Avey, and with me today are Spirit's President and Chief Executive Officer, Pat Shanahan; and Senior Vice President and Chief Financial Officer, Mark Suchinski.

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, including those 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. With that, I would like to turn the call over to Pat. .

Thank you, Ryan, and good morning, everyone. Let me say at the outset that I am so proud of the Spirit team and particularly proud of what we've accomplished through teamwork. I love this industry, our customers and the people that work in it.

And we set out every day to make the industrial system better while ensuring safety, quality and compliance in the supply of our products and services. .

For Spirit, the primary objectives of stabilizing operations, delivering on our customer commitments and strengthening our company financially have not changed. We are laser-focused and continue to make real progress towards these objectives.

Spirit AeroSystems is a critical component of a global network of engineers, manufacturers, customers and governments that comprise the aerospace industry. In that context, I'm going to frame our ongoing efforts. .

Demand for commercial air travel remains robust and firm. Our collective responsibility at Spirit is to match capacity and capability short and long term. It is a responsibility that defines the company and is at the core of our commitment to our customers.

So as the industry prepares to ramp up production, we are diligently working across the industrial system to ensure we possess and demonstrate the capability to deliver on our commitments. .

Before moving to other topics, I would like to address talks with the Boeing company about a possible acquisition. At the beginning of March, we responded to media speculation by confirming that we are in discussions with Boeing. Those discussions continue, and as all of you understand, I'm not at liberty to comment further.

When and if we have something to disclose, we'll make an announcement. .

At our last earnings call, I spoke about Spirit's rapid response in support of the FAA NTSB Airlines and Boeing resulting from the Alaska air accident. Those actions concentrated on mitigating human factors by improving mechanic proficiency, compliance, mistake proofing and observation.

Those systemic changes continue to take root as our foundational relationship with safety and quality matures. .

Building on that foundation of improvement, we've expanded our actions to strengthen leadership, product conformity and governance. In terms of leadership, Gregg Brown has joined our team as SVP for Global Quality. Gregg is an airline operator, an airline safety and quality expert and authority in the management of the FAA's safety management system.

He most recently was the Vice President of Technical Operations at JetBlue. Gregg possesses expertise for Airbus and Boeing products, having served in the industry and at Southwest Airlines for almost 4 decades. .

Steps to strengthen product conformity have been significant. The decision was made to fundamentally change the inspection process. This change aligns Spirit and Boeing efforts into a joint inspection. Partnering with Boeing, this transformative undertaking was industrialized in 34 days.

Today, working shoulder to shoulder with a standardized 26 zone product verification process, the teams verify conformity on the 737. .

Each week, the process improves in tandem with quality results being fed back to the teams working in station. Ultimately, our goal is not to streamline this operation but to move it further upstream to where the work is performed.

In the interim, utilizing end-to-end digital feedback and analytics, we are accelerating the quality improvements initiated in the first quarter. With critical new building blocks, process changes and insight, we have further reexamined governance. .

Breakthrough performance and safety and quality will be realized and sustained if teams at the point of production own their operations. We are moving from the office to the factory floor. We're enabling integrated product teams composed of quality assurance, manufacturing engineering, factory operations, supplier management and the customer.

This form of governance, which is not new to our industry, provides the requisite authorities, resources, inspiration and motivation that unlocks discretionary effort. This change in governance is early stage, but has the greatest potential. .

Now I will provide context on cash usage for the quarter. As Boeing mentioned on their call, they deliberately slowed 737 production below 38 per month to incorporate improvements to quality and safety management systems, including reducing traveled work and addressing supplier nonconformances.

The inspection process changed by Boeing in effect paused our ability to receive payment for completed fuselages. The implementation of the product verification required that we inspect all the fuselage stored in ship-in-place utilizing the new conformity process. .

This represents a total of 54 ship-in place units that needed to flow through the newly established process beginning March 1. In the quarter, we produced 89 units and delivered 44 units prior to implementing the new process. The result was an increase of 45 fuselages to our work in process.

To offset the lack of payment but recognizing the completion of fuselages, Boeing advanced Spirit $425 million to be repaid in the third quarter as the production system returns to equilibrium. .

We appreciate greatly Boeing's support operationally and financially as we strengthen the industrial system. Boeing is also modifying 787 deliveries due to supply chain challenges. Mark will provide additional detail.

However, with the 737 production rate currently at 31 airplanes per month and 787 deliveries approximately 25% below original plans, we will make near-term adjustments to our supply chain to ensure optimal levels of inventory and rate capability. .

We are closely coordinating with our supplier partners to mitigate the short-term disruption. Our intent is to quickly resynchronize the industrial system while still balancing the capacity and capability to snap back to future production rate increases.

The Spirit team is focused on driving our safety and quality efforts, synchronizing supplier partner operations and aligning to meet our commitments to defense customers, Airbus and Boeing. .

Turning to Airbus, as we've discussed on earnings calls over the past year, we've been attempting to reach a commercial agreement in the best interest of both companies. These conversations have yet to result in an agreement.

As a result of this impact and the continued pressure on meeting the delivery targets demanded by the rapid rate in the Airbus A350 and 220 programs, we booked significant losses this quarter, including net incremental losses for anticipated performance obligations extending beyond 2026. .

The strain on the supply chain being experienced by Spirit and other suppliers is both commercial and an operational risk. We have risen to the challenge thus far, and we'll continue to work with Airbus to ensure that quality and safety remain the foremost considerations.

And to close, while it's not been the focus of my opening remarks today, I want to highlight the strong performance of the Defense and Aftermarket teams. They continue to execute day in and day out and are performing to their commitments operationally and financially. .

With that, let me turn the call over to Mark, who will take you through the financials before we open up the call to Q&A.

Mark?.

Thank you, Pat. And good morning, everyone. As Pat covered in his opening remarks, there have been a number of events that have occurred since our last earnings call. I want to discuss the financial impacts of these items before getting into the first quarter results.

First, the implementation of Boeing's product verification process on the 737 program, including moving inspections and rework teams from Renton to Wichita while no longer allowing travel work.

This has been a collaborative effort to enhance quality and eliminate rework, but consequently has created delayed delivery acceptance in our factories, which has led to the build-up of undelivered units, higher levels of inventory and contract assets and lower cash flow. .

We are working with Boeing to mitigate the slowdown resulting from the process changes. And despite the slow start, we are seeing signs of improvement. And in the long term, expect the benefit to be more synchronized with our customers' inspection process.

Over the next few quarters, we expect to have our production systems aligned and built-up units delivered. Additionally, we have incurred factory and supply chain costs that were incurred to align with the higher 737 production rate, which has now been delayed. .

Our current rate is approximately 31 aircraft per month, and we now expect to remain at the lower-than-planned rate throughout the rest of the year. Similarly, on the 787 program, we are now anticipating delivering approximately 55 units during 2024, down from our original plan of approximately 80.

All of these items will have a negative impact on cash flow throughout the year, but I want you to know that we are strongly focused on liquidity and actions to improve our current position. .

Now let me take you through the details of our first quarter financial results. So let's move to Slide #2. Revenue for the quarter was $1.7 billion, up 19% from the first quarter of 2023. The year-over-year improvement was primarily due to higher production on our Commercial programs and increased Defense & Space revenues.

Overall deliveries in the quarter decreased 11% year-over-year as a result of fewer deliveries recorded on the 737 program due to the reasons I described in my opening remarks. .

The in-process and completed 737 fuselages that have not been through the new source inspection process are recorded as contract assets and not counted towards our shipset deliveries until accepted. The overtime accounting revenue recognition on these units has been reflected in our quarterly financial results. Now let's turn our attention to EPS.

We reported earnings per share of a negative $5.31 compared to negative $2.68 in the first quarter of 2023. .

Excluding certain items, adjusted EPS was negative $3.93 compared to negative $1.69 in the prior year. Operating margin was lower compared to the same period of 2023, largely driven by higher unfavorable changes in estimates during the first quarter of 2024.

First quarter net forward losses were $495 million and unfavorable cumulative catch-up adjustments were $39 million. This is compared to $110 million of forward losses and $12 million of unfavorable cumulative catch-up adjustments in the first quarter of 2023. .

The current quarter 4 losses were primarily driven by A350 and A220 programs of $281 million and $167 million, respectively. I know these are large losses but are really due to the inability to reach a conclusion to commercial negotiations with Airbus.

And as a result, we were required to adjust our assumptions and record forward losses on the A220 and A350 programs, which drove $373 million of total losses. This includes forward losses through 2025, our current accounting contract as well as losses for anticipated performance obligations beyond 2026. .

The remainder of the forward losses were a result of production cost growth and additional firm orders. Additionally, the 787 program drove $34 million of forward losses due to supply chain and labor cost growth to support future higher production rates.

The unfavorable cumulative catch-up adjustments primarily related to increased 737 costs associated with the product verification process changes, which caused delayed delivery acceptances and a significant build-up of undelivered units in Wichita. .

Now turning to free cash flow. Free cash flow usage for the quarter was $444 million compared to free cash flow usage of $69 million in the first quarter of 2023, primarily caused by disruption to the 737 production and delivery delay experienced in the period.

Having a large number of unbilled 737 units built during the first quarter had a significant negative impact on our first quarter free cash flow. Once these units can be fully inspected under the new product verification process, they will be considered delivered, and we can collect the cash earned on those units. .

The prior year free cash flow reflects $180 million surplus cash payment received related to the termination of the pension value Plan A. Now with that, let's turn to our cash and debt balances on Slide 3.

We ended the quarter with $352 million of cash, which reflects the unfavorable impacts of the disruption experienced on the 737 production and delivery process. We ended the quarter with $4.1 billion of debt. .

In April, we entered into an MOA with Boeing to provide cash advances totaling $425 million.

These funds were used to address Spirit's high levels of inventory and contract assets, lower operational cash flows, decreased deliveries and higher factory costs attributed to the change in the product verification process and the FAA's imposition of limitations on the Boeing increased production rates. .

This advance will be reflected in the second quarter financial results and will be treated as financing activity on the statement of cash flows. As I mentioned in my remarks, we are strongly focused on liquidity and our working plans to improve our current position.

Next, let's discuss our quarterly segment performance, along with the Commercial segment on Slide 4. .

Even with the 737 disruption impacts, Commercial revenue increased compared to the same period of 2023, primarily due to higher production across most of our programs. Quarterly operating margin decreased compared to the first quarter of 2023, primarily driven by higher changes in estimates recorded in the current period.

These changes in estimates included net forward losses of $494 million, which were largely driven by the change in assumptions on our conversations with Airbus and unfavorable cumulative catch-up adjustments of $39 million. .

In comparison, during the first quarter of 2023, the segment recorded charges of $110 million of forward losses and $11 million of unfavorable cumulative catch-up adjustments. Next, let's turn to Defense & Space segment on Slide 5. We are especially pleased with the performance by the Defense & Space teams this quarter.

Revenue grew to $251 million due to higher activity on development and classified programs as well as the Sikorsky CH-53K and FLRAA programs. Operating margin of 13% in the first quarter increased compared to the same period of 2023, primarily due to higher classified program activities and strong execution by the team. .

For our Aftermarket segment results, let's now turn to Slide 6. Aftermarket had another solid quarter with revenue of $96 million, up slightly over the prior year, primarily due to higher spare parts sales.

Operating margin in the first quarter of 2024 decreased compared to the first quarter of '23, primarily due to lower MRO activity during the current period. With that, we will be happy to take your questions. .

[Operator Instructions] So our first question comes from the line of Seth Seifman of JPMorgan. .

I was wondering, Pat and Mark, if you could talk about when we think about the potential deliveries from Spirit this year, and we think about the current production rate of 31, but the deliveries we saw in the first quarter, should we think about the rest of the year as being kind of that 31 per month plus, I guess, the difference between the 89 that were produced and the 44 that were delivered in the first quarter? Or will it take more time to kind of marry up the actual deliveries that can happen with that sort of underlying production rate of 31 a month? I guess how should we think about that trajectory of deliveries going forward and when those deliveries meet up with the production rate and how the excess fuselages come out over the rest of the year or longer as well?.

Yes, Seth, maybe just think about it this way. We'll be steady state at 31 aircraft per month for the balance of the year. And you might think of that ship-in-place as a buffer that will allow Boeing to increase to 38 per month when the time is appropriate based on their work with the FAA. So I kind of think of that buffer as surge capacity.

Based on the volume that's there, it positions us then to respond, should the rate go higher. .

Yes, Seth, just a little bit more color here for you. Let's just focus on Spirit deliveries, where we'll get paid cash.

I'd expect the second quarter cash deliveries to be consistent with the first quarter as we work through the product process verification and then we'll see our deliveries increase higher than that in the third and fourth quarter so that for the full year, the deliveries will be roughly 31 a month x 12. .

So we have some more ship-in-place Boeing owned inventory that needs to go through the process verification in the second quarter. And then our finished goods will start to follow after that.

So delivered units revenue -- or cash delivered units, again, will be consistent with the first quarter, and then we'll see those go higher in the third and fourth quarter. .

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. .

I wanted to ask about Airbus and the assumptions there.

Just what were the assumptions within the A220 and the 350 per pricing given part of the forward loss in the quarter was tied to the failure to reach a new pricing agreement there? And was there some sort of relief assumed in those numbers?.

Yes, Sheila, thanks for the question. Yes, there were embedded in our previous assumptions, an assumption on a higher price based on discussions that had ensued at the time. As we said, we haven't been able to come to a conclusion on that. So the forward loss is really represented, I think, in 3 components.

Number one is it's a reversal of that pricing benefit that we previously booked. It's additional orders that Airbus booked beyond 2026 on both A350 and A220. .

And so while we're a stand-alone company, we need to continue to record losses on those future performance obligations. And then there were just some normal cost growth associated with the production.

But in my remarks, I said specifically the reversal of those benefits and the additional losses on the future performance obligations were roughly $373 million of the total Airbus losses. .

Maybe just to clarify, can you level set us on what sort of cash usage we should assume for the Airbus business in '24 and '25?.

What I would say is this, Sheila, if you look at our balance sheet and you look at current forward loss reserves or liabilities, I would say that Airbus is about 80% to 85% of those balances. So I think you can do some math from there. .

The next question comes from the line of Jason Gursky of Citigroup. .

Pat, I was wondering if you could just spend a few minutes kind of contextualizing for all of us. The scale of the changes that the ecosystem is going through here. And this idea of reducing traveled work to 0 essentially, I'm guessing is, what's being asked of you.

How do you think of a philosophical changes in aerospace manufacturing? And how difficult is it going to be to achieve what's being asked of you and in turn, what you're asking, I suspect your suppliers to do?.

I think just big picture, giving us a really good understanding of the task at hand here and how maybe normal this is going to be? Or how unusual this is going to be, I think, would be helpful for all of us here on the call?.

Sure, Jason. Let me kind of break it into some different pieces.

So when we think about the process that's been stood up here in Wichita, think about it in terms of there are many points along the production system, and I'm going to characterize that as production system for this discussion starts in Wichita and ends when we load a fuselage into the Renton facilities, there are many points along that process where inspections take place.

.

And this effort with Boeing has been to better align all of that activity so that we can take the feedback from those inspections and drive [indiscernible] corrective action at a very top level, that's what we're talking about.

The details are more complicated than that in the sense that in our production system in Wichita, we conduct 9,000 inspections. .

When you think about the fuselage that we delivered to Boeing, it's 100 feet long and about 12 feet in diameter. It's the largest single integrated commercial aerostructure in the world, and we have very exacting tolerances in which we have to build that to from an engineering standpoint.

So when we talk about skin quality, skin quality must be within 10,000 [indiscernible] roughly the thickness of 2 sheets of paper. .

So when we think about that fuselages about the size of a high school basketball court. And when Boeing says, we expect perfection, they're talking about nothing in excess of 2 sheets of paper thickness. We also install on the skin, 100,000 -- it's about 100,000 fasteners.

So there are no fasteners that can have a tolerance greater than what you could detect with your fingernail. So what we've done here is to consolidate all of these inspections where there's a final inspection in Wichita before it goes to Boeing. .

And when Dave Calhoun talks about clean fuselages, the definition there is what we ship to them, they can load into their first position and immediately put [indiscernible] and the goal is that they can immediately go to work because what we provide to them is the pacing item for all of those installations, we cannot travel any type of work that would disrupt their ability to start on day 1.

.

I think we've made substantial improvement in realigning all the inspections, interpreting the engineering specifications in an exacting manner so that the eyes of Boeing and the eyes of Spirit are the same. And we've been migrating away from humans doing this to digitally inspecting the condition of assembly.

It's a long way of saying that we've made step function changes in how we inspect, where we inspect and how we do that together. .

The benefits in the short term have been we've seen about a 15% improvement in quality. That's just here in the first quarter. My expectation is that by the second half of this year, we'll actually see a step function change in the level of quality.

Our ultimate goal is always to drive this back in a position where the work is performed and eliminate the need for so many different inspection points. And I believe that will take place over time and probably faster than most people expect. Maybe I'll stop there and see if that touches on your question. .

Yes. No, it's great. Maybe just one quick follow-up to that. I'm sorry. But -- okay. So it sounds to me like process will get better, learning will happen more quickly, probably more inspections going on here.

But does this represent kind of a whole scale change in the way that both you and Boeing are approaching manufacturing? Or is this more kind of an evolutionary kind of thing? And there is a really visible path on how we're going to get all of this done in a relatively timely fashion.

I'm just trying to understand how big of a change this really represents and how hard it's going to be?.

Well, I think good portion of the hard work is done. The hard work was moving this activity 2,000 miles closer to where the work is being done, physically stand up at the operation and normalize the inspection process, that work is behind us. We did ran 2 fuselages through the process March 18, in April.

And in the month of May, we'll exceed the production rate of our internal operations. So we'll start to burn down the backlogs. I think the heavy lift has occurred. .

Now it's really utilizing the findings to rapidly improve the quality and position, which is really the foundation to get to the higher rates. I mean this all supports rate 42, rate 47 and beyond. So that part will be incremental.

The big step function of realigning the two companies and where the work is done, I think, is behind us, but it's significant. .

The next question comes from the line of David Strauss with Barclays. .

One clarification question and my main question. The 55 MAX units that you didn't ship in the quarter but produced, how many of those at this point have gone through this joint verification process and [indiscernible], that's my clarification question. And then my main question on Airbus and the negotiations there, Pat.

Has there been any progress on the pricing side? Or did the pricing negotiations kind of get put to the side at this point, given it sounds like you're potentially negotiating with Airbus to take back the A220, A350 work as part of a potential acquisition from Boeing?.

Sure. Let me address the first question. Mid-May, we'll start processing the first unit from the finished goods, work in place buffer and then we'll burn those down in terms of the advances we've been paid on by the third quarter.

Maybe more broadly to the subject of Airbus, I just maybe start out with, we have lots of conversations with Airbus on many different levels. The majority of the conversations tend to focus on the integrity of supply given the significant ramp-ups on the 350 and the 220.

And just kind of remind everybody, the ramp-up on the 350 is an increase of 43% this year in addition to delivering the ULR in the first freighter. .

On the 220 side, it's an increase of 52% in 1 year. So as you can imagine, there's an intensity of conversations going on there. We have never stopped talking about price with Airbus. We haven't made the progress, we've never stopped talking about price.

And maybe to the third point, we've explored other economics and different relationship in our production system. And I won't go further there. But there's a path forward on all fronts, and we'll continue to partner with Airbus. .

The next question comes from the line of Ken Herbert of RBC Capital Markets. .

I just wanted to follow up, if I could, [indiscernible] I apologize if you you've already addressed this. But what would you characterize for the A220 line, in particular, as sort of incremental investments to support the rates that Airbus has talked about in terms of mid-teens? You're looking at substantial growth this year.

I think the growth profile was pretty aggressive over the next few years. .

And Airbus has been pretty vocal about pushing as much cost on to the supply chain as possible.

Can you talk about that investment profile with you to support sort of a mid-teens rate on that particular program, I guess, predominantly, that would be within the Belfast facility?.

Yes. Ken, as you said, and Pat just mentioned it, we're talking about a 50-plus percent increase in deliveries in '24 compared to 2023. And then when you do the projection of getting to 14 a month in the '25, '26 time frame, that's essentially more than doubling from where we were last year.

So there's no doubt we have capital investments that would be required in our Belfast facility from a property plant and equipment, things like autoclaves and other significant pieces of equipment. .

So that CapEx has to start to take place in the back half of this year and into 2025 so that we can meet those production rate ramps that our customer is asking for. .

Can you put a finer point on that CapEx? Or maybe another way to ask it, Mark, is what staffing level are you at the Belfast facility and how much hiring would you have to do there to support the higher rate?.

Yes. So right now, we're staffed to meet the current requirements. We're not overstaffed there. We're still adding people to support the higher production as we move to the middle and into the back half of the year. So first things first here, as we said, we're looking at delivering somewhere in the ballpark of 90 to 100 units this year.

And we did around 60, a little more than that last year. .

So while we're in the process of bringing those folks on board, we call it green labor, training them, getting them on the bar lines, getting them through the learning process, but we're in the process of hiring those people to support the rate ramp here, but there's more work to be done.

As we think about '25 and '26, there will be additional CapEx required. There will be further hiring that will be need to be done and further alignment by the supply chain. .

The next question comes from the line of Myles Walton of Wolfe Research. .

Pat, [indiscernible], but I know David Gitlin took himself out of the potential running for Boeing CEO.

I'm curious if you'd care to share your thoughts on your future and your interest in that potential position?.

Yes, thanks for the question, Myles. I wake up every single day focused on Spirit, our teammates here, our suppliers, customers and shareholders. And that's my plans. .

Okay. I'm going to go for a second question, that was okay.

So the audit that the FAA ran inclusive of Spirit's facilities, can you quantify how many of those sort of failed audits or failed audit points you've addressed and have submitted to Boeing as part of a master schedule of recovery against those audits?.

Yes. I mean just right off the top of my head, I remember that there were 28 findings that were documented and I have to go ask our team, but I'm very confident that every item has been addressed with a mitigating action. And then our focus has really been the follow-up. So I mean it's one thing to have the action plans.

The other is to make sure that we're following through. And these were focused on things like tagging of storage parts and scrap materials, I think that's what you're referring to. .

That's right. .

We've followed through on those. But we -- our quality plan was addressed more than what they had audited and those quality plans continue to progress and grow week by week. And as I mentioned before, with the 15% improvement -- and this isn't just on the [indiscernible] across our other programs.

The attention and the benefits that we're seeing are going to continue to improve week over week and have a lot of confidence in the second half of this year. .

The next question comes from the line of George Shapiro from Shapiro Research. .

Two questions, I guess. One for you, Pat. What gets these Airbus negotiations to some resolution? I mean, I think like by your own admission, you've been on it for 3 to 6 months at this point in time.

Do you wind up having to threaten that you're not going to make the investments? Or if you could just provide some color on that? And then, Mark, one for you. The underlying margin to me looked like it was like 5.4% this quarter, down from around 9%. And you had mentioned that there were inefficiencies that caused reductions.

How much of that reduction was something that was fixed and how much of it was kind of going to be embedded in the longer-term profit margins?.

Yes, George. Let me take the second question, and then Pat can jump in on the Airbus side of things.

We talked about the disruption in the first quarter, the standing up of the process to inspect the units and the FAA audits and the NTSB investigation, all of that was very, very disruptive, right? And we continue to enable the operational execution of this inspection process.

And so all of that has now been embedded in our contract margins and it's put some pressure on our profit rates and the amounts that we're booking here. .

I think over the long term, a lot of this is onetime investment that we're making. It's near-term pressure from a cost standpoint.

But over the long term, when we think about this and the impact it has on a profitability rates, particularly on the 737 program, we think as we get through the learning and implement this and take the benefits from it that Pat talked about that it won't have a long-term negative impact on the margins. .

It's just -- it's painful right now. I think we're syncing up the system. Short-term pain right now. We're doing the right things from a business standpoint, and this will pay off as we think about the future. .

Yes. Thanks, Mark. George, maybe to answer your question, my experience in this industry is threats are not effective. And at the end of the day, we all have to work and partner together. But I would just say almost to a fault, we have tried to find solutions to this situation.

And our commitment has been to the integrity of supply, and I have shared this message time and time again. Financial risk ultimately manifests itself as operational risk. And the system is elastic until it's not. .

So if you look at what Boeing has done, they've secured supply from us with their agreements. Now we need to do the same with Airbus to protect supply. And we'll continue to have the conversations that we're having, and I am confident that we will come to some type of conclusion. .

But I guess, Pat, I mean, what kind of gets it going to get to that conclusion when you've been working on it for quite a while now?.

Well, I think with these production rates, we're going to have to have some of those real family meetings. And that's what it's going to take. But me threatening not to ship them parts or the drama, all of that is not a way to ensure that their customers get their supply. But at the same time, we have to have a financially strong business.

And partnerships are the only way to do this, but we'll probably have to have a few more family meetings. .

The next question comes from the line of Gavin Parsons of UBS. .

Pat, you mentioned aligning factory costs, but retaining the ability to snap back in rate.

Can you just give us a little more detail on what that means for the rate for your own suppliers, if that reflects any workforce changes? And how much notice you'd need to go above 31 per month?.

Right. Yes, we spend a lot of time on this subject. So I'll break it into 2 areas, maybe talk about the supply chain first. When we think of the [indiscernible], there are 425 critical suppliers. When we talk about suppliers, it's not monolithic. So they're not all the same.

They're about 400 suppliers in addition to that, that provide raw material forgings, fasteners. So we treat them differently, but they're a critical part of the supply chain.

A big component of what we've been trying to do or what we've been doing is, first of all, communicating formally and informally and then really doing the analysis of where do we need to create critical buffer stock going forward so we'll probably continue with the higher production rate. .

Where have we had shortages that we need to address in terms of the supply chain limitation? Where do we need buffer stock for programs like [indiscernible] analysis that goes on around the work statement so that we can snap back to the higher production rates.

Then there's a set of discussions around the suppliers themselves that the buyers perform to make sure they're viable that they can continue to produce now. We don't have the check book to support the whole supply chain nor do we have enough warehouse space to store all of the goods that would come through. .

So it's a balancing act that we're performing now. The good news is this isn't COVID, so we're talking months, not years. And this is reality of our industry where we have these kinds of disruptions and we'll roll up our sleeves and figure out a way for everybody to get through this, break, break.

When we think about our internal operations, what I've said to the team is that our teammates aren't 100% variable with rate, okay? It doesn't make sense to go up and down and have people go in and out the door. .

We've invested a lot in their training, they're critical part of our company. So we're trying to find the right balance here. So as the system recovers, we don't go through a quality issue or a training issue and repeat some of the things that it is hard coming out of COVID.

We're talking about smaller numbers, not big numbers like we did with the shutdown of COVID. But it's a balance of financials and then maintaining a bridge of talent. We'll have to make some decisions here in the next couple of weeks, which we're prepared to do. .

Those decisions will be preceded by conversations, the union, other constituencies, but I think we've got a very solid approach to being able to respond quickly as Boeing turns their rates back up. .

Yes. Gavin, I would just add because it's a bit of a follow-up on the margin conversation here. As Pat just said, to protect the future production rates, we're going to be carrying some additional costs, right? And it's going to have a near-term impact to profitability and cash. But it's the best thing for the long term.

As Pat said, this is -- we're going to be going up in rate. The production, the demand is there. And so we're working very hard to protect the production system while balancing our financial situation at the same time. .

Great. I appreciate the detail.

If I could just confirm, I heard you say 31 per month x 12, so about 370 MAX deliveries for the year?.

Yes. We would call it roughly 350-ish at this point in time. .

The next question comes from Cai von Rumohr of TD Cowen. .

So Pat, what about labor availability and attrition? Maybe talk about Wichita because Textron also has been building? And talk also about when we talk to -- about Ireland and the plant there and the ability to get folks to be able to surge by 50%?.

Sure, Cai. Labor scarcity is a challenge to the industry. We look at what are the big issues. Forgings, raw material and labor come to the top of the list. So here long term in Wichita, one is, it's a great part of the country for talent and skill where we need to go to market differently.

I mean there's a lot of skill that we have to train for that's differently than we have done in the past. .

So you said as your approach to hiring people going to be different than it has been in the past, it definitely will. We have a different workforce. What we've found so far is when we train them with the basics, they're just as talented and as committed as their predecessors.

So -- but I think how we recruit and how we train is an important part of getting these higher production rates. .

We have similar challenges in the marketplace in Northern Ireland. But I think it's not as industrialized when you kind of think about the Textrons of the world competing for the same type of labor, but labor is always a challenge. Attrition hasn't been a problem for us.

And I think these production rates, it's always hard to strike the balance of when you bring people on so that you aren't unnecessarily spending money, but at the same time, give people enough training so that they're prepared and they can produce the quality that's required. .

The next question comes from Peter Arment of Baird. .

Mark, maybe I could just ask quickly on Defense. Really good performance in the quarter.

I'm just wondering if there was any kind of one-offs on that margin rate of [indiscernible]? Or how sustainable that is just given the nice performance?.

Yes. Thanks, Peter. We've historically said we target on our Defense program somewhere between 12% to 14%. And I think we were right in the sweet spot there. So there were no what I would consider to be significant benefits that we recorded. I think it was just really good execution on the contracts that we have.

The last couple of quarters, we've had some challenges on the CH-53K. Our team there has done a wonderful job of really improving the production processes, and I think they're working very hard to please our Sikorsky customer there. .

So again, nothing significant, either good or bad. I think as we think about that business going forward, we expect our team to perform. And if they do, we should continue to perform to the margin targets that we've put out there. .

The next question comes from Michael Ciarmoli of Truist Securities. .

Pat, maybe just a quick two-parter here. I mean, how much if you can tell us what percent of your assets in Wichita IP tooling is already owned by Boeing? And then, obviously, we throw in some of the advances. You're still repaying them on each 787.

I guess I'm just trying to get a sense of if there was a transaction, how much value do they already own? And then the other follow-on to that is you're making all these wholesale changes, improving the inspection, process quality. Presumably, that will improve out-year margins and cash.

Why is it a good move for shareholders to potentially sell to Boeing?.

Yes, Michael, let me just kind of address your questions around assets and IP. And I guess your question was specifically around Wichita. In our industry -- and it's consistent with whether it's any OEM. The OEMs typically own the tooling associated with the production of their products.

The facilities, call it, the brick-and-mortar, the property, plant and equipment, whether it's tape-laying machines, autoclaves, broaches to drill holes, that equipment is owned by Spirit, right? So for the most part, it's a fully functioning business. It's consistent, whether it's in the U.S. or overseas. .

As it relates to IP, a lot of that just depends on the contract, right? It could be joint ownership, sole ownership. But I think that's the way I would characterize it. It's -- they own the tooling and Spirit owns the rest of the assets used in the production of the products that we build for whether it's Boeing, Airbus, Bombardier, et cetera. .

Maybe I'll just answer the broader question that you asked, the value of reintegration of most of these operations can only be unlocked by the OEM.

And when we think of supply chain optimization, whether it's forging, raw materials, fasteners, things that are needed for the higher production rates, that's a significant amount of value they can unlock. Same goes for internal operations in terms of safety, quality and delivery cost. .

In the case of Spirit, whether it's the wing of the fuselage on the 220 or the fuselage of the 737, so largest part of the build material for those major programs, it really represents another opportunity to drive efficiency. The kind of the broader value proposition is sharpening engineering and manufacturing expertise for the future.

And that's a skill that's hard to acquire. So whether you're Short Brothers or Bombardier [indiscernible] 100 years, depth of expertise that's here at Spirit and Wichita is similar. So -- but quite often, it's really only the OEM that can unlock that value. .

Ladies and gentlemen, this now concludes our Q&A session. I would like to thank you all for joining today's call. Have a great rest of your day. You may now disconnect your lines..