Why Small Changes Matter

The year was 490 BC. The Achaemenid-Persian Empire, founded by Cyrus the Great some 40 years prior was the dominant force in the intersection of modern Europe, Asia, and Africa, and was still expanding under one of its greatest administrators, Darius I (he was also called Darius the Great… there were lots of great folks this century). Through Darius’ reign, the empire controlled the largest fraction of the world’s population of any empire in history… 44% or better of the entire world population at the time.

But despite his and his predecessors’ incredible, historical successes, Darius had a problem in his empire. A fiery, rebellious, independent people to his west. A bunch of separate, non-unified city-states that, though often quarrelsome with each other, were all extremely vested in protecting their land, their culture, and their freedom. That rowdy bunch of rebel cities came to be known as Greece. Darius had already suffered a major rebellion led by the Greeks, and was determined to crush them into submission. He mobilized his massive army and headed west.

Come 490 BC, his campaign was advancing. The Persian force sailed into a bay near the town of Marathon, 25 miles from Athens. But those darn clever Greeks used their knowledge of their home terrain and topology to their advantage. The Athenians and an assisting force of Plataeans bunkered down in the two exits from the plain that were the only easy paths to Athens and greater Greece. The terrain prevented the Persian cavalry from aiding in the battle, and the infantry fell into a well-laid trap. The Greeks feigned a weak center, choosing to reinforce their flanks, and when the Persian army pushed into the center of the field, the Greek flanks collapsed inward, crushing the best Persian fighters and sending the rest scrambling back to their boats.

Realizing that the home city of Athens was still under threat from the Persian fleet sailing on the city with few standing defenses, the Greeks left a token resistance at Marathon and hastily marched the bulk of the army the 25 miles back to Athens. There, they once again prevented Darius from establishing a beachhead, and send the Persians home packing.

Historical speculation is tenuous, but it wouldn’t be exaggerating much to say that without the victory at Marathon, those of us here in the 21st century might look very different. The preservation of Greek culture against the invading Persians allowed the nascent “Western” culture that we enjoy today to continue to bloom.

To step even further onto the thin ice of historical speculation, imagine if the Persian forces could communicate as quickly as we do today. Let’s give Darius and his generals each a cell phone. What happens then?

Without question, the ability to communicate globally, instantly, as casually as we do today, if dropped in the middle of most human history, would be a complete game changer.

Now, rather than a cell phone, imagine you gave Darius and his men the material components of a cell phone.

A typical cell phone is in the realm of 150g of plastics, metals, ceramics, and some other trace stuff.

Darius probably would have looked at this handful of junk and discarded it. Maybe the metals would have been used to patch a piece of armor or fashion an arrowhead or spear tip.

2,500 years is a colossal amount of time when considering recorded human history. Still, the idea that any amount of time could turn a useless pile of materials into a tool that has changed the entire world is a humbling reflection of human progress. Even more humbling is the idea that something each of us carries around in our pocket all day and use primarily to watch cat videos and share partisan political memes is something history’s largest figures would have given vast wealth to gain access to.

But let’s get back to the point.


There are tons of theories on where economic growth comes from, but there are some central themes and concepts that stand out. The main ones we’re concerned with today are intensive and extensive growth.

To paint with a broad brush, intensive growth is “getting more out of the materials you already have,” where extensive growth is “getting more materials.” Darius’ flippant discarding of the materials of a cell phone is due to 2,500 years of intensive technological growth. Our present-day economy gets far more utility (usefulness) out of 150 grams of copper, iron, silicon, and petroleum, than the great Persian Emperors could have ever fathomed.

Over most human history, nations have warred over territory in an attempt to obtain extensive growth. When your people, your empire, are the sole focus of your leadership, taking someone else’s stuff is an easy way to grow. Subjugating your neighbors has historically meant more land, more resources, more labor at your disposal.

While we still squabble over international boundaries and territorial rights, humanity has just begun to enter an interesting stage of our development. We have, more or less, explored what our planet has to offer us. It sounds like science fiction, but early investors are beginning to look to other celestial bodies for resources. Serious people are talking about the possibility of mining asteroids and our neighbor planet Mars. It’s no doubt a field in its infancy, but the prospect is compelling – the materials contained within asteroids have been estimated in the tens of trillions, which, against the Gross World Product of around $75T, would constitute an immediate growth of the global economy by as much as 20%. If space mining is too far out to conceptualize, consider the amount of energy the sun throws at earth each day that could be captured to add a massive, constant resource to the otherwise closed system of earth.

And yes, all that is exciting and promising, at varying degrees. But most of us in the present world will probably never be a driving factor in achieving this kind of extensive growth. We happened to be born between the imperial and colonial eras and the economizing of space. Most of our lives and careers will be relegated to the far less sexy realm of small, incremental, iterative, intensive growth.


Being fully vulnerable with you, there was a stretch of years where I questioned whether working as a stress engineer in aerospace was a truly noble purpose. I always told myself that I was making better planes than the past, making them safer, and that those planes connected families and friends together, took people to new and exciting experiences, and greased the wheels of business and economic growth around the world. But my problem was, I never really connected with it. Running through loads iterations to take ounces of weight out of parts didn’t resonate with me, personally, as part of any meaningful progress. I think it’s a fairly common thing for people in their twenties to experience, and I’m no exception. Your formal education is complete, the excitement of getting into a “grown-up” job has started to fade, and you’re faced with that sense of normalcy, the realization that you’re not going to change the world so quickly, that for all your strengths and flaws, you’re not as special as you might have thought you were.

If you’re trying to think and feel your way through a similar existential crisis this little write-up probably isn’t going to be the lever that breaks you out of it. For me, it was reflection, continued learning, guidance from mentors, and consistent effort that finally broke me out of my negative feedback loop.

But maybe it will speak to someone. When I emerged on the other side, a more content, happy man, I realized that being a small part of something big is still doing big work. And sometimes, the work is so big you can’t comprehend it in a human lifetime. But that shouldn’t diminish your pride in what you do.

We all stand on the shoulders of giants. No one truly achieves greatness on their own. We may not be the first to set foot on a new planet, or pull the spoils of space back down to earth. But every time we prove a plane can be built with a little less metal, or fly a little further, or cost a little less, we’re contributing to a grand tradition of incremental growth that has propelled mankind to new eras, to the skies and beyond. Without the incremental change we fight for every day, quantum leaps wouldn’t be possible.

It’s a tradition we should be proud to play even a tiny part in.

Spirit AeroSystems – Q3 2017

Hello everybody, and welcome to November, and Spirit’s 3rd quarter financial summary!

As is tradition, let’s start by taking a quick look at the numbers.

Here’s the earnings and margin summary:

And the cash flow summary:

I highlighted the numbers I did because this quarter’s call focused a lot on “margin dilution” and what that meant for our future. You can see that our operating margin and net margin (highlighted on the first table) were down against last year from both a running 9 month perspective and a 3Q16 vs. 3Q17 perspective. Margin is why companies exist. It’s proof of our value proposition in the marketplace. A reduction is always going to be a bit concerning.

To allay your fears, our leadership had reasonable answers for why these numbers slipped. A lot of the slide in margins is because of our efforts to improve the future. We’re running expensive cost and quality initiatives that hurt our numbers now, but square us up to be more competitive, more profitable, and a higher quality partner in the future. That type of thinking should speak to all of us. It means our strategic direction isn’t focused on maximizing quarterly results at the expense of the bigger picture.

As a tacky metaphor, think of the lower margins this quarter like the feeling you get the day after a hard workout. You’re a little sore, a little weak, a little stiff, but you know you’ve done something that will make you stronger once you’ve recovered. Spirit’s cost savings and product quality initiatives are tough now, but are the exact kinds of activities we need to be doing to be healthier in the future.

I highlighted the free cash flow numbers in the second chart to illustrate another key takeaway: even during some major efforts to prepare Spirit for the future, we’re still bringing home good money. Margins may be the heart of a business, but cash is the blood, and Spirit’s is plenty healthy. This quarter’s financial results were just okay. But it brings the promise of better results in the future. It should be fun to watch.

Now let’s turn to the call.


Tom and Sanjay Introductions

The introductions were brief and positive as usual. They highlighted Spirit’s push for fabrication and defense work to be major growth areas, and they gave the standard fly-by on programs that are growing and shrinking. In this quarter, it was much the same as it has been recently: 737, 787, and defense were growth areas which were partially offset by lower 777 and aftermarket activities.

Overall, Tom and Sanjay were congratulatory to the Spirit team and seemed enthused for the future.

Before we jump into the Q&A, I have a quick disclaimer. I’m not sure if I just wasn’t on my game during the call or whether the content was truly above my level, but the Q&A this quarter seemed pretty broad and theoretical. I didn’t capture the usual amount of good questions and answers, and a couple of items are going to require some further study on my part to explain properly.

What you should take away from this though, as always, is the tone of the conversation. I wouldn’t have missed a question as unambiguous and dire as “Will Spirit still be open in the next 6 months?” Typically when the conversation leans far into the future, or heavily into strategy and theory, it means there isn’t overwhelming concern about the present.

Let’s go through the questions I did catch, with the executive responses and some limited feedback from me, then we’ll be on our way!

Q&A

  • Why will cash flow be weak in Q4 based on current guidance? And why did we have margin dilution in all the sectors?

o   Sanjay: Cash flow is due to higher capital expenditures to support rate growth, as well as some of the initiatives I’ll mention in a second. Margin dilution is partly due to some one-time aftermarket kinds of things. We’ve also been pouring lots of effort into supply chain initiatives that haven’t yet materialized in the numbers, but should start to appear in 2018. We’re currently supporting lots of rate increases and lots of ToW (Transfer of Work) activity as we optimize supply chain. We will see some inventory growth as we see rate increases and see some added inventory from supply chain activity.

o   Travis: The Q4 cash flow question was interesting from a simple math point of view. The analyst who asked this question took our provided 2017 full-year cash flow guidance, subtracted our actual performance through Q3, and noticed that Q4 is due for a decrease. Fun little Finance 101 problem. The margin dilution question goes back to my opening comments. Margin is a company’s heart, so a reduction is always concerning. Luckily, Sanjay gave us the answer to the preeminent question of this quarter’s call. Our margin is low now because we’re currently shouldering the burden of organic growth (rate increases) and cost savings efforts (supply chain, ToW) at the same time. The low margins this quarter aren’t a sign of weakness, they’re a sign of active preparation for the future.

  • This quarter we had $5M in negative adjustments. Is that a systemic problem?

o   Sanjay: $5M is pretty much noise. That’s spread across all programs, so sometimes we realize risks or miss opportunities, and sometimes we avoid risks and realize opportunities.

o   Tom: 737 rate increases actually caused some of the drag, where 737 is usually a boon. Part of that was also a refocus on quality with the Flawless Fuselage initiative causing some minimal disruption, but to increase the product quality. We’ve learned lots of lessons from this and expect it to be even stronger next year.

o   Travis: Ah, right, I haven’t mentioned Flawless Fuselage/Factory yet. This is, of course, another effort that isn’t free, but that is clearly part of Spirit’s positioning and value in the marketplace. One way to look at reduced earnings, if they’re not due to loss of revenue or growth in costs, is as reinvestment. We’re “burning” some of our earnings to improve quality (Flawless Factory), to get ready for more business (rate increases), and to focus on saving costs (SCM/ToW initiatives). Nonetheless, Sanjay’s right. $5M for Spirit is just noise. Sometimes it’s in our favor, sometimes it’s not, but it’s not an indicator of some giant lurking problem.

  • Are we worried about margins as we’ve got rate increases, some margin dilution this quarter, some price step-downs associated with the MOU, etc.?

o   Sanjay: Rate increases are expensive to capitalize up front, but we do eventually get productivity gains via fixed cost absorption with rate increases. Supply chain efforts are similar – expensive up front, but big potential savings for a long time. So we’re actually looking at some long-term margin increases if all of our initiatives come home, which we’re pretty bullish on.

o   Travis: Pretty much the same question as before. Keep in mind that repeated questions or slightly rephrased versions of the same question are really good tells of what’s bugging the analysts. It might make for a boring call to hear the same question twelve times in an hour, but that’s your clue that it’s the top-of-mind issue. To add just a little more to Sanjay’s already rational explanations on the lower margins this quarter, we should all keep in mind that Spirit’s long-term cash flow conversion goal was very recently increased. That means we expect our ultimate bottom line to look more favorable in the future.

  • On your billion dollar defense target, is that coming from products we’ve already won and will grow to that goal, or does that goal depend on winning new work or taking it from competitors?

o   Tom: Current programs over time get us to the billion. Still, we’re continuing to pursue organic growth initiatives to expand that and get defense up to a 15% share of our business even faster.

For anyone keeping score, the major topics of the call were supply chain initiatives and margin realization, which we’ve discussed above. Spirit is undergoing a bit of a transition again, but unlike last time, where we made some tough choices to potentially save the company, this time the transition is to move from a solid foundation to an even stronger place.

Stock price is an imperfect indicator, but it’s a good thing to look at for calibration. In the case of this quarter, it told a pretty fair story.

On earnings day, while Wall Street was digesting our financial results, which were admittedly pretty tepid on their own, our price was down. To be sure, there wasn’t a great deal to go all “buy frenzy” about in the numbers. But as it settled, everyone realized investing for the future is actually a pretty worthwhile reason to have temporarily lower margins, and the stock recovered in the following days back to where it was before (and beyond).

And that’s it for the quarter!

Below is a little essay I started some time ago and have finally gotten ready for people to read. I hope you find it interesting and inspirational.

Why Small Changes Matter

See you next quarter!