Spirit AeroSystems – Q1 2014

Iiiiiit’s time for another quarterly earnings call! I’m writing this intro before the earnings call starts, and based on the published financial statements I think it’s safe to say this will be a much easier message for me to write… and for you to read… than the last set of results.

Here’s a link to a great summary of the financial statements with the usual comparisons to Q1 of the previous year. It’s still in financial-ese, and I’ve got a neat story for you to illustrate another financial concept, so keep reading, but also give that link a peek. Remember that Q1 of 2013 our STIP score was something like 1.70, indicating that the reported financials were solid compared to our forecasts and goals. Keeping that in mind, let me draw your attention to the lines Operating IncomeNet Income, and Net Income as a % of Revenues on Table 1.

Now, let’s get to the call.

Summary of the Earnings Call

As always with the earnings calls, you could probably discern the performance from the tone of voice and interaction between our CEO/CFO and the analysts even if you didn’t speak English. If you were listening for such things, you’d have noticed that Mr. Lawson and Mr. Kapoor were very much at ease and much warmer than they were compared to defending the dire performance of last quarter. The analysts didn’t ask grilling questions or probe a specific troublesome topic. There was even a little laughter after Larry made a joke about 8-K SEC statements. No, nobody else got it either. Yes, it was kinda funny. Another funny moment was when an analyst was asking about the Tulsa sale and referred to it as “This……. asset.” His opinion on the site was pretty clear and the awkwardness warranted a chuckle.

Overall it was an impressive quarter. Compared to Q1 of 2013:

  • Sales grew 20%
  • Operating income (money we make from our “core business” of selling airplanes) grew 35%
  • Net income (also called “profit”) nearly doubled at 89%
  • Net income as a percent of revenues (or “profit margin” – how effective we are at turning sales into profit) grew from 5.6% to 8.9%

These are all really, really solid numbers and reflect tons of improvement not just in sales, but in the efficiency of our business. So good job :).

Some of my buddies made very good observations about the results and about the analyst impressions. Michael Kuchinski pointed out that our earnings per share (it’s just our net income divided by number of Spirit stock shares that exist) of $1.07 for the quarter is nearly half of our projected EPS for the entire year. Well done, Mike – an analyst asked about this very same thing, questioning if our 2014 guidance had some conservatism in it given the Q1 performance. Sanjay’s response was a little laugh; it seems like yes, we’re hoping to meet and exceed that guidance, at least if we keep pace with first quarter performance. You may also have noticed that they positively revised our free cash flow guidance for the year – as shown below (the blue slash and revised figure of $200M is theirs, the obnoxious red arrow pointing to it is mine).

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Now, let’s balance this positivity out a little bit. A very insightful observation was also made by Nic Hovey, who caught onto a major trend in the analyst questions. There wasn’t a big central topic to talk about like a forward loss, so the questions were more widespread, but what Nic pointed out that they had in common was questioning the reliability of Spirit’s forecasts. It was a great quarter no doubt, but we’ve had great quarters before and then been burned. We’re not risk-free or out of the woods just yet. We know this intuitively as employees, and it’s clear that the people who analyze our company on a full-time basis feel the same way.


 

Every quarter since Mr. Lawson has taken the reigns of Spirit, he has constantly harped on Spirit’s free cash flow. I talked about this a little bit in the last email, but wanted to expand on the topic for your learning pleasure this quarter.

To introduce the topic, I’ll relay one of the analyst questions that touched on it.

The analyst noticed that our accounts receivable increased. Accounts receivable (A/R or AR) are like checks written to us that haven’t cleared yet. We provided the goods or services and know the recipient will pay us, but we haven’t got the cash in hand yet. The analyst was wondering if this was due to non-payments particularly from Gulfstream and if we should be concerned about our inability to collect these bills. In short, Sanjay said that the AR growth was due to increased volume and payment structures and it was nothing to be concerned about. But this topic, this accounts receivable and cash flow thing, it’s a good one, so let’s learn a bit more.

Suggested Mini-Lesson

You’ll notice that in this quarter, we had a nice income — $154M in net income (profit). That means that we sold our stuff for more than it cost us to make it, by 8.9% (our profit margin) on average. Great! So uh… why was our cash flow from operations only $45M? And uhhhhh… why was our free cash flow negative $8M?

One part of the answer is exactly what Mr. Kapoor said; when you’re talking about hundreds of millions of dollars, those checks can clear kinda slow. But why free cash flow is such a focus for Mr. Lawson, and why it’s wise for him to focus on that, is a great topic. For this, see the story of the lemonade stand.