<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Manufacturer of Aerospace Structures Holdings Spirit AeroSystems (NYSE: SPR) has developed a long-term agreement with Boeing (NYSE: BA), establishing price and capital investment conditions with its most important customer and settling claims related to manufacturing delays. "data-reactid =" 11 "> Manufacturer of Aerospace Structures Holdings Spirit AeroSystems (NYSE: SPR) has developed a long-term agreement with Boeing (NYSE: BA), setting conditions for pricing and investment expenses with its most important customer and resolving claims related to manufacturing delays.

The transaction provides Spirit with the certainty it so badly needs as it seeks to invest in its business and dispels the anxiety of potential investors about the company after a difficult period in 2018.

Spirit, a wholly owned subsidiary of Boeing, manufactures approximately 70 percent of Boeing's 737 hot-selling aircraft fuselage, as well as key components of the 767, 777 and 787 Dreamliner. The long-term agreement sets the price conditions. for all models "well in the next decade", including 737 prices based on higher and lower production rates than current levels.

Boeing 737 fuselage in final assembly

More

A Boeing 737 fuselage entering the final assembly. Source of image: Boeing.

He also describes the tooling and capital investments for certain rate increases of 737 and asks the companies to work together to reduce the costs of the 777X and 787 Dreamliner models. In a statement, Spirit CEO Tom Gentile said that with this new agreement, "we expect the price to exceed the final cost of the 787 program."

Following the transaction, Gentile stated that Spirit was aiming for a 7% to 9% conversion of free cash flow.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Boeing had 737 unfinished units stacked at his Renton, L & # 39; assembly plant in Washington, last summer, partly because of delays in the manufacture of the engines, but also because of the problems encountered by Spirit to deliver the fuselages in time and in the right order . these delays were largely in the pastData-reactid = "28"> Boeing had 737 unfinished units piled up at its assembly plant in Renton, Wash., Last summer due to delays in engine manufacturing, but also because of the problems faced by Spirit fuselages in time and in the right order. In November, the Spirit stated that these delays were largely in the pastbut the claims surrounding them had remained unresolved until now.

Locking business

Some elements of the agreement imply a reshuffling of the payment schedule. The agreement requires Spirit to resume repayments of 787 advances in 2021. Spirit is also locked into an unfavorable price structure for the 787 over the next few years.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "But the company gets clarification on the prices of some of its largest contracts until 2030 and eliminates the potential uncertainty surrounding Boeing's ever-changing 737 production plan.Before this agreement, it was unclear whether Boeing, which aggressive expansion in areas historically dominated by supplierswanted to continue developing his relationship with Spirit. "data-reactid =" 31 "> However, the company is getting clarification on pricing some of its most important contracts up to 2030 and eliminates any potential uncertainty regarding Boeing 737's ever-changing production. agreement, it was unclear whether Boeing, who was aggressive expansion in areas historically dominated by supplierswanted to continue developing his relationship with Spirit.

Boeing is also about to decide to launch a new intermediate aircraft and Spirit is considering bidding for the fuselage work. Given the close relationship between the two companies, Spirit appears to be the favorite to win this new business, which would create a steady stream of revenue in the long run, but could significantly reduce margins in the coming years due to start-up costs. .

Acquisition still in progress

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Perhaps just as important is that Boeing will agree to De l & # 39; mind $ 650 million acquisition expected from Asco Industries. Spirit announced the deal last May and initially hoped to finalize the purchase by the end of the year, but the company has temporarily suspended the proposal from European regulators after encountering a problem. Data-reactid = "34"> Perhaps just as important is it as important that Boeing will agree to the spirit $ 650 million acquisition expected from Asco Industries. Spirit announced the deal last May and initially hoped to finalize the purchase by the end of the year. In October, the company temporarily withdrew the proposal from the European regulatory authorities after encountering a problem.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The Asco agreement is the key to the long term of Spirit A strategy to reduce its dependence on Boeing, which still accounts for nearly three quarters of Spirit 's 13 – year turnover after the Spirit' s independence. Wing, mechanical assemblies and other components to a range of products. Airbus Boeing, as well as the F-35 fighter and other military aircraft. It generates about $ 400 million in sales a year. "Data-reactid =" 35 "> The Asco agreement is the key to Spirit's long-term strategy to reduce its reliance on Boeing, which still accounts for nearly three quarters of its figure. 13 years later Spirit has gained its independence: Asco provides wing structures, mechanical assemblies and other components to Airbus Boeing, as well as the F-35 fighter and other military aircraft. It generates about $ 400 million in sales a year.

The story continues

At the time of the announcement of the transaction with Asco, Gentile stated that this target would generate approximately half of its revenues from Airbus and an additional 30% from other customers than Boeing, and that this purchase would provide a better balance to Spirit. This should also contribute to growth rates, as Spirit executives expect annual growth of 10% to 12% for Asco over the next few years.

Although Boeing is not the reason for the European antitrust delay, the support of a large customer should facilitate the approval process. Spirit hopes to close the deal by the end of this quarter.

A worry of less

<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Spirit AeroSystems is trading today at around 9 , 4 times the term profit, well below the industry leader TransDigm Group (19.7x) and heavy aerospace United Technologies (13x). The discount is partly due to its poor performance in delivery in 2018, but with each passing month, it seems that these problems are too. "Data-reactid =" 43 "> Spirit AeroSystems is trading today at about 9.4 times earnings futures, well below industry leader TransDigm Group (19.7x) and heavy aerospace United Technologies (13x). The reduction is partly due to its poor delivery performance in 2018, but with each passing month, it seems that these issues are also behind it.

Risks remain, including a planned CFO transition, the challenge of integrating Asco, and the possibility that when Boeing increases production, 737 rushes into the spirit again. But this new deal solved a huge problem, namely Spirit's long-term relationship with Boeing.

<p class = "canvas-atom web-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "With Boeing on board, the success of Spirit decreases moreover in addition to the way it will run over the next few quarters, and I liked what I've seen so far from Gentile and his team. I still prefer TransDigm, which despite its higher value has a concentration of exclusive products difficult to trivialize, or even Boeing himself, but I'll be watching Spirit closely in the months to come. "data-reactid =" 45 "> With Boeing, Spirit's success depends more and more on how it will perform over the next few quarters and I liked what I saw up to present of Gentile and his team, but I still prefer TransDigm which, despite its higher valuation has a concentration of exclusive products difficult to trivialize, or even Boeing, but I will closely follow the Spirit in the months to come.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " More from The Motley Fool "data-reactid =" 46 "> More from The Motley Fool

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Lou Whiteman owns shares of TransDigm Group. Motley Fool owns shares and recommends TransDigm Group. The Motley Fool has a disclosure policy."data-reactid =" 54 ">Lou Whiteman owns shares of TransDigm Group. Motley Fool owns shares and recommends TransDigm Group. The Motley Fool has a disclosure policy.