Spirit AeroSystems Holdings, a major supplier for Boeing, has recently announced a series of measures aimed at improving its financial position and restoring stability in the wake of challenging times. While the company’s shares have fallen, these steps are crucial for its future.
On Tuesday, Spirit (ticker: SPR) revealed its plan to raise $200 million through the sale of common stock and an additional $200 million through debt issuance. However, this announcement resulted in a 15% decline in Spirit’s stock during premarket trading, while S&P 500 and Dow Jones Industrial Average futures remained steady.
This market reaction is not unexpected; an increase in the number of shares issued dilutes the value of existing stocks, reducing each shareholder’s stake in the company. Additionally, higher debt levels lead to increased interest expenses, putting pressure on earnings and cash flow—the lifeblood of any organization.
Given the size of the raised amounts, the significant drop in Spirit’s stock is notable. The $200 million worth of common stock issued represents less than 10% of the company’s $2.6 billion market capitalization as of Wednesday.
The drop in share value can be attributed, in part, to investor apprehension. Spirit shareholders have been grappling with a combination of challenges resulting from the Covid-19 pandemic, as well as quality issues that have plagued the company for some time. As a result, Spirit’s shares have experienced a decline of over 70% in the past five years.
Recognizing the magnitude of these difficulties faced by its supplier, Boeing (BA) stepped in to provide support. The aerospace giant recently restructured various financial commitments related to contract pricing and debt repayments. This assistance prompted a 23% surge in Spirit’s stock on October 18.
The funds generated from the sale of stock and debt will be allocated for “general corporate purposes,” an industry standard phrase typically outlining the utilization of capital raised. In Spirit’s case, these funds will primarily be used to sustain daily operations. However, the challenges faced by both the wider aerospace industry and Spirit specifically have resulted in a concerning issue: cash burn.
Over the past four years, Spirit has consumed around $1.9 billion in cash, including estimated figures for the fourth quarter of 2023. This represents a particularly strenuous period following the company’s positive free cash flow of $723 million in 2019, as reported by FactSet.
According to FactSet, Wall Street analysts anticipate a growth in free cash flow from -$305 million in 2023 to $242 million in 2025. Achieving this improvement will hinge on Boeing’s ability to deliver more aircraft, as expected. In addition, Spirit will need to address its quality concerns that have contributed to delays in shipping aircraft parts.
In conclusion, Spirit AeroSystems’ recent actions are crucial steps towards restoring financial stability amid trying circumstances. The path towards positive cash flow will require concerted efforts from both Spirit and Boeing to overcome challenges, increase production, and streamline operations.