Boeing (NYSE:BA) has secured a significant financial agreement with its supplier, Spirit AeroSystems (NYSE:SPR) in Wichita, Kansas, to address production and quality issues. This agreement follows the recent dismissal of Spirit's CEO Tom Gentile and his replacement by Pat Shanahan, an ex-senior Boeing executive. The deal, finalized on Wednesday, aims to stabilize Spirit's production system and prepare it for Boeing’s planned production rate increases.
The contract was signed just ten days after Gentile's departure amidst a crisis at Spirit. It resolves all legal claims between the parties and is seen as mutually beneficial, bolstering operational stability and aiding in fulfilling customer commitments.
Under the terms of the agreement, Boeing will provide an immediate $100 million for capital investment in tooling to Spirit. Additionally, Boeing will increase its payments to Spirit by $455 million over two years, with an option to reclaim $265 million through price reductions on parts from 2026 to 2033.
The deal came after a series of production issues at Spirit, including misdrilled holes in the aft pressure bulkhead of the 737 MAX fuselage. This led to a Q3 loss for Boeing due to extensive inspections and repairs on previously built MAXs.
Ihssane Mounir, Boeing's senior VP managing the global supply chain, who has been negotiating these terms for months, said this agreement would encourage improved collaboration for better quality and increased future deliveries.
The contract also modifies pricing, inflating payments for near-term 787 components and trimming the cost for 737 Max shipsets delivered from 2026 onwards. This change is projected to increase Spirit's revenue by $455 million between 2023-2025 but reduce it by $265 million between 2026-2033.
Past manufacturing faults at Spirit led to a $206 million loss in Q2 of 2023 and necessitated Boeing to inspect roughly 165 already delivered 737 Max 8 fuselages for delivery assurance.
According to InvestingPro data, Spirit AeroSystems operates with a significant debt burden and has been burning through cash quickly. This is likely one of the reasons for the company's aggressive move to stabilize its production system with the help of Boeing. However, the company's revenue growth has been slowing down recently, and it has been operating with a poor return on assets.
On the other hand, Boeing, with a market cap of 113.05B USD, has been experiencing accelerating revenue growth. Despite this, the company is not profitable over the last twelve months, and its stock is in oversold territory, as per InvestingPro Tips.
The agreement between these two companies is a strategic move to improve their financial and operational stability. It is also a testament to the importance of collaboration and strategic partnerships in navigating challenging times.
For more insights and tips, readers can explore InvestingPro's platform, which offers a wealth of information on various companies, including Spirit AeroSystems and Boeing.
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