Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Spirit AeroSystems Holdings Inc (NYSE:SPR)
Q4 2019 Earnings Call
Feb 28, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Inc's Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Andrea, and I'll be your coordinator today. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.[Operator Instructions] Please note, this event is being recorded. I would now like to turn the presentation over to Ryan Avey, Director of Investor Relations. Please go ahead.

Ryan Avey -- Director, Investor Relations

Thank you, Andrea and good morning everyone. Welcome to Spirit's fourth quarter and full year 2019 earnings call. I'm Ryan Avey, Director of Investor Relations, and with me today are, Spirit's President and Chief Executive Officer, Tom Gentile and Spirit's Senior Vice President and Chief Financial Officer, Mark Suchinski.

After the opening comments by Tom and Mark regarding our performance and outlook, we will take your questions. In order to allow everyone to participate in the question and answer segment, we ask that you limit yourself to one question, please. Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks which are detailed in our earnings release and our SEC filings and in the forward-looking statement at the end of this web presentation.

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at investor.spiritaero.com. With that, I would like to turn the call over to our Chief Executive Officer, Tom Gentile.

Thomas C. Gentile III -- President and Chief Executive Officer

Thank you. Ryan, and good morning everyone. Welcome to Spirit's 2019 fourth quarter and full year earnings call. I'd like to start today by welcoming our new Chief Financial Officer, Mark Suchinski. Mark is a long-tenured and respected leader at Spirit, particularly within the finance team where he held a variety of key roles from 2006 to 2018, including serving as Controller and Principal Accounting Officer from 2014 to 2018. Most recently, Mark was our Vice President of Quality and before that VP of the 787 program. He brings a comprehensive understanding of our business and has strong relationships with both internal and external stakeholders.

Let's move on to the 737 MAX. I want to reemphasize that, while the current situation regarding the MAX is challenging, we remain confident in the long term outlook for the aircraft. The Boeing MAX backlog remains strong at approximately 4400 aircraft and there have been no significant cancellations. Air traffic growth was solid in 2019 at 4.2%. 2020 will be impacted by the coronavirus, but expectations for long term growth remain healthy. The MAX is critical to meet this demand for air traffic, especially given the high utilization of narrow bodies in the MAX's range and mission. And Spirit manufacturer 70% of the structure of the MAX including the entire fuselage.

In short, the MAX is an important aircraft for the global aviation system and Spirit is one of the key suppliers to the program. We are proud to be a partner on the MAX program and we will support Boeing as they work with the FAA and other global regulators to return it safely to service.

Given the delay in the MAX reentry back to service, Boeing made the decision on December 16 to suspend deliveries beginning in January and directed Spirit to do the same on December 19. On December 20, we announced the production suspension and began taking immediate actions to align our cost structure with expected lower levels of production in 2020. We took a number of actions. First, we directed our own suppliers to hold incoming deliveries to Spirit. We implemented a workforce reduction of approximately 2800 employees in Wichita and 400 employees in Oklahoma. We also initiated a voluntary retirement program for both hourly and salaried workers. Further, we are reducing capex spend, deferring all, but the most necessary expenditures. We've also created internal teams led by senior executives to manage and tightly control all of our indirect and discretionary expenditures.

Additionally, we extended our IAM union contract for approximately 9,000 workers for three years. The previous contract was set to expire on June 26 of this year. We jointly agreed with the IAM to work on the contract extension early, so that we could focus solely on the MAX situation.

On January 30, we reached an agreement with Boeing, regarding production and deliveries for 2020. We will produce and deliver 216 shipsets in 2020 compared to 606 shipsets in 2019. We will restart production slowly in the coming months, ramping up deliveries through the year to deliver about 70% in the back half of 2020. We do not expect to return to 52 shipsets per month until late 2022. Of course, this agreement is based on several assumptions, including the timing of the 737 MAX return to service and Boeing's expected production rate.

In addition, as part of this agreement, Boeing will pay $225 million to Spirit consisting of two parts. The first part is $70 million in support of our inventory and production stabilization, of which, we will repay $10 million in 2021. The second part is $155 million, which is an incremental prepayment for deliveries over the next two years. Other terms of the agreement include extending the repayment of the $123 million advance we received last year until 2022 and extending the 737 MAX contract through 2033. It previously expired in 2030. Importantly, the agreement also includes the creation of a Boeing-Spirit joint task force to monitor the health of Spirit's 737 MAX supply chain.

As production resumes this year, and Boeing advances to its target of 57 airport planes per month in the future, we expect several years of strong double-digit compound annual growth. This growth will be easier for us to execute for a number of reasons. First, we have already transitioned to 100% MAX production. Over the last few years, as we are increasing in rate, at the same time, we were shifting from the NG to the MAX. Today, the only NG's that we still produce are P-8's for the Navy, which averaged about two aircraft per month. We have previously produced up to 57 aircraft per month, which we achieved in early 2019 just prior to the MAX grounding. And we have experienced, at each of the production levels, we're going to see up to that level. We already have all the capital and tooling in place to achieve these higher production rates.

Finally, we are taking advantage of the slow period to train our workers, streamline our factories, do maintenance and improve manufacturing process flows, so we can come back more efficient with higher levels of quality. We have identified a number of initiatives we can leverage in this transition period that would be harder to achieve during full-rate production. These projects include things like accelerating the full transition of our new Global Digital Logistics Center, optimizing the product flow for two separate 737 fuselage sections, the wing box and the forward fuselage, and pulling forward digitization projects for our operating system.

Next, I want to address near term cash and liquidity, which is a major focus for us right now. Our strong 2019 cash performance combined with our decision to pause share repurchases helped to create a healthy cash balance by the end of 2019. Additionally, we drew $800 million on our revolver in late December, shortly after Boeing directed us to suspend production, in order to proactively protect liquidity, given the uncertainty. We ended 2019 with $2.4 billion in cash on our balance sheet.

Given, the 737 program is our largest contributor of cash and it represents half our revenue, the production halt and slow subsequent production ramp will be challenging in terms of cash flow for the first half of 2020. We have taken a number of proactive measures to improve our near-term liquidity, in addition to the cost mitigation actions I just described. Let me go over those. Given the significance of the 737 program to Spirit, we reduced our quarterly dividend from $0.12 to $0.01 to preserve liquidity until production rates are at higher levels.

As stated above. We also deferred repayment of $123 million cash advance from Boeing that we agreed in our April 2019 agreement from 2020 until 2022. We have also entered into a $375 million short-term delayed-draw term loan facility, which ensures access to additional funds if we need them. This facility matures in the third quarter of this year or 45 days after the FAA recertifies the 737 MAX, whichever is earlier. To provide ourselves with a further liquidity cushion, we are planning to raise additional capital in the bond market this year. The plan is to use this longer-term funding to pay off some of our shorter-term financing, including the revolver.

In terms of cash uses, we have two previously announced acquisitions expected to close this year, Asco and selected assets of Bombardier's aerostructures business. In addition, we closed one smaller defense-related acquisition in January, which I am very excited about and will go into more detail shortly. All three of these acquisitions are aligned with our strategy of increasing our Airbus Defense, fabrication and aftermarket content. We remain committed to these acquisitions, all of which contribute positively to our revenue, profit and cash flow in the coming years. Collectively, these three deals that are closing will require about $1 billion of cash in 2020, of which $120 million has already been paid.

As a result of our proactive balance sheet management and cash mitigation actions, since the MAX grounding, we are confident in our liquidity position to manage through the MAX situation under likely near term scenarios.

Let's move on to Q4 now. The performance in Q4 was mixed. The announcement by Boeing that they had reduced 787 rate from 12 aircraft per month to 10, resulted in a $34 million forward loss in Q4. On 737, we saw a significant disruption as we spend money early in the quarter and over time on contractors to meet delivery and quality requirements for 2019 only to then see a suspension of production, which caused us to extend our holiday shutdown period and take several units out of our production plant. Once we resume production of the 737 MAX, our goal is to stabilize the production system and return to our historically strong delivery and quality performance, while we focus on recovering margins to our target levels.

For 2020, improving quality, while managing costs and ramping to higher rates of 737 production will be our number one priority. At the same time, and equally as important, we are not slowing down on our long term inorganic growth and diversification strategy. Our strategic priorities for inorganic growth are Airbus Defense, fabrication and aftermarket.

As I mentioned earlier, in January, we completed a small, but very strategic acquisition of a company called FMI for $120 million. FMI is an industry-leading technology company specializing in high temperature materials and composites primarily for defense with several applications on hypersonics missiles. FMI is the sole source on several legacy strategic defense programs and they are partnered with the defense primes as well as the Department of Defense. FMI makes 3D woven carbon-carbon composite nose cones and throttles on vehicles like missiles, requiring temperatures above 4,000 degrees. Their performance on several Air Force and Navy programs over the last couple of decades has earned FMI attractive positions on the strategic defense applications. Acquiring FMI aligns with Spirit's strategic growth objectives to diversify its customers base and expand our current defense business. FMI's advanced capabilities in high temperature materials, combined with Spirit's expertise in industrializing next generation aerostructures, creates a critical capability to industrialize state-of-the-art defense technologies essential for the advancement of hypersonics weapons, which the Department of Defense has identified as a national priority.

The Asco acquisition will increase our Airbus Defense and fabrication footprint. Asco's revenue is 50% Airbus with exclusive and sole source positions on all the Airbus programs for slats and other wing mechanisms. Asco also grows our defense content on the F-35 program and expands our fabrication capability and capacity. Asco has resumed its operations following the cyber attack it experienced last year and we remain on track to meet all the conditions to close this transaction in 2020.

The Bombardier aerostructures acquisition solidifies our long term relationship with Airbus through the A220 wing and the A320neo thrust reverser. The acquisition also doubles our high margin aftermarket business and had significant business jet fuselage, propulsion and wing product revenue to our portfolio. This acquisition adds intellectual property in the form of state-of-the-art resin transfer infusion carbon fiber composite fabrication, which is used on the A220 wing and positions Spirit well for the next generation narrow-body aircraft. We expect to close on this transaction later this year.

With that, I'll ask Mark to lead you through the detailed 2019 financial results. Mark?

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Thank you, Tom, and good morning everyone. Before I begin, I want to thank Tom and the board for their confidence in asking me to take on this new role. While I'm new to the CFO position, I am not new to the company. I look forward to leveraging my finance and operations experience to help us navigate through the challenges and uncertainties that have resulted from the 737 MAX situation. These are challenging times, not only for Spirit, but also across the entire aerospace industry. I am confident that we are prudently managing the situation in the right way and I'm optimistic about the company's strong future ahead.

As we previously announced on January 30, the company conducted an accounting review. As a result of the review, the company determined that it did not comply with its established accounting processes with respect to certain potential contingent liabilities received after the end of the third quarter of 2019. After conducting the appropriate accounting review with respect to those potential contingent liabilities, the company concluded that it should have recorded an incremental contingent liability in the third quarter financial results of less than $8 million and we have recorded the appropriate amount in Q4. This amount is not material to our third quarter results and does not require a restatement of our financial statements. However, we have determined that the non-compliance resulted in a material weakness in our internal controls over financial reporting. We have corrective action in place and expect the material weakness in financial reporting to be fully remediated by the end of the year.

Since being appointed as Chief Financial Officer about a month ago, I've done a deep dive into the company's financial results and can confidently summarize those for you today. Please move to slide 5. Revenue for the year was $7.9 billion, up 9% from the prior year. This growth was driven by higher volumes of production on the 777, 787 and A350 programs, higher revenue recognized on the 787 program, increased aftermarket activity and favorable 737 model mix.

Let's now turn to earnings per share on slide 6. We reported adjusted EPS of $5.54 per share compared to $6.26 in 2018. The 2019 adjusted EPS excludes the impacts of the expenses related to the acquisitions and the voluntary retirement program announced in the second quarter of 2019. The adjusted EPS decreased year-over-year primarily due to forward losses recognized on the 787 program, resulting from Boeing's announcements to decrease production from 14 to 10 aircraft per month, reduced profitability on the 737 program, largely resulting from the impact of the MAX grounding, partially offset by higher production volumes on the 737 and 777 programs. The forward losses on the 787 program reflects the impact of fixed cost absorption due to extending the current accounting blocks, which runs through line unit 1405 and will now close in the first quarter of 2023.

As Tom mentioned, fourth quarter performance was mixed. In addition to the fixed cost absorption impact on the 787 from decreased production rate of 12 to 10 aircraft per month, we continue to have elevated costs in the 737 program due to production disruption and our efforts to improve quality. The 737 production suspension also impacted the number of units in the accounting contract which led to increased costs being recognized in the fourth quarter. Also, as mentioned on the last earnings call, there was a contractual price step-down on the A350 program in the fourth quarter.

Lastly, the fourth quarter was also impacted by a number of one-off non-recurring type items. These items included an additional forward loss on the BR725 program due to a block extension, asset write-offs and a few other smaller items.

Looking ahead to the 2020 financial reports, it's important to note that per GAAP, we will be recognizing excess costs resulting from the 737 MAX production suspension and subsequent production recovery schedule separate from normal production contract costs. We will recognize excess or abnormal expenses related to the idle plant and subsequent abnormally low rate as unallocated segment cost of sales. Further, these at normal costs will be recognized and reported in the period in which they occur, as opposed to normal production costs, which are allocated to an accounting contract, which could be spread over multiple periods. As a result, these excess costs associated with the production suspension, as well as, the subsequent low rate production, will be reflected as period results, beginning in the first quarter of 2020 and will continue until the production resources are utilized at normal capacity. Additionally, costs relating to restructuring, which include expenses such as those related to workforce reductions, will be reported separately on the income statement.

Now turning to free cash flow on page 7. Adjusted to exclude the impacts of the planned acquisitions, free cash flow for the year was $723 million, compared to $565 million in 2018. This reflects a 28% increase year-over-year, driven by several factors, including a $123 million cash advance received from Boeing in the third quarter, our continued focus on working capital and capital spend, as well as lower cash taxes.

Capital expenditures for the year were $232 million compared to $271 million in 2018. During the first half of 2019, soon after the MAX was grounded, we took actions to review our capital expenditure projects in order to determine which could be deferred or delayed in order to reduce the amount of capital spend to a range of $200 million to $250 million as compared to our previously forecasted range of $250 million to $300 million. We plan to continue this process during 2020 and expect to spend around $150 million on capital expenditures.

2020 will be a difficult year, especially in terms of cash and I can assure you that we will be diligently managing our liquidity and adjusting our cost structure to align to the lower levels of production. Currently, we're projecting negative overall free cash flow for 2020 with the majority of cash burn during the first half of the year. However, as we increase MAX production rates and begin to realize the benefits of our cost mitigation actions, we expect positive free cash flow on a run rate basis by the end of the year.

In addition, we amended our credit agreements to provide covenant relief through the end of the first quarter of 2021, at which point we expect to achieve sustained performance throughout the year from a stable and increasing MAX production rate and we'll also benefit from the full-year contribution to the earnings and cash flow from the acquisitions. The covenant relief demonstrates the support and confidence of our lenders in Spirit.

Now let's turn to our segment performance on slide 8. Fuselage segment revenue in the year was $4.2 billion, up 5% from 2018, primarily due to higher production volumes on the 777 and 787 programs and increased aftermarket activities, partially offset by lower production volumes on the Boeing 7370 program. Operating margin for the year was 10.5% compared to 14.4% in the prior year, primarily due to the 787 forward losses recognized as a result of Boeing's announced rate decreases and higher costs related to the 737 program. On a normalized basis, after reversing changes in estimates from the prior periods, fuselage segment margin was 11.4% compared to 14.4% last year. In the fourth quarter, we continue to incur costs due to the production slowdown and efforts to improve quality in the 737 program. We are taking full advantage of the production suspension and the slow ramp in production rate throughout this year to further optimize our production system, which will lead to improved operational metrics and lower cost going forward. Additionally, the price step-down on the A350 program impacted the fourth quarter profit.

In 2019, Propulsion revenue was $2.1 billion, up 21% compared to the prior year, primarily driven by higher production volumes on the 737, 777, and A220 programs, as well as favorable model mix on the 737 program. Operating margin for the year was 19.7% compared to 16.7% in 2018, primarily due to performance and favorable model mix on the 737 program. On a normalized basis, after reversing change in estimates, our Propulsion segment margin was 20.5% up compared to 16.7% in 2018.

In 2019, Wing revenue was $1.6 billion, up 5% compared to 2018, driven by higher production volumes on the Boeing 787 and Airbus A350 programs. Operating margin for the year was 13.6% compared to 15% in 2018, primarily due to to the 787 forward losses recognized as a result of Boeing's production rate decrease, performance on the 737 program, as well as pricing on the A350 program. On a normalized basis, after reversing change in estimate impacts, Wing segment margin was 14.2% compared to 14.8% in 2018.

As Tom mentioned in his opening remarks, there is still a lot of uncertainty surrounding the timing of the MAX's return to service. And as a result, we will not be providing full-year 2020 guidance at this time. We expect to slowly restart production in March and then gradually ramp throughout the year. For the year, we plan to produce a total of 216 MAX units, of which 70% will be produced during the second half of the year. We expect to return to a production rate of 52 per month by the end of 2022. I can assure you that detailed plans are being executed aggressively to manage overhead costs during the stage of low production. Cost reduction captains have been appointed to lead a very meticulous process to reset our cost structure, to better align with our current production volumes. Recovery begins in the second quarter and will improve through the year from increasing MAX production rates and realization of our cost mitigation activities. We plan to exit the year with stable cash flow generation and sufficient cash to fund our operations.

This is a very challenging time for Spirit and we have a lot of work to do. But as I said in my opening remarks, I am confident that we are prudently managing the situation in the right way and I feel very optimistic about our future. With that, I will turn it back over to Tom for some closing comments.

Thomas C. Gentile III -- President and Chief Executive Officer

Thanks, Mark. And now I'll make some closing comments before we take questions. Our focus in 2020 is on improving quality, managing costs and ramping to a higher rate of production over the next several years. And we will leverage the current lower rates of production to make sustained improvements to our assembly lines, especially the 737 assembly line. At the same time, we will work to close and integrate the three transformative acquisitions that we announced last year, Bombardier's aerostructures business, Asco and FMI. Executing on these two priorities, the cost reductions and quality in the operational goals, along with the inorganic growth, will help us become a leaner, more diversified company over the coming years. As I began earlier, we remain confident in the long term viability of the Boeing 737 MAX program and the outlook for aviation overall.

The MAX is critical to the future of the U.S. and global commercial aviation, and has a tremendous impact on the U.S. economy. Spirit is the most critical aerostructures supplier for the MAX, supplying 70% of their structure, including the entire fuselage. Spirit remains a proud partner on the MAX program and we look forward to working with Boeing to ensure the long term success of the program. With that, we'll be happy to take your questions.

Questions and Answers:

Operator

We will now begin the question and answer session. [Operator Instructions] And our first question comes from Carter Copeland of Melius Research. Please go ahead.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning. I guess, we're almost afternoon. I wondered if you might give us a little bit more understanding on -- you mentioned the supply chain health, I just -- I sort of wonder, obviously this is a challenging situation from a liquidity standpoint for you guys, but I'd imagine the supply chain beneath you as a collection of microcosms that look very, very similar. And so, do you anticipate having to pay out anything to support suppliers and what is your task force that you mentioned, kind of revealed about, risks when you try to ramp back up? Just any color you can give us on how that looks today, Tom, would be helpful. Thanks.

Thomas C. Gentile III -- President and Chief Executive Officer

Right. Thanks. Carter. Well, as you can imagine, the suppliers are critical partners to us across all parts of our business, but particularly to the 737 program and our most important strategic goal along with Boeing is to ensure the long term viability and health of the supply chain because, after we get back into service and start producing, eventually the rates are also going to start going up and we want to make sure that everybody can meet those rate increases and do it efficiently and with high levels of quality. So it's in all of our interest to ensure that we have a healthy supply chain.

So to that end, what we've done with Boeing is, we've formed a joint task force, because a lot of the suppliers who supply us also supply Boeing directly. And so there is a lot of crossover. So what we are doing is jointly reviewing all the suppliers and going through their situation, understanding their cash flow, their liquidity position, their debt situation, their operating performance and trying to understand what is a good solution for that particular supplier. And there's a lot of different levers that we can look at in terms of their inventory levels, their payment terms, the rate at which they are producing. We go through it and then we develop a customized solution for each of the suppliers. Now, as you can imagine, these discussions are ongoing. They're very dynamic, very fluid, because the situation is changing. And our goal is to work with each supplier to come up with a solution that works for them and works for the whole system, with the goal that we all get through this together and that we emerge stronger and able to meet the production rate increases that we know are going to come in the future.

Carter Copeland -- Melius Research -- Analyst

And how many of the suppliers have you reviewed at this point?

Thomas C. Gentile III -- President and Chief Executive Officer

We've reviewed a lot and we're open to talk to all the suppliers. I'm talking to suppliers every day and we have these formal reviews with them. So we've got this mechanism set up and we're going to make sure that we use it in order to help all the suppliers get through this very challenging situation.

Carter Copeland -- Melius Research -- Analyst

Great. Thanks, Tom.

Thomas C. Gentile III -- President and Chief Executive Officer

Thanks, Carter.

Operator

Our next question comes from Jon Raviv of Citi. Please go ahead.

Jon Raviv -- Citigroup Global Markets -- Analyst

Thanks guys, good morning. Tom, can you just put in the context here the needle that moves, you have a downgrade, the new facility put in place, what does all this mean and you're also saying you're going to raise debt on the certain capital return stuff. What does all that mean for capital allocation flexibility going forward? [Indecipherable] are you able to look back at retail at some point, restructure dividend at some point or are we sort of more tilted to not asking shareholders, certainly, given the mid term not just the near term, even going in '21, '22?

Thomas C. Gentile III -- President and Chief Executive Officer

Right. Well, a couple of things happened that impacted the whole liquidity situation. The first thing was the suspension of the production system for January, which also turned out into February, had an impact on our earnings and our cash flow in the first quarter. We have bank debt, so we have $800 million revolving facility and a $400 million term loan and there were covenants on that bank debt, which we would have been in danger of breaching through the normal course of operations in the first quarter. So the first thing we did was we had to negotiate waivers to the covenants on that bank -- on those bank loans. In addition, as you mentioned, we also did get downgraded by both Moody's and Standard & Poor's by 2 notches and so that took us out of investment grade into high yield, which put some additional pressure on the situation. So we did renegotiate those covenants and we negotiated waivers. That did put some restrictions in terms of our capital allocation. So until we return to investment grade, one of those restrictions is that we not make share repurchases. We do have the flexibility to increase dividends back up to the previous levels of about $0.12 a share. But our goal is, over the next couple of years is really focused on executing on the MAX production system, getting back to...

Operator

Pardon me. This is the conference operator. We seem to have lost connection with the speaker location. Please continue to hold, while we get them reconnected. Thank you. Pardon me, this is the conference operator, again. Please continue to hold while we reconnect the speakers. Thank you. Pardon me, this is the conference operator, we are trying to reconnect to the speaker location, please continue to hold while we reconnect. Thank you. Pardon me, this is the conference operator, we are experiencing technical difficulties. Please continue to hold while we reconnect the speaker location. Thank you. Pardon me, this is the conference operator. We have successfully reconnected the speaker location and they may proceed where they left off.

Thomas C. Gentile III -- President and Chief Executive Officer

Thank you very much and apologies everybody for the technical issues. But Jon had asked me about capital allocation and I'm not sure how much of that got through, so let me just repeat. When we learned of the production suspension at the end of 2019, that obviously impacted our first quarter financials, particularly our cash flow and our profitability because the MAX is half of our production. And so that put us at risk of of breaching our covenants on our bank loans, which consisted of our revolver and a $400 million term loan. In addition, Standard & Poor's and Moody's downgraded us 2 notches. So we went to our banks and renegotiated our loan covenants, and we were successful in doing that.

But as a result of doing that, particularly, since we are no longer investment grade, our new covenants, at least for this period of time until the early part of next year, have some restrictions on them related to capital allocation. Specifically, we are not permitted to do share repurchases until we regain investment grade. We can increase the dividend but really our focus for the immediate future is to focus on MAX execution to go up in rate, as Mark mentioned, by the second half of the year, really starting in Q3, we'll be cash flow positive again on a run rate basis and, as production increases over time, we will continue to generate more cash. And our goal is to pay down debt, over the next year and a half or so, get back to investment grade, and then we can resume the share repurchases and reset the dividend once we're in a much stronger cash position.

Jon Raviv -- Citigroup Global Markets -- Analyst

Thank you.

Thomas C. Gentile III -- President and Chief Executive Officer

Okay. Thank you, Jon.

Operator

Our next question comes from David Strauss of Barclays. Please go ahead.

David Strauss -- Barclays Capital -- Analyst

Thanks. One clarifying question and then a follow-up. So you had said that free cash flow in 2020 would be negative. I guess the clarifying question is, does that include the Boeing advance or is that excluding the Boeing advance? And then on 787, Tom, I know you've talked about step-down pricing there. Do you get any relief on 787 pricing, given what are now much -- where we're headed to in terms of much lower rates? Thanks.

Thomas C. Gentile III -- President and Chief Executive Officer

Okay. Well, on the free cash flow question, let me turn it over to Mark and then I'll touch on the 787 question.

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Yes, David. Our projection for negative cash flow for the year does include the $225 million of advances that we got from Boeing, which represent $155 million prepayment in price, and roughly $70 million for inventory and rent stabilization.

David Strauss -- Barclays Capital -- Analyst

Okay.

Thomas C. Gentile III -- President and Chief Executive Officer

Regarding the 787 question, in terms of pricing changes as the rate changes, the answer is no. The prices that we agreed with Boeing are essentially fixed and they do not index to rate. That's different than the 737 program, where we now have pricing out to 2033, that is indexed to rate, but on 787, it is not.

David Strauss -- Barclays Capital -- Analyst

Okay, thank you.

Operator

Our next question comes from Seth Seifman of J.P. Morgan. Please go ahead.

Seth Seifman -- J.P. Morgan -- Analyst

Thanks very much and good morning. Just two kind of quick clarifications, I guess. To follow up on David's last question, so at a rate of 10 a month, presumably I guess, unit 1400 goes out, I think you said, early in 2023. Beyond that, is there an opportunity to be cash profitable at -- if hypothetically the rate is 10 a month?

Thomas C. Gentile III -- President and Chief Executive Officer

The answer is yes. It represents each rate break from 14 to 12 and then from 12 to 10, represented a headwind of about $100,000, so $200,000. The new price is about $5.25 million after the 1405. And so we've got to make up the extra $200,000, but we have more time now to do it. The other positive aspect of this rate decline is the 787 is in a forward loss position and its cash flow negative and because we delivered fewer units, we consumed less cash in the time period up until 1405.

But we fully expect still to be cash flow positive once we get the line unit 1405, which is now going to be in early 2023 on the 787 program.

Seth Seifman -- J.P. Morgan -- Analyst

Great, great, thanks. And then just real quick follow-up to be clear, the $375 million short-term loan, that's still undrawn?

Thomas C. Gentile III -- President and Chief Executive Officer

Yes it is. Yeah, we haven't and we don't expect to draw on it. It was really a vehicle to help us get through the covenant renegotiations. And as we said, it expires later this year, either by the third quarter or by the recertification of the MAX, 60 days after that, whichever comes first.

Seth Seifman -- J.P. Morgan -- Analyst

Got it. Thank you very much.

Operator

Our next question comes from Cai von Rumohr of Cowen and Company. Please go ahead.

Cai von Rumohr -- Cowen and Company -- Analyst

Yes, thank you very much. So first, your comment about negative cash flow for the year. You mentioned you expect to be cash positive in the third and fourth quarters, which basically implies like a pretty big deficit in the first, and I guess, less in the second. Can you walk us through kind of some of the drivers? Is that -- or is that mainly going to be unallocated cost of goods sold? Is that going to be severance because you already laid off 21% of Wichita? And -- yeah, if you could answer those questions, that would be great.

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Look, Cai, it's Mark. Let me walk you through that. Obviously, the very low rate of production or essentially limited production in the first quarter is going to have a negative impact as it relates to our ability to -- we're not going to generate any revenue and therefore that's kind of a negative impact on any cash coming in the door. But you have to remember, at the end of '19, we were producing at a rate of 52 airplanes per month. We have a $1 billion accounts payable cash balance on our books. And so the cash drag is -- a big cash drag is related to working capital, so therefore we're going to have to liquidate the payables.

Most of our payment terms are between 60 to 90 days with our suppliers. So therefore, there'll be a big accounts payable, there'll be a big consumer of drawing down cash here in the first quarter, we'll start to slowly start to ramp back up in the second quarter, which will allow us to book revenue and start to generate some cash, but obviously the biggest drag will be specifically around working capital in the first half of the year. Obviously lower production volumes on 737 going from 600 units down to 200 will also have a negative impact on revenue and cash. So it's a combination of those two items, the burn down of the payables and the slow revenue rate ramp back up and really at the end of the day, as we move into the back half of the year, we will not have the type of excess costs at normal costs in fixed costs that we have in the first half, which again also will drive some consumption of cash.

Cai von Rumohr -- Cowen and Company -- Analyst

Okay.

Thomas C. Gentile III -- President and Chief Executive Officer

Yeah. So all the cash mitigation actions or the cost mitigation actions that we're taking, they are taking place now, including the layoffs and some of the reductions in our indirect costs. The benefits start to accrue in the back half of the year, which helps our cash position.

Cai von Rumohr -- Cowen and Company -- Analyst

So you've mentioned layoffs. but you already announced layoffs. So is this -- the cash impact of the layoffs really is hitting in the first quarter as opposed to in the fourth?

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Cai, that's right. So part of the regulatory process we had provided a warrant act and upon that warrant, we will require to pay our employees that were impacted by the reduction, 60 days' worth of pay. And so essentially those employees that were impacted by the workforce reduction, we're paying -- essentially paying their wages through the end of the first quarter and into April and so therefore that's going to cost a negative drag on cash flow on the first quarter as well.

Cai von Rumohr -- Cowen and Company -- Analyst

Thank you very much.

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Thanks, Cai.

Operator

Our next question comes from Sheila Kahyaoglu of Jefferies. Please go ahead.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you, Tom, and welcome, Mark. Can we maybe talk about profitability expectations on the MAX for Fuselage segment margins once you reach a normalized MAX production rate, whether it's in 2022? And, Mark you alluded to some charges that you said would be in the corporate line. How do we think about that Q4 run rate of 8.6% margins for Fuselage, given you're still producing at a rate of 52 a month in Q4?

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Well, there were several impacts, as Tom indicated, early in the fourth quarter. We were running pretty hard from a factory standpoint to catch up on some deliveries. We had some extra headcount and contractors and some over time, which had a negative impact on the profitability in the quarter. But also due to the slowdown, we actually shut down production the last couple of weeks of December after we were notified by Boeing that they were ceasing production in January. That also had a big time impact to us. And then, as a result of that slowdown, we had accounting contracts that go-over periods, and so we had to split our accounting contracts, we had less units in the accounting contracts, which also had a negative impact on what I would construe to be a normalized margin in the fourth quarter.

So the bottom line is, Q4, as it relates to the slowdown and some of our initial efforts on quality and over time in the early part of the quarter, really had a negative impact on the fourth quarter profitability for the Fuselage segment. I would tell you, as we look at -- as we get into '22 and 2023 and get back to 47, 52, we will go back up and have the types of margins that you guys have seen in 2017 and 2018 timeframe. And, really, as unfortunate as the situation is, there is a little silver lining here. We're really doing a lot of things from a factory standpoint that will allow us to go back up in rate, much more efficiently, much more cost effectively and allow us to really have a good chance to reach those target margins that we have and Tom has indicated in the past of getting our gross margin to 16.5%.

Thomas C. Gentile III -- President and Chief Executive Officer

Yeah, Sheila, let me just add to that. I think that Mark summarized it pretty well, but the Fuselage margins were really impacted a lot by fixed overhead right now, which we're not absorbing. Once we get back to rates and we start absorbing that, we expect that, with all the cost reduction actions that we took in the Fuselage in terms of process improvements and supply chain, is the Fuselage margins will get back to the historic levels of 15% to 16%.

But one of the things we've been talking about the last few quarters and I think you really see it this quarter is, how Propulsion now is really growing in terms of margin. So the margin this quarter for Propulsion was 20% versus 16% last year. So we're really starting to see Propulsion go up. That's going to continue. We're going to see relatively stronger margins in Propulsion but the Fuselage margins will bounce back to their historic levels of the 15% to 16% range. And, as Mark said, the overall margin, our goal is, once we get up into the 42, 47 range again, is for that to be at about 16.5%.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay, great. Thank you.

Thomas C. Gentile III -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Myles Walton of UBS. Please go ahead.

Myles Walton -- UBS Securities -- Analyst

A couple of clarifications. One, I think, Tom, you mentioned 30% of the deliveries will take place in the first half and obviously implies starting production deliveries next month, I would guess. What's the contingent milestones to restart that production? Is there anything externally related to the certification that's actually required for you to start delivering and for Boeing to start accepting those fuselages?

Thomas C. Gentile III -- President and Chief Executive Officer

The answer is no. I think Boeing has decoupled the production from the recertification. They've said that the recertification they could expect it mid-year, but that they were going to potentially start the production system, so that they could maintain the viability of the supply chain earlier than that. So it's decoupled. Now there is all sorts of assumptions that will be built into this, but right now, the plans are to restart production even in advance of the recertification per the plans that Boeing has already announced.

Myles Walton -- UBS Securities -- Analyst

Okay. And then the other one of the clarification on Bombardier. I think you've mentioned closing in 2020. Previously you had talked about the first half of 2020. Is it now looking like it's moving to the second half or is it still on track?

Thomas C. Gentile III -- President and Chief Executive Officer

No, I think we're still on track for the first half. We've made all the regulatory filings and working through the detail closing. It's all on track. And I said 2020, but we still think first half is achievable.

Myles Walton -- UBS Securities -- Analyst

Okay, I'll leave it here. Thank you.

Thomas C. Gentile III -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, good afternoon.

Thomas C. Gentile III -- President and Chief Executive Officer

Hello.

Robert Spingarn -- Credit Suisse -- Analyst

Tom, I wanted to go a little high level here and move past, if we could, the disruption this year and next year and go back to your normalized free cash conversion around 7% to 9% of sales. And I think you've said, you're going to bounce back on margin. So the question is, can you bounce back to that on cash flow long term, taking into account the new businesses you've bought and how does that answer change if mature rate on MAX only gets to 52 and if 787 stays at 10?

Thomas C. Gentile III -- President and Chief Executive Officer

Right. The answer is, absolutely, we're committed to getting back to that level of cash flow generation. I think once the MAX gets back into the 42 range, that's a more normalized level of production for us, and with all the actions that we've taken in terms of cost and manufacturing process, our cash flow generation should be pretty good. The acquisitions all contribute positively and accretively to cash flow. So 7% to 9% is certainly our goal. Now, we're going to have a little bit of headwind with 787 at 10, but Boeing has indicated that they expect that to go back up to 12 once orders recover in Asia, in particular. So -- but even at 10, our goal is going to be 7% to 9%, once the MAX gets back up into the 42 range of production rate.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Our next question comes from Doug Harned of Bernstein. Please go ahead.

Caius Slater -- Bernstein -- Analyst

Hi, this is Caius Slater standing in for Doug. And so, I just want to go back to the Propulsion systems margins. Tom, you said you thought the margins are going to stay strong there. So a part of that has been the shift toward the MAX. Now that, shift's taking place and you've got a couple of years of lower MAX production, what are the other parts that you're seeing there and why are you confident in the margin outlook there? Thanks.

Thomas C. Gentile III -- President and Chief Executive Officer

Well, the reason we're confident in the margin outlook there is, we have the most change in the configuration of those parts. So it's the pylon and the thrust reverser. So if you look at the MAX, we always say it's about 35% different than the NG. But most of the change was in the pylon and the thrust reverser. so that meant we went out to the market and essentially sourced all new products with suppliers and we're able to negotiate good rates. So a lot of the benefit came from sourcing those new products for the pylon and for the thrust reverser. That certainly continues.

The other thing is, another program that we have our pylon on is the A220 and the A220 was at a fairly low rate when it was the C Series under Bombardier, now that Airbus has taken over the program, we've seen the rates really start to ramp up very significantly and will continue to do so. That program is a good program for us and that is also going to contribute to our Propulsion margins over time, particularly as the rates increase, now that it's the A220.

Caius Slater -- Bernstein -- Analyst

That's great, thanks.

Operator

Our next question comes from Hunter Keay of Wolfe Research. Please go ahead.

Michael Maugeri -- Wolfe Research -- Analyst

Hi, good morning. This is actually Mike Maugeri on for Hunter. Can you talk a little bit about what you're seeing in Airbus in regard to the A321, the ACF delays? Are you seeing lower shipset pulls from Airbus in the supply chain? Any color would be helpful. Thanks.

Thomas C. Gentile III -- President and Chief Executive Officer

I would say, we've seen a little bit of a mix shift. So some of the A321s we had in our skyline have shifted to A320s. And -- but the rates are, I would say, largely the same. We've just seen a little bit of a mix shift. And we continue to do rate studies for Airbus in terms of looking at higher rates in the future. And so as we see it, as they resolve some of the production issues they have in Hamburg with the A321 and open up the new production line in Toulouse, that will normalize over time. But at this point, all we've seen is some mix shifting between the A321 and the A320.

Michael Maugeri -- Wolfe Research -- Analyst

Thank you.

Operator

Our next question comes from Peter Arment of Baird. Please go ahead.

Peter Arment -- Robert W. Baird & Co. -- Analyst

Yes. Good afternoon, Tom and Mark. Tom, you didn't mention -- can we maybe just get a better understanding on the production side, how you're treating the fuselages that are in storage? How you're going to be feathering those into the production system?

Thomas C. Gentile III -- President and Chief Executive Officer

Right. So we've had about 120 in storage right now and they're all wrapped and stored on the ramp that is adjacent to McConnell Air Force Base. And so, the goal is, over the next couple of years, as we ramp back up to 57, is that by the time we get to 57, that inventory should be essentially burned off to the sustainable level that we want. And one of the things that we've learned through this whole process is having a buffer between Wichita and Renton is a very good thing. It enables us to catch things to ensure that there are no issues with train delays or anything like that.

So, we'll probably always keep 20 or 25 in a buffer, so that we can cushion the production system, and the goal is that by the time we get to 57, sometime out in the future, is we will be at that level. So we will, essentially lag Boeing's production rate. They'll go up higher than us and we'll burn that off, but we expect that this year the buffer will still grow from the 120, but then it will burn down over the next couple of years as Boeing goes up in production and goes above us until we both get to 57.

Peter Arment -- Robert W. Baird & Co. -- Analyst

Appreciate the color. Thank you.

Operator

Our next question comes from Michael Ciarmoli of SunTrust. Please go ahead.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Hey, good afternoon. Thanks for taking the questions. Tom, just on the -- back to the free cash flow I guess. To exit the year at free cash flow positive, what sort of rate should we expect to see? And I guess you know how ironclad is the contract with Boeing to produce that 216, you know, if we continue to see maybe certification slide?

Thomas C. Gentile III -- President and Chief Executive Officer

Well, the 216 is the agreement that we have with Boeing. It depends on a lot of assumptions and if things change, they obviously could change that. So that is not locked in stone. But I think, given the assumptions they made for a midyear certification of the MAX, we expect to do that. Now, as we said, it's going to be a little bit fluid, as Mark said, about 70% of that production will be in the back half of the year. So we're going to start off relatively slowly in March, April and May to let those production system kind of catch-up and catch its breath and then we have to flush through a lot of work and process over the next couple of months as well.

So again, if you look at over 10 months, the average -- because we started in March, 10 months, it's about 21 a month, start very low and then gradually increase over the course of the year. So, not quite sure where we'll end up the year, but 28 to 30, in that range is probably a good estimate.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. And then just a follow-up. I guess the 777X, is that going to be additive to cash flow as you guys get through or exit the year or how are you thinking about that program?

Thomas C. Gentile III -- President and Chief Executive Officer

Well, as you know, the 777X schedule is pushing out and so we expect to see a little bit of headwind this year in terms of number of units that are in the skyline and those units are going to shift more toward 300ER on the freighter in a way from the X. So that's probably a little bit of headwind this year compared to last year. But, again, once that program is out, I mean, it had its first flight, it was terrific. I saw the aircraft just before it took its flight and with those folding wings, it's a spectacular aircraft. It's got a great outlook for it. And once the order start building and they get back up to the rates, five aircraft per month and potentially even above that, that will be a very strong program for us. But this year, it's a little bit of a headwind because of the delay.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. Thanks guys.

Operator

Our last question is a follow-up from David Strauss of Barclays. Please go ahead.

David Strauss -- Barclays Capital -- Analyst

Thanks for taking the follow-up. So Mark, it was helpful, your description of how the accounting will work on the MAX. At what rate -- you're saying you're going to have periodic costs when we're below normal in terms of production. At what rate would you not expect to be taking these costs -- these periodic costs and they would flow through the block in a normal way?

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

I would say, once you get to a rate of about 32, we get back to what will continue to be normal type production in the factory and therefore wouldn't be required to be recording these as abnormal or idle production costs. So for the most part, you're going to see the abnormal cost end up being periodic cost primarily here in 2020. There might be a little bit of bleed into 2021, but it will be mainly contained in 2020.

David Strauss -- Barclays Capital -- Analyst

Okay. And one other follow-up. Tom, you know, As you think about going back up in rate, can you talk about potentially the need to hire back labor and your ability to potentially call back or bring back experienced labor rather than green labor?

Thomas C. Gentile III -- President and Chief Executive Officer

Right. Well, our preference would be to bring back the people that we laid off. This was a difficult decision to have to make. These are our colleagues that we worked with every day and there were 2800 people in Wichita and about 400 people in Oklahoma. So the first goal would be to get those individuals back. Now of course, given that this production slowdown period could last up to a year, a year and a half, before we're going to need all of those people, they're going to look for new work. And we've actually been organizing job there in both Wichita and in Oklahoma with a goal to get as many people as possible, jobs in the local area because that's where they would prefer to live.

Now, we've also been talking to other companies, suppliers, customers who are out of state not in Kansas or Oklahoma. They've been coming in as well. And so some people may leave the state, but the people who live here in Wichita really like living in Wichita. And so when they have jobs, we're confident we can get a lot of them back. But even if we can't, this area has always been a very fertile ground for experienced aircraft mechanics, and engineers. And so we're confident that we'll be able to tap the area and get the people we need as we go back up in rate. But our first obligation and commitment and desire is to bring back all of the 2800 people in Wichita and the 400 people in Oklahoma that were part of the layoffs earlier this year.

David Strauss -- Barclays Capital -- Analyst

Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Ryan Avey -- Director, Investor Relations

Thomas C. Gentile III -- President and Chief Executive Officer

Mark J. Suchinski -- Senior Vice President and Chief Financial Officer

Carter Copeland -- Melius Research -- Analyst

Jon Raviv -- Citigroup Global Markets -- Analyst

David Strauss -- Barclays Capital -- Analyst

Seth Seifman -- J.P. Morgan -- Analyst

Cai von Rumohr -- Cowen and Company -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Myles Walton -- UBS Securities -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Caius Slater -- Bernstein -- Analyst

Michael Maugeri -- Wolfe Research -- Analyst

Peter Arment -- Robert W. Baird & Co. -- Analyst

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

More SPR analysis

All earnings call transcripts

AlphaStreet Logo