Spirit AeroSystems said Tuesday that it had reached an agreement with Triumph Group, Inc. to take over production of its money-losing Gulfstream wing work at Spirit’s facility in Tulsa, Okla.
The complicated deal includes both the G650 and G280 wing programs, the companies report.
The deal is expected to close by the end of the year.
“The Triumph Group emerged as the preferred owner of the Gulfstream wing programs following a rigorous bid process, and the deal offers compelling positives for both companies,” Spirit AeroSystems CEO Larry Lawson said in a statement. “We thoroughly evaluated all of our options and made the best decision for the company, our people and our customers. “
Triumph, based in Berwyn, Penn., designs, engineers, builds, repairs and overhauls aerostructures, aircraft components, accessories, subassemblies and systems.
In the agreement, Spirit will give Triumph a $160 million cash payment at closing, the companies said.
The deal also includes roughly $60 million to $80 million in inventory, tooling, machinery, equipment and other assets needed to take on the business.
The work will remain in Tulsa.
Of the 2,700 Spirit employees in Tulsa, about 800 to 900 work on the Gulfstream programs, Spirit spokesman Jarrod Bartlett said.
All Spirit employees who support the Gulfstream programs including those represented by the United Aerospace Workers, will be offered positions with Triumph at the same wage rates, Triumph said in a statement.
Triumph will sublease the building where the Gulfstream work is taking place, Bartlett said.
A Spirit site in McAlester, Okla., which builds some components for both programs, is not affected by the deal.
Spirit also builds wing components for Boeing’s 737, 747, 777 and 787 at its Oklahoma facilities.
“As for the other Tulsa programs, we are taking a pause in the process to evaluate the remaining work,” Lawson said in the statement.
There was no timetable given for the process of reaching a decision on the other Tulsa operations.
The transaction is an estimated loss to Spirit in the range of $205 million to $235 million ($1.45 to $1.65 per diluted share), the company said.
Overall, however, Spirit will gain a cash tax benefit from the deal of about $220 million to $230 million, it said.
Although the deal took much longer to complete than expected, the transaction benefits both Spirit and Triumph, analysts said.
Spirit has had its Tulsa operations up for sale for more than a year, as the company worked to better align its programs and costs with its resources.
“It’s been a complicated transaction for us,” Jeff McCrae, Triumph’s senior vice president and chief financial analyst, told analysts on a conference call Tuesday. “We’ve been engaged in this for a number of months.”
The two programs have performed poorly.
Spirit has been open with Triumph about the problems, McCrae said.
Triumph took time to fully understand where they were and see what kind of improvements could be made, he said.
The deal has advantages for Triumph, which already builds components for Gulfstream wings on two other programs.
“It’s an excellent strategic fit,” Jeff Frisby, Triumph president and CEO, told analysts on the conference call.
The programs are a logical extension of Triumph’s capabilities, Frisby said.
It further establishes Triumph as a leader in wing design and enhances its strong relationship with Gulfstream, he said.
The G650 and G280 wing programs will add about $250 million in annual revenue to Triumph.
It gives Triumph significant content on the two programs that have an attractive backlog and market. And it will help replace revenue for some programs that are sunsetting, Frisby said.
Spirit’s $160 million payment in the transaction is expected to cover Triumph’s cash losses on the G650 and G280 programs for the first three years, Triumph said.
Triumph expects the programs to turn cash positive in 2018.
In the deal, Triumph amended long-term agreements on the two programs with Gulfstream and with Israel Aircraft Industries to help support the transaction, it said.
Triumph also will bring back work once done in Tulsa but now done by Gulfstream.
That work will be pulled into another Triumph facility.
Long term, the challenge will be execution, Frisby said.
Triumph expects to be able to improve costs from supply chain agreements and labor enhancements, the company said.
The biggest opportunity for savings is expected in the supply chain, Frisby said,
For example, when Triumph bought Vought, a number of suppliers, worried they would lose work because of Triumph’s in-house capabilities, offered discounted prices to try to preempt it from moving, he said.
In addition, Triumph will recognize the UAW as a representing body for its Tulsa workforce, Frisby said in the conference call.
Most likely, the company will engage in discussions for a bargaining agreement for employees represented by the union, he said.
In September, UAW members at Spirit overwhelmingly rejected an offer of a new contract for those working on Gulfstream projects.
Some experts had speculated that a transaction might wait until arbitration between Gulfstream and Spirit is settled.
Spirit is seeking damages from Gulfstream for incomplete payments to Spirit for the manufacturing of G650 wings and other damages and relief, according to a Spirit filing with the Securities and Exchange Commission.
Gulfstream has filed a counterclaim against Spirit in the arbitration and seeks liquidated damages for delayed wing deliveries and other damages and relief, the filing said.
The two parties have selected arbitrators and expect a hearing to take place in the first quarter of 2015.
Spirit’s Tulsa plant began in 1962 as North American Aviation, which built the Hound Dog Cruise Missile for the U.S. Air Force.
In 1967, the company merged with Rockwell Standard Corp., becoming Rockwell International.
Boeing bought the operation from Rockwell in 1996.
The Oklahoma operations were included in the 2005 transaction when Boeing sold its Wichita commercial aviation operations to Onex Corp., becoming Spirit.