Spirit AeroSystems to take $350 million charge, plans to sell Oklahoma operations

08/06/2013 8:55 AM

08/08/2014 10:18 AM

Spirit AeroSystems plans to take a $350 million to $400 million pre-tax charge related primarily to the Gulfstream business jet program because of expected cost increases, the company said Tuesday.

It also has begun a process to sell its operations in Tulsa and McAlester, Okla., as it works to improve operations and cut costs.

Spirit employs about 2,400 people in Tulsa and about 300 in McAlester.

“The decision is about where Spirit can best differentiate itself in the aerostructures marketplace and about future allocation of resources,” Spirit CEO Larry Lawson said in a letter sent to employees Tuesday morning.

It was a difficult decision, he said.

“I can assure you that we didn’t come to this divestiture decision lightly; it was made after careful evaluation, and we are confident in the value of these sites. They include good people and solid programs with products in high demand.”

The Oklahoma sites are performing well and improving.

However, Lawson said, “We believe these programs may better align with another company’s strategy and core competencies.”

It’s worth exploring whether there’s a better owner who is interested in growing within this market, Lawson told analysts in a conference call Tuesday.

“If we turn out to be the best owner, we will be proud to own it,” Lawson said.

Last month, Reuters reported that British aerospace and car parts maker GKN was interested in buying a Spirit AeroSystems wing factory in Tulsa and that the U.S. company had hired Morgan Stanley to find a buyer, according to three people familiar with the matter.

The 1.9 million-square-foot Tulsa factory next to the Tulsa International Airport produces wing structures and other components for Boeing 737NG, 747, 777 and 787 jetliners. It builds the wings for the Gulfstream G280 and G250 business jets. It also rebuilds Airborne Warning and Control System radomes, and it has worked on the AC-130 U Gunship and Joint Unmanned Combat Air System.

Spirit’s 135,000-square-foot plant in McAlester, 90 miles from Tulsa, builds parts and subassemblies.

The sale of Spirit’s Oklahoma operations would include facilities, tooling, equipment and programs – “the entire site as an ongoing operation,” Lawson said.

The company said it would package the deal in different ways based on buyers’ interests, Lawson said.

“We’re going to entertain all offers,” he said.

Spirit executives did not say whether they have a buyer in mind.

Analysts have said that the Oklahoma operations have been a source of many of the cost overruns.

“If they were successful in divesting that facility, a lot of the write-off exposure would, in fact, go away,” Michael Callahan, vice president of equity research at Topeka Capital Markets, told Reuters.

The news of a proposed sale comes as Lawson, a former Lockheed Martin executive who replaced Jeff Turner as CEO in April, works on an ongoing comprehensive strategic review of the company’s operations.

Last month, Spirit laid off 360 salaried support and management employees in Wichita and Tulsa. It did not release how many were cut from each site.

“We are reviewing every single program,” Lawson told analysts Tuesday.

The review is expected to be completed by the end of 2013, he said. But the execution of any resulting plan and continuous improvement will be ongoing.

Going forward, Spirit “will be much more thoughtful and disciplined on our future commitments,” Lawson told analysts, including what work it precipitates, its contracts and other issues.

The company made a number of decisions in the 2005-07 time frame, when it brought on new work.

“We’ll continue to work our way through the programs” and focus on the fundamentals, such as cost structure, he said.

The divestiture and pre-tax charges are not related, Lawson said. The charges are primarily related to cost-growth forecasts on the wing segment during 2014 to 2021 with minimal cash flow impact in the current period.

The charges are the result of a better understanding of labor and material costs, he said. “And they are mostly in front of us.”

They also are an indication that Spirit’s cost structure continues to drive expenses that are too high, Lawson said in the letter to employees.

“While these results don’t tell our full story, they are the hard data by which we are measured, and clearly we have to demand more of ourselves,” Lawson said in the letter. “Changes are never easy, but Spirit must make dramatic improvements in order to keep our company healthy in a competitive environment.”

Spirit must do what any good competitor does, he said.

“When we get knocked down – we get back up, shake it off and bring our ‘A-game’ to get back on the winning track,” Lawson said in the letter.

The company is intensifying its focus around four key items: disciplined decision making and market focus; performance; cost; and cash flow, he said.

“The good news is, although we have challenges, we also have some great fundamentals to work with,” Lawson said in the letter. “Spirit has a strong team, we are on the right programs, with a $38 billion backlog, we bring differentiating capability to the marketplace. And we are focused on strong program performance and cash generation.”

The Wichita-based company said Tuesday it also was postponing the release of its second-quarter earnings, saying the company’s auditors have not completed their review.

Spirit expects to record second-quarter revenue of $1.51 billion, up 13 percent from $1.341 billion for the same period a year ago, the company said.

Excluding the charge, Spirit also expects to report second-quarter 2013 financial results that reflect continued strong demand for large commercial aircraft and strong mature program operating performance, according to information released by company officials.

In addition, Spirit has amended its senior secured loan and credit facility to suspend the financial covenants on the debt until the fourth quarter in 2014. Instead, it will be subject to a liquidity covenant with any revolving credit draws subject to borrowing base limitations. The company has not defaulted on its debt.

The news of Tuesday’s charge comes after Spirit took a hefty $590 million charge in the third quarter of 2012 on its new development programs, a move that surprised analysts and one that caused Spirit’s stock to drop 30 percent.

“With a new CEO, optimism had been growing that Spirit was a turnaround story this time,” RBC Capital Markets analyst Robert Stallard wrote in a report to investors. “Today’s developments – another massive charge, the delayed results, the covenant changes – are likely to again test investors’ patience and willingness to keep believing that this is the last time Spirit will do this. Wanting to sell Oklahoma is different than actually selling it, and any potential buyer will be well aware of the charges that Spirit booked – and the negative cash flow still ahead on these contracts.”

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.

Over the decades, the site has built parts for the Apollo spacecraft, Saturn rocket, the space shuttle, the B-1B, Global Hawk, the International Space Station, Joint Strike fighter and Boeing commercial airliners.

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