August 7, 2013

Analyst: Spirit ‘not out of the woods yet’

As Spirit AeroSystems announces plans to record a hefty charge on its Gulfstream business jet programs going forward, Spirit is “not out of the woods yet,” one analyst said in a note to investors.

As Spirit AeroSystems announces plans to record a hefty charge on its Gulfstream business jet programs going forward, Spirit is “not out of the woods yet,” one analyst said in a note to investors.

Questions remain on Spirit’s Airbus A350 XWB program.

The “A350 shoe (is) yet to drop,” Sterne Agee analyst Peter Arment wrote Wednesday. A sizable write-down on the Airbus program would not come as a surprise.

Spirit is evaluating the program.

“With the A350 program not yet in production and still in potential re-design phase, (Spirit) would not commit to finishing the review by year end,” Arment wrote.

Spirit has the opportunity for $2 billion in revenue on components it will build for the first 400 A350 commercial airliners, Arment said in the report. But “given the scope of the A350 program, we would not be surprised to see its write-down equal the Gulfstream programs.”

Spirit said Tuesday it plans to take a $350 million to $400 million pre-tax charge primarily related to its Gulfstream programs because costs are expected to rise in the wing segment during the years 2014 to 2021.

That will bring Spirit’s total write-downs for the Gulfstream programs — work on G280 and G650 business jets — to $600 million to $650 million.

Spirit also announced Tuesday that it plans to find a buyer for its Oklahoma facilities in Tulsa and McAlester.

Last year, it took a hefty $590 million charge in the third quarter on its new development programs, not including the A350.

Despite this week’s news of the charge on Gulfstream programs, “without a reset of the A350 program and divesting Oklahoma sites, (Spirit) CEO (Larry) Lawson has not yet cleared the decks,” Arment wrote.

Spirit has postponed release of its second quarter earnings because auditors have not yet completed their review of the company’s financial information.

The company builds the center fuselage frame sections for the A350 in Kinston, N.C., and ships them to its plant in St. Nazaire, France, for assembly and delivery to Airbus.

On a conference call with analysts Tuesday, a Spirit executive declined to say whether Spirit is anticipating more charges – on the A350 program or other programs during the second quarter.

“When we report our earnings later, we will talk about all the details around the rest of the performance of the company,” Spirit chief financial office Philip Anderson said.

Spirit officials did say they expect to report a 13 percent increase in revenue in the second-quarter results and better operating performance.

Lawson told analysts that Spirit is making “great progress” on the A350.

“We’re really just focused on the development — we’re early in the development phase of it so we’ll continue to ... just focus on delivering as part of the development program, that will continue to mature” Lawson told analysts.

It’s apparent that despite negative news, the underlying core business at Spirit remains strong, Sam Pearlstein senior analyst at Wells Fargo Securities said in an analyst report.

“We believe the divestiture of the problem Gulfstream programs reduces the risks for Spirit in future periods,” Pearlstein said.

A sale of Spirit’s Oklahoma facilities could generate about $500 million to $600 million in gross proceeds, he said.

Spirit’s decision to sell its Oklahoma operations makes sense, Cowen and Co. analyst Cai von Rumohr said in a report to investors. But it’s unclear whether it will be cash positive given the Gulfstream charges.

“It’s unclear if potential buyer’s synergies and Tulsa programs’ franchise value will outweigh their cash liabilities given Boeing and Gulfstream’s (approval) will be required to transfer the contracts,” von Rumohr wrote.

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