Spirit AeroSystems’ big losses surprise analysts

02/06/2014 9:47 AM

08/08/2014 10:21 AM

Spirit AeroSystems – Wichita’s largest private employer – recorded a net loss of $587 million in the fourth quarter of 2013, in part because of additional charges on the Boeing 787 Dreamliner program, the company reported Thursday.

That compares to a profit of $61 million for the same time a year ago.

The loss and additional charges surprised some analysts. Spirit stock dropped 20 percent on the news, closing at $26.51 a share, a decline of $6.46.

The announcement follows two quarters of “big charges that may have left investors thinking the big programs were sufficiently kitchen-sinked and de-risked,” Steven Cahall, an aviation analyst with RBC Capital Markets, said in an analyst report to investors.

Spirit took a total of $546 million in pretax charges – essentially a loss on the program – during the fourth quarter on a variety of programs. That includes $385 million for the Boeing 787 program; $54 million for the Gulfstream G650 wing program; $43 million on the Gulfstream G280 wing program; $31 million on the Boeing 747-8 program; $22 million on the BR725 nacelle program; and $11 million on the Boeing 767 program, it said.

Charges on the 787 were unexpected, said Peter Arment, an aerospace analyst with Sterne Agee. Not mentioned in the list of charges was the Airbus A350 program, another new program under development, which “leaves significant program risk,” Agee wrote in a report to investors.

For the year, Spirit recorded a loss of $621 million, compared to a profit of $35 million in 2012. Revenue for 2013 increased 10 percent to $6 billion.

For 2014, Spirit is forecasting revenue of $6.5 billion to $6.7 billion, based on Boeing’s 2014 delivery guidance of 715 to 725 commercial airplanes. Airbus is expected to deliver similar levels.

Spirit, headquartered in Wichita, employs about 16,000 people, including 10,800 here. It also has operations in Chanute; Kinston, N.C.; Tulsa and McAlester, Okla.; Nashville, Tenn.; Prestwick, Scotland; St. Nazaire, France; and Malaysia.

It builds airplane components for all Boeing commercial aircraft as well as components for Airbus, Gulfstream, Bombardier and Mitsubishi.

During the quarter, Spirit delivered strong operating performance across mature programs, increased 787 delivery to 10 airplanes a month and continued to work on the sale of its Oklahoma operations, said Spirit CEO and president Larry Lawson.

The company also is digesting its new programs and is focused on improving cash flow, performance and costs. In the longer term, Lawson told analysts on a conference call, Spirit is looking to grow.

“We believe we’ve set a path to stabilize and grow our business,” Lawson said.

Last year was a transformational one, he said.

“It’s been hard work,” Lawson said in a statement. “We’ve conducted our reviews; we’ve sharpened our processes and our team, and we have intensified the clarity and fidelity of the analyses.” A nine-month internal strategic and financial review has also been finalized.

The company is better positioned to move forward as it increases commercial airplane production to historical high rates, Lawson said. Spirit’s backlog totals $41 billion.

Spirit is continuing to work with potential buyers on the sale of its Oklahoma operations in Tulsa and McAlester, Lawson said. However, it will keep the operations if things don’t work out with a buyer, he said.

Tulsa builds wing components and floor beams for Boeing, wing components for Gulfstream and parts for the E-3 Airborne Warning and Control System program and other government programs.

“It’s a really good business, especially in this long cycle of the commercial aviation business,” Lawson said. “If things don’t work out, we’ll be the proud owners.”

The rationale around shedding the Tulsa facilities appears intact, Cahall wrote in an analyst report. The Tulsa facility is more of a “build-to-print” operation and not one of Spirit’s “traditional manufacturing power lane.”

Lawson’s comment that Spirit could keep the facility could mean a number of things, Cahall wrote, including a change of thinking or that potential buyers aren’t offering what Spirit thinks it’s worth.

“Either way, we think the divestiture is seen as a significant future catalyst, the loss of which is incrementally negative,” Cahall wrote.

On the 787, more work lies ahead. Spirit took a $385 million pretax charge for the 787 during the fourth quarter.

Program costs are coming down. However, “we have step-down pricing on our contracts,” with Boeing, said Sanjay Kapoor, Spirit chief financial officer. That means price declines are built into the contract.

“That does matter,” he said.

Spirit performed an exhaustive analysis of the 787 program, including how it relates to costs. The 787 cost reduction “curve” is great, Spirit noted, but that’s being offset by the step-down pricing, Cahall wrote.

Cost visibility on the 787 program will likely carry through 2014, he said. “But it was noted that 2015-16 will be challenging, and probably include the next set of pricing reductions.”

The 787 program already is at zero margin, Cahall noted.

“So if (Spirit) can’t hit its 787 cost targets in time, then there are further charges ahead,” he wrote.

By the end of 2013, Spirit had delivered 164 787 fuselages.

Spirit also remains in negotiations with Boeing on a master contract for pricing of parts it builds for Boeing commercial airplanes.

“We continue to meet with Boeing, and we continue to work on trying to reach an equitable agreement for both parties,” Lawson said. “The conversations have become more refined and more data driven. We’re going to continue to work with them … to figure out a way to bring this to an equitable conclusion.”

Going forward, Spirit is working to make “smart decisions” relating to the terms of work it becomes involved in and the ability to estimate that work, Lawson said. It wants to make sure the jobs Spirit takes on aligns with its core competencies, he said.

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