Efforts to rein in costs lead to higher profits for Spirit

Spirit AeroSystems said Wednesday the company will look for way to continue to rein in costs, even while preparing for production increases on several airplane programs.

The Wichita-based supplier said Wednesday that revenue for the three-month period that ended March 31 was $1.74 billion, compared with $1.72 billion in the first quarter of 2014.

Net income was $182 million for the quarter, compared with $154 million in the same period in 2014.

Spirit CEO Larry Lawson said in a conference call with analysts Wednesday that the company is benefiting from performance improvements and cost reductions, and a healthy demand for the aircraft components it makes.

“As you are aware, the market for commercial aircraft remains robust,” Lawson said, “and global air traffic continues to grow.”

He said the company will continue to focus on performance and cost reductions, while preparing for production increases on the Boeing 737 and 787, and the Airbus A350XWB.

Those preparations will include more than $100 million in investments this year in “automation projects” that Lawson said will help Spirit meet its production and cost reduction goals in 2015, and rate increases in the next few years.

Spirit is gearing up for rate increases on the Boeing 737 — from 42 a month now to 47 a month by 2017 — and the 787 — from 10 a month now to 12 a month by 2016. Production rates are also set to increase on the A350, though officials did not disclose specifics.

“Our goal is to execute a seamless ramp-up as we continue to reduce costs,” Lawson said.

Sanjay Kapoor, Spirit’s chief financial officer, said on the call that the company recorded higher deliveries year-over-year on three commercial airplane programs.

Kapoor said Spirit delivered 134 737 fuselages in the first quarter of 2015, up by nine from the 125 it delivered in first quarter 2014. It also delivered 135 A320 wing shipsets in the first quarter, seven more than a year ago. And it delivered six A350XWB shipsets — including the center section of the airplane’s fuselage as well as parts of its wings — in the first quarter 2015. That compares with two A350 shipsets it deliverd in the first quarter of 2014.

Kapoor also said that the company is making improvements on the 787 program by shaving $23 million in costs from deferred inventory. But Kapoor said pricing pressure will increase on its 787 work as the company delivers more of the airplane’s forward-fuselages and other components. That is, as it delivers more 787 components, the amount of money it receives for them decreases because it is assumed contractually that Spirit’s cost of making those components declines as well.

“We’re challenging ourselves to stay below the step-down pricing,” Lawson added.

Peter Arment, a Sterne Agee CRT analyst who follows Spirit, said he thinks the company will avoid any impact on lower pricing from the 787 program.

“There’s no question, I think they’ve made a tremendous amount of progress on the 787 program, both on the (787)-8 and (787)-9,” Arment said on Wednesday. “Clearly there’s always pressure when adjusting to new pricing agreements. So far they’ve been able to show solid progress on staying out in front of these adjustments.”

The company also disclosed that it had settled its arbitration with Gulfstream, although officials declined to disclose the details of the settlement. Spirit was seeking damages from business jet manufacturer 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 in 2014.

“It was fair, and we’re very pleased with how it turned out,” Kapoor said of the settlement.

Spirit said it was leaving its expectations for full-year 2015 revenue unchanged at between $6.6 billion and $6.7 billion.

Its backlog at the end of the first quarter of 2015 was $46 billion, which Kapoor said accounts for “ approximately seven years of sales visibility.”

Spirit’s backlog was $41 billion in the first quarter of 2014.

This story was originally published April 29, 2015 at 7:55 AM with the headline "Efforts to rein in costs lead to higher profits for Spirit."