Spirit AeroSystems delays earnings, to shed Oklahoma unit

Tue Aug 6, 2013 2:24pm EDT

(Reuters) - Spirit AeroSystems Holdings (SPR.N), a supplier of parts to Boeing Co (BA.N) and Airbus EAD.PA, on Tuesday said it plans to sell its Oklahoma operations and delayed its quarterly earnings report.

The company, which is looking to drive down expenses after past stumbles with cost overruns on airplane programs, said it expects to record a big charge to second quarter earnings, which it had been due to report on Tuesday. Its shares fell nearly 3 percent.

Spun off from Boeing in 2005, Spirit makes critical parts for popular planes such as the Boeing 737 and Airbus A320 as well as wing parts for Bombardier (BBDb.TO) and Gulfstream (GD.N) business jets. The company's sales are benefiting from rising commercial aircraft production, and Spirit added second quarter sales rose 13 percent to $1.52 billion.

Cost overruns have hurt profitability in recent years. Spirit said it expects to take a pretax charge of $350 million to $400 million against second-quarter results related to anticipated cost increases from 2014 to 2021 in Gulfstream business jet programs.

The Oklahoma operations in Tulsa and McAlester slated for divestiture employ 3,000 workers, nearly 20 percent of Spirit's total workforce of about 16,000. The facilities handle wing design for the Gulfstream G280 and G650 business jets and development of wing parts for the Boeing 737, 777 and 787.

Reuters reported on July 26 that British aerospace and car parts maker GKN Plc (GKN.L) was interested in buying a Spirit wing factory in Tulsa, citing three people familiar with the matter. A British newspaper also reported at the time that GKN was looking to purchase the whole of Spirit.

During a conference call on Tuesday, company executives said they expected to talk with a number of potential buyers of the Oklahoma unit but declined to comment on whether Spirit had received any indications of interest.

COST OVERRUNS

The Oklahoma operations have been the source of much of the cost overruns that have resulted in charges for Spirit in recent years, according to analysts.

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

The proposed sale of the Oklahoma operations comes as Larry Lawson, a former Lockheed Martin (LMT.N) executive named Spirit chief executive in March, reviews the company's operations. Late last month, Spirit announced it was laying off about 360 workers in Kansas and Oklahoma to cut costs, the first layoffs since the company went public.

The delayed second-quarter results and the expected charge may indicate that Spirit's operational challenges are not behind it, analysts said. In postponing its quarterly report, Spirit said auditors had not finished their review.

"With a new CEO, optimism had been growing that Spirit really was a turnaround story this time," RBC Capital Markets analyst Robert Stallard said in a note to clients. He said the news of the earnings delay and expected charge "are likely to again test investors' patience and willingness to keep believing that this is the last time Spirit will do this."

Selling the Oklahoma operations may not be easy, analysts added.

"It would be kind of difficult to find a buyer who's really willing to really put up a significant price because (the unit is) operating at a pretty significant loss and is somewhat of an unknown liability as far as how far the cost overruns might reach," said Callahan.

Callahan said he felt a sale of the entire company was unlikely, as Boeing, which accounts for roughly 80 percent of Spirit AeroSystems sales, would likely need to support such a move.

On Monday, the Society of Professional Engineering Employees in Aerospace (SPEEA) union sent a letter to Spirit's board expressing concern that outsourcing and layoffs were hurting work quality and productivity. The letter said union contract provisions were being reinterpreted in ways not explained.

"We are concerned that management is steering the company into a death spiral," the letter said.

In response to the union letter, Spirit said on Tuesday it had previously explained reasons for the layoffs and had nothing else to add.

Shares of Spirit were down 2.8 percent, or 73 cents, at $25.06 in afternoon trading on Tuesday.

(Reporting by Karen Jacobs in Atlanta; Editing by Gerald E. McCormick, John Wallace and Chris Reese)