Spirit Posts $590 Million Charge as New Jets Tax Output

Spirit Plunges Most Since 2008 on Charges Tied to Jet Parts
Jeff Turner, chief executive officer of Spirit AeroSystems Holdings Inc., poses for a photograph in Farnborough, U.K. Photographer: Matthew Lloyd/Bloomberg

Spirit Aerosystems Holdings Inc. dropped the most in four years after recording $590 million in charges as it struggled to develop and build parts for multiple new jets, including Boeing Co.’s Dreamliner, at the same time.

The company said today it no longer believes it can meet its financial forecasts after Boeing’s delays on the 787 meant the development and production ramp-up collided with other new models Spirit had agreed to help build. Spirit is struggling with its own suppliers on capacity and costs, as planemakers around the world boost output simultaneously.

“I’m extremely disappointed in how we’ve managed this complexity,” Chief Executive Officer Jeff Turner said on a call with analysts and investors. “I underestimated the organizational learning required.”

Spirit is juggling new products and expanding its customer base, still dominated by former parent Boeing, which spun it off in 2005. Planemakers have increasingly turned to suppliers such as Spirit to share the risk of developing new jets. Spirit makes sections for every Boeing model and is also working on new aircraft such as the A350 from Airbus SAS and the CSeries from Bombardier Inc.

Spirit dropped 30 percent to $15.11 at 4:02 p.m. in New York trading after a 34 percent drop that was the largest on an intraday basis since September 2008. The stock’s plunge erased about $1 billion in market value. At day’s end yesterday, the company was valued at $3.11 billion, according to data compiled by Bloomberg.

Greater Magnitude

The partsmaker noted the risk of more charges or a so-called forward loss in an August regulatory filing because of low margins on new components for planes including those by General Dynamics Corp.’s Gulfstream.

Still, the magnitude “is much greater than anybody would have expected,” Ken Herbert, an analyst with Imperial Capital LLC in San Francisco, said in an interview. “Clearly this brings into question a lot of the issues that plagued the company in 2009 and 2010 regarding execution of these programs that we thought had largely been put to rest.”

The 787 charge was particularly surprising because Spirit had been touting improvements made in costs for that program, as recently as last month, Joseph Nadol, an analyst with JPMorgan Chase & Co. in New York, wrote in a note.

Spirit makes sections of the wing and the fuselage for the Dreamliner, the world’s first jetliner built of composites. The plane was more than three years late when it entered service last year after Boeing struggled with the new materials and manufacturing processes.

‘Biggest Risk’

“The biggest risk for Spirit has been and continues to be the 787,” Turner said today.

The company had to postpone its plan to move some of the work to Malaysia from Tulsa, Oklahoma, because of unspecified problems in meeting the schedule. That pushed back the timing of expected savings from the move, said Ken Evans, a spokesman.

Some of the issues were internal and cost-related, and didn’t hurt Boeing, Turner said. While some shipments were delayed, Spirit met its contracted delivery schedule, he said. The company is building sections for 3.5 787s a month now and increasing the rate to 5 a month as it works to meet Boeing’s promise to double that rate by the end of next year.

The third-quarter charges include $184 million with the 787 program, a combined $314 million for the Gulfstream G650’s wing work and engine-nacelle package and $88 million for the G280’s wing development, Spirit said.

‘Very Complex’

The charges would reduce earnings per share by $2.90, Spirit said. An insurance settlement related to tornado damage earlier this year would temper that by $1.08, for a net cost of $1.82 a share.

The company is working to negotiate long-term contracts with its suppliers, which are “quite full with Boeing and Airbus work,” Turner said.

Both planemakers are pushing production above current record levels to meet demand for more fuel-efficient jets. That has made it harder to get the capacity and prices that Spirit had expected, Turner said. Contracts should be in place by mid-2013, he said.

“We doubt Spirit will see much success wringing savings from customers or suppliers, and so the risk of further charges remains,” Rob Stallard, an analyst with RBC Capital in London, wrote in a note after the call. “We had expected a charge from Spirit this quarter, but the hit was 10 times larger than our modest $50 million placeholder.”

Spirit Chief Financial Officer Phil Anderson said the charge may pressure cash flows through 2018, with larger effects in the next few years. The company’s free cash flow has been negative each year since its inception, said Nadol, who has a neutral rating on the stock.

Spirit said its lenders have approved amending credit-agreement ratios while the Wichita, Kansas-based company addresses the charges, and no default has occurred.

The partsmaker said it will give more details when it reports third-quarter earnings on Nov. 1. Analysts had projected, on average, adjusted profit of 54 cents a share on $1.35 billion in sales.

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