Spirit AeroSystems Holdings Inc (SPR.N) on Thursday warned of sizeable cost overruns on parts it supplies to major aircraft makers, sending its stock tumbling more than 30 percent.
The Wichita, Kansas-based company, which makes structures for wings, fuselages and other parts for Boeing(BA.N), Gulfstream, Airbus and other aerospace firms, said it would take a net pretax charge of about $371 million, or $1.82 a share, in the third quarter.
The charge relates to Boeing's 787 and several Gulfstream business jets. It resulted from Spirit's efforts to schedule production, take on more work and deal with design changes on a wide range of products at the same time.
Spirit said its lenders had agreed to adjust certain loan and credit facilities to accommodate the charges. The company noted that it had not defaulted, and that its cash position had improved substantially this year.
"I'm extremely disappointed," Spirit Chief Executive Jeff Turner told analysts. "As we have consistently described, the biggest risk for Spirit has been, and continues to be, the 787."
Turner said efforts to diversify and grow had "proven very complex" and that the company was applying "lessons learned".
The news caught investors and analysts off guard. The stock dropped as much as 34 percent before closing down 30.2 percent at $15.11, erasing nearly $1 billion in market value.
The charge likely will eliminate the company's profit for the third quarter, though not for the year. Analysts had expected Spirit to post 53 cents a share in profit when it reports earnings next week.
It also raised questions about Spirit's ability to supply big jet makers with the parts they need as they speed up production to cash in on big order backlogs.<ID: nL1E8LMNRQ>
Boeing said it doesn't comment on contracts with suppliers.
"Spirit is an important supplier and is supporting our production ramp-up across the commercial airplanes business," Boeing spokesman Marc Birtel said. "The ramp up is progressing to plan."
Analysts also said they didn't see an immediate problem with deliveries, but some said the warning raised concerns about future turbulence at the company.
Carter Copeland, an analyst at Barclays, said he highlighted cost overrun risks on one of the products - related to Gulfstream G280 jets - earlier this month and said there was risk of contagion to others.
He said Spirit's ability to deliver would likely stay on track.
"As a former division of Boeing, they know what it takes to hit delivery schedules even if it costs extra," he said.
Others suggested there could be more disruption ahead, possibly in management.
"You don't have a 30 percent cut in the value of the stock and not have the board asking questions," said an analyst who spoke on condition of anonymity because of concerns about retribution.
Analysts also questioned Spirit's ability to forecast its performance, given that the charge was so large, and that the company has a history of recording charges for plane programs.
"How could you have made a miss quite that big and not seen it earlier?" an analyst asked on a call with Spirit CEO Turner and CFO Phil Anderson.
Turner said it is negotiating with its suppliers for long-term contracts at lower prices that will allow it to book profits on the assembly it makes for the big jet makers. "We're getting significant improvement, but not to the level we had forecast," Turner said.
The charges totaled $590 million, but the company said it plans to partly offset it with a gain of $219 million, or $1.08 a share, from a severe weather insurance settlement.
The largest single charge is $184 million relating to wing structures production for Boeing's 787. The charges also included $163 million on the wing program from the Gulfstream G650 business jet; $151 million for the G650's engine nacelle package; and $88 million on the wing program for the Gulfstream G280 business jet, among other items. Gulfstream is owned by General Dynamics Corp (GD.N).
The charges resulted from the company's struggle with complex product development efforts as it expanded its production facilities and took on work from more customers. Since Boeing spun off Spirit in 2005, the company has boosted employment at its Oklahoma facilities to 3,000 from 1,000, and expanded its work to include many companies, not just Boeing.
Still, the size of the charges caught the market off guard.
"Management had previously mentioned that charges would likely come through this quarter, but this magnitude is a surprise," RBC Capital Markets analyst Robert Stallard said in a note to clients.
He cut his target price for the stock to $19 from $27, but continued to rate it "outperform."
"The question that we have is what happens next? Many of these contracts last for a number of years, and what assurance is there that similar charges can be avoided in the future?" Stallard asked.
(Reporting by Alwyn Scott and Karen Jacobs; Editing by Bernadette Baum and Andrew Hay)