Spirit says new program costs will lead to losses in 3rd quarter

Managing multiple new programs has been challenging, CEO says.

10/26/2012 7:03 AM

08/08/2014 10:12 AM

Spirit AeroSystems will take a $590 million hit in the third quarter on multiple new programs from increased costs in its supply chain, factory support and labor, the company announced Thursday.

The company’s execution of its diversification and growth strategy has been complex, Spirit AeroSystems CEO and president Jeff Turner said.

Spirit also has settled with insurers for claims related to damage from a tornado that hit the Wichita plant in April, officials said.

Managing multiple new programs has been challenging, Turner told analysts in a conference call about the charges.

“I’m extremely disappointed we have not better managed this complexity,” Turner said. “We continue to improve costs unit by unit, but our progress isn’t fast enough to achieve our cost targets.”

The company rapidly expanded its customer base, manufacturing sites and product design capabilities while it managed a number of development programs with significant design changes and schedule delays, Spirit said in a statement.

“It is unfortunate that we have struggled on these development efforts,” Turner said in a statement. “As we move forward, our focus is on applying our lessons learned in strong program management, change control and shop floor disciplines to drive performance on these programs and continue the solid performance on our core production programs.”

The company plans to record pre-tax charges of about $184 million on the 787 program; $163 million on the Gulfstream G650 wing program; $151 million on the G650 engine nacelle package called BR725; $88 million on the Gulfstream G280 wing program; and $4 million on other combined programs.

Spirit’s stock dropped 30 percent to $15.11 per share Thursday on the news.

The company is improving its management of costs, Turner told analysts, but not fast enough or soon enough to meet targets.

Still, Spirit’s core business is performing well, the company is financially healthy, and its balance sheet is strong, he said.

“We remain well positioned on the best platforms in the industry,” he said. “We have a strong market and strong backlog on our products.”

The size of the charges surprised analysts.

Investors had expected charges from $50 million to $200 million, RBC Capital Markets analyst Robert Stallard wrote in a report.

“Expecting a rock, not an asteroid,” Stallard wrote. “Management had previously mentioned that charges would likely come through this quarter, but this magnitude is a surprise.”

A loss of this size is “undoubtedly significant,” Stallard wrote.

The charge required Spirit to renegotiate its debt covenants.

“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,” he wrote.

All but one of the programs recording the charges are located in Spirit’s Tulsa facility, which has experienced rapid growth, Turner said.

The site went from a traditional “build to print” location to a “design-build” location, he said.

It grew from fewer than 1,000 employees in 2005 to more than 3,000 today.

Although it has started shipments on new programs, its cost predictions were too low.

The biggest problem was in the supply chain.

Spirit had expected to derive cost savings there but ran into difficulty because suppliers are “quite full” with Boeing and Airbus work, Turner said.

In addition, because of the size of the work packages, Spirit had difficulty placing the work.

It worked hard to get the pricing it believed it could get, Turner said.

But “a big piece of the size of the write-off is the realization that we’re not going to get the level of improvement that we had planned on,” Turner said.

The company continues to work on bringing down costs in the supply chain.

The biggest risk for Spirit continues to be the Boeing 787 program – specifically the wing components it supplies to Boeing.

The company also has reached a final settlement with its insurers for claims related to the tornado that hit Wichita in April.

Spirit received a settlement of about $235 million, lower than the $400 million in damage that had been estimated earlier.

The settlement resolves all property damages, cleanup, recovery and business interruption costs, the company said.

It will be recognized as a gain in the third quarter.

The company received a $105 million cash advance in the second quarter and will receive a cash settlement of $130 million from the settlement during the fourth quarter.

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