Boeing Supplier Takes $68 Million Charge on Production Woes: Triumph Group Shares Slide After Warning of Profit Hit

September 18, 2013, 4:07 p.m. ET

By  JON OSTROWER

The Wall Street Journal
   
 
A key Boeing Co. supplier on Wednesday warned its profit would be hurt by charges from work on the 747-8 jumbo jet, highlighting the challenges of managing the boom in commercial aerospace that has left plane makers with bulging order books.

Berwyn, Penn.-based Triumph Group Inc. is the third big Boeing supplier to run into trouble over the past five years as a number of new commercial and business jet programs provided buoyant sales, but with the risk of having to shoulder more development costs when problems emerged on cutting-edge jets.

Shares of the fuselage parts maker slid as much as 10% on Wednesday after it warned that its costs on the work would be $68 million higher than previously expected in its current fiscal year ending in March 2014, which analysts said would wipe around 14% from forecast earnings over the period.

“There was no big ‘gotcha’,” said David Kornblatt, Triumph’s chief financial officer, on a call with analysts. He said efforts to fix previously-identified problems with its production of fuselage parts for the 747-8 had been only partially successful, while higher labor and transport costs had further depressed profit margins on the program to “mid-single digits.”

Triumph started supplying major portions of the 747-8 when it paid $984 million for Vought Aircraft Industries in 2010 after the latter ran into trouble with its work on the delayed 787 Dreamliner.

Boeing was forced to buy out Vought’s contribution to the 787 program, taking over its North Charleston, S.C., facility and laying the groundwork for the plane maker’s historic move to start assembling jets on the East Coast for the first time.

Triumph’s disclosure follows the problems at Spirit AeroSystems Inc.,  Boeing’s largest supplier of aircraft structures—such as wings and fuselage panels. Spirit has revealed plans to take more than $1 billion in charges over the next several years that will bite into expected profit for its work on the 787 and new business jets being developed by the Gulfstream Aerospace unit of General Dynamics Corp.

Jeffry Frisby, Triumph’s chief executive, said it had already taken steps to address problems with its work on the 747-8, whose slow sales have led forced Boeing to trim production.

Executives disclosed that Triumph would have to hire an expensive Russian cargo plane to ship parts to Boeing’s Seattle-area facilities after falling behind on work, or resort to pricier express-rail services.

“Our opportunities lie exclusively in our ability to reduce our own cost,” said Mr. Frisby, adding that Triumph will have to shoulder these higher costs itself, and isn’t expecting any assistance from Boeing in the form of higher contract prices.

The stock was recently down 8.4% at $72, valuing Triumph at $3.66 billion.

Boeing has been conducting a companywide cost reduction effort dubbed Partnering For Success, enabling the plane maker to share productivity improvements in its supplier’s factories in the form of lower prices.

Triumph plans to update its full-year guidance when it reports its second-quarter 2014 results around October.

Company executives said one bright spot was a potential recovery in its defense business, which accounted 28% of sales in its fiscal first quarter. Mr. Kornblatt said the softness seen at the end of the quarter continued as the U.S. Air Force trimmed flying because of budget cuts.

He said there was “anecdotal” evidence emerging of what he called a “bow wave of activity later this year” as the air force carried out deferred maintenance work.

—Doug Cameron contributed to this article.

Source:   http://online.wsj.com