Boeing Supplier Spirit Surges on Tentative Deal in Parts Dispute

(Bloomberg) -- Spirit AeroSystems Holdings Inc. jumped the most in eight years after reaching an agreement with Boeing Co., its largest customer, that could end a sprawling contract dispute affecting every commercial jet in the planemaker's product lineup.

The two companies signed a memorandum of understanding addressing “open commercial issues” on a range of Boeing programs, including the 737 Max and 787 Dreamliner, Spirit said in a statement Wednesday as it announced earnings. The manufacturers are still working to finalize the five-year pact.

The tentative accord takes a major step toward removing a question mark surrounding Spirit, which makes major air-frame components and relies on Boeing for 80 percent of sales. The pact also provides a boost to Chief Executive Officer Thomas Gentile, who joined Wichita, Kansas-based Spirit last year.

“Despite warnings that a deal still isn't finalized, investors are likely to take the news of an MoU with Boeing as a sign of good progress and at least a partial removal of the uncertainty that has clouded the stock over the last few years,” Rob Stallard, an analyst at Vertical Research Partners, said in a note to clients.

Spirit advanced 14 percent to $69.40 at 9:40 a.m. in New York after climbing as much as 15 percent for the biggest intraday gain in eight years. Boeing rose less than 1 percent to $240.94.

Reducing Uncertainty

“By addressing a range of programs and not just 787 pricing, the MoU reduces much uncertainty that has long existed in the relationship with our largest customer and preserves our ability to meet our long-term cash flow goals,” Gentile said in the statement.

Pricing for the largest 787 Dreamliner models had been one of the biggest issues behind the four-year contract stalemate. The new deal framework hammered out by Spirit and Boeing sets a series of pricing discounts, known as step-downs, for the 787-9 and -10 planes that kick in at pre-determined points. Boeing is counting on price reductions from its suppliers to help erase $26.5 billion in production losses.

The deal also extends the number of planes covered by the 787 agreement to 1,300 units from the 1,003 carbon-composite jets covered under the current arrangement, and establishes a “planning block'' through line unit 1,405. That's an indication that Boeing might also be planning to raise its accounting block – an estimate of sales used to calculate profits under the arcane rules of program accounting – from the current 1,300 planes.

As a result of the tentative deal, Spirit recognized a reach-forward loss of $353 million on the 787 program. The agreement also includes a commitment from both companies to work together on advanced aerostructures and to jointly work together to cut costs.

Earnings Beat

“Spirit removed a major overhang today in announcing an agreement with Boeing on longstanding price negotiations,” Seth Seifman, an analyst at JPMorgan Chase & Co., said in a note. “In an ideal world, SPR would not have taken another charge on the 787 that push cumulative losses on the program” near $1 billion for 1,400 units. But the company's free cash flow appears to be intact, “which means more than any single program.”

Spirit's adjusted earnings rose to $1.57 a share in the second quarter, exceeding the $1.20 average of analyst estimates compiled by Bloomberg. Sales were little changed at $1.83 billion. Analysts had predicted $1.74 billion.

The company also increased its full-year profit forecast to a range of $5 to $5.25 a share. Analysts had anticipated $4.81 a share.

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Bruce Rule