October 13, 2017 / 8:14 AM / 10 months ago

GKN shares slump after 'blow to the head' profit warning

LONDON (Reuters) - GKN GKN.L warned on its year profit on Friday citing disappointing aerospace trading and two external claims that were expected to cost $53 million, hammering shares in the British engineering company.

Chief Executive Nigel Stein, who steps down at the end of the year, said the surprise claims and a failure to make productivity improvements in its North American aerospace business were “very disappointing” after 16 years of delivering on expectations.

“Frankly this feels like walking down the street and being mugged,” he said.

“We’ve taken a blow to the head, but we’ll pick ourselves up and carry on.”

GKN, which dates back to 1759 and employs 58,000 people across 30 countries, now expects its full-year pretax profit to be “slightly above” the 678 million pounds recorded in 2016.

Analysts on average had forecast profit to rise to 735 million pounds, Thomson Reuters data showed.

Shares in the company fell 9 percent in early trading, wiping half a billion pounds off its market value.

The warning comes as GKN embarks on a round of management changes, with Stein to be replaced by Kevin Cummings, currently head of the aerospace division.

Finance Director Adam Walker is due to leave in November.

Stein said it would take a couple of years before margins improved in its North American aerospace business, adding that recent performance had been below his expectations.

“Trading in the third quarter has been disappointing with a significant reduction in margin caused by on-going pricing pressure, continuing operational challenges and the impact of programme transitions,” GKN said of its aerospace operations.

It said the headwinds would not ease in the final quarter.

“In addition, it is disappointing that we expect to have to provide for two unexpected claims which will slow our steady growth in profits,” Stein said.

Stein said while changes to pricing in aerospace had not been dramatic, the company had not adapted properly.

GKN did not disclose many details about the external claims, one of which is in aerospace and one in its Driveline automotive power transmission business, saying they were commercially sensitive.

Stein said they were informed of the claims in a 24-hour period earlier this week. He said they were not litigation and did not expect them to be recurring.

The company said Driveline was continuing to outperform a global market growing at around 2 percent, but it was having to bear additional costs for raw materials and investment in systems for electric vehicles.

“The shame of the profit ‘warning’ is that organic sales growth in the third quarter appears to have been satisfactory,” Jefferies analysts said in a note.

“Ultimately, we cannot help but wonder whether this disappointment today will drive more significant change in due course.”

The British group has often faced speculation that it could be broken up into automotive and aerospace units.

($1 = 0.7535 pounds)

Editing by Kate Holton and Jason Neely

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