10-Q 1 a12-20136_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

Form 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 27, 2012

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              

 

Commission File Number 001-33160

 

Spirit AeroSystems Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-2436320

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3801 South Oliver

Wichita, Kansas 67210

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code:

(316) 526-9000

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of October 29, 2012, the registrant had outstanding 119,656,840 shares of class A common stock, $0.01 par value per share, and 24,026,372 shares of class B common stock, $0.01 par value per share.

 

 

 




Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

For the Three
 Months Ended

 

For the Nine
 Months Ended

 

 

 

September 27,
2012

 

September 29,
2011

 

September 27,
2012

 

September 29,
2011

 

 

 

($ in millions, except per share data)

 

Net revenues

 

$

1,365.3

 

$

1,129.7

 

$

3,972.1

 

$

3,644.9

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

1,746.7

 

963.0

 

3,994.6

 

3,245.6

 

Selling, general and administrative

 

40.6

 

38.4

 

125.9

 

118.5

 

Impact from severe weather event

 

(218.8

)

 

(164.3

)

 

Research and development

 

7.3

 

7.8

 

21.6

 

27.1

 

Total operating costs and expenses

 

1,575.8

 

1,009.2

 

3,977.8

 

3,391.2

 

Operating (loss) income

 

(210.5

)

120.5

 

(5.7

)

253.7

 

Interest expense and financing fee amortization

 

(16.2

)

(19.0

)

(62.6

)

(61.6

)

Interest income

 

 

 

0.1

 

0.2

 

Other income (expense), net

 

4.1

 

(1.6

)

3.4

 

 

(Loss) income before income taxes and equity in net loss of affiliates

 

(222.6

)

99.9

 

(64.8

)

192.3

 

Income tax benefit (provision)

 

88.3

 

(32.4

)

39.4

 

(59.6

)

(Loss) income before equity in net loss of affiliates

 

(134.3

)

67.5

 

(25.4

)

132.7

 

Equity in net loss of affiliates

 

(0.1

)

(0.2

)

(0.5

)

(0.7

)

Net (loss) income

 

$

(134.4

)

$

67.3

 

$

(25.9

)

$

132.0

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.94

)

$

0.48

 

$

(0.18

)

$

0.93

 

Diluted

 

$

(0.94

)

$

0.47

 

$

(0.18

)

$

0.93

 

 

See notes to condensed consolidated financial statements (unaudited)

 

3



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

 

 

 

For the Three
Months Ended

 

For the Nine
Months Ended

 

 

 

September 27,
2012

 

September 29,
2011

 

September 27,
2012

 

September 29,
2011

 

 

 

($ in millions)

 

Net (loss) income

 

$

(134.4

)

$

67.3

 

$

(25.9

)

$

132.0

 

Changes in other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized (loss) on interest rate swaps, net of tax effect of zero and $1.5 for each of the three months ended and $0.5, $2.5 for each of the nine months ended, respectively

 

 

(2.6

)

(0.9

)

(4.2

)

Less: reclassification adjustment for loss realized in net income, net of tax effect of zero and $0.5 for each of the three months ended and $1.2, $2.9 for each of the nine months ended, respectively

 

 

0.7

 

1.9

 

4.7

 

Net unrealized (loss) gain on interest rate swaps

 

 

(1.9

)

1.0

 

0.5

 

Unrealized gain (loss) on foreign currency hedge contracts, net of tax effect of zero and $0.1 for each of the three months ended and zero and $0.2 for each of the nine months ended, respectively

 

 

(0.3

)

 

0.5

 

Less: reclassification adjustment for loss realized in net income, net of tax effect of zero for each of the three months ended and zero for each of the nine months ended, respectively

 

0.1

 

 

0.1

 

0.1

 

Less: reclassification adjustment for loss realized in net other assets, net of tax effect of zero for each of the three months ended and zero and $0.4 for each of the nine months ended, respectively

 

 

 

 

0.7

 

Net unrealized gain (loss) on foreign currency hedge contracts

 

0.1

 

(0.3

)

0.1

 

1.3

 

Pension, SERP, and Retiree medical adjustments, net of tax effect of $0.1 for each of the three months ended and $0.3, $0.2 for each of the nine months ended, respectively

 

0.2

 

0.1

 

0.6

 

0.2

 

Unrealized foreign exchange gain (loss) on intercompany loan, net of tax effect of $0.7, $0.5 for each of the three months ended and $0.7, $0.1 for each of the nine months ended, respectively

 

2.2

 

(1.2

)

2.2

 

0.3

 

Foreign currency translation adjustments

 

5.9

 

(3.2

)

5.9

 

0.5

 

Total comprehensive (loss) income

 

$

(126.0

)

$

60.8

 

$

(16.1

)

$

134.8

 

 

See notes to condensed consolidated financial statements (unaudited)

 

4



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

221.7

 

$

177.8

 

Accounts receivable, net

 

514.6

 

267.2

 

Insurance receivable - severe weather event

 

129.9

 

 

Inventory, net

 

2,368.6

 

2,630.9

 

Deferred tax asset - current

 

62.1

 

52.2

 

Other current assets

 

43.7

 

27.7

 

Total current assets

 

3,340.6

 

3,155.8

 

Property, plant and equipment, net

 

1,657.0

 

1,615.7

 

Pension assets

 

138.3

 

118.8

 

Deferred tax asset - non-current, net

 

145.1

 

55.7

 

Other assets

 

92.5

 

96.4

 

Total assets

 

$

5,373.5

 

$

5,042.4

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

652.6

 

$

559.4

 

Accrued expenses

 

213.2

 

200.8

 

Profit sharing

 

25.1

 

23.5

 

Current portion of long-term debt

 

10.7

 

48.9

 

Advance payments, short-term

 

62.3

 

8.8

 

Deferred revenue, short-term

 

23.2

 

28.5

 

Deferred grant income liability - current

 

6.9

 

6.1

 

Other current liabilities

 

43.2

 

37.5

 

Total current liabilities

 

1,037.2

 

913.5

 

Long-term debt

 

1,168.4

 

1,152.0

 

Advance payments, long-term

 

846.1

 

655.9

 

Pension/OPEB obligation

 

89.2

 

84.2

 

Deferred grant income liability - non-current

 

118.1

 

121.8

 

Deferred revenue and other deferred credits

 

31.8

 

34.7

 

Other liabilities

 

121.0

 

115.6

 

Equity

 

 

 

 

 

Preferred stock, par value $0.01, 10,000,000 shares authorized, no shares issued

 

 

 

Common stock, Class A par value $0.01, 200,000,000 shares authorized, 119,518,290 and 118,560,926 shares issued, respectively

 

1.2

 

1.2

 

Common stock, Class B par value $0.01, 150,000,000 shares authorized, 24,132,748 and 24,304,717 shares issued, respectively

 

0.2

 

0.2

 

Additional paid-in capital

 

1,009.0

 

995.9

 

Accumulated other comprehensive loss

 

(116.4

)

(126.2

)

Retained earnings

 

1,067.2

 

1,093.1

 

Total shareholders’ equity

 

1,961.2

 

1,964.2

 

Noncontrolling interest

 

0.5

 

0.5

 

Total equity

 

1,961.7

 

1,964.7

 

Total liabilities and equity

 

$

5,373.5

 

$

5,042.4

 

 

See notes to condensed consolidated financial statements (unaudited)

 

5



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

For the Nine

 

For the Nine

 

 

 

Months Ended

 

Months Ended

 

 

 

September 27, 2012

 

September 29, 2011

 

 

 

($ in millions)

 

Operating activities

 

 

 

 

 

Net (loss) income

 

$

(25.9

)

$

132.0

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities

 

 

 

 

 

Depreciation expense

 

113.6

 

97.0

 

Amortization expense

 

3.8

 

3.6

 

Amortization of deferred financing fees

 

13.1

 

7.0

 

Accretion of customer supply agreement

 

0.1

 

 

Employee stock compensation expense

 

12.0

 

8.6

 

Excess tax benefit of share-based payment arrangements

 

(1.2

)

(1.2

)

Loss from discontinued hedge accounting on interest rate swaps

 

2.2

 

 

Loss from the ineffectiveness of hedge contracts

 

0.2

 

 

(Gain) loss from foreign currency transactions

 

(5.9

)

1.2

 

Loss on disposition of assets

 

5.8

 

0.8

 

Deferred taxes

 

(100.6

)

16.0

 

Long-term tax provision

 

1.3

 

8.9

 

Pension and other post retirement benefits, net

 

(7.0

)

(7.4

)

Grant income

 

(4.1

)

(4.0

)

Equity in net loss of affiliates

 

0.5

 

0.7

 

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(242.5

)

(127.9

)

Inventory, net

 

272.6

 

(61.1

)

Accounts payable and accrued liabilities

 

109.7

 

89.5

 

Profit sharing/deferred compensation

 

1.6

 

4.2

 

Advance payments

 

243.7

 

(158.7

)

Income taxes receivable/payable

 

(38.3

)

29.2

 

Deferred revenue and other deferred credits

 

(7.3

)

(265.1

)

Insurance receivable for severe weather related expenses (see Note 3)

 

(129.9

)

 

Insurance proceeds for investing purposes - severe weather event (see Note 3)

 

(7.0

)

 

Other

 

25.0

 

50.9

 

Net cash provided by (used in) operating activities

 

235.5

 

(175.8

)

Investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

(163.5

)

(164.2

)

Purchase of property, plant and equipment - severe weather event (see Note 3)

 

(7.0

)

 

Insurance proceeds for investing purposes - severe weather event (see Note 3)

 

7.0

 

 

Proceeds from sale of assets

 

1.3

 

0.4

 

Other

 

(1.2

)

 

Net cash (used in) investing activities

 

(163.4

)

(163.8

)

Financing activities

 

 

 

 

 

Proceeds from revolving credit facility

 

170.0

 

 

Payments on revolving credit facility

 

(170.0

)

 

Proceeds from issuance of debt

 

547.3

 

 

Principal payments of debt

 

(567.0

)

(5.3

)

Excess tax benefit of share-based payment arrangements

 

1.2

 

1.2

 

Debt issuance and financing costs

 

(11.3

)

 

Net cash (used in) financing activities

 

(29.8

)

(4.1

)

Effect of exchange rate changes on cash and cash equivalents

 

1.6

 

0.4

 

Net increase (decrease) in cash and cash equivalents for the period

 

43.9

 

(343.3

)

Cash and cash equivalents, beginning of period

 

177.8

 

481.6

 

Cash and cash equivalents, end of period

 

$

221.7

 

$

138.3

 

Supplemental information

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Property acquired through capital leases

 

$

2.6

 

$

 

Financing obligations

 

$

 

$

12.5

 

 

See notes to condensed consolidated financial statements (unaudited)

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

1.  Organization and Basis of Interim Presentation

 

Spirit AeroSystems Holdings, Inc. (“Holdings” or the “Company”) was incorporated in the state of Delaware on February 7, 2005, and commenced operations on June 17, 2005 through the acquisition of The Boeing Company’s (“Boeing”) operations in Wichita, Kansas, Tulsa, Oklahoma and McAlester, Oklahoma (the “Boeing Acquisition”). Holdings provides manufacturing and design expertise in a wide range of products and services for aircraft original equipment manufacturers and operators through its subsidiary, Spirit AeroSystems, Inc. (“Spirit”). Onex Corporation (“Onex”) of Toronto, Canada and certain of its affiliates maintain majority voting power of Holdings. In April 2006, Holdings acquired the aerostructures division of BAE Systems (Operations) Limited (“BAE Aerostructures”), which builds structural components for Airbus, a division of the European Aeronautic Defense and Space NV (“Airbus”) and Boeing. Prior to this acquisition, Holdings sold essentially all of its production to Boeing. Since Spirit’s incorporation, the Company has expanded its customer base to include Sikorsky, Rolls-Royce, Gulfstream, Bombardier, Mitsubishi Aircraft Corporation, Southwest Airlines, Continental Airlines, and American Airlines. The Company has its headquarters in Wichita, Kansas, with manufacturing facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Wichita and Chanute, Kansas; Kinston, North Carolina and Subang, Malaysia. The Company also has an assembly plant for the A350 XWB aircraft in Saint-Nazaire, France.

 

The Company is the majority participant in the Kansas Industrial Energy Supply Company (“KIESC”), a tenancy-in-common with other Wichita companies established to purchase natural gas.

 

The Company participates in two joint ventures, Spirit-Progresstech LLC (“Spirit-Progresstech”) and Taikoo Spirit AeroSystems Composite Co. Ltd. (“TSACCL”), of which Spirit’s ownership interest is 50.0% and 31.5%, respectively.  Spirit-Progresstech provides aerospace engineering support services and TSACCL was formed to develop and implement a state-of-the-art composite and metal bond component repair station in the Asia-Pacific region.

 

The accompanying unaudited interim condensed consolidated financial statements include the Company’s financial statements and the financial statements of its majority-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X.  The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.  Investments in business entities in which the Company does not have control, but has the ability to exercise influence over operating and financial policies, including Spirit-Progresstech and TSACCL, are accounted for under the equity method.  KIESC is fully consolidated as the Company owns 77.8% of the entity’s equity.  All intercompany balances and transactions have been eliminated in consolidation. The Company’s U.K. subsidiary uses local currency, the British pound, as its functional currency; the Malaysian subsidiary uses the British pound and our Singapore subsidiary uses the Singapore dollar.  All other foreign subsidiaries and branches use the U.S. dollar as their functional currency.

 

As part of the monthly consolidation process, our international entities that have functional currencies other than the U.S. dollar are translated to U.S. dollars using the end-of-month translation rate for balance sheet accounts and average period currency translation rates for revenue and income accounts.

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations for the interim periods. The results of operations for the nine months ended September 27, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Certain reclassifications have been made to the prior year financial statements and notes to conform to the 2012 presentation.  In connection with the preparation of the condensed consolidated financial statements, the Company evaluated subsequent events through the date the financial statements were issued. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 23, 2012 (the “2011 Form 10-K”).

 

2.  Change in Estimate

 

The Company’s long-term contract estimates are based on estimated contract revenues and related costs over the Company’s current contract blocks.  Estimated contract revenues are generally not subject to significant revisions as most of the Company’s contracts are fixed price and known at the inception of the contract, however, the contract cost elements of these estimates change frequently as the programs mature and that has historically been the primary driver of changes in our estimates.   Contract costs are estimated based on actual costs incurred to date and an estimate of remaining costs over the current contract block which can extend for multiple years.  During the early phases of our development contracts, the future cost estimates are subject to significant variability and are based on numerous assumptions and judgments and require management to use its historical experience on similar programs until aircraft programs are type certified; low rate production is achieved; production processes mature, supply chain partners are contracted; and unit costs stabilize which typically results in assumptions that costs will improve over the life of the contract block. This learning curve concept is typical in our industry, however, the level of design change and time spent in low rate production that was anticipated when we initially established these curves has been significantly exceeded as original delivery schedules have been delayed and engineering changes continued. During the third quarter of 2012 a combination of events occurred that resulted in changes in estimates on several development programs resulting in forward losses being recorded on some of these programs. Following is a summary of events that occurred during the third quarter of 2012 that resulted in revisions of estimates on certain programs.

 

7



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Performance Issues-Tulsa Facility

 

The Company’s Tulsa facility has significant work content on three of the development programs (B787, G280, G650). The multiple complex development programs at this facility have created various performance issues that have resulted in previous changes to our contract estimates on these development programs.

 

The performance issues at the Tulsa facility were magnified in the third quarter of 2012 when the Company implemented a recovery plan which would bring the Company current on the delivery schedule for its B787 wing components. The Company began implementing the recovery plan during late July 2012 which resulted in the addition of significant additional resources to meet delivery schedules. As the Company was implementing the recovery plan, it became clear during the third quarter estimation process that the remediation would have a significant impact on the future cost curves due to significant amounts of additional headcount and disruption.

 

Type Certification

 

On September 4th and 7th 2012, Gulfstream received type certification on the G280 and G650 aircraft. These type certifications impact three of the Company’s development programs, G280, G650 and BR725 (the engine nacelle on the G650). Type certification is a significant program milestone for commercial aerospace products as it represents the airworthiness authority’s approval of the completion and functionality of engineering design and the ability of the aircraft to enter into service, and leads directly to the commencement of full rate production. However, following type certification the ability to redesign for cost is significantly less if no derivative aircraft design is planned.  We currently have no plans for derivative models, making redesign for cost improvements difficult after type certification.

 

The pace of cost improvements was not keeping up with projected learning curves particularly related to redesign opportunities and as all three programs are preparing to enter full rate production, we revised our estimates to reflect higher costs.

 

Decision on Work Package Transfers

 

Given certain challenges of new programs at the Company’s Kinston, NC site and the fact that our newest facility in Chanute was in the process of multiple work package transfers during the third quarter, the Company decided to delay the transfer of any additional work packages into these facilities. Overall, this had a significant impact on the BR725 program and the timing of anticipated cost reduction from the planned transfer of work content to lower-cost facilities.

 

Finalization of supplier contracts

 

During the early phases of our development programs, the Company will frequently procure small quantities of required sub-assemblies and parts from our suppliers.  This practice generally forces us to pay higher unit prices for these sub-assemblies and parts, but allows us flexibility in evaluating supplier performance and quality as well as address design changes that frequently occur during the early phases of these development programs.  Once design changes subside, we will generally contract on a longer-term basis with our suppliers, which allows us to experience more favorable supply chain pricing.

 

The Company has been successful in negotiating lower costs with suppliers on most of these development programs; however, these costs are not as low as original estimates. This pressure on supply chain cost runs across all of our development programs. As Boeing and Airbus have increased production rates on existing commercial programs, our suppliers have limited capacity to deal with even modest rate increases on our business jet programs. In addition, the capacity constraint in our supply base has prevented us from off-loading to the supply chain certain work we currently perform in-house. As a result of higher current costs which have exceeded estimates and recent negotiations with suppliers, the Company has revised supplier costs across several of the development programs.

 

Due to these and other events, for the three months ended September 27, 2012, we recorded forward loss charges of $184.0 million on the Boeing 787, $162.5 million on the Gulfstream G650, $151.0 million on the Rolls-Royce BR725, $88.1 million on the Gulfstream G280, $2.4 million on the Airbus A350 XWB non-recurring wing and $2.4 million on the Boeing 747-8 wing programs. These amounts are recorded on the condensed consolidated balance sheet as forward loss provisions within Inventory.

 

Our consolidated net adjustments for costs related to these changes in estimates decreased operating profit, before income taxes, by approximately $590.4 and $610.3 for the three and nine months ended September 27, 2012, respectively.  These adjustments decreased net earnings by approximately $407.4 ($2.90 per share) and $421.1 ($3.01 per share) for the three and nine months ended September 27, 2012, respectively.

 

8



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

3. Impact from Severe Weather Event

 

On April 14, 2012, during a severe weather event, the Company’s Wichita, Kansas facility, which includes its headquarters and manufacturing facilities for all Boeing models as well as operations for maintenance, repair and overhaul support and services (MRO), was hit by a tornado which caused significant damage to many buildings, disrupted utilities and resulted in complete suspension of production for eight days.  The Company’s work-in-process and production equipment generally remained intact, and the Company resumed production on April 23, 2012, although some inefficiencies continued thereafter as a result of the damage and repair efforts.

 

As of September 27, 2012, the Company had received a total of $105.0 in partial insurance payments based on estimated losses incurred as a result of the April 14, 2012 tornado.  In accordance with its credit agreement, the Company provided a certificate to its lenders indicating that all net proceeds received in connection with the destruction caused by the April 14th tornado would be used for repair, replacement or restoration at the Wichita facility.

 

On October 19, 2012, the Company reached an agreement with its insurers on a final settlement for all claims relating to the April 14, 2012 severe weather event. Under the terms of this settlement the insurers agreed to pay to the Company $234.9 (including payments previously made) to resolve all property damage, clean-up and recovery costs related to the severe weather event as well as all expenses incurred to make up for the interruption of production and to reduce further disruptions. Under the settlement agreement, the Company assumes all risk involving the severe weather event on April 14, 2012.  As of September 27, 2012, the insurers had agreed that payment of the claim was due to Spirit.  As the amount of the claim became certain, the Company deemed it appropriate to include the settlement amount in the financial statements for the third quarter.  The Company expects to receive non-refundable payments of the settlement amount (less $105.0 in cash advance payments already received during the second quarter of 2012) from its insurers prior to December 31, 2012.

 

The condensed consolidated balance sheet for September 27, 2012 includes $129.9 in “Insurance receivable — severe weather event” for the amounts due from the insurers under the terms of the settlement agreement.

 

For the three months ended September 27, 2012, the Company recorded a net gain of $218.8 under severe weather event, which represents the settlement amount of $234.9 less current period charges of $16.1.  For the nine months ended September 27, 2012, the Company recorded a net gain of $164.3 under severe weather event, which represents the settlement amount of $234.9 less cumulative charges of $70.6.  Future expenditures will be recorded as incurred.  The Company’s estimate of these future expenditures will likely change as the Company evaluates different repair and build-back options.

 

During the three months and nine months ended September 27, 2012, the Company recorded an impairment charge of $0.2 for certain assets that were destroyed during the severe weather event.  Any future impairment charges are expected to be immaterial.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

4.  New Accounting Pronouncements

 

As of September 27, 2012, there have been no material changes to our significant accounting policies as described in our 2011 Form 10-K.

 

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (FASB ASU 2012-02).  The amendment in this update permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill.  The provisions of FASB ASU 2012-02 are effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012. Early adoption is permitted.  The adoption of the provisions of FASB ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In December 2011, the FASB issued Accounting Standards Update 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (FASB ASU 2011-12).  The amendments in this update defer certain changes in FASB ASU 2011-05 that relate to the presentation of reclassification adjustments of items out of accumulated other comprehensive income.  The provisions of FASB ASU 2011-12 were effective for annual and interim periods beginning after December 15, 2011.  The adoption of the provisions of FASB ASU 2011-12 did not have a material impact on the Company’s consolidated financial statements.

 

In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (FASB ASU 2011-11).  The amendments in this update will require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The intention is to enhance required disclosures by improving information about financial instruments and derivative instruments that are either offset in accordance with FASB guidance or are subject to an enforceable master netting arrangement; irrespective of whether they are offset in accordance with FASB guidance.  The provisions of FASB ASU 2011-11 will be effective for annual reporting periods beginning on or after January 1, 2013.  The adoption of the provisions of FASB ASU 2011-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurements (Topic 820)—Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, (FASB ASU 2011-04). This update will require disclosures regarding transfers between Level 1 and Level 2 of the fair value hierarchy, disclosures about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy, and the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed. The provisions of FASB ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011. The adoption of the provisions of FASB ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements.

 

5.  Accounts Receivable, net

 

Accounts receivable, net consists of the following:

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

Trade receivables (1)(2) 

 

$

501.8

 

$

258.0

 

Other

 

17.1

 

10.6

 

Less: allowance for doubtful accounts

 

(4.3

)

(1.4

)

Accounts receivable, net

 

$

514.6

 

$

267.2

 

 


(1)         Includes unbilled receivables of $30.1 and $17.4 at September 27, 2012 and December 31, 2011, respectively.

(2)         Includes $56.7 and $39.7 held in retainage by customers at September 27, 2012 and December 31, 2011, respectively.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Accounts receivable, net includes unbilled receivables on long-term aerospace contracts, comprised principally of revenue recognized on contracts for which amounts were earned but not contractually billable as of the balance sheet date, or amounts earned in which the recovery will occur over the term of the contract, which could exceed one year.

 

On May 3, 2012, one of our customers, Hawker Beechcraft, filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Subsequent to the bankruptcy filing, the Company reserved the remaining balance of its $3.5 receivable from Hawker.

 

6.  Inventory

 

Inventories are summarized as follows:

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

260.9

 

$

236.9

 

Work-in-process

 

2,097.9

 

1,800.0

 

Finished goods

 

34.7

 

40.8

 

Product inventory

 

2,393.5

 

2,077.7

 

Capitalized pre-production

 

549.5

 

553.2

 

Forward loss provision

 

(574.4

)

 

Total inventory, net

 

$

2,368.6

 

$

2,630.9

 

 

Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. Significant unfunded statement of work changes can also cause pre-production costs to be incurred.  These costs are typically recovered over a certain number of ship set deliveries and the Company believes these amounts will be fully recovered.

 

Work-in-process inventory includes deferred production costs for the excess of production costs over the estimated average cost per ship set, and credit balances for favorable variances on contracts between actual costs incurred and the estimated average cost per ship set for units delivered under the current production blocks.  Recovery of excess-over-average deferred production costs is dependent on the number of ship sets ultimately sold and the ultimate selling prices and lower production costs associated with future production under these contract blocks. The Company believes these amounts will be fully recovered.  Sales significantly under estimates or costs significantly over estimates could result in the realization of losses on these contracts in future periods.

 

Non-recurring production costs include design and engineering costs and test articles.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Inventories are summarized by platform and costs below:

 

 

 

September 27, 2012

 

 

 

Inventory

 

Capitalized Pre-
Production

 

Deferred
Production

 

Non-Recurring

 

Forward Loss
Provision

 

Total Inventory, net
September 27, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B747

 

$

94.3

 

$

6.9

 

$

23.2

 

$

2.0

 

(5.1

)

$

121.3

 

B787

 

240.0

 

196.9

 

578.5

 

27.8

 

(184.0

)

859.2

 

Boeing - All other platforms

 

423.7

 

4.7

 

(36.9

)

47.0

 

 

438.5

 

A350

 

140.5

 

56.9

 

124.2

 

39.8

 

(8.9

)

352.5

 

Airbus - All other platforms

 

93.5

 

 

17.4

 

 

 

110.9

 

G280

 

76.8

 

5.5

 

77.8

 

 

(98.8

)

61.3

 

G650

 

38.0

 

224.9

 

274.2

 

 

(162.5

)

374.6

 

Rolls-Royce(1)

 

16.9

 

53.7

 

44.5

 

 

(115.1

)

 

Sikorsky

 

 

 

 

7.6

 

 

7.6

 

Aftermarket

 

44.1

 

 

 

 

 

44.1

 

Other platforms(2)

 

(4.9

)

 

 

3.5

 

 

(1.4

)

Total

 

$

1,162.9

 

$

549.5

 

$

1,102.9

 

$

127.7

 

(574.4

)

$

2,368.6

 

 

 

 

December 31, 2011

 

 

 

Inventory

 

Capitalized Pre-
Production

 

Deferred
Production

 

Non-
Recurring

 

Total Inventory,
net December 31,
2011

 

 

Cumulative Forward
Loss Provision
(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B747

 

$

88.8

 

$

5.5

 

$

31.8

 

$

10.8

 

136.9

 

 

$

(18.3

)

B787

 

210.3

 

210.5

 

533.2

 

17.1

 

971.1

 

 

 

Boeing - All other platforms

 

428.2

 

2.1

 

6.9

 

20.5

 

457.7

 

 

 

A350

 

96.6

 

36.2

 

 

41.4

 

174.2

 

 

(3.0

)

Airbus - All other platforms

 

84.0

 

 

11.5

 

 

95.5

 

 

 

G280

 

42.9

 

 

37.2

 

 

80.1

 

 

(177.6

)

G650

 

93.1

 

240.9

 

167.1

 

 

501.1

 

 

 

Rolls-Royce(3)

 

12.1

 

58.0

 

25.5

 

 

95.6

 

 

 

Sikorsky

 

 

 

 

17.5

 

17.5

 

 

(29.0

)

Aftermarket

 

43.1

 

 

 

 

43.1

 

 

 

Other platforms(2)

 

56.3

 

 

 

1.8

 

58.1

 

 

 

Total

 

$

1,155.4

 

$

553.2

 

$

813.2

 

$

109.1

 

2,630.9

 

 

$

(227.9

)

 


(1)         Forward loss provision of $151.0 recorded in the third quarter of 2012 exceeded the total program inventory balance. The excess of the charge over program inventory is classified as a contract liability of $35.9 which will be reduced as additional inventory is generated. This contract liability is reported in other current liabilities.

 

(2)         Includes over-applied and under-applied overhead.

 

(3)         Net of $58.0 reclassification of Rolls-Royce non-recurring inventory to pre-production, to conform to current year presentation.

 

(4)         Forward loss charges taken through December 31, 2011 were reflected within capitalized pre-production and inventory for the respective programs. The balances of each inventory classification are shown as the net amounts with the forward loss provisions shown only for purposes of comparability.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

The following is a roll forward of the capitalized pre-production costs included in the inventory balance at September 27, 2012:

 

Balance, December 31, 2011(1)

 

$

553.2

 

Charges to costs and expenses

 

(32.4

)

Capitalized costs

 

28.7

 

Balance, September 27, 2012

 

$

549.5

 

 


(1)         Net of $58.0 reclassification of Rolls-Royce non-recurring inventory to pre-production, to conform to current year presentation.

 

The following is a roll forward of the deferred production costs included in the inventory balances at September 27, 2012:

 

Balance, December 31, 2011

 

$

813.2

 

Charges to costs and expenses

 

(160.8

)

Capitalized costs

 

447.9

 

Exchange rate

 

2.6

 

Balance, September 27, 2012

 

$

1,102.9

 

 

Significant amortization of capitalized pre-production and deferred production inventory will occur over the following contract blocks:

 

 

 

Contract Block
Quantity

 

 

Orders(1)

 

 

 

 

 

 

 

 

B747-8

 

56

 

 

81

 

B787

 

500

 

 

812

 

A350 XWB

 

400

 

 

558

 

G280

 

250

 

 

49

 

G650

 

350

 

 

89

 

Rolls-Royce

 

350

 

 

75

 

 


(1)                   Orders are from the published firm-order backlogs of Airbus and Boeing.  For all other programs, orders represent purchase orders received from OEMs and are not reflective of OEM sales backlog. Orders reported are total block orders, including units delivered.

 

Current block deliveries are as follows:

 

 

Current Block
Deliveries

 

 

 

 

 

B747-8

 

48

 

B787

 

84

 

A350 XWB

 

2

 

Business/Regional jets (1)

 

98

 

 


(1)                   Excludes Hawker deliveries as the block closed in early 2012.

 

Contract block quantity is projected to fully absorb the balance of deferred production inventory.  Capitalized pre-production and deferred production inventories are at risk to the extent that we do not achieve the orders in the forecasted blocks, as those categories of inventory are recoverable over future deliveries.  In the case of capitalized pre-production this may be over multiple blocks.  Should orders not materialize in future periods to fulfill the block, potential forward loss charges may be necessary to the extent the final delivered quantity does not absorb deferred inventory costs.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

7.  Property, Plant and Equipment, net

 

Property, plant and equipment, net consists of the following:

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

Land

 

$

17.7

 

$

17.0

 

Buildings (including improvements)

 

444.8

 

431.5

 

Machinery and equipment

 

903.1

 

849.3

 

Tooling

 

710.5

 

665.0

 

Capitalized software

 

158.2

 

118.7

 

Construction-in-progress

 

206.6

 

204.0

 

Total

 

2,440.9

 

2,285.5

 

Less: accumulated depreciation

 

(783.9

)

(669.8

)

Property, plant and equipment, net

 

$

1,657.0

 

$

1,615.7

 

 

Interest costs associated with construction-in-progress are capitalized until the assets are completed and ready for use. Capitalized interest was $1.9 and $1.7 for the three months ended September 27, 2012 and September 29, 2011, respectively, and $5.8 and $4.7 for the nine months ended September 27, 2012 and September 29, 2011, respectively. Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs, excluding the impact of the severe weather event, of $27.4 and $26.1 for the three months ended September 27, 2012 and September 29, 2011, respectively, and $74.0 and $77.1 for the nine months ended September 27, 2012 and September 29, 2011, respectively.

 

We capitalize certain costs, such as software coding, installation and testing, that are incurred to purchase or to create and implement internal use computer software in accordance with FASB authoritative guidance pertaining to capitalization of costs for internal-use software.  Depreciation expense related to capitalized software was $4.8 for each of the three month periods ended September 27, 2012 and September 29, 2011, and $13.7 and $14.0 for the nine months ended September 27, 2012 and September 29, 2011, respectively.

 

Spirit reviews capital and amortizing intangible assets (long-lived assets) for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with FASB authoritative guidance on accounting for the impairment or disposal of long-lived assets.  Due to charges taken for the three months ended September 27, 2012, we evaluated the long-lived assets at our locations and determined no impairment was necessary.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

8.  Other Assets

 

Other assets are summarized as follows:

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

Intangible assets

 

 

 

 

 

Patents

 

$

2.0

 

$

2.0

 

Favorable leasehold interests

 

9.7

 

9.7

 

Customer relationships

 

28.1

 

26.8

 

Total intangible assets

 

39.8

 

38.5

 

Less: Accumulated amortization-patents

 

(1.2

)

(1.1

)

Accumulated amortization-favorable leasehold interest

 

(4.6

)

(4.2

)

Accumulated amortization-customer relationships

 

(22.8

)

(19.3

)

Intangible assets, net

 

11.2

 

13.9

 

Deferred financing

 

 

 

 

 

Deferred financing costs

 

75.3

 

64.0

 

Less: Accumulated amortization-deferred financing costs

 

(48.1

)

(35.0

)

Deferred financing costs, net

 

27.2

 

29.0

 

Other

 

 

 

 

 

Fair value of derivative instruments

 

 

0.6

 

Goodwill - Europe

 

2.9

 

2.9

 

Equity in net assets of affiliates

 

5.0

 

4.5

 

Customer supply agreement (1)

 

39.9

 

39.8

 

Other

 

6.3

 

5.7

 

Total

 

$

92.5

 

$

96.4

 

 


(1)                  Under an agreement with our customer Airbus, certain payments accounted for as consideration given by the Company to Airbus are being amortized as a reduction to net revenues.

 

The Company recognized $1.0 and $1.1 of amortization expense of intangibles for the three months ended September 27, 2012 and September 29, 2011, respectively, and $3.1 and $3.2 for the nine months ended September 27, 2012 and September 29, 2011, respectively.

 

9.  Research and Development Milestones

 

Milestone payments.  Milestone payments are recognized as revenue when milestones are deemed to be substantive and are achieved.  A substantive milestone is one that is based on successful performance by the Company and not solely contingent upon the passage of time or performance by another party.  Milestone payments collected in advance that have significant future performance obligations are presented as advance payments or deferred revenue, and are recognized when the milestone is achieved.

 

As part of our ongoing participation in the B787-9 program, we received research and development milestone payments of $22.1 and $27.3 for the three month and nine month periods ended September 27, 2012, respectively.  Revenue and cost associated with the performance of the research and development are included in program revenue and costs.  We expect to receive additional payments related to research and development on this program. These additional payments remain un-negotiated as of September 27, 2012.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

10.  Advance Payments and Deferred Revenue/Credits

 

Advance payments.  Advance payments are those payments made to Spirit by third parties in contemplation of the future performance of services, receipt of goods, incurrence of expenditures, or for other assets to be provided by Spirit on a contract and are repayable if such obligation is not satisfied. The amount of advance payments to be recovered against units expected to be delivered within a year is classified as a short-term liability, with the balance of the unliquidated advance payments classified as a long-term liability.

 

In March 2012, we signed a Memorandum of Agreement with Airbus providing for us to receive advance payments in 2012.  The advance payments will be offset against the recurring price of A350 XWB ship sets invoiced by Spirit at a rate of $1.25 per ship set.  We received $50.0 and $250.0 in the three and nine month periods ended September 27, 2012, respectively.

 

Deferred revenue/credits.  Deferred revenue/credits generally consist of nonrefundable amounts received in advance of revenue being earned for specific contractual deliverables. These payments are classified as deferred revenue/credits when received and recognized as revenue as the production units are delivered.

 

Advance payments and deferred revenue/credits are summarized by platform as follows:

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

B737

 

$

  21.9

 

$

  23.6

 

B747-8

 

 

0.2

 

B787

 

630.8

 

629.1

 

A350 XWB

 

251.5

 

22.9

 

Airbus — All other platforms

 

7.0

 

7.4

 

Gulfstream

 

30.1

 

35.6

 

Other

 

22.1

 

9.1

 

Total advance payments and deferred revenue/credits

 

$

  963.4

 

$

  727.9

 

 

11. Government Grants

 

We received grants in the form of government funding for a portion of the site construction and other specific capital asset cost at our Kinston, North Carolina and Subang, Malaysia sites.  Deferred grant income is being amortized as a reduction to production cost. This amortization is based on specific terms associated with the different grants. In North Carolina, the deferred grant income related to the capital investment criteria, which represents half of the grant, is being amortized over the lives of the assets purchased to satisfy the capital investment performance criteria. The other half of the deferred grant income is being amortized over a ten-year period in a manner consistent with the job performance criteria. In Malaysia, the deferred grant income is being amortized based on the lives of the eligible assets constructed with the grant funds as there are no performance criteria. As of September 27, 2012, the value recorded within property, plant and equipment related to the use of grant funds in North Carolina and Malaysia was $147.4 prior to amortization, including foreign exchange rate changes.

 

Deferred grant income liability consists of the following:

 

Balance, December 31, 2011

 

$

127.9

 

Grant income recognized

 

(4.5

)

Exchange rate

 

1.6

 

Total deferred grant income liability, September 27, 2012

 

$

125.0

 

 

16



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

The asset related to the deferred grant income consists of the following:

 

Beginning Balance, December 31, 2011

 

$

128.3

 

Depreciation

 

(3.8

)

Exchange rate

 

1.6

 

Total asset value related to deferred grant income, September 27, 2012

 

$

126.1

 

 

12.  Fair Value Measurements

 

FASB’s authoritative guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance discloses three levels of inputs that may be used to measure fair value:

 

Level 1                         Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market.

 

Level 2                         Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Observable inputs, such as current and forward interest rates and foreign exchange rates, are used in determining the fair value of our interest rate swaps and foreign currency hedge contracts.

 

Level 3                         Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

17



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

 

 

Fair Value Measurements

 

 

 

September 27, 2012

 

At September 27, 2012 using

 

Description

 

Total Carrying
Amount in
Balance Sheet

 

Assets
Measured at
Fair Value

 

Liabilities
Measured at Fair
Value

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Money Market Fund

 

$

151.1

 

$

151.1

 

$

 

$

151.1

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

(4.7

)

$

 

$

(4.7

)

$

 

$

(4.7

)

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Hedge Contracts

 

$

0.1

 

$

0.1

 

$

 

$

 

$

0.1

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

December 31, 2011

 

At December 31, 2011 using

 

Description

 

Total Carrying
Amount in
Balance Sheet

 

Assets
Measured at
Fair Value

 

Liabilities
Measured at Fair
Value

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Money Market Fund

 

$

75.3

 

$

75.3

 

$

 

$

75.3

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

(4.8

)

$

 

$

(4.8

)

$

 

$

(4.8

)

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Hedge Contracts

 

$

(0.4

)

$

1.2

 

$

(1.6

)

$

 

$

(0.4

)

$

 

 

The fair value of the interest rate swaps and foreign currency hedge contracts are determined by using mark-to-market reports generated for each derivative and evaluated for counterparty risk. In the case of the interest rate swaps, the Company evaluated its counterparty risk using credit default swaps, historical default rates and credit spreads.

 

The Company’s long-term debt consists of a senior secured term loan, senior unsecured notes, and the Malaysian term loan.  The estimated fair value of our debt obligations is based on the quoted market prices for such obligations or the historical default rate for debt with similar credit ratings.  The following table presents the carrying amount and estimated fair value of long-term debt in accordance with FASB authoritative guidance on fair value measurements related to disclosures of financial instruments:

 

 

 

September 27, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Senior secured term loan (including current portion)

 

$

546.0

 

$

553.4

(1)

$

561.9

 

$

560.1

(1)

Senior unsecured notes due 2017

 

295.4

 

324.8

(1)

294.9

 

325.5

(1)

Senior unsecured notes due 2020

 

300.0

 

330.0

(1)

300.0

 

317.9

(1)

Malaysian loan

 

13.9

 

13.0

(2)

16.1

 

14.1

(2)

Total

 

$

1,155.3

 

$

1,221.2

 

$

1,172.9

 

$

1,217.6

 

 


(1)          Level 1 Fair Value hierarchy

 

(2)          Level 2 Fair Value hierarchy

 

See Note 13, Investments for fair value disclosure on government and corporate debt securities.

 

18



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

13.  Derivative and Hedging Activities

 

The Company enters into interest rate swap agreements to reduce its exposure to the variable rate portion of its long-term debt. The Company also enters into foreign currency hedge contracts to reduce the risks associated with the changes in foreign exchange rates on sales and cost of sales denominated in currencies other than the entities’ functional currency. Any gains or losses on the hedges are included in earnings when the underlying transaction that was hedged occurs. The Company does not use these contracts for speculative or trading purposes. On the inception date, the Company designates a derivative contract as either a fair value or cash flow hedge in accordance with FASB guidance on accounting for derivatives and hedges and links the contract to either a specific asset or liability on the balance sheet, or to forecasted commitments or transactions. The Company formally documents the hedging relationship between the hedging instrument and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge’s inception and on a quarterly basis, whether the derivative item is effective in offsetting changes in fair value or cash flows.

 

Changes in the fair value of derivative instruments considered to be effective hedges are reported in other comprehensive income, net of tax. In the case of interest rate swaps, amounts are subsequently reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. If the actual interest rate on the fixed rate portion of debt is less than LIBOR, the monies received are recorded as an offset to interest expense. Conversely, if the actual interest rate on the fixed rate portion of debt is greater than LIBOR, then the Company pays the difference, which is recorded to interest expense. Reclassifications of the amounts related to the foreign currency hedge contracts are recorded to earnings in the same period in which the underlying transaction occurs. Any change in the fair value resulting from ineffectiveness is immediately recognized in earnings.

 

The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has applied these valuation techniques as of September 27, 2012 and believes it has obtained the most accurate information available for the types of derivative contracts it holds. The Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions, which are expected to be able to fully perform under the terms of the agreement.

 

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item; the derivative expires or is sold, terminated or exercised; the derivative is no longer designated as a hedging instrument because it is unlikely that a forecasted transaction will occur; or management determines that the designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company continues to carry the derivative instrument on the balance sheet at its fair value with subsequent changes in fair value included in earnings, and gains and losses that were accumulated in other comprehensive income are recognized immediately in earnings to the extent the forecasted transaction is not expected to occur, or when the underlying transaction settles.

 

To the extent that derivative instruments do not qualify for hedge accounting treatment, the changes in fair market value of the instruments are reported in the results of operations for the current period.  As a result of the senior secured Credit Agreement entered into on April 18, 2012, the interest rate swaps no longer qualify for hedge accounting while LIBOR is below the LIBOR floor of 75 basis points under the Credit Agreement.  Amounts in other comprehensive income for interest rate swaps as of April 18, 2012 remain in other comprehensive income and will be amortized over the remaining tenor of the interest rate swaps.

 

The Company enters into master netting arrangements for its derivatives to mitigate the credit risk of financial instruments.

 

The Company’s hedge agreements do not include provisions requiring collateral. The Company has certain derivative instruments covered by master netting arrangements whereby, in the event of a default as defined by the senior secured credit facility or termination event, the non-defaulting party has the right to offset any amounts payable against any obligation of the defaulting party under the same counterparty agreement.

 

The entire asset classes of the Company, including hedges, are pledged as collateral for both the term loan and the revolving credit facility under the Company’s senior secured credit facility (see Note 15, Debt).

 

19



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Interest Rate Swaps

 

We enter into floating-to-fixed interest rate swap agreements periodically. As of September 27, 2012, the interest rate swap agreements had notional amounts totaling $325.0.

 

 

 

 

 

 

 

 

 

Effective

 

Fair Value,

 

Notional Amount

 

Expires

 

Variable Rate

 

Fixed Rate(1)

 

Fixed Rate(2)

 

September 27, 2012

 

$

50

 

March 2013

 

1 Month LIBOR

 

0.72

%

N/A

 

$

(0.1

)

$

50

 

June 2013

 

1 Month LIBOR

 

0.84

%

N/A

 

$

(0.2

)

$

225

 

July 2014

 

1 Month LIBOR

 

1.37

%

N/A

 

$

(4.4

)

 

 

 

 

 

 

 

 

Total

 

$

(4.7

)

 


(1)           The fixed rate represents the rate at which interest is paid by the Company pursuant to the terms of its interest rate swap agreements.

 

(2)           As of September 27, 2012 the interest rate swaps are no longer effective and therefore the effective fixed rate is not applicable.

 

The purpose of entering into these swaps was to reduce the Company’s exposure to variable interest rates. The interest rate swaps settle on a monthly basis when interest payments are made. These settlements occur through the maturity date. The interest rate swaps are being accounted for as cash flow hedges in accordance with FASB authoritative guidance. The fair value of the interest rate swaps was a liability (unrealized loss) of ($4.7) at September 27, 2012 and ($4.8) at December 31, 2011.

 

Foreign Currency Forward Contracts

 

Spirit’s wholly-owned subsidiary Spirit AeroSystems (Europe) Limited (“Spirit Europe”) has certain sales, expenses, assets and liabilities that are denominated in British pounds sterling. However, certain sales of Spirit Europe’s products and some procurement costs are denominated in U.S. dollars and Euros. As a consequence, movements in exchange rates could cause net sales and our expenses to fluctuate, affecting our profitability and cash flows. In addition, even when revenues and expenses are matched, we must translate British pound sterling denominated results of operations, assets and liabilities for our foreign subsidiaries to U.S. dollars in our consolidated financial statements. Consequently, increases and decreases in the value of the U.S. dollar as compared to the British pound sterling will affect our reported results of operations and the value of our assets and liabilities on our consolidated balance sheet, even if our results of operations or the value of those assets and liabilities has not changed in its original currency. These transactions could significantly affect the comparability of our results between financial periods and/or result in significant changes to the carrying value of our assets, liabilities and shareholders’ equity.

 

We use foreign currency hedge contracts to reduce our exposure to currency exchange rate fluctuations, which include hedging contracts to hedge U.S. dollar revenue from certain customers.  The objective of these contracts is to minimize the impact of currency exchange rate movements on our operating results. The hedges are being accounted for as cash flow hedges in accordance with FASB authoritative guidance. Gains and losses from these cash flow hedges are recorded to other comprehensive income until the underlying transaction for which the hedge was placed occurs and then the value in other comprehensive income is reclassified to earnings. The exception to the aforementioned treatment of realized gains/losses involves certain cash payments to Airbus, payable in British pounds sterling which were hedged, and this amount in other comprehensive income was reclassified into other assets when the underlying transaction occurred and will be amortized over the first A350 XWB contract block. The fair value of the forward contracts was a net asset of less than $0.1 as of September 27, 2012.

 

20



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Notional Amount

 

 

 

September 27, 2012

 

December 31, 2011

 

Year

 

USD
Buy/(Sell)

 

Foreign
Buy/(Sell)

 

USD
Buy/(Sell)

 

Foreign
Buy/(Sell)

 

2012

 

$

(1.1

)

£

0.7

 

$

(9.0

)

£

5.6

 

2013

 

 

 

 

(0.1

)

 

 

$

(1.1

)

£

0.7

 

$

(9.0

)

£

5.5

 

 

The following table summarizes the Company’s fair value of outstanding derivatives at September 27, 2012 and December 31, 2011:

 

 

 

Fair Values of Derivative Instruments

 

 

 

Other Asset Derivatives

 

Other Liability Derivatives

 

 

 

September 27, 2012

 

December 31, 2011

 

September 27, 2012

 

December 31, 2011

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

Current

 

$

 

$

 

$

3.0

 

$

2.4

 

Non-current

 

 

 

1.7

 

2.4

 

Foreign currency hedge contracts

 

 

 

 

 

 

 

 

 

Current

 

0.1

 

 

 

0.2

 

Non-current

 

 

 

 

 

Total derivatives designated as hedging instruments

 

0.1

 

 

4.7

 

5.0

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency hedge contracts

 

 

 

 

 

 

 

 

 

Current

 

 

0.6

 

 

0.7

 

Non-current

 

 

0.6

 

 

0.7

 

Total derivatives not designated as hedging instruments

 

 

1.2

 

 

1.4

 

Total derivatives

 

$

0.1

 

$

1.2

 

$

4.7

 

$

6.4

 

 

21



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

The impact on other comprehensive income (“OCI”) and earnings from cash flow hedges for the three and for the nine months ended September 27, 2012 and September 29, 2011 was as follows:

 

Derivatives in

 

Amount of Gain or (Loss) Recognized
in OCI, net of tax, on Derivative

(Effective Portion)

 

Location of (Gain)
or Loss
Reclassified from

 

Amount of (Gain) or Loss Reclassified
from Accumulated OCI into Income
(Effective Portion)

 

Location of (Gain) or
Loss Recognized in
Income on Derivative
(Ineffective Portion

 

Amount of Loss Recognized in Income
on Derivative (Ineffective Portion and
Amount Excluded from Effectiveness
Testing)

 

Cash Flow

 

For the Three Months Ended

 

Accumulated OCI

 

For the Three Months Ended

 

and Amount Excluded

 

For the Three Months Ended

 

Hedging
Relationships

 

September 27,
2012

 

September 29,
2011

 

into Income
(Effective Portion)

 

September 27,
2012

 

September 29,
2011

 

from Effectiveness
Testing)

 

September 27,
2012

 

September 29,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(2.6

)

Interest expense

 

$

 

$

1.2

 

Other (income)/expense

 

$

 

$

 

Foreign currency hedge contracts

 

0.1

 

(0.3

)

Sales/Revenue

 

(0.1

)

 

Other (income)/expense

 

 

 

Total

 

$

0.1

 

$

(2.9

)

 

 

$

(0.1

)

$

1.2

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in

 

Amount of Gain or (Loss) Recognized
in OCI, net of tax, on Derivative

(Effective Portion)

 

Location of (Gain)
or Loss
Reclassified from

 

Amount of Loss Reclassified from
Accumulated OCI into Income
(Effective Portion)

 

Location of (Gain) or
Loss Recognized in
Income on Derivative
(Ineffective Portion

 

Amount of Loss Recognized in Income
on Derivative (Ineffective Portion and
Amount Excluded from Effectiveness
Testing)

 

Cash Flow

 

For the Nine Months Ended

 

Accumulated OCI

 

For the Nine Months Ended

 

and Amount Excluded

 

For the Nine Months Ended

 

Hedging
Relationships

 

September 27,
2012

 

September 29,
2011

 

into Income
(Effective Portion)

 

September 27,
2012

 

September 29,
2011

 

from Effectiveness
Testing)

 

September 27,
2012

 

September 29,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(0.9

)

$

(4.2

)

Interest expense

 

$

3.1

 

$

7.6

 

Other (income)/expense

 

$

 

$

 

Foreign currency hedge contracts

 

0.1

 

0.5

 

Sales/Revenue

 

 

0.1

 

Other (income)/expense

 

 

 

Total

 

$

(0.8

)

$

(3.7

)

 

 

$

3.1

 

$

7.7

 

 

 

$

 

$

 

 

The impact on earnings from interest rate swaps that are no longer effective was a loss of ($0.9) for the nine months ended September 27, 2012 and zero for nine months ended September 29, 2011.

 

The impact on earnings from foreign currency hedge contracts that do not qualify as cash flow hedges was $0.2 income for the nine months ended September 27, 2012 and not material for nine months ended September 29, 2011.

 

Gains and losses accumulated in OCI for interest rate swaps are reclassified into earnings as each interest rate period is reset. During the next twelve months, the Company estimates that a loss of ($0.8) will be reclassified from OCI, net of tax, as a charge to earnings from interest rate swaps. Interest rate swaps are placed for a period of time not to exceed the maturity of the Company’s senior secured term loan. None of the gains or losses reclassified to earnings were attributable to the discontinuance of cash flow hedges.

 

Gains and losses accumulated in OCI for foreign currency hedge contracts are reclassified into earnings as the underlying transactions for which the contracts were entered into are realized. During the next twelve months, the Company estimates that a gain of less than $0.1 will be reclassified from OCI, net of tax. None of the gains or losses reclassified to earnings are attributable to the discontinuance of cash flow hedges.

 

22



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

14.  Investments

 

The amortized cost and approximate fair value of held-to-maturity securities are as follows:

 

 

 

September 27, 2012

 

December 31, 2011

 

 

 

Current

 

Noncurrent

 

Current

 

Noncurrent

 

Government and Corporate Debt Securities

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

0.6

 

$

2.9

 

$

0.4

 

$

3.1

 

Unrealized gains

 

 

0.1

 

 

 

Unrealized losses

 

 

 

 

(0.1

)

Fair value

 

$

0.6

 

$

3.0

 

$

0.4

 

$

3.0

 

 

Maturities of held-to-maturity securities at September 27, 2012 are as follows:

 

 

 

Amortized
Cost

 

Approximate
Fair Value

 

Within One Year

 

$

0.6

 

$

0.6

 

One to Five Years

 

1.8

 

1.9

 

Five to Ten Years

 

0.2

 

0.2

 

After Ten Years

 

0.9

 

0.9

 

Total

 

$

3.5

 

$

3.6

 

 

At September 27, 2012 and December 31, 2011, the fair value of certain investments in debt and marketable securities are less than their historical cost.  Total fair value of these investments was $0.5 and $1.8, respectively, for the periods then ended, which is approximately 13% and 53%, respectively, of the Company’s held-to-maturity investment portfolio.  These declines primarily resulted from decreases in market interest rates and failure of certain investments to maintain consistent credit quality ratings or meet projected earnings targets.

 

Based on evaluation of available evidence, including changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

 

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the permanent impairment is identified.

 

15.  Debt

 

Total debt shown on the balance sheet is comprised of the following:

 

 

 

September 27,

 

December 31,

 

 

 

2012

 

2011

 

Senior secured term loan (short and long-term)

 

$

546.0

 

$

561.9

 

Senior notes (due 2017 and 2020)

 

595.4

 

594.9

 

Malaysian term loan

 

13.9

 

16.1

 

Present value of capital lease obligations

 

16.4

 

15.2

 

Other

 

7.4

 

12.8

 

Total

 

$

1,179.1

 

$

1,200.9

 

 

23



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Senior Secured Term Loan

 

On April 18, 2012, Spirit entered into a $1.2 billion senior secured Credit Agreement (the “Credit Agreement”) consisting of a $650.0 revolving credit facility and a $550.0 term loan B facility.  The Credit Agreement refinanced and replaced the Second Amended and Restated Credit Agreement dated as of November 27, 2006, as amended.  Proceeds of the new term loan were used to pay off outstanding amounts under the prior credit agreement.  The revolving credit facility matures April 18, 2017 and bears interest, at Spirit’s option, at either LIBOR, or a defined “base rate” plus an applicable margin based on Spirit’s debt-to-EBITDA ratio (see table below).  The term loan matures April 18, 2019 and bears interest, at Spirit’s option, at LIBOR plus 3.00% with a LIBOR floor of 0.75% or base rate plus 2.00%, subject to a step down to LIBOR plus 2.75% or base rate plus 1.75%, as applicable, in the event Spirit’s secured debt-to-EBITDA ratio is below 1:1 at any time after 2012.  Substantially all of Spirit’s assets, including inventory and property, plant and equipment, were pledged as collateral for both the term loan and the revolving credit facility.  As of September 27, 2012, the outstanding balance of the term loan was $548.6.  As of December 31, 2011, the outstanding balance of the old term loan, which was repaid upon closing of the new credit facilities, was $561.9.  As of September 27, 2012 the carrying amount of the term loan was $546.0.  The amount outstanding under the revolving credit facility was zero as of September 27, 2012.  The amount outstanding under the old revolving credit facility was zero as of December 31, 2011.  As of September 27, 2012, there were $19.9 of letters of credit outstanding under the revolving credit facility.  The Company recorded a charge of $9.5 in the second quarter of 2012 for unamortized deferred financing fees as a result of extinguishment of the debt under the prior credit agreement.

 

In addition to paying interest on outstanding principal under the Credit Agreement, Spirit is required to pay an unused line fee on the unused portion of the commitments under the revolving credit facility based on Spirit’s debt-to-EBITDA ratio (see table below). Spirit is required to pay letter of credit fees equal to the applicable margin for LIBOR rate revolving credit borrowings with respect to letters of credit issued under the revolving credit facility (see table below).  Spirit is also required to pay to the issuing banks that issue any letters of credit, letter of credit fronting fees in respect of letters of credit at a rate equal to twenty basis points per year, and to the administrative agent thereunder customary administrative fees.

 

Pricing Tier

 

Debt-to-EBITDA
Ratio

 

Commitment
Fee

 

Letter of
Credit
Fee

 

Eurodollar
Rate Loans

 

Base Rate
Loans

 

1

 

> 3.0:1

 

0.450%

 

2.50%

 

2.50%

 

1.50%

 

2

 

< 3.0:1 but > 2.25:1

 

0.375%

 

2.25%

 

2.25%

 

1.25%

 

3

 

< 2.25:1 but > 1.75:1

 

0.300%

 

2.00%

 

2.00%

 

1.00%

 

4

 

< 1.75:1

 

0.250%

 

1.75%

 

1.75%

 

0.75%

 

 

At September 27, 2012, the Company’s debt-to-EBITDA ratio was 4.65:1.0, resulting in applicable margins under the revolving credit facility, which will go into effect upon delivery of a quarterly compliance certificate, of 2.5% and 1.5% on Eurodollar and base rate loans, respectively, and commitment fees on the undrawn portion of the revolving credit facility and letter of credit fees of 0.45% and 2.5%, respectively.

 

The Credit Agreement contains customary affirmative and negative covenants, including restrictions on indebtedness, liens, type of business, acquisitions, investments, sales or transfers of assets, payments of dividends, transactions with affiliates, change in control and other matters customarily restricted in such agreements.  The Credit Agreement also contained the following financial covenants (as defined in the Credit Agreement):

 

Senior Secured Leverage Ratio

 

Shall not exceed 2.75:1.0

Interest Coverage Ratio

 

Shall not be less than 4.0:1.0

Total Leverage Ratio

 

Shall not exceed 4.0:1.0

 

24



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

To address the charges in the third quarter, the Company amended the Credit Agreement effective October 26, 2012. The amendment resulted in a revision of the financial covenant ratios. No event of default has occurred and the Company is in full compliance for its third quarter 2012 compliance certification. The amended ratios are illustrated in the table below:

 

 

 

Q3 2012

 

Q4 2012

 

Q1 2013

 

Q2 2013

 

Thereafter

 

Senior Secured Leverage Ratio (Shall not exceed)

 

3.25

 

3.25

 

3.25

 

2.75

 

2.75

 

Interest Coverage Ratio (Shall not be less than)

 

2.25

 

2.25

 

2.25

 

3.00

 

4.00

 

Total Leverage Ratio (Shall not exceed)

 

6.00

 

6.00

 

6.00

 

4.75

 

4.00

 

 

Additionally, the amendment increased the time the Company has to apply the proceeds from the insurance settlement in connection with the severe weather event against expenses resulting from the event from 12 months to 24 months before the proceeds may be considered eligible for prepayment against the senior secured credit facility.

 

Senior Notes

 

On November 18, 2010, we issued $300.0 aggregate of 6.75% Senior Notes due December 15, 2020 (the “2020 Notes”), with interest payable, in cash in arrears, on June 15 and December 15 of each year, beginning June 15, 2011. The 2020 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and Spirit’s existing and future domestic subsidiaries that guarantee Spirit’s obligations under Spirit’s senior secured credit facility.  The carrying value of the 2020 Notes was $300.0 as of September 27, 2012.

 

On September 30, 2009, we issued $300.0 of 7.50% Senior Notes due October 1, 2017 (the “2017 Notes”), with interest payable, in cash in arrears, on April 1 and October 1 of each year, beginning April 1, 2010. The 2017 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and Spirit’s existing and future domestic subsidiaries that guarantee Spirit’s obligations under Spirit’s senior secured credit facility. The carrying value of the 2017 Notes was $295.4 as of September 27, 2012.

 

As of September 27, 2012, we were and expect to remain in full compliance with all covenants contained in the indentures governing the 2020 Notes and the 2017 Notes for the foreseeable future.

 

Malaysian Term Loan

 

On June 2, 2008, the Company’s wholly-owned subsidiary, Spirit AeroSystems Malaysia SDN BHD entered into a Facility Agreement for a term loan facility for Ringgit Malaysia (“RM”) 69.2 (approximately USD $20.0 equivalent) (the “Malaysia Facility”), with the Malaysian Export-Import Bank. The Malaysia Facility requires quarterly principal repayments of RM 3.3 (approximately USD $1.0) from September 2011 through May 2017 and quarterly interest payments payable at a fixed interest rate of 3.50% per annum.  The Malaysia Facility loan balance as of September 27, 2012 was $13.9.

 

French Factory

 

On July 17, 2009, the Company’s indirect wholly-owned subsidiary, Spirit AeroSystems France SARL entered into a capital lease agreement for €9.0 (approximately USD $13.1 equivalent) with a subsidiary of BNP Paribas Bank to be used towards the construction of an aerospace-related component assembly plant in Saint-Nazaire, France.  Lease payments are variable, subject to the three-month Euribor rate plus 2.20%. Lease payments are due quarterly through April 2025. As of September 27, 2012, the Saint-Nazaire capital lease balance was $10.7.

 

Nashville Design Center

 

On September 21, 2012, the Company entered into a capital lease agreement for $2.6 million for a portion of an office building in Nashville, Tennessee to be used for design of aerospace components.  Lease payments are due monthly, and are subject to yearly rate increases until the end of the lease term of 124 months.

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

16. Pension and Other Post-Retirement Benefits

 

 

 

Defined Benefit Plans

 

 

 

For the Three
Months Ended

 

For the Nine
Months Ended

 

Components of Net Periodic Pension 
Income

 

September 27,
2012

 

September 29,
2011

 

September 27,
2012

 

September 29,
2011

 

Service cost

 

$

1.7

 

$

1.5

 

$

5.0

 

$

4.3

 

Interest cost

 

11.3

 

11.1

 

33.9

 

33.3

 

Expected return on plan assets

 

(18.7

)

(16.8

)

(56.1

)

(50.4

)

Amortization of net (gain)/loss

 

1.4

 

(0.1

)

4.2

 

(0.2

)

Net periodic pension income

 

$

(4.3

)

$

(4.3

)

$

(13.0

)

$

(13.0

)

 

 

 

Other Benefits

 

 

 

For the Three
Months Ended

 

For the Nine
Months Ended

 

Components of Other Benefit Expense

 

September 27,
2012

 

September 29,
2011

 

September 27,
2012

 

September 29,
2011

 

Service cost

 

$

0.8

 

$

0.7

 

$

2.5

 

$

2.2

 

Interest cost

 

0.9

 

0.9

 

 2.6

 

2.8

 

Amortization of net (gain)/loss

 

0.3

 

0.3

 

 0.9

 

0.6

 

Net periodic other benefit expense

 

$

2.0

 

$

1.9

 

$

6.0

 

$

5.6

 

 

Employer Contributions

 

We expect to contribute zero dollars to the U.S. qualified pension plan and less than $0.7 to both the Supplemental Executive Retirement Plan (SERP) and post-retirement medical plans in 2012.  Our projected contributions to the U.K. pension plan for 2012 are $9.0, of which $6.6 was contributed by the end of the third quarter of 2012.  We anticipate contributing the additional $2.4 to the U.K. pension plan during the remainder of 2012.  The entire amount contributed and the projected contributions can vary based on exchange rate fluctuations.

 

17.  Stock Compensation

 

Holdings has established various stock compensation plans which include restricted share grants and stock purchase plans. Compensation values are based on the value of Holdings’ common stock at the grant date. The common stock value is added to equity and charged to period expense or included in inventory and cost of sales.

 

For the three months ended September 27, 2012, Holdings recognized a net total of $3.4 of stock compensation expense, which is net of stock forfeitures, as compared to $3.4 of stock compensation expense, net of forfeitures, for the three months ended September 29, 2011.  The entire $3.4 of stock compensation expense recorded for the three months ended September 27, 2012 was recorded as selling, general and administrative expense in accordance with FASB authoritative guidance. The entire $3.4 of stock compensation expense recorded for the three months ended September 29, 2011 was recorded as selling, general and administrative expense.

 

For the nine months ended September 27, 2012, the Company recognized a total of $12.0 of stock compensation expense, net of forfeitures, as compared to $8.6 of stock compensation expense, net of forfeitures, recognized for the nine months ended September 29, 2011. Of the total $12.0 of stock compensation expense recorded for the nine months ended September 27, 2012, in accordance with FASB authoritative guidance, $2.1 was charged directly to cost of sales and $9.8 was recorded as selling, general and administrative expense, which includes $0.9 of accelerated vesting expense for participants meeting the conditions for “Qualifying

 

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Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

Retirement” under the Short-Term Incentive Plan or “STIP” as set out in the Proxy Statement for our 2012 annual meeting of stockholders. Of the $8.6 of stock compensation expense recorded for the nine months ended September 29, 2011, less than $0.1 was charged directly to cost of sales, $8.5 was recorded as selling, general and administrative expense, and the remaining $0.1 was capitalized in inventory and is recognized through cost of sales in accordance with FASB authoritative guidance.

 

In February 2012, 104,405 shares of Class A common stock with an aggregate grant date fair value of $2.5 were granted under the Company’s Short-Term Incentive Plan and such shares will vest on the one-year anniversary of the grant date. Additionally, 169,391 shares of Class A common stock with an aggregate grant date fair value of $4.3 granted under the Company’s Short-Term Incentive Plan vested during the quarter ended March 29, 2012.

 

In May 2012, 618,804 shares of Class A common stock with an aggregate grant date fair value of $15.3 were granted under the Company’s Long-Term Incentive Plan and such shares will vest annually in three equal installments beginning on the two-year anniversary of the grant date.  Under the Company’s Board of Director’s Stock Plan, 29,271 shares of Class A common stock with an aggregate grant date fair value of $0.7 were granted during the second quarter, and such shares will vest on the one-year anniversary of the grant date.  Additionally, 421,088 shares of Class A common stock with an aggregate grant date fair value of $7.8 awarded under the Company’s Long-Term Incentive Plan and 27,063 shares of Class A common stock with an aggregate grant date fair value of $0.6 awarded under the Board of Directors Stock Plan vested during the second quarter of 2012.

 

On June 22, 2012, 92,250 shares of Class A common stock with an aggregate grant date fair value of $2.2 were granted to members of the UAW union pursuant to performance improvements provided for in the 2010 ten-year labor contract.  The shares vested immediately upon issuance.

 

18. Income Taxes

 

The process for calculating our income tax expense involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. Deferred tax assets are periodically evaluated to determine their recoverability. The total net deferred tax assets at September 27, 2012 and December 31, 2011 were $200.5 and $102.1, respectively. This increase is primarily due to a majority of the long-term contract forward losses not currently deductible for tax purposes.

 

In general, the Company records income tax expense each quarter based on its best estimate as to the full year’s effective tax rate. Certain items, however, are given discrete period treatment and the tax effects for such items are therefore reported in the quarter that an event arises. Events or items that give rise to discrete recognition include finalizing amounts in income tax returns filed, finalizing audit examinations for open tax years, and an expiring statute of limitations.

 

However, the Company has determined that a calculation of an annual effective tax rate would not represent a reliable estimate due to the sensitivity of the annual effective tax rate estimate to even minimal changes to forecasted fourth quarter pre-tax earnings. Under the discrete method, the Company determines the tax expense based upon actual results as if the interim period were an annual period.  The discrete method was used for our U.S. pre-tax income and an annual effective rate was used for our international pre-tax income.

 

The 60.8% effective tax rate for the nine months ended September 27, 2012 differs from the 31.0% effective tax rate for the same period in 2011 primarily due to a corresponding tax benefit from current period losses combined with our permanent differences and income tax credits.

 

We file income tax returns in all jurisdictions in which we operate. We established reserves to provide for additional income taxes that may be due in future years as these previously filed tax returns are audited. These reserves have been established based on management’s assessment as to the potential exposure attributable to permanent differences and associated interest.  All tax reserves are analyzed quarterly and adjustments made as events occur that warrant modification.

 

We continue to operate under a tax holiday in Malaysia effective through September 2024.  Management is maintaining a reserve for potential uncertainty in meeting the tax holiday’s conditional employment and investment thresholds.

 

We are participating in the Internal Revenue Service’s Compliance Assurance Process (“CAP”) program for our 2011, 2012 and 2013 tax years.  The CAP program’s objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination.  HM Revenue & Customs is currently examining our 2009 U.K. income tax return.  While a change could result from the ongoing examinations, the Company expects no material change in its recorded unrecognized tax benefit liability in the next 12 months.

 

27



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

($, €, £, and RM in millions other than per share amounts)

 

19.  Equity

 

Earnings per Share Calculation

 

Basic net (loss) income per share is computed using the weighted-average number of outstanding shares of common stock during the measurement period. Diluted net (loss) income per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential outstanding shares of common stock during the measurement period.

 

Subject to preferences that may apply to shares of preferred stock outstanding at the time, holders of the Company’s outstanding common stock are entitled to any dividend declared by the Board of Directors out of funds legally available for this purpose. No dividend may be declared on the Class A or Class B common stock unless at the same time an equal dividend is paid on every share of Class A and Class B common stock. Dividends paid in shares of the Company’s common stock must be paid, with respect to a particular class of common stock, in shares of that class. The Company does not intend to pay cash dividends on its common stock. In addition, the terms of the Company’s current financing agreements preclude it from paying any cash dividends on its common stock.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

For the Three Months Ended

 

 

 

September 27, 2012

 

September 29, 2011

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income