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

 

TABLE OF CON TENTS

 

PART I — FINANCIAL INFORMATION

			Page
Item 1.		Condensed Consolidated Financial Statements (unaudited)	7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.		Controls and Procedures	62
PART II — OTHER INFORMATION			62
Item 1.		Legal Proceedings	62
Item 1A.		Risk Factors	62
Item 6.		Exhibits	63
Signatures			64

 

2

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)

 

6

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.

 

9

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.

 

10

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.

 

11

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.

 

12

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.

 

13

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.

 

14

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.

 

15

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

---