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 26, 2013

 

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

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 25, 2013, the registrant had outstanding 120,713,397 shares of class A common stock, $0.01 par value per share, and 23,953,341 shares of class B common stock, $0.01 par value per share.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Page

Item 1.

Financial Statements (unaudited)

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61

Item 4.

Controls and Procedures

61

 

 

 

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

62

Item 1A.

Risk Factors

62

Item 6.

Exhibits

63

Signatures

 

64

 

2



Table of Contents

 

PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

For the Three
 Months Ended

 

For the Nine
 Months Ended

 

 

 

September 26, 2013

 

September 27,
2012

 

September 26,
2013

 

September 27,
2012

 

 

 

($ in millions, except per share data)

 

Net revenues

 

$

1,503.7

 

$

1,365.3

 

$

4,466.6

 

$

3,972.1

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

1,388.4

 

1,746.7

 

4,315.7

 

3,994.6

 

Selling, general and administrative

 

52.8

 

40.6

 

151.2

 

125.9

 

Impact from severe weather event

 

4.5

 

(218.8

)

19.6

 

(164.3

)

Research and development

 

7.5

 

7.3

 

23.6

 

21.6

 

Total operating costs and expenses

 

1,453.2

 

1,575.8

 

4,510.1

 

3,977.8

 

Operating income (loss)

 

50.5

 

(210.5

)

(43.5

)

(5.7

)

Interest expense and financing fee amortization

 

(17.1

)

(16.2

)

(52.0

)

(62.6

)

Interest income

 

0.1

 

 

0.2

 

0.1

 

Other income (expense), net

 

7.4

 

4.1

 

(1.2

)

3.4

 

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

 

40.9

 

(222.6

)

(96.5

)

(64.8

)

Income tax benefit

 

53.0

 

88.3

 

62.3

 

39.4

 

Income (loss) before equity in net (loss) of affiliates

 

93.9

 

(134.3

)

(34.2

)

(25.4

)

Equity in net (loss) of affiliates

 

(0.2

)

(0.1

)

(0.3

)

(0.5

)

Net income (loss)

 

$

93.7

 

$

(134.4

)

$

(34.5

)

$

(25.9

)

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.66

 

$

(0.94

)

$

(0.24

)

$

(0.18

)

Diluted

 

$

0.65

 

$

(0.94

)

$

(0.24

)

$

(0.18

)

 

See notes to condensed consolidated financial statements (unaudited)

 

3



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

 

 

For the Three
Months Ended

 

For the Nine
Months Ended

 

 

 

September 26,
2013

 

September 27,
2012

 

September 26,
2013

 

September 27,
2012

 

 

 

($ in millions)

 

Net income

 

$

93.7

 

$

(134.4

)

$

(34.5

)

$

(25.9

)

Changes in other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(0.9

)

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

 

 

 

 

1.9

 

Net gain on interest rate swaps

 

 

 

 

1.0

 

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

 

Net (loss) on foreign currency hedge contracts

 

 

0.1

 

 

0.1

 

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

 

0.2

 

0.2

 

0.6

 

0.6

 

Unrealized foreign exchange (loss) on intercompany loan, net of tax effect of $0.9 and $0.7 for each of the three months ended and $0.2 and $0.7 for each of the nine months ended, respectively

 

2.4

 

2.2

 

(0.8

)

2.2

 

Foreign currency translation adjustments

 

8.1

 

5.9

 

(1.8

)

5.9

 

Total other comprehensive income (loss)

 

10.7

 

8.4

 

(2.0

)

9.8

 

Total comprehensive income (loss)

 

$

104.4

 

$

(126.0

)

$

(36.5

)

$

(16.1

)

 

See notes to condensed consolidated financial statements (unaudited)

 

4



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

September 26,

 

December 31,

 

 

 

2013

 

2012

 

 

 

($ in millions)

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

435.6

 

$

440.7

 

Accounts receivable, net

 

623.7

 

420.7

 

Inventory, net

 

2,120.0

 

2,410.8

 

Deferred tax asset - current

 

68.8

 

57.1

 

Other current assets

 

19.3

 

26.1

 

Total current assets

 

3,267.4

 

3,355.4

 

Property, plant and equipment, net

 

1,767.0

 

1,698.5

 

Pension assets

 

99.2

 

78.4

 

Deferred tax asset - non-current, net

 

287.0

 

192.0

 

Other assets

 

91.9

 

91.0

 

Total assets

 

$

5,512.5

 

$

5,415.3

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

700.5

 

$

659.0

 

Accrued expenses

 

249.7

 

216.3

 

Profit sharing

 

43.7

 

28.3

 

Current portion of long-term debt

 

16.6

 

10.3

 

Advance payments, short-term

 

124.6

 

70.7

 

Deferred revenue, short-term

 

23.1

 

18.4

 

Deferred grant income liability - current

 

8.2

 

6.9

 

Other current liabilities

 

84.2

 

57.1

 

Total current liabilities

 

1,250.6

 

1,067.0

 

Long-term debt

 

1,152.9

 

1,165.9

 

Advance payments, long-term

 

755.9

 

833.6

 

Pension/OPEB obligation

 

78.4

 

75.6

 

Deferred grant income liability - non-current

 

109.5

 

116.6

 

Deferred revenue and other deferred credits

 

33.5

 

30.8

 

Other liabilities

 

160.2

 

128.9

 

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, 120,734,535 and 119,671,298 shares issued, respectively

 

1.2

 

1.2

 

Common stock, Class B par value $0.01, 150,000,000 shares authorized, 23,954,587 and 24,025,880 shares issued, respectively

 

0.2

 

0.2

 

Additional paid-in capital

 

1,023.3

 

1,012.3

 

Accumulated other comprehensive (loss)

 

(147.1

)

(145.2

)

Retained earnings

 

1,093.4

 

1,127.9

 

Total shareholders’ equity

 

1,971.0

 

1,996.4

 

Noncontrolling interest

 

0.5

 

0.5

 

Total equity

 

1,971.5

 

1,996.9

 

Total liabilities and equity

 

$

5,512.5

 

$

5,415.3

 

 

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 26, 2013

 

September 27, 2012

 

 

 

($ in millions)

 

Operating activities

 

 

 

 

 

Net (loss)

 

$

(34.5

)

$

(25.9

)

Adjustments to reconcile net (loss) to net cash provided by operating activities

 

 

 

 

 

Depreciation expense

 

117.4

 

113.6

 

Amortization expense

 

3.9

 

3.8

 

Amortization of deferred financing fees

 

4.8

 

13.1

 

Accretion of customer supply agreement

 

0.3

 

0.1

 

Employee stock compensation expense

 

15.7

 

12.0

 

Excess tax benefit of share-based payment arrangements

 

(0.5

)

(1.2

)

Loss from discontinued hedge accounting on interest rate swaps

 

 

2.2

 

(Gain) loss from the ineffectiveness of hedge contracts

 

(1.9

)

0.2

 

Loss (gain) from foreign currency transactions

 

3.3

 

(5.9

)

Loss on disposition of assets

 

0.2

 

5.8

 

Deferred taxes

 

(104.6

)

(100.6

)

Long-term tax provision

 

(2.5

)

1.3

 

Pension and other post retirement benefits, net

 

(10.8

)

(7.0

)

Grant income

 

(5.3

)

(4.1

)

Equity in net loss of affiliates

 

0.3

 

0.5

 

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(206.5

)

(242.5

)

Inventory, net

 

331.4

 

272.6

 

Accounts payable and accrued liabilities

 

72.1

 

109.7

 

Profit sharing/deferred compensation

 

15.4

 

1.6

 

Advance payments

 

(23.8

)

243.7

 

Income taxes receivable/payable

 

(8.3

)

(38.3

)

Deferred revenue and other deferred credits

 

9.5

 

(7.3

)

Insurance receivable for severe weather related expenses

 

 

(129.9

)

Insurance proceeds for investing purposes

 

 

(7.0

)

Other

 

23.7

 

25.0

 

Net cash provided by operating activities

 

199.3

 

235.5

 

Investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

(168.1

)

(163.5

)

Purchase of property, plant and equipment - severe weather event

 

(23.4

)

(7.0

)

Insurance proceeds for investing purposes - severe weather event

 

 

7.0

 

Proceeds from sale of assets

 

0.1

 

1.3

 

Other

 

(0.6

)

(1.2

)

Net cash (used in) investing activities

 

(192.0

)

(163.4

)

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

 

(8.0

)

(567.0

)

Excess tax benefit of share-based payment arrangements

 

0.5

 

1.2

 

Debt issuance and financing costs

 

(4.1

)

(11.3

)

Net cash (used in) financing activities

 

(11.6

)

(29.8

)

Effect of exchange rate changes on cash and cash equivalents

 

(0.8

)

1.6

 

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

 

(5.1

)

43.9

 

Cash and cash equivalents, beginning of period

 

440.7

 

177.8

 

Cash and cash equivalents, end of period

 

$

435.6

 

$

221.7

 

 

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.  In September 2013, the Company exercised its contractual right to withdraw from the Spirit-Progresstech joint venture.  The intended sale of the Company’s ownership interest in Spirit-Progresstech to a related party of Progresstech Ltd. is expected to occur within the next quarter and is not expected to have a material impact on the Company.

 

The accompanying unaudited interim condensed consolidated financial statements include the Company’s financial statements and the financial statements of its majority-owned subsidiaries and effectively-controlled joint ventures, 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 the 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 26, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Certain reclassifications have been made to the prior year financial statements and notes to conform to the 2013 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 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2013 (the “2012 Form 10-K”).

 

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)

 

2.  New Accounting Pronouncements

 

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (FASB ASU 2013-11).  This update was issued to give explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The provisions of FASB ASU 2013-11 are effective for fiscal years and interim periods beginning after December 15, 2013.  The adoption of the provisions of this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2013-10).  The amendments in this update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges.  The amendment is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The adoption of the provisions of ASU 2013-10 did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (FASB ASU 2013-02). The amendment in this update requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. The provisions of FASB ASU 2013-02 are effective for annual and interim periods beginning after December 15, 2012.  The adoption of the provisions of FASB ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.

 

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.  The adoption of the provisions of FASB ASU 2012-02 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 are effective for annual and interim reporting periods beginning on or after January 1, 2013.  The adoption of the provisions of FASB ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.

 

3.  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 which 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 have continued. During the first nine months of 2013, a combination of events occurred that resulted

 

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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)

 

in significant changes in estimates on several development programs, resulting in forward losses being recorded on some of these programs. The following is a summary of those events.

 

Performance Issues — A350 XWB

 

Our A350 XWB fuselage recurring program has experienced various production delays and performance-related issues mostly driven by engineering changes to the aircraft design. Airbus is assisting us as we work through these issues and has provided additional resources to work alongside our personnel.  There continues to be risk of additional forward loss associated with the recurring contract as we work through production issues.

 

Non-Recurring Contract Agreements — A350 XWB

 

In September and October of 2013 we agreed with Airbus on the work scope for the design and tooling related to the -1000 derivative of the A350 XWB fuselage and wing contracts. Based on current estimates, the agreement for the non-recurring phase of the -1000 derivative fuselage resulted in significant changes in estimates for the program, which has been recorded in the third quarter of 2013. There is a risk of additional forward loss if we do not successfully execute the design and engineering change process as projected.

 

Supply Chain Cost Reductions — G280 and G650

 

At the time we recorded the forward loss charges on the Gulfstream G280 and G650 programs in the third quarter of 2012, we had included in the respective estimates at completion significant cost reductions primarily related to sourcing costs between 2015 and 2018. These amounts were based on the experience of the supply chain team and operational management.  During the second quarter of 2013, it became apparent that a substantial portion of the total cost savings included in the contract estimates for each program would not be realized. This determination was based on a number of changing conditions and new developments including an assessment of our actual experience with our customers regarding their receptiveness to proposed changes, completion of our detailed part analyses during the second quarter of 2013 as part of our effort to project future sourcing costs and our inability to achieve estimated supplier price reductions via negotiations with suppliers.

 

Labor Estimates— Tulsa Facility

 

The labor cost forecasts within the contract estimates for the G280, G650 and Boeing B787 are based on certain assumptions, including the level of disruption expected in the future.  In our contract estimates through the first quarter of 2013, we assumed that certain disruptions to the manufacturing line caused by i) supplier quality issues and late deliveries, ii) customer inspections occurring in our facilities and iii) our own manufacturing quality issues would be resolved by the middle of 2013.  During the second quarter of 2013, key performance dates were missed, and we extended the expected period of time during which these issues would be resolved in our assumptions for our contract estimates. As a result, we experienced higher actual costs as well as significant increases to forecasted costs, resulting in additional forward losses recognized on all of these programs in the second quarter of 2013.

 

Contractual Items — G650

 

As we worked with Gulfstream to meet its production demand, we negotiated a temporary transfer of a portion of our work scope to Gulfstream for completion.  In the second quarter of 2013, due to the effect of continued production challenges on our forecasted ability to achieve scheduled deliveries, we changed our assumptions to extend the duration of the work transfer and updated our estimates regarding this temporarily transferred work scope which is accounted for as a reduction in forecasted revenue.  As described in more detail in Note 21, Commitments, Contingencies and Guarantees, we instituted a demand for arbitration against Gulfstream to resolve certain contractual disputes primarily related to engineering changes made by Gulfstream and the impact of those changes to weight and delivery schedules as well as for incomplete payments to Spirit. We continually assess these contractual items and adjust our estimates as appropriate each quarter.  Changes in these particular estimates resulted in additional forward loss recognized on the G650 in the second quarter of 2013.

 

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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)

 

New Program Summary Performance

 

Due primarily to the events described above regarding the third quarter of 2013, for the three months ended September 26, 2013, we recorded forward loss charges of $78.6 on the recurring A350 XWB Section 15, $32.7 on the non-recurring A350 XWB Section 15, $6.4 on the G280, $5.3 on the Boeing B747 fuselage and $0.8 on the Boeing B767 propulsion programs.  Due primarily to the events described above regarding the second and third quarters of 2013, for the nine months ended September 26, 2013, we recorded forward loss charges of $78.6 on the recurring A350 XWB Section 15, $32.7 on the non-recurring A350 XWB Section 15, $197.9 on the G280, $234.2 on the G650, $37.3 on the B787, $10.3 on the Boeing B747 fuselage and $4.8 on the Boeing B767 propulsion programs. The change in estimates also resulted in a reduction of forward loss charges for the three months ended June 27, 2013 on the Rolls-Royce BR725 of $(8.4). These amounts were recorded within the Company’s results of operations as part of cost of goods sold as well as on the condensed consolidated balance sheet as forward loss provisions within inventory to the extent each program’s inventory balance was sufficient to absorb the charge. In the case that program inventory was not sufficient to absorb the full amount of a charge, the remainder was classified as a current liability.

 

Our consolidated net adjustments for costs related to the changes in estimates for the second and third quarters of 2013 decreased operating profit, before income taxes, by approximately $123.8 and $572.1 for the three and nine months ended September 26, 2013, respectively.  These adjustments decreased net earnings by approximately $77.9 ($0.54 per share) and $359.9 ($2.55 per share) for the three and nine months ended September 26, 2013, respectively.

 

4. 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.

 

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 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 final insurance settlement amount of $234.9 less cumulative charges of $70.6.

 

As of December 31, 2012, the Company had received a total of $234.9, including the previously received partial payment, in insurance payments based on estimated losses incurred as a result of the April 14, 2012 tornado. The $234.9 in insurance payments was the result of an agreement between the Company and its insurers on a final settlement for all claims relating to the April 14, 2012 severe weather event. 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 severe weather event would be used for repair, replacement or restoration at the Wichita facility.

 

For the three and nine months ended September 26, 2013, the Company recorded charges of $4.5 and $19.6, respectively, under severe weather event, which represents continuing incremental freight, warehousing and other costs which are recorded as incurred. 

 

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)

 

5.  Accounts Receivable, net

 

Accounts receivable, net consists of the following:

 

 

 

September 26,

 

December 31,

 

 

 

2013

 

2012

 

Trade receivables (1)(2)

 

$

614.6

 

$

415.9

 

Other

 

9.3

 

9.1

 

Less: allowance for doubtful accounts

 

(0.2

)

(4.3

)

Accounts receivable, net

 

$

623.7

 

$

420.7

 

 


(1)                   Includes unbilled receivables of $34.1 and $25.6 at September 26, 2013 and December 31, 2012, respectively.

(2)                   Includes $135.1 and $102.0 held in retainage by customers at September 26, 2013 and December 31, 2012, respectively.

 

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.

 

Also included in accounts receivable are amounts held in retainage which, as of September 26, 2013, is all related to Gulfstream and represent amounts due on G650 deliveries from 2010 through the present.  As production rates on this program increase, this amount may grow significantly if not resolved with Gulfstream in a timely manner. As described in more detail in Note 21, Commitments, Contingencies and Guarantees, in August 2013, Spirit instituted a demand for arbitration against Gulfstream, seeking damages from Gulfstream for incomplete payments, as well as other damages and relief. Gulfstream counterclaimed against Spirit in the arbitration, seeking liquidated damages for delayed deliveries of wings, as well as other damages and relief.  While the Company believes that the short-paid amount is collectible, if the Company is unable to collect this amount or if it becomes part of an overall settlement or arbitration award, recognition of additional forward losses on the G650 program could be required and the future cash flows of the Company could be significantly impacted.

 

On May 3, 2012, Hawker Beechcraft, Inc. (“Hawker”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy on February 19, 2013 as Beechcraft Corporation. The Company’s remaining balance of its reserved $3.5 receivable from Hawker was written off as of March 28, 2013.

 

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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)

 

6.  Inventory

 

Inventories are summarized as follows:

 

 

 

September 26,

 

December 31,

 

 

 

2013(1)

 

2012(2)

 

Raw materials

 

$

219.0

 

$

250.3

 

Work-in-process

 

1,011.8

 

1,033.6

 

Finished goods

 

53.7

 

35.9

 

Product inventory

 

1,284.5

 

1,319.8

 

Capitalized pre-production

 

505.2

 

524.6

 

Deferred production

 

1,484.5

 

1,173.8

 

Forward loss provision

 

(1,154.2

)

(607.4

)

Total inventory, net

 

$

2,120.0

 

$

2,410.8

 

 


(1)         Reclassified $9.4 from work-in-process to deferred production related to A350 XWB in the third quarter of 2013.

(2)         For December 31, 2012, deferred production of $1,173.8 was reclassified from work-in-process to conform to current year presentation.

 

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.

 

Deferred production includes 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 26, 2013

 

 

 

Product Inventory

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

Non-Recurring

 

Capitalized Pre-
Production

 

Deferred
Production

 

Forward Loss
Provision
(1) (2)

 

Total Inventory,
net September
26, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B747(3)

 

$

91.0

 

$

 

$

4.9

 

$

(0.2

)

$

(10.3

)

$

85.4

 

B787

 

253.1

 

11.0

 

167.4

 

613.8

 

(221.3

)

824.0

 

Boeing - All other platforms(4)

 

403.7

 

17.8

 

7.1

 

(36.6

)

(12.8

)

379.2

 

A350(5)

 

149.0

 

78.7

 

77.0

 

291.6

 

(112.8

)

483.5

 

Airbus - All other platforms

 

83.4

 

 

 

11.6

 

 

95.0

 

G280(6)

 

75.0

 

 

5.2

 

194.3

 

(274.5

)

 

G650

 

49.8

 

 

198.5

 

344.1

 

(396.7

)

195.7

 

Rolls-Royce(7)

 

15.4

 

 

45.1

 

65.3

 

(125.8

)

 

Sikorsky

 

 

0.7

 

 

 

 

0.7

 

Bombardier C-Series

 

6.9

 

 

 

0.6

 

 

7.5

 

Aftermarket

 

61.6

 

 

 

 

 

61.6

 

Other platforms(8)

 

(14.1

)

1.5

 

 

 

 

(12.6

)

Total

 

$

1,174.8

 

$

109.7

 

$

505.2

 

$

1,484.5

 

$

(1,154.2

)

$

2,120.0

 

 

 

 

December 31, 2012

 

 

 

Product Inventory

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

Non-Recurring

 

Capitalized Pre-
Production

 

Deferred
Production

 

Forward Loss
Provision
(1)

 

Total Inventory,
net December 31,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B747

 

$

83.6

 

$

(0.7

)

$

7.2

 

$

3.6

 

$

(11.5

)

$

82.2

 

B787

 

225.2

 

26.6

 

189.5

 

595.1

 

(184.0

)

852.4

 

Boeing - All other platforms(4)

 

392.3

 

31.6

 

5.8

 

(67.6

)

(6.5

)

355.6

 

A350

 

133.2

 

51.3

 

56.8

 

177.4

 

(8.9

)

409.8

 

Airbus - All other platforms

 

88.2

 

 

 

18.2

 

 

106.4

 

G280

 

83.3

 

 

5.5

 

98.3

 

(118.8

)

68.3

 

G650

 

36.7

 

 

208.4

 

297.3

 

(162.5

)

379.9

 

Rolls-Royce(7)

 

12.6

 

 

51.4

 

51.2

 

(115.2

)

 

Sikorsky

 

 

4.7

 

 

 

 

4.7

 

Bombardier C-Series

 

3.9

 

 

 

0.3

 

 

4.2

 

Aftermarket

 

45.0

 

 

 

 

 

45.0

 

Other platforms(8)

 

98.3

 

4.0

 

 

 

 

102.3

 

Total

 

$

1,202.3

 

$

117.5

 

$

524.6

 

$

1,173.8

 

$

(607.4

)

$

2,410.8

 

 

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)

 


(1)         Forward loss charges taken since January 1, 2012 on open blocks.

 

(2)         Forward loss charges taken through December 31, 2011 were reflected within capitalized pre-production and inventory for the respective programs and are therefore not reflected as part of the Forward Loss Provision figure presented.  The cumulative forward loss charges, net of contract liabilities, through September 26, 2013 on open blocks are $115.8, $452.1 and $29.0 for the A350 XWB, G280 and Sikorsky programs, respectively.

 

(3)         Due to contract block closure in the second quarter of 2013, $5.1 of forward loss provision related to wing was closed out against deferred production.

 

(4)         Forward loss provision of $8.0 recorded on the B767 program in the fourth quarter of 2012 exceeded the total inventory balance.  The excess of the charge over program inventory was classified as a contract liability of $1.5 as of December 31, 2012 and was reduced to zero as additional inventory was generated in 2013.

 

(5)         Forward loss provision of $32.7 recorded on the non-recurring fuselage portion of the A350-1000 XWB program in the third quarter of 2013 exceeded the total inventory balance.  The excess of the charge over the program inventory is classified as a contract liability of $7.7, which will be reduced as additional contract costs are incurred.  This liability is reported in other current liabilities and will flow back into the forward loss category of inventory as inventory on the non-recurring portion of the program increases.

 

(6)         Forward loss provision of $191.5 recorded in the second quarter of 2013 exceeded the total inventory balance.  The excess of the charge over program inventory is classified as a contract liability.  The total contract liability as of September 26, 2013 has been reduced to $42.2 as additional contract costs have been incurred.  This contract liability is reported in other current liabilities.  This liability will flow back into the forward loss category of inventory as inventory on the program increases.

 

(7)         Forward loss provision of $151.0 recorded in the third quarter of 2012 exceeded the total inventory balance.  In the second quarter of 2013, due to changes in estimates on the Rolls-Royce BR725 program, the forward loss provision was reduced by $8.4, to a total of $142.6.  The excess of the charge over program inventory is classified as a contract liability.  The total contract liability at December 31, 2012 has been reduced to $16.8 as of September 26, 2013 as additional contract costs have been incurred.  This contract liability is reported in other current liabilities.  This liability will flow back into the forward loss category of inventory as inventory on the program increases.

 

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

 

The following is a roll forward of the capitalized pre-production costs included in the inventory balance at September 26, 2013:

 

Balance, December 31, 2012

 

$

524.6

 

Charges to costs and expenses

 

(45.1

)

Capitalized costs

 

25.7

 

Balance, September 26, 2013

 

$

505.2

 

 

The following is a roll forward of the deferred production costs included in the inventory balance at September 26, 2013:

 

Balance, December 31, 2012

 

$

1,173.8

 

Charges to costs and expenses

 

(230.7

)

Capitalized costs

 

541.7

 

Exchange rate

 

(0.3

)

Balance, September 26, 2013

 

$

1,484.5

 

 

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)

 

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

 

Model

 

Contract Block
Quantity

 

Orders(1)

 

B787

 

500

 

890

 

A350 XWB

 

400

 

725

 

G280

 

250

 

85

 

G650

 

350

 

146

 

Rolls-Royce

 

350

 

140

 

 


(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 delivered units.

 

Current block deliveries are as follows:

 

Model

 

Current Block
Deliveries

 

B787

 

145

 

A350 XWB

 

7

 

Business/Regional Jets

 

186

 

 

Contract block quantities are 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 or if future actual costs exceed current projected estimates, 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.

 

7.  Property, Plant and Equipment, net

 

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

 

 

 

September 26,

 

December 31,

 

 

 

2013

 

2012

 

Land

 

$

17.5

 

$

17.7

 

Buildings (including improvements)

 

533.0

 

504.7

 

Machinery and equipment

 

1,032.3

 

960.0

 

Tooling

 

776.4

 

722.4

 

Capitalized software

 

177.0

 

170.2

 

Construction-in-progress

 

160.8

 

143.0

 

Total

 

2,697.0

 

2,518.0

 

Less: accumulated depreciation

 

(930.0

)

(819.5

)

Property, plant and equipment, net

 

$

1,767.0

 

$

1,698.5

 

 

Interest costs associated with construction-in-progress are capitalized until the assets are completed and ready for use. Capitalized interest was $1.7 and $1.9 for the three months ended September 26, 2013 and September 27, 2012, respectively and $4.5 and $5.8 for the nine months ended September 26, 2013 and September 27, 2012, 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 $21.8 and $27.4 for the three months ended September 26, 2013 and September 27, 2012, respectively and $65.6 and $74.0 for the nine months ended September 26, 2013 and  September 27, 2012, 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)

 

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 $5.1 and $4.8 for the three months ended September 26, 2013 and September 27, 2012, respectively and $15.0 and $13.7 for the nine months ended September 26, 2013 and September 27, 2012, respectively.

 

The Company 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 and nine months ended September 26, 2013, we evaluated the long-lived assets at our locations and determined no impairment was necessary.

 

8.  Other Assets

 

Other assets are summarized as follows:

 

 

 

September 26,

 

December 31,

 

 

 

2013

 

2012

 

Intangible assets

 

 

 

 

 

Patents

 

$

1.9

 

$

2.0

 

Favorable leasehold interests

 

9.7

 

9.7

 

Customer relationships

 

27.7

 

28.1

 

Total intangible assets

 

39.3

 

39.8

 

Less: Accumulated amortization - patents

 

(1.3

)

(1.2

)

Accumulated amortization - favorable leasehold interest

 

(5.1

)

(4.8

)

Accumulated amortization - customer relationships

 

(26.0

)

(23.7

)

Intangible assets, net

 

6.9

 

10.1

 

Deferred financing

 

 

 

 

 

Deferred financing costs

 

80.4

 

76.4

 

Less: Accumulated amortization - deferred financing costs

 

(54.4

)

(49.6

)

Deferred financing costs, net

 

26.0

 

26.8

 

Other

 

 

 

 

 

Goodwill - Europe

 

3.0

 

3.0

 

Equity in net assets of affiliates

 

5.1

 

5.1

 

Customer supply agreement (1)

 

38.5

 

39.9

 

Other

 

12.4

 

6.1

 

Total

 

$

91.9

 

$

91.0

 

 


(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 $0.9 and $1.0 for the three months ended September 26, 2013 and September 27, 2012, respectively and $3.0 and $3.1 of amortization expense of intangibles for the nine months ended September 26, 2013 and September 27, 2012, 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.

 

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)

 

As part of our ongoing participation in the B787-9 program, we received research and development milestone payments of $13.7 and $18.3 for the three and nine months ended September 26, 2013, respectively and $22.1 and $27.3 for the three and nine months ended September 27, 2012, respectively.  Revenue and cost associated with the performance of this 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 26, 2013.

 

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 of $250.0 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.

 

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 26,

 

December 31,

 

 

 

2013

 

2012

 

B737

 

$

19.3

 

$

20.5

 

B787

 

613.6

 

629.8

 

A350 XWB

 

244.9

 

250.2

 

Airbus — All other platforms

 

5.7

 

6.7

 

Gulfstream

 

23.5

 

28.2

 

Other

 

30.1

 

18.1

 

Total advance payments and deferred revenue/credits

 

$

937.1

 

$

953.5

 

 

11. Government Grants

 

We received grants in the form of government funding for a portion of the site construction and other specific capital asset costs 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. The value recorded within property, plant and equipment prior to amortization, including foreign exchange rate changes, related to the use of grant funds in North Carolina and Malaysia was $152.5 and $148.7 as of September 26, 2013 and December 31, 2012, respectively.

 

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)

 

Deferred grant income liability, net consists of the following:

 

Balance, December 31, 2012

 

$

123.5

 

Grant liability amortized

 

(4.3

)

Grant income recognized

 

(0.9

)

Exchange rate

 

(0.6

)

Total deferred grant income liability, September 26, 2013

 

$

117.7

 

 

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

 

Balance, December 31, 2012

 

$

124.9

 

Amortization

 

(3.9

)

Exchange rate

 

(0.5

)

Total asset value related to deferred grant income, September 26, 2013

 

$

120.5

 

 

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.

 

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)

 

 

 

Fair Value Measurements

 

 

 

September 26, 2013

 

At September 26, 2013 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

 

$

308.3

 

$

308.3

 

$

 

$

308.3

 

$

 

$

 

Interest Rate Swaps

 

$

(2.0

)

$

 

$

(2.0

)

$

 

$

(2.0

)

$

 

 

 

 

Fair Value Measurements

 

 

 

December 31, 2012

 

At December 31, 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

 

$

312.2

 

$

312.2

 

$

 

$

312.2

 

$

 

$

 

Interest Rate Swaps

 

$

(4.0

)

$

 

$

(4.0

)

$

 

$

(4.0

)

$

 

 

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 includes 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 26, 2013

 

December 31, 2012

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Senior secured term loan (including current portion)

 

$

539.5

 

$

541.9

(1)

$

543.4

 

$

550.0

(1)

Senior unsecured notes due 2017

 

296.2

 

308.0

(1)

295.6

 

321.8

(1)

Senior unsecured notes due 2020

 

300.0

 

314.8

(1)

300.0

 

321.8

(1)

Malaysian loan

 

10.8

 

9.3

(2)

13.4

 

11.8

(2)

Total

 

$

1,146.5

 

$

1,174.0

 

$

1,152.4

 

$

1,205.4

 

 


(1)         Level 1 Fair Value hierarchy

 

(2)         Level 2 Fair Value hierarchy

 

See Note 14, Investments for fair value disclosure on government and corporate debt securities.

 

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)

 

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 could enter 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 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 any amounts related to foreign currency hedge contracts would be 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 26, 2013 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 carries 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.  Amounts in other comprehensive income for interest rate swaps as of April 18, 2012 have been included in earnings.

 

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

 

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.

 

All assets of the Company 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).

 

Interest Rate Swaps

 

We enter into floating-to-fixed interest rate swap agreements periodically. As of September 26, 2013, the interest rate swap agreements had notional amounts totaling $225.0.

 

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)

 

 

 

 

 

 

 

 

 

Effective

 

Fair Value,

 

Notional Amount 

 

Expires

 

Variable Rate

 

Fixed Rate (1)

 

Fixed Rate(2)

 

September 26, 2013

 

$

225.0

 

July 2014

 

1 Month LIBOR

 

1.37

%

N/A

 

$

(2.0

)

 


(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 26, 2013 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 $(2.0) at September 26, 2013 and $(4.0) at December 31, 2012.

 

Foreign Currency Forward Contracts

 

We could 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 would be to minimize the impact of currency exchange rate movements on our operating results. The hedges would be accounted for as cash flow hedges in accordance with FASB authoritative guidance. Gains and losses from cash flow hedges would be 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 following table summarizes the Company’s fair value of outstanding derivatives at September 26, 2013 and December 31, 2012:

 

 

 

Other Liability Derivatives

 

 

 

September 26, 2013

 

December 31, 2012

 

Derivatives designated as hedging instruments

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

Current

 

$

2.0

 

$

2.8

 

Non-current

 

 

1.2

 

Total derivatives designated as hedging instruments

 

2.0

 

4.0

 

Total derivatives

 

$

2.0

 

$

4.0

 

 

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 26, 2013 and September 27, 2012 was as follows:

 

Derivatives in
Cash Flow
Hedging
Relationships

 

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

 

Location of (Gain)
or Loss
Reclassified from
Accumulated OCI

 

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

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

September 26,
2013

 

September 27,
2012

 

into Income
(Effective Portion)

 

September 26,
2013

 

September 27,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

 

Interest expense

 

$

 

$

 

Foreign currency hedge contracts

 

 

0.1

 

Sales/ Revenue

 

 

(0.1

)

Total

 

$

 

$

0.1

 

 

 

$

 

$

(0.1

)

 

Derivatives in
Cash Flow
Hedging
Relationships

 

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

 

Location of (Gain)
or Loss
Reclassified from
Accumulated OCI

 

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

 

 

For the Nine Months Ended

 

 

For the Nine Months Ended

 

 

September 26,
2013

 

September 27,
2012

 

into Income
(Effective Portion)

 

September 26,
2013

 

September 27,
2012

 

Interest rate swaps

 

$

 

$

(0.9

)

Interest expense

 

$

 

$

3.1

 

Foreign currency hedge contracts

 

 

0.1

 

Sales/ Revenue

 

 

 

Total

 

$

 

$

(0.8

)

 

 

$

 

$

3.1

 

 

The impact on earnings from interest rate swaps that are no longer effective was a loss of ($0.9) for each of the nine months ended September 26, 2013 and September 27, 2012.

 

The impact on earnings from foreign currency hedge contracts that do not qualify as cash flow hedges was income of zero and $0.2 for the nine months ended September 26, 2013 and September 27, 2012, respectively.

 

14.  Investments

 

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

 

 

 

September 26, 2013

 

December 31, 2012

 

 

 

Current

 

Noncurrent

 

Current

 

Noncurrent

 

Government and Corporate Debt
Securities

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

0.3

 

$

3.3

 

$

0.6

 

$

2.8

 

Unrealized gains

 

 

0.1

 

 

0.1

 

Unrealized losses

 

 

(0.1

)

 

 

Fair value

 

$

0.3

 

$

3.3

 

$

0.6

 

$

2.9

 

 

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)

 

Maturities of held-to-maturity securities at September 26, 2013 are as follows:

 

 

 

Amortized
Cost

 

Approximate
Fair Value

 

Within One Year

 

$

0.3

 

$

0.3

 

One to Five Years

 

1.5

 

1.5

 

Five to Ten Years

 

0.2

 

0.2

 

After Ten Years

 

1.6

 

1.6

 

Total

 

$

3.6

 

$

3.6

 

 

At September 26, 2013 and December 31, 2012, the fair value of certain investments in debt and marketable securities are less than their historical cost. Total fair value of these investments was $1.5 and $0.8, respectively, for the periods then ended, which is approximately 41% and 22%, 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 in which the permanent impairment is identified.

 

15.  Debt

 

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

 

 

 

September 26,

 

December 31,

 

 

 

2013

 

2012

 

Senior secured term loan (short and long-term)

 

$

539.5

 

$

543.4

 

Senior notes (due 2017 and 2020)

 

596.2

 

595.6

 

Malaysian term loan

 

10.8

 

13.4

 

Present value of capital lease obligations

 

15.6

 

16.4

 

Other

 

7.4

 

7.4

 

Total

 

$

1,169.5

 

$

1,176.2

 

 

Senior Secured Credit Facilities

 

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 26, 2013, the outstanding balance of the term loan was $541.8 and the carrying amount of the term loan was $539.5.  The amount outstanding under the revolving credit facility was zero as of September 26, 2013.

 

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).

 

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)

 

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

%

 

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

 

To address the forward loss charges that the Company recognized in the third quarter of 2012, the Company amended the Credit Agreement effective October 26, 2012. The amendment resulted in a temporary revision of the quarterly financial covenant ratios and 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.

 

Additionally, to address the forward loss charges that the Company recognized in the second quarter of 2013, the Company amended the Credit Agreement effective August 2, 2013. The amendment suspended the existing financial covenant ratios until December 31, 2014. The amendment requires Spirit to meet certain minimum liquidity and borrowing base requirements while the existing financial covenant ratios are suspended. Among other things, the amendment provides for the following key changes during the suspension period:

 

·                  The applicable margin for the revolving credit facility component of the senior secured Credit Agreement shall be the applicable percentage per annum set forth in Pricing Tier 1 (see table above), plus one-half of one percent (0.5%).

·                  The applicable margin for the term loan B credit facility component of the senior secured Credit Agreement shall be 3.00% per annum for Eurodollar Rate Loans and 2.00% per annum for Base Rate Loans.

·                  The Total Secured Outstandings (as defined in the Credit Agreement) shall not exceed the Aggregate Borrowing Base Amount (as defined in the Credit Agreement) Spirit is required to maintain and liquidity is not to be less than $500.0.

 

In addition, pursuant to the amendment the mandatory application of proceeds from the sale of the Oklahoma sites to repay the borrowings under the senior secured credit agreement is reduced from 100% to 50%.

 

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 26, 2013.

 

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

 

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)

 

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 $296.2 as of  September 26, 2013.

 

As of September 26, 2013, we were in full compliance with all covenants contained in the indentures governing the 2020 Notes and the 2017 Notes.

 

Malaysian Facility Agreement

 

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 26, 2013 was $10.8.

 

French Factory Capital Lease Agreement

 

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 our 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 26, 2013, the Saint-Nazaire capital lease balance was $10.7.

 

Nashville Design Center Capital Lease Agreement

 

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.

 

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 26,
2013

 

September 27, 2012

 

September 26,
2013

 

September 27, 2012

 

Service cost

 

$

1.9

 

$

1.7

 

$

5.7

 

$

5.0

 

Interest cost

 

11.5

 

11.3

 

34.5

 

33.9

 

Expected return on plan assets

 

(21.1

)

(18.7

)

(63.4

)

(56.1

)

Amortization of net loss

 

2.9

 

1.4

 

8.8

 

4.2

 

Net periodic pension income

 

$

(4.8

)

$

(4.3

)

$

(14.4

)

$

(13.0

)

 

25



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Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

 

 

Other Benefits

 

 

 

For the Three
Months Ended

 

For the Nine
Months Ended

 

Components of Other Benefit Expense

 

September 26,
2013

 

September 27,
2012

 

September 26,
2013

 

September 27, 2012

 

Service cost

 

$

0.7

 

$

0.8

 

$

2.0

 

$

2.5

 

Interest cost

 

0.5

 

0.9

 

1.6

 

2.6

 

Amortization of net loss

 

 

0.3

 

 

0.9

 

Net periodic other benefit expense

 

$

1.2

 

$

2.0

 

$

3.6

 

$

6.0

 

 

Employer Contributions

 

We expect to contribute zero dollars to the U.S. qualified pension plan and a combined total of approximately $1.4 for the Supplemental Executive Retirement Plan (SERP) and post-retirement medical plans in 2013.  Our projected contributions to the U.K. pension plan for 2013 are $9.0, of which $7.0 was contributed by the end of the third quarter of 2013.  We anticipate contributing the additional $2.0 to the U.K. pension plan during the remainder of 2013.  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 26, 2013, Holdings recognized a net total of $3.7 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 27, 2012.  The entire $3.7 of stock compensation expense recorded for the three months ended September 26, 2013 was recorded as selling, general and administrative expense in accordance with FASB authoritative guidance, and the amount includes zero accelerated vesting expense for participants meeting the conditions for “Qualifying Retirement” under the Short-Term Incentive Plan or “STIP.” 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.

 

For the nine months ended September 26, 2013, the Company recognized a total of $15.7 of stock compensation expense, net of forfeitures, as compared to $12.0 of stock compensation expense, net of forfeitures, recognized for the nine months ended September 27, 2012. Of the total $15.7 of stock compensation expense recorded for the nine months ended September 26, 2013, in accordance with FASB authoritative guidance, the full amount was recorded as selling, general and administrative expense, which includes $0.5 of accelerated vesting expense for participants meeting the conditions for Qualifying Retirement under the STIP as set out in the Proxy Statement for our 2013 annual meeting of stockholders. Of the $12.0 of stock compensation expense recorded for the nine months ended September 27, 2012, $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 Retirement under the STIP.

 

In February 2013, 86,063 shares of Class A common stock with an aggregate grant date fair value of $1.4 were granted under the STIP and such shares will vest on the one-year anniversary of the grant date. During the quarter ended March 28, 2013, 95,759 shares of Class A common stock with an aggregate grant date fair value of $2.3 awarded under the Company’s Short-Term Incentive Plan vested. During the quarter ended September 26, 2013, 17,235 shares of Class A common stock with an aggregate grant date fair value of $0.3 granted under the Company’s Short-Term Incentive Plan vested.

 

In April 2013, as part of the Company’s Long-Term Incentive Plan, 33,784 shares of Class A common stock with an aggregate grant date fair value of $0.7 were granted by the Board of Directors, and such shares will vest annually in three equal installments beginning on the two-year anniversary of the grant date.

 

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Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

In May 2013, 1,360,724 shares of Class A common stock with an aggregate grant date fair value of $28.2 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. Additionally, 288,047 shares of Class A common stock with an aggregate grant date fair value of $6.0 were granted, and will vest annually in three equal installments beginning in April 2014. Under the Company’s Director Stock Plan, 34,747 shares of Class A common stock with an aggregate grant date fair value of $0.7 were granted during the second quarter of 2013, and such shares will vest on the one-year anniversary of the grant date.  Additionally, 517,476 shares of Class A common stock with an aggregate grant date fair value of $10.3 awarded under the Company’s Long-Term Incentive Plan and 29,271 shares of Class A common stock with an aggregate grant date fair value of $0.6 awarded under the Company’s Director Stock Plan vested during the quarter ended June 27, 2013. During the quarter ended September 26, 2013, 34,425 shares of Class A common stock with an aggregate grant date fair value of $0.7 awarded under the Company’s Long-Term Incentive Plan vested.

 

In August 2013, as part of the Company’s 2013 Long-Term Incentive Plan, 37,754 shares of Class A common stock with an aggregate grant date fair value of $0.9 were granted by the Board of Directors, and such shares will vest annually in three equal installments beginning on the two-year anniversary of the grant date.

 

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 26, 2013 and December 31, 2012 were $343.6 and $238.6, respectively. This increase is primarily due to forward losses that were recognized but are not currently deductible for tax.

 

In determining whether a valuation allowance against the Company’s net deferred taxes is warranted, Management assesses all available positive and negative evidence such as prior earnings history, expected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. After the evaluation of all available positive and negative evidence, Management reached the conclusion that it is more likely than not that the Company will generate enough future taxable income to realize the net deferred tax asset on its balance sheet as of September 26, 2013. We will continue to regularly assess the potential for realization of our net deferred tax assets in future periods. Changes in future earnings projections, among other factors, may cause us to record a valuation allowance against some or all of our net deferred tax assets, which may materially impact our income tax expense in the period we determine that these factors have changed.

 

We file income tax returns in all jurisdictions in which we operate. We establish reserves to provide for additional income taxes that may be due upon audit. These reserves are established based on Management’s assessment as to the potential exposure attributable to permanent tax adjustments and associated interest.  All tax reserves are analyzed quarterly and adjustments made as events occur that warrant modification.

 

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 may include finalizing amounts in income tax returns filed, finalizing audit examinations for open tax years, expiration of statutes of limitations and changes in tax law.

 

However, the Company has determined that a calculation of an annual effective tax rate would not represent a reliable estimate for its U.S. operations 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 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.

 

We continue to operate under a tax holiday in Malaysia effective through September 2024.  Management continues to maintain a reserve for the potential uncertainty in meeting the tax holiday’s conditional employment and investment thresholds.  If those thresholds are met by the required date, we expect an $11.6 reduction in our tax reserves.

 

On January 2, 2013, the President signed legislation retroactively extending the U.S. Research Tax Credit for two years, from January 1, 2012 through December 31, 2013.  Our income tax expense for 2013 reflects the entire benefit of the Research Tax Credit attributable to 2012, of $6.9, and the benefit of the 2013 Research Tax Credit.

 

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Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

The 64.6% effective tax rate for the nine months ended September 26, 2013 differs from the 60.8% effective tax rate for the same period in 2012 primarily due to the inclusion of the 2012 and 2013 U.S. Research Tax Credits.

 

We are participating in the Internal Revenue Service’s Compliance Assurance Process (“CAP”) program for our 2012 and 2013 tax years.  Additionally, we have been selected for the Compliance Maintenance phase of the CAP program for the 2013 tax year.  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 and 2010 U.K. income tax returns.  The Directorate General of Public Finance is currently examining our 2011 and 2012 France income tax returns.  While a change could result from the ongoing examinations, with the exception of the Malaysia issue mentioned above, the Company expects no material change in its recorded unrecognized tax benefit liability in the next 12 months.

 

19.  Equity

 

Earnings per Share Calculation

 

Basic net income per share is computed using the weighted-average number of outstanding shares of common stock during the measurement period. Diluted net 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 26, 2013

 

September 27, 2012

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Loss

 

Shares

 

Per Share
Amount

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) available to common shareholders

 

$

92.7

 

141.4

 

$

0.66

 

$

(132.2

)

140.1

 

$

(0.94

)

Income (loss) allocated to participating securities

 

1.0

 

1.4

 

 

 

(2.2

)

2.3

 

 

 

Net income (loss)

 

$

93.7

 

 

 

 

 

$

(134.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted potential common shares

 

 

 

0.6

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

93.7

 

143.4

 

$

0.65

 

$

(134.4

)

140.1

 

$

(0.94

)

 

28



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Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

 

 

For the Nine Months Ended

 

 

 

September 26, 2013

 

September 27, 2012

 

Basic EPS

 

Income

 

Shares

 

Per Share
Amount

 

Loss

 

Shares

 

Per Share
Amount

 

(Loss) available to common shareholders

 

$

(34.2

)

141.2

 

$

(0.24

)

$

(25.5

)

139.8

 

$

(0.18

)

(Loss) allocated to participating securities

 

(0.3

)

1.5

 

 

 

(0.4

)

2.3

 

 

 

Net (loss)

 

$

(34.5

)

 

 

 

 

$

(25.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)

 

$

(34.5

)

141.2

 

$

(0.24

)

$

(25.9

)

139.8

 

$

(0.18

)

 

The balance of outstanding common shares presented in the condensed consolidated balance sheets was 144.7 million and 143.7 million at September 26, 2013 and September 27, 2012, respectively. Included in the outstanding common shares were 3.2 million and 2.7 million of issued but unvested shares at September 26, 2013 and September 27, 2012, respectively, which are excluded from the basic EPS calculation. For the nine months ended September 26, 2013, 0.7 million shares are not included in the calculation of diluted earnings per share, as their inclusion would have been anti-dilutive. These securities could be dilutive in future periods.

 

Accumulated Other Comprehensive Loss

 

Accumulated Other Comprehensive Loss is summarized by component as follows:

 

 

 

For the Nine Months Ended
September 26, 2013

 

For the Twelve Months Ended
December 31, 2012

 

 

 

 

 

 

 

Pension

 

$

(132.1

)

$

(132.0

)

SERP/ Retiree medical

 

(2.1

)

(2.6

)

Foreign currency impact on long term intercompany loan

 

(4.2

)

(3.5

)

Currency translation adjustment

 

(8.7

)

(7.1

)

Total accumulated other comprehensive (loss)

 

$

(147.1

)

$

(145.2

)

 

Noncontrolling Interest

 

The balance of noncontrolling interest presented in the consolidated balance sheet was $0.5 for each of the nine month periods ended September 26, 2013 and September 27, 2012.

 

20.  Related Party Transactions

 

On May 3, 2012, Hawker Beechcraft, Inc. (“Hawker”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy on February 19, 2013 as Beechcraft Corporation. The Company’s remaining balance of its $3.5 receivable from Hawker was written off during the first quarter of 2013.  The Company’s Prestwick facility provided wing components for the Hawker 800 Series manufactured by Hawker. No sales to Hawker were recorded for the three months ended September 26, 2013 or September 27, 2012.  For the nine months ended September 26, 2013 and September 27, 2012 sales to Hawker were zero and $1.2, respectively.

 

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Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

The Company paid $0.2 and less than $0.1 to a subsidiary of Onex for services rendered for the three month periods ended September 26, 2013 and September 27, 2012, respectively and $0.3 and $0.2 for the nine month periods ended September 26, 2013 and September 27, 2012, respectively. Management believes the amounts charged were reasonable in relation to the services provided.

 

A director (and former executive) of the Company is a member of the Board of Directors of Rockwell Collins, Inc., a supplier of manufacturing parts to the Company.  Under the commercial terms of the arrangement with the supplier, Spirit paid less than $0.1 for  the three month periods ended September 26, 2013 and September 27, 2012 and $0.1 and less than $0.1 for the nine month periods ended September 26, 2013 and September 27, 2012, respectively.  The amounts owed to Rockwell Collins and recorded as accrued liabilities were less than $0.1 as of September 26, 2013 and September 27, 2012.

 

A director (and former executive) of the Company is a member of the Board of Directors of a Wichita, Kansas bank that provides banking services to Spirit. In connection with the banking services provided to Spirit, the Company pays fees consistent with commercial terms that would be available to unrelated third parties.  Such fees are not material to the Company.

 

21.  Commitments, Contingencies and Guarantees

 

Litigation

 

From time to time we are subject to, and are presently involved in, litigation or other legal proceedings arising in the ordinary course of business. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the meritorious legal defenses available, it is the opinion of the Company that none of these items, when finally resolved, will have a material adverse effect on the Company’s long-term financial position or liquidity. Consistent with the requirements of authoritative guidance on accounting for contingencies, we had an accrual of less than $1.0 at September 26, 2013 and zero at December 31, 2012 for loss contingencies. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

 

From time to time, in the ordinary course of business and like others in the industry, we receive requests for information from government agencies in connection with their regulatory or investigational authority. Such requests can include subpoenas or demand letters for documents to assist the government in audits or investigations. We review such requests and notices and take appropriate action. We have been subject to certain requests for information and investigations in the past and could be subject to such requests for information and investigations in the future. Additionally, we are subject to federal and state requirements for protection of the environment, including those for disposal of hazardous waste and remediation of contaminated sites. As a result, we are required to participate in certain government investigations regarding environmental remediation actions.

 

In December 2005, a lawsuit was filed against Spirit, Onex and Boeing alleging age discrimination in the hiring of employees by Spirit when Boeing sold its Wichita commercial division to Onex. The complaint was filed in U.S. District Court in Wichita, Kansas and sought class-action status, an unspecified amount of compensatory damages and more than 1.5 billion dollars in punitive damages. The asset purchase agreement from the Boeing Acquisition requires Spirit to indemnify Boeing for damages resulting from the employment decisions that were made by us with respect to former employees of Boeing Wichita, which relate or allegedly relate to the involvement of, or consultation with, employees of Boeing in such employment decisions. On June 30, 2010, the U.S. District Court granted defendants’ dispositive motions, finding that the case should not be allowed to proceed as a class action.  Following plaintiffs’ appeal, on August 27, 2012 the Tenth Circuit Court of Appeals affirmed the District Court’s ruling in all respects.  The district court has now set certain deadlines for certain prospective plaintiffs to bring individual claims.  In the event this litigation continues, the Company intends to continue to vigorously defend itself. Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

 

In December 2005, a federal grand jury sitting in Topeka, Kansas issued subpoenas regarding the vapor degreasing equipment at our Wichita, Kansas facility. The government’s investigation appeared to focus on whether the degreasers were operating within permit parameters and whether chemical wastes from the degreasers were disposed of properly. The subpoenas covered a time period both before and after our purchase of the Wichita, Kansas facility. Subpoenas were issued to Boeing, Spirit and individuals who were employed by Boeing prior to the Boeing Acquisition, but are now employed by us. We responded to the subpoena and provided additional information to the government as requested. On March 25, 2008, the U.S. Attorney’s Office informed the Company that it was closing its criminal file on the investigation. A civil investigation into this matter is ongoing. Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

 

30



Table of Contents

 

Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

On February 16, 2007, an action entitled Harkness et al. v. The Boeing Company et al. was filed in the U.S. District Court for the District of Kansas. The defendants were served in early July 2007. The defendants included Spirit AeroSystems Holdings, Inc., Spirit AeroSystems, Inc., the Spirit AeroSystems Holdings Inc. Retirement Plan for the International Brotherhood of Electrical Workers (IBEW), Wichita Engineering Unit (SPEEA WEU) and Wichita Technical and Professional Unit (SPEEA WTPU) Employees, and the Spirit AeroSystems Retirement Plan for International Association of Machinists and Aerospace Workers (IAM) Employees, along with Boeing and Boeing retirement and health plan entities. The named plaintiffs are twelve former Boeing employees, eight of whom were or are employees of Spirit. The plaintiffs assert several claims under the Employee Retirement Income Security Act and general contract law and brought the case as a class action on behalf of similarly situated individuals. The putative class consists of approximately 2,500 current or former employees of Spirit. The parties agreed to class certification. The sub-class members who asserted claims against the Spirit entities are those individuals who, as of June 2005, were employed by Boeing in Wichita, Kansas, were participants in the Boeing pension plan, had at least 10 years of vesting service in the Boeing plan, were in jobs represented by a union, were between the ages of 49 and 55, and who went to work for Spirit on or about June 17, 2005. Although there were many claims in the suit, the plaintiffs’ claims against the Spirit entities, asserted under various theories, were (1) that the Spirit plans wrongfully failed to determine that certain plaintiffs are entitled to early retirement “bridging rights” to pension and retiree medical benefits that were allegedly triggered by their separation from employment by Boeing and (2) that the plaintiffs’ pension benefits were unlawfully transferred from Boeing to Spirit in that their claimed early retirement “bridging rights” are not being afforded these individuals as a result of their separation from Boeing, thereby decreasing their benefits. The plaintiffs initially sought a declaration that they were entitled to the early retirement pension benefits and retiree medical benefits, an injunction ordering that the defendants provide the benefits, damages pursuant to breach of contract claims and attorney fees. On June 20, 2013, the district court entered an order dismissing all claims against the Spirit entities with prejudice.  Plaintiffs’ claims against Boeing entities remain pending in the litigation. Boeing has notified Spirit that it believes it is entitled to indemnification from Spirit for any “indemnifiable damages” it may incur in the Harkness litigation, under the terms of the asset purchase agreement from the Boeing Acquisition between Boeing and Spirit. Spirit disputes Boeing’s position on indemnity. Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

 

On July 21, 2005, the International Union, Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) filed a grievance against Boeing on behalf of certain former Boeing employees in Tulsa and McAlester, Oklahoma, regarding issues that parallel those asserted in Harkness et al. v. The Boeing Company et al. Boeing denied the grievance, and the UAW subsequently filed suit to compel arbitration, which the parties eventually agreed to pursue. The arbitration was conducted in January 2008. In July 2008, the arbitrator issued an opinion and award in favor of the UAW. The arbitrator directed Boeing to reinstate the seniority of the employees and “afford them the benefits appurtenant thereto.”  On March 5, 2009, the arbitrator entered an Opinion and Supplemental Award that directed Boeing to award certain benefits to UAW members upon whose behalf the grievance was brought, notwithstanding the prior denial of such benefits by the Boeing Plan Administrator. On April 10, 2009, Boeing filed a Complaint in the United States District Court for the Northern District of Illinois, seeking a ruling that the arbitrator exceeded his authority in granting the Supplemental Award. On September 16, 2009, the District Court entered an order affirming the arbitrator’s Supplemental Award. Boeing appealed the District Court’s decision to the U.S. Seventh Circuit Court of Appeals, which affirmed the District Court’s decision. Boeing previously notified Spirit of its intent to seek indemnification from Spirit for any “indemnifiable damages” it may incur in the UAW matter, pursuant to the terms of the asset purchase agreement from the Boeing Acquisition. Spirit disputes Boeing’s position on indemnity. Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

 

On May 11, 2009, Spirit filed a lawsuit in the United States District Court for the District of Kansas against SPS Technologies LLC (“SPS”) and Precision Castparts Corp. Spirit’s claims are based on the sale by SPS of certain non-conforming nut plate fasteners to Spirit between August 2007 and August 2008. Many of the fasteners were used on assemblies that Spirit sold to a customer. In the fall of 2008, Spirit discovered the non-conformity and notified the customer of the discrepancy. Subsequently, Spirit and the customer removed and replaced nut plates on various in-process aircraft assemblies and subsequently agreed to an appropriate cost related to those efforts. Spirit’s lawsuit seeks damages, including damages related to these efforts, under various theories, including breach of contract and breach of implied warranty.

 

On June 3, 2013, a putative class action lawsuit was commenced against Holdings, Jeffrey L. Turner, and Philip D. Anderson in the U.S. District Court for the District of Kansas.  The named plaintiff, who alleges that he is a purchaser of Holdings securities, alleges that defendants violated the federal securities laws by making material misrepresentations and omissions in the Company’s public disclosures about the circumstances underlying the Company’s accrual of $590 million in forward loss charges in the third quarter of 2012.  The lawsuit seeks certification of a class of all persons other than defendants who purchased Holdings securities between May 5, 2011 and October 24, 2012, and seeks an unspecified amount of damages on behalf of the putative class.  Currently pending are

 

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Spirit AeroSystems Holdings, Inc.

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

 

motions to name a lead plaintiff.  The Company intends to vigorously defend against these allegations, and management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations, or liquidity.

 

In August, 2013, Spirit instituted a demand for arbitration against Gulfstream Aerospace Corporation.  Spirit seeks damages from Gulfstream for its incomplete payments to Spirit for the wings Spirit produces for the G650 airplane, as well as other damages and relief.  Gulfstream counterclaimed against Spirit in the arbitration, seeking liquidated damages for delayed deliveries of wings, as well as other damages and relief.  The parties are in the process of selecting arbitrators, and currently expect the arbitration hearing will take place sometime in the second half of 2014.  The Company intends to vigorously prosecute its claims and defend Gulfstream’s claims.  Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations, or liquidity.

 

Guarantees

 

Contingent liabilities in the form of letters of credit, letters of guarantee and performance bonds have been provided by the Company. These letters of credit reduce the amount of borrowings available under the revolving credit facility. As of both September 26, 2013 and December 31, 2012, outstanding letters of credit were $19.9. Outstanding guarantees were $25.1 and $25.6 at September 26, 2013 and December 31, 2012, respectively.

 

Indemnification

 

The Company has entered into customary indemnification agreements with each of its Directors, and some of its executive employment agreements include indemnification provisions. Under those agreements, the Company agrees to indemnify each of these individuals against claims arising out of events or occurrences related to that individual’s service as the Company’s agent or the agent of any of its subsidiaries to the fullest extent legally permitted.

 

Service and Product Warranties and Extraordinary Rework

 

The Company provides service and warranty policies on its products. Liability under service and warranty policies is based upon specific claims and a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience change. In addition, the Company incurs discretionary costs to service its products in connection with product performance or quality issues.

 

The following is a roll forward of the service warranty and extraordinary rework balance at September 26, 2013:

 

Balance, December 31, 2012

 

$

30.9

 

Charges to costs and expenses

 

28.6

 

Write-offs, net of recoveries

 

(0.5

)

Exchange rate

 

(0.1

)

Balance, September 26, 2013

 

$

58.9

 

 

22.  Other Income (Expense), Net

 

Other income (expense), net is summarized as follows:

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 26,

 

September 27,

 

September 26,

 

September 27,

 

 

 

2013

 

2012

 

2013

 

2012

 

KDFA bond

 

$

0.8

 

$

1.0

 

$

2.5

 

$

3.4

 

Rental and miscellaneous (expense)

 

(0.2

)

(2.9

)

(0.1

)

(6.2

)

Foreign currency gains (loss)

 

6.8